Correction to This Article
This article about a dispute between Constellation Energy and its French partner incorrectly said that President Obama had visited Constellation's Calvert Cliffs nuclear power plant. George W. Bush visited the site as president, and Obama traveled to a different location in Maryland to discuss federal loan guarantees.

Constellation, EDF in purchase dispute

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By Steven Mufson
Saturday, September 25, 2010

Constellation Energy Group is bickering with its French partner in nuclear energy over a $2 billion option that would effectively force the partner, Electricite de France, to buy several of Constellation's aging natural gas, coal and hydropower plants.

Constellation wants to exercise that option before its Dec. 31 expiration deadline, and one person familiar with the negotiations said the dispute between the two companies "isn't brewing. It's brewed."

The mere fact that Baltimore-based Constellation might be willing to anger its partner, which does not want to purchase the power plants, suggests that the relationship might become a casualty of deepening pessimism about whether the much-anticipated U.S. nuclear renaissance is imminent, analysts said.

Constellation and EDF jointly own five nuclear power plants and are equal partners in Unistar, a venture aimed at building a fleet of U.S. nuclear reactors, starting with a third unit at Constellation's Calvert Cliffs plant in Maryland. EDF, which owns 8.4 percent of Constellation shares, is one of the largest companies in Europe; it has 38 million customers and operates more than 65 gigawatts of nuclear plants.

But the economics of nuclear plants in the United States have become more difficult.

Despite a visit by President Obama to Calvert Cliffs, federal loan guarantees that could save billions of dollars for construction haven't come through.

Moreover, increasing volumes of shale gas are bringing down long-term forecasts for natural gas prices, making it tougher for expensive nuclear plants to compete. And while many executives expected Obama to win congressional support for climate legislation, it appears improbable that lawmakers will agree to put a price on carbon fuels.

In an interview last week, EDF chief executive Henri Proglio said a loan guarantee was needed as "a signal that, first of all, there is a will to develop nuclear in this country and, second, to identify the best possible operators to be drivers of this."

A loan guarantee "is a necessary hurdle" but "not the only one which must be addressed before any shovel goes into the ground," Constellation chief executive Mayo Shattuck told analysts in July. "It's also obvious to everyone that the market signals to build a base load plant of any kind, let alone nuclear, has suffered significantly since we started the project four years ago."

In an interview earlier this year, John Rowe, the chief executive of Exelon, the nation's largest nuclear utility, said the economics of capital-intensive nuclear power plants didn't make sense unless there was a $25 a ton price on carbon and natural gas prices were $6 to $7 a thousand cubic feet. Gas prices are about $4 a thousand cubic feet.

Another sign of the dimming nuclear outlook: Areva has slowed down construction work on its Newport News facility for making heavy components for nuclear power plants. Areva said in August that it was "adjusting our construction schedule to meet our customers' planning timetables." The company said that without "sufficient loan guarantee funding . . . customers are delaying the start of projects."

Against this backdrop, Constellation might move ahead with the option on nonnuclear plants, although it acknowledged in its annual report filed with the Securities and Exchange Commission that doing so might "adversely impact our relationship with EDF" and their nuclear joint ventures.

The option was drawn up two years ago, when Constellation was rocked by the financial downturn and was scrambling to assure investors about its liquidity. EDF, which owned a sizable stake in Constellation, came to the rescue by buying half its nuclear plants. It also moved to prevent Warren Buffett's MidAmerican Energy from acquiring a large piece of Constellation. (Buffett is a Washington Post Co. director.)

As part of the plan, EDF agreed to the option. If it needed additional liquidity, Constellation would be able to sell as many as 11 power plants - three coal, seven natural gas and one hydropower - to EDF at values agreed to two years ago. Since then, however, Constellation's finances have stabilized and falling natural gas prices have undercut the value of the gas plants.

"Since then, power markets have declined and the value of these assets have declined, too," said Aneesh Prabhu, a Standard & Poor's analyst for Constellation. He added that EDF has already "made significant investments in Constellation, and they may not be looking to pay for assets that don't have that much value."

EDF thinks that after calculating taxes and other costs, Constellation would end up with far less than $2 billion or the $1.4 billion that the company has estimated, say sources familiar with the negotiations who spoke on the condition of anonymity. The plants, some dating to the 1970s, have been largely depreciated.

But above all, sources say, EDF thinks that it is being badly repaid for all it did to rescue Constellation and to contribute to operations and planning since then.

S&P's Prabhu said that even if the two firms make no progress on new plants, Constellation "will have a very miffed partner owning 50 percent of their nuclear fleet." He said the decision came down to, "Do you want to have the money or the relationship?"


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