Constellation's French ally now harsh critic in buyout

October 15, 2011|Jay Hancock

Three years ago, Constellation Energy boss Mayo Shattuck signed up a huge French electricity company to save his job. By now, he may be wondering whether the deal was worth it.

Owned mostly by the French government, EDF Group first clashed with Constellation about developing a new nuclear reactor at Calvert Cliffs in Southern Maryland. Then it publicly threatened Shattuck in a stare-down over a financial option worth hundreds of millions of dollars.

Now it's trying to bust up Constellation's $7.9 billion agreement to merge with Chicago-based Exelon Corp.

"My primary recommendation is that the commission should deny authorization for the merger outright," Jeffrey W. Johnson, an expert witness and consultant for EDF, said in testimony filed last week with the Maryland Public Service Commission.

EDF is unlikely to be the deciding factor in whether Constellation and subsidiary Baltimore Gas and Electric Co. end up getting managed from Chicago. But it's proving to be an entertaining addition to the uncertain consumers, strutting CEOs, high-horsing politicians and overpaid lawyers who constitute the usual cast in these affairs.

Now that Constellation's most important business partner has also become the merger's fiercest opponent, the once-stodgy proceedings have taken on an air of confrontation, betrayal and French pique.

EDF was already a Constellation shareholder and nuclear-development teammate when Constellation was hurtling toward bankruptcy during the 2008 financial crisis. Imprudent borrowing and the credit collapse had turned the once-dependable Baltimore utility into something that looked more like Lehman Brothers.

Constellation's first rescuer was Warren Buffett's MidAmerican Energy, which offered a bailout in exchange for a deal to buy the company at a Filene's Basement price. But EDF, not wanting to lose Constellation as its American beachhead for nuclear power development, offered an alternative that kept the company independent and run by Shattuck.

That investment gave EDF an ownership stake of nearly half in Constellation Energy Nuclear Group, which owns Constellation's atomic-energy reactors. The French now have more than $5 billion sunk into Constellation in the form of common stock, nuclear-generation ownership and development costs for another Calvert Cliffs reactor.

If they expected gratitude rather than a clear-eyed American focus on cost-cutting and raising Constellation's stock price, they were wrong. Buffett was going to buy Constellation for $26.50 a share. Exelon has agreed to pay stock worth about $40 per share. Constellation's board and almost certainly a majority of Constellation's shareholders will take the deal, assuming regulators allow it.

"At the present time, EDF does not see how it could vote in favor of this merger," company spokeswoman Kelly Sullivan told The Baltimore Sun last week. But EDF's 7 percent stake will almost surely be outvoted by pension funds, arbitrageurs and other Constellation shareholders. That means the French company must win over the Public Service Commission, which has veto power over the merger.

EDF's main worry seems to be the prestige and control it would lose if Constellation Energy Nuclear Group gets buried within Exelon's much bigger nuclear fleet. But the company is also appealing to Gov. Martin O'Malley's desire for carbon-free energy and is shamelessly playing the is-this-the-treatment-we-deserve? card. So last week it set itself as the deal's most outspoken critic.

"When Constellation was on the verge of bankruptcy and facing an out-of-state takeover, EDF acted as a friendly 'white knight,' which allowed Constellation to remain one of Maryland's few Fortune 500 companies," Johnson complained in his EDF testimony.

EDF "has been Maryland's reliable and steadfast energy partner," he said. The "alleged benefits" Exelon has offered Maryland — temporarily protecting BGE jobs, building a regional headquarters, ratepayer rebates and charity guarantees — are "extremely limited, ambiguous and do not and cannot overcome the serious downsides to Maryland of the proposed merger," he said.

Previous concerns from state agencies that a combined Exelon-Constellation could push up Maryland electricity prices haven't been expressed strongly enough, Johnson said. And if Exelon really wanted to help, he added, it would help EDF build the new Calvert Cliffs reactor.

"When it comes to a project that really counts for Maryland, Exelon has looked the other way," he said.

This verges on delusion. Since Constellation pulled out of the Calvert Cliffs team last year, EDF has been looking for an American partner to help it build the reactor. As a foreign company, it can't do it alone.

But neither economics nor politics favors reactor construction. Without a carbon tax to make nuclear energy competitive, natural-gas plants are the cheapest generation option. The Fukushima disaster in Japan set back the industry's public relations by decades.

That doesn't mean the Exelon buyout should be approved or that regulators will do so. Concerns about Exelon-Constellation's ability to push up prices are real. So are worries about Exelon's potential ability to plunder BGE in the future.

EDF may wind up helping to save Shattuck's job again. This time, however, neither party will be thrilled about the renewed partnership.

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