Markets, Liquidity Concerns Roil Industry

Constellation Energy Group, parent of Baltimore Gas & Electric, faces a crisis of confidence over the liquidity needs of its trading arm.
Constellation Energy Group, parent of Baltimore Gas & Electric, faces a crisis of confidence over the liquidity needs of its trading arm. (By Jay Mallin -- Bloomberg News)
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By Steven Mufson
Washington Post Staff Writer
Thursday, September 18, 2008

Market turbulence continued to ripple through the energy industry yesterday.

Constellation Energy Group, parent of Maryland's biggest utility, was said by a key analyst to be at an "advanced stage" in talks to sell part or all of the company after it came under pressure to boost liquidity for its energy-trading business.

Ethanol giant VeraSun lost three-quarters of its already deeply depressed stock value after saying it would lose up to $103 million in the third quarter because it made bad hedging bets on corn.

And leading oil price bull Goldman Sachs slashed its forecasts for the next few months. Less than one month after it reiterated a target of $149 a barrel by yearend, Goldman Sachs said the financial crisis and global economic slowdown could push prices down to $75.

Constellation Energy, one of the country's top generators of electricity and the parent of Baltimore Gas & Electric, is facing a crisis of confidence over the liquidity needs of its trading arm, which until this year was a profitable and rapidly growing business. The company issued a statement saying it was in "active discussions with potential strategic partners" and had retained advisers from Morgan Stanley and UBS.

Standard & Poor's issued a report saying, "These strategic options include an outright sale of Constellation, which management has informed us is at an advanced stage." Maryland Gov. Martin O'Malley's office later said that state regulators would have to approve a sale if it included BGE.

Constellation's stock has lost half its value in the past two days and 70 percent of its value since July 31. Its market capitalization yesterday was $5.5 billion.

Constellation officials did not return calls for comment.

In early August, Constellation disclosed that if its credit rating were downgraded, the company would need $3.3 billion in collateral. That was about $1 billion more than it had previously said would be needed. While the revision had no immediate financial impact, it damaged investor and lender confidence.

"It was seen more as a lapse in risk management," said Aneesh Prabhu, an analyst at S&P, which lowered its credit rating for Constellation to "BBB" on Aug. 13.

He said crumbling confidence had prompted a small number of counterparties on London's ICE exchange to already cut off business with Constellation. Though they were not significant in amount, Prabhu said "once it starts, it can certainly snowball."

Analysts said there were concerns that a $2 billion credit line that Constellation had negotiated but not closed with Royal Bank of Scotland and Union Bank of Switzerland would fall through. But Constellation said yesterday that the credit line was intact. S&P's report said the rating agency had separately contacted the banks, which said they would provide the credit even if an effort to syndicate the loan to other institutions failed, a much greater possibility in the current financial climate.

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