Expecting to grow its unregulated earnings up to 25% a yearbeginning in 2001, Constellation Energy Group will separate itsunregulated energy trading and generation group from its regulatedentities that include Baltimore Gas & Electric Co.

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

The move follows a similar announcement by Houston-based ReliantEnergy Corp., which said in July it would separate its unregulatedbusiness from regulated utilities to capture higher growth inunregulated power companies (see Daily GPI, July 28).

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

Saying that Constellation had “unbundled its businesses,” CEOChristian H. Poindexter said that the separation would help thecompany “significantly tighten its strategic focus.” Buoyed by afavorable deregulation law in Maryland, the Baltimore-basedcorporation is “now ready to take the next step of the journey,”said Poindexter.

Under the Maryland deregulation law, Constellation was able tomove plants out of its utility unit without paying a premium toratepayers. Instead, residential ratepayers received a 6.5% ratecut, and a pledge that their rates would not rise above five centsa kilowatt hour until 2006. The unregulated unit has to sell powerback to the utility to cover the residential load until 2003.Constellation’s average generation cost is three cents per kilowatthour, 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 42cents a quarter. The change will give the company $200 million morea year to invest in power plant expansions, expected beconcentrated in the mid-continental area of the United States, withexpansions or new plants in California, Texas, Illinois, Florida,Virginia and West Virginia over three years.

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

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

Both companies will be headquartered in Baltimore. And theGoldman Sachs managers and traders who have worked withConstellation for the past three years will be offered jobs withCEG.

Although analysts expressed enthusiasm with the separation,Fitch downgraded Constellation’s debt on Oct. 20, noting that thepower plant transfer had left the utility with a higher debtleverage. It also said the utility only had enough power through2003 even though it is required to stabilize residential ratesthrough 2006. Because of this, the utility could be vulnerable topower price rises, said Fitch.

In its third quarter announcement Oct. 20, Constellationreported common stock earnings of $147.5 million, or $.98 a share,compared with $136.1 million, or $.91 a share for the same periodof 1999. Earnings were “significantly impacted by mild summerweather,” said Constellation. Total electric sales to utilitycustomers decreased more than 2.6% compared with 1999, andresidential sales decreased nearly 11%.

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