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Constellation Deal to Quintuple Macquarie Gas Volumes

February 9, 2009
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The pending combination of the downstream natural gas unit of Constellation Energy with the operations of Australian investment bank Macquarie Group's Macquarie Cook Energy could create a gas marketer with about 17 Bcf/d of volume, according to company and NGI figures.

Constellation is selling its Houston-based downstream gas unit to Macquarie Group, the companies said last Tuesday. The move is one of several intended to reduce risk in foundering Constellation's merchant business and boost liquidity through the return of posted collateral. When combined with Macquarie's North American gas trading business, Macquarie Cook Energy, the business will become a leading participant in the North American wholesale gas market, Macquarie said.

Based in Houston and with operations in Calgary and Baltimore, Constellation's downstream gas trading unit provides physical gas to local distribution companies, power generators, retail aggregators, industrials and large end-users in the United States and Canada. In the third quarter of 2008 Constellation ranked third on NGI's ranking of top gas marketers by volume at 13.93 Bcf/d, behind BP plc at 29.9 Bcf/d and ConocoPhillips at 15.5 Bcf/d. The Constellation unit has about 130 employees.

The business is to be integrated into Macquarie Cook Energy, which currently offers customers asset management and optimization, structured hedging, core needs fulfillment and risk management. Macquarie Cook Energy was established in 2005 following the acquisition of Los Angeles-based Cook Inlet Energy Supply LLC (see NGI, Oct. 24, 2005) and has offices in Los Angeles and Denver. It averages marketing about 3 Bcf/d and has approximately 80 employees. The firm did not participate in NGI's latest ranking, but at 3 Bcf/d it would be ranked at No. 11 for the third quarter, below EnCana at 3.86 Bcf/d and above ONEOK at 2.86 Bcf/d.

The combined trading operation would be No. 2 in NGI's ranking, assuming a simple addition of gas volumes.

Macquarie Cook Power, an affiliated business also within Macquarie Group, has operated since early 2007 and serves North American electricity producers, mid-sized utilities, industrial end-users and other large wholesale energy sector participants.

"This transaction is a logical addition in the evolution of Macquarie's North American gas trading business and will form an integral part of our larger energy markets platform, which we have grown in key global markets since 2002," said Andrew Downe, global head of Macquarie's Treasury and Commodities Group.

The majority of Macquarie Cook Energy's operations are to be relocated to Houston, which will serve as its headquarters. The integrated business will continue to be led by Nicholas O'Kane, global head of Macquarie's Energy Markets Division.

"Constellation Energy's operations are a highly complementary fit with our own existing business and will bolster areas in which we currently have a relatively low market share, notably in the Midcontinent and Canadian markets," O'Kane said.

The deal is expected to close in the second quarter, subject to regulatory approvals. Terms were not disclosed. Constellation shares closed up 1.73% at $26.45 last Wednesday following the deal's announcement.

In a related transaction, Constellation and Macquarie Cook Energy signed a letter of intent for Macquarie Cook Energy to supply gas to Constellation's Louisville, KY-based retail gas division, Constellation NewEnergy Gas.

Macquarie Group has been bucking the trend in the middle of an economy that has raked financial markets and banks worldwide. The group still has a healthy balance sheet, according to analysts, and the market is ripe for picking up impaired assets on the cheap, they note. However, the group last week warned that its profits would be halved this year due to writedowns, marking the first profit decline in 17 years. Australian rival Babcock & Brown, also an acquirer of energy industry assets, has not fared as well as Macquarie.

Other recent handoffs in the trading arena include Barclays Capital's takeover of the UBS book for base metals, oil and U.S. natural gas and power trading.

Holding on for better days is what will remain of Constellation.

"The pending sale of our downstream natural gas business and the recently announced divestiture of our international commodities business illustrate that we are making substantial progress in derisking our business and right-sizing our merchant businesses in light of current economic conditions," said Constellation CEO Mayo A. Shattuck. "Completion of these transactions will meaningfully improve our near- to mid-term liquidity position. We continue to assess the ongoing capital requirements of our merchant businesses with an eye toward reducing risk, stabilizing risk-adjusted returns and optimizing the value of our premier generation assets and leading customer supply businesses."

On Jan. 20 Constellation announced the divestiture of its London-based international commodities unit to an affiliate of Goldman Sachs; the transaction is expected to close by the end of the first quarter of 2009 (see NGI, Jan. 26).

In December Constellation spurned Warren Buffett's MidAmerican Energy Holdings Co., with which it had agreed to merge, and opted instead for a richer deal to sell a 49.99% interest in Constellation Energy Nuclear Group LLC for $4.5 billion to Electricite de France subsidiary EDF Development Inc. (see NGI, Dec. 22, 2008). When the deal was announced, Constellation executives updated investors on efforts to right the company.

The scale and scope of Constellation's global commodities business is being reduced and speculative activities are being wound down as the company applies free cash flow to debt reduction, cuts overhead and streamlines operations, they said. Earnings guidance for 2009 is $2.90-3.30/share. The company was projecting five-year compound annual earnings per share growth of 6-8%.

Constellation's liquidity woes were apparent last summer when the company announced a plan to sell upstream gas assets to raise money (see NGI, Sept. 1, 2008). Weeks later Constellation was caught in the downdraft of the bankruptcy of Lehman Brothers Holdings Inc. and its shares plummeted (see NGI, Sept. 22, 2008). The company said it will provide an update on its liquidity and collateral positions during a fourth quarter earnings conference call on Feb. 18.

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