A rescue fueled by back-to-basics

Turnaround: Mayo Shattuck's strategy in pulling Constellation from the mire was to get back to the business of producing energy.

February 09, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

On the day that Mayo Shattuck arrived to straighten out the floundering operations of Constellation Energy Group Inc., the former banking executive thought he had joined the energy industry.

He had no idea that he had also become a shipping executive - the proud owner of a 41,500-ton transport tanker. He knew nothing of the Boeing 747 he now controlled either, one of the many peculiar investments that the utility had made over the past two decades.

By the time the former Deutsche Banc Alex. Brown executive was hired in November 2001 to rein in Baltimore's largest energy company, the troubled utility had strayed so far from its core energy business that Shattuck found himself sitting astride a major real estate portfolio, a lucrative nursing home business and $5 billion in debt.

Wasting little time, Shattuck replaced almost the entire management team, killed major power plant construction projects, trimmed the work force 10 percent and eliminated nearly all assets not related to the energy business. He sold the ship to the Navy; re-leased the jumbo jet to an airline. Millions of dollars in real estate holdings were unloaded, the senior-living business abandoned.

That was the easy part.

In the ensuing 15 months, the refocused Constellation Energy Group has accomplished what most other energy companies can only envy: It has exceeded earnings guidance for five consecutive quarters and projects 10 percent earnings growth for several years, acquired four energy businesses and resolved a potentially thorny dispute with California over accusations that it illegally took advantage of the state's power crisis by inflating energy prices.

And analysts say it might not have been possible without Shattuck, an outsider who wandered into an industry littered with the wreckage of an energy crisis that included the Enron Corp. bankruptcy, accounting and trading scandals and a weak economy. It was his financial acumen, analysts say, that may have turned Baltimore's 187-year-old utility around.

"With Mayo at the helm, there is a level of understanding that he understands the capital markets and understands what investors value," said Jeffrey Gildersleeve, a utilities analyst for Argus Research in New York. "He's an expert on financing. He's improving the quality of earnings. There is a building confidence in Mayo and his team."

A messy situation

Mayo A. Shattuck III knew on Oct. 26, 2001, that he was stepping into a messy situation. He just didn't know how messy.

That was the day Constellation made its stunning announcement that it was scrapping a yearlong plan to split into two independent businesses, one a high-growth, high-risk company that would produce and sell power nationwide, and the other a slow-growth regional distribution company that would include BGE.

The backtracking forced the company to pay Goldman Sachs Group Inc. $355 million to end a partnership in Constellation's energy trading business. The architect of the separation plan, Chief Executive Christian H. Poindexter, also stepped aside and was replaced by Shattuck, who had recently left his job as chairman at Deutsche Banc.

The market responded to the news by driving down Constellation's stock almost 11 percent, closing at $23.41 - less than half of its 52-week high.

Investors, already angered by the company's 71 percent dividend cut, threatened to dump the stock. Bewildered employees blamed company leaders for squandering Constellation's fortunes on an unsound strategy and for lacking a detailed plan for the future.

Wall Street analysts immediately downgraded the stock.

Constellation's credibility had already taken a huge hit that year. The company had lowered its earnings forecasts twice, failed to sell power for future use from its Midwestern plants and botched negotiations for new coal contracts.

But, Shattuck said, he neither anticipated the troubles that pounded the energy industry throughout the next year nor the depth of Constellation's problems until he began work that November.

In pursuit of aggressive strategies that promised triple-digit earnings growth, many companies like Constellation focused on producing and trading power. The stodgy business of delivering power to customers was not glamorous or profitable enough.

The California energy crisis, Enron bankruptcy, accounting and trading scandals, and the weak economy soon showed that premise was wrong.

"I certainly didn't know how bad the industry was when I took over," Shattuck said. "I was negatively surprised by Enron and all the fallout from that. I was surprised by the lack of a centralized risk-management structure. And I was surprised by the implications of how long it would take to work out of these things."

Slow reactions

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