Flipping the switch

SunSpot Staff

Energy news hit with a ferocious one-two punch in recent weeks. First, Constellation Energy Group canceled plans to spin-off BGE and become a riskier, faster growing player in energy markets. Then, power trading giant Enron was driven into bankruptcy by faulty accounting practices. CEG's new CEO, Mayo A. Shattuck III, recently discussed what happened and where Constellation will go from here.

How would you characterize Constellation's stunning about-face, the company's decison to scuttle a plan to split that had been a year in the making? Was it a failure? Was the company too slow to capitalize on a market opportunity?

I wouldn't call it a failure. I think the company appropriately reacted to a market window and the implications of being able to raise money at much lower rates by virtue of separating. You have to keep in mind that the process of separating has a long, laborious aspect to it with respect to its various filings and approvals. Having been in the investment banking industry for most of my career, I can tell you that market windows open and market windows close. What transpired in the last six to nine months was a market window closing before Constellation had an opportunity to take advantage of those lower costs of capital. Having seen it across all industries and in different market environments, it's not that atypical. A number of other things happened in that time as well, including September 11th, that lead you to believe that scale and stability is a more prudent course to take.

It certainly was an expensive decision. You are paying Goldman Sachs $255 million to walk away from the deal.

Well actually that's not the correct impression. The relationship with Goldman Sachs has actually been very profitable for this company because it involves not only the start-up of a new business -- a power trading business -- but also the investment in Orion, the merchant generation company. All in all, the company effectively has an up-and-running and profitable power generation business, plus some cash associated with the Orion sale. When you take those things together, it's been a very profitable relationship. In the end, the purchasing of Goldman's interest on the power generation side really was a very easy economic decision to make. We paid effectively $190 million for their economic interest in a business that in the prior 12 months had yielded them $61 million. Any time you can pay three times cash for a business you are making a smart economic move.

How would you describe your mission at Constellation?

Well I think the first mission is to reintegrate the company and to get it set on a solid footing. The benefits of Constellation's more stable business -- like utility and its excellence on the nuclear side -- can be balanced with higher levels of risk-taking and potential return associated with the power trading business. In effect, we have a portfolio of business that when married together create a nice balance between stability and growth.

Analysts are saying the energy market is going to see more consolidation in the coming months. Is the sale of CEG something you are interested in?

We want to control our own destiny here. In a consolidating market those opportunities are going to be available to us also. Providing we execute well and improve the valuation of the company, we are going to be in control of our own destiny.

Four executives left the company in the last few weeks. That was expected with the huge changes the company has gone through. What are some other changes that are in the works?

I told people that I was sort of halfway through, and that I wanted to get my organization together very fast so that we could get down to the work of doing our business. Through the next couple weeks we'll be finalizing the management team and really simplifying the organization a bit. Of course, it had been made more complicated by virtue of the decision to separate. So, I want to reduce the redundancy, make the organization have greater clarity and focus. That's what this reorganization is all about.

I think that there is probably some continued streamlining that we need to do. I want to make sure that we are putting our resources in places where we have a competitive advantage.

You have announced plans to cut 450 jobs through early retirement. Will there be outright layoffs if that goal isn't reached?

It depends on the success of that program. We think that program is going to be successful, but when you look at our business, as any business, you have to assume that we have excess capacity in some areas. I think we have to be vigilant about making sure that we have the best competitive cost structure in the industry. That's what's going to allow us to control our own destiny.

Will there be further reductions even if you do cut 450 jobs?

That's our goal right now.

What would your message be to a longtime BGE and Constellation shareholder, someone that has watched as this stock has slid?

I think number one, be patient. Our purpose is to improve shareholder value. I think this is an outstanding platform. We have to reintegrate and get along with our mission and we'll do just that.

What's Constellation's new role going to be in the deregulated market? Where's the growth going to come?

I think that it's a matter of evaluating our core competencies. This company is a good generator in both the nuclear and fossil areas. I also feel like we have a very strong platform in the business of constructing long-term risk management solutions off of this trading platform that we have. That's going to be a big focus of mine. With the world churning in that market too -- with everything that's going on with Enron -- there are going to be a lot of opportunities. We want to approach them with great care but that's a business that I've been associated with for a long time.

What comments do you have on Enron's meltdown? This has really taken the market by surprise.

Enron's trading platform is the most important source of liquidity in our market, so we hope the situation stabilizes. We're not exposed to Enron like a lot of companies are from a credit standpoint, which is a plus.

Constellation has routinely disappointed Wall Street with its earnings recently. There has been some chatter about analysts being tired of being let down and losing trust in CEG's projections. Is that something you would like to address?

Obviously, coming from Wall Street, one of my most important objectives is restoring the credibility of the company in terms of delivering what we say we're going to deliver. There are certain things you can't control, and I think there have been things that have been a disappointment for us. We're going to try to create the foundation and go out and meet or beat those expectations.

Are the plans still on to move the headquarters?

Yep, we're going to move down the street. 250 to 750 [Pratt St.] That's still a go.

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