CEG files to sell stake in gas unit

Shares in Alabama natural gas operation may bring $150 million

June 15, 2006|By PAUL ADAMS | PAUL ADAMS,SUN REPORTER

While lawmakers debated the fate of its BGE subsidiary, Constellation Energy Group said yesterday that it is selling a stake in its natural gas operations in Alabama - the latest in a series of signals to Wall Street that it is moving forward with a business strategy that lies beyond the influence of politicians in Maryland.

In a regulatory filing, Constellation said it will hold a public offering for 6 million shares in Constellation Energy Resources LLC, a subsidiary that owns and develops natural gas fields in the Black Warrior Basin of Alabama.

The stock sale, which is expected to raise about $150 million, comes on the heels of a June 6 announcement that the company plans to raise an estimated $1 billion or more by selling six gas-fired power plants in other states.

Both moves are signs the company is getting back to business and turning its attention to strengthening its balance sheet - something that will become increasingly important if legislative action shrinks BGE's profitability and scuttles the parent company's $10.8 billon merger with a Florida energy company.

The moves also serve as a symbolic reminder that less than a third of the Fortune 200 company's revenue comes from Baltimore Gas and Electric Co. The rest comes mostly from a rapidly growing energy trading and commodities business that has little to do with the furor over BGE's pending 72 percent rate increase.

"The vast majority of the organization has nothing to do with the General Assembly [in Maryland]," said Paul Patterson, an industry analyst with Glenrock Associates in New York. "These guys still have to go about the nuts and bolts of their business."

Wall Street seemed buoyed by news that the company is sticking to plan and that lawmakers are close to completing a BGE rate deal that the company finds palatable. Constellation's shares climbed $1.83, or 3.5 percent, to close at $54.16 in trading yesterday, marking its biggest one-day jump since news of the merger with FPL Group Inc. broke in December. But the shares are still off 6 percent for the year, suggesting that investors continue to lack confidence in the FPL merger taking place.

Legislation being debated in Annapolis would limit BGE's rate increase to 15 percent for 11 months and replace members of the state Public Service Commission with people seen as more consumer-conscious. It remains uncertain how a newly constituted PSC would handle unanswered questions surrounding the rate issue or what further concessions the company would be asked to provide in exchange for merger approval.

Given those uncertainties, Citigroup analyst Greg Gordon puts the odds of the merger happening at less than 50 percent. He said in a research note yesterday that the restructuring of the PSC could delay merger approval beyond FPL's timeline, given the "heavy workload being dumped on a reconstituted and potentially unsophisticated group of new PSC commis- sioners/staff."

In a flurry of analyst research notes released this week, analysts seem increasingly pessimistic about the merger, but bullish about Constellation's prospects as it moves ahead with a business plan that has transformed it into a $17 billion global energy company.

`A cheap stock'

"We think [Constellation] is a cheap stock whether or not the proposed merger with FPL closes," Gordon wrote.

The plan to sell shares in Constellation Energy Resources will help the company achieve tax savings and finance expansion of the gas business. The price of natural gas has climbed considerably since the company acquired the Alabama gas fields a year ago, and supplies remain tight nationwide. Rising natural gas prices are partly responsible for the higher cost of electricity for BGE customers.

Constellation said this year that it has invested about $250 million in the business and plans to use proceeds from the stock sale to drill new wells or buy more properties. The division had 436 producing wells at the end of last year. Constellation said the unit had net income of $4.4 million on sales of $9.75 million in the first quarter. The company will retain a majority share in the business and expects to invest about $8 million in the partnership.

Constellation said it was purely coincidental that it filed notice of the pending stock offer on the same day that lawmakers were meeting in special session over the rate increase. The pending sale of the gas-fired power plants - which some analysts say could fetch $1.2 billion - also was unrelated to the rate negotiations, the company said.

`A business to run'

"We do have a business to run, and we're running it every day," said Lawrence McDonnell, a Constellation spokesman. "Both announcements in the last week are part of growing this business."

Analysts said the deals will give the company more cash, which will help its standing in credit markets. Some credit ratings agencies have downgraded BGE's debt as a result of the rate issue, and further turmoil could negatively affect Constellation's rating as well. The company had hoped to strengthen its credit standing with the FPL merger, but those prospects seem less likely now.

Strong credit is essential in the energy trading business, which requires participants to take large forward positions in sometimes volatile markets.

"I think it [the stock offering and plant sales] is a function of raising cash," said Michael Worms, an analyst with Harris Nesbitt in New York. "I think to be in the business they're in takes a strong balance sheet and that takes strong credit ratings."

paul.adams@baltsun.com

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