Tough measures

The Baltimore Sun

Constellation Energy Group's chief executive, Mayo A. Shattuck III, blaming himself for the company's financial troubles, announced yesterday that the firm is cutting its dividend in half after losing $1.4 billion in the fourth quarter of 2008.

The company said yesterday that it will seek a rate increase for delivering electricity and natural gas next year to 1.2 million customers of its subsidiary Baltimore Gas and Electric Co., though it did not provide details. And Shattuck said he will forgo his 2008 bonus because of the company's financial problems.

After emerging from near-bankruptcy in September by eventually selling half of its nuclear power business, Constellation will focus on strengthening itself during the next 12 to 24 months, Shattuck said. The company has sold assets and laid off workers to ease its cash problems during the recession.

"Over the past year, it was nearly impossible to be a business leader anywhere in America without feeling humbled. And I feel that sense of humility very much myself," Shattuck said during a conference call with analysts. "As CEO, I take full responsibility for what has occurred at Constellation and for the steps we have taken and we'll take as we weather this storm."

Shattuck said he is giving up the 2008 bonus as a "modest and firm signal that I'll do all that I can do to help steer this great company back to health with renewed growth."

It was unclear yesterday what that bonus would be worth, but Shattuck was awarded a $5.5 million bonus as part of his nearly $14 million compensation package for 2007, which included salary, stock awards and options. The company's board of directors is working on determining executive compensation for 2008, a year in which Constellation's stock plummeted 75 percent.

Shares dropped $1.97, or 8 percent, to close at $22.30 yesterday.

Shattuck's comments in shouldering the blame came as the Baltimore utility reported a fourth-quarter loss due mostly to costs related to its terminated sale to MidAmerican Energy Holdings Co. To break off the deal, Constellation paid $593 million in cash and gave MidAmerican 10 percent of the company's stock, among other financial incentives.

Constellation will pay a dividend of 96 cents per share annually, down from $1.91 a share, affecting many Maryland stockholders who bought the stock for the quarterly payments. The dividend cut is expected to save $190 million a year.

And BGE plans to request this year an increase in distribution rates for gas and electricity, effective in 2010.

BGE charges customers for delivery of electricity and gas. The delivery charge of 2.4 cents makes up 17 percent of the total 14 cents per kilowatt hour that BGE households pay for electricity. The natural gas delivery charge of 34 cents per therm makes up about 25 percent of the total cost of $1.36 per therm.

The company did not say how much of an increase it will seek, but electricity delivery charges are capped at 5 percent under a previous deal with state regulators. While just a portion of the cost that ratepayers shoulder, the move is likely to frustrate BGE customers who have complained about higher bills this season. And Maryland consumers are paying 85 percent more for electricity since the state's power market was deregulated in 1999.

Constellation's net loss in the three months that ended Dec. 31 was $1.4 billion, or $7.75 a share, compared with net income of $258 million, or $1.42 a share, in the year-ago period.

Write-downs for its merchant business and some gas properties as well as $1.17 billion in charges for payments related to the canceled MidAmerican deal hurt fourth-quarter earnings.

Excluding such charges, earnings were 3 cents per share, compared with $1.48 per share in the corresponding period in 2007. Revenue fell 7.5 percent, to $4.9 billion, from $5.3 billion.

Earnings for BGE in the fourth quarter were 29 cents per share, up from 12 cents a year earlier.

In September, Constellation agreed to sell itself to MidAmerican, a subsidiary of Warren Buffett's Berkshire Hathaway, for $4.7 billion when a threat of another credit downgrade endangered its survival. A further downgrade would have required Constellation to put up more cash collateral than it could raise.

Constellation scrapped that deal in December to sell half of its nuclear power business to France's largest utility, Electricite de France, for $4.5 billion. The move enables Constellation to remain an independent company.

Shattuck said the two companies are working hard to close the transaction by the end of the third quarter of this year.

Constellation and EDF, which has an existing partnership to develop new nuclear projects, hope to receive a "conditional commitment" of a federal loan guarantee to build a third reactor at Calvert Cliffs in Southern Maryland by the end of the year, according to Michael J. Wallace, vice chairman of the joint venture called UniStar Nuclear Energy. The U.S. Energy Department provides a guarantee of up to 80 percent for costs of new energy projects, including nuclear power plants.

The permit application is pending before the Nuclear Regulatory Commission, which has said that it plans to make a final ruling by mid-2012.

Describing this year as "transitional," Shattuck outlined steps that the company has taken to reshape its business model and strengthen its balance sheet. It shed 8 percent of its work force, or more than 800 people, in December to reflect the company's smaller operations.

Constellation is selling or winding down much of its trading operations. Because that business requires Constellation to post huge collateral requirements, available cash is vital. The meltdown in the U.S. financial sector limited the company's access to credit, while downgrades in its ratings raised its collateral requirements.

This year, the company agreed to sell its London-based commodities business to Goldman Sachs and its Houston-based natural gas unit to Macquarie Group of Australia.

After the sales close by the end of the second quarter, they are expected to increase the company's liquidity by $1 billion through the return of collateral.

Total liquidity was $2.35 billion as of Dec. 31, which is more than the $1.7 billion in collateral required if the company's credit was downgraded to junk status, according to Constellation.

As the trading business shrinks, the company expects collateral requirements to decline to $2.8 billion at the end of this year, from $4.5 billion at the end of 2008.

The trading group will primarily provide risk-management services and hedge the company's generation assets and customer supply business, Shattuck said.

Travis Miller, an equity analyst at Morningstar Inc., said yesterday that Constellation is headed in the right direction by returning its focus to power generation and reducing its volatile trading operations. And while recent moves have resulted in loss in shareholder value, "it does put them in a bit better position," Miller said, noting that it was reassuring to hear Shattuck take responsibility for the company's woes.

$1.4 billion

Constellation Energy Group's fourth-quarter loss, which equals $7.75 a share.

Developments announced yesterday

by the Baltimore company:

CEO Mayo A. Shattuck III will forgo

his 2008 bonus; a year ago he

received $5.5 million.

The company cut its dividend in half, from $1.91 per share to 96 cents per share annually. A quarterly dividend of 24 cents per share is payable April 1.

Its Baltimore Gas and Electric Co. subsidiary, the state's largest utility, will submit a request to increase delivery charges next year for electricity and natural gas. The delivery charge of 2.4 cents makes up 17 percent of the price per kilowatt hour that BGE customers pay for electricity. The natural gas delivery charge of 34 cents per therm makes up about 25 percent of the cost to consumers. The delivery rate increase for electricity is capped at 5 percent. Constellation says its request would be the first delivery rate increase for electricity since 1992 and for gas

since 1995.

The company is working to close its

deal with Electricite de France, which would provide $4.5 billion for half of Constellation's nuclear power business by the end of the third quarter.

Constellation and EDF hope to receive

a "conditional commitment" on a federal loan guarantee by the end of the year for a new unit at the Calvert Cliffs nuclear power plant in Southern Maryland. The U.S. Energy Department provides a guarantee of up to 80 percent for costs for energy projects.

An information box accompanying yesterday's article about Constellation Energy Group incorrectly stated the year of the company's last request for a distribution rate increase for natural gas. It was in 2005.The Baltimore Sun regrets the error.
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