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Constellation Pullout Tests Obama Taste for Risk

Constellation Nuclear-Loan Pullout Tests Obama Taste for Ris
A Constellation Energy Group Inc.'s power plant in Baltimore, Maryland. Photographer: Jay Mallin/Bloomberg

A U.S. loan-guarantee program is testing how much risk the Obama administration is willing to take to revive the nuclear-power industry.

Constellation Energy Group Inc. said last week it was pulling out of talks on a $7.5 billion loan guarantee to build a reactor at its Calvert Cliffs facility in Maryland. The estimated $880 million the company would have to pay the Treasury Department was “shockingly high,” Chief Operating Officer Michael Wallace said in an Oct. 8 letter to the Energy Department.

The administration offered terms no better than Constellation could get from private investors, said Christine Tezak, a senior energy and environment analyst for Robert W. Baird & Co., a Milwaukee-based brokerage.

“The fact that there seems to be a focus that these projects be very low in terms of financial risk seems counterproductive,” Tezak said in an interview yesterday.

The Energy Department has authority to provide $18.5 billion in guarantees to nuclear-power producers, serving effectively as a co-signer to help utilities get financing. The only award so far was to Southern Co. of Atlanta and its partners, which are getting an estimated $8.3 billion in federal backing for a project in Georgia. Southern hasn’t disclosed an estimate of the cost for its federal guarantee.

President Barack Obama has called for an increase to $54 billion in loan guarantees. The U.S. needs a “new generation of clean, safe nuclear power plants,” Obama said in his State of the Union address Jan. 27. Nuclear plants don’t release carbon dioxide linked to global warming.

‘Mitigate That Risk’

The administration must weigh its support for nuclear power against limiting the risk that taxpayers will be stuck with the bill should a nuclear utility default, Kenneth Baer, a spokesman for the administration’s Office of Management and Budget, said in an interview.

“Our job is to mitigate that risk to the degree we possibly can, while also understanding that there also is the goal of getting these projects off the ground,” Baer said. The budget office negotiates the terms of loan guarantees along with the Energy Department.

Constellation’s decision to cut off talks during negotiations surprised administration officials, Baer said.

The administration considers revitalizing the nuclear industry a “crucial part of reducing greenhouse-gas emissions and creating jobs in growing sectors of the economy,” Baer said.

NRG’s Prospects

Constellation’s decision places NRG Energy Inc., a Princeton, New Jersey-based power producer, in the lead for the next loan-guarantee award, Charles Fishman, an analyst at Pritchard Capital Partners LLC in Falls Church, Virginia, said in a note to investors yesterday.

“However, if the fees are this large, it might be a victory that NRG and its partners will also not necessarily want, dooming that project too,” Fishman wrote.

Constellation was unchanged at $32.30 at 10:24 a.m. in New York Stock Exchange composite trading. NRG shares fell 14 cents to $21.

NRG is seeking a guarantee to add two units at its South Texas power plant in Matagorda County. The company has sought to reduce project risks by choosing a reactor design already used in Japan and certified in the U.S, Dave Knox, an NRG spokesman, said. The company is also securing Japanese government financing, he said.

“We’re very confident already about the loan guarantee,” Knox said in a telephone interview. The talks haven’t yet turned to how much NRG would have to pay, he said.

Constellation, EDF

Constellation of Baltimore was teamed with Electricite de France SA, Europe’s biggest utility, to build the Calvert Cliffs reactor. The companies had been discussing ways to resolve a dispute over an option Constellation has to sell non-nuclear plants to EDF for as much as $2 billion.

Constellation’s decision to back away from the loan-guarantee negotiations may signal it wants to force EDF to purchase those assets, said Ingo Becker, head of utilities-sector research at Kepler Capital Markets in Frankfurt.

EDF, the largest shareholder in Constellation, would support the sale of the company as relations between the partners sour, said a person with knowledge of the matter who declined to be identified because the talks are private. A spokeswoman for EDF and a spokesman for Constellation declined to comment.

Senator Jeff Bingaman, a New Mexico Democrat who heads the Senate Energy and Natural Resources Committee, criticized the administration’s handling of the loan-guarantee program at a hearing of the panel on Sept. 23.

‘Larger Role’

The guarantees should fulfill a “larger role” in taking on risk the private sector wouldn’t tackle to “encourage companies to manufacture and create jobs here rather than being enticed to go somewhere else to manufacture and create jobs,” Bingaman said.

Southern Co. isn’t the only company that says it’s committed to building nuclear-power plants. Scana Corp. plans to build two reactors at its Virgil C. Summer plant in South Carolina.

While the company has applied for a loan guarantee, the project isn’t contingent on securing federal help, Chief Financial Officer Jimmy Addison said yesterday in an interview.

Scana of Columbia, South Carolina, had sold about $1 billion in shares and bonds to finance the investment, Addison said.

Santee Cooper

Santee Cooper, South Carolina’s state-owned electric and water utility and a partner with Scana, said the loan guarantee process is “pretty expensive” and the federal aid may not be necessary after a drop in interest rates on corporate debt, according to Chief Operating Officer William McCall.

Southern and Scana operate in regulated markets with customers to buy the power. Constellation would sell its power in a deregulated market where it wasn’t assured a return on its investment, raising its risk, Tezak of Baird said.

Congress may need to do more to encourage nuclear-power projects by passing climate-change legislation putting a price on carbon emissions or including nuclear energy in a federal standard requiring the use of renewable energy, Tezak said. Obama-backed energy legislation on both themes stalled in the Senate this year.

Low natural-gas prices also make nuclear plants less competitive, she said.

“There are a number of things that needed to happen, which one-by-one dissipated as we look at the nuclear renaissance,” Tezak said.

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