Just two days after worries over Constellation Energy Group's relationship with bankrupt Lehman Brothers Holdings Inc. sparked a freefall in the electricity supplier Goliath's stock price, it appears that the white knight to the rescue will be Berkshire Hathaway's MidAmerican Energy Holdings Co., which has agreed to purchase all of the outstanding shares of Constellation Energy for $4.7 billion, or $26.50/share, cash. However, reports on Friday warned that a company was expected to come in with a competing bid.
Following the Lehman fallout (see related story), which prompted fears that Constellation could lose its credit lines, shares of Constellation -- the parent of Baltimore Gas & Electric (BGE) and the nation's largest wholesale power seller -- plummeted 73% in intraday trading last Tuesday and closed at $30.76, down 36% from the previous day's close. The New York Stock Exchange was forced to halt trading in Constellation shares just before 2 p.m. EDT on that day. The decline continued last Wednesday when Constellation shares closed down more than 19% at $24.77 after a day of heavy trading. News of the acquisition Thursday appeared to mostly halt the assault on the company's stock value. Shares on Thursday dropped a little more than 2% to $24.20, but rallied almost 6.5% Friday to finish at $25.76/share.
Constellation attempted to head off the whole mess last Monday, but to no avail. "Constellation Energy Group Inc., Constellation Energy Commodities Group Inc. and Baltimore Gas and Electric Co. (BGE) have business relationships with subsidiaries of Lehman. Constellation, Constellation Commodities and BGE believe the Lehman bankruptcy and the possible resulting effects on subsidiaries of Lehman will not have a material adverse effect on the company or its subsidiaries," the company said in a regulatory filing last Monday.
Last Wednesday Constellation said sponsoring banks confirmed that a firm, underwritten commitment for an additional $2 billion credit facility, announced on Aug. 27, remained in effect with terms that include a material adverse change condition, defined as "a material adverse change in the business, financial condition or financial results of operations of the company and its material subsidiaries, taken as a whole on a consolidated basis." The company said its credit exposure to financial institutions was limited. As of Sept. 15 Constellation had net credit exposure to 14 financial institutions. The company's estimated aggregate credit exposure, net of collateral, to these institutions was approximately $120 million, with no single financial institution representing more than $28 million of net credit risk exposure.
Last month Constellation announced a bid to improve liquidity through the sale of upstream gas assets. The assets, including Constellation Energy Partners LLC, had a book basis of $850 million and could sell for as much as $1 billion, Constellation Energy CEO Mayo Shattuck III said at the time (see NGI, Sept. 1).
After reaching a tentative agreement overnight Wednesday, MidAmerican and Constellation entered into a definitive merger agreement late Friday. Upon the signing, Constellation Energy was to issue $1 billion of preferred equity yielding 8% to MidAmerican.
While the agreement has been unanimously approved by both companies' boards of directors, it is subject to further due diligence, as well as shareholder and customary federal, state and local regulatory approvals. The transaction is expected to close within nine months.
"We strongly believe this transaction is in the best long-term interest of our investors, employees and the customers and communities we serve," said Shattuck. "The financial services sector and energy commodity markets have witnessed unprecedented volatility. Backed by the significant industry expertise and financial stability of MidAmerican and Berkshire Hathaway, Constellation Energy will build on its reputation as a first-choice energy solution provider for our many customers."
Warren E. Buffett, chairman of Berkshire Hathaway, which controls Des Moines, IA-based MidAmerican Energy Holdings, said, "MidAmerican has been a wonderful steward of its energy assets and the acquisition of Constellation Energy, when completed, will prove beneficial to all constituents."
A Fortune 125 company with 2007 revenues of $21 billion, Constellation is the nation's largest competitive supplier of electricity to large commercial and industrial customers and the nation's largest wholesale power seller. Constellation is a top gas marketer, reporting 14.2 Bcf/d in sales in 2Q2008, and is ranked second in NGI's latest survey of North America's natural gas traders (see related story). The company also manages fuels and energy services on behalf of energy-intensive industries and utilities. It owns a diversified fleet of 83 generating units located throughout the United States, totaling approximately 9,000 MW of capacity.
Commenting on the proposed acquisition, Fitch reaffirmed its "BBB" long-term issuer default rating for Constellation and its "BBB+" long-term issuer default rating for its Baltimore Gas & Electric subsidiary. The issuer default rating indicates how likely a company is to meet its financial obligations. A "BBB" rating is considered investment grade by the ratings agency.
Fitch said it does not expect MidAmerican Energy Holdings' current capital structure to be materially impacted by closing of the merger transaction because the company's $4.7 billion investment will be "funded by common and trust preferred equity from its parent, Berkshire Hathaway."
Standard & Poor's Ratings Services (S&P) said Friday that its "BBB" corporate credit ratings on Constellation and its subsidiaries remained on CreditWatch with developing implications, where they were placed following the tentative merger agreement. The ratings agency said while news of the transaction is positive, the acquisition still has a number of regulatory hurdles to get over during the next nine months. Meanwhile, S&P placed its "A-" ratings on MidAmerican Energy Holdings and most of its rated U.S. subsidiaries on CreditWatch with negative implications because the acquisition marks a "sharp departure" from S&P's expectations that additional MidAmerican acquisitions would be "squarely and narrowly focused" on regulated, integrated electric and gas operations.
The fact that a Buffett-backed purchase of Constellation didn't ruffle any feathers with credit ratings agencies comes as no surprise due to his track record. Last year, S&P noted that the billionaire's venture into the energy utility business is focused on the lower-risk, steadier rewards inherent in prudently operated public utilities while passing on his Midas touch to a growing stable of companies, including PacifiCorp, Northern Natural Gas Co. and MidAmerican Energy Co.
"In Constellation Energy we have a partner that brings a world-class organization of people and an industry-leading collection of energy assets," said MidAmerican Energy Holdings CEO Gregory E. Abel. "MidAmerican is very comfortable with, and committed to, Constellation Energy's current strategic plan. We intend, as with all of our investments, to allow Constellation Energy to operate autonomously as it pursues its long-term goals. Constellation Energy's premier fleet of nuclear assets, and its UniStar joint venture with EDF, complements MidAmerican's ongoing commitment to environmental initiatives, including investments in hydro, wind and geothermal energy. Joining forces with Constellation Energy accelerates our strategic initiative to develop and build energy infrastructure assets in North America."
Morgan Stanley and UBS Investment Bank are serving as financial advisors to Constellation.
MidAmerican Energy Holdings provides electric and natural gas service to more than 6.9 million customers worldwide through various businesses.
Following news of the acquisition, Constellation Energy Partners LLC said its sponsor, Constellation Energy Group, reaffirmed that it will continue to provide services to the company as agreed to under the management services agreement. All employees in the operations organization in the field offices and the Tulsa technical office are employees of Constellation Energy Partners.
"We have been closely monitoring the current market environment and assessing the impact of recent events on the company," said Constellation Energy Partners CEO Stephen R. Brunner. "We continue to work closely with our board of managers and the management team at Constellation Energy Group to evaluate the potential impact that their current and future decisions may have on our company.
"The commitment of support from Constellation Energy Group coupled with our employee base at [Constellation Energy Partners] and the recent implementation of a long-term incentive plan focused on attracting and retaining key employees provides us confidence that our company remains well positioned to continue to execute on our 2008 strategic plan," said Brunner. "We continue to believe the third and fourth quarters are important for the company and are pleased with the progress we have made in our drilling program this quarter. We did not experience any meaningful impact from Hurricane Ike as it moved through the Midcontinent region. Given our performance, we are reaffirming our intent to recommend to the board of managers maintaining the distribution for the third quarter."
Constellation Energy Partners also indicated that it has no hedging or other contractual counterparty exposure to Lehman Brothers Holdings, its subsidiaries or its affiliates.
As the week continued, reports in a number of newspapers indicated that there could be a dark horse that might swoop in over the weekend with a competing offer, one that is rumored to be more than a billion dollars sweeter to Constellation.
One such report comes from Les Echos, the French financial daily newspaper, which claims Electricite de France SA (EDF) is eyeing an 11th hour offer for Constellation's hand that will trump the current offer. The article said EDF, which currently has a 9.51% stake in Constellation, would take on a U.S. partner -- as required by U.S. regulations -- in placing its bid for the electricity giant.
EDF, which has a joint venture with Constellation already, had hopes of using the U.S. company as its jumping off point in the states. The French firm is also in final negotiations on a 15 billion euro offer for British Energy, which primarily operates nuclear power plants in the United Kingdom.
Les Echos reported that EDF contacts have already been made with various potential allies and that several American electricity companies should be tempted by the opportunity, especially since it is widely believed that MidAmerican is acquiring Constellation at a price that does not reflect the intrinsic value of the company. Citing several sources, the paper said EDF and a U.S. partner could likely pay between $1 billion and $2 billion more than the MidAmerican deal.
Another report in the Financial Times Friday said EDF could have its deal on the table as early as Friday night.
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