CEG backs off on payout

$32 million to be spent elsewhere

March 21, 2009|By Hanah Cho | Hanah Cho,hanah.cho@baltsun.com

Baltimore's Constellation Energy Group said yesterday that it no longer will guarantee up to $32 million in performance and retention payouts for executives after facing sharp public criticism over the incentives.

The reversal comes two days after the awards were revealed by Th e Baltimore Sun. The disclosure sparked anger from consumers concerned about higher energy bills. And state lawmakers criticized the payouts, which became public during a national backlash involving bonuses to executives at insurance giant American International Group.

When Constellation agreed to sell half of its nuclear power business to France's largest utility for $4.5 billion, it had negotiated the incentive deal to retain its senior managers. Constellation is the parent of Baltimore Gas and Electric Co., Maryland's largest utility with 1.2 million customers.

The 135 top Constellation executives would still be eligible for long-term incentives if company performance goals are met, but they would no longer be guaranteed payouts that they would have received under an original deal with billionaire Warren Buffett.

After agreeing to sell itself to Buffett's MidAmerican Energy Holdings Co. to head off a bankruptcy last fall, Constellation scrapped that deal in favor of Electricite de France's bid in December.

EDF will still pay up to $32 million to Constellation if the deal closes, under the purchase agreement. But the money will be used to "help stabilize and run the business" instead of being earmarked for executive retention incentives, spokesman Rob Gould said.

Acknowledging the fallout over executive compensation recently, Constellation Chairman and Chief Executive Officer Mayo A. Shattuck III said, "This program has been misconstrued by some as a potential cost to our BGE customers, who we recognize are struggling with high energy bills.

"The funds for this program were coming entirely from EDF and would have not impacted BGE rates," Shattuck said yesterday in a statement. "Nonetheless, we have determined that this issue has become a significant distraction to the important long-term benefits for Maryland that our strategic partnership with EDF represents."

Because the outlook for Constellation's financial health has improved, the company decided to "remove this compensation issue from the critically important review of our transaction with EDF," Shattuck said.

While state lawmakers likened the payouts to AIG bonuses, Constellation executives pointed out this week that no taxpayer money was involved.

State energy regulators are investigating whether the deal would have substantial influence over BGE, an issue that could determine whether the transaction requires their approval.

"It appears that Constellation did the right thing by removing these bonuses, and obviously, the [Maryland] Public Service Commission will continue its inquiry into the Constellation-EDF deal," said Rick Abbruzzese, a spokesman for Gov. Martin O'Malley.

O'Malley and other lawmakers condemned the payments, saying they were coming at a time when BGE customers are paying higher bills, shareholders have seen their stock lose more than 75 percent of its value and the company has laid off more than 800 workers.

The incentives "should not have been there in the first place," state Sen. George Della Jr., a Baltimore Democrat, said in response to Constellation's reversal. "What was going through their minds?"

Democratic state Sen. James C. Rosapepe, who has co-sponsored legislation to end the 1999 state law that deregulated the energy industry, credited Constellation yesterday for recognizing that it would have been "unconscionable" to guarantee money for its executives while not helping its ratepayers.

But he noted that Constellation's initial decision to dole out incentives has created momentum to re-regulate the energy industry in Maryland.

O'Malley and others have argued that a gradual shift to re-regulation would ensure that decisions about the state's energy future are made for the public good, not corporate profit. Lawmakers are working on legislation, and a key committee could vote on the plan as early as Monday.

"The lesson this week is: The case for re-regulation has dramatically increased," Rosapepe said.

EDF was slated to pay the difference between what senior Constellation executives would earn based on company performance and what they would have received under the Buffett buyout.

The sale to Buffett would have triggered "change-in-control" payments for executives, including early payouts of long-term performance incentives at a high level. It's a common practice intended to ensure that management works in the best interest of shareholders.

Constellation said it was concerned about losing critical managers in such highly skilled areas as safety and reliability. The company said it negotiated the retention payouts as part of its existing long-term incentive plan.

EDF had agreed to pay up to $19 million in performance and retention awards covering 2007-2009 and up to $13 million for 2008-2010.

About 120 senior managers would have been eligible to receive $7.8 million and $5.7 million for those respective periods. The payout averaged about $113,000 per employee during the two performance periods.

No top-tier executive officer, including Shattuck, had been guaranteed payments, according to Constellation.

Had the MidAmerican sale closed, Shattuck would have received $10.9 million in incentives, according to proxy documents filed with the Securities and Exchange Commission.

Constellation said yesterday that the $32 million represented less than 1 percent of its total annual employee compensation costs.

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