Analyst sees seeds of a settlement in Constellation – EdF deal 

Posted: 7:01 pm Mon, October 26, 2009
By Danielle Ulman
Daily Record Business Writer

If Gov. Martin O’Malley has his way, approval of Constellation Energy Group’s nuclear deal would come with conditions that the Baltimore-based firm has already rejected, but one analyst said Monday a deal might be closer than it seems.

Settlement talks between the state and the company ended without an agreement, and Maryland’s Public Service Commission has been reviewing the deal to determine if Electricite de France’s bid to buy 49.99 percent of Constellation’s nuclear business would be in the public interest.

The state said for the first time in a filing with the PSC Monday that it would endorse approving the deal, so long as the commission included certain stipulations in its approval, including a one-time credit of roughly $200 to residential customers of Constellation’s regulated utility, Baltimore Gas & Electric Co. The credits would cost Constellation about $230 million, according to The Daily Record’s research.

Analyst Paul Freemont with Jefferies & Co. in New York, said the two sides are now closer together than they appear.

He pointed to a filing from the Office of the People’s Counsel that suggested that Constellation could put the $20 million it had promised to use to build a visitor center at its nuclear plant in Calvert County and the $36 million it had pledged to contribute to its charitable foundation toward ratepayer credits.

“I’m saying that at the end of the day I see plenty of opportunity to provide a decision somewhere in between the parties that would make me much more optimistic that this transaction will ultimately close,” he said.

As it stands, Constellation’s $4.5 billion deal with the French utility EDF “offers not a single dollar of benefits to BGE customers. Maryland law requires both ‘benefits and no harm to consumers,’” according to the state’s filing with regulators.

But Constellation counts the $129 million in taxes that the state would get from the deal as a benefit. It also said that delays in requests for rate increases and the possibility that it would build a third nuclear reactor in Maryland would be beneficial.

Each party to the case submitted their final filings Monday, and once the commission has reviewed all of the case information, it will issue a ruling. Constellation declined to comment on the filings. A call for comment from O’Malley was not returned.

The governor’s other stipulations include not allowing BGE to pay dividends to Constellation unless at least two ratings agencies list it above investment grade, that equity make up between 46 percent and 48 percent of Constellation’s equity structure, composing BGE’s board of majority independent directors and financially separating BGE from Constellation.

Constellation said in its filing that the ratings agencies have said that if the commission forced the company to offer “costly rate reductions or rebates,” that its credit rating could be harmed. If either Constellation or BGE suffered a downgrade, it could cost a lot more to borrow money.

Travis Miller, an analyst with Morningstar Inc. in Chicago, said he found the customer rebates “the crux of the issue” compared to the governor’s other requests.

“I think it would be a strong likelihood that they would seriously consider backing away from the deal,” if customer credits were a stipulation of approval, he said.

The one-time credit, the dividend prohibition and the independent directors were all part of the governor’s demands during the settlement talks, which took place over the summer.

However, O’Malley did scale back some of his previous requests, saying that Constellation only had to stand by its commitments on pay for its CEO and chairman, Mayo A. Shattuck III, instead of forcing the company to not pay Shattuck his retirement benefits. The company would also have to stick to the agreed-upon delays in its schedule for asking for rate increases. O’Malley scrapped demands for long-term rate stabilization.