     Energy Company Values Sink In Response to Changing Times ,
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October 29, 2001=20


Energy Company Values Sink
In Response to Changing Times=20



By Robert C. Bellemare
Vice President=20


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Constellation Energy's (NYSE:CEG) shares fell nearly 11 percent on Friday i=
n response to announcements that the company is cutting its earnings' proje=
ctions, shelving plans to split the company into two parts, and severing it=
s ties with investment bank Goldman Sachs (NYSE:GS) which would have been a=
 minority partner in its energy-trading operation if the spin-off had gone =
ahead.=20

Analysis: Constellation Energy's stock value dropped to its lowest level in=
 seven years-down nearly 11 percent in one day, and down over 45 percent si=
nce May 1, 2001. But perhaps what is most important about Constellation is =
its shift in business strategy as it becomes the second company of the week=
 to announce it is withdrawing plans to split its company into two parts. E=
arlier in the week Allegheny Energy (NYSE:AYE) announced it would hold off =
on its planned initial public offering (IPO) of Allegheny Energy Supply Com=
pany, its unregulated power generation and trading subsidiary, until market=
 conditions improve.=20

The dramatic shift in company strategy appears to be driven by the same for=
ces. Constellation sited falling energy prices, the changing nature of the =
California power crisis and weak economic conditions as the main reasons fo=
r dropping its company-separation plans. The company said it would now focu=
s on using its "single" status to leverage its balance sheet to participate=
 in the consolidation of the wholesale electricity industry in the United S=
tates. "What seems to matter now is size and stability and we think that co=
mes from being a single company ? What has changed (in the last one year) i=
s the significant change in the immediate growth rate we are seeing for new=
 power plants ? the reasons are simple and profound. The world has changed,=
'' Constellation Energy Chairman Christian Poindexter said in a conference =
call with the media.=20

The change in Constellation's strategy will be costly. The company will pay=
 Goldman Sachs about $355 million to terminate their power-marketing agreem=
ent, $159 million which Goldman had previously put in the business, and $19=
6 million in future income Goldman would have earned had the business conti=
nued. Constellation expects the Goldman Sachs business termination will cau=
se the company to record a $200-million special expense in the fourth quart=
er. The company said that its split-up with Goldman Sachs was amicable. Gol=
dman's relationship with Constellation started in the mid-nineties when the=
 investment bank was looking for a partner to help it break into the energy=
 trading and marketing business. In 1999 Goldman agreed it would take a 17.=
5-percent stake in Constellation's trading business when the state of Maryl=
and deregulated the power industry and Constellation decided to make a sepa=
rate trading company. Poindexter indicated that Goldman did not want to be =
part of a situation where energy trading and generation would remain togeth=
er.

It certainly has been an active week for Constellation as it has made other=
 significant announcements concerning its future plans. Mayo A. Shattuck II=
I was elected to the position of president and CEO effective Nov. 1, 2001. =
Shattuck recently resigned his position as chairman and CEO of Deutsche Ban=
c. Alex Brown and has served on Constellation's board of directors for the =
past seven years. On Oct. 24, the New York Public Service Commission said i=
t would approve the sale of Niagara Mohawk's Nine Mile nuclear generating s=
tation in New York to Constellation Nuclear for $780 million. Constellation=
 Nuclear is a unit of the Constellation Energy Group. As part of the sale, =
Constellation has agreed to sell 90 percent of Nine Mile's output at fixed =
prices for 10 years, or through August 2009 if the operating license of Nin=
e Mile 1 is not extended.=20

The unregulated generation and trading activities continue to drive the bul=
k of earnings for both Constellation and Allegheny. Constellation's domesti=
c merchant energy business contributed $0.89 of their $1.00 earnings per sh=
are of common stock for the quarter ending Sept. 30, 2001, slightly higher =
than last year when the business contributed $0.87 of the $0.98 per share i=
n earnings for the same quarter. Allegheny Energy reported that their third=
-quarter profits more than doubled on increased generation capacity and the=
 acquisition of a trading and marketing unit. Allegheny's third-quarter ear=
nings were $1.33 per share, compared with $0.69 per share one year ago, and=
 beating analysts' earnings of $1.10 to $1.28 per share. Allegheny is confi=
dent that its year-end earnings will be within its guidance range of $3.80 =
to $4.10 per share.=20

Despite the strong earnings, Allegheny's stock price has dropped over 30 pe=
rcent since May, and over 5 percent in the past 10 trading days. The drop i=
n energy stock value appears to be driven by softening wholesale power pric=
es. Earlier in the month Lehman Brothers lowered its estimate of Allegheny'=
s 2002 earnings by 12 cents, to $4.03, citing reduced forward power price a=
ssumptions.=20

The high-flying days of the recent past, where energy companies' price-to-e=
arnings (P/E) multiples were exceeding 50 in certain cases, appear to be ov=
er. Many power producers are returning to their roots-scrapping plans for s=
plitting operations and questioning whether more risky overseas operations =
can be supported by lower prices brought on by a slowing economy and soften=
ing wholesale market prices. Paul Patterson, an energy analyst with ABN Amr=
o, said there are common themes affecting the industry: "One is lower power=
 prices and the margins that are associated with them. And two is lower sto=
ck prices and the ability to finance more asset driven growth."=20

AES Corp. (NYSE:AES ), apparently agrees. Its earnings fell for a second co=
nsecutive quarter on poor results from operations in Brazil and Britain and=
 said last Thursday it would revamp its organization and did not rule out s=
elling off assets. AES' Chief Executive Officer Dennis Bakke indicated AES =
was placing a renewed emphasis on the traditionally profitable, long-term c=
ontract generation business. By placing generating capacity into long-term =
contracts a company is able to provide profit stability during times of fla=
t growth. Just one year ago physical reserve margins in power markets were =
very low, allowing generation companies to achieve high profits for their p=
roduct. But with the slowing economy, mild weather and consumer response to=
 the higher prices, power demand for 2001 is flat or even down from one yea=
r ago in many parts of the country.=20

The recent actions of Constellation, Allegheny and AES likely indicate a fu=
ndamental shift in the electric business. Their actions are, in some respec=
ts, a return to the past-companies striving for predictability and reliabil=
ity in their power supply costs, profits and operations. Perhaps most signi=
ficantly, companies are once again rethinking their strategy in regard to w=
hether or not they will continue to be an integrated business. As Constella=
tion concluded, one way to achieve and maintain a critical mass of business=
 is to remain an integrated company. We would not be surprised if others co=
me to the same conclusion.=20


An archive list of previous IssueAlerts is available at
www.scientech.com <http://secure.scientech.com/issuealert/>=20


We encourage our readers to contact us with their comments. We look forward=
 to hearing from you. Nancy Spring  <mailto:nspring@scientech.com>

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Copyright 2001. SCIENTECH, Inc. All rights reserved.

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