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CEOs on Change

Utilities adapt to a shifting landscape.

Fortnightly Magazine - June 2009

in December and agreed to sell 49.99 percent of its nuclear energy business to EDF Group for $4.6 billion, including an immediate $1 billion cash infusion. The deal gave Constellation financial breathing room so it could begin what CEO Mayo Shattuck called a “strategic realignment.” Among other things, Constellation sold the energy trading business that represented the lion’s share of its daily collateral requirements.

When Fortnightly asked Shattuck what lessons he’d learned over the past year, he focused on the company’s growth strategy, which in part aimed at building a lucrative wholesale trading book. “We tried to build a business based on the evolution of competitive markets in the states and internationally,” he said. “We weren’t successful at convincing people of the quality of earnings that fall into the bucket of trading earnings. They weren’t valued in the market, so the additional risk associated with lower-quality earnings wasn’t worth it. To the extent you degrade your model with a lower-quality earnings base, you potentially aren’t adding as much shareholder value as you might hope.”

Constellation’s prospects have improved, but the company isn’t out of the woods yet. CEG shares fell to $15.50 in mid-March, and since then have rebounded to only about $25. Some investors worry that Constellation surrendered half of the long-term cash flow from its most valuable assets in exchange for short-term life support. Others, however, view CEG as a bargain at $25, given the long-term potential for nuclear development and the regulated cash flow of the company’s Baltimore Gas & Electric subsidiary.

Shattuck takes the latter view, of course, and time will tell whether the nuclear renaissance has merely been delayed or whether it’s been buried in permanent storage. Either way, teaming with EDF and exiting the trading business allowed Constellation to step back from the brink, and to prepare for a possible nuclear future—a future that holds opportunities for companies with rock-solid credit and strong balance sheets.

“In the United States, all of us are pretty small in the scheme of things, to be building plants that can cost $10 to $13 billion,” Shattuck said. “We have to think creatively about alliances. It’s not just about money, but also skill and perseverance to stay in the game and in fact lead the charge.”

Allegheny: Move Fast

For Allegheny Energy, the current shifts in the U.S. utility landscape represent only the most recent chapter in an ongoing saga of change.

In the 1990s, Allegheny sought growth in the wholesale energy trading business—to become what current CEO Paul Evanson calls “a mini-Enron.” The company acquired Merrill Lynch’s trading book and operations, and bought power plants all over the country. Then, when Enron collapsed and brought the energy-trading industry down with it, Allegheny’s growth strategy turned into a recipe for disaster. Burdened with a mountain of debt in a risky business, Allegheny’s credit ratings fell from investment grade to triple-C.

In 2003, Allegheny hired Evanson, formerly president of Florida Power & Light, to manage the company’s turnaround. Allegheny went back to basics, like many other companies did, shedding unregulated trading businesses,