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Frontlines

Energy companies' best-laid plans in 2001 were put on hold, after circumstance and fate stepped in.
Fortnightly Magazine - December 2001

trading floors a few years ago, and listening to how the agreement between the two would lead to them becoming the premier energy trader in North America. I also remember both Constellation and Goldman, Sachs employees touting the risk management systems and advanced capabilities they would have to beat their competition. At the time, it seemed like a marriage made in heaven.

Instead, the companies are separating-at a price. Constellation is "paying" $355 million to Goldman, Sachs to terminate the relationship.

The company explained that the cost of raising the spin-off's equity would not cover its future income.

"A year ago we thought the sum of parts looked greater than the whole and now after what's happened in the world (since then) we don't see that. There is no great advantage in being separate. What seems to matter now is size and stability and we think that comes from being a single company,'' said Constellation's Chairman and CEO Christian Poindexter.

Poindexter, like his counterpart at UtiliCorp, is, of course, right. The markets have changed, not only here, but also abroad.

Another high profile company to do an about-face in the last month was CMS Energy. No longer would it pin its earnings hopes on an international strategy. The debt burden had become too large, overseas markets were not bringing in the cash, so it was time to sell, sell, sell ... and focus on the U.S.

Where will the earnings come from? Seven percent to 9 percent will be achieved with growth principally in electric and gas marketing, exploration and production, pipelines, midstream and liquefied natural gas receiving and processing, according to a CMS quarterly earnings report.

The New Defense Posture: Green Light From Wall Street?

So, how has the industry retrenching gone down with investors?

CMS Energy was upgraded by CIBC World Markets. But Merrill Lynch downgraded Aquila, UtiliCorp's energy trading & marketing division.

"We see near-term issues holding the stock back after strategic U-turn on [the] Aquila spin-off," said Merrill Lynch analyst Steven Fleishman. Issues expected to hold UtiliCorp stock back "include 1) arbitrage pressure while the exchange is outstanding; 2) dilution potential if the exchange has to be increased; 3) reversion to UtiliCorp's former conglomerate discount valuation; and 4) risks of market dislocation if and when the offer is completed."

Banc of America Securities downgraded Constellation. According to a Standard & Poors Stock Report, which also downgraded the company, "Having been badly hurt by CEG's earlier announcement of an expected earnings shortfall for 2001, the shares dropped again after the company announced that it had cancelled the pending separation of its merchant energy operations and that it expected its earnings for 2002 to be relatively flat with those of 2001.

"Given this outlook, we expect investors to avoid these shares for the near term. However, with the stock down nearly 60 percent from its year to date high, and trading at about eight times our new 2002 estimate, we would recommend accumulation for those investors with a longer time horizon," according to the S&P report. It appears Wall Street