Righting the course

Shattuck says partnership with EDF puts Constellation back on track

December 19, 2008|By Robert Little | Robert Little,robert.little@baltsun.com

For months, the only words to escape from Constellation Energy Group's boardroom were statements praising the company's $4.7 billion emergency takeover by investor Warren Buffett - support required under the terms of the hastily arranged agreement.

But minutes after Constellation executives called off the deal in favor of a $4.5 billion nuclear energy partnership with Paris-based Electricite de France, chief executive Mayo A. Shattuck III emerged with a different perspective.

"We were well aware that there was a window for someone else to come in and make a better offer," Shattuck said Wednesday, shortly after the company released details of the EDF deal. "Now we're back to being a 100 percent publicly traded company again; we're still a Fortune 500 company based in Baltimore; and we're back to a more stable platform."

Yesterday, as Constellation continued its business on Pratt Street as an independent company and one of Baltimore's major employers, analysts offered differing views on whether breaking the deal with Buffett was the right course. Few would discuss whether Constellation always figured that someone would step forward with a better offer.

Buffett's MidAmerican Energy Holdings Co. had fronted $1 billion to Constellation and lent its boss' considerable bank accounts and reputation to rescue the Baltimore company from its credit crisis. MidAmerican will receive $593 million in breakup fees and 10 percent of Constellation's stock as a result of the deal's cancellation. MidAmerican officials declined to comment yesterday on what future role they might play in the company. Shares of Constellation rose 97 cents yesterday, or just over 4 percent, to close at $23.97 on the New York Stock Exchange. That is about 10 percent below the $26.50 per share the company rejected from Buffett, and some analysts called it a bargain.

"The share reaction presents a buy opportunity," said Gabelli & Co. analyst Barry Abramson in a report released yesterday. "The EDF deal, in my opinion, gives [Constellation] the liquidity it needs and the time it needs to gradually wind down its energy trading business and go back to concentrating on getting the full value out of its physical assets - nuclear and non-nuclear power plants."

Jefferies & Co. released a report yesterday calling Constellation's shares "attractive," and saying that the EDF deal appears to provide the company with enough cash to weather any lingering problems.

But others said it is too early to determine whether Constellation chose the right path, and some said they do not have enough information about the company. One Wall Street analyst said yesterday that he would not discuss the company publicly because he does not see enough detail in its recent presentations to make an informed judgment.

"I just don't have enough information about what's going on to tell you what the company's prospects are going forward," he said.

Constellation officials heard similar comments during a conference call Wednesday when analysts quizzed executives about the company's available cash.

"I think with a company that has such a focus on liquidity you could do a better job of defining it," said Fidelity Investments research analyst Carrie St. Louis.

"On liquidity, it is obviously of utmost focus," replied Constellation Chief Financial Officer Jonathan W. Thayer. "We meet on it daily at a senior management level."

Available cash is vital to the company's operations as an independent corporation because of the risk of downgrades in its ratings from credit agencies. Such moves could force a company to put up increased collateral - the situation that pushed Constellation to the brink of bankruptcy in September. When the rating agency Moody's dropped the company's rating one notch in response to the EDF deal Wednesday, it triggered an added collateral requirement of $335 million. A downgrade to junk status - one more notch - would require $1.7 billion, according to the company. Constellation officials declined to comment yesterday, but Shattuck said Wednesday that assuaging the rating agencies was a key element of the company's negotiations.

"It was important for us to get assurances that we would remain at an investment-grade rating," Shattuck said. The company plans to unwind much of its complex energy-trading business, cutting risk but also reducing the potential for revenue growth.

The chairman of the Federal Energy Regulatory Commission indicated yesterday that the EDF deal would not face the kinds of obstacles that Constellation encountered when it tried to merge with Florida Power and Light in 2006. Federal regulators failed to approve the deal, which later collapsed, despite six months of consideration.Commission Chairman Joseph Kelliher told reporters in Washington yesterday that the FPL deal "was a very complicated merger and we needed additional information, much more complex than what EDF- Constellation presents, I think."

The EDF deal is subject to approval by the Nuclear Regulatory Commission and the Committee on Foreign Investment in the United States. The Maryland Public Service Commission is expected to review Constellation's recent proposals at a meeting today.

Bloomberg News contributed to this article

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