More to Constellation Pullout Than Fiery Letter Indicates

By Nancy E. Roth, Managing Editor

Reliable industry sources have told FCW that the high credit subsidy fee Constellation Energy criticized in a scalding letter to the U.S. Department of Energy last Friday by no means represents all of the company’s motives in withdrawing from discussions of a loan guarantee in support of its Calvert Cliffs new-build project.

In the letter Constellation COO Mike Wallace blasted a proposed loan guarantee structure with a “shockingly high” 11.6% credit subsidy fee, or $880 million that UniStar, Constellation’s joint venture with Electricite de France, would have to shoulder in order to obtain the loan guarantee.

“Such a sum would clearly destroy the project’s economics … and was dramatically out of line with both our own and independent assessments of what the figure should reasonably be,” continued Wallace in the letter.

A series of meetings with DOE program officials (whom Wallace praised for their “professionalism and dedication”) failed to “meaningfully and sufficiently lower the credit subsidy cost number,” and exacerbated financial risks, he added. This he attributed to a “significant problem in the methodology” that the Office of Management and Budget used to evaluate the credit risk of loan guarantee packages.

The Administration may take steps to modify the methodology, continued Wallace, but the timing remains uncertain, which, in the absence of energy security and climate change legislation and with declining natural gas prices and rising construction costs, “Constellation Energy does not see a timely path to reaching a workable set of terms and conditions” for the project.

Although in the letter Wallace said that Constellation’s partner was “aware of our views” EDF told the Washington Post on Oct. 9 that it was “disappointed and shocked” that Constellation had “unilaterally decided” to pull out, adding, “…we were at the finish line…and were making significant progress” in the DOE negotiations.

EDF Willing to Take on Project

One source familiar with the loan guarantee process told FCW that Constellation had not accurately conveyed the status of the negotiations in the letter. “Applicants are in daily contact with the DOE manager responsible for the application,” said the individual. “Throughout the process there is a dialogue, including exchange about how a deal could be framed.”

The proposal that Constellation chose to highlight in the letter was discussed two months ago. “Everyone knew that it couldn’t be done even back then,” FCW was told. “It wasn’t made public because it was only one of many ways to structure the deal.”

In effect, Constellation was disingenuous in attacking a loan-guarantee structure that was no longer in discussion. “Constellation behaved very poorly,” an industry source told FCW. “The offer they outlined in the letter was not current, and they knew that.”

Constellation was not rejecting any offer currently on the table, added the individual. “They pointed out that the joint venture can go forward— but we [Constellation] are not going to contribute any more money to it. But UnStar is still on the application.”

Asked if EDF could take the project forward without Constellation, the source replied that the French company had the financial wherewithal to do so, although it was not clear that it would.

Bloomberg reported on Wednesday evening, however, that EDF had written a letter to Constellation declaring that it was prepared to buy its partner’s stake in the UniStar joint venture and bring in another U.S. partner later on, Bloomberg said.

Fragile Partnership Under Pressure

Another point many recent reports have overlooked is that the partnership has been under duress for some time due to demands from Constellation’s shareholders. They have been pressuring the company to drop the Calvert Cliffs project, which would ratchet up the company’s risk exposure without producing near-term profit. Since Constellation released its Oct. 8 letter its share price has risen 2.3%, from $31.97 at the end of Oct. 7, to $32.72 at close of business Oct. 12.

Shareholders have also been pushing Constellation to exercise a put option in the December 2008 agreement in which EDF acquired 49.9% of Constellation’s nuclear assets for $4.5 billion. That option allows Constellation to sell EDF its sell non-nuclear assets for an additional $2 billion.

The assets, coal-fired plants, were worth that amount in 2008, but their net value has now sunk to about $500 million after tax, an industry source told FCW. Leaning on EDF to buy them at the agreed-upon price would afford Constellation a tidy profit—at its partner’s expense.

Constellation’s shareholders have filed lawsuits to compel the company to do just that. Consequently it opened discussions with EDF in August, but the two quickly reached an impasse. One source familiar with the talks told FCW that, should Constellation force the issue, the UniStar joint venture would collapse.

In its Oct. 12 letter to Constellation EDF said the option to buy Constellation’s coal-fired plants was “not exercisable under present circumstances.”

DOE, OMB Put on Defensive

An OMB spokesman has claimed that Constellation quit just as DOE and OMB were preparing to put out a new set of loan-guarantee terms. The spokesman, Kenneth Baer, defended the financial methodology OMB uses in evaluating the loan guarantee risk in language similar to that used by DOE spokesman Ebony Meeks in an interview with FCW in early August.

“I understand the frustration of the industry, but we must be sure the projects are sound and reliable, and minimize the risk to the American taxpayers,” said Meeks at the time (FCW #388, Aug. 5).

Nevertheless, FCW found no one who endorsed the OMB’s evaluation methodology. All regarded it as flawed for nuclear projects and in need of revision. The Nuclear Energy Institute released a statement reiterating points that President and CEO Marvin Fertel delivered in a hearing before the U.S. Senate on Sept. 23.

“Clearly, the loan guarantee methodology used by the Executive Branch inflates the credit subsidy cost well beyond the level required to compensate the federal government for the risk taken in providing the loan guarantee,” Fertel said in part.

A spokesman for Sen. Jeff Bingaman (D-N.M.) who chairs the Energy and Natural Resources Committee that held the hearing, told reporters on Monday that the “entire Administration” would need to commit to improving the loan guarantee process, and that the nominee to head OMB, Jacob Lew, had promised to do so.

Still, a source familiar with the nuclear utilities told FCW that some utility officials were probably secretly pleased that “Constellation is calling out OMB.”

President Obama had been more vocally supportive of nuclear than anyone in the industry had expected, said the individual. “No one wants to offend him. They’ve all been extremely frustrated with OMB but have been afraid to say so.”

Now that the problem is out on the table, perhaps a more frank—and constructive—conversation about the program could take place, added the source.