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Constellation to Sell Downstream Gas Trading Operations

November 10, 2008
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With its acquisition by Berkshire Hathaway's MidAmerican Energy Holdings working its way through the regulatory process and plans to divest itself of its upstream gas assets and international coal and freight businesses already announced, Constellation Energy said Thursday it also intends to sell its Houston-based downstream gas trading operations.

If all of the divestitures are completed, the combined impact would be expected to generate an improvement in liquidity of $1 billion-1.5 billion through the return of collateral, the company said. Constellation anticipates closing on approximately $1.2 billion of a previously announced credit facility as early as the next few days, and MidAmerican has committed to provide Constellation up to $350 million of liquidity reserves in addition to the $1 billion cash investment MidAmerican committed in conjunction with the companies' mid-September merger agreement (see NGI, Sept. 22a).

Constellation moved 14.20 Bcf/d in 2Q2008, placing it in a tie for second place in NGI's latest survey of North America's natural gas marketers. Constellation's gas sales climbed higher than any other participant in the survey, with a 73% increase from a year ago (see NGI, Sept. 22b).

Constellation reported a net loss of $225.7 million (minus $1.27/share) in 3Q2008, compared to earnings of $250.7 million ($1.38/share) in 3Q2007. Constellation reported adjusted earnings of 76 cents/share for 3Q2008, compared to $1.45/share in 3Q2007. Adjusted earnings exclude the impact of special items, including the addition of impairments and other costs of $1.76/share, the company said.

"During the past several months we have been focused on reducing risk and the overall collateral requirements of our Merchant segment," said CEO Mayo A. Shattuck III. "We are taking active steps to adjust to a new business environment marked by declining prices, illiquid markets and scarce credit. Since the merger announcement, we have emphasized the need to reduce earnings at risk and decrease our exposure to incremental collateral posting. We have substantially reduced our economic exposure to directional commodity price risk by reducing position size and overall length of our portfolio. These activities have affected our third quarter results, particularly late in the quarter, and will continue to influence earnings in the fourth quarter. We expect to continue to actively reduce near-term cash flow risk in our business, which may be at the expense of near-term earnings.

"A primary goal is to position Constellation Energy to earn reasonable risk-adjusted returns on capital while reducing earnings risk and variability. Longer term, we are targeting a reduction in our capital consumption consistent with our current long-term bank facilities. The immediate actions we've taken to improve liquidity, combined with the anticipated divestitures, would represent significant progress toward achieving that goal."

After Constellation's stock price plunged precipitously in mid-September following the bankruptcy of Lehman Brothers Holdings, with which Constellation had various business relationships, MidAmerican stepped in quickly with an acquisition bid of $26.50/share, or $4.7 billion. Investor fears had centered on the possibility that the parent of distribution utility Baltimore Gas & Electric (BGE) and the nation's largest wholesale power seller could lose its credit lines. Soon after, Electricite de France (EDF) made a rival offer to acquire Constellation for $35/share, $8.50/share more than what MidAmerican bid (see NGI, Sept. 29). Despite the higher bid, Constellation accepted MidAmerican Energy's offer and the two companies filed an application with the Federal Energy Regulatory Commission (FERC) requesting approval of their merger plan (see NGI, Oct. 20). The companies asked FERC to act on the application by Jan. 15. In October EDF said it would not revise its offer, ending the competition to acquire Constellation.

BGE reported adjusted earnings of 16 cents/share in 3Q2008, up from 14 cents/share in 3Q2007. Last month MidAmerican filed an application with the Maryland Public Service Commission requesting approval to acquire BGE. The application included a proposal to cut in half the 5% cap that was to apply to any increase in an electric distribution rate case filed by BGE in 2009 and a commitment to not file the next BGE electric distribution and natural gas distribution rate cases until January 2011.

On an adjusted basis, Constellation's merchant segment earned 59 cents/share during 3Q2008, down 72 cents/share from 3Q2007. While generation was up 39 cents/share, primarily due to higher energy and capacity pricing, global commodities was down $1.08/share, driven by lower new business results in portfolio management and trading.

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