Tue 5 Oct 2004
Today’s Eph trivia question is: Which Ephs are CEOs of companies in the S&P 500? One answer is Mayo Shattuck ’76, head of Constellation Energy. The Economist ran a profile on Shattuck in August (link not available but article provided below the break). Here is a longer, albeit somewhat dated, overview on Shattuck’s career. Fellow Ephs provide some commentary.
Christopher Grant [’76], another Nobles grad who was also Shattuck’s roommate at Williams for four years, said Shattuck always had a quiet confidence and a natural leadership ability even at a young age. Shattuck was elected president of the student government at Williams his senior year and was also captain of the tennis team.
“Mayo dedicates himself to things, and what Mayo wants, Mayo gets,” Grant said. “Everyone felt that Mayo was a decent person with a good brain.”
Other friends and colleagues note that for all of Shattuck’s wealth and power — Deutsche Bank was paying him more than $7 million a year — he still remains very grounded, loyal to old friends and not as arrogant as many chief executives.
“He’s just as nice and natural a person as you’d ever like to meet,” said Frederic M. Clifford [’58], a Nobles grad who served as president of the school’s board of trustees. “He doesn’t carry an ego in any shape or form.”
For those wondering if Shattuck is our still mysterious Eph Donor, I think that he isn’t — even though his son (Mayo IV) is class of 2003 and his daughter Kathleen is (I think) a senior. Why not? Recall that our mystery donor was a scholarship student at Williams. Shattuck’s family was well-off (although his father did pass away when he was 19) and he attended one of Boston’s tonier prep schools. So, I suspect, but don’t know for sure, that he was not on financial aid at Williams.
Having spent the 1990s reinventing themselves as whizzy energy traders, America’s power utilities have been just as busy recently convincing the world they want nothing to do with the suddenly-sinful business. Yet even as former trading giants such as Dynegy, American Electric Power and Reliant make humble journeys back to their basics as slow-growing, regulated utilities, a few courageous souls have dared to persevere with trading. One is Constellation Energy, the modern incarnation of Baltimore Gas & Electric, the descendant of America’s first gas utility. Led by Mayo Shattuck, Constellation has, almost unnoticed, grown to become the biggest power trader in America.
At the height of new-economy lunacy, shareholders were bestowing on America’s youthful energy-trading industry the sort of gravity-defying valuations typical for stars of the bubble. Fast money rushed into the industry, fuelling unbridled expansion, a power-plant building boom and all sorts of behaviour that Americans now understand to be “excessive”.
It was Mr Shattuck’s luck to join the industry just as its fortunes went into a shuddering reverse. Following a high-flying career as an investment banker, which he crowned with the lucrative sale of his own firm, Alex Brown, to Deutsche Bank, Mr Shattuck almost took up an offer to head the US Olympic Committee. But a hankering for more work in the private sector and the prospect of dealing with the Olympic Committee’s 120-strong board of squabbling directors persuaded Mr Shattuck to join Constellation instead, in October 2001. In the end, dealing with the Olympic Committee’s tortuous politics might have been the more comfortable job. Within weeks of starting his new career, Enron’s sudden collapse rocked the entire industry.
As a banker, Mr Shattuck had suspected before he joined Constellation that the energy-trading industry was in for a tougher time. Constellation’s own energy-trading business had its roots in a 1997 joint-venture between Baltimore Gas & Electric and Goldman Sachs, an investment bank. Mr Shattuck planned to buy Goldman out, restructure the business, improve its risk management, trim the risks that its traders had been taking with shareholders’ money, and hunker down.
But by the summer of 2002, the industry had gone from bad to awful. Some energy traders were mired in allegations that they had caused California’s energy crisis in the winter of 2000 by rigging the markets. Congressional investigations abounded. “We didn’t know how bad it was going to get,” says Mr Shattuck. “We had to test our resolve.” Along with Enron, all the big energy traders had “capitulated”, says Mr Shattuck. As regulators, bad publicity and fleeing investors overwhelmed the industry, Wall Street firms such as UBS (which bought Enron’s trading operations) and Morgan Stanley quietly cleaned up.
As Mr Shattuck scrambled to refinance and reduce the firm’s billions of dollars in debt and sell $1 billion-worth of assets, he resolved to stick doggedly to Constellation’s trading strategy: there would be “no retreat”. With the firm’s erstwhile bigger rivals fleeing the industry, Mr Shattuck figured there might be more business for him. In the 20-odd states which had deregulated their wholesale energy markets, freeing big customers to buy power from whomever they liked, Constellation’s business customers would still need the risk-management services that its trading arm could sell them: a guarantee to procure energy at a long-term fixed price from a market in which price swings in the hundreds of per cent are not uncommon. The main challenge was to persuade bondholders and banks not to pull the plug on him. A gamble? “Absolutely,” laughs Mr Shattuck.
Despite his efforts to shrink Constellation’s debts, reduce its trading risks and embrace conservative accounting policies ahead of rule changes mandated by America’s accounting regulators at the beginning of 2003, not everyone is yet convinced by his strategy. To Constellation’s disgust, the latest comment on the firm’s efforts by Standard & Poor’s, an influential ratings agency, was to downgrade Constellation’s credit rating in March, from A- to BBB+.
Mr Shattuck is unruffled. The rating agencies will come around in the end, he says. In the meantime, some of those Wall Street hopefuls that were poaching business in 2002 have since run into trouble. Fewer than 100 of the 630 traders that UBS bought from Enron remain with the firm. Morgan Stanley has had mixed results as well. Constellation’s trading business, meanwhile, has flourished, and now accounts for about two-thirds of the firm’s $9.7 billion of annual sales, a similar slice of its $470m annual profits, and almost all of its growth. Mr Shattuck predicts that his trading business will grow by 10-20% a year for several years to come.
Meanwhile, the stockmarket has begun to reward Mr Shattuck’s dogged pursuit of trading, and Constellation is beginning to build a small and enthusiastic following: the firm’s share price has almost doubled recently. As Mr Shattuck points out, despite the scandals, civil litigation and criminal prosecutions that continue to hang over energy trading, the thrust of state energy policies is still for the most part towards greater deregulation. As more big customers are freed to buy their power from merchant-energy firms, more of them will demand the sort of risk management that Constellation sells. In the long run, Wall Street’s traders may find they lack the physical assets that make energy trading work. Only energy firms, he argues, can put together both the physical markets for production and transportation and financial markets for energy derivatives–and so arbitrage both efficiently. Whatever their other failings, Enron and the rest may have been on to something after all–though please don’t call Constellation the new Enron.
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