Buffett buys Constellation

The Wall Street financial crisis hit Baltimore’s main street on Thursday, as Constellation Energy Group agreed to be bought by Warren Buffet’s MidAmerican Energy Holdings for $4.7 billion ($26.50 per share.)

Among the victims in the sale could be Constellation’s attempt to build a new, third nuclear generating unit at its Calvert Cliffs site in Calvert County, Md., south of Baltimore and Washington. It’s difficult to see MidAmerican agreeing to go forward with a multi-billion merchant generator in today’s credit market.

Constellation, which owns the regulated Baltimore Gas and Electric Co. utility, has a large energy trading operation which has pumped up the company’s balance sheet in the past. But recently, the traders reported faltering numbers, the debt was downgraded, and the stock lost 60% of its value over the past week, according to the Wall Street Journal.

Then, earlier this week, S&P indicated that it was contemplating a further downgrade of Constellation’s current BBB rating. A downgrade would have triggered a need for greater collateral to back its borrowings. Constellation didn’t have adequate funds to post additional capital and started looking for a buyer with deep pockets.

Constellation’s first choice, according to several accounts, was Electricite de France, which already owns some 9 percent of the Baltimore company. But Constellation needed an immediate bailout to prevent a run on the company and resulting failure. If EdF were to buy Constellation, it would face the problem of foreign ownership of a U.S. nuclear power plant, currently not allowed.

In a written statement, Mayo A. Shattuck III, Constelleation’s CEO said, “The financial services sector and energy commodity markets have witnessed unprecedented volatility. Backed by the significant industry expertise and financial stability of MidAmerican and (Buffet’s) Berkshire Hathaway, Constellation Energy will build on its reputation as a first-choice energy solution provider for our many customers.”

MidAmerican has said Constellation will remain a standalone business. The issue of who will run the company was not decided at the time of the announcement.

According to Baltimore Sun columnist on a Baltimore radio show, the deal negotiators literally worked all night Wednesday, and announced the deal at 9:45 a.m., just 15 minutes before the opening of the New York Stock Exchange.

The acquisition of Constellation will require approval by shareholders, the Maryland Public Service Commission, and the Federal Energy Regulatory Commission. The two companies said they expect to close the deal in nine months. When it comes to utility mergers, that’s very rapid.