Stock charms Constellation yearly meeting

December 09, 2006|By Paul Adams | Paul Adams,Sun reporter

Constellation Energy Group's annual meeting was supposed to be a victory lap for company executives, who a year ago anticipated the gathering would end with shareholders approving a more than $12 billion merger with FPL Group Inc. of Florida.

Instead, shareholders yesterday were treated to a mostly sedate affair that lacked much of the emotion that surrounded the merger's demise, which came in the midst of a spectacular political feud over rising electric rates in Maryland. But there was little sign of disappointment in the ranks yesterday.

The long-delayed meeting came as the Baltimore energy giant's stock was trading at near a 52-week high after briefly touching a record above $70 per share this week. Constellation Chief Executive Officer Mayo A. Shattuck III noted Wall Street's continued enthusiastic support even as he took responsibility for the merger's failure.

"There is widespread recognition in the investment community that the merger fell victim to events far beyond the control of either company," he told a crowd of 50 to 75 shareholders who attended the meeting at Constellation's downtown headquarters. "The merger would have allowed us to grow the scale of Constellation Energy, and it was an important strategic goal. It simply didn't work out, and for that I assume full responsibility."

The merger broke up in October after executives concluded there were too many obstacles to winning regulatory approval. The deal was hamstrung by political and consumer angst over a 72 percent rate increase at Constellation's utility subsidiary, Baltimore Gas and Electric Co. The company had put off yesterday's meeting while the regulatory battle played out.

Shattuck said the industry is still ripe for consolidation "once political winds become more favorable." But he stressed that Constellation is in no position to contemplate another deal in the near term and will instead focus on its strategy as a stand-alone company.

"As it turns out, we exited the merger in a very favorable light," he said.

Analysts agree, saying the company still has strong growth prospects. It has continued to pull ahead of competitors as the nation's largest marketer of energy to Fortune 100 companies, municipalities, utilities and other large users. And its recent sale of six gas-fired power plants outside of Maryland generated enough cash to pay down debt and answer investor concerns about the strength of the company's balance sheet, said Paul B. Fremont, an analyst with Jefferies & Co. in New York.

"This company, I think, has a strong growth profile which is going to look attractive from a shareholder perspective," he said.

But Fremont acknowledged investors would remain slightly on edge as long as political issues surrounding BGE remain unresolved. Lawmakers and state utility regulators are studying changes to deregulation rules, with the aim of lowering future rates and preventing price shocks such as the one that gripped consumers last summer.

The General Assembly passed legislation in June to limit BGE's rate increase to 15 percent temporarily, but regulators must come up with a plan to phase in the rest of the 72 percent rate increase by January 2008. Gov.-elect Martin O'Malley and other lawmakers campaigned on the issue, at times directing harsh criticism at the state utility commission and utility executives for the fiasco.

Shattuck expressed optimism that solutions will be easier to come by now that the emotional election season is over and the merger is off the table.

"The electioneering is over; the governing is about to begin," he said. "The conversations I've had with our incoming governor and General Assembly leaders have been constructive and encouraging."

High on the company's legislative agenda is action to restore BGE's standing with credit ratings agencies, Shattuck said. The utility's debt ratings were downgraded last summer after lawmakers stepped in to hold electric rates in check. A diminished credit rating could increase BGE's borrowing costs and ultimately lead to higher electric rates in the future, Shattuck said.

The rate issue came up only once during a question-and-answer session during yesterday's meeting. Shareholder Jody Landers said he was conflicted over his feelings about the company's performance in light of the BGE rate increase. As a shareholder, he said, "I'm very happy."

"On the other hand, as a ratepayer, I'm not so happy with the company," he said.

Shattuck responded that the fast-growing nonregulated businesses that are driving Constellation's growth - and much of the share price - are separate from BGE, whose profits are fixed by regulators. Profits on the utility side of the business remain about the same despite the increase in rates, which the company says are a result of rising energy costs.

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