OGJ Online

Oct. 23, 2000¬óConstellation Energy Group Inc.’s common shares jumped almost 15% or 5 7/8 points by noon today on news that the company would split into two separate publicly traded entities by late 2001.

Under the proposal, Constellation will keep its merchant energy business, including its wholesale power marketing unit, and spinoff its utility Baltimore Gas & Electric Co. and the energy services company into a separate company to be called BGE Corp. The merchant energy business will get a cash infusion of $250 million from Goldman Sachs in return for a 17.5% equity stake.

“The market has a clear preference for a pure play merchant energy company and in general gives them a higher multiple,” says Paul Freemont, analyst with Jefferies & Co. in New York.

Constellation executives on a conference call this morning with analysts said they expected growth in earnings per share for the merchant company to be 20%-25% for 2002. They said the transaction with Goldman Sachs will not be completed early enough in the year 2001 to have much impact on growth. Deregulation only began in Maryland began in July 2000.

The rapid growth rate will be achieved by amassing a 30,000 Mw portfolio of unregulated generation by 2005, according to the company.

The existing generating capacity the new merchant company will have includes the power plants transferred from the utility totaling 6,239 Mw, 2,039 Mw of generation under contractual control, and 327 Mw of interests in independent power projects. Constellation also has about 2,000 Mw currently under construction.

The company says that it will own about 18,000 Mw of the 30,000 Mw through the existing 10,600 Mw, greenfield development of another 5,000 Mw, and the balance through acquisitions. The remainder of the 30,000 Mw portfolio will be generation controlled contractually through long-term tolling arrangements, which means the company supplies a power plant with fuel and then takes title to a certain percentage of the output.

Besides the investment from Goldman, Constellation will finance its projected growth from free cash flow that will be generated by cutting the dividend to an annual rate of 48

Executives said absent the aggressive greenfield development and acquisition of new merchant capacity, the growth rate of the merchant company would be in the “high teens.”

On the regulated side, the utility will own transmission and distribution and continue to deliver energy to 1.1 million electricity customers and about 600,000 gas customers. There will also be a competitive affiliate that will provide energy services to customers in central Maryland and throughout the mid-Atlantic region. Constellation expects the growth rate to be 3-5% per year for this company.

The regulated company or BGE Corp. is under a 6-year rate cap for retail customers beginning in July 2000. The utility must still supply electricity customers who do not choose alternative providers with power under the ‘standard offer price’ that was negotiated under the restructuring agreement hammered out and approved by the Maryland Public Service Commission.

BGE Corp. no longer owns power plants under the restructuring agreement but has contractual arrangements to meet the standard offer for customers for 3 years, company executives said. After that, BGE will have to get competitive bids to supply power for residential customers for the rest of the transition period.

The company said it expects to have fewer customers to supply power because customers will have switched to competitive retail providers who will be offering service to residential and small business customers by then.

Observers of Maryland deregulation are concerned that not many retail providers will not have entered the market under the present structure approved by the Maryland Public Service Commission.

“That retail market is dead,” says Susan Daycock, executive director of MidAtlantic Power Supply Association (MAPSA).

MAPSA challenged the commission’s restructuring order in state court and lost. But the organization may still appeal the Maryland Circuit Court’s decision to the Maryland Court of Special Appeals by a October 29th deadline.

“The large question in my mind is whether the restructuring order will stand?” says Daycock.