Utility merger could include power-sharing deal for CEOs

December 16, 2005|By PAUL ADAMS | PAUL ADAMS,SUN REPORTER

Baltimore's Constellation Energy Group and Florida-based FPL Group Inc. are in the final stages of working out a merger agreement that would leave the combined company with joint headquarters in Baltimore and Florida and include an unusual power-sharing agreement between the two chief executives, according to a source familiar with the talks.

Though many details remain to be worked out and no deal is assured, the working framework has Constellation chief executive Mayo A. Shattuck III taking the title of executive chairman and remaining a central figure in running the fast-growing merchant energy business that is based in Baltimore and accounts for three-quarters of Constellation's revenue. The company's expansive wholesale and retail power marketing business and Baltimore Gas and Electric operations would remain essentially intact.

FPL chief executive Lewis Hay III, who served as chief financial officer for Columbia-based U.S. Foodservice before leaving for FPL, would become chief executive officer. Juno Beach, Fla.-based FPL is the parent of Florida Power & Light, a traditional power utility that serves 4.2 million customers in eastern and southern Florida. Sources indicated that both men would likely maintain offices in both cities, though many details remain unclear.

An announcement could come as early as Monday, said the source familiar with the talks. Both companies have declined to comment.

Though industry analysts say Hay's title would put him in a greater position of power, the joint headquarters structure could mitigate concerns among Baltimore leaders about a widespread loss of jobs and the prestige that comes with having a Fortune 500 company based downtown. Constellation is the only Fortune 500 firm based in Baltimore and one of two remaining in the Baltimore area; Towson-based Black & Decker Corp. is the other.

Analysts said FPL would buy Constellation primarily for its nuclear power assets and nonregulated power marketing business, which would likely expand as the primary growth engine for the combined entity.

"This deal is not about firing a few people to generate a few extra cents a share," said Robert Rubin, a utilities analyst who follows both companies for Deutsche Bank. "This deal is about strategy, and the greatest assets in the Constellation enterprise are the people who go up and down in the elevators in Baltimore."

FPL would reportedly pay more than $11 billion in the transaction, though industry analysts expect the final price to be higher. The deal would create the nation's third-largest utility operator, with revenue of about $23 billion and the ability to sell power to customers nationwide.

Shattuck has transformed Constellation from primarily a local utility into the nation's largest marketer of power by forging deals to sell bulk power to such municipalities as Boston and such corporate giants as General Electric. In contrast, FPL derives most of its revenue from its Florida utility, though it has been aggressively buying power plants nationwide to expand its nonregulated power sales.

Some analysts and management experts doubt that management power could be effectively shared between Juno Beach and Baltimore. Such arrangements are usually a stopgap until one of the CEOs finds an exit strategy, experts said. Six weeks ago, Constellation's board sweetened its so-called golden parachute agreements with Shattuck and other executives in case they leave the company after a merger.

"It sounds to me like it could be the beginning of [Shattuck's] separation from this new entity, and he goes on and does other things," said Paul Fremont, a utilities analyst with Jeffries & Co. in New York. "It would imply to me at least that he is looking to play a vastly diminished role in the governance of the company."

Shattuck, a former investment banker, came close to merging Constellation less than two years ago with Cincinnati-based Cinergy Corp. Cinergy pulled out of the talks and is in the midst of a $9.1 billion merger with Duke Energy Corp.

The management structure Constellation proposed in its bid for Cinergy looks strikingly similar to what is being proposed now -- only reversed. Sources familiar with those talks said Shattuck would have become CEO with Cinergy chief executive James Rogers becoming executive chairman.

However, management experts say keeping both CEOs in a merged company can lead to a destructive power struggle.

"You have to have one CEO, the person who runs the company," said Peter Morici, an economist and professor of business at the University of Maryland's Robert H. Smith School of Business. "To some extent, the other job has to be really honorary."

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