Parent of BGE eyes U.K. plant

Constellation, partners offer $4.1 billion for coal-fired facility


The owners of Baltimore Gas and Electric Co., who have been providing electricity and natural gas to city residents for generations, moved a tiny step closer yesterday to doing the same for legions of Britons.

Baltimore-based Constellation Energy Group, the largest power marketer in the United States, and its partners outlined details of a $4.1 billion bid to buy Europe's largest coal-fired power plant, Drax Group Ltd. If the deal is approved by Drax shareholders, Constellation will put up 200 million to 300 million British pounds, $347 million to $520.6 million, as part of the cash and debt offer.

The deal would give Constellation a beachhead in the lucrative United Kingdom energy market at a time of rising electricity prices and would mark another phase in its transformation from a Maryland-based utility into a global buyer and seller of electricity, natural gas and coal.

It's a story written in the laws and regulations that have in the past decade pried open once tightly regulated energy markets in the United States and abroad. Constellation has taken advantage of those market changes more than any other U.S. power provider by snatching up power plants and hiring a mostly young group of traders to help it capture power sales in markets stretching far beyond its roots on the shores of Chesapeake Bay.

Analysts credit the strategy for giving Constellation a strong balance sheet and solid earnings per share. Now, the company says, it plans to export its business model to Europe.

Over the past 18 months, the company has established itself as a major supplier of coal in the United Kingdom while quietly setting up the building blocks for a growing gas and electricity marketing operation that would in many ways mirror the company's U.S. business. It has about 35 employees in the United Kingdom, though some of the tiny trading operation is backed up in the company's corporate headquarters in Baltimore.

"We've taken important steps toward replicating aspects of our wholesale business in the United Kingdom, including power and natural gas provisioning, and coal," said Lawrence McDonnell, a spokesman for Constellation's non-regulated businesses. "Drax would fit in well with that strategy at the right price and under the right conditions."

But first, Constellation and its key partners, private investment fund Blackstone Group LP and New York hedge fund Perry Capital LLC, have to persuade Drax's owners to sell.

Last week, Drax officials characterized Constellation's bid as too low. At least one major shareholder, Stark Investments of Milwaukee, disagreed yesterday, saying the latest proposal looked attractive. Stark owns 10 percent of Drax, which is in Selby, Yorkshire.

The power plant's investors have to choose between selling to the group led by Constellation or listing the shares on the London Stock Exchange beginning Dec. 15. A vote on the matter will be held Nov. 30.

"Drax doesn't have to make a whole lot of money for it to be incremental for Constellation," said Raymond E. Moore, an industry analyst for Shields and Co. in New York. Moore doesn't own shares in the company.

Constellation initially offered about $3.5 billion for Drax in a bid submitted Sept. 13. Two other bidders - Texas Pacific Group Europe and International Power Plc and Mitsui & Co. - subsequently made offers, but both groups have dropped out of the bidding. Constellation said it could come to terms in two weeks.

Moore said Constellation has plenty of access to capital and that the acquisition would give the company a hedge against some of its riskier power marketing businesses.

"This is a way of getting their feet wet, and if it doesn't work, they can always sell it," Moore said.

U.S. energy companies have had a stormy history in Britain. A handful of U.S. companies entered the United Kingdom's deregulated power market in the late 1990s, only to see their investments wiped out as the British market tanked.

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.

But energy prices in Britain have nearly doubled in the last year, creating a much more favorable market for investors, analysts said.

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