Constellation pulls out of new Calvert Cliffs nuclear power venture

Constellation Energy Group walked away this weekend from federal financing negotiations for a proposed third nuclear reactor at Calvert Cliffs in a move that casts the project into doubt and threatens to erase thousands of jobs to build and operate the plant, as well as cut off a crucial supply of power expected to lower prices.

Known as Calvert Cliffs 3, the new nuclear plant was expected to generate 1,600 megawatts of carbon-free energy, which would help alleviate an expected electricity shortfall in Central Maryland that could start as early as next year. The project has been a joint venture between Baltimore-based Constellation and France's EDF Group, though the relationship between the two companies has been strained in recent months.

The new Calvert Cliffs plant has been estimated to cost up to $9.6 billion. Constellation and its partner, EDF Group, had already spent more than $600 million on the project. In a letter to the U.S. Department of Energy on Friday, and made public shortly after midnight Saturday, Constellation said it was worried the terms of a proposed federal loan guarantee would add another $880 million to the venture's cost.

The Paris-based EDF Group, the world's largest owner of nuclear energy plants, has been pushing to revive nuclear energy plant construction in the United States along with others.

The Calvert Cliffs project would have marked EDF Group's continued expansion into the United States' nuclear energy market, two years after the company came to the rescue of a then-financially troubled Constellation.

In an e-mail to Constellation employees on Saturday, CEO Mayo A. Shattuck III said the loan guarantee was "unreasonably burdensome and would create unacceptable risks and costs for our company."

But in a news statement Saturday, EDF sharply criticized the Baltimore energy company for "unilaterally" withdrawing from the multibillion-dollar project.

"It's really unclear at this point how the project could move forward, given Constellation's surprising decision," said Kelly Sullivan, a spokeswoman for EDF Group.

Constellation and EDF had sought a loan guarantee from the federal government, which, through the Energy Act of 2005, tried to make it easier for companies to access credit to finance nuclear power plant construction. But Constellation and EDF would have had to pay for the federal backing, at a cost that Constellation thought was too high.

In pulling out of the federal loan process, Constellation cited the loan's high cost, as well as other factors, such as cheaper natural gas prices and the lack of climate-change legislation that would make nuclear power more financially viable for energy companies. Some analysts had questioned the timing of the project.

"The real culprit has nothing to do with Constellation, EDF or the federal government," said Paul B. Fremont, an energy analyst with Jefferies and Co. in New York. "It has to do with gas prices being clearly lower today than when they made the decision to go ahead with the project. … There's not a single new power plant that's moving forward in the current low price environment, and that includes other forms of generation."

Travis Miller, an analyst with Morningstar, released a report Thursday commenting on the Calvert Cliffs venture, saying that "new merchant nuclear is not economic at current gas and power prices."

Politicians and leaders from both companies had been promoting the project as one that was good for the Maryland economy. Constellation and EDF had been in talks for months with the federal government over terms and conditions for a loan guarantee.

"After months of effort strongly engaging on the project's behalf, I am disappointed, but will continue working to see if additional resources can be brought to bear in the days ahead to resume the loan guarantee process," said Rep. Steny H. Hoyer, House majority leader, whose district includes the Calvert Cliffs plant.

Gov. Martin O'Malley, who supported the Calvert Cliffs project, said through a spokesman that he was surprised and disappointed by the news.

"All parties were pretty confident that we were close to the finish line, so it was surprising to see Constellation pull the plug," said spokesman Shaun Adamec. "The governor personally lobbied the White House, and had a conversation with the president regarding these loan guarantees. It's a setback."

In a statement, O'Malley's re-election opponent, former Republican Gov. Robert L. Ehrlich Jr., blamed O'Malley for the project stalling.

"Governor O'Malley had an obligation to broker an agreement between these parties in order to make this economic development project a reality. He failed," according to Ehrlich. The two candidates have sparred over increases in power prices during the past several years, which were part of the state's energy market deregulation.

Shattuck, in his statement to Constellation employees, thanked Maryland's congressional delegation, the governor, labor unions and "the people of southern Maryland" for supporting the nuclear plant.

In its letter to the Department of Energy on Friday announcing its withdrawal from the loan guarantee process, Constellation noted the lack of climate-change legislation, which would make carbon-free nuclear energy cheaper than traditional power plants, declining natural gas prices, and the rising cost of plant construction.

Michael J. Wallace, the chairman of Constellation's nuclear energy group, who worked closely on the collaboration, said in the DOE letter that there was significant uncertainty with how the Office of Management and Budget determined the loan guarantee fee that Constellation and EDF would have to pay, leading to "unreasonably burdensome conditions."

In July, Shattuck warned that the new reactor would be in jeopardy if the project did not receive the loan approval by the end of the summer, though he said other variables remained before Constellation and EDF made a final decision on moving forward. Because of the delay, the company cut back on its spending on the project.

The Calvert Cliffs expansion was proposed by the Constellation-EDF joint venture known as UniStar Nuclear. UniStar planned to build a next-generation nuclear power plant that was based on previous plants in the United States, Europe and China. The joint venture also has plans for nuclear plants in Missouri, Pennsylvania and New York.

The partnership between Constellation and EDF began with great promise.

In 2007, they formed UniStar to develop new nuclear projects in North America, including Calvert Cliffs, and ignite a U.S. nuclear renaissance. EDF is now Constellation's second-largest shareholder.

Then, two years ago, EDF Group came to Constellation's financial rescue when it bought out nearly half of its nuclear operation. Constellation had teetered on the edge of bankruptcy amid the financial sector meltdown in late 2008, and EDF bailed out the company by paying $4.5 for its share.

Constellation had initially agreed to a takeover by billionaire investor Warren Buffett but instead took the deal with EDF — allowing the company to remain independent.

But in recent months, the relationship between the two partners has been tested over a dispute involving a provision of their deal. EDF is concerned that Constellation would exercise an option to sell its non-nuclear power plants to the French company for up to $2 billion. That option expires Dec. 31.

Jonathan W. Thayer, Constellation's chief financial officer, said in late September that the company would collect $1.4 billion after taxes if it were to exercise the option. Analysts have speculated in recent days that it would make sense for Constellation to do so.

If Constellation were to pull the trigger on the option, EDF Chairman and CEO Henri Proglio told The Baltimore Sun last month that it would cause a "breaking point" that "will destroy the credibility of the management" at Constellation.

In its statement Saturday, Constellation said it would discuss the future of Calvert Cliffs 3 with EDF, and that UniStar's board of directors will consider the latest developments.

"We are deeply disappointed that the loan guarantee process did not play out as we had hoped," according to Constellation.

Baltimore Sun reporter Hanah Cho contributed to this article.

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