Constellation Energy weighs bid for U.K. plant

No. 1 coal-fired power facility in Europe may be bought by utility, N.Y. hedge fund

September 14, 2005|By Paul Adams | Paul Adams,SUN STAFF

Constellation Energy Group of Baltimore and a New York hedge fund plan to offer $3.5 billion for the United Kingdom's largest power plant - perhaps marking a new phase in the power provider's strategy to export its business model overseas.

Constellation approached the plant's owner, Drax Group Ltd., about making an all-cash offer on Monday. The deal would give the plant's creditor owners an alternative to an initial public offering planned for later this year, Constellation and the hedge fund Perry Capital LLC said in a statement yesterday.

Drax has a turbulent history, having been turned over to creditors in 2003 after it lost its biggest customer, Texas-based TXU Europe. The plant's owner, AES Corp. of Arlington, Va., was eventually forced to write off its $3 billion investment, becoming one of several U.S. companies to retreat after gambling on Britain's power market in the late 1990s.

Drax has since recovered as power prices have surged in the U.K., providing a possible opportunity for Constellation chief executive Mayo A. Shattuck III to re-establish a beachhead for U.S. power companies in Britain. Shattuck has said the company is interested in buying more generating assets at home or abroad.

Constellation is the nation's biggest marketer of electricity in states where power providers are allowed to compete for big customers. The company already is a major provider of coal in the U.K. and has established a 20-person sales and marketing office there.

"I imagine this probably fits" with Constellation's strategy, said Raymond E. Moore, an analyst with Shields & Co. in New York. He rates the company's shares "market perform."

"You can't argue with it because they've been doing something, and I think the street will give them credit for it," he said.

Constellation's shares fell 55 cents to $60.35 in trading yesterday on the New York Stock Exchange.

The addition of the Drax plant would give Constellation its first tangible assets in Britain, where electricity futures have surged 58 percent in the past year. The plant in Selby, Yorkshire, is the largest coal-fired power plant in Europe. Capable of producing 4,000 megawatts, it supplies about 7 percent of the United Kingdom's power.

The banks and other creditors that own Drax would be repaid with proceeds from the sale or public offering. Drax said in its statement yesterday that it plans to continue pursuing its public offering while it considers the proposal.

In its statement, Drax's board of directors suggested the proposed bid might fall short of the company's value based on current trading of its debt and equity. Constellation and Perry, a $12 billion hedge fund, have not made a formal bid.

Constellation declined to comment yesterday beyond its statement confirming the proposed bid. It is unknown how much of an ownership stake the company would take or how the deal would be financed.

The power provider would be delving into a market that is competitive but not growing, Moore said.

"If you're going to get growth, you're going to get it at someone else's expense," he said.

Power prices sank in the late 1990s as the British market fell into disarray, prompting some U.S. companies to exit after several tough years.

AES bought Drax in 1999 from International Power PLC, but quickly ran into trouble when TXU Europe went bankrupt. The Texas energy company bought 60 percent of Drax's power output, and the lost business nearly bankrupted AES.

AES began turning the assets over to creditors after its offer to buy back some of Drax's debt in exchange for an equity stake was rejected. The plant then become the subject of a bidding war between British and U.S. rivals, including investment bank Goldman Sachs.

But no deal was reached and the creditors decided to go it alone. In a Financial Times article, Drax Chairman Gordon Horsfield likened the plant's financial rescue "to a drowning man, thrown a succession of life-belts, only to find that he can swim after all."

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