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Constellation Forecasts Calmer Waters Ahead

With two major divestitures nearly completed and a strong liquidity position achieved, the end of an often turbulent transition period for Constellation Energy may be at hand, the company said last week.

Constellation has refocused its strategy to target three core operations -- generation, customer supply and utility Baltimore Gas & Electric (BG&E) -- and has taken steps to protect the earnings of those businesses through 2010, CEO Mayo A. Shattuck III said during a conference call with financial analysts. Constellation is in position to grow earnings in 2011 and beyond, he said.

Baltimore-based Constellation reported a loss of $123.5 million (minus 62 cents/share) in 1Q2009, compared with earnings of $145.7 million (81 cents/share) in 1Q2008. The loss was driven primarily by special charges related to divestiture activities, merger termination costs and impairments, Constellation said. The company reaffirmed its 2009 earnings guidance of $2.90-3.20/share and estimated guidance for 2010 at $3.05-3.45/share.

Net available liquidity has increased to approximately $4 billion from $2.4 billion at the end of 2008, Shattuck said.

During the first quarter Constellation completed the divestiture of its Houston-based downstream gas unit as well as a majority of its London-based coal, freight and international commodities business (see NGI, April 6). The divestitures complete two initiatives that Constellation undertook to reduce risk in its merchant businesses and improve liquidity through the return of posted collateral. In a related transaction, Constellation struck a gas supply agreement with Macquarie Cook Energy to supply gas to Constellation's Louisville, KY-based retail division, Constellation NewEnergy Gas.

"On a cash basis, we expect to receive approximately $35 million of net proceeds from these collective strategic actions," Shattuck said. "More importantly, as we complete these transactions between the first and second quarters of this year, they will return approximately $1 billion of collateral. Applying this liquidity to support new business activity at our customer supply business should facilitate lower risk and future profitability."

Constellation last year announced liquidity difficulties and a plan to sell upstream gas assets in an effort 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).

In February the Federal Energy Regulatory Commission approved Electricite de France SA (EDF) subsidiary EDF Development Inc.'s acquisition of a 49.99% interest in Constellation Nuclear Group LLC, a unit of Constellation Energy Group Inc., for $4.5 billion. The deal was struck last year as a means to save struggling Constellation Energy. It offered richer terms than an offer to acquire Constellation Energy from Warren Buffet's MidAmerican Energy Holdings Co. (see NGI, Dec. 22, 2008). EDF is 85% owned by the French government. EDF International owns an 8.52% interest in Constellation Energy.

Constellation recorded a loss of 23 cents/share in 1Q2009 associated with its efforts to close a nuclear joint venture with EDF and close its obligations to MidAmerican, Shattuck said. The EDF transaction remains on schedule to close in 3Q2009, he said.

Last year the Nuclear Regulatory Commission accepted a second portion of an application from UniStar Nuclear Energy -- a venture of EDF and Constellation -- for a U.S. Evolutionary Power Reactor (EPR) at a site adjacent to Constellation's Calvert Cliffs Nuclear Power Plant in Lusby, MD. Constellation Energy and AREVA formed the original UniStar Nuclear venture in 2005 to market AREVA's EPR technology in the United States. In August 2007 Constellation Energy and Electricite de France formed an additional joint venture, UniStar Nuclear Energy, to develop and deploy a fully standardized fleet of advanced nuclear power plants at selected sites throughout the U.S.

Constellation and EDF have been exploring other options of value transfer, including the possibility of entering into a new below-market power purchase agreement with UniStar for the Calvert Cliffs nuclear plant's output, Constellation said. Such an agreement would have certain efficiency benefits that would make it desirable, the company said.

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