Berkshire Hathaway Buys Into Constellation’s Nuclear Fleet Model
An often repeated lie by people that do not like nuclear power is that “Wall Street does not like it” and “not a dime of private capital” has been put at risk in any of the several dozen new nuclear power projects that are currently underway in the United States. Another one is that the January 2008 decision by MidAmerican Energy Group to shelve plans to build a new “greenfield” sited nuclear plant in Idaho after spending $13 million in project research proves that nuclear power is not economically competitive.
Last week, during a tumultuous week on Wall Street, Warren Buffett’s MidAmerica Energy Holdings decided to take advantage of an enormous market opportunity and agreed to pay $4.7 billion dollars for Constellation Energy Group, valuing the company at $26.50 per share. As recently as mid summer 2008, Constellation stock was trading for more than $80 per share. Buffett is famous for spending his days reading annual reports and learning about companies; he is also famous for buying companies he likes “on sale”.
MidAmerican was able to make its bid after just 48 hours of review because the company was already familiar with Constellation’s assets and plans. Part of that familiarity came as a result of the $13 million investment in the project research in Idaho - MidAmerican had planned to partner with Unistar Nuclear to build and operate the plant.
Unistar Nuclear, a joint venture with EDF (Electricite de France, mainly owned by the French government), is a major part of Constellation Energy’s strategy for future growth. Unistar has partnered with some of the premier suppliers in the energy business including Areva, Bechtel, Alstom, and Accenture, to put together a formidable team that is dedicated to the following mission:
UniStar Nuclear Energy, LLC, a Constellation Energy and EDF company, is working to enhance U.S. energy security through the expansion of clean, safe and sustainable nuclear energy. We ensure the highest level of reactor safety, security, and reliability. Through licensing, constructing and operating the most efficient fleet of advanced nuclear power plants in North America, we are working to help slow, stop and reverse the impacts of global climate change.
A number of blogs, including Most Popular in USA and the Wall Street Journal’s Environmental Capital, have pointed out that MidAmerican’s investment in Constellation sends a different signal about Buffett’s comfort level with nuclear power than its previous decision in Idaho. Some dissenters on those blogs have attempted to marginalize the importance of that signal by pointing out that Constellation’s current assets of 8700 MW of generating capacity - with more than 60% in already operating nuclear plants - means that the $4.7 billion investment can be justified without any future growth.
The fact that Constellation’s current asset base makes the purchase a good buy on its own without growth is a reasonable first order interpretation. That is not the Buffett way of investing, however. He is famously known as someone who does not overpay for anything - which might explain the decision to wait on the Idaho investment at a time when the price of everything associated with building a new power plant seemed to be headed into the stratosphere.
However, Warren Buffett is also famously known for buying companies with good management, excellent growth prospects, dominant market position and understandable product lines that would benefit greatly by having a patient financial partner who can support their growth plans. There are few products in the world more basic and understandable than electricity and few other industries where the normal practice is to allow a single supplier to dominate regional markets.
Here is what his point man on the Constellation purchase said about the future:
Gregory Abel, chief executive of MidAmerican, said Berkshire is “very comfortable with and committed to Constellation’s current strategic plan” and intends “to allow Constellation Energy to operate autonomously” as it pursues its goals, including development of nuclear plants. Constellation’s current management is expected to remain.
This purchase is getting good support in the press in Constellation’s home town of Baltimore, Maryland and should be interpreted as far more than a demonstration of support for the future prospects of nuclear power by one of the world’s most far sighted investors. One of the biggest legitimate questions about the nuclear renaissance has been related to obtaining the necessary capital to build the plants.
For one company, at least, that question has been answered in a very direct manner; few would disagree that Unistar Nuclear, which is now backed by both the French government and Warren Buffett’s Berkshire Hathaway, has the corporate resources to finance several new plants without any additional support from external partners.
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