Buffet Scoops Up an Energy Casualty

By Daniel Englander

The financial crisis has claimed its first major energy casualty. Warren Buffet beat out French energy giant EDF to buy cash-strapped Constellation Energy (CEG) for a pittance this evening. The utility and power trading company’s stock dove 58 percent over three days this week, pushed down by liquidity fears and a downgraded credit rating. Sound familiar? Buffet’s MidAmerican Energy will buy Constellation for $4.7 billion after Constellation’s board rejected an offer from EDF, which owns 9 percent of the power trader, for a $500 million cash infusion.

Though Constellation owned a physical asset base of roughly 9,000 MW they marketed closer to 32,000 MW to commercial and industrial customers. They are also the country’s sixth largest wholesale power marketer. However, because their assets under contract far exceeded their physical assets (and because their physical assets were mostly minimally-profitable baseload capacity), the company needed to generate cash for more contracts somewhere.

So Constellation sought more and more capital to develop their oversees commodity trading business while taking on more debt to finance these upstream operations. Soon, the company’s trading partners were voicing concerns that Constellation wouldn’t be able to make good on its supply contracts. Finally, although Constellation was able to secure a $2 billion credit facility from lenders, the potential that a credit downgrade to junk status would cost the company another $1.6 billion in collateral sent investors running for the exits this week. I think I’ve heard this one before.

Didn’t these people learn anything from Enron? Energy trading without a physical asset base or easy access to credit is a recipe for failure. With the Libor hitting record highs this week, all was lost for Constellation. I hope Constellation CEO Mayo Shattuck is ready to trade Baltimore crabs for Omaha steak.

Comments

[pjm43:]

What happens to the CEG dividend between today's sale agreement and the settlement date? Will it be eliminated by this agreement?

2008 Sep 19 09:28 AM

[pjm43:]

What happens to the dividend on CEG between today's expected sale agreement and the settlement date and shareholders get 26.50 @share in cash? Is the dividend eliminated during this period or is that yet to be decided?

2008 Sep 19 09:31 AM

[tipalia:]

my guess pjm43 is if the dividend has been already annouced you should get it but how do you think that Buffet made his fortune?

2008 Sep 20 02:12 PM

[weiwentg:]

Is there anyone who will take me up on the following bet: under Berkshire, Constellation will eliminate its trading division.

2008 Sep 21 08:39 AM