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.
