September 18, 2008|By Hanah Cho and Andrea Walker | Hanah Cho and Andrea Walker,hanah.cho@baltsun.com and andrea.walker@baltsun.com
Constellation Energy Group, one of only two Fortune 500 companies in the region, said yesterday that it is in active discussions with "potential strategic partners," a process that could include the sale of the entire company, to avert a credit squeeze in its energy-trading business.
One possible buyer is Constellation's largest shareholder, French power company Electricite de France International, according to a Morningstar analyst.
Earlier this month, Paris-based EDF nearly doubled its stake in Constellation to 9.5 percent. The two companies formed a joint venture to develop and deploy new nuclear power plants in the United States and Canada.
Officials for Constellation, which owns Baltimore Gas and Electric Co., declined to comment yesterday. An EDF spokeswoman would not comment when asked whether it would buy Constellation or increase its stake.
Shares in Baltimore-based Constellation declined even further yesterday, losing 19.47 percent, or $5.99, to $24.77. The stock has lost nearly 60 percent of its value since Monday and 76 percent since the beginning of the year. Yesterday was the third straight day the company's shares fell by double-digit percentages.
Constellation's plummeting value reflects the degree to which investors have lost faith in its commodities-trading business, which relies heavily on its ability to get financing, amid the financial market turmoil. As a result, credit rating agency Standard & Poor's said Constellation is facing an "acute crisis of confidence."
One analyst compared Constellation's credit concerns to Enron, the Houston energy company that quickly sank into oblivion after trading partners refused to renew its borrowing privileges.
"By no means are we saying that Constellation has engaged in any of the illegal and unethical practices in which Enron partook, but a similar 'run on the bank' scenario, although less likely, could unfold here," Morningstar analyst Paul Justice wrote in a report yesterday.
In July, Constellation reported a 47 percent increase in its second-quarter profit, buoyed by its gas and electricity trading business.
Constellation said in a statement yesterday that it hired Morgan Stanley and UBS as advisers to evaluate strategic alternatives, which could include options beyond an outright sale, such as selling other parts of the business and issuing equity.
S&P, which put Constellation on credit watch, issued a report yesterday saying that an outright sale of the company is at an "advanced stage," based on discussions the rating agency had with Constellation management.
While Constellation is still widely seen as a utility company, it 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 creditworthiness.
"Constellation has a large, risky and opaque trading book, which debt agencies cited recently as having insufficient control and transparency," Justice, the Morningstar analyst who predicted EDF could be interested in Constellation, said in an interview. He noted the company functions more like an investment bank than a traditional utility.
"Given the leverage and size of Constellation's trading book, it has a high degree of dependence on a functioning capital market to survive and prosper. In the good times, it could do very well. And in the bad times, when your balance sheet is already stretched, and if you need to liquidate securities ... in a rapid manner in an uncooperative market, it could result in rapid write-downs."
Constellation tried addressing liquidity concerns during the past several days, confirming yesterday that it had lined up an additional $2 billion in credit and that its credit exposure to financial institutions is limited to about $120 million.
And Constellation said in a regulatory filing Monday that Lehman Brothers' bankruptcy this week has no significant impact on its energy-trading and credit relationships. While Constellation has a credit line of $150 million with Lehman Brothers Bank, it also has about $2 billion in excess liquidity available. That does not include a new $2 billion commitment, according to the SEC filing.
BGE, which has existing contracts with Lehman for the purchase of natural gas for the coming winter, also does not have credit exposure and will not face difficulties meeting its customers' energy needs, according to the filing.
S&P, which had downgraded Constellation's credit in August, said yesterday that the company also intends to add $750 million to $1 billion of equity through a strategic partner or other means, including an outright sale of the company.
