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MidAmerican Merger With Constellation Clears Initial Hurdle

Amidst lawsuits, a competing bid and some angry shareholders, the Constellation Energy Group and MidAmerican Energy Holdings merger continues to move forward, according to the companies. MidAmerican said last Friday it has completed its 14-day due diligence of Constellation's retail and wholesale businesses, including trading records. Meanwhile, Constellation Energy Partners LLC earlier in the week put itself on the "for sale" block.

"Our 14-day due diligence was completed early, and we waived the related termination right under the merger agreement," said MidAmerican CEO Gregory E. Abel.

Berkshire Hathaway's MidAmerican came to the rescue after Constellation's relationship with bankrupt Lehman Brothers Holdings Inc. and fears that it could lose its credit lines sparked a freefall in the electricity supplier's stock price in mid-September. Under the Sept. 19 merger agreement (see NGI, Sept. 22), MidAmerican will purchase all of the outstanding shares of Constellation for about $4.7 billion, or $26.50 per share, cash. The definitive 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.

"With MidAmerican's affirmation of the stability and underlying strength of Constellation Energy and the recent infusion of $1 billion to increase our liquidity, we are now poised to successfully complete the merger approval process," said Constellation CEO Mayo A. Shattuck III.

The deal has encountered a few bumps along the way. A number of shareholder lawsuits have been filed claiming that Des Moines, IA-based MidAmerican's offer did not reflect the true value of Constellation (see NGI, Sept. 29), parent of Baltimore Gas & Electric and the nation's largest wholesale power seller and major natural gas supplier.

Another hiccup is the $6.2 billion ($35/share) rival offer for Constellation from Electricite de France (EDF) International SA, the largest power producer in Europe. Despite the higher bid, Constellation has accepted MidAmerican Energy's offer.

Earlier last week, Constellation Energy Partners LLC (CEP), whose sponsor is Constellation, retained a financial advisor to assist in a review of the company's strategic alternatives to enhance unitholder value. Tudor, Pickering, Holt & Co. Securities Inc. has been engaged to advise management. CEP was formed by Constellation in June 2005 to focus on the acquisition, development and exploitation of oil and natural gas properties, as well as related midstream assets. In November 2006 CEP conducted an initial public offering, and Constellation assumed the role of sponsor and provider of support services. Constellation currently owns 28% of CEP.

CEP assets include gas and oil reserves in the Black Warrior Basin in Alabama, the Cherokee Basin in Oklahoma and Kansas and the Woodford Shale in the Arkoma Basin in Oklahoma. The company has said these reserves provide long-lived production, low-risk, low-cost drilling opportunities and a high percentage of proved developed reserves.

"Given the current market environment and the recent merger announcement by our sponsor, Constellation Energy Group, we believe the assistance of Tudor, Pickering, Holt & Co. Securities will be helpful in our efforts to conduct a comprehensive review of our strategic options," said CEP CEO Stephen R. Brunner. "We will continue to focus on the interests of our company and unitholders."

CEP noted that the board of managers has not determined to pursue any particular alternative and that it does not intend to disclose developments unless and until the board has approved a course of action.

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