Adieu, Constellation Deal With Edf, And Power Plant

August 19, 2009|By JAY HANCOCK

This is a column about how Constellation Energy Group and Electricite de France are going to scrap the $4.5 billion deal that has filled headlines, politics and regulators' files for eight months.

My apologies for not writing it sooner - like the day they announced it. We should know by now that, any time Constellation contemplates matrimony, the courtship is probably doomed to political resistance and heartache.

Shame about that third nuclear reactor the companies were going to build at Calvert Cliffs on the Chesapeake. An electricity-starved Maryland could have used the juice.

A dead deal also means the fabulous paycheck of Constellation boss Mayo A. Shattuck III will escape molestation. Gov. Martin O'Malley was demanding a Shattuck haircut as part of the ransom for approving the deal.

Maybe that's Constellation's main motivation for exiting. But it's not the only one.

I could be wrong. No announcements have been made. To hear Constellation tell it, it's committed to gaining the Public Service Commission's approval and finishing the transaction this year.

But the line of previous deals involving Constellation and subsidiary Baltimore Gas and Electric looks like cattle skulls on the Santa Fe Trail in July. There are reasons to believe this one will meet the same end.

Constellation doesn't need the EDF project as badly as it once did. A few months ago the promise of the French billions and a short-term French bailout were the only things between Constellation and bankruptcy.

The company had borrowed too much and bet too big and nearly came to grief in last fall's financial crash.

First it found a savior in Warren E. Buffett's Mid-American Energy, which agreed to buy it for a bargain price. Then it spurned Buffett and turned to the French, who agreed to inject $4.5 billion in return for half-ownership in Constellation's nuclear-energy business.

But meanwhile Constellation has been replenishing its coffers and cutting its debt. It sold off some businesses. It cut the dividend paid to shareholders. It unwound risky bets on commodities. It laid off employees.

Now, in the opinion of some smart Wall Street cookies, the company is ready to go off the Gallic oxygen if it must.

"We do not believe that Constellation needs the deal to survive," Macquarie Research's Angie Storozynski wrote clients a couple weeks ago. Fitch Ratings came up with the same conclusion.

Not long ago a "what-if-the-EDF-investment-falls-through" analysis would have seemed a waste of time. Both companies were willing. Contracts had been signed.

The General Assembly passed a law excluding the Public Service Commission from blocking such deals unless certain conditions were met. The EDF agreement didn't come close.

But regulators asserted authority anyway. Hearings start next month. O'Malley presented a list of demands including givebacks to BGE ratepayers, new regulations protecting BGE from potential financial trauma and "a rational approach" to pay for Shattuck, who pulled down $15.7 million last year after he nearly wrecked the company.

Worthy goals all. Except for the fact that in this case they're none of the state's business. To get the short-term political bump that would come with Constellation concessions, O'Malley risks the new Calvert Cliffs plant, a crucial, long-term piece of Maryland's economy.

No EDF deal, no plant. Or accompanying construction jobs. Or new, carbon-free megawatts. Those are more important than Shattuck's pay or quickie rate relief.

Constellation might even be better off without EDF, says Storozynski, whose firm does investment banking for the Maryland company.

If the deal craters, Constellation gets to keep all of its nuclear power business instead of selling half. Nuclear power should look increasingly attractive if Congress starts taxing carbon emissions.

Plus, as a part of the agreement signed last year, Constellation could sell 11 of its (mainly) coal-fired generators, including two in Maryland, to EDF at a predetermined price. Under that scenario Constellation would get less cash than with the nuclear deal. But it could unload some dirty old plants that might not fare well in a lower-carbon economy.

And Shattuck could keep his money and stick it to O'Malley.

In any event, "I struggle to understand why a company would want to invest so much money in a state where every year there's a discussion of re-regulation" of electricity, Storozynski said.

EDF may not be keen to finish what it started, either. Like Constellation, it is trying to sell assets, raise cash and reduce debt in rough financial waters.

"If EDF is struggling to cover costs at home, it is unlikely they will have the funds to take on such large-scale projects," a financial analyst told The Times of London last week. He was referring to EDF's plans for nuclear plants in Britain, but he could have been talking about Calvert Cliffs and the Constellation investment.

A Constellation spokesman referred me to Shattuck's comments on a recent conference call in which he said: "We have very strongly taken a position that we would like to get this transaction completed."

OK. The company said the same thing before it pulled the plug on the Buffett deal last year. Before it scrapped an agreement to merge with FPL Group in 2006, blaming regulatory demands. Before it called off a merger with Potomac Electrical Power Co. in the 1990s for the same reason.

Shattuck doesn't need the EDF deal as badly as O'Malley thinks he does. Maryland needs it more than either of them. Shame we probably won't get it.

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