Dubious record, high praise for Shattuck

The Baltimore Sun

How hard is it to be fired from the top reaches of corporate America? Consider the strange case of Mayo A. Shattuck III, chairman and chief executive of Baltimore-based Constellation Energy.

Commodity bets with borrowed money and market turmoil nearly pushed Constellation into bankruptcy in September.

The company's stock has fallen 75 percent since the beginning of 2008. Constellation shares have delivered about the same return as a broad basket of U.S. electricity and utility stocks since Shattuck took over in late 2001.

Constellation said this week that it was cutting its dividend by half, reducing income for thousands of Marylanders who bought the stock back when it was a reliable, boring utility called Baltimore Gas & Electric. The company lost $1.4 billion last quarter. It's laying off 800 people.

But not the guy at the helm when the sloop hit the reef.

"What is the rationale for keeping Mayo Shattuck as CEO and chairman," I asked as many Constellation directors as I could track down, "given last year's problems, the hit to shareholder value and the unambiguous repudiation of the direction he was taking the company?"

Most didn't respond. A couple referred me to Constellation's media relations department, which works for Shattuck. But I wanted to hear from Shattuck's direct bosses, who met recently to discuss the CEO's future.Two spoke on the record - Douglas Becker, head of Laureate Education, and Freeman A. Hrabowski III, president of the University of Maryland, Baltimore County. Shattuck also weighed in on his own behalf.

The case for Shattuck is this: While Constellation shareholders have suffered, the CEO has learned from his mistakes and prevented the worst. Few foresaw the financial panic that brought Constellation's stock and credit ratings crashing in September.

In any event, nobody but Shattuck was smart enough to bring Constellation through the crisis and guide it through what is still great uncertainty, his supporters say.

"I'm not saying he is blameless, and I don't think he is saying he is blameless," Becker said. "But he has absolutely the skill and the heart and the best interests of everybody in mind. I think he's the best guy to lead us through this period."

Constellation's board has met without Shattuck in recent months and discussed whether he is the right boss, Becker said. While there was no thumbs-up or thumbs-down vote, Becker said, there was "overwhelming" sentiment to keep him.

Hrabowski emphasized Shattuck's intelligence and imperturbability amid chaos.

"We have watched him negotiating with others on behalf of the company and seen the kind of respect he commands," he said, noting that Shattuck got Warren Buffett to rescue Constellation last fall and then got Electricite de France to spoil Buffett's deal and keep Constellation an independent corporation.

"He fully understands the important role that Constellation as an employer and as a corporate headquarters has played and must continue to play in this state."

Shattuck acknowledges mistakes. "Over the past year, it was nearly impossible to be a business leader anywhere in America without feeling humbled," he told analysts this week after the company reported those major losses.

But in an interview yesterday he defended his record, saying that Constellation is still stronger and more profitable than when he took over.

"The platform is considerably larger and greater than where it was in 2001," he said, when Constellation was still evolving from its historical role as a regulated utility. "We're in an unbelievably dynamic business since deregulation. You have to develop strategies around what the market's going to give you."

Even after setbacks, Constellation's earnings per share are more than 50 percent higher than when he took over, he said.

The company increased profits in spite of a long freeze on BGE residential electricity prices and more than $1 billion spent on anti-pollution equipment on Constellation's generators, he said. It expanded its generation portfolio, bought nuclear plants and developed a profitable business of trading electricity, natural gas and other commodities, becoming in some ways more like Merrill Lynch or Goldman Sachs than a mere energy merchant.

It was this last business, which Constellation is winding down, that got it in trouble. Big trading profits require much borrowed money, which made it vulnerable when credit markets froze up five months ago.

Shattuck, whose tenure at investment houses Alex. Brown and Deutsche Bank made him a natural at financial bets, seems unrepentant for building the business that almost did Constellation in. A proposed merger three years ago with FPL Group, blocked by the Maryland legislature, would have given the company a better capital cushion and reduced its vulnerability to turmoil, he and directors said.

"We built a very big [trading] business, as did a lot of other banks, and a lot of other banks aren't going to be standing at the end of this," he said. Listening to his critics, he said, "somehow there's a little bit of sense that you should never take any risks" if there's a possibility of loss.

So avoiding the fate of bankrupt Lehman Brothers is now the standard for success in the energy business.

Shattuck is the only guy smart enough to get Constellation out of trouble, directors seem to be saying, because he was the only guy smart enough to get it into trouble to begin with.

Would that argument work with your boss?

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