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
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