Reflecting how the financial sector's meltdown has reverberated beyond Wall Street, investors wiped out about 70 percent of the value of Constellation Energy Group's stock at one point yesterday, despite little information about how or whether the Baltimore energy company's trading operations are affected by the demise of Lehman Brothers and other firms.
Constellation shares lost nearly 36 percent, or $17.23, to close yesterday at $30.76 on the New York Stock Exchange.
The closing price was the lowest since May 2003, according to Bloomberg News, but it could have been much worse: At one point, the stock fell to $13 before recovering in the final hour of trading.
That's on top of an 18 percent decline on Monday after Lehman's bankruptcy filing and the fire sale of Merrill Lynch to Bank of America resulted in a broader market selloff.
Constellation is one of only two Fortune 500 companies headquartered in the Baltimore area. It is the area's eighth-largest private employer with about 4,500 jobs, according to the Economic Alliance of Greater Baltimore, and its stock is widely held by individuals and institutions.
Credit Suisse analysts said yesterday in a research report that Constellation suffered on "no explicit news but on a series of fears" about whether its complex, and often opaque, trading operations would have difficulty finding the large amounts of short-term financing and partners needed to make trades.
Constellation said in a regulatory filing Monday that Lehman's bankruptcy has no significant impact on its energy-trading and credit relationships. It made no statements yesterday, and spokesman Robert Gould would not comment.
While Constellation is still widely thought of as a utility company, because of its ownership of Baltimore Gas and Electric, it now gets 83 percent of its revenue from merchant operations, which are not regulated by the state.
It trades in electricity, natural gas, coal and other energy products all over the world. Part of that business takes large positions in electricity markets, placing bets on where prices will go.
The business relies heavily on its ability to access financing, which is highly sensitive to Constellation's credit-worthiness. While Constellation has a credit line of $150 million with Lehman Brothers Bank, it also has about $2 billion in other liquidity available, according to the SEC filing.
Still, some analysts pointed to credit concerns exacerbated by recent market turmoil.
Constellation "remains under significant pressure [yesterday] as investors remain concerned about the company's potential loss of access of liquidity and the potential evaporation of trading counterparties for its commodity business in the wake of financial market turmoil," JPMorgan analyst Andrew Smith wrote in a research report yesterday.
He noted that increased costs to insure Constellation's debt also may be adding to liquidity concerns.
Credit-default swaps rose 366 basis points to 663 basis points midafternoon yesterday, according to CMA Datavision. That means it costs about $663,000 to insure $10 million of the debt, up from about $180,000 on Sept. 12.
Moreover, banks and other Wall Street investment firms could pull back on energy deals to reduce their risks, Smith said.
Mayo A. Shattuck III, Constellation's CEO, said in July that the company has started to assess capital requirements of the global commodities business and it was exploring strategic alternatives that could involve a partnership agreement.
"No question that the company should have been more aware of its credit exposures and the large size of commodities compared to the balance sheet especially as the financial markets started to sour a year ago," wrote Credit Suisse analyst Dan Eggers, noting that his firm's instinct is to stick with the company in the long term.
Douglas G. Ober, chairman and chief executive of closed-end mutual funds Adams Express Co. and Petroleum & Resources Corp. in Baltimore, said he hasn't seen or read anything to indicate Constellation could be hurt by its exposure to Lehman.
"Investor fear is such that if Lehman's name is associated with someone for whatever reason, people are going to say, 'I don't want anything to do with it,' " Ober said. "That's the height of market fear, in my opinion."
Jeffrey Frankel, the James W. Harpel professor of capital formation and growth at the Harvard Kennedy School of Business, said the market has given people who normally might not worry things to be concerned about.
"There are some worrisome things to react to," Frankel said. "A lot of people read the papers yesterday and said, 'Oh, my gosh.' People are getting very alarmed, even people who don't worry about these things. I think that there is a bit of a panic reaction."
Constellation's stock loss comes nearly a month after its shares fell 16 percent in one day, when one analyst questioned the company's accounting and another raised concerns about the effects of a potential credit downgrade.