Not your father's local electric company anymore

By Phil Manger

September 26, 2008

Now I know how Warren E. Buffett acquired all those companies so cheaply.

The deal his MidAmerican Energy Holdings struck with the board of Constellation Energy Group last week smacks of possible management self-dealing. For accepting Mr. Buffett's steeply discounted offer at $26.50 per share, while spurning an offer that would have given shareholders $8.50 per share more while still providing Constellation all the cash it needs, the directors and management have a "lot of 'splainin' to do."

Constellation CEO Mayo A. Shattuck III is probably telling the truth when he says Mr. Buffett's was the "most superior offer" - for management, that is, since Mr. Buffett is known for letting existing management keep their jobs. Everybody else, it seems, can just go take a hike.

So far, most of the public outrage over this deal is about its likely effect on ratepayers. But it is the CEG shareholders who have taken the biggest hit. And most of them aren't rich.

Consider, for example, my parents, both of whom passed away this summer. They began buying shares in the company back in the 1960s, when it was just the Baltimore Gas and Electric Co.

Because my father was self-employed and - except for what he was due for his years in the Army Reserve - could expect no pension, they were buying the shares for retirement. Back then, public utility stocks were considered "defensive" investments. They were like money in the bank, promising a reasonably good dividend but only modest growth - the kind of stock you bought and forgot about. You certainly couldn't expect to get rich from them.

That BGE was a hometown company that employed friends and neighbors they had known most of their lives gave my parents still more confidence. They weren't just handing their savings over to some remote and faceless corporation.

In 1999, BGE evolved into Constellation Energy Group, and by the time my mother died on July 21, their initial modest investment had grown, through dividend reinvestment, to 5,300 shares worth about $425,000. An impressive number, yes - but it was all on paper. Until I took them out of the dividend reinvestment program last year, they had not even received any cash dividends.

When my father passed away on Aug. 19, the value of their CEG investment had slipped to $330,000. Today, if the MidAmerican deal is allowed to stand, their shares are worth just over $140,000. And that might not even be enough to pay the taxes due on them, because estate taxes are based on the value of assets at the time of death, not their value when the tax is paid.

The deal with MidAmerican is not final. It has to be approved by the shareholders, and my brother and I plan to vote the 5,300-plus shares we control against it - as I'm sure our parents would, if they were still here. Few things angered my father more than self-dealing by the directors and management of publicly owned corporations.

In fact, if we get the chance, we'll vote to oust the entire Constellation board. And we would be happy to join in any lawsuit that blocks payment of the $175 million "penalty" for backing out of the MidAmerican deal.

As our family has learned, to our chagrin, BGE is not your father's local electric company anymore.