Constellation's partnership with French company tested

Partnership to develop nuclear power faces economic headwinds, uncertainty

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Crisis can trash or temper a marriage. We'll soon know which way it goes for Baltimore's Constellation Energy Group and France's EDF Group.

Their partnership in owning and developing nuclear electricity plants is being tested by the terrible economy, slumping energy prices and an overdue decision from Washington on loan guarantees for a new reactor in Maryland.

There's also leftover business from almost two years ago, when EDF, parent of Electricite de France, bailed Constellation out of a mess by buying almost half its nuclear operation. As part of that rescue, it also gave Constellation an option to sell non-nuclear generation plants to EDF for up to $2 billion.

The option expires Dec. 31. Constellation doesn't need the cash nearly as badly as it did during the financial crisis. But EDF, which has better things to do with its money these days, seems increasingly concerned that Constellation boss Mayo Shattuck will pull the trigger to unload the assets.

Such a move would cause a "breaking point" that "will destroy the credibility of the management" at Constellation, EDF Chairman and CEO Henri Proglio said in a telephone interview Friday.

If the companies break up, it'll be a large setback for U.S. nuclear development and probably doom chances that a new reactor at Constellation's Calvert Cliffs plant will someday feed megawatts to an electricity-starved Maryland.

Proglio was in Baltimore Friday for meetings on the Calvert Cliffs project. He did not meet with any Constellation officials, EDF said. He has good reason to worry that Shattuck will stick him with the aging, mainly coal-fired American electricity plants that are in the $2 billion "put" option.

Thanks to low energy prices, the plants are worth much less than when the companies struck their agreement. Exercising the option would give Constellation a net gain of $1 billion, calculates Paul Fremont, who follows the company's stock for Jeffries & Co. in New York.

Given Constellation's "fiduciary responsibility to its shareholders to maximize the value of the company, it's very hard for us to see a scenario where management could justify sort of walking away from the value that's inherent in the option," Fremont said in an interview.

But it's not just the option that's potential grounds for divorce.

As I wrote a few weeks ago, the outlook for U.S. nuclear electricity plants has grown much dimmer. Low prices for fossil energy make nuclear electricity less competitive. So does Congress' failure to approve a tax or cap-and-trade scheme for carbon dioxide emissions.

Many investors had assumed that $100-a-barrel oil and penalties for carbon would make nuclear energy the low-cost, high-profit alternative. But the changing prospects prompted EDF to book a large charge against profits this summer to reflect the lower value of its U.S. nuclear operations.

And the Energy Department still hasn't decided whether to guarantee loans for the third nuclear reactor that Constellation and EDF have proposed to build at Calvert Cliffs, on the Chesapeake's western shore. Constellation expected a decision months ago.

Shattuck criticized the delay in July. Proglio, too, said he is "frustrated."

"This should happen quickly," he said. "It's very important both for the company and the Maryland state and new nuclear in the U.S."

He rejected suggestions that changing energy economics make the proposed Calvert Cliffs unit too risky or existing nuclear plants unattractive. "We believe in the project," he said. "We believe in our presence in this country. We believe in the efficiency of nuclear in the long term."

Even if he's right, a rejection by the Energy Department would hurt the EDF-Constellation relationship. Another project is competing for the same loan guarantees, which are essential for financing the third Calvert Cliffs unit. Without a reactor to build with its partner, there's less reason for EDF to keep its investment either in Constellation's existing nuclear plants or in Constellation's common stock.

A Shattuck decision to exercise the $2 billion put option, forcing a far-from-flush EDF to write a big check, could lead to an irreparable breach. Proglio, who has run EDF for only about a year, may not be committed in any case. Last year the French press reported that he didn't want to consummate the investment in Constellation's nuclear business.

What will Constellation do?

"We are committed to working with EDF to resolve these issues," the company said in an e-mailed statement. But, it added, both companies face an "increasingly challenging economic and policy environment." Constellation, it said, must be mindful of "our contractual rights and obligations and the interests of our shareholders." 

The Energy Department guarantee is the fulcrum. If Washington backs a new reactor at Calvert Cliffs, Constellation and EDF may have a baby to raise, a reason to stay together and compromise on the put option. If the project dies, Shattuck has little reason not to cram the coal plants down EDF's throat.

The companies' differences will have become irreconcilable. And we all know what that means: divorce.

An earlier version of this column reported incorrectly Henri Proglio met with Constellation energy CEO Mayo Shatttuck. EDF officials say the two did not meet when Proglio was in Baltimore on Friday. The Sun regrets the error.
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