Spinoff could revive energy merger

Shedding BGE would allow Constellation deal to proceed without regulators’ approval

Friday, Nov. 3, 2006

Constellation Energy Group might try to revive its aborted merger with Florida energy giant FPL Group — or pursue one with another company — by spinning off its regulated utility, Baltimore Gas & Electric Co.

That way, Constellation would be free to merge its wholesale business without state regulators’ approval.

It’s a ‘‘key question,” says the company’s CEO, chairman and president, Mayo A. Shattuck III.

‘‘We’ve always been forthright about the way in which we look at all of our assets in terms of our strategic options, and I suspect we have some [options] with BGE,” Shattuck said during a conference call last week. ‘‘There are a lot of things we have to sort out with respect to [Senate Bill 1].”

That bill, which was passed by the General Assembly in June, will help put in context how BGE fits into Constellation, he said.

In calling off their potential $12.4 billion merger with FPL of Juno Beach, Fla., last week, Constellation officials said state regulators were not clear enough on what would be needed to complete the union.

If Constellation does spin off BGE to get around regulators, it will be doing ratepayers a great disservice, said Johanna Neumann, a policy advocate for the Maryland Public Interest Research Group in Baltimore.

‘‘One reason they said they wanted to do the merger was to create more value for ratepayers. But if they cut and run, it would be clear they were doing this merger because there is a lot of money to be made for top executives,” Neumann said.

Shattuck and other Constellation executives had stood to make about $73 million in bonuses, stock options and other benefits if the merger was completed, according to filings with the U.S. Securities and Exchange Commission earlier this year.

Looking forward, the state’s regulatory environment for utilities would soon smooth out, Shattuck said in the conference call.

‘‘We will restore ourselves to a normal regulatory regime once the politics subside,” he said. ‘‘But there are some aspects to the legislation that give BGE more flexibility, particularly with respect to procurement, and I think we want to put all these things into perspective before we make any types of decisions.”

Shattuck added that BGE is a ‘‘very solid franchise” that has been ‘‘very important” to Constellation. ‘‘I’m sure we will be very thoughtful about how important it is as an integrated part of this company as we look at all of our strategic options going forward,” he said.

Constellation, which through BGE has a service territory that extends beyond the Baltimore area to parts of Montgomery, Prince George’s, Carroll and Calvert counties, gets the bulk of its revenue from its energy trading business, selling energy nationwide to users. Through the first nine months of 2006, Constellation’s non-regulated revenues accounted for about 84 percent of the total, or $12.4 billion out of $14.7 billion in total sales, according to its third-quarter report.

By contrast, the non-regulated revenues of Allegheny Energy of Greensburg, Pa., which serves Frederick County, parts of Montgomery and Carroll counties and western Maryland, account for about 48 percent of its business. But that doesn’t mean that all of that energy is unregulated, said David Neurohr, an Allegheny spokesman.

‘‘Those entities sell the electricity they generate into regulated markets,” he said. ‘‘So to call about half of our revenues unregulated is not a fair assessment.”

Constellation reported a 75 percent increase in third-quarter net income to $324.4 million over a year ago.

Constellation also reported spending $12.4 million in merger-related costs during the first nine months of 2006. But the company expects to recover $5 million by the end of the year, primarily due to tax benefits on merger expenses that were previously not tax-deductible.

Other energy companies saw substantial increases in third-quarter earnings. That included 209 percent to $110.2 million for Allegheny; and 55 percent to $524 million for FPL Group.

Going nuclear

Constellation received a boost in its nuclear capacities — which company officials hope to grow further — this week when the U.S. Nuclear Regulatory Commission renewed operating licenses for two units that a subsidiary mostly owns at the Nine Mile Point plant in New York. The 20-year renewals will allow one reactor to run until 2029 and the other until 2046.

The NRC had been reviewing the renewal request for more than two years. Constellation Generation Group owns all of one unit and 82 percent of the other.

Constellation hopes to be among the first companies to be licensed to build a new nuclear plant in about three decades. The company has a heavier emphasis on nuclear energy than most in the industry, with about 50 percent of its electricity generated through nuclear power. The national average is 20 percent, according to the Nuclear Energy Institute of Washington, D.C.

Last year, Constellation and Areva, a Bethesda nuclear energy services subsidiary of French energy giant Areva Group, formed a joint venture, UniStar Nuclear of Annapolis, to build new facilities. Among the sites UniStar is considering for new plants are Calvert Cliffs in southern Maryland, where Constellation already owns two reactors, and Nine Mile Point.

In August, Calvert County commissioners approved property tax breaks worth about $300 million over 15 years to Constellation if the company builds a new unit at the Lusby plant. The expansion is expected to add about 400 new, permanent jobs and more than 3,000 construction jobs during the five-year construction phase, said Danita Boonchaisri, a spokeswoman for the Calvert County Department of Economic Development.

‘‘Constellation is the largest taxpayer in the county,” she said. ‘‘Calvert Cliffs now contributes about $15.5 million in taxes annually to the county, and this expansion would result in much more new tax revenue.”

One unresolved issue in the industry is what to do with the reactors’ highly radioactive waste. Plants such as Calvert Cliffs now store the waste onsite in pools or in concrete and steel casks.

The U.S. Department of Energy has approved a plan to store the nation’s spent fuel at Yucca Mountain in Nevada, but officials estimate the earliest that site will receive waste is 2017. U.S. Sen. Peter Domenici (R-N.M.) has filed legislation to open interim storage sites much sooner than 2017 in the 34 states with either operating or shutdown reactors, which includes Maryland.

That proposal alarms some. The opening of such dumps would not improve public safety or security of the waste, said Kevin Kamps, a radioactive waste specialist with the Nuclear Information and Resource Service, a Takoma Park organization.

‘‘That would initiate unprecedented numbers of waste shipments on the roads, rails and waterways that would be vulnerable to accidents or attacks,” he said.

One area that should be looked at in dealing with nuclear waste is recycling, according to a recent study by the Boston Consulting Group completed for Areva. Facilities owned by Areva Group in France have recycled nuclear waste for decades.

Officials with Constellation and Calvert County said the Maryland nuclear facility has a strong safety record. The NRC gave Calvert Cliffs high marks during its annual inspection earlier this year. Inspectors cited a concern in early 2004 when a relay in a steam valve failed in the second reactor, but officials addressed that problem to the NRC’s satisfaction by last year.

‘‘It’s been a good neighbor to our residents,” Boonchaisri said. ‘‘I’m not aware of any problems that people around here have had.”