Just two days after worries over Constellation Energy’s relationship with bankrupt Lehman Brothers Holdings Inc. and fears that it could lose its credit lines 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.
Following the Lehman fallout (see related story), 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. The New York Stock Exchange halted trading in Constellation shares just before 2 p.m. EDT on 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 (see Daily GPI, Sept. 18). News of the acquisition appeared to mostly halt the assault on the company’s stock value. Shares on Thursday dropped a little more than 2% to $24.20.
After reaching a tentative agreement overnight Wednesday, MidAmerican and Constellation said they expect to enter into a definitive merger agreement by the close of business on Friday. Upon signing a definitive merger agreement, Constellation Energy will issue $1 billion of preferred equity yielding 8% to MidAmerican.
The tentative agreement, which has been unanimously approved by both companies’ boards of directors, 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 Constellation Energy CEO Mayo A. Shattuck III. “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. 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.”
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, Standard & Poor’s Ratings Services (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. (see Daily GPI, Nov. 2, 2007).
“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 Energy.
MidAmerican Energy Holdings is a global provider of energy services. Through its business platforms it provides electric and natural gas service to more than 6.9 million customers worldwide. These business platforms are Pacific Power, Rocky Mountain Power and PacifiCorp Energy, which comprise PacifiCorp; MidAmerican Energy Co.; CE Electric UK; Northern Natural Gas Co.; Kern River Gas Transmission Co.; and CalEnergy.
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 Thursday that it has no hedging or other contractual counterparty exposure to Lehman Brothers Holdings, its subsidiaries or its affiliates.
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