Constellation may sell BGE's `pipes, wires'

Parent considering possibility of deal for transmission business

Could happen within 5 years

Move depends on FERC's setup of U.S. power grid

April 27, 2002|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

After news of a 15 percent drop in first-quarter core earnings caused mostly by a mild winter and lower power prices, Constellation Energy Group Inc.'s new chief executive said yesterday that the energy company is considering selling Baltimore Gas and Electric Co.'s transmission business.

Addressing the issue for the first time since taking charge Nov. 1, CEO Mayo A. Shattuck III said selling BGE's "pipes and wires" could happen within a five-year period depending on how the Federal Energy Regulatory Commission decides to connect the nation's power grid.

BGE's transmission business consists of the high-voltage lines that connect Constellation's power plants to substations and the regional grid. Its distribution business is the network of lines that carry electricity to homes and businesses.

FOR THE RECORD - The main headline of an article about Constellation Energy Group Inc. in Saturday's editions could have led readers to believe the company was considering the sale of the bulk of Baltimore Gas and Electric Co. The company might consider the sale only of its transmission lines, which represent just a small portion of the utility's business. In addition, the article incorrectly reported the company's forecast for second-quarter earnings per share. The correct forecast is for second-quarter earnings of 50 to 55 cents per share. The Sun regrets the error.

"The entire industry has to be prepared to respond to FERC actions that may either require or strongly encourage, from an economic standpoint, the separation of one's transmission assets from the distribution business," Shattuck said. "We may be obligated or incentivized to move our transmission assets to another entity. We're just setting up the possibility that that might happen. ... "

Last summer, Constellation's top leaders said the company had no "For Sale" signs on any part of BGE. But with the California power crisis, the Enron Corp. debacle and a sluggish economy, the rosy forecast for the electric industry disappeared along with Constellation's ambitious plan to split into two businesses - a nationwide power supplier and a regional delivery business that would include BGE.

Since scrapping its plan to divide in October, Constellation has adopted a more conservative strategy to cut expenses, increase profits by 10 percent in the next several years, develop a stronger balance sheet and rebuild investor confidence for the 186-year-old utility.

"When I reflect back on October, there were reasons why the market was jittery on the whole industry and us," Shattuck said. "That's why we took a very definitive path to let people know that we needed time to tell our story, digest the numbers and put our plans in place. We're well into the execution phase now, and it's going very well. I think that does change the perception that people do have of this company."

Analysts, who previously criticized the company for missed earnings and poor financial disclosures, say the new strategy is working. Constellation's stock has jumped 39 percent since Nov. 1, its debt ratio has been reduced from 56 percent to 51 percent, and it beat Wall Street's expectations of 46 cents per share for first-quarter earnings - despite a warm winter.

Shares of Constellation closed yesterday at $31.70, up $1.10.

The company said yesterday that excluding special items, Constellation earned $80 million, or 49 cents per share, for the three months that ended March 31. In comparison, earnings for the same period last year were $94.1 million, or 62 cents per share, excluding the sale of equity securities.

Total revenue for the quarter fell 7 percent to $1 billion from $1.1 billion in 2001.

The slide in earnings was attributed to warm weather, dilution from the issuance of 13.2 million share of common stock last year, a planned outage at Calvert Cliffs Nuclear Power Plant, lower California power prices and other factors. Stronger earnings from its power-generating and risk-management subsidiary, Constellation Power Source, helped offset some of that decline.

Chief Financial Officer E. Follin Smith said net income doubled to $228.6 million, or $1 per share, boosted by cash proceeds of $555.4 million from the sale of its stakes in Orion Power Holdings Inc. and a real estate investment trust.

"It is a difficult time for electric and gas companies because of the mild weather, and electric prices are very weak," said Daniele M. Seitz, an analyst at Salomon Smith Barney. "I think that in those conditions and the fact that the company is trying very diligently to improve productivity, it's a very good progress report on work in progress."

In recent months, Constellation completed the purchase of Nine Mile Point Nuclear Power Station in New York, adding revenue to its Constellation Power Source unit; renegotiated a favorable long-term power agreement with California that reduces the company's risks; and refinanced debt at lower interest rates.

Analysts applauded Constellation's efforts to cut costs. Since October, Constellation reduced its work force by 10 percent, or 900 employees. Eight-hundred accepted early retirement packages and 100 were laid off, company officials said.

Also, Shattuck's disclosure that the company's transmission assets could be sold proves that "he's saying that he's open to everything," said analyst Ronald S. Tanner at Legg Mason Wood Walker. "Any smart CEO has to look at all the pieces of the business and see which ones can be sold to maximize shareholder value. It wouldn't surprise me if they did that."

CFO Smith said the company expects per-share earnings of 55 cents to 60 cents in the second quarter and $2.65 to $2.75 per share for the year. Thomson Financial/First Call is estimating $2.65 per share for the year.

"We continue to like the CEG story," analyst Steven Fleishman of Merrill Lynch Capital Markets said in a recent report. "The corporate strategy is focused on maintaining a strong balance sheet - key in today's environment - and delivering on commitments. We see upside to the low $30s area on a modest premium to the group as investor credibility is regained."

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