Constellation Holdings subsidiary casts shadow on BG&E Losses in real estate are drag on the utility.

April 15, 1992|By Ross Hetrick | Ross Hetrick,Staff Writer

While Baltimore Gas and Electric Co. basks in the glow of improved earnings at its annual meeting today , an unregulated corner of its corporate structure loses money on one of the scourges of recent years -- commercial real estate.

Despite two years of losses in that sector, BG&E is determined to stay in the business, although it has cut back development until it can sell some of its mature projects, said Bruce M. Ambler, president of Constellation Holdings Inc., the unregulated subsidiary that includes the real estate operation.

"We don't have any intention of getting out of real estate property," he said. "We feel it will get stronger as we go forward."

Although BG&E is intent on staying in the real estate business, one analyst suggests that the utility should leave the market and stick to what it knows -- generating power.

"It dilutes management's abilities to best enhance the wealth of shareholders," said Gary F. Hovis, director of utility analysis for Argus Research Corp., an independent research business in New York.

The Public Service Commission, the state agency that regulates BG&E rates, keeps tabs on the utility's non-regulated activities to ensure that they do not affect the regulated operation, said Frank B. Fulton, a spokesman for the commission.

Although BG&E does not file regular reports on its Constellation operations with the commission, company records are accessible to the commission, and its performance is part of rate hearings, Mr. Fulton said. "We are always concerned about a utility's diversified activities," he said.

BG&E first got into the real estate business in 1981, when it established its resource and property management division. That operation later became part of Constellation Holdings, which was set up in 1984.

Last year, Constellation reported income of $8.5 million, or 11 cents a share. But its real estate and senior living facilities division lost $13.6 million, or 16 cents for each share of BG&E common stock outstanding, partly a result of a $9 million write-down on properties and mother losses.

That followed a loss of $2.2 million, or 3 cents a share, for the division in 1990.

Results for KMS Group Inc., the Constellation subsidiary that manages real estate projects in Maryland and Delaware, are not reported separately.

KMS is managing or developing four shopping centers, five office projects, five business parks and three mixed-use developments.

Among those developments, 95 percent of the retail space is leased and 85 percent of its office space is rented, excluding National Business Park, a 350-acre business park in Anne Arundel County.

The occupancy of the National Business Center is "pretty low," Mr. Ambler said, declining to give a percentage. However, he said the company is in advanced negotiations with possible tenants for large portions of the complex. National Business Park accounts for 10 percent of KMS' office park space, Mr. Ambler said.

Constellation's real estate and senior living division made a profit of $3.9 million, or 5 cents a share, in 1989 and had a net income of $2.4 million, or 3 cents a share, in 1988.

Constellation's real estate strategy of developing projects, leasing them and then selling them was derailed by the crash in commercial real estate prices. As a result, the company has had to hold on to property, to the detriment of its bottom line, Mr. Ambler said.

In November KMS tried to sell three retail centers -- the 225,000-square-foot Valley Centre mall in Owings Mills, the 150,000-square-foot Cranberry Square in Westminster and the 180,000-square-foot First State Plaza in Wilmington -- for $52 million but took them off the market when it couldn't get its price.

"This is where we decided that if we didn't get a reasonable price, we should hold the property until the market returns to a more normal state," Mr. Ambler said.

He is confident that any future real estate losses can be easily absorbed by Constellation Holdings, which has shareholder equity of $280 million. There should be no need to tap the resources of the parent company, Mr. Ambler said.

Mr. Ambler also sees Constellation's diversity as a strong point, allowing one segment to decline while another improves. "One of the strengths of Constellation," Mr. Ambler said, "is we have a focused but somewhat diversified program."

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