CEG chiefs' gain could help BGE customers


It's the invisible elephant in Annapolis, a force just as critical in the Baltimore Gas and Electric fight as the popular stampede to diminish electric-rate increases and the industry lobbying to maximize them.

What is it? Sacks of money dangled before the trained executives at Constellation Energy, BGE's parent, to try to coax them into performing for shareholders. In Constellation CEO Mayo Shattuck's case, we now know, that potentially exceeds $70 million.

This particular package of obscene executive pay, however, may work in favor of electricity customers. How? Part of the Constellation boodle appears tied to completion of the pending merger with FPL Group, parent of Florida Power & Light, although the Baltimore company denies this.

The General Assembly has calculated that it can hold the merger hostage in return for rate relief. Legislators aren't necessarily saying they want to lift Shattuck's wallet, but if executives' desire for a merger payoff inclines them to cut a better deal for ratepayers, it will be a perversely satisfactory outcome.

We don't know exactly how much executive money is at stake. This will shock you, but with the General Assembly in session, Constellation has not gotten around to filing the required public document disclosing how much.

At this point in Procter & Gamble's $57 billion buyout of Gillette last year, the merger summary disclosing Gillette boss James Kilts' $165 million payout had just been filed.

But not for Constellation's $11 billion (much smaller) merger with FPL.

Constellation officials say that, with the legislature moving to block the merger or cut BGE's rates, filing a summary disclosure of the merger would be premature. "Obviously we have a few major, unresolved issues right now," said company spokesman Lawrence McDonnell. "And as we reach a resolution on those, we'll be in a better position to prepare and complete material required for the filing."

Some call Constellation boss Shattuck "the $61 million man," apparently after seeing a February article in Public Utilities Fortnightly that said he cashed $61 million in Constellation options in December.

Not really. He exercised options worth $44 million to buy Constellation stock worth $86 million and then sold off $61 million of the stock to pay taxes and the exercise price on the options.

He did not cash anything out. He more or less maintained his stake in Constellation stock and today owns shares worth $32 million, not $61 million. This is money he would have had with or without the merger.

But there's more, of course.

In December I tried to calculate what Shattuck would potentially make from the FPL marriage based on the hieroglyphics in federal filings that pass for executive-pay disclosure.

I figured there would be in excess of $40 million tied directly to the FPL deal, assuming Shattuck leaves the company a year after the merger.

Also tied to the deal would be post-merger options that are difficult to value and golden-parachute taxes Constellation agreed to pay for him.

How big a merger payoff there might be for Shattuck and other top executives can also be gauged by the December option exercises.

The company asked executives to unload all vested options to minimize any excess parachute tax that might be due, which means it's expecting some ripcords to be pulled. (The tax gets slapped on parachutes worth more than three times the previous five years' average annual compensation; exercising options in December boosts the previous -- 2005 -- comp and lowers the potential tax.)

But much depends on the merger. Constellation officials disagree with my contention that the FPL deal promises an extra payoff for Shattuck.

"The merger does not trigger extra compensation," said McDonnell. "The agreement reflects what our CEO would have received if he stayed with the company over the next few years, which he intends to do."

Wait. Shattuck renegotiated his golden parachute multiple times just ahead of the merger announcement. Does that mean he has no intention of using it?

Besides, the merger accelerates vesting of unvested stock options and awards new options with higher strike prices, at a cost to shareholders.

It ensures that Shattuck, even though he will be nominally demoted, gets raises to make the same money as FPL boss Lew Hay. And it makes Shattuck eligible for a pension worth millions even though he's only been at Constellation a few years as an executive.

At the same time, the merger's failure would almost certainly cause a plunge in Constellation stock, which would dent the balance sheet of every company executive.

Either indirectly, through his $32 million in stock, or directly, through compensation linked explicitly to the FPL marriage, Shattuck has at least $72 million at stake.

Rate relief appears to be the key. It is quite possible that too much of a rate giveback by Constellation could swamp the merger by making FPL get cold feet. But if the right amount of rate relief helps the merger go through, Constellation bosses and customers, in a wacky sort of way, might be on the same side.


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