Rating agencies review Constellation

The Baltimore Sun

Wall Street's three major credit-rating agencies said yesterday that they are studying the latest twist in Constellation Energy Group's pending sale to decide whether changes should be made to the Baltimore company's bond ratings, a source of concern that helped push it to seek buyers this summer.

The proposed $4.7 billion takeover of Constellation, the parent of Baltimore Gas & Electric Co., by Warren Buffett's MidAmerican Energy Holdings Co. was cast into question this week with a proposal by Constellation's largest shareholder.

Electricite de France, a European utility that owns 9.5 percent of Constellation stock, offered to buy half of Constellation's nuclear power business for nearly the same price as MidAmerican offered for the whole company.

EDF's unsolicited bid prompted Fitch Ratings to shift Constellation's ratings yesterday from "stable" outlook to credit watch "evolving," which means the company's investment grade ratings can be downgraded, upgraded or remain the same.

Moody's reaffirmed that Constellation's ratings are under review for a possible downgrade; Standard & Poor's said the company's ratings remain on credit watch with developing implications.

"There's a huge amount of uncertainty, including how shareholders would vote for this thing," said Scott Solomon, a senior analyst at Moody's.

A shareholder meeting is scheduled Dec. 23. Constellation spokesman Rob Gould declined to comment yesterday on the ratings agencies' views.

Constellation struck its $26.50-per-share deal with MidAmerican in September, when a threat of another downgrade in the company's credit rating triggered a cash shortage that posed a "real risk of immediate bankruptcy," company officials said in documents filed this week with the Securities and Exchange Commission.

Because Constellation's commodities-trading business is required to post collateral to operate, further downgrades would have required Constellation to put up more cash than it could raise. The financial sector meltdown also increased pressure on Constellation's liquidity access.

EDF offered in September to buy the whole company for $35 a share, but Constellation officials decided MidAmerican's deal was the "only viable alternative," given Buffett's cash, according to SEC filings.

EDF's latest proposal calls for selling half of Constellation's nuclear power assets to the French firm for $4.5 billion, including an immediate down payment of $1 billion in cash, and also selling several non-nuclear power plants to the company for as much as $2 billion.

The rest of Constellation would remain roughly the same - publicly traded and operating out of its Baltimore headquarters.

The agreement with MidAmerican prohibits Constellation from seeking other bids, but it allows the company to consider an unsolicited offer, such as EDF's, if the board deems it a "superior proposal." Constellation would have to notify MidAmerican of such a decision, giving the company five days to revise its offer.

Yesterday, the rating agencies pointed to several unknowns, such as how Constellation's board would react to EDF's proposal and what actions MidAmerican would take. MidAmerican Chairman David Sokol told Bloomberg News on Wednesday that the company has "no intention to alter our bid."

Glen Grabelsky, a managing director at Fitch, said yesterday that it is difficult to analyze EDF's terms at this point because there were no direct negotiations between the French firm and Constellation. Such negotiations are prohibited under Constellation's current agreement with MidAmerican.

The rating firms also noted uncertainties related to Constellation's liquidity and the risk the company faces if the deal with MidAmerican falls through and it fails to close on EDF's offer.

If Constellation emerges with no buyer, its "overall business and operating risk, financial outlook and liquidity profile could be materially compromised resulting in a below investment grade rating," Moody's said.

Constellation shares lost a penny to close at $27.69 yesterday.

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