Constellation sale was fast, furious

SEC filing shows high-pressure talks led BGE parent to accept Buffett's stern offer

October 19, 2008|By Jay Hancock and Hanah Cho | Jay Hancock and Hanah Cho,ay.hancock@baltsun.com and hanah.cho@baltsun.com

Constellation Energy Group boss Mayo A. Shattuck III knew he had a crisis on his hands in early September.

Financial markets were churning. Another huge Wall Street bank was near failure. And credit-rating agencies trained a withering eye on Constellation and other companies that borrowed big money and chanced it on derivatives and futures.

Still, Shattuck and other Constellation directors finished an emergency conference call on Sept. 12, with the idea that they had time, according to company documents released late last week. They were trying to raise cash as a shield against the financial storm. Executives said that credit-rating agency Moody's had marked October as the earliest it might change Constellation's rating.

How wrong they were.

A 174-page proxy statement filed late Friday with the Securities and Exchange Commission provides the first behind-the-scenes details of the unfolding financial crisis Constellation faced. It also outlined how its lawyers were preparing bankruptcy papers before Constellation revealed its troubles and how the Baltimore company was forced to sell at a bargain price that Shattuck at first resisted.

The filings and interviews with executives highlight the intense negotiations leading up to the shotgun sale agreement and a frenzied, caffeinated week in which no fewer than five companies expressed interest in buying all or pieces of Constellation.

At one point during that third week in September, four suitors had representatives at Constellation headquarters, with Constellation executives shuttling between trying to make a deal to survive. Within a week Shattuck was forced to sell Constellation and subsidiary Baltimore Gas and Electric Co. to the shrewd Warren E. Buffett.

The price he got for one of Baltimore's two Fortune 500 employers was $26.50 a share, a fourth of its market value at the beginning of the year.

"The events of the last week obviously were dramatic," chief executive Shattuck told analysts three days after he signed the sale agreement. "The combination of several issues placed the company in an extremely difficult situation."

Shattuck, an investment-banking whiz with deal-making in his blood, didn't do much negotiating. Buffett's first and unsolicited offer turned out to be his final offer.

Only one company tried to beat Buffett's MidAmerican Energy Holdings for the prize. Electricite de France, which held a big Constellation stake, bid $35 a share. But Constellation had already tentatively sold itself to MidAmerican. And MidAmerican executives threatened to walk away from the deal if Constellation spoke further to the French. Less than three hours later the deal was sealed.

The very idea that Constellation was a financial high roller, vulnerable in Baltimore to what happened in Lower Manhattan, came as a shock to many. But around the core of BGE, which gave Baltimore the nation's first gas streetlights in the early 1800s, had grown a trading operation to rival Wall Street banks in sophistication, if not size.

Constellation had already diversified beyond the electric and gas utility business, but Shattuck pushed it even further from Pratt Street and toward Wall Street after taking over in late 2001. The demise of Enron Corp. in 2002 gave CEG a chance to hire traders and other sophisticated energy financiers.

The beginning of the end of Constellation's status as an independent company came in early August.

Executives revealed that they had drastically understated the collateral they would have to post if Constellation's debt ever got downgraded - as much as $3.4 billion.

Constellation's stock plunged from the $80 range down to nearly $60. Worries increased as the global credit crisis deepened. With each financial company linked to a dozen others and everybody borrowed to the earlobes, no trading escaped suspicion.

The situation turned dire Sept. 15, a Monday, when Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America. Constellation immediately faced questions about its exposure to Lehman and growing doubts from investors and business partners about its ability to weather the credit crisis. That day Constellation's stock plummeted nearly 18 percent to a 52-week low of $47.99.

A CEG statement that the Lehman bankruptcy would not hurt it did nothing to calm investors' fears the next day. Constellation shares lost another 36 percent, trading as low as $13 before rebounding to close at $30.76 that Tuesday. Some business partners stopped trading with Constellation, while others expressed concern about possible credit downgrades.

Seeing how quickly things were deteriorating, Shattuck invited Morgan Stanley advisers to his Pratt Street headquarters to help save Constellation.

Constellation executives reached out to its largest shareholder, Electricite de France, to invest up to $500 million to help the company avoid the growing credit crisis. But no agreement was reached.

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