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Constellation sale was fast, furious

The Baltimore Sun

Constellation Energy Group boss Mayo A. Shattuck III knew he had a crisis on his hands in early September.

Financial markets were churning. Another huge Wall Street bank was near failure. And credit-rating agencies trained a withering eye on Constellation and other companies that borrowed big money and chanced it on derivatives and futures.

Still, Shattuck and other Constellation directors finished an emergency conference call on Sept. 12, with the idea that they had time, according to company documents released late last week. They were trying to raise cash as a shield against the financial storm. Executives said that credit-rating agency Moody's had marked October as the earliest it might change Constellation's rating.

How wrong they were.

A 174-page proxy statement filed late Friday with the Securities and Exchange Commission provides the first behind-the-scenes details of the unfolding financial crisis Constellation faced. It also outlined how its lawyers were preparing bankruptcy papers before Constellation revealed its troubles and how the Baltimore company was forced to sell at a bargain price that Shattuck at first resisted.

The filings and interviews with executives highlight the intense negotiations leading up to the shotgun sale agreement and a frenzied, caffeinated week in which no fewer than five companies expressed interest in buying all or pieces of Constellation.

At one point during that third week in September, four suitors had representatives at Constellation headquarters, with Constellation executives shuttling between trying to make a deal to survive. Within a week Shattuck was forced to sell Constellation and subsidiary Baltimore Gas and Electric Co. to the shrewd Warren E. Buffett.

The price he got for one of Baltimore's two Fortune 500 employers was $26.50 a share, a fourth of its market value at the beginning of the year.

"The events of the last week obviously were dramatic," chief executive Shattuck told analysts three days after he signed the sale agreement. "The combination of several issues placed the company in an extremely difficult situation."

Shattuck, an investment-banking whiz with deal-making in his blood, didn't do much negotiating. Buffett's first and unsolicited offer turned out to be his final offer.

Only one company tried to beat Buffett's MidAmerican Energy Holdings for the prize. Electricite de France, which held a big Constellation stake, bid $35 a share. But Constellation had already tentatively sold itself to MidAmerican. And MidAmerican executives threatened to walk away from the deal if Constellation spoke further to the French. Less than three hours later the deal was sealed.

The very idea that Constellation was a financial high roller, vulnerable in Baltimore to what happened in Lower Manhattan, came as a shock to many. But around the core of BGE, which gave Baltimore the nation's first gas streetlights in the early 1800s, had grown a trading operation to rival Wall Street banks in sophistication, if not size.

Constellation had already diversified beyond the electric and gas utility business, but Shattuck pushed it even further from Pratt Street and toward Wall Street after taking over in late 2001. The demise of Enron Corp. in 2002 gave CEG a chance to hire traders and other sophisticated energy financiers.

The beginning of the end of Constellation's status as an independent company came in early August.

Executives revealed that they had drastically understated the collateral they would have to post if Constellation's debt ever got downgraded - as much as $3.4 billion.

Constellation's stock plunged from the $80 range down to nearly $60. Worries increased as the global credit crisis deepened. With each financial company linked to a dozen others and everybody borrowed to the earlobes, no trading escaped suspicion.

The situation turned dire Sept. 15, a Monday, when Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America. Constellation immediately faced questions about its exposure to Lehman and growing doubts from investors and business partners about its ability to weather the credit crisis. That day Constellation's stock plummeted nearly 18 percent to a 52-week low of $47.99.

A CEG statement that the Lehman bankruptcy would not hurt it did nothing to calm investors' fears the next day. Constellation shares lost another 36 percent, trading as low as $13 before rebounding to close at $30.76 that Tuesday. Some business partners stopped trading with Constellation, while others expressed concern about possible credit downgrades.

Seeing how quickly things were deteriorating, Shattuck invited Morgan Stanley advisers to his Pratt Street headquarters to help save Constellation.

Constellation executives reached out to its largest shareholder, Electricite de France, to invest up to $500 million to help the company avoid the growing credit crisis. But no agreement was reached.

They also instructed lawyers to prepare a possible bankruptcy filing as a contingency.

In Des Moines, Iowa, meanwhile, MidAmerican executives saw an opportunity. Constellation was a company it admired, MidAmerican Chief Executive Officer Gregory Abel said in an interview last month after the deal was announced.

At 2:15 p.m. Sept. 16, MidAmerican Chairman David Sokol called Shattuck to ask about a possible deal, according to the proxy. It was the first time company executives discussed a deal.

Shattuck asked Sokol to arrive at Constellation's Baltimore headquarters by 6 p.m.

Others companies also expressed interest. One was an unnamed energy company that indicated it might be interested in making an investment in Constellation. Another was a private equity firm.

As the urgency grew, Constellation's board was told it needed an immediate cash infusion to assuage nervous credit-rating agencies. Without the cash, the agencies were likely to downgrade the company's bonds, which would have forced it to come up with even more cash it didn't have.

The board told Shattuck to raise up to $1.5 billion.

Shattuck met with MidAmerican's Abel and Sokol twice that Tuesday evening. Sokol told Shattuck that MidAmerican wanted to buy Constellation for $4.7 billion and would provide $1 billion immediately. While Shattuck said he was not looking to sell, he told Sokol he would review any offer. It included terms that made it difficult to attract another suitor. MidAmerican wanted exclusive negotiating rights to finalize a deal by 5 p.m. Sept. 19, meaning Constellation could not have discussions with other potential buyers.

But MidAmerican insisted that Constellation sign a tentative agreement by Sept. 17 or the offer would be withdrawn.

Shattuck was not happy with the bid, according to the proxy.

On Sept. 17, Constellation revealed that it was talking with several potential partners, a process that could lead to a sale of the company.

The urgency for immediate action grew when Standard & Poor's warned that a multiple-notch downgrade was likely.

At 1:30 p.m. Sept. 17, MidAmerican made a formal offer.

Shattuck asked Sokol and Abel to consider increasing its $26.50-a-share bid. They refused.

At 6 p.m., Shattuck and his senior management team met. They discussed a possible credit downgrade from Moody's and its potentially disastrous impact. Management did not believe an EDF offer to invest $450 million would be enough to satisfy the credit-rating agencies, given the deteriorating financial markets.

Fearing that MidAmerican's proposal was about to expire, management agreed to sell Constellation, believing the other three suitors could not provide the cash needed to avoid bankrutpcy, according to the documents.

After executives from both companies stayed up all night going over details, Constellation's board approved a tentative deal at 8:45 a.m. Thursday, Sept. 18, according to Shattuck. Soon after, the news of Constellation's proposed takeover became public.

The company's options were limited, Shattuck said in an interview that day. "Now, I wished we could have done it in better circumstances at a better time, but for shareholders and for employees, this is a solid and good outcome."

Constellation and MidAmerican spent Thursday and Friday finalizing the details. Executives worried that a definitive deal needed to be in place by 5 p.m. or it would lead to an immediate ratings downgrade and force Constellation to file for bankruptcy protection the following Monday.

But the deal wasn't a guarantee. EDF and two U.S. private equity firms, including Kohlberg Kravis Roberts & Co., submitted a last-minute bid Friday afternoon, offering $35 a share for Constellation. The group said it would also provide a $1 billion investment under better terms than MidAmerican.

With less than three hours until the 5 p.m. deadline, Shattuck asked Abel to waive MidAmerican's exclusivity right so that Constellation and its advisers could get more details.

Abel refused and warned that MidAmerican would walk away if a deal was not signed and approved by the deadline, according to the SEC documents.

In the board's deliberations, directors reviewed the whirlwind events of the week and the risks if the deal was not consummated.

Shattuck said that Maryland lawmakers have generally expressed positive reaction to Constellation's takeover by Buffett. He also said he had a productive conversation with Buffett.

As for EDF's proposal, the board concluded that it did not guarantee that "a transaction would be completed quickly and would take the place of MidAmerican equity investment," according to the proxy. And none of the other suitors offered cash on the timetable or scale that Constellation wanted.

At 4:50 p.m. Friday, Sept. 19, Shattuck informed Abel of the deal's approval. MidAmerican provided $1 billion the following Monday - the cash Constellation needed to survive.

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