Thursday, August 5, 2010

Will Constellation walk away from Calvert Cliffs III?

The pressure is on for the utility to make up its mind

take a walkConstellation (NYSE:CEG) has always been upfront about its “walk away” option for the Calvert Cliff's III nuclear reactor project if the Department of Energy (DOE) loan guarantee is not awarded to it. Thanks to a vote in Congress, DOE only has enough loan guarantee authority to cover one new reactor project and there are three contenders.

Now we may know why Constellation is speaking so frankly about its options. CEO Mayo Shattuck told the Baltimore Sun Aug 1 he’s “frustrated” by the delays. Is there more to it? Forbes reports that Constellation is under pressure from investors to think carefully about the future of the 1,650 MW Areva EPR.

Without citing any of the investors by name, or with a quote for attribution, Forbes writes that the delay in the loan guarantee is "great news for investors."

"While the companies desperately want to win loan guarantees, their investors are hoping the companies lose out. With energy prices low and new nuclear construction so risky and expensive, investors would rather that their companies stick to more conventional businesses."

The analysis hinges on the deal with EDF for 49% of the company. In December 2008, EDF paid $4.5 billion for the equity stake. According to Forbes, Constellation is looking at an option to sell 12 fossil fueled power plants to the French power group for an additional $2 billion. Forbes says investors would rather see Constellation put the cash from that deal in conventional new energy projects, such as gas fired plants, than pursue its expansion plans for the Calvert Cliffs nuclear power station.

Can EDF swing a deal?

Square DanceThe dilemma for EDF is it has its eyes on another dance partner. The two-step experience EDF has in mind is a 15% stake in Areva. With its vertical integration worldwide across the entire nuclear fuel cycle, an investment in Areva may be more attractive to EDF.

If EDF faces a zero sum choice between Constellation’s U.S. coal-fired plants and a piece of Areva’s global nuclear business, which one will get the cash assuming EDF has it?

How does Constellation look in comparison? It turns out EDF took a provision against earnings in the first half of 2010 regarding the Calvert Cliffs project.

“In response to all of the new information and outlooks, EDF established a provision of [E]1,060 million . . . This provision covers the risks of impairment of the assets of CENG [Constellation Energy], the investment in Unistar and certain future costs and risks associated with the project, as EDF still intends to continue studies for development of a new reactor on the Calvert Cliffs site.”

Money futures What EDF is talking about is that when it got into the Calvert Cliffs deal two years ago, natural gas prices were going up. Now they’re headed the other way and demand for electricity in Constellation’s service area has tanked thanks to the current U.S. recession. What conditions will prevail for these and other factors five or eight years from now is an unknown. EDF has to account in the here and now for the financial risks facing the project.

EDF's income fell by nearly 50% in the first half of 2010. It is also facing a growing debt problem and has expansion plans for new nuclear projects in the U.K. If Constellation is looking hard for that $2 billion, the utility’s investors had better hope EDF has a cookie jar hidden away somewhere.

A big piece of EDF’s decision comes down to what the French government wants for EDF and Areva. Calvert Cliffs III is intended to be a show piece for Areva’s EPR in the U.S. No other U.S. utility is as far along in development of a new build with the French state-owned reactor design.

There is a web of interests involved in decisions about the future of the Maryland power station. Constellation's investors and the utility’s management will have a lot on their mind. A prudent investor will likely want to keep his options open.

Who is waiting in the wings for loan guarantees?

backstage2Backstage at the DOE playhouse the main competition over the contest for loan guarantee comes from NRG’s twin 1,350 MW ABWR reactors planned for the South Texas Project (STP). There the utility has unique financing plans waiting for the NRC license. The investors include support from Japan’s export bank and a major Japanese nuclear utility.

NRG (NYSE:NRG) CEO David Crane told the Dallas Morning News Aug 3 he is “confident” NRG will get the loan guarantee. This statement comes after the House voted down a provision last week to expand DOE’s loan authority by $9 billion.

The other two projects on DOE’s short list are Scana’s V.C. Summer Station (twin Westinghouse 1,150 MW AP100s) and Luminant’s Comanche Peak (twin Mitsubishi 1,750 MW APWRs). Neither had said much recently about their prospects. Luminant was hopeful when the additional $9 billion was approved by a House committee. Scana said in a statement the future of its project does not hang so closely on the fate of loan guarantees,

If DOE is forced to choose between Constellation and NRG for the remaining loan guarantee authority, it’s going to be a long night at the Forrestal Building.

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1 comment:

Jonathan said...

Dan: When I mentioned investors in Constellation and NRG would be happy to lose out on the loan guarantees, I was sourcing the general Wall Street sentiment that a loan guarantee win would be, in their parlance "a significant negative" for the stock. Brian Chin of Citigroup, for example, wrote this in a recent note and others feel the same. Hope this helps! Jonathan Fahey, Forbes.