Friday, September 26, 2008

The Warp Effect: WSJ on Buffett, Constellation and the Fate of the EPR

Buffett Nuclear EnergyThe Wall Street Journal has a story about Warren Buffett's pending purchase of Constellation Energy and, particularly from our point of view, its UniStar subsidiary, a nuclear consortia that includes Electricite de France, AREVA and Bechtel.

The WSJ has no idea how Buffett might proceed with its Unistar subsidiary:

On Thursday, MidAmerican chief executive Greg Abel sounded more enthusiastic about the technology, saying "we're committed to new nuclear."
But:
Mr. Buffett's sudden emergence raises questions about whether nuclear development, in general, has viability, according to Paul Patterson, head of Glenrock Associates LLC in New York, a research firm. "It's a very cloudy picture," Mr. Patterson says, "And, so far, we don't have anyone making a firm decision to go forward." [We're not sure if he means Buffett, which would be an awfully early call, or the industry, which is plainly false.]
What is not fully noted in the story is that the UniStar subsidiary is the gateway to introducing the EPR plant design into the American market (EPR stands for Evolutionary Power Reactor). EPRs are notably expensive - about double per plant than the $4 billion Buffett is paying for Constellation.

For those who may not know or remember, Buffett's company, MidAmerican, abandoned plans to build an EPR in Idaho last year. Luckily, the numbers for Constellation's planned EPR at the Calvert Cliffs nuclear site are much more favorable.

First, the retail price for power in Maryland (9.95 cents/kWh) is twice as high as Idaho (4.92 cents/kWh). This makes a huge difference. NEI believes that the costs of a new nuclear plant financed with a loan guarantee are 6.4 - 7.6 cents/kWh (pdf, page 12). The new plant costs are definitely in the range of competitiveness and profitability for the state.

Furthermore, Constellation has much more nuclear experience than MidAmerican - CEG owns and operates five nuclear reactors whereas MidAmerican owns 25% of two nuclear reactors. CEG also is working close with Areva to pass lessons learned from the construction of the two EPRs at Olkiluoto in Finland and Flammanville in France.

And last, Calvert Cliffs is located in a congested electric region (PJM) where dense sources of emission-free power are needed. Maryland also is part of the Regional Greenhouse Gas Initiative whose goal is to reduce carbon dioxide emissions 10% by 2018 in the ten Northeastern and Mid-Atlantic states (map to the right). These states definitely have an incentive to build an EPR at Calvert Cliffs.

As we've seen over the last couple of days, inserting large personalities into an issue can create a celebrity warp large enough to impress Captain Kirk - whether it is the Presidential candidates dropping in to rescue America or Warren Buffett toying with a new industry.

If Buffett goes all in on the EPR, other energy companies using that design will benefit tremendously. Buffett's imprimatur can loosen the credit market, influence energy policy, and cause other players to rethink their plans. If not, shudders all around, with, at worst, EDF's and AREVA's plans in this country possibly cratering, at least in the short term. A warp.
If Berkshire pulled the plug on the additional reactor at Calvert Cliffs [in Maryland], it would be a set back for Areva, as well as other companies planning on using Areva's design, such as Missouri-based Ameren Corp., and Pennsylvania-based utility, PPL Corp.
And:
Mike Wallace, Constellation's generation group president, said that if "Calvert doesn't pencil out, none of the others will, either."
Now, just as John McCain and Barack Obama dropping by Washington shouldn't make us worry overly 'bout the current financial tumult, neither should Buffett's actions in the nuclear industry. Nuclear energy doesn't rise or fall on the strength of a single success or failure and, as we've seen, there's virtually no way for America (and the world) to achieve its energy policy goals without nuclear energy.

However, Buffett can roil any industry he steps into by dint of his presence in it. That cannot be underestimated, since just a statement of intent has pushed nuclear energy closer to the center of the energy debate. Fine by us, even if the attendant drama might make us wish for a debate in Mississippi to clear the air.

Written by Mark Flanagan. Contributions from David Bradish.

The USS Enterprise. Back in the nineties, IBM called a computer operating system OS/2 Warp and intended to use the original Star Trek cast in commercials. When terms couldn't be worked out, IBM got Kate Mulgrew from Voyager instead. No offense to Miss Mulgrew, a fine actress, but a black hole of an idea rather than a warp.

2 comments:

Starvid said...

The board of Constellation have been incredibly incompetent and are in dereliction of duty to the shareholders.

They have sold off an excellent generation portfolio located in an extremely strategic area for chump change. Indeed, they chose to sell to Buffet instead of EdF in spite of EdF offering a much higher price.

All this because they had changed their energy trading division from a hedging facility into a profit facility. This meant they were very sensitive to the credit crunch and sold the company for a third or a quarter of what the nuclear assets alone was worth.

This is what happens when companies start doing things they don't understand and aren't good at. Trading is not for power generators and should be left to investment banks (if there are any left?). Power generators should make money from generating power.

Today we see the results of replacing engineers in management with "financial engineers". Disaster ensues.

(Ps. Noticed that GE profit warning? You think that came from the engineering part of GE or from the bloated finance division? Yeah, that's right...)

Anonymous said...

I agree with starvid. Enron was brought down in a similar manner. You would think that CEG would have learned from their mistakes.

PEG also made some bad moves in foreign countries a number of years ago. That greatly wasted shareholder equity in the process. Fortunately for PEG, they did not really go into heavy trading operations.

CEG is probably better off now that they are under control of Buffet. He rarely does stupid things with companies. Job number one is to fire all incompetent management at the top.