Constellation pulls plug on its split-up

Lagging economy, uncertain market in energy are factors

Stability `what matters'

Former chairman of Deutsche Banc named new CEO

October 27, 2001|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

In a stunning strategy reversal that scrapped a year's worth of preparation, Constellation Energy Group Inc. canceled its ambitious plan to split into two independent businesses at the end of the year, citing a failing economy and an uncertain energy market.

As part of the change, Constellation named Mayo A. Shattuck III, former chairman of Deutsche Banc Alex. Brown, as its new president and chief executive. He will take over Nov. 1, replacing Christian H. Poindexter, who will remain as chairman until his retirement in October 2003.

Constellation also said yesterday that it will pay $355 million to Goldman Sachs Group Inc. to end their five-year power advisory relationship.

The company's board approved the sudden change late Thursday, but the announcement was delayed until yesterday.

The turn of events came one year and three days after Constellation said it would split into two publicly traded companies, one a fast-growth, unregulated business that would generate and sell power nationwide and the other a regional electric company called BGE Corp. that would include its regulated subsidiary Baltimore Gas and Electric Co.

Constellation had begun splitting its staff, offices and resources to function as two separate holding companies, as well as hiring and promoting top executives to lead each company. Now as they move back toward consolidation, Poindexter and Shattuck will begin Monday to discuss reorganizing operations and cutting jobs.

Constellation employs about 8,000, with most of its workers based in Maryland.

"We have canceled our plans to separate into two separately traded companies," Poindexter said during an analysts conference at 8 a.m. "The reasons are simple and profound. The world has changed dramatically since last October and especially since Sept. 11. In times of economic uncertainty, it is wise to build from the size and stability that we have today."

Later, Poindexter said: "When this began, we saw the sum of the parts as being greater than the whole. Now we don't see that anymore. There's no great advantage to being separate. What matters now is size and stability, and we think that comes from being a single company."

Wall Street reacted poorly to the news. Constellation's stock price plunged $5.34 shortly after the market opened but rebounded by the end of the day to close at $23.41. That is a 10.8 percent drop from Thursday's close of $26.24 and less than half of its 52-week high of $50.14 in May.

Adding to the grim news was a second earnings revision for the year by company officials who warned that Constellation's profit will be less than expected next year, mostly because of increased costs in coal. Analysts had expected the company to earn $3.24 per share in 2002, according to an average estimate of analysts polled by Thomson Financial/ First Call. In July, the company had lowered its earnings forecast for the year by 40 cents a share because of a drop in wholesale electricity prices and a delay in closing its purchase of a New York nuclear power plant.

While Constellation did receive word that its purchase of Nine Mile Point Nuclear Plant was approved this week by New York regulators, it was not enough to offset the change in plans and a relatively unspectacular third-quarter earnings report. Constellation's net income rose 11 percent to $163.6 million, or $1 a share, compared with $147.5 million or 98 cents a share in the third quarter of 2000.

Constellation is not the only energy company experiencing a tough year. The California power fiasco, a subsequent backlash against electricity deregulation, lower energy prices and fears of a glut in the energy supply because of the rush to build power plants has walloped energy companies across the country.

Other companies that split from their utilities to pursue a strategy as independent power producers saw their stock prices drop by almost 50 percent. Some, such as Hagerstown-based Allegheny Energy Inc., postponed plans to spin off its power generation subsidiary. Analysts say they believe Constellation is pursuing a strategy similar to North Carolina-based Duke Energy, one of the nation's largest power producers and regulated utilities.

But analysts said Constellation faces a tough road ahead.

"The move not to separate is wise given the current market conditions," said Edward C. Metz, managing director at SNL Securities LC. "But it's always hard to get the confidence of Wall Street back after you've burned them. "

Poindexter said yesterday that the company had been on target to split, and company officials have repeatedly insisted that the plan to split had not changed - even as recently as last week.

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