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SCIENTECH's IssueAlert
Today's IssueAlert Sponsors: =09 [IMAGE] SCIENTECH is currently interviewing 1,500 utilities on CIS/CRM and = customer care in the United States and Canada to determine: The leadin= g software providers Drivers of utility technology decisions Analysis of = license sales versus ASP sales New market opportunities Growing/shrinking= software markets Download a sample prospectus for an introduction to th= is new survey at: http://secure.scientech.com/specialpages/Multi_Client.asp= and contact Jon Brock at 505.244.7607 for more details.=09 [IMAGE] Miss last week? Catch up on the latest deregulation, competition a= nd restructuring developments in the energy industry with SCIENTECH's Issue= sWatch =09 [IMAGE] [IMAGE] October 29, 2001=20 Energy Company Values Sink In Response to Changing Times=20 By Robert C. Bellemare Vice President=20 [IMAGE] 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 i= n seven years-down nearly 11 percent in one day, and down over 45 percent s= ince May 1, 2001. But perhaps what is most important about Constellation i= s its shift in business strategy as it becomes the second company of the we= ek to announce it is withdrawing plans to split its company into two parts.= Earlier in the week Allegheny Energy (NYSE:AYE) announced it would hold o= ff on its planned initial public offering (IPO) of Allegheny Energy Supply = Company, its unregulated power generation and trading subsidiary, until mar= ket 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 f= or dropping its company-separation plans. The company said it would now fo= cus on using its "single" status to leverage its balance sheet to participa= te in the consolidation of the wholesale electricity industry in the United= States. "What seems to matter now is size and stability and we think that= comes from being a single company ? What has changed (in the last one year= ) is the significant change in the immediate growth rate we are seeing for = new power plants ? the reasons are simple and profound. The world has chan= ged,'' Constellation Energy Chairman Christian Poindexter said in a confere= nce call with the media. =20 The change in Constellation's strategy will be costly. The company will pa= y Goldman Sachs about $355 million to terminate their power-marketing agree= ment, $159 million which Goldman had previously put in the business, and $1= 96 million in future income Goldman would have earned had the business cont= inued. Constellation expects the Goldman Sachs business termination will c= ause the company to record a $200-million special expense in the fourth qua= rter. The company said that its split-up with Goldman Sachs was amicable. = Goldman's relationship with Constellation started in the mid-nineties when= the investment bank was looking for a partner to help it break into the en= ergy 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 = Maryland deregulated the power industry and Constellation decided to make a= separate trading company. Poindexter indicated that Goldman did not want = to be part of a situation where energy trading and generation would remain = together. It certainly has been an active week for Constellation as it has made other= significant announcements concerning its future plans. Mayo A. Shattuck I= II was elected to the position of president and CEO effective Nov. 1, 2001.= Shattuck recently resigned his position as chairman and CEO of Deutsche B= anc. Alex Brown and has served on Constellation's board of directors for th= e past seven years. On Oct. 24, the New York Public Service Commission sai= d it would approve the sale of Niagara Mohawk's Nine Mile nuclear generatin= g station in New York to Constellation Nuclear for $780 million. Constella= tion Nuclear is a unit of the Constellation Energy Group. As part of the s= ale, Constellation has agreed to sell 90 percent of Nine Mile's output at f= ixed prices for 10 years, or through August 2009 if the operating license o= f Nine 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 domest= ic merchant energy business contributed $0.89 of their $1.00 earnings per s= hare 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 = in earnings for the same quarter. Allegheny Energy reported that their thi= rd-quarter profits more than doubled on increased generation capacity and t= he acquisition of a trading and marketing unit. Allegheny's third-quarter = earnings 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 c= onfident 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 = in energy stock value appears to be driven by softening wholesale power pri= ces. Earlier in the month Lehman Brothers lowered its estimate of Alleghen= y's 2002 earnings by 12 cents, to $4.03, citing reduced forward power price= assumptions. =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 = splitting operations and questioning whether more risky overseas operations= can be supported by lower prices brought on by a slowing economy and softe= ning wholesale market prices. Paul Patterson, an energy analyst with ABN A= mro, said there are common themes affecting the industry: "One is lower po= wer prices and the margins that are associated with them. And two is lower = stock prices and the ability to finance more asset driven growth." =20 AES Corp. (NYSE:AES ), apparently agrees. Its earnings fell for a second c= onsecutive quarter on poor results from operations in Brazil and Britain an= d said last Thursday it would revamp its organization and did not rule out = selling off assets. AES' Chief Executive Officer Dennis Bakke indicated AE= S was placing a renewed emphasis on the traditionally profitable, long-term= contract generation business. By placing generating capacity into long-ter= m contracts a company is able to provide profit stability during times of f= lat growth. Just one year ago physical reserve margins in power markets we= re very low, allowing generation companies to achieve high profits for thei= r product. But with the slowing economy, mild weather and consumer respons= e to the higher prices, power demand for 2001 is flat or even down from one= year 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 respe= cts, a return to the past-companies striving for predictability and reliabi= lity in their power supply costs, profits and operations. Perhaps most sig= nificantly, companies are once again rethinking their strategy in regard to= whether or not they will continue to be an integrated business. As Conste= llation concluded, one way to achieve and maintain a critical mass of busin= ess is to remain an integrated company. We would not be surprised if other= s come to the same conclusion. =20 An archive list of previous IssueAlerts is available atwww.scientech.com=20 We encourage our readers to contact us with their comments. We look forwar= d to hearing from you. Nancy Spring Reach thousands of utility analysts = and decision makers every day. Your company can schedule a sponsorship of I= ssueAlert by contacting Jane Pelz at 505.244.7650. Advertising opportuniti= es are also available on our Website. =09 Our staff is comprised of leading energy experts with diverse background= s in utility generation, transmission & distribution, retail markets, new = technologies, I/T, renewable energy, regulatory affairs, community relatio= ns and international issues. Contact consulting@scientech.com or call Nan= cy Spring at 505.244.7613. =09 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us know if we can help you with in-depth analyses or any other SCIENTECH i= nformation products. If you would like to refer a colleague to receive our= free, daily IssueAlerts, please reply to this e-mail and include their f= ull name and e-mail address or register directly on our site. If you no = longer wish to receive this daily e-mail, and you are currently a registere= d subscriber to IssueAlert via SCIENTECH's website, please visit http://s= ecure.scientech.com/account/ to unsubscribe. Otherwise, please send an e-= mail to to IssueAlert , with "Delete IA Subscription" in the subject line.= =09 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAler= ts are not intended to predict financial performance of companies discusse= d, or to be the basis for investment decisions of any kind. SCIENTECH's so= le purpose in publishing its IssueAlerts is to offer an independent perspe= ctive regarding the key events occurring in the energy industry, based on = its long-standing reputation as an expert on energy issues. Copyright = 2001. SCIENTECH, Inc. All rights reserved.=09
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