UPDATE: Constellation, EDF End Nuclear Deal As Ties Sour

Electricite de France SA (EDF.FR) and Constellation Energy Group Inc. (CEG) agreed Tuesday to end a joint venture to develop nuclear power plants together after the relationship soured in recent months.

Problems with the five-year-old venture known as UniStar erupted this fall after Constellation dropped out of an application for a federal loan guarantee for the partnership's first project, citing high government financing costs. The withdrawal put in doubt the development of a new reactor at the Calvert Cliffs nuclear plant in Maryland and strained fragile relations between the companies.

The agreement reached by EDF and Constellation will allow the French power giant to continue pursuing the construction of a new reactor in Maryland and two additional U.S. sites. In exchange, Constellation Energy will receive $250 million in cash and stock. EDF's nearly 50% stake in Constellation's existing nuclear power plants, acquired two years ago in a deal designed to help Constellation stave off bankruptcy, won't change.

The deal is likely to raise questions about whether EDF will be able to go it alone in the U.S. and if Constellation got a fair price for its stake in the partnership and an option to sell the French company several fossil-fuel power plants.

Federal law prevents a foreign operator from owning 100% of a nuclear plant, and analysts have suggested EDF may look for another U.S. partner to replace Constellation.

Asked in an interview if EDF intended to pursue the development of nuclear plants alone in the U.S., EDF Chief Financial Officer Thomas Piquemal said the company was "determined to keep studying" nuclear development prospects in the U.S., but declined to elaborate. EDF also faces questions over whether building new nuclear plants makes sense in the U.S., amid a slump in power demand and uncertainty over federal energy and climate-change policy.

The new agreement will eliminate a clause of the 2008 deal under which EDF could have been required to buy 12 power plants--most of them coal-fired--from Constellation for as much as $2 billion. The disputed requirement known as the put option was part of the deal in which Constellation sold nearly half of its existing nuclear-power business to EDF. EDF had threatened to sue Constellation if it executed the option by a December deadline.

Under the new agreement, EDF will acquire Constellation's 50% ownership in UniStar for $140 million. The French company will receive sites at the Calvert Cliffs plant to build two reactors and sites to build additional reactors at Nine Mile Point and R.E. Ginna in New York. EDF will transfer 3.5 million shares--valued at $110 million--it holds in Constellation to the Baltimore company. That will cut EDF's holdings in Constellation to an estimated 13.5 million shares, and EDF will no longer hold a seat on Constellation's board.

Analysts said the deal announced Tuesday was positive for both companies, since they managed to avoid what could have been a long, costly and uncertain legal battle over their partnership and the put option.

"We had hoped for a more cash-rich settlement, but having taken into account the cash, shares, restructured (power-purchase agreement), a nuclear service agreement and avoided costs, the settlement seems decent to us," Macquarie Capital analyst Angie Storozynski wrote in a note to clients. "A bird in the hand is better than two in the bush."

Piquemal said EDF won't need to take any additional provisions on the partnership after recording a EUR1.06 billion charge in June. Last month, Constellation said the sale of the plants under the put option could result in a $400 million gain for the U.S. company and a loss of $1 billion for EDF. Earlier this month, the company said an initial offer to transfer its interest in Unistar for $1 plus $117 million in reimbursements was below market value. EDF and Constellation invested $817 million in the Maryland nuclear project together.

Constellation shares weren't active ahead of the market opening in the U.S., while shares of EDF were recently up 1.4% at EUR32.80 in Paris.

-By Mark Peters, Dow Jones Newswires; 312-750-4141; mark.peters@dowjones.com; Geraldine Amiel, Dow Jones Newswires; +33 1 40171767; geraldine.amiel@dowjones.com;

(Naureen S. Malik in New York contributed to this report.)

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