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Constellation to Separate Regulated, Unregulated Units

Constellation to Separate Regulated, Unregulated Units

Expecting to grow its unregulated earnings up to 25% a year beginning in 2001, Constellation Energy Group plans to separate its unregulated energy trading and generation group from its regulated entities, including its flagship, Baltimore Gas & Electric Co.

Goldman Sachs Group Inc., which three years ago helped Constellation set up its successful trading arm, said last week it will invest $250 million in the unregulated entity for a 17.5% equity.

The move follows a similar announcement by Houston-based Reliant Energy Corp., which said in July it would separate its unregulated business from regulated utilities to capture higher growth in unregulated power companies (see NGI, July 31).

Unlike Reliant, however, Constellation already has transferred its 6,200 MW capacity portfolio of utility power plants to the unregulated entities for a total current capacity of 8,500 MW, and said that by 2005, it intends to add 20,000 MW more, moving it to the front of the line in national generators.

CEO Christian H. Poindexter said that the separation would help the company "significantly tighten its strategic focus." Buoyed by a favorable deregulation law in Maryland, the Baltimore-based corporation is "now ready to take the next step of the journey," he said.

Under the Maryland deregulation law, Constellation was able to move plants out of its utility unit without paying a premium to ratepayers. Instead, residential ratepayers received a 6.5% rate cut, and a pledge that their rates would not rise above five cents a kilowatt hour until 2006. The unregulated unit has to sell power back to the utility to cover the residential load until 2003. Constellation's average generation cost is three cents per kilowatt hour, considered one of the lowest cost suppliers in the market.

Constellation also said Monday that it would lower its dividend, effective April 2001, to 12 cents a quarter from its current 42 cents a quarter. The change will give the company $200 million more a year to invest in power plant expansions, expected be concentrated in the mid-continental area of the United States, with expansions or new plants in California, Texas, Illinois, Florida, Virginia and West Virginia over three years.

Additional growth is also expected to come from new acquisitions, Poindexter said.

Constellation's board approved the deal on Oct. 20, which will give existing shareholders one share of stock in each separately traded company for each share of Constellation stock they hold. The unregulated entity, which will hold about $6.4 billion in assets, will keep the Constellation Energy Group name. The retail services group, with about $4 billion assets, will be renamed BGE Corp. The separation is expected to be completed by the end of 2001, pending regulatory approvals.

Both companies will be headquartered in Baltimore. And the Goldman Sachs managers and traders who have worked with Constellation for the past three years will be offered jobs with CEG.

Although analysts expressed enthusiasm with the separation, Fitch downgraded Constellation's debt on Oct. 20, noting that the power plant transfer had left the utility with a higher debt leverage. It also said the utility only had enough power through 2003 even though it is required to stabilize residential rates through 2006. Because of this, the utility could be vulnerable to power price rises, said Fitch.

In its third quarter announcement Oct. 20, Constellation reported common stock earnings of $147.5 million, or $.98 a share, compared with $136.1 million, or $.91 a share for the same period of 1999. Earnings were "significantly impacted by mild summer weather," said Constellation. Total electric sales to utility customers decreased more than 2.6% compared with 1999, and residential sales decreased nearly 11%.

Carolyn Davis, Houston

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