Constellation to sell Texas unit to boost liquidity

Md. firm could get $350 million more in MidAmerican deal

November 07, 2008|By Hanah Cho | Hanah Cho,

Constellation Energy Group said yesterday that it wants to sell another part of its volatile commodities trading operations and is taking more steps to shore up its balance sheet ahead of its pending $4.7 billion sale to Warren Buffett's MidAmerican Energy Holdings Co.

The Baltimore company said it will receive up to $350 million in additional liquidity from MidAmerican, which had already provided an immediate $1 billion cash infusion as part of the deal.

Constellation also plans to sell its Houston-based natural gas trading business, on top of previously announced sales of another portion of its natural gas assets and international coal and freight business. Constellation expects to increase its liquidity by up to $1.5 billion through the return of collateral, which is required in its trading operations, once the sales are completed.

Also yesterday, the company reported a third-quarter loss of $225.7 million, or $1.27 a share, mostly because of write-downs in its commodities business. That compared with a profit of $251.4 million, or $1.38 a share, in the same period a year ago.

Constellation, the parent of Baltimore Gas & Electric Co., is trying to reduce its risk and collateral exposure associated with its trading operations, which was the source of concern amid the meltdown of the U.S. financial sector. The turmoil in the credit markets affected the energy industry, particularly ones with trading operations, which rely heavily on credit.

Facing a potentially fatal credit rating downgrade and falling investor confidence in the company's ability to access cash to fund its business, Constellation agreed in September to sell itself to MidAmerican. The Des Moines, Iowa, company agreed to pay $26.50 a share, about one-fourth of Constellation's market value at the beginning of the year.

The deal must be approved by shareholders. That meeting is expected to take place in late December or January, said Mayo A. Shattuck III, Constellation's chairman and chief executive. The deal also requires state and federal regulatory approval.

Shattuck said Constellation is adjusting its strategy to an environment in which commodities prices are falling and liquidity and credit are scarce.

But in light of Constellation's recent efforts, one shareholder questioned whether the deal is necessary if the company raises the cash it needs through asset sales.

David Frank of Catapult Capital Management told Shattuck during the analyst call that "I would certainly vote against the deal, and I would hope to get a resounding no because your company is certainly worth far more stand-alone than under this price."

Frank declined to comment further yesterday.

Shattuck said that financial markets are still volatile and that Constellation found a good partner in MidAmerican.

"My expectation is that when people get to see the information ... [they] will make their own judgments on that," Shattuck said. "And we completely expect people will see the advantages of merging with MidAmerican."

Shares of Constellation dropped 30 cents, or 1.3 percent, to close at $23.25 yesterday.

Some analysts said that securing shareholder approval is the top priority for Constellation and MidAmerican.

"Right now, winning over the mind of the investors to get the deal to closure, that's the most important issue," said Morningstar analyst Paul Justice.

Constellation had begun addressing its risk exposure and assessing capital requirements of the commodities business last summer when it became apparent that a weak economy was raising more concerns in credit markets.

The company said yesterday that falling commodity prices and the steps it has taken to shrink its portfolio have reduced the collateral requirement. The company said it would need $2.2 billion as of Oct. 17 if its rating is downgraded to junk status, down from $4.6 billion June 30.

Constellation's total liquidity fell to $2.3 billion in the third quarter, down from $2.89 billion in the previous quarter. But Constellation Chief Financial Officer Jonathan W. Thayer said it has "sufficient amount of liquidity to execute our business plan at an appropriate cost."

The liquidity does not include MidAmerican's new cash infusion commitment or a $1.2 billion credit line, which is lower than the initial $2 billion amount, expected to close as early as next week.

Shattuck said yesterday that the company expects to sign an agreement on the international coal and freight business in the next two weeks and is soliciting bids for the gas assets. Constellation hopes to close the two sales by the end of December.

The company wants to sign a sale agreement for its Houston gas-trading business by mid-December, Shattuck said.

Constellation reported that revenue fell to $5.32 billion in the three months that ended Sept. 30, from $5.86 billion in the corresponding period last year.

BGE reported a net income of 11 cents per share, down from 14 cents in the year-ago period.

BGE reported adjusted earnings of 16 cents per share, up 2 cents per share over third-quarter 2007 adjusted earnings, due to benefits from the rate settlement with the state.

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