Constellation's comeback

Power Surge

A re-energized Constellation jumps 149 places on the Fortune 500 list

April 29, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Constellation Energy Group has something to crow about. It made the largest ascent on the Fortune 500 list this year, and is building momentum as a top national energy company, selling power to the likes of Ford Motor Co., Starwood Hotels and Staples Inc.

But in Baltimore, "some people still think of it as the old gas company," Mayo A. Shattuck III, chairman, president and chief executive officer of the parent company of Baltimore Gas and Electric Co., said yesterday. "When you think about it, it has transformed from what the average citizen thinks about BGE into an entirely different company in three years."

Shattuck is credited with leading an about-face that has enabled the Baltimore-based company to scoop up bargains from competitors wracked by the industry turmoil that followed the California energy crisis and collapse of Enron. It's a fate that Constellation narrowly avoided.

Instead the company is making waves, its revenue vaulting it from No. 352 to No. 203 on the Fortune 500 list this year. In 2 1/2 years, it has grown from a $3 billion local utility to a nearly $10 billion player in national energy supply and now ranks as Maryland's second-largest company in terms of revenue, after Lockheed Martin Corp.

Its stock is up 72 percent since a management changeover in November 2001, with shares gaining 40 percent last year alone. And first-quarter earnings, once special items are factored out, leaped 83 percent, the company reported yesterday. Earnings on that basis were 66 cents a share, up from 36 cents per share in the three months that ended March 31 last year and exceeding the average estimate of 58 cents from analysts surveyed by Thomson Financial.

Revenue rose 30 percent to $3.04 billion from $2.33 billion. And Constellation raised its earnings projection for the year by 5 cents to a range of $3.05 to $3.20 per share yesterday.

"The company continues to take solid advantage of the deregulating electricity market place, their growth in market share and their industry-leading competitive capabilities," James L. Dobson, an analyst with Deutsche Bank Securities, which has raised its 2005 target for Constellation shares to $46, said in a report.

For the management team under Shattuck, the former Deutsche Banc Alex. Brown executive brought in to steer the company through a troubled time, the first-quarter results mark the 10th consecutive quarter of either meeting or exceeding earnings projections.

While others in the industry were retreating from failed strategies of power plant development or energy trading and returning to their roots in regulated utilities, Constellation took another approach altogether. While debate raged over the effectiveness of deregulated markets, Constellation moved aggressively to stake out a leading position, becoming the nation's biggest energy provider to commercial and industrial customers in competitive markets.

Analysts have applauded the strategy.

"While CEG has captured a sizable market share, there is still plenty of room to grow," Steve Fleishman, an analyst with Merrill Lynch, said in a research report.

"CEG has superior growth potential and visible earnings drivers, strong financial position, a highly accountable management team and aggressive hedging strategy," Fleishman said.

But it's a strategy initially seemed to go against the grain.

Shattuck took over as chief executive at Constellation at a critical time. The industry faced huge uncertainty about whether deregulation was working, and the wreckage of once high-flying companies littered the landscape. Surveying the seismic shift, Constellation abruptly dumped a plan to split into two companies, and its chief architect, then-CEO Christian H. Poindexter, stepped aside in favor of Shattuck, a Constellation board member.

Shattuck moved quickly to shed noncore assets, including real estate, assisted-living complexes, a power plant in Guatemala and a leased Boeing 747 jumbo jet. The new management team also reduced payroll 10 percent, pared debt and restructured the balance sheet, while companies such as Enron were collapsing. In about 90 days, the company sold $750 million of noncore assets. The divestitures have allowed Constellation to reduce debt-to-capital ratios from 55 percent at the end of 2001 to a projected 47 percent at the end of this year.

But even with the realignment, Shattuck said, company executives knew that competitive markets were here to stay.

`Important decision'

"We had to make a very important decision," Shattuck said. "Do we move forward and extract the best part of the deregulatory process and take advantage of it?"

By the second quarter of 2002, he and other managers had decided the company was positioned to enter the competitive market nationally, at a time when few others had the financial wherewithal to do so.

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