Executives Went to Great Lengths to Keep Deal Secret

… Constellation, Exelon used code names, secret meetings to evade notice …

baltimoresun.com

By Hanah Cho, The Baltimore Sun

9:54 PM EDT, April 29, 2011

Baltimore’s Constellation Energy Group was dubbed “Ginger.” Exelon Corp. was code-named “Allspice.”

On a few occasions, Constellation board members met in private rooms at the Center Club, a members-only downtown restaurant. At one point, Constellation officials even frosted the glass of the boardroom at its headquarters to hide the Wall Street financial advisers who had come to Baltimore.

And when a Constellation executive met with lawyers in Washington, he swapped his usual bag with the company logo for a plain briefcase so as not to be recognized.

These undercover steps, first detailed on Friday, enabled the negotiators to conceal the $7.9 billion proposed union announced this week between Constellation and Chicago-based Exelon Corp., which would create the largest competitive energy provider in the United States.

Documents and interviews with executives and Constellation insiders familiar with the deal paint the behind-the-scenes picture of how the deal came together in six months.

The interviews also underscore how mindful Constellation and Exelon officials were of the challenging environment in Maryland, where energy regulators had clashed with Constellation over a previous takeover attempt and other issues. Constellation also has had a testy relationship with lawmakers and ratepayers in recent years after the deregulation that has increased electric rates by 72 percent.

Constellation Chairman and CEO Mayo A. Shattuck III and Exelon’s top executives met with Gov. Martin O’Malley at the State House exactly a week before Thursday’s announcement to brief him on the possible marriage between the two companies.

The sides agreed in the early stages of negotiations to devise an incentive package that would make a potential merger attractive to Maryland and ratepayers of Baltimore Gas & Electric Co., Constellation’s regulated utility, according to Constellation sources who asked not to be named.

To that end, the sources said, the companies hired Saul Ewing, the Baltimore law firm that represented FirstEnergy and Allegheny Energy in their merger case before Maryland regulators. The Maryland Public Service Commission signed off on that deal this year but placed several conditions, including requiring a one-time $29 credit to Allegheny’s utility customers in Maryland.

Ultimately, Constellation and Exelon settled on a $250 million incentive package, which includes a $100 credit for each BGE household and millions of dollars for energy efficiency, renewable energy development and electric vehicle infrastructure. Consumer advocates are reserving judgment on whether customers are getting a good deal.

“We took the terms of the FirstEnergy and Allegheny [merger] as approved by the state commission and scaled it up to Constellation’s scale,” Exelon CEO John W. Rowe said in an interview this week at Constellation’s Pratt Street headquarters. “We’re going in saying we know we have to make a proportional commitment to the state.”

The marriage between Constellation and Exelon didn’t come as a complete surprise to industry analysts, given failed merger attempts on both sides.

Their courtship began in November at an industry conference in Palm Desert, Calif., where Exelon President and chief operating officer Christopher M. Crane first approached Shattuck.

“We started to talk about the potential strength of the combination, and we went for months continuing to evaluate what it would look like and how we could both benefit each other’s shareholders and customers,” Crane said in an interview.

From the beginning, the match was intriguing for both sides.

Constellation was eyeing opportunities to add more generation capacity to meet the demand of its growing business of selling energy to residential, commercial and wholesale customers. In Exelon, Constellation would get its larger number of power plants, which have more than double Constellation’s energy-producing capacity.

For Exelon, Constellation offered another chance at a large-scale merger under Rowe, who had long believed industry consolidation was necessary to grow the business.

After first contact, each side began exploring the possibilities, reaching out to its bankers. Shattuck first informed the Constellation board on Dec. 17 that he had been approached by Exelon and advised that it would be prudent to explore the proposition, according to Constellation sources. The board agreed.

The companies exchanged confidentiality agreements in early January, allowing each to share nonpublic financial information.

At that point, only six Constellation officials were aware of the secret talks, according to company insiders: Shattuck; Chief Financial Officer Jonathan Thayer; Andrew Good, senior vice president of corporate strategies; Dayan Abeyaratne, vice president of corporate strategies; Charles A. Berardesco, general counsel, and Vice Chairman Michael Wallace, who retired this month.

Besides exploring risks, Constellation’s deal team also paid great attention to the transaction’s impact on Maryland and BGE customers, Constellation sources said.

Exelon, too, recognized that getting regulatory approval in Maryland would be crucial.

“We started talking about that essentially at Day One,” Exelon spokeswoman Judith Rader said.

A series of secret meetings began in Baltimore, New York and Washington.

Constellation officials took several measures to prevent leaks.

Members of Constellation’s management committee were told they could not attend a Jan. 20 dinner meeting of the company board in January because compensation matters would be discussed — a cover story, company sources said. The dinner was held at the Center Club instead of the usual spots — the Capital Grille or Ruth’s Chris Steakhouse.

And when top executives of the two companies met in New York in February, they did so in the offices of Winston & Strawn, a law firm that had no connection to their secret talks.

“You could imagine we were concerned about a leak,” said one Constellation official. “It could kill what otherwise would be an attractive transaction.”

In Chicago, Exelon officials used the code name “Project Lightning” to refer to the deal. Constellation was called “Bolt” and Exelon was “Electron.”

The companies set a Feb. 11 deadline to determine whether the transaction was attractive enough to pursue. Each side decided to move forward.

Talks intensified by late March as the negotiators tried to assess the effect of the Japanese earthquake and nuclear crisis on their own business. Exelon is the largest U.S. operator of nuclear plants, while Constellation owns several units in Southern Maryland and New York under a joint venture.

Also in March, the two companies had agreed to terms on the incentive package for BGE customers, according to Constellation sources.

By early April, other top Constellation executives were brought into the fold at a strategic meeting in Cambridge on the Eastern Shore. There, Shattuck and his managers continued to debate the risk and opportunities of the proposed union as compared with those of remaining an independent company.

On April 18, Exelon’s Rowe and Crane and their financial advisers attended a Constellation board meeting at the Center Club.

Meanwhile, other Constellation officials begin thinking about an outreach plan to lawmakers and other officials. At the top of the list was O’Malley, who has quarreled with Constellation over electric rates and Shattuck’s compensation in recent years. Shattuck, Crane and Rowe met with O’Malley at the State House on April 21.

The governor has said his administration would participate in the regulatory process to ensure that the deal is in the “best interest of Maryland ratepayers,” but has not offered an opinion on the proposed merger.

“We made the decision that it would be appropriate and important to approach the governor ahead of any final decision,” said James Connaughton, Constellation’s executive vice president for corporate affairs and public and environmental policy.

A flurry of activities occurred over Easter weekend as negotiations over the merger continued and the agreement was completed.

On Wednesday, Constellation’s board approved the deal over a conference call. Exelon’s board did the same.

Within hours, word of the merger reached the news media. The next morning, the deal was officially announced.

hanah.cho@baltsun.com

Copyright © 2011, The Baltimore Sun

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… Once again the big guys will get the re$ource$.  The little guys will get only the $haft.   Surprise, surprise. …

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