Fitch Affirms Constellation Energy's and Baltimore G&E's Ratings; Outlook Stable

July 29, 2010 12:17 PM EDT

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings of Constellation Energy Group (CEG), including the Issuer Default Rating (IDR) at 'BBB-', and CEG's utility subsidiary Baltimore Gas and Electric (BGE; IDR 'BBB'). The Rating Outlook for both entities is Stable. The actions, which result from a routine credit review, affect approximately $4.5 billion of obligations. The full list of ratings is below.

The ratings affirmation for CEG and Stable Rating Outlook reflect CEG's favorable business and financial performance after the transfer of a 49.99% interest in Constellation Energy Nuclear Generating LLC (CENG) to Electricite de France (EDF; IDR 'A+' with a Stable Outlook) for $4.7 billion in November 2009. Since then, first half of 2010 cash flow and profitability have been consistent with or superior to the assumptions in Fitch's projections prior to the transaction, and business risk has been reduced. The rating and Stable Outlook also consider CEG's available liquidity, low level of debt maturities, and prospects for improving the cash flow of subsidiary BGE.

CEG reduced commodity price sensitivity and liquidity risk in 2009 by selling several large but non-essential parts of its energy marketing and trading activities and continued in 2010 to wind down residual exposures. CEG has continued to reduce collateral needs and the contingent liquidity exposure related to its wholesale energy activities. Also, the company reduced debt with transaction proceeds. Credit measures such as Debt-to-EBITDA, Debt-to-FFO, and FFO-to-Interest are now robust relative to Fitch's benchmarks for IDR of 'BBB-' to 'BBB'. Finally, the company's current business, financial strategy, and control systems are consistent with the current ratings.

Despite CEG's sale of half of the nuclear portfolio and resulting reduction in cash flow from power generation, the effect on credit ratios in 2010 and 2011 is offset by: materially lower debt; profits from a discount built into the power purchase agreement between CENG and CEG for two years; and favorable margins in the energy retail and wholesale customer supply business. Fitch expects that the aggregate cash flow from the competitive businesses will likely weaken in 2012 as current power sales contracts and hedges are replaced with new contracts at lower prevailing market prices, combined with the expiration of the discount on sales of energy from CENG to CEG. However, Fitch expects that BGE's contribution will improve over the next several years, assuming a balanced outcome of pending and future rate cases in Maryland. Overall, CEG credit ratios are expected to remain at least consistent with the 'BBB-' IDR for the next several years. Fitch's projections do not assume material investments by CEG over the next several years in new nuclear plant development.

CEG's power generation portfolio including a net ownership of 1,920 MW of nuclear capacity is well positioned relative to competitors with a higher dependence on coal-fired generation. Continued expansion of environmental regulations that target coal-fired power sources is likely to enhance the value of CEG's fleet. CEG has high contractual cover of its expected generation output for 2009 through 2011, but is increasingly exposed to market prices thereafter. CEG's profitable competitive customer supply business focused on commercial and industrial customers and small utilities acts as an internal downstream hedge that should moderate the volatility of the power generation business.

Positive rating actions could result from success in hedging future years' power output at prices that maintain credit ratios, while negative rating actions could occur in the event of further deterioration in prices of energy and capacity in CEG's key power markets; inability to manage risks of the competitive customer supply business and commodity hedging activities; or major merger and acquisition activity or leveraging transactions that are outside the scope of the company's current business plan.

Baltimore Gas and Electric:

The affirmation of BGE's rating with a Stable Rating Outlook is driven by the utility's lower debt leverage relative to comparable utilities, a situation that helps to offset the low earnings that have resulted from a history of rate freezes and rate caps affecting BGE's electric utility business. BGE serves a region with good demographic characteristics, and planned investments in electric distribution and transmission projects are potential growth opportunities. However, the Maryland regulatory environment has at times been challenging and politicized.

Despite the current constraints on electric base rate increases, BGE is no longer constrained in its ability to receive timely recovery of power and capacity supply costs, and can recover investments in demand response and energy conservation through trackers. Cash flow volatility is reduced by volume decoupling mechanisms for both gas and electricity sales.

Fitch's financial projections for BGE assume ongoing capital investment and rate base growth for distribution and transmission projects and gradual improvement in BGE's earned return on equity over the next three to four years, assuming balanced outcomes in a succession of base rate increases and elimination of constraints on tariff actions. BGE filed a $46.9 million electric and a $42 million gas rate case in June 2010, and a decision is expected by year end. Fitch projects that the utility will fund its capex with a mix of debt and equity, and that BGE's credit ratios will continue to match or be superior to Fitch's benchmarks for the 'BBB' IDR. The rating could improve in the future, depending on the results of the pending 2010 rate case and future cases, while adverse rating actions could result from an unfavorable decision on the pending base rate case or inability to recover energy costs or capital investments in a timely manner.

BGE has access to a separate $600 million credit facility and has no debt or credit that is subject to cross default in the event of a CEG default. As a result of additional ring-fencing provisions implemented in the past year, BGE no longer combines its short-term cash in a CEG cash pool.

Applicable criteria available on Fitch's website at www.fitchratings.com include:

--'Corporate Rating Methodology' Nov. 24, 2009;

--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines' Aug. 22, 2007;

--'Fitch's Approach to Rating Competitive Generators', July 24, 2007;

--'Credit Rating Guidelines for Regulated Utility Companies' July 31, 2007;

--'Utilities Sector Notching and Recovery Ratings', March 16, 2010.

Fitch has affirmed the following ratings:

Constellation Energy Group, Inc.

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Short-term IDR and commercial paper at 'F3';

--Junior subordinated notes at 'BB'.

Baltimore Gas and Electric Company

--Long-term IDR at 'BBB';

--Senior unsecured notes and pollution control revenue bonds at 'BBB+';

--Secured debt at 'A-' (none currently outstanding);

--Short-term IDR and commercial paper at 'F2';

--Preferred stock at 'BBB-'.

BGE Capital Trust II

--Preferred stock at 'BBB-'.

The Rating Outlook is Stable for CEG and BGE.

Additional information is available at www.fitchratings.com.

Related Research:

Corporate Rating Methodologyhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelineshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

Fitch's Approach to Rating Competitive Generatorshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=333818

Credit Rating Guidelines for Regulated Utility Companieshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652

Utilities Sector Notching and Recovery Ratingshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings, New YorkEllen Lapson, CFA, +1-212-908-0504Shalini Mahajan, CFA, +1-212-908-0351Media Relations:Cindy Stoller, +1-212-908-0526cindy.stoller@fitchratings.com

Source: Fitch Ratings

Create E-mail AlertRelated Categories

Press Releases

Stocks Mentioned

Related Entities

• Fitch Ratings

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?