Constellation, EDF face a decision over deal’s status 

Posted: 12:37 pm Fri, October 30, 2009
By Danielle Ulman
Daily Record Business Writer

Despite approval from state regulators, it is uncertain whether Constellation Energy Group Inc. will decide to close its $4.5 billion nuclear transaction with Electricite de France.

Constellation entered the deal at a time when it was financially unstable, but it has made moves to sell off some of its riskier businesses and could survive without a partner. Constellation could also choose to take its case to court to challenge the Public Service Commission’s jurisdiction over the deal.

The companies said in a statement that they had received the PSC’s order and would review it over the weekend. The PSC asked the companies to confirm the deal’s status by Friday.

Calls to Constellation for comment were not returned.

Rumors that the French government and the new head of EDF would like to scrap the deal to buy 49.99 percent of Constellation’s nuclear business began circulating last week. A French official told the Dow Jones Newswires Friday that the government has no position yet.

If EDF did pull out of the deal, Constellation has the option to sell $2 billion worth of coal plants to EDF, something that officials of the French company said they did not want during PSC hearings.

“I think the contract was written in a time when Constellation was concerned about a possible bankruptcy, so if ever there was an agreement that should have been written in an airtight way, this is that agreement,” said Paul Freemont, an analyst with Jefferies & Co. in New York.

“And because EDF was basically trying to induce Constellation to walk away from an existing ironclad agreement with MidAmerican [Energy Holdings Co.], I would assume that the contract would have been written to benefit Constellation,” said Freemont, who noted that he is optimistic that the transaction will close.

Conditions attached

Friday’s ruling came with conditions attached. The PSC said the conditions, including a $250 million investment into Baltimore Gas & Electric Co., one-time credits of about $100 per customer and measures to protect BGE from bankruptcy, were needed to make sure the deal is in the public’s interest and provides benefits and no harm to consumers.

State regulators found that the benefits Constellation said were inherent in the deal — including possible construction of a third nuclear reactor at Calvert Cliffs — were “too contingent” to provide benefits to consumers.

In order to meet the benefits provision of the law governing public utility companies, the PSC said Constellation would have to pay one-time credits to ratepayers totaling $110.5 million. The PSC said the credit was designed to be as “neutral financially” as possible to the companies, and is just under the total EDF and Constellation planned to invest in other items.

The credit would be about half of what Gov. Martin O’Malley told the PSC he would like to see the company pay customers for the deal’s approval. O’Malley commended the PSC for its “fair and reasonable order” in a statement Friday, although it did not attach all of the conditions he had suggested.

“By ordering certain conditions as part of the approval, the PSC clearly addressed the core issue the [s]tate has pursued in this matter from the start — to protect the 1.1 million BGE ratepayers by upholding a law that requires this deal to provide ‘benefits and no harm’ to ratepayers,” he said.
Travis Miller, an analyst with Morningstar Inc. in Chicago, said it seems like the PSC came “down the middle” between what the governor wanted and what the company said it was willing to do.

Rosapepe disappointed

Sen. James C. Rosapepe, D-Prince George’s and Anne Arundel, said he was disappointed with the ruling and will take the fight to Annapolis.

“The PSC had strong pro-consumer proposals from Gov. O’Malley and from others which would have reduced rates, improved our environment, helped the needy and moved to end the failed experiment with deregulation,” he said.

Regulators did order Constellation to invest $250 million in BGE to ensure its stability and restrict dividends paid by BGE to Constellation unless the company meets certain equity milestones.  BGE may file with the PSC to raise electricity and gas distribution rates in January, and the next rate case cannot be filed until January 2011.

Following the close of the deal, Constellation would be required to implement a variety of measures to distance itself from BGE, in order to protect the utility from bankruptcy and ratings downgrades. BGE would be prohibited from putting money into Constellation’s “cash pool.”

“These conditions not only will protect BGE against financial catastrophe at the hands of its parent, but will strengthen BGE in ways that will yield more for ratepayers in the long term than any rebate,” the PSC said.

Mayo A. Shattuck III, Constellation’s CEO, president and chairman, said during an earnings conference call Friday morning — before the PSC released its order — that the company would move forward with the deal if the ruling was reasonable.

The PSC’s approval comes more than a year after Constellation fell into a dire position when investors lost confidence that the firm’s commodities-trading business would be able to secure financing as lending contracted on Wall Street. The company agreed to a $4.7 billion merger with Warren Buffett’s MidAmerican to stave off bankruptcy, but later canceled that deal to accept EDF’s offer.

Constellation said when it accepted the deal with EDF that it didn’t think state regulators would need to approve the deal because of a $2 billion settlement it had signed with Maryland in 2008. The company fought the state’s right to review the deal in court, but lost.

In the settlement the state agreed to give up regulatory controls over any deal involving the transfer of up to 20 percent of the company’s stock or control of 20 percent of its board of directors in exchange for rebates for BGE’s customers. Larger transactions would be monitored by the state under this “safe harbor” arrangement.

9 percent stake

The deal would net EDF a 9 percent stake in Constellation and one of 13 seats on its board, but the PSC decided to launch an investigation into whether the deal would require its approval because the transaction involved assets, not board control.

The company and the O’Malley administration traded settlement proposals over the summer that neither side found workable. If an agreement had been brokered, O’Malley would have suggested to the PSC that the terms of the settlement cleared up concerns that EDF would have influence over BGE and that a review of the deal would not be necessary.

O’Malley very publicly voiced his opinions on the nuclear deal and tried to win rebates for customers in exchange for his blessing over the transaction. Constellation has said that approval of the deal would pave the way for the companies to move forward with plans to build a new nuclear reactor in Calvert County, bringing jobs to the ailing construction industry and a new power supply to a state with possible energy shortages in its future.

Without EDF as a partner, Constellation said it will not build Calvert Cliffs 3.