Executives went to great lengths to keep deal secret

Constellation, Exelon used code names, secret meetings to evade notice

April 29, 2011|By Hanah Cho, The Baltimore Sun

Baltimore's Constellation Energy Group was dubbed "Ginger." Exelon Corp. was code-named "Allspice."

On a few occasions, Constellation board members met in private rooms at the Center Club, a members-only downtown restaurant. At one point, Constellation officials even frosted the glass of the boardroom at its headquarters to hide the Wall Street financial advisers who had come to Baltimore.

And when a Constellation executive met with lawyers in Washington, he swapped his usual bag with the company logo for a plain briefcase so as not to be recognized.

These undercover steps, first detailed on Friday, enabled the negotiators to conceal the $7.9 billion proposed union announced this week between Constellation and Chicago-based Exelon Corp., which would create the largest competitive energy provider in the United States.

Documents and interviews with executives and Constellation insiders familiar with the deal paint the behind-the-scenes picture of how the deal came together in six months.

The interviews also underscore how mindful Constellation and Exelon officials were of the challenging environment in Maryland, where energy regulators had clashed with Constellation over a previous takeover attempt and other issues. Constellation also has had a testy relationship with lawmakers and ratepayers in recent years after the deregulation that has increased electric rates by 72 percent.

Constellation Chairman and CEO Mayo A. Shattuck III and Exelon's top executives met with Gov. Martin O'Malley at the State House exactly a week before Thursday's announcement to brief him on the possible marriage between the two companies.

The sides agreed in the early stages of negotiations to devise an incentive package that would make a potential merger attractive to Maryland and ratepayers of Baltimore Gas & Electric Co., Constellation's regulated utility, according to Constellation sources who asked not to be named.

To that end, the sources said, the companies hired Saul Ewing, the Baltimore law firm that represented FirstEnergy and Allegheny Energy in their merger case before Maryland regulators. The Maryland Public Service Commission signed off on that deal this year but placed several conditions, including requiring a one-time $29 credit to Allegheny's utility customers in Maryland.

Ultimately, Constellation and Exelon settled on a $250 million incentive package, which includes a $100 credit for each BGE household and millions of dollars for energy efficiency, renewable energy development and electric vehicle infrastructure. Consumer advocates are reserving judgment on whether customers are getting a good deal.

"We took the terms of the FirstEnergy and Allegheny [merger] as approved by the state commission and scaled it up to Constellation's scale," Exelon CEO John W. Rowe said in an interview this week at Constellation's Pratt Street headquarters. "We're going in saying we know we have to make a proportional commitment to the state."

The marriage between Constellation and Exelon didn't come as a complete surprise to industry analysts, given failed merger attempts on both sides.

Their courtship began in November at an industry conference in Palm Desert, Calif., where Exelon President and chief operating officer Christopher M. Crane first approached Shattuck.

"We started to talk about the potential strength of the combination, and we went for months continuing to evaluate what it would look like and how we could both benefit each other's shareholders and customers," Crane said in an interview.

From the beginning, the match was intriguing for both sides.

Constellation was eyeing opportunities to add more generation capacity to meet the demand of its growing business of selling energy to residential, commercial and wholesale customers. In Exelon, Constellation would get its larger number of power plants, which have more than double Constellation's energy-producing capacity.

For Exelon, Constellation offered another chance at a large-scale merger under Rowe, who had long believed industry consolidation was necessary to grow the business.

After first contact, each side began exploring the possibilities, reaching out to its bankers. Shattuck first informed the Constellation board on Dec. 17 that he had been approached by Exelon and advised that it would be prudent to explore the proposition, according to Constellation sources. The board agreed.

The companies exchanged confidentiality agreements in early January, allowing each to share nonpublic financial information.

At that point, only six Constellation officials were aware of the secret talks, according to company insiders: Shattuck; Chief Financial Officer Jonathan Thayer; Andrew Good, senior vice president of corporate strategies; Dayan Abeyaratne, vice president of corporate strategies; Charles A. Berardesco, general counsel, and Vice Chairman Michael Wallace, who retired this month.

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