Constellation Drops Nuclear Plant, Denting EDF's U.S. Plans

Constellation Energy Group Inc. pulled out of negotiations on a $7.5 billion loan guarantee to build a nuclear reactor in Maryland with Electricite de France SA, potentially damaging the French utility’s U.S. expansion plans and the companies’ partnership.

The cost of the U.S. government loan guarantee that the companies’ joint venture, UniStar Nuclear Energy, would need to build the Calvert Cliffs 3 reactor is too high and creates too much risk for Constellation, the Baltimore-based utility said in a statement yesterday. The statement said the next step is up to EDF.

Constellation’s decision may make it more likely that the U.S. utility will exercise a put option forcing EDF to buy as much as $2 billion of Constellation’s non-nuclear power plants, said Ingo Becker, head of utilities sector research at Kepler Capital Markets.

“EDF very clearly said if they exercise the put, this thing is over,” Becker said. “Constellation may have just turned around the calendar and pulled out of the new build before exercising the put, anticipating EDF’s reaction.”

In a letter Oct. 8 to Daniel Poneman, deputy secretary of the U.S. Department of Energy, Constellation said it received a government estimate that the venture would have to pay about $880 million to the U.S. Treasury for the loan guarantee, “dramatically out of line with both our own independent assessments and of what the figure should reasonably be.”

Increased Risks

Further negotiations only increased the risks and failed to significantly lower the cost figure, Constellation said in a letter posted on the Washington Post website and confirmed by Constellation.

Obama administration officials were “surprised to get that letter,” said Kenneth Baer, spokesman for the White House Office of Management and Budget, in an e-mailed statement yesterday.

“DOE had been working with them diligently on this complex transaction and even on the day they sent this news had a modified set of loan terms that responded to the concerns they had,” Baer said. “We urge Constellation and its partners to examine this modified set of terms and continue working on this project.”

Poneman, reached by telephone yesterday, declined to comment. Department of Energy spokeswomen Tiffany Edwards and Stephanie Mueller didn’t immediately return messages requesting comment.

EDF, the world’s biggest operator of nuclear plants, said it was shocked by Constellation’s withdrawal.

Finish Line

“We were at the finish line with the Department of Energy and were making significant progress,” Paris-based EDF said in an e-mailed statement. “Constellation has withdrawn from CC3 in spite of our repeated efforts to substantially decrease their exposure and risk to the project.”

Constellation Energy spokesman Lawrence McDonnell declined to comment on the company’s statement or EDF’s response. He also declined to comment on whether Constellation has decided to exercise its put option.

Constellation gained the option in a 2008 agreement in which EDF paid $4.5 billion for a half stake in the U.S. company’s reactors. The deal kept EDF’s nuclear foothold in the U.S., thwarting a takeover by Warren Buffett’s MidAmerican Energy Holdings Co.

More Favorable Terms

Constellation’s pullout might also be an effort to win more favorable loan guarantee terms, said Daniele Seitz, a New York- based utility analyst for Dudack Research Group.

“Building a nuclear plant for Constellation would be an investment of $5 billion or more with no return for 10 years, so it needs help,” Seitz said. “Constellation may feel that the government is not willing to bear enough share of the cost.”

It could also be a way to put pressure on EDF to fund more of the construction, she said. EDF, which is building a reactor based on the same design in Flamanville, France, estimates the cost of the French reactor at 5 billion euros ($7 billion).

Separately, Constellation’s plan to purchase conventional power plants from Boston Generating LLC for $1.1 billion moved ahead yesterday after a bankruptcy court judge approved an auction of the assets.

U.S. Bankruptcy Judge Shelley Chapman in Manhattan approved Boston Generating’s auction and bidding rules. Chapman, who considered the asset sale at a four-day hearing that ended Oct. 7, overruled objections by creditors including Fortress Investment Group LLC.

Decline in Profit

Constellation’s profit declined 34 percent to $143.5 million, or 36 cents, in the second-quarter ended June 30. Sales fell 14 percent to $3.31 billion. Its shares have dropped 8.6 percent this year. Constellation will announce third-quarter earnings Oct. 29.

Constellation’s pullout from the Calvert Cliffs expansion could halt the first project in EDF’s program to develop a new generation of reactors in the U.S. The reactors, called EPR, are designed by Paris-based Areva SA.

EDF on July 30 reported a 47 percent drop in first-half profit on a charge linked to the Calvert Cliffs project and the outlook for lower prices in the U.S. Net income was 1.7 billion euros in the first half compared with 3.1 billion euros the previous year. That missed the 2.52 billion euro median estimate of nine analysts surveyed by Bloomberg.

EDF shares have declined 24 percent this year.

Ameren, Northrop Grumman

Other companies with plans that might be affected by a collapse of the Constellation-EDF partnership include Ameren Corp., the St. Louis-based utility owner that has proposed building an Areva-designed reactor, and Northrop Grumman Corp., which proposed a plant in Virginia to build parts for Areva reactors, Seitz said.

“We’re very disappointed and even surprised” by Constellation’s announcement, said Shaun Adamec, press secretary for Maryland Governor Martin O’Malley, who had personally lobbied U.S. President Barack Obama on behalf of the loan guarantee. “Everyone would agree we were close to the finish line.”

The U.S. government has approved one conditional loan guarantee for a nuclear power project, to Southern Co., which can recover costs during construction under Georgia law. Maryland regulations say that power plant construction costs can be passed through to customers only once the plant is operating, the Washington Post said.

Committed to U.S.

While the future of the Calvert Cliffs plant on the Chesapeake Bay about 45 miles (72 kilometers) southeast of Washington is “unclear,” EDF said it “remains committed to pursuing new nuclear in the U.S.”

EDF would look for new U.S. partners to build reactors should arrangements with Constellation collapse, according to the Oct. 4 note by analyst Ameet Thakkar, citing an analyst lunch with EDF Group Senior Executive Vice President of Finance Thomas Piquemal.

That might prove difficult, Kepler’s Becker said.

“Constellation is saying that nuclear new build is not attractive at this time, and they are not a small utility,” Becker said. “That doesn’t bode well for EDF.”

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net Alan Katz in Paris at akatz5@bloomberg.net.

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net.

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