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Rating Action:

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

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 developing.

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.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kevin G. Rose
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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