CEG agrees to sell 6 gas-fired plants

Out-of-state power complexes to bring $1.64 billion

October 12, 2006|By Paul Adams | Paul Adams,Sun reporter

The sale of the plants — Constellation Energy Group Inc., whose proposed merger with FPL Group Inc. is threatened by regulatory delays in Maryland, said yesterday that it has agreed to sell six natural-gas fired power plants to Nebraska-based Tenaska Power Fund LP for a higher-than-expected $1.64 billion.

The sale of the plants - all outside Maryland - will result in a pretax gain of about $245 million, which analysts say will allow the company to pay down debt and bolster its balance sheet as it contemplates its future as a stand-alone company. The increased liquidity will enhance the Baltimore-based energy company's creditworthiness - considered critical to maintaining rapid growth in its energy trading and marketing operations, which rely on large amounts of borrowed money.

"Current markets are offering a premium for these gas-fired plants relative to their strategic value to us," said Angelique L. Rewers, a Constellation spokeswoman.

The deal comes as Constellation is in regulatory limbo over its merger with FPL, now valued at $12 billion. A state appeals court recently struck down a law aimed at firing the state's Public Service Commission in a dispute over the electricity rate increase that Baltimore Gas and Electric Co., owned by Constellation, implemented in July. But the court left in place a provision in the legislation that prohibits the current commissioners from ruling on the deal.

FPL has sued to force a resolution to the matter and its chief executive, Lewis Hay III, told a group of investors two weeks ago that the merger could be derailed if the process drags on too long.

Selling the six power plants would enhance Constellation's position if the merger fails. Constellation has the nation's largest competitive energy trading operation, but that operation is considered riskier than traditional, regulated utility businesses because it requires the company to take large financial positions to buy and sell power. That adds pressure on Constellation to maintain a strong balance sheet to retain the confidence of credit-rating agencies and banks.

The merger with FPL - which enjoys strong cash flow from one of the nation's fastest-growing regulated utilities - was one avenue for the company to answer that concern.

"As an energy trader and marketer, it's important for them to maintain their credit quality," said Paul Patterson, an energy industry analyst with Glenrock Associates in New York.

The asset sale also fits with Constellation's move away from natural gas generation toward more coal and nuclear, which have a higher profit margin and operate more consistently.

"The big thing was that gas-fired units could be relatively small and built very quickly, and if gas costs are low, they can be highly efficient," said Raymond Moore, an analyst with Shields & Co. in New York. "The problem is with older turbines; they are no longer efficient."

When Constellation announced in June that it was putting the plants on the market, analysts anticipated the sale would net about $1 billion. The market for gas-fired plants has improved in recent months as natural gas prices have fallen.

"I think it's around the upper end of the range that people had thought the plants would sell for," said Patterson, the Glenrock analyst. Duke Energy Corp. and others have written off sizable investments in gas-fired plants recently as their value has diminished. None of the six Constellation-owned plants have been written down since going online in 2001 and 2003.

"We believe these gas-fired assets offer fewer synergies to our competitive supply portfolios or to our strategy of optimizing the efficiency of our baseload coal and nuclear assets," Rewers said.

The six plants have a combined capacity to produce 3,145 megawatts of electricity, or enough to power roughly 2.5 million average homes. The plants are located in California, Texas, Illinois, West Virginia and Virginia. All were investments launched prior to Mayo A. Shattuck III taking over as chief executive officer.

The deal is expected to close this year or in early 2007.

Constellation owns 100 power generating units throughout the United States with a capacity to produce 12,000 megawatts of electricity. It is the largest seller of electricity to BGE, which transferred ownership of its power plants as part of the state's move to a deregulated energy market.

paul.adams@baltsun.com

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