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11 Jul 2006
MOODY'S DOWNGRADES BALTIMORE GAS & ELECTRIC (SR. UNSEC. TO Baa2 FROM A3); RATING OUTLOOK NEGATIVE; AFFIRMS CONSTELLATION ENERGY GROUP (Baa1 SR. UNSEC.); OUTLOOK REVISED TO NEGATIVE FROM DEVELOPING
Approximately $4.8 Billion of Debt Securities Affected
New York, July 11, 2006 -- Moody's Investors Service downgraded the long-term ratings
of Baltimore Gas & Electric Company (BGE; senior unsecured to
Baa2 from A3). Moody's confirmed BGE's short-term
ratings for commercial paper and variable-rate tax exempt debt
at Prime-2 and VMIG-2, respectively. The action
concludes the review for possible downgrade of BGE's ratings that
was initiated on March 22, 2006. The rating outlook for BGE
is negative, reflecting a difficult and uncertain regulatory environment
and exposure to market prices for power beginning in mid-2007.
Moody's also affirmed the ratings of Constellation Energy Group,
Inc. (CEG; senior unsecured Baa1), which is BGE's
parent, and changed CEG's rating outlook to negative from
The downgrade of BGE's ratings reflects Moody's belief that
the utility's financial performance will be significantly weaker
for at least the next 18 months, due to substantial regulatory deferral
of recovery of sharply higher costs for purchased power. Under
the current rate mitigation plan, or any revision that seems feasible
under the current regulatory environment, BGE's cash flow
coverage of interest and debt is expected to fall to levels that would
be more consistent with a low Baa rating in 2006 and 2007. The
increase in the expected amount of cost deferrals since the last Moody's
rating action will result in lower cash from operations over the next
two years and higher debt balances for a longer period. The expected
amount of cost deferral has increased as a result of the rate mitigation
plan imposed upon the company through Senate Bill 1, which was passed
during a special session of the Maryland General Assembly. The
downgrade also takes into account the financial effects of approximately
$380 million of "give backs" by BGE that would be mandated
under Senate Bill 1 over the next ten years and the significant increase
in BGE's regulatory and legislative risk profile.
BGE's regulatory risk profile has deteriorated significantly since
March. The original plan for rate increases that was approved by
the Maryland Public Service Commission (PSC) provided for a more moderate
deferral of rate increases. The state legislature subsequently
voted for a larger deferral. The legislature also voted to replace
the full slate of PSC commissioners. There is still some uncertainty
surrounding this section of Senate Bill 1 because a Maryland Court of
Appeals Order has enjoined any action to replace the currently serving
commissioners pending further consideration by the court. The removal
of all currently serving commissioners would be a highly unusual event
in the modern history of the U.S. regulated utility industry.
Even if the courts block this initiative, the scope of the legislative
action is viewed as signaling a high likelihood that rate increases would
still be constrained through other means.
Under the current rate mitigation plan, BGE's deferrals during
the 11-month period to end May 31, 2007 are expected to be
slightly under $600 million. Although BGE will be required
to initially fund deferrals with its own liquidity, including cash
on hand and $175 million of unused bank facilities, it is
expected that these borrowings will ultimately be refinanced through a
securitization financing. While the securitization financing would
be repaid through a customer surcharge rather than a direct reliance upon
BGE, the multi-year customer rate increases to service the
securitized debt may reduce the flexibility to increase rates in the future
if other cost pressures arise.
Moody's affirmation of CEG's ratings reflect expectations
that the company's consolidated financial performance will be maintained
at the current level as stronger results from its unregulated business
balances weaker performance by BGE. CEG's Baa1 senior unsecured
rating continues to be supported by the strong cash flow of its unregulated
operations, including its fleet of almost 12,000 megawatts
of electric generation assets, most of which is either contracted
or low cost. Absent further weakening of the credit profile of
BGE, CEG's financial metrics are expected to be sufficiently
strong to maintain its existing rating, with consolidated CFO/debt
and FFO/debt in the mid-20 percent range. These metrics
would be consistent with the existing rating for an issuer with a substantial
level of unregulated operations, and are comparable to other Baa1
companies with a similar risk profile, such as Sempra Energy.
The change in CEG's rating outlook to negative from developing reflects
the possibility that CEG's rating would be downgraded if there is
further unexpected deterioration in the credit quality of BGE that results
in weaker consolidated financial performance for the parent.
Baltimore Gas & Electric Company is a regulated transmission and distribution
utility subsidiary of Constellation Energy Group, Inc.,
which is a holding company that also has investments in several other
energy-related unregulated businesses. Its headquarters
are in Baltimore, Maryland.
Corporate Finance Group
Moody's Investors Service
Kevin G. Rose
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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