Constellation to Buy Nine Mile Point Nuclear Plants; Match for ,
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SCIENTECH IssueAlert, December 13, 2000
Constellation to Buy Nine Mile Point Nuclear Plants; Match for Entergy
in New York
By: Will McNamara, Director, Electric Industry Analysis
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Constellation Nuclear, a wholly owned subsidiary of Constellation Energy,
and the owners of the two Nine Mile Point nuclear power plants announced
that Constellation Nuclear will buy 100 percent of Unit 1 and 82 percent
of Unit 2. Constellation will own a total of 1,550 MW of Nine Mile Point's
1,757 MW of total generating capacity. The total purchase price, including
fuel, is $815 million. The Federal Energy Regulatory Commission, the Nuclea=
r
Regulatory Commission (NRC) and the New York Public Utilities Commission
still need to give regulatory approval to the purchase, but Constellation
Nuclear has said it expects the deal to be completed by mid-2001.

ANALYSIS: This is a very strategic move for Constellation Nuclear for sever=
al
reasons. First, the purchase of the plants expands Constellation's generati=
on
assets, which has been one of the key strategies of the company over the
last year. Secondly, the location of the plants is a critical factor.=20
Constellation
has narrowed its competitive strategy to the Northeast region, and New
York in particular is shaping up to be arguably the most important playing
field for nuclear assets. Third, owning the Nine Mile Point plants will
elevate Constellation's stature, moving it ever close to become on par
with its nearest competitor in the New York market, Entergy Corp.

Before I expand on the reasons why I think this is a such a pivotal move
for Constellation Nuclear, let me establish some of the important factors
of the deal. Nine Mile Point is a two-unit boiling water reactor site.
Nine Mile 1 began producing electricity in 1969; Nine Mile 2 began producin=
g
electricity in 1988. The two units are both located in Scriba, N.Y., which
is about 40 miles north of Syracuse. The Nine Mile Point units have had
rather spotty histories, but over the last two years have shown signs of
becoming strong performers. Niagara Mohawk operates both units.

Constellation Nuclear is purchasing the plants from a group of several
different utility owners. Niagara Mohawk happens to be the sole owner of
Unit 1. Unit 2 is owned by a group of co-owners: Niagara Mohawk (41 percent=
),
New York State Electric & Gas (18 percent), Rochester Gas & Electric=20
Corporation
(14 percent), and Central Hudson Gas & Electric Corporation (9 percent).
It is important to note that Constellation Nuclear is only able to purchase
82 percent of Unit 2 because the Long Island Power Authority, an additional
co-owner that controls 18 percent of Unit 2, has opted not to sell its
share of the plant at this time.

The sale came about in part as a result of the New York Public Service
Commission urging nuclear plant owners in the state to determine the market
value of their plants through an open, competitive process. This is part
of an overall effort to separate generation, transmission and distribution
activities within the state.

With that established, I will continue to support my case that the acquisit=
ion
of the Nine Mile Point plants effectively supports Constellation Energy's
growth strategy. In early 2000, Constellation began a restructuring of
its corporate identity, dividing its operations into two separate segments:
one focused on its merchant energy business (including Constellation Nuclea=
r)
and the other focused on regional retail energy services. The merchant
energy business was ranked fifth in the nation for sales of electric power
in the third quarter of 2000, and the company is committed to expanding
this growth. The goal for the merchant energy business, according to=20
Constellation
Energy CEO Christian Poindexter, is to establish a portfolio of over 30,000
MW of electric generation facilities by 2005. Toward that end, Constellatio=
n
Energy acknowledged earlier this year that it would be taking advantage
of "bargain prices for nuclear plants," which resulted in large part from
other utilities focusing on transmission operations and thus choosing,
or being mandated, to divest their generation plants.

Another important point is that the Constellation Nuclear Services group,
a unit within Constellation Nuclear, was established when Baltimore Gas
& Electric, another Constellation Energy subsidiary, created a new area
for its life-cycle license renewal activities. Thus, most likely Constellat=
ion
will be applying to renew the licenses for the two Nine Mile Point units,
and has a core group of people with expertise in this area. License renewal=
s
in general have been moving rather smoothly through the NRC, so there shoul=
d
not be any difficulty for Constellation with regard to this process. The
only challenge might be that the two Nine Mile Point units are very differe=
nt
in age and could be viewed as two separate plants by the NRC.

Presently, Constellation's generation assets are based in a mixture of
coal and nuclear. The nuclear plant purchases that Constellation is making
expand upon its Calvert Cliffs asset, an 850-MW two-unit nuclear plant
in Southern Maryland. As natural gas prices are projected to rise for the
foreseeable future, buyers on the wholesale market may turn to coal and
nuclear as substitutes for their power purchases. Thus, Constellation could
be in a prime position if the desire for nuclear-generated power continues
to rise, as the company anticipates. While Constellation will most likely
retain its coal-fired generation assets, the company is clearly moving
closer toward a nuclear-based portfolio. Constellation has justified its
move in this direction by saying that its experience has found that nuclear
fuel is cheaper than coal and gas generators and that "the economics [of
nuclear] are quite robust, once they are calculated out."

A key element of the acquisition that may get overlooked in the press relea=
ses
is that Constellation Nuclear has secured a 10-year contract to provide
electricity to the sellers at negotiated competitive prices. Specific terms
of the deal are that Constellation has agreed to sell 90 percent of its
share of the Nine Mile Point plants' output back to the sellers at an avera=
ge
price of nearly $35/MWh until 2010. This alone should provide a solid rate
of return for Constellation's merchant energy business.

In addition, as I indicated, the New York location is key factor in this
deal. Aside from its large population, the state of New York is home to
a number of nuclear plants that have come up for sale recently. For these
two reasons alone, New York stands out as the center within Constellation's
focus on the Northeastern United States. Yet, Constellation's competitors
also have the same plan, and have all fought to gain assets in the region.


Just within the last few months, Entergy Corp.=01*which also has based its
strategy to a large extent on nuclear=01*has been aggressively making its
own acquisitions of nuclear plants in New York State. In fact, Entergy
was competing against Constellation Nuclear as one of the other bidders
for the Nine Mile Point plants. I know this because I spoke to Carl Crawfor=
d,
an Entergy spokesperson, back in August and he confirmed that Entergy was
actively attempting to purchase the two plants. However, despite the loss
of the two Nine Mile Point plants, Entergy retains a very strong nuclear
presence in New York. In late November, Entergy closed the sale on the
New York Power Authority's two nuclear power plants, Indian Point Unit
3 in Westchester County and the James A. Fitzpatrick plant in Oswego County=
.
In fact, the purchase of the two plants from NYPA marked the largest=20
acquisition
to date in Entergy's nuclear strategy, and also represented the highest
purchase price ($967 million) ever of a nuclear asset. Earlier in the same
month, Entergy completed a purchase of the Indian Point 2 plant from Con
Edison. Altogether, Entergy now controls over 3,000 MW of nuclear generatio=
n
in the state of New York.

Consequently, since clearly Constellation Nuclear wants to become one of
the top nuclear power producers in the industry, it will need to match
Entergy (along with other competitors such as Exelon and Duke) with regard
to its nuclear portfolio. There is only a limited number of nuclear plants
that will become available for purchase, and thus any acquisition of an
operational nuclear plant is a significant accomplishment for those in
this particular market.

As a sidenote, I established that Niagara Mohawk was one of the primary
sellers of the Nine Mile Point plants (100 percent of Unit 1 and 41 percent
of Unit 2). It is important to remember that Niagara Mohawk is being acquir=
ed
by National Grid, a U.K. company that is considered one of the world's
largest independent transmission companies. The acquisition of Niagara
Mohawk is supporting National Grid's strategy of becoming a major presence
in the transmission and distribution sectors of the U.S. energy industry.
Generation is not a high priority for National Grid, and the sale of Niagar=
a
Mohawk's nuclear assets resulted from this strategy.

Moreover, once again we see a case that represents the divergent approaches
that different companies have toward deregulation in the United States.
Whereas generation does not factor in to Niagara Mohawk's current strategy,
it is a key component for Constellation Energy. There are certainly risks
associated with both approaches, but the bottom line on this deal, from
my perspective, is that Constellation has acquired some valuable assets
in a strong market. It's pretty obvious that Constellation intends to be
a contender in the nuclear arena, especially in New York, and owning the
two Nine Mile Point units should effectuate that goal.
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