Constellation Energy Exits North American Gas Trading Business (CEG, GS)

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In its seemingly never-ending quest to raise cash, Constellation Energy Group, Inc. (NYSE:CEG) has sold its downstream natural gas trading business to the North American trading arm of Australia’s Macquarie Group. Financial details of the sale were not disclosed. Last month, the company sold its international commodities trading operations to Goldman Sachs Group Inc. (NYSE:GS).

Constellation’s North American gas trading business is one of thecountry’s largest, moving about 10 billion cubic feet of natural gasper day. In its third-quarter 10-Q, Constellation noted, "[W]e tradeenergy and energy-related commodities and deploy risk capital in themanagement of our portfolio in order to earn additional returns. Theseactivities are managed through daily value at risk and stop loss limitsand liquidity guidelines, and may have a material impact on ourfinancial results."

Constellation faced the prospect of having to increase the amount ofcapital it needed to stay in the trading business, and it simply can’tgo down that path. At the end of 2007, Constellation had posted $485.3million in net collateral. By the end of the third quarter of 2008,that number had gone up to $1.05 billion. About $130 million of theadditional collateral was posted "due to certain counterparties thatwould not accept letters of credit issued by certain financialinstitutions."

There’s little question that Constellation is doing everything it canto shed assets that it can not afford to support properly. It has soldnatural gas properties that it can’t afford to develop, tradingbusinesses it can’t afford to collateralize, and half it’s nucleargeneration business. Will it be enough?

Paul Ausick
February 6, 2009