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EDF Bows Out as Constellation-MidAmerican Moves Forward

The competition to acquire Constellation Energy Group officially ended last Wednesday after global power producing giant Electricite de France (EDF) said it will not revise its current offer, but that it will continue its objective of developing new nuclear plants in the United States. Also last week, Constellation and MidAmerican Energy Holdings filed their merger plan with FERC and MidAmerican made a pitch to the Maryland Public Service Commission about the benefits of a union.

"Given the current state of financial markets and in particular the difficult credit market for corporates, and after discussions with several potential American partners, EDF has determined that current conditions are not conducive to presenting a new offer for Constellation Energy Group," EDF said on Wednesday.

After Constellation's stock price plunged precipitously in mid-September following the bankruptcy of Lehman Brothers Holdings, with which Constellation had various business relationships, Berkshire Hathaway's MidAmerican stepped in quickly with an acquisition bid of $26.50/share, or $4.7 billion (see NGI, Sept. 22). Investor fears had centered on the possibility that the parent of distribution utility Baltimore Gas & Electric (BGE) and the nation's largest wholesale power seller could lose its credit lines.

Soon after, EDF made a rival offer to acquire Constellation for $35/share, $8.50/share more than what MidAmerican bid (see NGI, Sept. 29). Despite the higher bid, Constellation stayed with MidAmerican's offer.

As for EDF's plans in the United States going forward, the company confirmed its objective of developing at least four new nuclear plants in the United States using Evolutionary Power Reactor technology. EDF said it is looking to partner with one or several American players and continues to review options. The United States is one of the four target countries identified by EDF for nuclear development

Earlier this month UniStar Nuclear Energy, a joint venture of Constellation and EDF, submitted a combined construction and operating license application to the Nuclear Regulatory Commission for a potential new nuclear reactor at the Nine Mile Point Nuclear Station in Scriba, NY.

Last Tuesday, MidAmerican and Constellation filed an application with the Federal Energy Regulatory Commission (FERC) requesting approval of their merger plan. The companies asked FERC to act on the application by Jan. 15.

MidAmerican President Gregory E. Abel said, "We believe this transaction will provide Constellation Energy with improved access to capital through the backing of MidAmerican, ensuring it will continue to operate its facilities safely and reliably under the guidance of a United States-based owner." On Oct. 5 MidAmerican said its 14-day due diligence was completed early, and it had waived the related termination right under the merger agreement.

In related news last week, MidAmerican filed an application with the Maryland Public Service Commission requesting approval to acquire BGE. "This transaction will bring financial stability to Constellation Energy and BGE, and comes with our proposal to reduce and delay planned BGE rate requests for the benefit of BGE customers," said Abel.

MidAmerican said the two significant rate benefits for BGE customers are:

As a result, MidAmerican said there will be no increase in BGE's gas and electric base distribution rates in 2010 and the first half of 2011. The value to BGE customers from these actions depends upon the amount of BGE gas and electric rate increases granted by the Maryland Public Service Commission. Based upon assumptions identified in testimony filed by MidAmerican as part of its application, the combined potential benefit from these two commitments could be as much as $70 million for BGE electric and natural gas customers.

MidAmerican's application further pledges that BGE's charitable and community-related contributions will be maintained at no less than the past three-year average level of approximately $2.9 million annually through Dec. 31, 2013. In addition, the application says BGE's headquarters will remain in Baltimore and no reduction in force at BGE is planned as a result of the proposed merger.

MidAmerican has committed that BGE will be protected from any adverse financial results at Constellation Energy or MidAmerican or any of their affiliates through a procedure called ring-fencing. The suitor has also promised that no costs related to the transaction or any severance or change-in-control payments to Constellation staff would be included in BGE rates.

"Our application identifies the significant commitments we are making to BGE customers, communities and employees regarding rates, community involvement, job opportunities and investment in energy infrastructure in the state of Maryland," added Abel. "We strongly support the efforts of UniStar Nuclear Energy, LLC to develop advanced nuclear generation in the United States, and we affirm our support for the proposed new nuclear plant at Calvert Cliffs."

MidAmerican affirmed its support for Constellation's involvement in the UniStar Nuclear Energy LLC joint venture and the commitment to prioritize the development of a new nuclear unit at the company's Calvert Cliffs Nuclear Power Plant over the development of a nuclear facility at any other site it controls. MidAmerican further committed to keep Constellation's headquarters in Baltimore, and that Constellation would continue to be a prominent contributor to charitable and community-related activities.

In addition, Constellation CEO Mayo A. Shattuck III has irrevocably waived his right to receive payment of any cash severance to which he would otherwise be entitled under his change-in-control agreement as a result of the merger. He has requested that Constellation donate that amount to the Constellation Energy Group Foundation. At the time of closing, MidAmerican has agreed to match any such contribution, resulting in a total endowment increase of $36 million to support future charitable endeavors for the long-term benefit of the Baltimore community and the state of Maryland.

"The application filed today underscores the conviction of MidAmerican's commitment to successfully closing this transaction, and to Constellation Energy and BGE remaining integral members of the local community," said Shattuck. "This merger will deliver significant long-term benefits to our customers, employees and the communities we serve by allowing BGE and Constellation Energy to operate autonomously and providing the strong financial backing of Berkshire Hathaway."

In related news last Friday, Constellation filed preliminary proxy materials with the Securities and Exchange Commission related to the proposed merger.

The merger agreement has been approved by both companies' boards and is subject to shareholder and federal and state regulatory approvals. The transaction is expected to close in nine to 12 months.

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