Constellation Energy Group DEF 14A 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
Constellation Energy Group, Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
April 29, 2009
You are invited to attend our annual meeting of shareholders to be held on Friday, May 29, 2009 at 9:00 a.m. in the Sky Lobby Conference Room, 750 East Pratt Street, in downtown Baltimore. Enclosed is our 2008 Annual Report for your review.
At the meeting, shareholders will be voting on the following business matters: the election of directors and the ratification of our independent registered public accounting firm for 2009. Please consider the issues presented and vote your shares as promptly as possible.
Your vote is important. Whether or not you plan to attend the annual meeting, please complete your proxy card and return it to us to ensure that your vote is counted. If you hold your shares through an account with a brokerage firm, bank or other nominee, please follow the instructions you receive from them to vote your shares.
Thank you for your continued support of Constellation Energy.
Mayo A. Shattuck III
Constellation Energy Group, Inc.
100 Constellation Way
Baltimore, MD 21202
Notice of Annual Meeting of Shareholders
To the Owners of Common Stock of
Constellation Energy Group, Inc.:
Our annual meeting of shareholders will be held on Friday, May 29, 2009 at 9:00 a.m., in the Sky Lobby Conference Room, 750 East Pratt Street, Baltimore, Maryland to:
The Board of Directors recommends a vote FOR each of the director nominees and ratification of the independent registered public accounting firm.
We discuss the above business matters in more detail in the attached Proxy Statement.
Only holders of record of our common stock at the close of business on March 27, 2009 will be entitled to vote. If you plan to attend the annual meeting, please note the admission procedures set forth in the attached Proxy Statement.
Charles A. Berardesco
Senior Vice President, General Counsel and Corporate Secretary
April 29, 2009
Important Notice Regarding the Availability of Proxy Materials
for the Shareholder Meeting to Be Held on May 29, 2009:
The Proxy Statement and 2008 Annual Report are available at
Constellation Energy Group, Inc.
Who is entitled to vote at the annual meeting, and how many votes do they have?
Holders of record of our common stock who owned shares as of the close of business on March 27, 2009 may vote at the meeting. Each share has one vote. There were 200,279,777 shares of common stock outstanding on that date.
When were the enclosed solicitation materials first given to shareholders?
The enclosed Annual Report and proxy card, together with the Notice of Annual Meeting and Proxy Statement, was first sent, or given, to shareholders on or about April 29, 2009.
Who can attend the annual meeting?
All shareholders as of March 27, 2009 may attend the annual meeting. Please check the box on your proxy card if you plan to attend the annual meeting.
You will need an admission ticket or proof of ownership of Constellation Energy common stock to enter the annual meeting. An admission ticket is attached to your proxy/voting instructions card if you hold shares directly in your name as a shareholder of record or if you are a participant in any of our employee savings plans. If you plan to attend the annual meeting, please submit your proxy but keep the admission ticket and bring it with you to the meeting. Please note that you also will be asked to present valid picture identification, such as a drivers license or passport.
If your shares are registered or held in the name of your broker or bank or other nominee, your shares are held in street name. Please note that if you hold your shares in street name, you will need to bring proof of your ownership of Constellation Energy common stock as of March 27, 2009, such as a copy of a bank or brokerage statement, and check in at the registration desk at the meeting.
Since seating is limited, admission to the meeting will be on a first-come, first-served basis. For the safety of attendees, all boxes, handbags and briefcases are subject to inspection. Cameras (including cell phones with photographic capabilities), recording devices and other electronic devices are not permitted at the meeting.
What is a quorum of shareholders?
A quorum is the presence at the annual meeting in person or by proxy of shareholders entitled to cast a majority of all the votes entitled to be cast. Since there were 200,279,777 shares of common stock outstanding on March 27, 2009, the presence of holders of 100,139,889 shares is a quorum. We must have a quorum to conduct the meeting.
How many votes does it take to pass each matter?
If a quorum is present at the meeting, we need the affirmative vote of:
How are abstentions and broker non-votes treated?
Abstentions and broker non-votes count for purposes of determining the presence of a quorum. For all matters, abstentions and broker non-votes will not have any effect on the results of the votes.
How do I vote?
You must be present, or represented by proxy, at the annual meeting in order to vote your shares. Since many of our shareholders are unable to attend the meeting in person, we send proxy cards to all of our shareholders. If you plan on attending the annual meeting in person and need directions to the meeting site, please contact Investor Relations at (410) 470-6440 or email@example.com.
If my shares are held in street name by my broker, will my broker vote my shares for me?
If your shares are held in a brokerage account, you will receive a full meeting package including a voting instructions form to vote your shares. Your brokerage firm may permit you to provide voting instructions by telephone or by the Internet. Brokerage firms have the authority under New York Stock Exchange rules to vote their clients unvoted shares on certain routine matters. The matters covered by Proposal Nos. 1 and 2 are considered routine matters under the rules of the New York Stock Exchange. Therefore, if you do not vote on one or more of these proposals, your brokerage firm may choose to vote for you or leave your shares unvoted. We urge you to respond to your brokerage firm so that your vote will be cast.
What is a proxy?
A proxy is another person you authorize to vote on your behalf. We solicit proxy cards that are used to instruct the proxy how to vote so that all common shares may be voted at the annual meeting even if the holders do not attend the meeting.
How will my proxy vote my shares?
If you properly sign and return your proxy card or voting instructions form, your shares will be voted as you direct. If you sign and return your proxy card or voting instructions form but do not specify how you want your shares voted, they will be voted FOR the election of each director nominee and FOR the ratification of the appointment of our independent registered public accounting firm. Also, you will give your proxies authority to vote, using their discretion, on any other business that properly comes before the meeting, including to adjourn the meeting.
How do I vote using my proxy card?
There are three steps.
Please check the box on your proxy card if you plan to attend the annual meeting.
Can I vote by proxy even if I plan to attend the annual meeting?
Yes. If you vote by proxy and decide to attend the annual meeting, you do not need to fill out a ballot at the meeting, unless you want to change your vote.
Why might I receive more than one proxy card? Should I vote on each proxy card I receive?
First, you may have various accounts with us that are registered differently, perhaps in different names or with different social security or federal tax identification numbers. Second, you may also own shares indirectly through your broker or through our employee savings plans. Your broker or the plan trustee will send you a proxy card or voting instructions form for these shares. You should vote on each proxy card or voting instructions form you receive and mail it to the address shown on the proxy card or form. If employee savings plan participants do not vote their shares, the plan trustee will vote the shares in the same proportion as the trustee was instructed to vote shares for which it received voting instructions forms.
How can I get only one copy of the Annual Report sent to my home if I currently receive multiple copies?
You may be receiving multiple copies of the Annual Report because you have more than one account, each registered differently with the same mailing address. To receive only one Annual Report you may:
How do I change previous instructions to send only one Annual Report to my home?
Simply call the number noted above or notify our transfer agent at the address indicated in the previous question that you want to receive an Annual Report for each of your accounts (your stock account numbers must be included in the notification).
Can I receive future proxy materials electronically?
Yes, to receive future proxy materials via the Internet please visit www.amstock.com, click on Shareholder Account Access and follow the instructions to consent to the electronic delivery of materials. Instead of receiving paper copies of future proxy materials by mail, you will receive an e-mail message that will provide a link to those documents on the Internet. If you are a street name shareholder, please check the information provided by your bank, broker or other nominee concerning the availability of this service.
How do I change my vote?
You may change your vote at any time before the annual meeting by:
Who is soliciting my proxy, how is it being solicited, and who pays the cost?
Constellation Energy, on behalf of the Board of Directors, through its directors, officers and employees, is soliciting proxies primarily by mail. However, proxies may also be solicited in person, by telephone or facsimile. Innisfree M&A Incorporated, a proxy solicitation firm, will be assisting us for a fee of approximately $20,000, plus out-of-pocket expenses. Constellation Energy pays the cost of soliciting proxies.
Proposal No. 1: Election of Directors
Eleven current members of the Board of Directors have been nominated by the Board of Directors for election as a director at the 2009 annual meeting to serve until the 2010 annual meeting of shareholders and until his or her successor is elected and qualifies. Douglas L. Becker, a current director, has informed the Board of Directors that he will not stand for re-election. Each of the nominated directors has agreed to serve if elected. However, if for some reason one of them is unable to serve or for good cause will not serve, your proxies will vote for the election of another person nominated by the Board of Directors, unless the Board of Directors reduces the number of directors. Biographical information for each of the nominees and other information about them is presented beginning on page 6. The Board of Directors recommends a vote FOR each director nominee.
Proposal No. 2: Ratification of PricewaterhouseCoopers LLP as Independent Registered Public Accounting Firm for 2009
This proposal is to ratify our appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2009. See Proposal No. 2 on page 61. The Board of Directors recommends a vote FOR this proposal.
Other Business Matters
The Board of Directors is not aware of any other business for the annual meeting. However:
then shareholders present at the meeting may vote on such items. If you are represented by proxy, your proxy will vote your shares using his or her discretion.
Vote Required; Recommendation of the Board of Directors
Since there are no nominees other than the Board of Directors nominees, directors will be elected by a majority of the votes cast (number of shares voted for a director nominee must exceed the number of votes cast against that director nominee), assuming a quorum is present. Abstentions and broker non-votes have no effect on this proposal, except they will be counted as having been present for purposes of determining the presence of a quorum.
If any current director nominee is not elected at the annual meeting by a majority of the votes cast, under Maryland law the director would continue to serve on the Board of Directors as a holdover director until the directors successor is elected and qualifies. However, under our Corporate Governance Guidelines, any director who fails to be elected must offer to tender his or her resignation to the Board of Directors. The Nominating and Corporate Governance Committee would then make a recommendation to the Board of Directors whether to accept or reject the offer of resignation, or whether other action should be taken. The Board of Directors will act on the Nominating and Corporate Governance Committees recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. A director who offers to resign will not participate in the decision of the Board of Directors.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF EACH OF THE BOARD OF DIRECTORS NOMINEES. IF NOT OTHERWISE SPECIFIED, PROXIES WILL BE VOTED FOR EACH OF THE BOARD OF DIRECTORS NOMINEES.
Yves C. de Balmann, age 62, a director since July 2003, has been Co-Chairman of Bregal Investments LP (a private equity investing firm) since September 2002. He was Co-Chairman and Co-Chief Executive Officer of Deutsche Banc Alex. Brown from June 1999 to April 2001, and a Senior Advisor to Deutsche Bank AG from April 2001 to June 2003. He is also a director of ESI Group, a technology company based in France.
Ann C. Berzin, age 57, a director since February 2008, has been a private investor since 2001. From 1992 to 2001, she served as Chairman and Chief Executive Officer of Financial Guaranty Insurance Company (an insurer of municipal bonds and structured finance obligations). Ms. Berzin is a director of Ingersoll-Rand Company Ltd. and Kindred Healthcare, Inc.
James T. Brady, age 68, a director since May 1999, has been the Managing DirectorMid-Atlantic of Ballantrae International, Ltd. (a management consulting firm) since January 2000, and is the former secretary of the Maryland Department of Business & Economic Development, where he served from 1995 to 1998. He was also a managing partner of Arthur Andersen LLP from 1985 to 1995. Mr. Brady is a director of McCormick & Company, Inc., T. Rowe Price Group, Inc. and NexCen Brands, Inc. Mr. Brady was a director of Constellation Enterprises, Inc. from March 1998 to May 1999.
James R. Curtiss, age 55, a director since April 1999, was a partner in the law firm of Winston & Strawn LLP from 1993 to April 2008, and has been retired since that time. From 1988 to 1993, he served as a Commissioner of the United States Nuclear Regulatory Commission. He is also a
director of Cameco Corporation (owner and operator of uranium mines). Mr. Curtiss was a director of BGE from 1994 to April 1999.
Freeman A. Hrabowski, III, age 58, a director since April 1999, has been President of the University of Maryland Baltimore County since 1993. He is also a director of the Baltimore Equitable Society and McCormick & Company, Inc. Dr. Hrabowski was a director of BGE from 1994 to April 1999.
Nancy Lampton, age 66, a director since April 1999, has been Chairman and Chief Executive Officer of American Life and Accident Insurance Company of Kentucky since 1971 and has been Chairman and Chief Executive Officer of its holding company, Hardscuffle, Inc., since January 2000. She is also a director of DNP Select Income Fund, Duff & Phelps Utility and Corporate Bond Trust Inc. and DTF Tax-Free Income Inc. Ms. Lampton was a director of BGE from 1994 to April 1999.
Robert J. Lawless, age 62, a director since January 2002, served as Chairman of the Board of McCormick & Company, Inc. (a company in the food manufacturing industry) from January 1997 until March 2009, having also served as President until December 2006 and Chief Executive Officer until January 2008, and is now retired. He is also a director of Baltimore Life, Inc.
Lynn M. Martin, age 69, a director since October 2003, has been President of The Martin Hall Group LLC (a human resources consulting firm) since January 2005. From 1993 to October 2005, Ms. Martin was an Advisor to Deloitte & Touche LLP. Ms. Martin served as United States Secretary of Labor from 1991 to 1993. Prior to her tenure as Secretary of Labor, she was a member of the United States House of Representatives from 1981 to 1991. She is also a director of The Procter & Gamble Company, Ryder System, Inc., AT&T Inc. and various funds of The Dreyfus Corporation.
Mayo A. Shattuck III, age 54, a director since May 1999, has been Chairman of Constellation Energy since July 2002 and President and Chief Executive Officer since November 2001. Mr. Shattuck also served as Chairman of the Board of Directors of BGE from July 2002 to April 2007. He is also a director of Capital One Financial Corporation, Gap, Inc., the Edison Electric Institute, the Nuclear Energy Institute and the Institute of Nuclear Power Operations.
John L. Skolds, age 58, a director since November 2007, served as Executive Vice President of Exelon Corporation and President of Exelon Energy Delivery from December 2003 until his retirement in September 2007, and has been retired since that time. He also served as President of Exelon Generation from March 2005 to September 2007. From March 2002 to December 2003, Mr. Skolds served as Senior Vice President of Exelon Corporation and President and Chief Nuclear Officer of Exelon Nuclear.
Michael D. Sullivan, age 69, a director since April 1999, is a private investor, and has been Chairman of the Board of ADVANCARE Health Care, LLC (a company in the home health care industry) since January 2006. Mr. Sullivan also has been a director of BGE since September 2008, having previously served as a director of BGE from 1992 to April 1999.
DETERMINATION OF INDEPENDENCE
A majority of Constellation Energys directors are required to be independent in accordance with New York Stock Exchange (NYSE) listing standards. For a director to be considered independent, the Board of Directors must affirmatively determine that such director has no material relationship with Constellation Energy. When assessing the materiality of a directors relationship with Constellation Energy, the Board of Directors considers the issue from both the standpoint of the director and from that of persons and organizations with whom or with which the director has an affiliation. The Board of Directors has adopted standards to assist it in determining if a director is independent in accordance with the NYSE listing standards. A director shall be deemed to have a material relationship with Constellation Energy and shall not be deemed to be an independent director if:
The Board of Directors has determined that each member of the Board of Directors, other than Mr. Shattuck, who is the chief executive officer of Constellation Energy, has no material relationship with Constellation Energy and is independent under NYSE listing standards.
In determining that each individual who served as a member of the Board of Directors during 2008, other than Mr. Shattuck, is or was independent, the Board of Directors considered the following relationships, which it determined were immaterial and did not impair any directors independence:
The Board of Directors met 21 times in 2008. Each of the directors nominated for reelection attended 75% or more of the total number of meetings of the Board of Directors and of any committees on which the director served.
The Board of Directors has adopted a policy which encourages each director to attend the annual meeting of shareholders. Twelve of the thirteen directors in office as of the date of the 2008 annual meeting of shareholders attended the meeting.
The Board of Directors has the following committees:
Executive Committee: This committee may exercise all of the powers of the Board of Directors, except that it may not authorize dividends or the issuance of stock (except in certain limited circumstances authorized by the Board of Directors), recommend to shareholders any action requiring shareholder approval, amend the bylaws, or approve mergers or share exchanges that do not require shareholder approval. The committee met once in 2008. Mr. Shattuck is Chairman, and Messrs. Brady, Curtiss, Lawless and Sullivan are members.
Audit Committee: This committee oversees Constellation Energys auditing, accounting, financial reporting, risk management, corporate compliance and internal control functions as set forth in its charter. The committee also approves the services provided by Constellation Energys independent registered public accounting firm, and monitors and evaluates its performance, the fees paid, and the compatibility of the non-audit services provided by the firm with maintaining the firms independence. Each member of the committee is an audit committee financial expert as that term is defined in the applicable rules of the Securities and Exchange Commission (SEC), and financially literate as that term is defined in the listing standards of the NYSE. Mr. Brady currently serves on the audit committees of three other public companies. The Board of Directors has determined that such service does not impair the ability of Mr. Brady to effectively serve on the committee. The committee met eight times in 2008. Mr. Brady is Chairman, and Messrs. de Balmann and Skolds and Ms. Berzin are members.
Committee on Nuclear Power: This committee monitors the performance and safety at Constellation Energys nuclear power plants and oversees Constellation Energys initiatives to develop, own and operate new nuclear projects in the United States and Canada. The committee met five times in 2008. Mr. Curtiss is Chairman, and Ms. Lampton, Ms. Martin and Mr. Skolds are members.
Compensation Committee: With respect to compensation and benefits matters, this committee is responsible for:
This committee also reviews the recommendations of the chief executive officer for candidates for positions as executive officers of Constellation Energy and recommends candidates to the Board of Directors. The committee also oversees succession planning for the chief executive officer and senior management. The committee met five times in 2008. Mr. Lawless is Chairman, and Messrs. Becker and Sullivan, Dr. Hrabowski and Ms. Martin are members. Information on the roles of executive officers and compensation consultants in determining or recommending the amount or form of executive and director compensation is provided under Compensation Discussion and Analysis and Director Compensation below.
Nominating and Corporate Governance Committee: This committee considers and recommends to the Board of Directors nominees for election as directors, including nominees recommended by shareholders. It oversees corporate governance, Board of Directors composition, annual evaluations of the Board of Directors and its committees, and committee structure, membership and functions. The committee periodically reviews Constellation Energys Corporate Governance Guidelines and Principles of Business Integrity. The committee met four times in 2008. Mr. Sullivan is Chairman, and Messrs. Becker and Lawless, Dr. Hrabowski and Ms. Martin are members.
The Audit, Compensation and Nominating and Corporate Governance Committees are composed entirely of independent directors under NYSE listing standards, SEC requirements and other applicable laws, rules and regulations.
Constellation Energy maintains on its website, www.constellation.com, copies of the charters of each of the committees of the Board of Directors, as well as copies of its Corporate Governance Guidelines, Principles of Business Integrity, Corporate Compliance Program, Insider Trading Policy, Policy and Procedures with respect to Related Person Transactions and Information Disclosure Policy. Copies of these documents are also available in print upon request of Constellation Energys Corporate Secretary. The Principles of Business Integrity is a code of ethics which applies to all of our directors,
officers and employees, including the chief executive officer, chief financial officer and chief accounting officer. Constellation Energy will post any amendments to, or waivers of, the Principles of Business Integrity applicable to its chief executive officer, chief financial officer or chief accounting officer on its website.
In addition, the Board of Directors has designated the Chairman of the Nominating and Corporate Governance Committee to act as its Lead Director. In that capacity, the current Chairman, Mr. Sullivan, has the following duties and authority:
Interested parties may communicate directly with Mr. Sullivan in his capacity as Lead Director by writing to the Corporate Secretary, Constellation Energy Group, Inc., 100 Constellation Way, Suite 1800P, Baltimore, Maryland 21202, or by calling (877) 248-1476.
NOMINATIONS FOR DIRECTOR
The Board of Directors seeks diverse candidates who possess the background, skills and expertise to make a significant contribution to the Board of Directors, Constellation Energy and its shareholders. Annually, the Nominating and Corporate Governance Committee reviews the qualifications and backgrounds of the directors, as well as the overall composition of the Board of Directors, and recommends to the full Board of Directors the slate of director candidates to be nominated for election at the next annual meeting of shareholders. The Board of Directors has adopted a policy whereby the Nominating and Corporate Governance Committee shall consider the recommendations of shareholders with respect to candidates for election to the Board of Directors and the process and criteria for such candidates shall be the same as those currently used by Constellation Energy or otherwise suggested by the Board of Directors or management for director candidates recommended by the Board of Directors. From time to time, the Nominating and Corporate Governance Committee may retain third party search firms to assist the Board of Directors in identifying and evaluating potential nominees to the Board of Directors.
Constellation Energys Corporate Governance Guidelines, a copy of which is maintained on our website, www.constellation.com, include the following criteria that are to be considered by the Nominating and Corporate Governance Committee and Board of Directors in considering candidates for nomination to the Board of Directors:
Each of the nominees for director proposed by the Board of Directors is a current director of Constellation Energy, and, as discussed in Determination of Independence, all of them (other than Mr. Shattuck) have been determined by the Board of Directors to be independent under NYSE listing standards.
A shareholder who wishes to recommend to the Nominating and Corporate Governance Committee a nominee for director for the 2010 annual meeting of shareholders should submit the recommendation in writing to the Corporate Secretary, Constellation Energy Group, Inc., 100 Constellation Way, Suite 1800P, Baltimore, Maryland 21202 so it is received by February 13, 2010.
The Board of Directors has adopted a policy whereby any communications from shareholders of Constellation Energy to the Board of Directors shall be directed to Constellation Energys Corporate Secretary, who shall (i) determine whether any of such communications are significant, and promptly forward significant communications to the Board of Directors, and (ii) keep a record of all shareholder communications that the Corporate Secretary deems not to be significant and report such communications to the Board of Directors on a periodic basis, but not less frequently than quarterly.
A Constellation Energy shareholder who wishes to communicate to the Board of Directors may submit such communication in writing to the Corporate Secretary, Constellation Energy Group, Inc., 100 Constellation Way, Suite 1800P, Baltimore, Maryland 21202, or call (877) 248-1476.
Transactions with Électricité de France
As disclosed in Stock Ownership, E.D.F. International S.A. (EDFI) beneficially owns more than five percent of Constellation Energys voting securities.
On December 17, 2008, Constellation Energy and certain of its subsidiaries entered into a series of agreements with EDFI and its wholly-owned subsidiary EDF Development, Inc. (EDFD), under which EDFD purchased from Constellation Energy preferred stock and agreed to purchase an ownership interest in Constellation Energys nuclear generation and operation business. In addition, EDFD and its affiliates have and will provide Constellation Energy with additional liquidity.
The principal transactions include:
In connection with these transactions, Constellation Energy entered into a Senior Unsecured Note Commitment Letter with Électricité de France, SA, which is the parent of EDFI (EDF), which provides for the commitment by EDF to purchase from Constellation Energy senior unsecured debt securities up to an aggregate principal amount of $600 million. EDFs commitments will terminate on the earlier of (i) the date on which the conditions to the exercise of the put option described above in an aggregate amount equal to at least $600 million, (ii) the date on which Constellation Energy obtains alternate financing in an aggregate principal amount of at least $600 million and (iii) June 16, 2009. Each senior unsecured note issued will mature on the earlier of (i) 30 days after the issue date or (ii) the termination of the commitment. There have been no senior unsecured notes issued under the commitment to date.
EDF also has provided Constellation Energy with a payment guaranty, pursuant to which EDF guaranteed full and prompt payment of EDFDs payment obligations in connection with the transactions described above, subject to (i) a $500 million limit for obligations in connection with the acquisition and put option arrangement described above occurring prior to a redemption of the Series B Preferred Stock or, if issued, prior to a repayment of 10% senior notes that will be issued by Constellation Energy upon a redemption of the Series B Preferred Stock; (ii) a $1.5 billion limit for obligations in connection with the acquisition and put option arrangement described above occurring after a redemption of the Series B Preferred Stock or, if issued, after a repayment of the 10% senior
notes; and (iii) a $1.0 billion limit for obligations under the Series B Preferred Stock purchase agreement.
These transactions are summarized in additional detail in the Annual Report accompanying this Proxy Statement and in Constellation Energys Current Report on Form 8-K filed on December 18, 2008.
Transactions with MidAmerican Energy Holdings Company
As disclosed in Stock Ownership, MidAmerican Energy Holdings Company (MEHC) beneficially owns more than five percent of Constellation Energys voting securities.
On December 17, 2008, immediately prior to entering into the transactions with EDF and its subsidiaries, Constellation Energy and MEHC agreed to terminate the merger agreement they had entered into on September 19, 2008. In connection with the merger agreement termination and the conversion of Series A Preferred Stock issued to an affiliate of MEHC in September 2008, Constellation Energy:
On January 12, 2009, Constellation Energy repaid the 14% Senior Note in full together with accrued and unpaid interest through January 12, 2009 of approximately $5.0 million.
These transactions are summarized in additional detail in the Annual Report accompanying this Proxy Statement and in Constellation Energys Current Report on Form 8-K filed on December 17, 2008.
Policy and Procedures with respect to Transactions with Related Persons
Constellation Energy has adopted a Policy and Procedures with respect to Related Person Transactions, a copy of which is available on Constellation Energys website at www.constellation.com. This policy sets forth the review and approval requirements for transactions in which Constellation Energy will be a participant and any Constellation Energy director, director nominee, executive officer, other employee or greater than 5% beneficial owner of Constellation Energy common stock, or any immediate family member or any affiliated entity of such persons, has a direct or indirect interest.
Pursuant to this policy, any proposed transaction that would require disclosure under the SECs related persons transaction disclosure requirements must be submitted to the Nominating and Corporate Governance Committee for consideration at the next committee meeting, or, if it is not practicable or desirable to wait until the next meeting, to the Chair of the Nominating and Corporate Governance Committee, who has delegated authority to act between committee meetings. No member of the Nominating and Corporate Governance Committee may participate in any consideration or approval of any related person transaction with respect to which such member or any of such members immediate family members is the related person.
The Nominating and Corporate Governance Committee or the Chair may approve only those related persons transactions that are in, or are not inconsistent with, the best interests of Constellation Energy and its shareholders, as the Committee or the Chair determines in good faith. In making such a determination, the Nominating and Corporate Governance Committee or the Chair is required to consider all of the relevant facts and circumstances relating to the transaction including, but not limited to, the following:
If Constellation Energy becomes aware of an ongoing related person transaction subject to the SECs related persons transaction disclosure requirements that was not properly approved, it must be submitted to the Nominating and Corporate Governance Committee or the Chair for an evaluation of all the options, including ratification, amendment or termination. If the related persons transaction has been completed, the Nominating and Corporate Governance Committee or the Chair must determine if rescission of the transaction is appropriate and request that Constellation Energys chief compliance officer determine the reason the transaction was not properly approved and whether any changes to the related persons transaction approval policy and procedures are recommended.
The Chair must report to the Nominating and Corporate Governance Committee at the next Committee meeting any approval made by him pursuant to his delegated authority and the Committee must periodically report on its activities pursuant to the policy to the Board of Directors. Annually, the Committee reviews any previously approved related persons transactions involving executive officers or directors that remain ongoing to determine if it remains in the best interests of Constellation Energy and its shareholders to continue the transaction.
The full Board of Directors (which included all members of the Nominating and Corporate Governance Committee) approved the transactions with Électricité de France and MEHC given their significance to Constellation Energy.
During 2008, there were no other transactions with related persons required to be reported under the applicable rules and regulations of the SEC.
REPORT OF THE AUDIT COMMITTEE
The role of the Audit Committee of the Board of Directors is to assist the Board of Directors in its oversight of Constellation Energys responsibility relating to: (i) the integrity of Constellation Energys financial statements; (ii) compliance with legal and regulatory requirements; (iii) the independent registered public accounting firms qualifications and independence; (iv) the performance of Constellation Energys internal auditors and independent registered public accounting firm; (v) risk assessment; and (vi) risk management. We operate pursuant to a charter that was last amended and restated by the Board of Directors in November 2006, a copy of which is available on Constellation Energys website at www.constellation.com. Management of Constellation Energy is responsible for the preparation, presentation and integrity of Constellation Energys financial statements, accounting and financial reporting principles, and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The independent registered public accounting firm is responsible for auditing Constellation Energys financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and expressing an opinion as to their conformity with accounting principles generally accepted in the United States. The independent registered public accounting firm has free access to the Audit Committee to discuss any matters they deem appropriate.
In the performance of our oversight function, we have considered and discussed the audited financial statements with management and the independent registered public accounting firm. We also have discussed with the independent registered public accounting firm such firms audit of the effectiveness of Constellation Energys internal control over financial reporting. We rely without independent verification on the information provided to us and on the representations made by management and the independent registered public accounting firm. We have discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as currently in effect. Finally, we have received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firms communications with the Audit Committee concerning independence, as currently in effect, and have considered whether the provision of non-audit services by the independent registered public accounting firm to Constellation Energy is compatible with maintaining the independent registered public accounting firms independence and have discussed with the independent registered public accounting firm the independent registered public accounting firms independence.
Based upon the reports and discussions described in this report, we recommended to the Board of Directors that the audited financial statements be included in Constellation Energys Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.
February 26, 2009
Stock Ownership of Five Percent Beneficial Owners
As of March 27, 2009, to the knowledge of the Board of Directors, the only persons beneficially owning more than 5% of Constellation Energy voting securities were:
Stock Ownership of Directors and Executive Officers
The following table shows as of March 27, 2009, the beneficial ownership of Constellation Energy common stock of each director, the named executive officers of Constellation Energy shown in the 2008 Summary Compensation Table, and all directors and executive officers as a group. If the individual participates in Constellation Energys long-term incentive plans, Shareholder Investment Plan or Employee Savings Plan, those shares are included. Each of the individuals listed in the table beneficially owned less than 1% of the outstanding shares of Constellation Energy common stock, except Mr. Shattuck, who beneficially owned approximately 1.1% of the outstanding shares. All directors and executive officers as a group beneficially owned approximately 1.7% of the outstanding shares of Constellation Energy common stock. None of them beneficially owned shares of any other class of our or any of our subsidiaries equity securities. The address of each executive officer and director is c/o Constellation Energy Group, Inc., 100 Constellation Way, Baltimore, Maryland 21202.
Compensation Discussion and Analysis
In this compensation discussion and analysis, we explain our general compensation philosophy for the executives named in the 2008 Summary Compensation Table, our named executive officers, as well as provide an overview and analysis of the different material elements of compensation that we provide our named executive officers. We have organized our discussion and analysis as follows:
Impact of Events of 2008 on Executive Compensation
In 2008, two events significantly influenced our business environment: (1) the collapse of the credit markets which materially adversely affected corporations globally and (2) the extreme volatility in the energy markets. Our liquidity was severely impacted as a result of these events and in September 2008 we faced severe uncertainty about our ability to maintain sufficient liquidity to continue operating our business. Additionally, we were experiencing pressure from rating agencies to enhance our liquidity position. As a result, we sought an immediate, substantial investment to ensure our ability to continue operating our business, and in mid-September 2008 we ultimately agreed to a transaction with MidAmerican Energy Holdings Company (MidAmerican) that involved an immediate $1 billion preferred equity investment by MidAmerican in our company, followed by an all cash sale of Constellation Energy to MidAmerican. In early December 2008, we received an unsolicited offer from EDF Group and related entities (EDF) to acquire an interest in our nuclear generation and operation business, which our board of directors determined to be in the best interests of shareholders. Therefore, in December 2008, we and MidAmerican terminated our planned transaction and we entered into a series of transactions with EDF that would result in the sale of a 49.99% interest in our nuclear business for $4.5 billion and that has provided us with additional liquidity. We discuss these transactions in more detail in the accompanying 2008 Annual Report.
As a result of these significant events of 2008, in the fourth quarter we radically altered the near term objectives of the company to focus on generating cash and collateral, to nearly the complete sacrifice of earnings. As a result of this unexpected change in strategic direction, our earnings per share performance in 2008 did not meet our plan or the guidance provided to investors at the beginning of 2008. Accordingly, none of the named executive officers received a performance-based annual incentive award under our Executive Annual Incentive Plan for 2008. However, several named executive officers received an annual bonus payout on an exception basis as described herein.
We are actively seeking to increase available liquidity and reduce our business risk, and over the next one to two years we expect to be in a transition period during which we will focus on executing our business objectives that we believe will strengthen Constellation Energy. These objectives include selling certain assets and operations, working to close the EDF transaction, continuing a disciplined approach to the management of collateral and liquidity, focusing on Constellation Energys core strengths, continuing to reduce the scale of, and to refocus the activities of, our global commodities and customer supply operations and maintaining credit metrics consistent with investment grade ratings. As a result, the Compensation Committee evaluated the design for 2009 compensation to focus on retention of key executive officers and our pay for performance principles.
With this in mind, the Compensation Committee determined that none of the named executive officers would receive a base salary increase for 2009. Additionally, given that 2009 will be a transition year, Constellation Energy will have less of a focus on earnings performance and will place greater emphasis on key objectives which include maintaining positive cash flow and sufficient liquidity, closing the transaction with EDF and completing key divestitures. These objectives are the primary metrics for our 2009 short-term incentive award opportunity.
As a result, the 2009 short-term incentive program consists of financial and operational objectives as well as subjective factors to provide flexibility to meet changing priorities in uncertain times. Performance payout will be based on an assessment of successful achievement of the following objectives:
The Compensation Committee also considered the overall structure of the Companys short-term and long-term incentive programs in light of the fact that the 2008 short-term incentive program did not result in any payment of performance-based annual compensation and that the outstanding long-term incentive awards have significantly lower probabilities of achieving any payout. The Committee determined that the overall structure of the programs, including the use of annual performance based awards and long-term awards consisting of stock options and performance units, continues to serve the Committees stated purpose of paying for performance. As a consequence, the overall structure of Constellation Energys 2009 compensation program remains largely unchanged from prior years.
2009 Executive Compensation Decisions
The following section summarizes the views of the Compensation Committee with respect to the compensation of Constellation Energys chief executive officer and the other named executive officers. The Compensation Committee makes its decisions on executive compensation using an approach we
refer to as the total rewards program. Under the total rewards program, in February of each year, each executive officer is considered for the following:
We note that several of the elements and timing of the total rewards program as administered annually by the Compensation Committee do not directly correspond to the information set forth in the tables required to be included in this Proxy Statement pursuant to the rules and regulations of the Securities and Exchange Commission. While the annual cash bonus or non-equity incentive plan compensation information does correspond to the companys approach, the SEC requires that long-term incentive compensation be reflected using the accounting expense recorded for all unvested outstanding stock and option awards made during years prior to the current year, 2009. This contrasts to the Compensation Committees approach, which is to consider the amount of the long-term incentive awarded in the current year, and to consider the size of that award based on prior years performance and the Committees consideration of current executive compensation trends and other information.
To better summarize the Compensation Committees approach to executive compensation administration, the table below summarizes, for our chief executive officer, the Committees total reward approach as administered in 2008 for 2007 performance and in 2009 for 2008 performance (dollar amounts in millions):
With respect to the total rewards approach for Mr. Shattuck, the Board of Directors and Compensation Committee believed that Mr. Shattuck led the Company through the unprecedented business environment caused by the collapse of the credit markets and extreme volatility of the energy markets during 2008. In particular, the Board and Committee noted Mr. Shattucks successful leadership in negotiating the MidAmerican investment and merger transaction, the subsequent termination of the MidAmerican merger transaction and the transaction with EDF. Mr. Shattuck also restructured Constellation Energys management team during this time, including assuming direct responsibility for the global commodities and customer supply businesses, while effecting a reduction in the scale and change in focus of the activities of those businesses and the strategic divestiture of certain assets. He also led the revamping of the overall strategy and risk positions of Constellation Energy as part of the companys adapting to the new credit and energy market environments. In addition, these activities were undertaken at a time when Constellation Energy continued to safely and reliably operate its fleet of generating facilities and successfully operated its regulated utility.
However, while the Compensation Committee and the Board believed Mr. Shattuck provided excellent leadership through the unprecedented business environment faced by Constellation Energy, the Committee and the Board agreed with Mr. Shattuck that he should not have any increase in base salary and that he be paid no bonus for 2008. Also in line with his recommendation and as noted in the
table on the prior page, the Committee and the Board reduced the value of his long-term incentive award granted in February 2009 by 24% from the prior year award value. Thus, his total direct compensation value was reduced by 49% from the prior year, and the performance-based at risk components of his 2009 target compensation continue to be in excess of 85% of his total target compensation.
With respect to the other named executive officers, the aggregate amount of cash bonuses declined by 92%, from an aggregate of $21 million paid to five executive officers for 2007 performance to an aggregate of $1.6 million for six executive officers for 2008 performance. This reflects the Compensation Committee decision that named executive officers who held their positions throughout all of 2008 be paid no cash bonus for the year. In addition, none of the named executive officers received a base salary increase for 2009.
In determining the significant reductions in total compensation value for both Mr. Shattuck and the other named executive officers, the Compensation Committee also considered a number of additional factors. The Committee considered that it is likely that the overall compensation for financial institution executives will decline in future years. While Constellation Energy is not itself a financial institution, it has competed, and will likely continue to compete, against financial institutions for talent in a number of areas critical to its operations, such as commodities operations, control and risk. In addition, Constellation Energy anticipates that its overall earnings mix will continue to shift to more stable, risk-adjusted earnings derived from its generating fleet, regulated utility and wholesale and retail customer supply businesses. This shift is intended to reduce the volatility of Constellation Energys earnings and its exposure to commodity price risk and overall credit markets.
The Committee also noted that with respect to all option awards granted prior to 2009, the current market value is significantly lower than the option price. In addition, the performance units granted in 2007 and 2008 are also unlikely to deliver any value unless the stock price appreciates significantly prior to the end of their respective performance periods in 2009 and 2010. While the Committee has concerns that these grants do not provide the kind of retention value desired in the total reward program, such grants reinforce the Committees and managements philosophy that long-term awards are performance-based and must be earned based on the criteria established in the program.
The 2008 Summary Compensation Table provided later in this Proxy Statement describes all other compensation items pertinent to the named executive officers. One important change made in the beginning of 2009 is that certain perquisites (other than relocation costs) will no longer be grossed-up for tax purposes. This means that the executive will have to pay all taxes associated with any perquisites received.
The 2008 Summary Compensation Table also includes the change in value associated with retirement plans. As described later in this Proxy Statement, Mr. Shattuck participates in a supplemental retirement plan that is designed to provide a competitive total compensation and benefits package. Although Mr. Shattuck is not vested in that plan because he has not met the age and service requirements, the value of that plan changes each year due to certain factors such as his prior years bonus levels, interest rates and the increase in his age. As reflected in the 2008 Summary Compensation Table, in 2008 the increase in Mr. Shattucks supplemental retirement benefit value was approximately $10 million and, as reflected in the Pension Benefits Table, his accumulated benefit was approximately $33 million as of December 31, 2008; however, Mr. Shattuck has received no distribution of funds from the plan. While the value of his benefit will increase or decrease from year to year, the plan was offered to Mr. Shattuck when he was recruited to manage the company in 2001 and the plan benefit formula has not been modified during Mr. Shattucks tenure with Constellation Energy.
Executive Compensation Objectives and Major Policies
In structuring the compensation program for our named executive officers, the Compensation Committee traditionally has taken into account that we have multiple businesses. For 2008, that included considering BGE, a regulated electric and gas public utility in central Maryland, which is wholly-owned by Constellation Energy and Constellation Energys merchant energy business, which consisted of (1) a power generation and development operation that owns, operates and maintains fossil and renewable generating facilities, (2) a nuclear generation operation that owns, operates and maintains nuclear generating facilities, (3) a customer supply operation that primarily provides energy products and services to wholesale and retail customers and (4) a global commodities business that manages generation, natural gas, coal and freight assets, provides risk management services and trades energy and energy related commodities. As a result of the multiple businesses, we have faced unique challenges in setting competitive compensation including determining appropriate benchmarks for the wide variety of duties performed by our named executive officers. As discussed above in Impact of Events of 2008 on Executive Compensation, after the company structured its 2008 compensation program in early 2008, our business was severely affected by the collapse of the credit markets and extreme volatility in the energy markets during the fourth quarter of 2008. While these events and the subsequent changes in our business and strategic focus could not be contemplated at the time the Committee structured the 2008 compensation program, they were considered by the Committee in making final compensation decisions for 2008, as discussed in further detail below.
In general, executive compensation is highly leveraged so that executives are rewarded for achieving and exceeding metrics that support our corporate strategy. In years where company performance does not meet expectations, executive compensation will reflect lower rewards. The compensation policies are designed to meet the following objectives:
To accomplish these objectives, the Compensation Committee, taking into account corporate, staff and business unit and individual performance, administers the compensation program so that:
Average Compensation Mix for Named Executive Officers*
Use of Compensation Consultants and Benchmarking
Constellation Energy administers compensation changes for all employees, including our named executive officers on an annual basis. Each February, after performance results for the prior year are finalized and publicly announced, short- and long-term incentive payouts for the prior performance
period are determined and base salary changes and long-term incentive grants are approved by the applicable authorized individuals. This administration schedule permits compensation decisions to be made within a reasonable time after disclosure of Constellation Energys annual earnings, so that an assessment of business unit and individual contributions to corporate performance can provide alignment of pay with performance. This schedule also facilitates the establishment of short- and long-term performance metrics that are consistent with Constellation Energys business plan objectives, including achievement of annual earnings per share results and long-term stock price growth expectations consistent with guidance communicated to shareholders at the beginning of the year.
Use of Compensation Consultants
Our Compensation Committee retains a compensation consultant to assist the Committee in determining both the mix of compensation that we make available to our named executive officers and the amount of each element, taking into account the general goals of our compensation program. The compensation consultant also provides research and market data to the Compensation Committee. A representative of the compensation consultant generally attends meetings of the Compensation Committee and also communicates directly with the Compensation Committee Chair. For 2008 our Compensation Committee retained Exequity LLP (Exequity), which exclusively provides executive compensation consulting services to the Compensation Committee and no other consulting services to Constellation Energy.
With assistance from the compensation consultant, our Compensation Committee has established the following peer groups to benchmark the components of the total direct compensation of our named executive officers:
The compensation consultant conducted market studies using compensation data from both peer groups. The consultant examined the pattern of compensation practices among the peer group companies and adjusted the benchmark data as deemed necessary to reflect the pay levels the peer group companies were expected to pay if they were Constellation Energys revenue size. The Compensation Committee reviewed the benchmark data at the 50th and 75th percentiles as a reference for determining the 2008 base salary, 2008 short-term incentive award and 2008 long-term incentive target award for Constellation Energys named executive officers.
In addition to reviewing the data from the peer groups outlined above, for Ms. Boultwood, our Chief Risk Officer, the Chief Executive Officer reviewed with the Compensation Committee data from McLagan Partners, Inc. (McLagan), which is a leading compensation consulting firm that focuses on the financial services industry, because Constellation Energy competes with companies in the financial industries for talent in our risk management jobs. The Chief Executive Officer and the Compensation Committee reviewed data for 2007 base salary (which was adjusted using an annualized projected salary growth rate of 3.75% to September 1, 2008) short term-incentives and long-term incentives at the 50th and 75th percentiles from McLagans Risk Management survey for the Head of Risk Management. This McLagan data was used because the survey Head of Risk Management position represents the duties of Ms. Boultwood.
Material Elements of Compensation
We paid or provided the following elements of compensation to our named executive officers with respect to 2008:
In February 2008, the funding mechanism for the pool from which the 2008 short-term incentives for the named executive officers were to be paid was established by management and reviewed by the Compensation Committee. The funding mechanism was based on achievement of earnings per share (EPS) goals, as adjusted to eliminate the effect of special items. Adjusted EPS is publicly reported quarterly by Constellation Energy. We believe that adjusted EPS reflects results that are comparable among periods since it excludes the impact of items such as workforce reduction costs or gains and losses on the sale of assets, which may recur occasionally, but tend to be irregular as to timing. We believe this view of adjusted EPS is consistent with how our investors view our business, and that adjusted EPS is an appropriate measure for these executives because of their company-wide responsibility. A target 2008 EPS of $5.35 was established for purposes of sizing the short-term incentive pool, which was within the EPS guidance that management communicated to Wall Street, and which represented 16% year-over-year earnings growth.
At the Compensation Committee meeting in February 2009, the Committee determined that the 2008 performance targets were not achieved with respect to the short-term incentive award and considered that the failure to achieve performance targets was due to unprecedented market events and an unexpected change in Constellation Energys strategic direction. In light of these considerations, the Compensation Committee reviewed the following factors to determine whether any 2008 bonus should otherwise be payable:
After reviewing the foregoing factors, the Committee determined that no awards were payable to the named executive officers for 2008 under the AIP. However, the Committee did award Mr. Barron and Ms. Boultwood bonuses outside of the plan for 2008 in light of their joining Constellation Energy in 2008. Both executives received a bonus payment equal to their short-term incentive target (100% of base salary). The Committee also recognized that Mr. Thayer was entitled to a 2008 bonus under the agreement he previously entered into with Constellation Energy described in Employment, severance and other agreements beginning on page 32. The Committee also considered that the resulting total direct compensation for 2008 for each named executive officer was at or below the median of the market data discussed above in Benchmarking, even taking into consideration the annual bonuses paid to Messrs. Barron and Thayer and Ms. Boultwood. The Committee determined that the bonuses it approved for the named executive officers were reasonable. The bonus payouts approved by the Compensation Committee are reflected in the Bonus column of the 2008 Summary Compensation Table on page 36 and related footnotes and, to the extent applicable, the target payouts at the time of grant are reflected in the Grants of Plan-Based Awards Table on page 40.
In October 2008, we benchmarked our grant mix of stock options and performance units and Exequity determined the mix is consistent with prevalent practices at other companies. In January 2009, Exequity reconfirmed the market prevalence of the grant mix for the Compensation Committee. These award vehicles promote both improved performance and retention over time. Stock options accrue value for recipients only when share price appreciates, and they vest each year on a ratable basis over a three-year period. Performance units reward recipients only when Constellation Energys total shareholder return performs well in relation to our peers and they vest at the end of a three-year performance period. These awards are generally intended to qualify as performance-based under Section 162(m) of the Internal Revenue Code.
2008 2010 Long-Term Incentive Program. In February 2008 the named executive officers each were granted awards under the long-term incentive program (except for Mr. Barron who received a grant upon his hire in April 2008). The awards consisted of stock options and performance units. The amounts of the awards approved by the Compensation Committee were based on a review of market data for each job as described in Benchmarking as well as recommendations of the Chief Executive Officer for the other named executive officers. The Committee approved an award grant at the top quartile for Messrs. Shattuck, Wallace and Yoskowitz (which grant Mr. Yoskowitz subsequently forfeited as described in Employment, severance and other agreements). While the expected value of these grants was higher than an amount consistent with the compensation philosophy of extending long-term incentive grants at the median of the market, the larger grants reflected the Compensation Committees evaluation of the contributions of these named executives to Constellation Energys superior 2007 earnings and stock price performance.
Stock options were granted on February 21, 2008 with an option price equal to the closing price per share of Constellation Energy common stock on the date of grant ($93.97). The market price of Constellation Energys stock on December 31, 2008 was well below the option price for all outstanding options.
Awards of performance units were made on February 21, 2008 for the three-year performance period that began January 1, 2008. Each performance unit is equivalent to one dollar ($1.00). The value of the performance unit award payout is dependent on one of two measures. The primary measure, which is Constellation Energys total shareholder return for the three-year
performance period relative to the total shareholder return of investment grade large- and mid-cap companies in the Dow Jones Electricity and Multiutilities Indexes, must be above the 25th percentile in order to merit a payout between 50% and 200% of the original grant value. If Constellation Energys percentile rank for the primary measure is below the 25th percentile, a secondary measure compares Constellation Energys total shareholder return for the three-year performance period to companies who are in the S&P 500 Index. If Constellation Energys total shareholder return is above the 25th percentile of this group, payment under the secondary measure will be between 50% and 100% of the original grant value. Performance units vest at the end of a three-year performance period and will be paid out in cash. Constellation Energys relative total shareholder return as of December 31, 2008 was below threshold for both the primary and secondary measure.
The option grants and performance unit awards approved by the Compensation Committee are reflected in the Grants of Plan-Based Awards Table on page 40.
As described in Pension Benefits beginning on page 44, Constellation Energy also provides Messrs. Shattuck and Wallace with additional supplemental retirement benefits that are designed to provide a competitive total compensation and benefits package to a select few executives. To be eligible for the retirement benefit, the executive must be at least age 55 with 10 or more years of service at the date of employment termination, which provides a retention mechanism for participating executives. As of December 31, 2008, Mr. Shattuck did not meet the age and service requirements to receive benefits under this plan.
No new participants have been admitted to Constellation Energys supplemental retirement plan since January 2002, when Mr. Wallace was hired. At that time, as an inducement to join Constellation Energy, he was provided with a three-year employment contract that admitted him to the plan and credited him with seven years of additional vesting service so that he would have a vested benefit under the plan when his employment contract expired. The additional years of vesting service did not increase the amount payable to Mr. Wallace upon vesting in the plan. Based on his age and credited service, he became eligible to retire under the plan in January 2005. On December 12, 2008, the Compensation Committee approved an amendment to the plan that entitled Mr. Wallace to receive a one-time lump sum payment of his supplemental retirement benefits on a date certain prior to his termination from employment. The Committee approved this amendment to induce Mr. Wallace, who was planning to retire, to instead accept the increased responsibilities required of his new Vice Chairman position and to take on the additional role of primary point of contact with EDF executives. Therefore, the amendment permitted Mr. Wallace to continue to provide critical executive management leadership to Constellation Energy rather than be forced to terminate employment to receive his
supplemental retirement benefits. After the payment of the supplemental retirement plan benefits, Mr. Wallace will cease to accrue benefits under both the Supplemental Plan and the Benefits Restoration Plan. For more information, see footnote 3 to the Pension Benefits Table on page 46.
We also believe that the executive perquisites we provide are consistent in form and amount to those offered to executives at similar levels at companies with whom we compete for talent.
Beginning in 2009, Constellation Energy has discontinued the practice of providing tax gross-up on perquisites that are provided to our executive officers, other than tax gross-ups on relocation benefits.
In January 2008, in connection with her offer of employment into a non-executive officer position, Ms. Boultwood received a taxable cash signing bonus of $850,000. This bonus was
intended to compensate her for unvested equity and cash-based grants that she forfeited as well as amounts she was required to pay back to her previous employer as a consequence of leaving that employer to work for Constellation Energy. We understand that our practice of compensating employees for value foregone as a result of accepting employment with the company is consistent with prevalent hiring practices. This bonus is subject to a pay-back agreement if she is terminated for cause or voluntarily resigns from Constellation Energy within two years of the commencement of her employment. Ms. Boultwood also received other compensation as part of her employment offer that is disclosed in the applicable tables. This employment offer was not reviewed by the Compensation Committee because Ms. Boultwood was not hired into an executive officer position. After Ms. Boultwood was promoted into an executive officer position, the Compensation Committee ratified her compensation.
The Compensation Committee approved the following terms of an offer of employment to Mr. Barron. On April 1, 2008, as part his employment offer, Mr. Barron received an annual grant under the Executive Long-Term Incentive Plan consistent with market median levels of annual total direct compensation for his position. This grant consisted of stock options with an option price of $90.00 (the fair market value on the date of grant) that vest and become exercisable over a three-year period beginning on February 21, 2009. It also included performance units that will vest at the end of the three-year performance period that began January 1, 2008. In order to compensate Mr. Barron for equity and cash-based grants he forfeited as a consequence of leaving his former employer to work for Constellation Energy, Mr. Barron received a signing bonus of 25,690 service-based restricted stock units, with a fair market value (average of high and low stock price on the date of grant) of $89.53 per stock unit, that will be settled in cash or stock at the sole discretion of Constellation and will vest ratably over 4 years subject to Mr. Barrons continued employment (25% of the grant vested on April 1, 2009 and 25% will vest on April 1 of each of the next three years thereafter). Dividends will accumulate and be paid out as the applicable units vest.
In October 2008 Mr. Thayer was named Treasurer of Constellation Energy. Because of the importance of his relationship with credit rating agencies and credit facility banks, and to induce him to accept the position and to remain employed with Constellation Energy, he entered into an agreement with Constellation Energy that entitled him to a guaranteed minimum 2008 bonus amount of $800,000 (2008 Bonus) payable in 2009, and a guaranteed minimum 2009 bonus amount of $600,000 (2009 Bonus) payable in 2010. This agreement also states that if Mr. Thayers employment is terminated by Constellation Energy for a reason other than for cause or he leaves the company for good reason (as defined in the agreement), Mr. Thayer would be entitled to the following: (i) payment of the 2008 Bonus and 2009 Bonus at the same time such bonuses would have otherwise been paid, (ii) an amount equal to his monthly base salary rate which would continue to be paid monthly for a period of 12 months following such termination, and (iii) continuation of health benefits at employee rates for 12 months, which would discontinue if he obtains employment that offers group health benefits. In exchange for these benefits, Mr. Thayer would not be eligible to participate in the Constellation Energy severance plan, and would be required to execute a release of claims against the company. This agreement was not reviewed by the Compensation Committee because Mr. Thayer was not in an executive officer position at the time of the agreement. After Mr. Thayer was promoted to the Chief Financial Officer position, the Compensation Committee ratified his compensation, including his agreement.
In October 2008, Constellation Energy terminated the employment of Mr. Yoskowitz. To settle all outstanding compensation and benefit issues with respect to Mr. Yoskowitzs employment with and immediate exit from Constellation Energy, the company agreed to provide him with a severance payment of $4,750,000 and a lump sum payment for medical coverage of $90,788 which included tax gross-up. This severance was the result of negotiations with Mr. Yoskowitz during the period in which Constellation Energy was under an agreement with MidAmerican which was expected to result in a change in control. Among other benefits Mr. Yoskowitz would have received if his employment had been terminated in connection with a change in control with an assumed closing date of June 30, 2009, he would have received a $6 million cash severance payment, an accelerated payout on outstanding performance units of $1.4 million, a pro-rata maximum annual incentive award payment of $825,000 and an enhancement of his Benefits Restoration Plan benefit totaling $1.2 million. In return for the severance payment, Mr. Yoskowitz agreed to the cancellation of his existing options and performance units, with the exception of options that were granted as part of his initial employment offer, and released Constellation Energy from future claims. For more information see Termination of Named Executive Officer on page 56.
Stock Ownership and Hedging Policy
To more closely align the interests of our named executive officers with our shareholders, we require our named executive officers to acquire and hold Constellation Energy stock with a value equal to established multiples of base salary:
Due to the steep decline in Constellation Energys stock price in 2008, none of the named executive officers employed by Constellation Energy on December 31, 2008, were in compliance with stock ownership requirements at that time, with the exception of Mr. Wallace.
Under Constellation Energys Insider Trading Policy, employees including named executive officers are prohibited from selling securities of Constellation Energy short and from transacting in options, warrants, puts and calls or similar instruments on Constellation Energys securities.
Policy concerning $1 million deduction limitation. Section 162(m) of the Internal Revenue Code (Code) limits to $1,000,000 the annual tax deduction for compensation paid to named executive officers, unless paid pursuant to a performance-based shareholder approved plan. We intend that most of the total direct compensation payable to the named executive officers (base salary, short-term incentive and long-term incentive) be deductible by Constellation Energy and much of the other
compensation, such as the supplemental retirement plan, be paid at a time when not subject to the limitations of Section 162(m). While the Compensation Committees general intent is to design and administer the executive compensation programs in a manner that will preserve the deductibility of compensation payments to executive officers, the Committee may award or pay some elements of compensation that are not deductible by reason of Section 162(m) in order to achieve its desired compensation objectives.
Policy concerning additional tax on nonqualified deferred compensation plan benefits. Constellation Energys compensation and benefit plans and arrangements have been designed and administered with the objective of not triggering the additional tax under Section 409A of the Code.
Amendments approved during 2008 for tax purposes. The Compensation Committee approved amendments to the benefit plans and agreements set forth below to ensure an exemption from or compliance with Section 409A of the Code.
None of the changes made to the benefit plans and agreements enhanced the amount of benefits to which a participant is or may be entitled under the benefit plans and agreements.
In addition, the Compensation Committee approved an amendment to Constellation Energys 2007 Executive Annual Incentive Plan (AIP) to reflect recent interpretative guidance provided by the Internal Revenue Service regarding when payments made upon an involuntary termination without cause are deemed performance-based for purposes of Section 162(m) of the Code. The AIP was amended to delay payouts to participants who are terminated at the request of a third party who has taken steps reasonably calculated to effect a change in control or in anticipation of a change in control transaction until the earlier of the end of the applicable performance period or the completion of the change in control transaction.
2008 Summary Compensation Table
Notes to 2008 Summary Compensation Table:
The negative amounts for 2007 are the result of the reversal, for accounting purposes, of expense previously recognized related to the grant of performance units under the 2007 long-term incentive plan and which had been reported in the 2007 Summary Compensation Table. Under applicable accounting rules, because Constellation Energys relative total shareholder return performance through December 31, 2008 was below threshold, prior expense accruals based on target performance were required to be reversed.
Private transportation. A per hour cost of Constellation Energy employed drivers is calculated by taking the total driver compensation and dividing by the total hours worked in the year. The incremental cost for the executives personal use is determined by multiplying the total hours of personal trip time by the per hour cost. Incremental cost for third-party contract drivers is the total amount paid by Constellation Energy.
Aircraft. Constellation Energy owns a fractional interest in aircraft operated by a third party which are used for business travel by executives. There was no personal use of private aircraft by Constellation Energy executives during 2008.
Matching gifts. Constellation Energy matches gifts of up to $10,000 made by the named executive officer to accredited higher education institutions and charitable organizations.
Relocation. Constellation Energy provides relocation benefits to employees who relocate their personal residence in connection with accepting an offer of employment from Constellation Energy. These relocation benefits were provided to the named executive officers who were hired in 2008. The relocation benefits provided to the named executive officers include some enhancements above the standard relocation benefits provided to other employees. The amounts reported as perquisites for relocation represent the enhancements to the standard benefits; however, the tax gross-up amounts reported include the total gross-up on all relocation benefits received by the executive.
All other perquisites. The total actual cost to Constellation Energy is reflected as incremental cost.
Discontinuance of tax gross-ups. Beginning in 2009, Constellation Energy has discontinued the practice of providing tax gross-up on perquisites that are provided to our executive officers, other than tax gross-up on relocation benefits.
The following table indicates the various perquisites for which Constellation Energy has incurred incremental costs for each named executive officer. A check mark (ü) indicates perquisite usage during 2008 by the named executive officer listed at the top of the column. For those perquisites for which the value exceeds $25,000, the amount is indicated. The cost of tax gross-up on certain perquisites is also included:
Grants of Plan-Based Awards
As described in Compensation Discussion and Analysis, Constellation Energy granted cash-based and equity awards to the named executive officers under Constellation Energys short-term and long-term incentive plans. The following table sets forth the range of future payouts pursuant to awards granted in February 2008 (except for Mr. Barron who received grants upon hire in April 2008).
Notes to 2008 Grants of Plan-Based Awards Table:
Outstanding Equity Awards at Fiscal Year-End
The market values in the table below are based on the closing price of Constellation Energy common stock on December 31, 2008 of $25.09 per share.
Notes to Outstanding Equity Awards Table:
The performance units are paid out only if Constellation Energy meets performance objectives established by the Compensation Committee. The primary performance criterion is three-year total shareholder return (TSR) relative to investment grade large- and mid-cap companies in the combined Dow Jones Electricity and Multiutilities Indexes. If Constellation Energys TSR is below a minimum threshold during the performance period, then Constellation Energys TSR will be measured against the TSR of investment grade companies in the S&P 500 Index. See Potential Post-Employment Payments beginning on page 48 for a description of the treatment of performance units in the event that employment is terminated.
Option Exercises and Stock Vested
The following table provides information regarding amounts realized by each named executive officer due to the vesting or exercise of equity compensation during the year.
Notes to Option Exercises and Stock Vested in 2008 Table (all values are based on the fair market value of Constellation Energy common stock on the exercise/vesting date):
Pension Equity Plan
The Pension Equity Plan is a tax qualified employee pension plan under which a lump sum benefit amount is computed based on covered earnings multiplied by a total credit percentage. Covered earnings are equal to the average of the highest three of the last five years base pay plus annual incentive, but covered earnings may not exceed the Internal Revenue Service compensation limitations. The total service credit percentage is equal to the sum of the credit percentages based on the following formula 5% per year of service through age 39, 10% per year of service from age 40 to age 49, and 15% per year of service after age 49. No benefits are available under the Pension Equity Plan until a participant has at least three years of vesting service. Benefits payable under the Pension Equity Plan are paid in periodic installments unless a participant elects a lump sum.
Benefits Restoration Plan
The Benefits Restoration Plan is a nonqualified employee pension plan. Benefits under the Benefits Restoration Plan accrue in accordance with the benefit formula of the Pension Equity Plan, but without regard to Internal Revenue Service compensation limitations. No benefits are available until a participant has at least three years of vesting service. Lump sum benefits under the Benefits Restoration Plan will be offset by the benefits under the Pension Equity Plan, but will not be offset by Social Security.
As of December 31, 2008, Messrs. Shattuck, Collins, Thayer, Wallace and Yoskowitz were eligible to receive benefits under the Benefits Restoration Plan. If Mr. Shattuck terminates employment for any reason prior to meeting the eligibility requirements for benefits under the Senior Executive Supplemental Plan that is described below (i.e., before reaching age 55 with 10 or more years of vesting service or before experiencing an entitlement event), he would be eligible to receive benefits under the Benefits Restoration Plan calculated in the manner described above. As of December 31, 2008, Mr. Shattucks and Mr. Wallaces Benefits Restoration Plan accrued benefits were $4,923,000 and $1,430,000 respectively, and are included in the Supplemental Plan amounts shown in the Pension Benefits Table on page 46. Accrued benefits under the Benefits Restoration Plan for Messrs. Collins, Thayer and Yoskowitz are reported in the Pension Benefits Table. Mr. Barron and Ms. Boultwood who were hired in 2008 are not eligible to receive benefits under the Benefits Restoration Plan.
Senior Executive Supplemental Plan
Messrs. Shattuck and Wallace participate in the Senior Executive Supplemental Plan (Supplemental Plan) which is a nonqualified pension plan. Under the Supplemental Plan, a participant must be at least age 55 with 10 or more years of vesting service to retire and be entitled to benefits. A participant who experiences an entitlement event is also eligible for benefits. Once a participant becomes entitled to benefits under the Supplemental Plan, benefits are in lieu of any benefits under the Benefits Restoration Plan. Benefits paid upon retirement before age 62 are reduced for early receipt. Mr. Shattucks normal retirement annuity benefit under the Supplemental Plan, which is available at age 62 with five or more years of vesting service, will be computed at 60% of covered earnings. At December 31, 2008, based on his current age of 54 and nine years and eight months of vesting service (which includes service as a non-employee director), Mr. Shattuck was not eligible for benefits under the Supplemental Plan as he did not meet the age and service requirements.
Normal retirement annuity benefits available under the plan at age 62 for Mr. Wallace accrue at 5.5% per year of benefit service up to a maximum annuity benefit of 55% of covered earnings. Beginning in January 2005, Mr. Wallace became eligible to retire based on his then current age of 57 and three years of service, plus the seven years of additional vesting service with which he has been credited as described in footnote 1 to the table on the next page. As discussed in footnote 3 to that table, Mr. Wallace received a payout of his Supplemental Plan benefit on April 1, 2009.
Covered earnings under the Supplemental Plan are equal to the average of the highest two of the last five years base pay amounts plus the average of the highest two of the last five years short-term incentive award amounts and are determined without regard to the Internal Revenue Service compensation limitations. For Mr. Wallace, the short-term incentive award included in covered earnings is capped at 200% of base pay. Benefits payable under the Supplemental Plan are paid in periodic installments unless a participant elects a lump sum. Plan participants are entitled to a 50% survivor annuity benefit at no cost, which applies once a participant has vested in the Pension Equity Plan, regardless of whether the participant was eligible to receive a benefit under the Supplemental Plan. The benefits computed under the Supplemental Plan are offset by benefits under the Pension Equity Plan, but are not offset by Social Security.
Vesting of accrued benefits under the Supplemental Plan accelerates when any of the following events occur: employment termination, demotion or loss of benefit eligibility without cause; a change of control of Constellation Energy followed within two years by the executives demotion, employment termination or loss of benefit eligibility; or reduction of previously accrued benefits. As a result of such accelerated vesting, the executive would be entitled to a lump sum payout of the vested amount from the Supplemental Plan after employment termination as described in Potential Post-Employment Payments beginning on page 48.
The table below sets forth the present value of accumulated benefits as of December 31, 2008 for each of the named executive officers under the plans described above. As of December 31, 2008, Mr. Shattuck was not vested in the Supplemental Plan.
Notes to Pension Benefits Table:
Nonqualified Deferred Compensation
Constellation Energy sponsors the Nonqualified Deferred Compensation Plan that provides the opportunity for eligible employees, including the named executive officers, to defer certain compensation including base salary and short-term incentive awards. Under the Plan, eligible employees may defer up to 15% of base salary below the Internal Revenue Service compensation limit (applicable to qualified employee 401(k) plans), up to 85% of base salary above the Internal Revenue Service compensation limit and up to 100% of annual incentives. Under the plan, Constellation Energy matches base salary deferral amounts for salary over the Internal Revenue Service compensation limit using the same matching formula as under the Constellation Energy qualified 401(k) savings plan (match of 50% up to the first 6% of employee salary deferral).
Nonqualified Deferred Compensation Plan participants may elect to invest their plan account balances in investment options that substantially mirror the qualified employee 401(k) plan options. However, unlike the 401(k) plan, there is no option to invest in Constellation Energy common stock in the Nonqualified Deferred Compensation Plan.
Plan participants do not pay income taxes on amounts deferred, company contributions, or earnings thereon, until those amounts are distributed from the Nonqualified Deferred Compensation Plan. A participants benefits under the Nonqualified Deferred Compensation Plan always are fully vested and are payable after employment termination. Benefits are paid in a lump sum unless a participant elects annual installments.
The named executive officers Nonqualified Deferred Compensation Plan accounts are summarized below:
Notes to 2008 Nonqualified Deferred Compensation Table:
Potential Post-Employment Payments
Constellation Energy has entered into certain agreements and maintains certain plans that provide compensation to named executive officers in the event of a termination of employment or a change in control transaction. Generally under our plans, a change in control is deemed to have occurred upon:
Employment Termination or Change in Control Scenarios
Voluntary/involuntary with cause. There would be no accelerated vesting or incremental payments if the named executive officer separates from service in this manner.
Involuntary without cause. Generally, if a named executive officer separates from service in this manner, he or she would receive a cash severance benefit, a pro rata cash payout of his or her short-term incentive award and a pro rata payout of certain outstanding service-based restricted stock and/or performance units. Computation of these benefits is described in more detail beginning on page 51.
Additionally, pursuant to the terms of the Supplemental Plan, separation in this manner is an entitlement event for Messrs. Shattuck and Wallace, and they would receive the net accrued supplemental benefit as of the date of the entitlement event. Without this entitlement event, no payment would be made to Mr. Shattuck until he becomes eligible to retire.
As discussed in Compensation Discussion and Analysis, Mr. Wallace has elected to receive payment of benefits under the Supplemental Plan effective April 1, 2009. This will make him ineligible to receive additional accrued benefits based on an entitlement event after that date.
Change in control. Pursuant to the terms of Constellation Energys long-term incentive plans, vesting of outstanding equity awards will accelerate as described in Treatment of outstanding long-term incentive awards on page 52.
Change in control with qualifying termination. Each of Messrs. Shattuck, Collins, Barron and Wallace is a party to a change in control agreement with Constellation Energy. Including the named executive officers, there are a total of six executive officers who have a change in control agreement with Constellation Energy.
If the employment of Messrs. Shattuck or Wallace terminates at any time during the two-year period following completion of a change in control transaction and it is a qualifying termination (which is termination of employment by Constellation Energy without cause or resignation by the executive with good reason), the executive would become entitled to receive the following additional payments and benefits:
As discussed in Supplemental retirement benefits in Compensation Discussion and Analysis, Mr. Wallace has elected to receive payment of benefits under the Supplemental Plan effective April 1, 2009. This will make him ineligible to receive additional Supplemental Plan benefits based on a change in control after that date.
If the employment of Messrs. Collins or Barron terminates at any time during the two-year period following completion of a change in control transaction and it is a qualifying termination, the executive would become entitled to the following additional payments and benefits:
If a named executive officer who is party to a change in control agreement would be subject to the excise tax as a result of Section 280G of the Internal Revenue Code, and is required to make a payment due to the application of this section, the named executive officer will receive a gross-up payment such that he or she is placed in the same after-tax position as if no excise tax had been imposed. In addition, Constellation Energy has the right to delay payments to comply with Section 409A of the Internal Revenue Code and the obligation to notify the named executive officer if a payment would be subject to Section 409A, as well as to negotiate reasonably and in good faith to amend the terms of the arrangements between the named executive officer and Constellation Energy to comply with Section 409A of the Internal Revenue Code. Constellation Energy has also agreed not to take actions (without the named executive officers written consent) that would expose any benefits or payments to the named executive officer to additional taxes under Section 409A of the Internal Revenue Code and to hold the named executive officer harmless for any action Constellation Energy may take in violation of these obligations.
Under the terms of their change in control agreements, the named executive officers would receive a grant of replacement options to purchase a number of shares of Constellation Energy common stock equal to the number of shares subject to options that the named executive officer holds and that are actually cancelled upon completion of a change in control transaction. The replacement options would be subject to the same vesting terms and expiration dates as options that were canceled, except that (a) the exercise price of the replacement options would be the higher of the exercise price of the canceled options or the fair market value of the Constellation Energy common stock at the time the replacement options are granted and (b) the replacement options would have the same vesting terms that the canceled options had prior to any vesting acceleration as a result of the change in control transaction. The replacement options would automatically vest if, within two years following the
completion of a change in control transaction, Constellation Energy terminates the named executive officers employment without cause or the named executive officer resigns for good reason (in each case, as defined in the change in control agreement).
Mr. Thayer, who is not party to a change in control agreement, would receive benefits pursuant to his agreement described in Employment, severance and other agreements in Compensation Discussion and Analysis which entitles him to payment of the full minimum guaranteed 2008 Bonus and 2009 Bonus, an amount equal to his monthly base salary rate for a period of 12 months in lieu of a cash severance benefit and continuation of health benefits at employee rates for 12 months. Computation of these benefits is described in more detail below where the applicable provisions of the benefit plans are summarized.
Ms. Boultwood, who is also not party to a change in control agreement, would receive payments pursuant to the change in control provisions contained in benefit plans that address such an event. In general, under the severance plan she would receive a cash severance benefit and a pro rata cash payout of her annual incentive award. Computation of these benefits is described in more detail below where the applicable provisions of the benefit plans are summarized. Under the severance plan, she would also be entitled to a subsidy of COBRA costs for six months, twelve months of outplacement assistance and up to $3,000 in educational assistance.
For each of the named executive officers, long-term incentive award payouts would be made consistent with the provisions described below.
Death. Generally, if a named executive officer terminates in this manner, the only incremental payments relate to life insurance benefits and outstanding long-term incentive awards.
Disability. Generally, if a named executive officer terminates in this manner, the only incremental payments relate to disability benefits and outstanding long-term incentive awards.
Normal retirement. None of the named executive officers are eligible for normal retirement as of December 31, 2008.
Early retirement. Only Mr. Wallace, who became eligible as of January 2005, is eligible for early retirement as of December 31, 2008.
Benefit Plan Provisions Related to Employment Termination or Change in Control
Severance plan. The plan provides a cash severance benefit equal to two weeks of eligible pay per year of service with a minimum of 26 weeks and a maximum of 52 weeks. Eligible pay includes (i) the named executive officers then current weekly base salary, plus (ii) the named executive officers average annual incentive bonus (calculated as the average of the executives two most recent incentive bonus amounts paid) expressed as a weekly amount. The cash severance benefit is payable in biweekly installments. Since Ms. Boultwood is not party to a change in control agreement, she would become entitled to a severance benefit under this plan upon a qualifying termination following a change in control transaction. Messrs. Shattuck, Collins, Barron and Wallace are not entitled to a severance benefit under this plan in the event of a change in control since they would receive a severance benefit pursuant to their change in control agreements. Mr. Thayer would not be entitled to benefits under this plan. As discussed in Employment, severance and other agreements in Compensation Discussion and
Analysis, he will receive benefits based on the agreement he entered into in October 2008 which provides the following: (i) payment of the 2008 Bonus and 2009 Bonus payable at the same time such bonuses would have otherwise been paid, (ii) an amount equal his monthly base salary rate which would continue to be paid monthly for a period of 12 months following his termination, and (iii) continuation of health benefits at employee rates for 12 months, which would discontinue if he obtained employment that offers group health benefits.
Treatment of outstanding long-term incentive awards. The named executive officers have outstanding long-term incentive awards under Constellation Energys long-term incentive plans. These plans include provisions for treatment of outstanding awards under employment termination or change in control scenarios as summarized below.
Stock Options. Under most termination scenarios, unexercisable (unvested) options would be forfeited. In the event of retirement, with respect to options granted before 2008, unexercisable (unvested) would be forfeited. Pursuant to an amendment approved by the Compensation Committee in February 2008 for options granted in 2008 and thereafter, options continue to vest and vested options are exercisable until the earlier of five years after the date of retirement or the option term. Under a change in control with or without a qualifying termination, vesting would accelerate and unvested options would become exercisable and, under certain plans, paid out in cash.
With respect to Mr. Wallace, pursuant to terms approved by the Compensation Committee in July 2007 that were intended to induce him to remain employed with Constellation Energy at least through 2008, for options granted before 2008, upon termination a pro rata portion of the unvested options awarded will vest based on months of service as of the effective date of such termination. All vested options will remain outstanding until the expiration of the option term.
Service-Based Restricted Stock. Under a termination that is voluntary or involuntary with cause, unvested awards would be forfeited. Under a termination that is involuntary without cause or in the event of retirement, death or disability, awards would vest on a pro rata basis. Under a change in control with or without a qualifying termination, awards would vest immediately.
Performance Units. Under a termination that is voluntary or involuntary with cause, unvested performance units would be forfeited. Under a change in control with or without a qualifying termination, performance units would vest on a pro rata basis based on months of service during the performance period and the vested units would be paid out assuming maximum performance. For performance units granted in 2008 and thereafter, in the event of retirement, a pro rata portion (based on service during the performance period) of the performance unit award will payout at the end of the performance period based on actual performance. Under other scenarios, performance units would vest on a pro rata basis, but would be paid out assuming target performance if actual performance through the termination date is at or above target; provided, however, that beginning in 2009, Constellation Energy will apply a standard treatment for payment of outstanding performance units so that performance units vest on a pro rata basis, but will be paid out at the end of the performance period based on actual performance, capped at the pro rata target amount.
With respect to Mr. Wallace, pursuant to terms approved by the Compensation Committee in July 2007, in the event he is terminated without cause or in the case of death or disability, a pro rata portion of the performance units granted in 2008 will vest based on service during the performance period and payout will be at target if Constellation Energys performance is at or above target at the time of such termination. If performance is below target then the performance
units are forfeited. If Mr. Wallace terminates employment for any reason after December 31, 2008 he will be entitled to a pro rata payout of performance units at the end of the performance period based on actual performance.
Supplemental long-term disability plan. If the named executive officer elects disability insurance coverage under the standard employee disability insurance plan, he or she will be covered under the supplemental long-term disability plan for that part of eligible pay that exceeds $200,000 (which is the maximum eligible pay under the standard employee plan) based on the coverage level in the employee plan. Unlike the employee plan which provides tax-free benefits, the supplemental plan benefit is taxable. The maximum benefit under this plan is capped at $25,000 per month.
In-service death benefit. In addition to the company-paid insurance offered under Constellation Energys employee life insurance program (one times base salary), the named executive officers are provided with a supplemental death-related benefit. If a named executive officers death occurs while an active employee, a lump sum payment equal to annualized base salary at the time of death grossed-up to cover federal and state income tax withholding will be paid to the executives beneficiary.
Health benefits. Mr. Shattuck is entitled to a one-time payment of approximately $21,800, which is equal to the present value of the retiree health subsidy he might have received had he met the retiree health plans eligibility criteria, if he is not eligible for retiree health coverage at the time of separation for any reason, which would include voluntary or involuntary termination, death or disability.
Supplemental benefits plan. Each executive is also entitled to personal financial, tax and estate planning benefits that continue during the year of retirement or death plus the next two calendar years. The planning benefit is grossed-up to cover federal and state income tax withholding. Beginning in 2009, these benefits will no longer be grossed up.
Receipt of the severance benefits described above is subject to the execution by the executive of a release of claims against Constellation Energy.
The amount of incremental compensation payable to each named executive officer under the employment termination and change in control scenarios is summarized in the following table:
(See Notes to table on next page)
Notes to Potential Post-Employment Payments Table:
Termination of Named Executive Officer
Under the terms of separation agreed to by Mr. Yoskowitz and Constellation Energy related to the termination of his employment by Constellation Energy in October 2008, Mr. Yoskowitz received the following:
This severance was the result of negotiations with Mr. Yoskowitz during the period in which Constellation Energy was under an agreement with MidAmerican which was expected to result in a change in control. Among other benefits Mr. Yoskowitz would have received if his employment had been terminated in connection with a change in control with an assumed closing date of June 30, 2009, he would have received a $6 million cash severance payment, an accelerated payout on outstanding performance units of $1.4 million, a pro-rata maximum annual incentive award payment of $825,000 and an enhancement of his Benefits Restoration Plan benefit totaling $1.2 million. In return for the severance payment, Mr. Yoskowitz entered into an agreement with Constellation Energy that settled all outstanding compensation and benefit issues with respect to his employment with and immediate exit from Constellation Energy, and cancelled all of his existing options and performance units, with the exception of options that were granted as part of his initial employment offer (as described in the next paragraph), and he released Constellation Energy from future claims. As part of this agreement, Mr. Yoskowitz is eligible to continue his company-provided health benefits pursuant to COBRA until December 2010 for himself and October 2014 for his spouse, provided he elects COBRA coverage and pays the applicable premium and provided that coverage may be terminated if Mr. Yoskowitz or his spouse obtain health coverage in connection with subsequent employment.
Options to purchase 163,830 shares of common stock granted in June 2005, all of which are vested, will continue to be exercisable until June 1, 2015 pursuant to Mr. Yoskowitzs original employment offer.
Constellation Energy does not pay directors who are also employees of Constellation Energy or its subsidiaries for their service as directors.
On a biannual basis, the Compensation Committee has retained a compensation consultant to benchmark our outside directors mix of compensation and amount of each element of compensation to the outside director compensation of various peer groups at the 50th percentile.
In the fall of 2008, Exequity performed the biannual director compensation benchmark study. Exequity recommended reducing the number of peer groups to two by discontinuing the use of the cross-board peer group. Exequity reported that use of such a peer group is not a prevalent practice and
pay comparability among this group is not normally a driving consideration in the Board selection process. Exequity further recommended narrowing the group of approximately 400 general industry companies used in previous benchmarking analysis to include a smaller group of companies that are more closely aligned with Constellation Energys revenue size, which is a more prevalent practice for benchmarking director compensation. The peer groups used in benchmarking director compensation are described below.
At the request of the Compensation Committee, Exequity reported the results of its benchmarking study to the Committee in October 2008 and Exequity recommended increases to compensation that were in line with both peer groups. At that time, the Committee elected to make no changes to director compensation.
In 2008, non-employee directors received the following compensation:
The following table sets forth a summary of the 2008 director compensation:
Notes to 2008 Director Compensation Table:
Stock awards granted to directors are fully vested at the end of the year of the grant. Therefore, at December 31, 2008, there are no outstanding unvested equity awards. The number of shares of Constellation Energy common stock and deferred stock units owned by each director is disclosed in Stock Ownership of Directors and Executive Officers on page 19.
Directors have the opportunity to elect to defer some or all of their retainers in deferred stock units or in a cash account, and to defer some or all of their fees in a cash account. Directors may also defer their common stock award in deferred stock units. Deferred stock units are bookkeeping entries that track the performance of Constellation Energy common stock and are not actual shares of stock. The bookkeeping entries reflect Constellation Energy common stock price changes, dividends, stock splits and other capital changes. At the end of their Constellation Energy board service, directors receive cash based on the value of their deferred stock units.
The director compensation program for 2009 is unchanged from 2008.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis beginning on page 21 with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Proxy Statement for the 2009 annual meeting of shareholders.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Constellation Energys directors and executive officers are required to file initial reports of ownership and reports of changes of ownership of Constellation Energy common stock with the Securities and Exchange Commission. Based upon a review of these filings and written representations from the Constellation Energy directors and executive officers, all required filings were timely made in 2008, except that one Form 4 reporting a purchase of shares of common stock by Ms. Lampton was filed late.
PUBLIC ACCOUNTING FIRM FOR 2009
Vote Required; Recommendation of the Board of Directors
Approval of the proposal to ratify PricewaterhouseCoopers LLP as Constellation Energys independent registered public accounting firm for the year 2009 requires the affirmative vote of a majority of the votes cast by holders of shares of Constellation Energy common stock present in person or by proxy at the meeting and entitled to vote, assuming a quorum is present. Abstentions and broker non-votes have no effect on this proposal, except they will be counted as having been present for purposes of determining the presence of a quorum.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THIS PROPOSAL. IF NOT OTHERWISE SPECIFIED, PROXIES WILL BE VOTED FOR APPROVAL OF THIS PROPOSAL.
The Audit Committee has appointed PricewaterhouseCoopers LLP as the independent registered public accounting firm of Constellation Energy for the fiscal year ending December 31, 2009. PricewaterhouseCoopers LLP has been Constellation Energys independent auditors since 1941. A member of PricewaterhouseCoopers LLP will be at the annual meeting and will have the opportunity to make a statement and answer appropriate questions. If the shareholders fail to ratify PricewaterhouseCoopers LLP as the independent registered public accounting firm, the Audit Committee will reconsider its selection.
Below is a breakdown of fees paid to PricewaterhouseCoopers LLP in 2007 and 2008:
For 2008, the Audit-Related Fees category includes fees incurred in connection with other services related to our annual audit and interim reviews including services relating to the MidAmerican merger that was ultimately terminated, the execution of the transactions with EDF, audits of unconsolidated entities in which we have an investment, audits of employee savings plans and services related to BGE regulatory matters. For 2007, this category includes fees incurred in connection with other services related to our annual audit and interim reviews including audits of unconsolidated entities in which we have an investment, audits of employee savings plans, due diligence for a business acquisition and services related to BGE regulatory matters. The All Other Fees category consists of fees incurred in connection with certain software subscriptions in 2007 and 2008 and with services related to a gross receipts tax matter in 2008.
Additionally, in 2008 and 2007, approximately $97,000 and $103,000, respectively, of fees were incurred in connection with audits of employee pension plans, which were paid by the pension plan trusts and not included in the table above.
Policy for Approval of Audit and Permitted Non-Audit Services
The Audit Committee is responsible for the appointment, compensation, and oversight of the work of Constellation Energys independent registered public accounting firm. As part of this responsibility, the Audit Committee has adopted an Audit and Non-Audit Pre-Approval Policy, which sets forth the procedures and the conditions pursuant to which services proposed to be performed by the independent registered public accounting firm must be approved. All services to be provided by the independent registered public accounting firm as well as the related fees must be pre-approved by the Audit Committee and all such services and fees were pre-approved in 2007 and 2008. The Chairman of the Audit Committee has been delegated the authority to specifically pre-approve services, which pre-approval is subsequently reviewed with the Committee. In no event may pre-approval authority be delegated to Constellation Energy management. In the course of carrying out its responsibilities, the Audit Committee considers whether services proposed to be performed by the independent registered public accounting firm are consistent with the rules promulgated by the Securities and Exchange Commission on auditor independence. The Audit Committee also considers the independent registered public accounting firms familiarity with Constellation Energys business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance Constellation Energys ability to manage or control risk or improve audit quality.
FOR NEXT YEAR
For inclusion in next years proxy statement: Any Constellation Energy shareholder who desires to include a proposal in the proxy statement for the 2010 annual meeting must deliver it so that it is received by December 30, 2009. In addition, a shareholder must meet all requirements under the rules of the SEC necessary to have a proposal included in Constellation Energys proxy statement.
For presentation at the next annual meeting of shareholders: Under the Constellation Energy bylaws, any shareholder who wants to propose a nominee for election as a director, or to present any other proposal, at the 2010 annual meeting must deliver the proposal so it is received by February 13, 2010. However, if the date of the 2010 annual meeting is changed so that it is more than 30 days earlier or more than 60 days later than May 29, 2010, any such proposals must be delivered not more than 120 days prior to the 2010 annual meeting and not less than the later of (1) 90 days prior to the 2010 annual meeting or (2) 10 days following the day on which we first publicly announce the date of the 2010 annual meeting.
Any proposals must be sent, in writing, to the Corporate Secretary, Constellation Energy Group, Inc., 100 Constellation Way, Suite 1800P, Baltimore, Maryland 21202. Proposals will not be accepted by facsimile.
ANNUAL MEETING OF SHAREHOLDERS OF
CONSTELLATION ENERGY GROUP, INC.
May 29, 2009
Please sign, date and mail
your proxy card in the
envelope provided as soon
Important Notice Regarding the Availability of Proxy Materials for
the Shareholder Meeting to be held on May 29, 2009:
The Proxy Statement and 2008 Annual Report are available at
i Please detach along perforated line and mail in the envelope provided. i
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL DIRECTOR NOMINEES AND FOR PROPOSAL 2.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE x