Constellation Energy said last week that subsidiary Constellation NewEnergy-Gas Division (CNE Gas) would acquire Cornerstone Energy Inc., further positioning CNE Gas as a supplier to commercial, industrial and institutional customers in North America and giving the company a larger foothold in growing ethanol markets.

The acquisition will increase the scale of CNE Gas by 29% in terms of volume (to 457 Bcf of deliveries per year) and expand its geographic footprint and its leadership in new and existing markets, Constellation said.

Privately held Cornerstone, which is based in Omaha, NE, was founded by former executives of Aquila Inc. It is one of the country’s largest nonutility affiliated gas marketers and provides supply and financial hedging services to more than 1,400 commercial, industrial and institutional customers across the Midcontinent United States. Cornerstone also provides gas and related services to more than 8,500 small commercial businesses. Core markets are in Arkansas, Colorado, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota. Cornerstone delivers more than 120 BCF annually and serves customers behind 15 local distribution companies.

CNE Gas is Constellation’s retail gas marketing arm. Constellation NewEnergy is its retail power marketing arm. Constellation Energy also has a division called Constellation Energy Commodities Group, which is a wholesale gas and power marketer. The Commodities Group ranked sixth on NGI‘s ranking of top North American gas marketers for the third quarter of 2006.

CNE Gas CEO Drew Fellon told NGI that Cornerstone fits well with CNE because the two companies’ markets complement each other with very little overlap and Cornerstone offers good opportunities for organic growth.

Typical customers are large commercial and industrial accounts across the board, Fellon said. Additionally, because of Cornerstone’s participation in a variety of retail choice programs at some utilities the size of customer served by the company gets down to small restaurants and businesses such and laundries.

Fellon said that in recent years Constellation has seen a great deal of conservation and efficiency measures being taken by its customers.

“The industry is much more efficient today than it was one year ago, let alone five years ago,” he said. “I think one of the interesting things we saw several years ago when gas went from $4.50 per MMBtu to say about $6.50, we saw a lot of companies spend capital to put in more efficient equipment. This goes back several years now, and they really saw a lot of efficiencies, a lot lower energy consumption as a result of that.”

Because of more efficient gas use Constellation saw customer consumption decline for a while. But then it picked back up due to economic growth. “In general, our customers’ demand has gone down, but the strength in the economy we’ve seen in the last couple of years has allowed the volumes to stay fairly steady.”

The addition of Cornerstone will not bring Constellation its first entry into the ethanol business, Fellon said, but it gives the company a strong foothold in the Midwest, where ethanol is particularly popular. “It’s a growing industry segment throughout the Midwest because it’s the corn belt.”

“Growing the scale of Constellation NewEnergy’s Gas Division will allow us to increase efficiency and broaden the set of products and services we supply to customers,” said Thomas F. Brady, executive vice president corporate strategy and retail competitive supply, Constellation Energy. “It also will provide us with an access point for the growing ethanol markets in the Corn Belt. From a strategic and market standpoint, it works on many levels.”

The transaction is expected to close in May, subject to conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act. It is anticipated that Cornerstone Energy’s 42 employees, including its founders, will join CNE Gas. Upon closing, Cornerstone Energy will operate under the Constellation NewEnergy Gas Division brand from its base in Omaha and report into the CNE Gas headquarters in Louisville, KY. Constellation Energy expects the transaction to be neutral to 2007 earnings and modestly accretive in 2008.

Constellation created CNE Gas in 2004 by consolidating three subsidiaries: Alliance Energy Services, Blackhawk Energy Services and Kaztex Energy Management.

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