Shattuck and the Enronettes Get a Payday Loan.

If you take nothing else away from this blog, heed this: Don't ever screw with Warren Buffet in matters financial. Never. Ever. Just don't do it. Really.

I came to this realization while looking at Constellation Energy's latest annual report. Constellation is the electricity provider of first and last resort here in Maryland. In 1999, they convinced the legislature to allow them to deregulate, but our rates were capped until 2006. As you might imagine, no real competition materialized, as was promised by Constellation in 1999, so they were able to reap the rewards of being a pseudo-monopoly via a 72% rate increase. Constellation's CEO, Mayo Shattuck III, used the profits to expand the Merchant Energy division of Constellation, which by all descriptions sounded like an Enron-styled energy trader. The outcome was readily foreseeable as evidenced in this excerpt from a 2006 Washington Post article regarding an aborted merger with FPL, ironically titled: Contrarian Shattuck Took Constellation To the Top.

"The biggest asset in these deals is the unregulated division and it is very clear, piecing together what's been said about this deal, that they will be using the two regulated utilities to basically underwrite their more risky but profitable merchant business," said Tyson Slocum, director of the energy program at Public Citizen. "What happens if their bets in the wholesale market turn sour?" Slocum said "I don't see anything that will shield customers of problems at the parent company." That could mean higher rates for consumers.

In August of 2008, the worldwide commodities bubble burst, causing prices to tumble. Constellation found itself with a hedge book that was deeply underwater, despite Shattuck's previous, Enron-like claims that they monitored risk closely. In fact, it might be more accurate to call it a speculation book because their derivative positions deteriorated sufficiently to make a credit downgrade a distinct possibility. In the event of a downgrade, Constellation would have had to increase its collateral under the terms of it's debt instruments. Unfortunately, Constellation couldn't borrow the funds required, forcing a fire sale. Enter Warren Buffet and his MidAmerican Energy Holdings Company.

On 9/18, MidAmerican tendered an offer of $26.50/share of CEG totalling $4.7B, with MidAmerican providing $1B upfront in exchange for preferred shares yielding 8%. This capital injection provided the liquidity required for Constellation cover its collateral obligations, essentially saving Shattuck and his ship of fools, but leaving Buffett as the new owner. On 12/17, Constellation declined MidAmerican's offer and accepted a more lucrative offer from √Člectricit√© de France (EDF) for 49.99% of Constellation's nuclear generating assets. Additionally, EDF wrote $2B in put options, expiring 12/31/2010, on unspecified generation assets and allowed Shattuck to transfer $700M in bad derivative bets into the joint venture between the companies. For very good reason, Buffet elected to terminate the agreement. Under MidAmerican's terms given in Constellation's 2008 10-k, they were required to provide the following consideration for breaking the deal:
1. $175M for a merger termination fee
2. 19,897,322 shares of common stock valued at $572.6M, which represents 9.99% of the outstanding shares.
3. $418M to make up for the 15.6M of common shares that couldn't be issued due to regulatory limitations.
4. $20M from 8% Interest on $1B in preferred stock for 90 days, until preferred converted to 14% Senior debt.
5. $5M from interest accrued on $1B Senior Note. Repaid 1/12/09.

Summing, Buffet received $175M+$572.6M+$418M+$20M+$5M=$1,190M=$1.19B for investing $1B for 115 days. Annualized that's a mindnumbing, breeches filling, 373%. Essentially, Constellation's shareholders would have been better off if Shattuck had taken the deed for Calvert Cliffs to the nearest pawn shop. Not to mention the 80% loss in value of the common shares that have been diluted by 9.9%, as a result of Shattuck's folly. That is a lot of screwing up, for any one person, yet Shattuck still has a job. Ultimately, the cost of Constellation's incompetence will be passed on to the captive ratepayers, since the Maryland Legislature has done little to stop them so far.


  1. If you are willing to share did you find a trade?

  2. Maybe. I'll post about it later.