Warren Buffet Scoops Up an Energy Casualty

The financial crisis has claimed its first major energy casualty. Warren Buffet beat out French energy giant EDF to buy cash-strapped Constellation Energy 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.