After Mayo A. Shattuck III and Lewis Hay III began meeting last spring to discuss a merger of the power companies they lead, they described their talks as "Project NASCAR." Shattuck's Constellation Energy Group Inc. in Baltimore was code-named "Chevy" and Hay's FPL Group Inc. was "Ford."
Yesterday, in the pre-dawn darkness in midtown Manhattan, their tinkering under the hood was revealed: an $11.5 billion deal that will form the nation's second-largest electric utility portfolio and the largest energy supplier in markets where unregulated competition is allowed. It would also be the first of what are expected to be further such consolidations since Congress last summer repealed a 70-year-old law that limited mergers in the power industry.
The joining of FPL and Constellation might mean little change for consumers in the Baltimore area, but there's little else simple about it.
The new $27 billion entity would begin, at least, with a complex dual identity. FPL and Constellation said the "mutual merger" would have dual headquarters in Juno Beach, Fla., and Baltimore. The company would keep the Constellation name, in part because a major area of growth will be selling energy beyond the core regulated markets the companies serve along the Atlantic seaboard. The new corporation will be registered in Maryland, where Constellation's fast-growing unregulated business is expected to expand and be the primary growth engine for the new company.
Power shift But the power behind the company shifts to Florida. Nine of the 15 board members will be named by FPL. Hay, currently FPL's chairman, president and chief executive officer, will be CEO of the new Constellation. Shattuck, the current CEO of Constellation, will become chairman.
FPL stockholders, who will get one share for each of their shares, will wind up with about 60 percent of the company's shares after the stock-for-stock deal.
Constellation shareholders will get 1.444 common shares of the merged company for each Constellation share they own prior to the merger. That translates into a sale price of $62.02 per share, or a roughly 15 percent premium over the price just before news of the merger leaked last week.
Constellation shareholders will see their dividends rise by more than half because they will receive FPL's higher dividend rate after the merger.
Shares of Constellation fell $2.52, or 4 percent, to $59.10 in trading yesterday on the New York Stock Exchange, in part because investors were expecting FPL to pay a higher premium in the deal. However, the shares had climbed more than 8 percent after word of the merger leaked. FPL shares fell 19 cents yesterday to $42.76.
Baltimore's future The long-term future of Baltimore's lone Fortune 500 company is far from assured in the transaction. The agreement guarantees Baltimore status as co-headquarters for five years. After that, the majority-FPL board could decide to pull out of one city or keep things the same.
Constellation executives concede there will be some job losses in the deal, but say most can come from retirements and "natural attrition" over the next two years.
At the end of five years, some industry experts said, Baltimore could be positioned to hang on to the headquarters. Constellation has added hundreds of jobs to its downtown offices over the past three years, and officials from both FPL and Constellation said it was the primary reason for FPL's decision to merge.
The agreement calls for the merged company to maintain at least current levels of charitable and civic contributions in both cities for no less than 10 years. Constellation spends about $10 million annually on philanthropy in the Baltimore area.
"My sense is that it's very clear that it is not an acquisition," said Shattuck, 51, who will head the new company's unregulated merchant energy group.
That distinction is an important one to state regulators, who must sign off on the deal, and to Baltimore's political and civic establishment, which has seen countless numbers of the city's blue-chip corporations get bought by out-of-state companies.
"From the Constellation standpoint, we can now really pursue growth without restraint. ... This is essentially a strategic merger. This is by no means a cash-out," Shattuck told investors in a conference call.
A new severance deal, reached Sunday and filed with the SEC yesterday, guarantees that Shattuck will get $15 million in cash if the company pushes him out within a year or he leaves because his duties were reduced. He'd also get millions if he stays.
The $15 million payment - or a $5 million severance payment, plus millions of dollars in stock, that he would get if he stays for a year but leaves within three years - were key features of a revised employment agreement reached Sunday.
The latest version also stretches the period for which he's eligible for severance to three years after the deal, from two years in the previous agreement, reached last Wednesday. The two changes in the past week followed another severance revision on Nov. 4. All of those updates modified a severance deal dating from August 2004.
The payments would be triggered if Shattuck is let go by the new company - unless he's convicted of a felony or caught in an embezzlement or other serious breach - or if he chooses to leave because his duties or perks are reduced.
As for whether he is likely to stay on, and what his duties would be if he does, the agreement says that Shattuck will be chairman of the board of the merged company "with continuing executive management responsibilities. He will maintain these responsibilities for a year, or until they have been transitioned to new managers, and then will assume other senior management responsibilities to be agreed."
"I've never been one too hung up on titles," said Shattuck, who will have a three-year employment agreement as part of the merger terms. "Since Lew and I know each other as well as we do, I'm perfectly happy to be part of the team."
Company leader In interviews yesterday, Shattuck made it clear that Hay is the company's leader. Analysts and industry experts are divided on whether their unique power-sharing agreement will last, and what the implications of Shattuck's secondary role will be for the Baltimore operations.
Hay, 50, a former executive at Columbia-based U.S. Foodservice and former Howard County resident, will buy a house in Maryland and shuttle between Maryland and Florida, company officials said. The company's board of directors will hold meetings in both cities on an alternating basis.
"I would just be surprised to see either one of them disappear," said Christian Poindexter, who hand-picked Shattuck to replace him as Constellation's chairman and chief executive in 2001. Poindexter owns a second house in Florida just miles from Hay, who is an occasional golf partner.
Shattuck and Hay began discussing the merger last spring, shortly after Duke Energy Corp. and Cinergy Corp. in May announced plans to combine. Since then, Congress smoothed the path for energy company mergers when it repealed the Public Utility Holding Company Act of 1935, which placed restrictions on utility ownership.
Shattuck had come close to a merger agreement with Cinergy less than two years ago, but the two sides walked away from the deal. Both Hay and Shattuck felt the industry was ripe for consolidation and that it would benefit Constellation and FPL to pick their partners sooner rather than later.
Compatible assets The two sides found that their assets were complementary. FPL gets most of its revenue from its regulated utility and has a much larger fleet of power plants, with 33,000 megawatts of generating capacity. By contrast, Constellation has about one-third as much generating capacity and gets most of its revenue by selling bulk power to corporations, utilities and other large customers - including 72 of the Fortune 100 companies.
Combined, the two will have more than 45,000 megawatts of generating capacity - enough to power 36 million homes - and a power marketing arm stretching from New England to California. It will be the third-largest nuclear plant operator in the United States, with seven plants and 11 reactor units.
The merchant energy business includes Constellation's wholesale and retail power business, as well as its sizable energy trading operations downtown. It is expected to account for more than half of the merged company's earnings, with most of the rest coming from the regulated utilities: Constellation's Baltimore Gas & Electric and FPL's Florida Power & Light, which together serve more than 5.5 million customers.
State and federal regulators must sign off on the deal, weighing cost savings, better management and greater efficiency with concern about loss of local control. Among the agencies are the Maryland Public Service Commission and the Federal Energy Regulatory Commission, the Federal Trade Commission or the Justice Department, and the Nuclear Regulatory Commission, which will oversee licensing of the combined company's nuclear plants.
The Maryland Public Service Commission could ask the new company to fix prices for a certain time in exchange for commission sanction, as it has before.
"At this point, I really wouldn't have a good sense of what impact if any there would be," PSC spokeswoman Christine Nizer said.
She said it was too early to talk about the specifics in this case, other than to say it is unlikely the agreement would affect the price cap set to expire in July. In 1999, the state deregulated electricity, allowing residents to choose their suppliers beginning in 2000. Those who elected to stay with BGE were given a 6.5 percent rate cut and a promise of fixed prices through July 1, 2006.
In 1997, a $3 billion merger proposal between BGE, owned by Constellation, and Potomac Electric Power Co. died after the Maryland and Washington regulatory agencies asked the companies to slash rates by $250 million over four years.
firstname.lastname@example.org email@example.com firstname.lastname@example.orgSun reporter Jamie Smith Hopkins contributed to this article.
Article Constellation, FPL unveil $11.5 billion merger plan compiled by www.baltimoresun.com