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Announcement:

Moody's assigns Baa3 to Constellation Energy's $550 million senior unsecured bond; outlook stable

09 Dec 2010

New York, December 09, 2010 -- Moody's Investors Service assigned a rating of Baa3 to the new senior unsecured note issuance of Constellation Energy Group, Inc. (CEG) of $550 million. Moody's affirmed CEG's existing ratings including the Baa3 senior unsecured rating and the Prime-3 commercial paper rating. The rating outlook is stable.

Ratings assigned:

Baa3 senior unsecured notes due 2020

Ratings affirmed:

Baa3 senior unsecured notes

Ba1 subordinated debentures

Prime-3 commercial paper

CEG intends to use proceeds from the offering to (i) fund part of the pending acquisition of Boston Generating, LLC (Boston Gen), (ii) repurchase all outstanding unsecured bonds due April 2012 and (iii) fund certain future contributions of its pension plan (approximately $50M).

CEG expects to complete the $1.1 billion acquisition of Boston Gen within the next several weeks. CEG will fund the majority of the purchase price with cash; its cash balance currently exceeds $1.2 billion.

"The Baa3 rating reflects CEG's success in lowering its risk profile through the restructuring of its balance sheet, asset divestitures and a reduction in trading positions and exposures," said Moody's Vice President Scott Solomon. "The rating also considers the company's sound rationale for acquiring Boston Gen and the incremental fuel and geographic diversification it brings to CEG's existing fleet of generating assets," added Solomon.

CEG, however, is not without challenges.

"The company faces a repricing of existing purchase power agreements (PPA's) with its Constellation Energy Nuclear Group (CENG) affiliate in 2012 that, combined with current reduced power prices, is expected to pressure cash flows and financial metrics," continued Solomon. Specifically, these PPA's were priced at below market prices to allow the transfer of $700 million of value to CEG in 2010 and 2011. For 2012 and beyond, CEG has fixed the pricing on a portion of the PPA. CEG will continue to fix the pricing on the remaining power under the PPA at market rates and use that power to supply its customer supply business.

On a standalone basis (excluding the financial results of Baltimore Gas and Electric Company, a wholly-owned utility subsidiary), CEG's ratio of cash from operations pre-working capital (CFO pre-W/C) to debt is expected to remain strong, exceeding 30% through 2011 while interest coverage is expected to exceed 6 times. These key financial metrics, however, are expected to decline in 2012 to approximately 19% and 4 times, respectively, weakening the company's position within the Baa3 rating category.

CEG's key financial metrics are expected to rebound in 2013 triggered by higher capacity prices in PJM, increased sales volumes at its competitive energy supply business and the growth of its solar and recently acquired demand response businesses. Moody's current expectation is for CEG (excluding BGE) to achieve CFO pre-WC to debt and interest coverage in the 20-24% and the 4.5-5.0 times range, respectively, in 2013. Failure to demonstrate this expected improvement in financial performance could negatively impact its ratings.

The rating also reflects an expectation that CEG will continue to maintain a solid liquidity profile. Specifically, we forecast CEG will have approximately $500-600 million of available cash at year-end 2011 that will be used in part to meet an expected cash deficit in 2012. We further forecast minimal borrowing under CEG's $3.7 billion of committed credit facilities; these facilities are expected to be used primarily to support the issuance of letters-of-credit by CEG's competitive supply business.

The acquisition of Boston Gen is consistent with CEG's stated strategy of deploying up to $1 billion of cash to acquire reasonably priced assets in regions where the company's load obligations exceeds its generation capacity. CEG acquired 1,100 megawatts of gas-fired generating assets in Texas earlier this year for $365 million, funded with cash.

That being said, the Boston Gen transaction reduces CEG's financial flexibility by adding a modest amount of incremental debt onto its balance sheet and consuming a considerable amount of its cash balance. Further sizable acquisitions, should they arise, would likely need to be financed with equity in order for CEG to maintain an investment grade rating.

The principal methodology used in rating CEG was Moody's Rating Methodology: Unregulated Utilities and Power Companies, published in August 2009.

Constellation Energy Group, Inc. is a diversified energy company, whose businesses largely include a generation business and a customer supply business, along with Baltimore Gas and Electric Company, a regulated electric and gas utility in central Maryland. The company is headquartered in Baltimore, Maryland..

New York
Scott Solomon
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Baa3 to Constellation Energy's $550 million senior unsecured bond; outlook stable
No Related Data.
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