Message-ID: <16992506.1075858742854.JavaMail.evans@thyme> Date: Mon, 29 Oct 2001 10:03:06 -0800 (PST) From: issuealert@scientech.com To: issuealerthtml@listserv.scientech.com Subject: Energy Company Values Sink In Response to Changing Times Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \RSHAPIRO (Non-Privileged)\Shapiro, Richard\Deleted Items X-Origin: Shapiro-R X-FileName: RSHAPIRO (Non-Privileged).pst Today's IssueAlert Sponsors:=20 SCIENTECH is currently interviewing 1,500 utilities on CIS/CRM and customer= care in the United States and Canada to determine:=20 The leading software providers=20 Drivers of utility technology decisions=20 Analysis of license sales versus ASP sales=20 New market opportunities=20 Growing/shrinking software markets=20 Download a sample prospectus for an introduction to this new survey at: and=20 contact Jon Brock at 505.244.7607 for more details. =20 Miss last week? Catch up on the latest deregulation, competition and restru= cturing developments in the energy industry with SCIENTECH's IssuesWatch =20 October 29, 2001=20 Energy Company Values Sink In Response to Changing Times=20 By Robert C. Bellemare Vice President=20 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 =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz at 505.244.7650. Advertising opportunities are also= available on our Website.=20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission & distribution, retail markets, new tech= nologies, I/T, renewable energy, regulatory affairs, community relations an= d international issues. Contact consulting@scientech.com or call Nancy Spring at 505.244.7613.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer a colleague to receive our fr= ee, daily IssueAlerts, please reply to this e-mail and include their full n= ame and e-mail address or register directly on our site.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = to unsubscribe. Otherwise, please se= nd an e-mail to to IssueAlert , with "Dele= te IA Subscription" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis = of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts= are not intended to predict financial performance of companies discussed, = or to be the basis for investment decisions of any kind. SCIENTECH's sole p= urpose in publishing its IssueAlerts is to offer an independent perspective= regarding the key events occurring in the energy industry, based on its lo= ng-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved.