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Global Credit Research - 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.
Baa3 senior unsecured notes due 2020
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
"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
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
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..
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Baa3 to Constellation Energy's $550 million senior unsecured bond; outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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