The deal to sell half of Constellation's nuclear power business to Electricite de France ended the shotgun marriage with Buffett's MidAmerican Energy Holdings Co., which was arranged in September as Constellation teetered on the edge of bankruptcy. Constellation officials said the MidAmerican deal was "mutually and amicably terminated," and a shareholder vote scheduled for Tuesday was canceled.
For Baltimore, yesterday's move means the city won't lose the corporate headquarters of its only Fortune 500 company, though the deal needs to clear several regulatory hurdles because it includes some foreign ownership of nuclear power plants. And Paris-based EDF said it will provide the cash that Constellation needs to stem the credit crisis as a stand-alone business.
But Constellation officials quickly were reminded of how volatile life as an independent company can be. The bond-rating agency Moody's downgraded Constellation's credit in response to yesterday's announcement, triggering a 20 percent drop in the company's shares. The stock fell $5.74 to close at $23 on the New York Stock Exchange.
Buffett's offer valued the company at $26.50 a share, or $4.7 billion. His September proposal included $1 billion immediately and rescued the company as credit downgrades threatened to trigger a crippling cash collateral payment. But it was widely regarded by shareholders as unrealistically low. Constellation's stock traded at more than $100 a share at the start of the year, and at least nine lawsuits have been filed by shareholders challenging the deal.
In announcing the EDF deal yesterday, Constellation's chief executive, Mayo A. Shattuck III, and other company officials unveiled a corporate "right-sizing" strategy that will create a starkly different company in coming years. By selling off or winding down much of the commodities trading operation that was the source of its credit troubles, Constellation will focus more on its traditional energy business. The company's recently announced layoff of 8percent of its work force - about 800 people - will remain in place.
Said Shattuck: "We're back to a more stable platform."
Officials also announced that recent troubles will force the company to cut its quarterly, 48-cent dividend payments - a key attraction of its stock for many investors - by 50 percent to 60 percent.
"I think clearly it's incumbent upon Constellation to earn its way back," said Chief Financial Officer Jonathan W. Thayer. "We've learned a great deal in the last four months, and we're determined not to repeat the experience."
In terminating the deal with Iowa-based MidAmerican, Constellation agreed to pay Buffett $593 million in fees, to give him 10 percent of the company's stock and to repay the $1 billion emergency loan at a 14 percent interest rate.
Critics were quick to express disbelief at the payoff to Buffett, including a Maryland state delegate who said it could violate state law. But Constellation officials said their brief courtship with MidAmerican, while expensive, also allowed them to weather a credit storm that had threatened to destroy one of Baltimore's oldest and largest institutions.
"MidAmerican came in and made an investment during a frightening market and got rewarded for it," Shattuck said. "Warren Buffett and his team really deserve the reputation they have as smart investors."
Local leaders said they were pleased that this deal leaves Constellation as an independent company.
"This secures the headquarters of a Fortune 500 company in Baltimore City, which will retain jobs and maintain the presence of a long-standing corporate and civic partner," Mayor Sheila Dixon said. While analysts applauded what they agreed was a superior offer, there was skepticism that Constellation has fully recovered from the cash shortage that precipitated its recent troubles.
Whereas Buffett was able to ameliorate the markets largely with his reputation and his deep pockets, the EDF deal includes a $1 billion cash payment and a promise to buy up to $2 billion worth of Constellation's non-nuclear assets. And much of EDF's cash infusion will go toward MidAmerican's breakup fees. EDF is Constellation's largest shareholder.
Paul Justice, an equity analyst with Morningstar Inc. in Chicago, said the EDF deal leaves some unanswered questions over Constellation's future growth.
"I still think there's a lot of value to be had at Constellation," Justice said. "The nuclear plants are still valuable, but Constellation did give away half of that business to EDF. You've essentially reduced your future earnings stream by a substantial amount, so earnings growth and the absolute earnings level is now going to be lower than it was projected to be six months ago."
EDF officials said that all of those issues were considered and that they believe Constellation emerges on a strong footing.
"We're very confident in the strength of Constellation to go on and stand alone and believe they have enough liquidity," said Jean-Pierre Benque, senior executive vice president of EDF North America.
Several longtime Maryland shareholders, many of whom bought Constellation stock for its dividends and admired the hometown enterprise, were happy to see Buffett's overture rebuffed and said they hope to see the company return to a model that more closely resembles the old Baltimore Gas and Electric Co., a forefather of the current Constellation.
"I'm quite sure that the picture is much better without MidAmerican," said Richard Ober, who lives in Baltimore and owns a little less than 2,000 shares. "I'm very happy from my general standpoint, but also from the standpoint of the stockholders of the old BG&E. I think Constellation Energy has the people who can do the right thing, and they just got led astray."
The deal with EDF will create a joint venture, based in Baltimore, that will manage all of Constellation's nuclear power assets. Each company will appoint five members to a new board of directors that will oversee the new operation.
Federal law prohibits full ownership or control of a U.S. nuclear plant by a foreign entity, and the deal is subject to approval by the Nuclear Regulatory Commission and the Committee on Foreign Investment in the United States.
Officials at EDF say a deal approved by the commission several years ago, allowing for a joint venture between British Energy and Chicago-based Exelon Corp. to own and operate nuclear plants in the United States, provides a framework for approval of their proposal. Exelon bought out British Energy's interest in the joint venture in 2003.
A spokesman for the NRC said several U.S. nuclear plants have had small foreign-ownership components in the past, including a now-decommissioned plant in Oregon, a plant in New Hampshire and another in Connecticut, none of which currently has any foreign ownership. The NRC's review of the EDF proposal could take at least six months, said David McIntyre, an NRC spokesman.
EDF teamed up last year with Constellation to develop and invest in new nuclear reactors under a joint venture called UniStar Nuclear Energy LLC. In the fall, UniStar asked state regulators for a permit to build a third reactor at Calvert Cliffs in Southern Maryland. The application is pending before the Maryland Public Service Commission, and it is one step in a large regulatory review that also includes the Nuclear Regulatory Commission.
The latest proposal also faces review by state officials. State Del. Patrick L. McDonough, a Republican who represents Baltimore and Harford counties, issued a statement yesterday calling Constellation's payments to Buffett "egregious and damaging to the future operation of the company," and said he believes the deal violates state laws protecting utility ratepayers.
The state Public Service Commission, which regulates utilities, is still planning on exploring the deal with MidAmerican and has said in the past that it would study the termination payout.
In a note sent to employees yesterday, Shattuck said the deal with MidAmerican was designed to allow for the current scenario.
"When we agreed to merge with MidAmerican, our primary goal was to stabilize the company in the midst of a global financial crisis," he wrote. "But we also left open the possibility that another company might attempt to make a better offer, particularly one which provided a path to achieving a higher value over time."
Sun reporters Hanah Cho, Lorraine Mirabella and Laura Smitherman contributed to this article.
Electricite de France charts its future in Maryland.