Constellation Weighs 'Home Run' Power-Plant Sale To Partner EDF

A clause in the deal Constellation Energy Group Inc. (CEG) cut with Electricite de France SA (EDF.FR) to save itself could reap a handsome return for the U.S. power company.

In late 2008, Constellation agreed to sell nearly half of its nuclear-power business to the French power giant after the financial crisis nearly drove the Baltimore company into bankruptcy. The $4.5 billion deal was lauded as positive for both companies, since Constellation could remain an independent, publicly traded company, while EDF expanded its reach in the U.S. nuclear-power business.

As part of the deal, EDF agreed to a put option allowing Constellation to sell it 12, mostly coal-fired power plants for up to $2 billion. The put option, which gives Constellation the right, not the obligation to sell the plants to EDF, was created to ensure the cash-strapped U.S. company had ample liquidity. Now, it could end up netting Constellation a big return if exercised before a December expiration and leave EDF saddled with a fleet of U.S. power plants.

If exercised, Constellation would sell to EDF natural gas, hydroelectric and coal plants, mostly located in the Northeast U.S. Since the deal was cut in December of 2008, the value of the power plants has dropped amid declining electricity demand and slumping power prices. The value of coal-fired plants are under additional pressure from expected new air- and water-quality regulations and possible limits on greenhouse-gas emissions to curb climate change.

Analysts at Jefferies & Co. estimate the current value of the 12 Constellation plants at $450 million, while the company would net $1.4 billion after taxes if it exercises the EDF option. They expect Constellation's share price to rally if it goes forward with the sale, with an execution of the option adding $4.75 to Jefferies' target price for shares. Constellation shares closed Thursday at $36.05 up 2.5% on the year.

"Our view is that (the put option) is a home run for the company and its shareholders," Jefferies analyst Paul Fremont said this week.

Nevertheless, exercising the option would present complications for Constellation. The agreement was put in place to ensure liquidity and wasn't a bet by EDF on future asset prices. At the same time, Constellation has to maintain an ongoing relationship with EDF, which will continue to own 49.99% of Constellation's nuclear business and serve as a main partner in its plans to build new reactors in the U.S.

The two companies have one of the leading nuclear-power projects in the U.S. and are in the final stages of a competition for critical federal loan guarantees with an announcement possible in the coming months. Constellation and EDF would build a new reactor at an existing nuclear plant in Maryland.

A Constellation spokesman said the company has received certain approvals from federal regulators to transfer ownership of the fossil plants to EDF, but referred to comments made by Constellation Chairman and Chief Executive Mayo Shattuck at an investor conference this week for the company's current stance on the option.

Shattuck during the meeting indicated Constellation's ongoing relationship with EDF is being factored into the company's deliberations. He said the option was put in place for liquidity reasons, but if exercised holds significant value. Shattuck during the conference declined to elaborate further on how Constellation plans to proceed between now and December.

"Obviously the value of (the option) went significantly into the money. And I think I'm reminded of that by all of you every day," Shattuck told investors during the conference.

A spokeswoman for EDF declined to comment this week beyond explaining the mechanics of the agreement, including how the option was originally put in place to be used by Constellation "in a liquidity stress situation."

Analysts said instead of just exercising the option for cash Constellation may negotiate to take back a larger share of the existing nuclear business or use the money to fund the new nuclear project. But the outlook for the Maryland reactor build has dimmed in the face of slumping natural gas prices. Shattuck said this week the loan guarantee award isn't the only factor in determining whether Constellation proceeds with developing the new reactor. The company will need higher gas prices as well.

-By Mark Peters, Dow Jones Newswires; 212-416-2457; mark.peters@dowjones.com

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