Constellation Energy Group said yesterday that Chief Executive Officer Mayo A. Shattuck III would waive $18 million in cash severance under the company's planned merger, though he still would be eligible for millions if the deal is approved by state regulators.
Under the plan, the company's Baltimore Gas and Electric Co. customers could receive a small break on their utility bills. But one lawmaker immediately criticized the proposal, characterizing any savings for ratepayers as "pennies."
Constellation and its buyer, Warren E. Buffett's MidAmerican Energy Holdings Co., outlined the benefits of the proposed $4.7 billion deal in documents filed late yesterday, making its case to the Maryland Public Service Commission. The deal is subject to approval by regulators and shareholders.
Baltimore-based Constellation agreed last month to sell itself for $26.50 a share as it faced a credit crisis. But some shareholders are upset that Constellation rejected a higher offer from its largest shareholder, Electricite de France. EDF, which offered $35 a share, decided this week not to submit a new offer. Shares of Constellation fell 27 cents, or 1.11 percent, to close at $24.06 yesterday.
Shattuck, whose $18 million severance would be triggered under the merger, has requested that Constellation donate that payment to the company's charitable foundation, a contribution that MidAmerican said it will match.
But Shattuck is still eligible for $10.9 million in previously owed incentive payments upon completion of the merger, according to the preliminary proxy filed yesterday with the Securities and Exchange Commission. And, in most circumstances, if he's terminated within two years after the merger closes, Shattuck would receive another $11.3 million in bonuses and a pension upgrade.
The proxy also discloses vivid new details about how MidAmerican rescued Constellation from what otherwise would have been a death spiral last month, including descriptions of a preparation for bankruptcy filing and the hard bargain driven by MidAmerican.
MidAmerican Chief Executive Officer Gregory Abel said its purchase of Constellation, if approved, would stabilize the company's troubled finances and also benefit BGE customers, the community and employees. He said in an interview that the proposed merger would allow BGE to reduce and delay planned increases in distribution rates for the utility's more than 1.2 million electric and 630,000 gas customers.
Des Moines, Iowa-based MidAmerican said it plans to cut by half the 5 percent cap on any electric delivery rate increase request filed by BGE in 2009. It also would not request an increase in electric and natural gas distribution rates until January 2011.
That means BGE customers would not see an increase in gas and electric delivery rates in 2010 and the first half of 2011, resulting in a potential savings of as much as $70 million during that period, according to MidAmerican.
"We always start with customers; our first focus is to deliver significant benefits to them," Abel said. "There's a clear savings by implementing the proposal we have and then, secondly, it brings a great deal of rate certainty to customers. In this difficult time, that's very important."
BGE charges customers rates for delivering electricity and gas. The delivery charge of 2.4 cents is a small portion of the total 14 cents per kilowatt hour that BGE households pay for electricity. Likewise, the gas delivery charge is a small portion of the total bill.
The bulk of the costs for electricity and natural gas that customers pay are largely set by a deregulated energy market. Rising energy prices have been a source of concern for Maryland residents during the past several years. Combined with previous rate increases, BGE's residential customers are paying 85 percent more for electricity than they were before deregulation was passed in 1999.
Democratic Sen. Jim Rosapepe of Prince George's County said yesterday that the PSC should not approve the deal because it's not in the best interest of Maryland ratepayers. He described MidAmerican's proposal as "pennies" in savings for ratepayers.
"Gov. [Martin] O'Malley got $350 million for ratepayers and they're talking about $70 million over three years," Rosapepe said, referring to a recent settlement between the state and Constellation that in part provided a $170 one-time credit to customers. "It's peanuts. I don't think ratepayers will be fooled by it. The big issue here is the state is going to craft a deal that is good for BGE ratepayers."
PSC Chairman Douglas Nazarian declined to comment on the application submitted by Constellation and MidAmerican. The state's energy industry regulator has six months to review the transaction.
In its application, MidAmerican reiterated its pledge that BGE would remain in Baltimore. Abel said MidAmerican would continue BGE's charitable contributions at no less than the three-year average of $2.9 million annually through Dec. 31, 2013.
In matching Shattuck's contribution, MidAmerican would give a total of $36 million to the foundation. As Constellation's charitable arm, the foundation has given money to area nonprofits including the Kennedy Krieger Institute, the B&O; Railroad Museum, Maryland Food Bank and United Way.
"He thought it was appropriate, and we have a great deal of respect for that," Abel said of Shattuck's decision to donate the $18 million he waived. "We're basically matching what he's agreed to waive. We don't want to benefit from that; we would like the community to benefit from that."
Asked about Shattuck's future at Constellation, Abel said he and Shattuck still haven't discussed that issue.
The two companies also said that customers will not pay any costs related to the transaction through higher utility rates. That includes any severance or change-of-control payments, the companies said.
MidAmerican also said it was committed to Constellation's involvement in a joint venture for nuclear energy projects and that it hopes to build a new unit at Constellation's Calvert Cliffs plant in Lusby.
The shotgun takeover of Constellation marked a stunning decline for the company, one of only two Baltimore-area Fortune 500 companies. It came amid a Wall Street meltdown that emerged last month with the fall of Lehman Brothers. Constellation came under extraordinary pressure as investors lost confidence in the company's ability to access cash and credit to operate its business.
As credit-rating agencies prepared to downgrade Constellation bonds, company lawyers began preparing bankruptcy papers and executives continued talking with potential rescuers, the proxy reveals.
In the end, though, Buffett's MidAmerican moved quickly to provide an immediate infusion of $1 billion that the company needed to stay alive.
MidAmerican Chairman David Sokol demanded a steep price, however: the right to acquire all of Constellation at only one-fourth the company's market value from earlier in the year.
Baltimore Sun reporters Jay Hancock, Lorraine Mirabella and Andrea K. Walker contributed to this article.
Highlights of MidAmerican Energy Holdings' acquisition of Constellation Energy, if approved by regulators:
* Constellation CEO Mayo A. Shattuck III would waive $18 million in cash severance but still would be eligible for millions
* MidAmerican would match Shattuck's severance and donate $36 million to the Constellation Energy Group Foundation
* Baltimore Gas and Electric Co. customers would be eligible for savings of up to $70 million through minimal and delayed gas and electric base distribution rate increases through the first half of 2011
* BGE's charitable and community-related contributions would be maintained at no less than $2.9 million annually through 2013
* There would be no BGE layoffs as a result of merger
Source: Documents filed with the Maryland Public Service Commission