Constellation Energy has hired Morgan Stanley and UBS to advise it on “strategic alternatives” and said Wednesday “the company and its advisors are in active discussions with potential strategic partners.” Meanwhile, Constellation shares posted a second day of steep declines, and Standard & Poor’s (S&P) warned of a “multiple-notch” downgrade if the company’s credit position isn’t bolstered.

Shares of Constellation — the parent of Baltimore Gas & Electric and the nation’s largest wholesale power seller — plummeted 73% in intraday trading Tuesday and closed at $30.76, down 36% from the previous day’s close. Worries over the company’s relationship with bankrupt Lehman Brothers Holdings Inc. and fears that it could lose its credit lines sparked a trading frenzy in the stock. The New York Stock Exchange halted trading in Constellation shares just before 2 p.m. EDT Tuesday (see Daily GPI, Sept. 17). The decline continued on Wednesday when Constellation shares closed down more than 19% at $24.77 after a day of heavy trading.

On Wednesday Constellation said sponsoring banks have confirmed that a firm underwritten commitment for an additional $2 billion credit facility, announced on Aug. 27, remains 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 is 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.

On Wednesday S&P placed Constellation’s “BBB” rating on watch with the “developing” designation, indicating it could be raised or lowered. “The CreditWatch placement reflects the increased urgency for the company to execute on its recently announced asset divestment plan and to complete other credit-supportive strategic initiatives to shore up its balance sheet in the face of a broad loss of market confidence,” said S&P, noting that a few of Constellation’s counterparties have curtailed business activity.

S&P noted concerns that a $2 billion credit line Constellation had negotiated with The Royal Bank of Scotland and The Union Bank of Switzerland could be canceled. The ratings agency said it confirmed with the banks that the agreements were intact and underwritten.

“Resolution of the CreditWatch depends on the sustained availability of the $2 billion bank lines, the near-term infusion of equity, and the completion of the asset sale, or an outright sale of the company,” S&P said. “If these sales are not executed, other concerns such as the need to refinance existing credit lines will emerge. We would also review our decision if the actions of another agency result in additional collateral posting requirements. In the absence of rapid execution of these credit supportive actions, a multiple-notch downgrade is likely. We do not expect the company to withstand such a rating action.

“Constellation’s large global commodities operations rely heavily on sustained counterparty confidence, and curtailment of business by these counterparties has the potential to impair Constellation’s ability to conduct its commodities operations,” S&P said.

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, CEO Mayo Shattuck III said at the time (See Daily GPI, Aug. 29).

Constellation Energy on Wednesday also reaffirmed its third quarter 2008 earnings outlook of 83-99 cents/share and full-year 2008 earnings guidance of $5.25-5.75/share. Constellation had 2007 revenues of $21 billion. It claims to be the nation’s largest competitive supplier of electricity to commercial and industrial customers and the nation’s largest wholesale power seller. It owns 83 generating units throughout the United States, totaling approximately 9,000 MW. The company delivers electricity and natural gas through Baltimore Gas and Electric, its regulated utility in central Maryland.

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