Constellation's fallout with French firm unfortunately the new business as usual
Thursday, October 14, 2010; 9:04 PM
If you were looking for an example of the erosion in standards of business behavior, you couldn't do better than the story of Constellation Energy and its recent falling-out with the French nuclear energy company EDF.
It was only two years ago that Constellation, the corporate descendent of Baltimore Gas & Electric, was on the verge of financial meltdown. For years, its trading desk had posted huge profits speculating in energy futures. But when the financial crisis hit, futures fell and its credit rating was downgraded, Constellation's creditors and counterparties suddenly demanded payment of billions of dollars in cash it didn't have. Desperate, Constellation reluctantly agreed to be bought by a Midwestern utility at a price of one-quarter of its former market value.
Just before the takeover was to close, however, EDF showed up with a less onerous rescue package - one that allowed Constellation to keep its independence, allowed chief executive Mayo Shattuck to keep his job and created a new transatlantic partnership to build next-generation nuclear plants, including a third facility at Calvert Cliffs that was already on the drawing board. To reassure investors and creditors, EDF became Constellation's largest investor and offered to buy its partner's nonnuclear generating plants for $2 billion if Constellation found itself in a cash squeeze.
"We perceive [the option to sell the plants to EDF] primarily as a backstop liquidity facility," Shattuck told industry analysts in trumpeting his exciting new partnership with the French firm. Constellation, he said, "would not have the intent at this point to put the assets to EDF."
Since then, Constellation's finances have stabilized but demand for electric power has fallen, reducing not only the market value of old power plants but the viability of building new ones. The economic prospects of the Calvert Cliffs plant have also been challenged by a sharp drop in the cost of producing power from natural gas and the failure of Congress to pass climate-change legislation that would have raised the price of producing power from coal. And if all that weren't enough, the cost of the federal government's loan guarantee for the project came in at $880 million, three times what the partners had expected.
So what does Constellation do when faced with such challenges? In a stunning display of gratitude and loyalty, it informs EDF that, even though it has no pressing need for cash, it intends to exercise the option to sell those aging power plants to EDF for the agreed-upon price of $2 billion - double what the plants are now worth. And then, with little if any notice to its French partner, Constellation sends a a letter to the federal government announcing its withdrawal from the project, blaming the government for its unwillingness to assume a greater share of the financial risk.
I realize we're a long way from those days when business was done on a handshake and a businessman was only as good as his word, but even by today's diminished standards, this is remarkably shoddy conduct. It's a glaring example of the triumph of Wall Street culture over Main Street culture, of short-termism over long-term value creation, of a corporate ethic that amounts to: "It's just business. Nothing personal."
It should tell you all you need to know that Wall Street analysts cheered Constellation's decision to blow up its partnership with its largest shareholder to book a one-time, $1.4 billion after-tax gain. CFO Jonathan Thayer told analysts he believes his "fiduciary duty" to shareholders demands nothing less.
With its abandonment of Calvert Cliffs III, Constellation has also reaffirmed its well-deserved reputation for political ham-handedness. Holding out the prospect of 4,000 badly needed construction jobs, the company had put the arm on Maryland's governor and congressional delegation to lobby the White House and Energy Department for a big chunk of the nuclear power loan guarantee fund. As late as last Friday, administration officials were rushing to work out a revised financing scheme that could have cut the the loan guarantee's price in half. Now, with Constellation's withdrawal, they all have political egg on their faces. It's an embarrassment they will surely remember the next time Constellation comes calling.
Constellation's political problems, however, go deeper. For years, the electric industry told Americans they would be better off if their industry were freed from suffocating regulation and companies could compete to sell power to households and businesses. When oil and gas prices rose, utility executives blamed environmentalists and government regulators for thwarting the promise of nuclear power. And like most other industries, it joined the chorus of business interests demanding less government interference in the economy.
Now everything that the industry asked for has been granted, but things haven't exactly worked out as promised. Constellation has turned itself into a competitive merchant power generator, but its customers are paying more for their electricity than ever. In search of low-carbon energy, a liberal Democratic administration has thrown its support to construction of new nuclear plants, only to find that companies like Constellation have suddenly lost interest. And what does Constellation want now? A more generous package of loan guarantees.
At this point I think it's fair to say that Shattuck, Constellation's chief executive, has lost all credibility - with the public, with the industry and, to judge from Constellation's stock price, even with investors. He struck out with with the proposed merger with Florida Power & Light, struck out with Enron-style trading, and now he's struck out with nuclear. My guess is that he'll try to gussy up Constellation's balance sheet, sell the company to the highest bidder and walk away with a severance package worth tens of millions of dollars. And, the thing is, he'll probably get away with it.