Financial Meltdown at Constellation Energy -- For Sale?
The Company: Constellation Energy Group, a power and gas wholesaler and owner of Baltimore Gas & Electric.- The Filing: Form 10-Q filed with the SEC on August 11, 2008.
- The Finding: Amid concerns over Constellation Energy Group’s commodity trading activities and related access to credit, Standard & Poor’s is ready to cut its ‘BBB’ ratings on the power supplier and utility owner’s debt, according to Reuters. Constellation said today that it had an underwritten commitment for an additional $2 billion in credit, if needed.
The Upshot: Under counterparty contracts related to merchant energy activities, if Constellation’s senior unsecured debt were downgraded three levels to junk status, the company would need to post incremental obligations of $3.3 billion in collateral to meet existing margin requirements,
That the power company caught the flu infecting U.S. financial markets should come as no surprise. In August 2008, the company revealed in its second-quarter regulatory filing that it had net exposure of $5.3 billion, primarily related to open energy positions from its global commodities operations.
The company’s trading profits have cloaked anemic growth at its regulated electric and gas segments. In the first half of 2008, Constellation realized about $366 million in (mark-to-market) gains from its trading activities. Excluding global commodity operations, the company lost $34.2 million on electric and gas sales of $1.7 billion.
Constellation Energy also confirmed today that it retained Morgan Stanley and UBS to advise on available strategic alternatives, such as a sale of the company. France’s EDF SA, which owns a 9.5 percent stake in the company and is a joint partner with respect to nuclear projects, could be a likely suitor.
The company apparently ignored its stated business strategy of generating income across the energy value chain, from generation to distribution of electric power.
In a change of control scenario, Chairman and Chief Executive M.A Shattuck III, could receive up to $47 million in post-employment benefits (severance and pension benefits, but excluding out-of-the money equity awards), according to the 2008 Proxy Statement.
The Question: If a suitor does not emerge for Constellation, can the company survive on its own?
David Phillips has more than 25 years experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. His work has been cited as "Must-Read" by Kiplinger's Personal Finance, Washington Post (May 2009), and by BusinessWeek.
BNET User Analysis