Constellation offloads international commodity business

Goldman Sachs has purchased Constellation Energy Group's London-based international commodities business for an undisclosed fee. The deal is still pending and neither party would comment on the full details, although Michael DuVally, a spokesperson for Goldman Sachs, said the new business complemented its existing operations.

Constellation's international business includes the company's coal and freight platforms, as well as its European-focused power, gas and carbon trading operations. The transaction is expected to close by the end of the first quarter of 2009.

"It's a sale of necessity as I understand it," says Shannon Burchett, chief executive of Risk Limited. "I don't know what price they got for it, but I think there is some risk to the fact it wasn't a casual sale. However, it was a sale to a logical partner and maybe a partner that they have a good relationship with. Of course that doesn't necessarily mean it was sold at the best price."

In line with a wider strategy announced last year to increase its liquidity and reduce collateral requirements by divesting select merchant businesses, Constellation has also signalled its intention to sell its Houston-based downstream natural gas trading unit.

Mayo Shattuck, CEO of Constellation Energy, said in a statement that "market conditions continue to be difficult, but we're actively reducing capital consumption and cash flow risk, and right-sizing the business to address the realities of the new financial and economic environment".

Burchett adds that as well as raising cash and reducing its risk profile, Constellation's balance sheet would benefit from the offloading of the cash collateral requirements of its trading operations.

"The credit and cash requirements for being a good counterparty in the trading sector at the moment mean this is also quite telling about Goldman Sachs, that they have the strength to do this right now," he said. "Regardless of the price they paid, Goldman needs to have the cash collateral requirements on an ongoing basis to run the trading business, so the acquisition is likely a very positive signal about their projected financial position."

After concerns surfaced about Constellation's exposure to liquidity risk surfaced last year, it agreed a merger deal with Warren Buffett's MidAmerican Energy in September 2008. This arrangement was then rejected in December 2008 for a $4.5 billion deal with French firm EDF, which included a 49.99% stake in Constellation's nuclear generation and operation business.

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