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Constellation seals deal for its sale

Constellation Energy Group sealed an agreement yesterday allowing Warren Buffett's MidAmerican Energy Holdings to buy the company for $4.7 billion, even as the Baltimore firm's largest shareholder was reported to be weighing a higher bid for the company.

The board of Electricite de France met yesterday to "present different options regarding Constellation Energy," said spokeswoman Carole Trivi. She declined to say what options were being considered or whether a decision was made.

EDF's renewed interest comes after the French state-controlled energy company passed on a possible deal with Constellation earlier this week. The company explored increasing its stake in Constellation before the MidAmerican deal was made.

Published reports yesterday indicated EDF is now considering different scenarios, including topping the $26.50-a-share bid from Des Moines, Iowa-based MidAmerican. EDF must make a joint bid with a U.S. company since foreign entities cannot own a majority stake in a nuclear power plant.

Constellation, which owns Baltimore Gas and Electric, agreed this week to be acquired by MidAmerican after Constellation's stock price plummeted amid the credit crisis on Wall Street. By signing the deal yesterday, MidAmerican will purchase $1 billion of preferred shares from Constellation to immediately avert a potentially fatal credit downgrade, which fueled the shotgun sale announced Thursday.

A Morningstar analyst said yesterday that a definitive merger agreement between the two companies would not prohibit EDF, which nearly doubled its stake in Constellation to 9.5 percent recently, from joining the table so late in the game.

"I wouldn't say it's completely unlikely that Constellation could have other people looking at this," analyst Paul Justice said, noting another bid could include compensation for MidAmerican. "Any bid would have to be a substantial premium [above] $26.50. To the right suitor, Constellation is worth substantially more."

Constellation shares gained $1.56, or 6.45 percent, to close at $25.76 yesterday.

Constellation spokesman Rob Gould declined comment on the EDF reports. MidAmerican Chief Executive Gregory E. Abel could not be reached last night.

Paul Fremont, an analyst at Jefferies & Co. in New York, said EDF's move, however, is too late.

"We'd be highly skeptical of EDF being able to change the outcome at this late hour," Fremont told Bloomberg News.

Les Echos, the French financial daily, reported on its Internet site that EDF might decide this weekend to top Buffett's offer, according to Bloomberg News. It said a less likely alternative would be to seek discussions with Buffett to consolidate EDF's partnership with Constellation and increase its stake in the utility.

The Financial Times on its Web site said EDF's board agreed in an emergency meeting to back a joint bid with a U.S. partner.

Abel said this week it was unlikely another company would bid on Constellation. Among other things, Constellation must pay MidAmerican $175 million if it finds another buyer, according to the agreement both companies signed this week.

The agreement, however, gives MidAmerican 14 days to review Constellation's books related to its retail and wholesale businesses, including energy-trading activities. MidAmerican can terminate the deal if the value of such businesses and assets fell by more than $200 million since June 30.

Abel said that clause is needed because of the "sheer magnitude and number of transactions" in Constellation's commodities-trading business.

"Management has given us every assurance again that there are no issues there," he said. "We just need a little bit more time to validate that."

Constellation came under enormous pressure this week as investors lost confidence in the company's ability to access cash and credit to fund its business. The rapid unraveling of Constellation's value - its stock fell nearly 60 percent in three days - forced it to seek a partner with deeper pockets.

In a nearly hourlong interview yesterday at Constellation's Inner Harbor headquarters before EDF indicated it was considering new options, Abel said he was looking forward to the deal closing in nine months.

The transaction requires shareholder, state and federal approval.

"One thing we believe is that we brought a lot of stability to this business," Abel said. "We would like to see the transaction get closed. It's another step in people moving on with the underlying business plan. That's clearly our next step."

While Constellation is still widely seen as a utility company with the ownership of BGE, it gets 83 percent of its revenue from merchant operations, which are not regulated by the state.

It trades in electricity, natural gas, coal and other energy products all over the world. Part of that business takes large positions in electricity markets, placing bets on where prices will go.

That business relies heavily on its ability to get financing, which is highly sensitive to Constellation's creditworthiness.

Because it is a commodities-trading business, as its credit rating falls, Constellation has to put up more collateral. Standard & Poor's, which downgraded Constellation's credit rating in August, threatened another downgrade this week. Such a move could have put Constellation on the hook for more than $3 billion in collateral.

Despite the risks involved with Constellation's commodities-trading division, Abel reiterated that MidAmerican is "very comfortable" with and "committed to" that business.

When asked if MidAmerican would reduce Constellation's energy-trading activities, Abel said "the only way it gets pared down is relative to the size of our balance sheet and making sure the size of the business is appropriate and doesn't get overextended, sort of like a home.

"You have a certain number of assets and you could only extend yourself so far. You've got to find that proper balance."

Also during the interview, Abel detailed his management style, as one in line with Buffett's Berkshire Hathaway philosophy to let subsidiaries operate autonomously.

Constellation will operate as a stand-alone unit under privately held MidAmerican without disruptions to its 10,000-employee work force, Abel said.

"We really believe in responsibility and accountability," he said. "This is their plan. They should execute upon it. Do we want to know if there is bad news? Yes. Problems? Absolutely."

EDF would face regulatory hurdles in any deal with Constellation. Constellation owns nuclear power plants, including Calvert Cliffs on the western shore of the Chesapeake Bay, where it wants to build one of the first U.S. units in decades.

EDF and Constellation formed a joint venture in 2007 to develop and deploy new nuclear power plants in the United States and Canada. EDF bought 8.1 million shares of Constellation on Aug. 28, when it doubled its stake. It paid $68.49 a share, so it lost more than $340 million in three weeks.

Baltimore Sun reporters Robert Little and Jay Hancock contributed to this article.

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