As the sun began to set that Wednesday night, Mayo Shattuck huddled with the rest of his management team and reviewed their last, desperate options to buy their company one more day.
Shattuck, the chairman, chief executive officer and president of Constellation Energy Group, and other top executives had spent that frantic day of Sept. 17 dashing between boardrooms at their headquarters, trying to cut a deal that would give the company the cash it needed to avoid bankruptcy.
Two rival energy companies and a consortium of private equity firms converged on 750 E. Pratt St. The company’s largest shareholder, a French energy giant, also looked to increase its stake.
But looming behind them all stood a “Godfather” offer from the Sage of Omaha. Famed investor Warren Buffett had sent representatives the day before with a $5.7 billion buyout offer that would bail out Constellation. All Buffett wanted? Constellation itself, at a price far below its recent high value.
According to documents filed with the Securities and Exchange Commission last month, all had come to Baltimore that Wednesday in hopes of benefiting from the death spiral of the city’s biggest company.
Constellation’s leadership team spent that wild day juggling the potential suitors advising each of the energy company’s immediate cash needs. At least one said outright that it could not make the kind of rapid investment Constellation needed.
Few could. The company needed at least $750 million in a matter of hours to stay afloat. Constellation’s legal advisers had been told the day before to prepare for a possible bankruptcy filing, according to regulatory documents.
Buffett’s representatives already had extended their company-saving offer once and were prepared to pull it off the table if a deal was not consummated before midnight. Without an investment in place, Constellation would crumble when the stock markets opened for trading the next morning.
At about 11 p.m., Shattuck signed the documents to make Constellation Energy Group a subsidiary of Buffett’s Iowa-based MidAmerican Energy Holdings Co. The company had succumbed to one of the worst credit crises ever to sweep the United States.
Since then, Shattuck and other executives have refused repeated requests to be interviewed.
But regulatory filings, earnings reports and interviews with financial analysts paint a picture of a firm that rose rapidly to the top only to crash in the span of three rocky days.
A contrary direction
New York’s most powerful analysts filled a room at the Sheraton New York Hotel and Towers on a January night in 2002.
Standing before them was Shattuck, named CEO of Constellation less than three months before. A veteran of Baltimore investment bank Alex. Brown & Sons and chairman of the company following its merger in the late 1990s with Deutsche Bank, he had his sights on a new agenda.
That high-stakes meeting in New York joined the jumbled pieces of Constellation into a clearer picture of what the eventual Fortune 125 company would become.
Gone were the power plants in Guatemala. Sold were the company’s investment in a tanker ship, an assisted-living community and 1,300 acres of real estate. Scrapped was the plan to split Baltimore Gas and Electric Co. and Constellation into two separate companies.
Instead, the company eyed nuclear plants and closed on its first new purchase, the Nine Mile Point nuclear power plant in Scriba, N.Y.
But the boldest move intrigued the assembled analysts: Shattuck vowed Constellation would ramp up its commodities trading business. The move came as Houston-based Enron, one of the nation’s original energy traders, found itself in the midst of a collapse, sending shock waves across the country.
“Now the impact of those actions certainly stabilized the company,” Shattuck said at a meeting with analysts this August. “But, they also allowed us to do a number of things … [when] the market was going in the other direction. I think that all of you know that this was a contrarian move on our part.”
In 1997, BGE formed a partnership with Goldman Sachs to trade energy commodities. It was called Constellation Power Source and was then a subsidiary of BGE, rather than its parent company.
By mid-2000 the partnership ranked as the nation’s eighth-largest energy trader. The amount of electricity it sold increased 93 percent from the previous year, according to the company records.
But when Shattuck took over, the company bought out Goldman Sachs’ interest in the partnership and moved it under Constellation’s roof. It paid Goldman Sachs a total of $355 million to cut ties, according to the company’s third-quarter 2001 earnings.
“Constellation saw that opportunity to gain a lot of market share in a high-return business,” said Morningstar analyst Paul Justice.
Shattuck’s moves appeared to be a resounding success with the stock price closing at $26.39 a share on the day of the New York meeting. In the years to come, Constellation stock rose to $61.62 a share the day before its next big shake-up.
Partnership and turbulence
On Dec. 19, 2005, Constellation announced a $11.5 billion merger with FPL Group of Juno Beach, Fla. It would marry FPL’s regulated utility business, larger than Constellation’s, with the Maryland company’s bulk power business.
“From the Constellation standpoint, we can now really pursue growth without restraint,” Shattuck said at the time. “This is essentially a strategic merger. This is by no means a cash-out.”
The merger was an attempt to balance Constellation’s unregulated interests with something that could be more easily valued by investors.
“[It] became apparent that investors were going to have a hard time valuing a company like ours that had a utility, had a merchant generation and had a commodity business that was expanding,” Shattuck told analysts earlier this year.
The deal came just six months before BGE customers would see the cost of their electricity bills increase 72 percent. Under the 1999 deregulation agreement, electricity prices would be held at 1993 levels until July 1, 2006. That day, Maryland would “catch up” with open market prices, including natural gas prices that had been driven significantly higher from damage caused by Hurricane Katrina.
A firestorm of criticism followed. Maryland lawmakers sought rate concessions for approval of the deal, and the issue became a major issue of debate in that year’s gubernatorial race between Gov. Robert Ehrlich and then-Baltimore Mayor Martin O’Malley.
“The state of Maryland was looking for concessions, specifically a rate concession from the generation part of the business,” said Paul Fremont, an analyst with Jeffries & Co.
Facing an increasingly uncertain approval process, Constellation and FPL canceled their deal on Oct. 25, 2006.
“As we considered the situation in Maryland, we determined the risks and uncertainties were too significant to overcome,” Shattuck said afterward.
Despite the merger’s downfall, Constellation survived on the strength of its core assets and the attractiveness of its energy trading operation. Revenues soared from $3.9 billion in 2001 to $17.1 billion in 2005 and $19 billion in 2006, pushing the company from 432nd on the Fortune 500 list to 125th, according to a study by company employees Stephen King and Michael Wright in the summer 2007.
In 2001, 75 percent of the company’s revenue came from its regulated utility business, and 25 percent from its commercially competitive, unregulated energy business, the study said. By last summer, that ratio was reversed.
As Constellation continued operations through 2006 and 2007, its commodities trading divisions remained heavily leveraged. The company required ever-increasing amounts of liquidity and credit to grow its trading operations.
“It’s tough for people not on Wall Street to understand what a double-edged sword leverage is,” said Justice, the Morningstar analyst. “You’re playing with fire. Fire isn’t necessarily bad — you can cook with fire — but if you let it get out of control, it can burn your house down.”
Constellation’s overall financial state, backed by its energy generation assets, remained strong and its earnings appeared stable. But by late summer this year, its trading operation found itself with precious little cover in the face of one of the nation’s fiercest financial storms.
The fall
At around 2:15 p.m. Sept. 16, Shattuck’s phone rang.
On the other end was David Sokol, chairman of MidAmerican Energy Holdings Co., owned by super-investor Buffett. The two had never spoken before.
MidAmerican was ready to fly to Baltimore that day to discuss a possible transaction with Constellation, Sokol said. The offer he and MidAmerican Chief Executive Officer Greg Abel presented to Shattuck later that night was not up for debate: an immediate $1 billion injection of cash, but with a full buyout of Constellation.
Buffett had the leverage to make that offer. Constellation’s stock had plummeted in recent days as fearful investors pulled their money out. Now the company needed a cash infusion to continue making deals.
When they arrived in Baltimore that night, Shattuck said Constellation only was looking for the cash it needed to survive. He was also “dissatisfied” with Buffett’s offer price of $26.50 a share, according to regulatory documents. Constellation’s 52-week high stock price was $107.97 a share.
But the Sage of Omaha could offer $1 billion on the spot and could lay to rest the concerns of Wall Street simply by attaching his name to Constellation.
Constellation had hit its first speed bump in early August, when it misjudged the amount of cash it would need to post as collateral if the company’s credit rating slid several notches.
Companies like Constellation post collateral to get the lines of credit they need to operate. Those requirements increase or decrease depending on how the company is viewed by credit ratings agencies. Projecting those increases or decreases incorrectly can have a major effect on a company’s balance sheet.
Company executives said they had a $2 billion commitment from UBS Loan Finance LLC and RBS Securities Corp. But analysts said the revelation of the company’s misjudgment had injected an element of fear into views of Constellation.
Those fears were exacerbated when New York investment bank Lehman Brothers filed for bankruptcy Sept. 15. Constellation had only $150 million tied up in the firm, a small amount for a company of its size. But Lehman had become toxic to investors, who pulled money out of Constellation stock until its share price had slid 18 percent that day.
There was concern that UBS and RBS might withdraw their pledged $2 billion. Constellation shares were pummeled when the market opened Sept. 16, falling at one point as low as $13 a share, prompting the New York Stock Exchange to temporarily halt trading of the company’s stock. It eventually closed down 36 percent to $30.76, its lowest price since May 2003.
As questions of Constellation’s available cash grew louder, credit rating companies began mulling a downgrade of the company’s ratings. Credit downgrades could have triggered at least hundreds of millions in additional collateral Constellation would need to post on certain deals — money it didn’t have.
“It’s a self-fulfilling prophecy,” Justice said. “Once the fear is there, investors are hesitant to step in, credit rating companies aren’t sure and threaten to downgrade, and this causes investors who already weren’t going to lend money to call in the money they already placed, all at a time when the capital markets are nearly frozen.”
Shattuck and his team juggled the other potential suitors during that frantic Wednesday, but none could bring to bear the kind of funds that Buffett’s MidAmerican could.
The only way out of that death spiral was to sign on Buffett’s dotted line. Shattuck signed Sept. 17.
Full circle
“How easy would it have been for management to issue that same $1 billion in equity during the last three years, or since they realized the FPL deal wasn’t going to happen?” Jeffries & Co. analyst Fremont asked. “If the company realized it had an inadequate balance sheet, they had plenty of time to do it before the Lehman Brothers bankruptcy. I find it highly disingenuous for the management to blame the environment of September for what happened.”
When Constellation becomes a subsidiary of MidAmerican, analysts said they expect its trading divisions to be drastically scaled back. MidAmerican likely will focus on the company’s nuclear power plants and electricity generation capabilities, they said.
MidAmerican CEO Abel said Constellation’s commodities trading sectors would be “managed down,” but has not provided specific plans since.
“I would say they definitely exit commodities trading, and they may opt to leave the retail sector as well,” Fremont said. “What they’re buying the company for is the generation and the nuclear. They [MidAmerican] want the utility.”
That would bring Constellation back much closer to where it started.
On April 16, 1999, the day shareholders approved the creation of the Constellation Energy, BGE stock closed at $26.06 a share. Nine years and 44 cents later, Mid-American purchased the company for $26.50 a share.
“It was absolutely a crazy ride,” Justice said.
Who is Mayo Shattuck?
• Age: 54
• Position: President and chief executive officer of Constellation Energy since November 2001; chairman of the board since July 2002.
• Previous jobs: Chairman, Deutsche Bank Alex. Brown, 1999-2001; co-chairman and co-CEO, BT Alex. Brown, 1997-1999; president and chief operating officer, Alex. Brown & Sons, 1991-1997
• Education: B.A., Williams College; MBA, Stanford University; honorary doctor of public service, University of Maryland Baltimore County.
• Other affiliations: member, Board of Directors, Gap Inc.; member, Board of Trustees, Johns Hopkins Medicine; chairman, Board of Visitors, University of Maryland Baltimore County.
• Trivia: Shattuck was on the short list of candidates to succeed Paul Tagliabue as NFL commissioner, a job that ultimately went to Roger Goodell.
• Personal: His wife, Molly, will be giving away at least $100,000 of their own money on an episode of the new reality show “Secret Millionaire.”
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