Constellation, EdF agree to close deal 

Posted: 9:26 am Mon, November 2, 2009
By Danielle Ulman
Daily Record Business Writer

Standard & Poor’s Ratings Services downgraded Constellation Energy Group Inc. Monday, as the company and its French partner said they would agree to the conditions set by state regulators to complete their nuclear deal.

The ratings agency lowered Constellation’s ratings to BBB- from BBB, one step above junk bond status. S&P said it based its downgrade on conditions set by the Maryland Public Service Commission Friday for approval of Constellation’s $4.5 billion deal to sell 49.99 percent of its nuclear business to Electricite de France.

One of those conditions required Constellation to financially separate from its regulated utility, Baltimore Gas & Electric Co. Based on those changes, S&P upgraded BGE to BBB+ from BBB.

“The MPSC order is supportive of BGE, while not unduly onerous on Constellation,” S&P said in a news release.

“Some of the measures required as part of the ring-fencing are among the stronger regulatory provisions we have seen across jurisdictions,” the ratings agency said. “To recall, we consider the regulatory environment in Maryland in the least credit supportive category.”

S&P said it lowered the Constellation’s ratings after it looked at the company’s stand-alone finances. Constellation was removed from S&P’s “CreditWatch negative” status, which is a warning that the company’s credit rating could be downgraded during the next review.

Ratings downgrades nearly pushed Constellation into bankruptcy last year, but the company agreed to merge with MidAmerican Energy Holdings Co. Constellation later ended that agreement in favor of the EDF deal.

In conversations with S&P, Constellation said ring-fencing measures would include adding independent board directors, dividend restrictions — another requirement of the PSC — and non-consolidation opinions between BGE and Constellation, meaning that BGE’s assets would not be consolidated with Constellation’s if Constellation filed for bankruptcy protection.

The ratings separation between BGE and Constellation is based on S&P’s “assumption” that Constellation will move to insulate BGE within three to four months. S&P does not usually rate a wholly owned subsidiary higher than its parent company.

“In our opinion, insulating the utility will not only allow BGE the opportunity to earn its approved [return on equity], it will likely provide for a more constructive regulatory environment because protecting the utility from the riskier activities of the parent was a key focus for state regulators in recent proceedings,” S&P said.

Fitch Ratings said Monday that it does not expect Constellation’s ratings to be affected by the sale of half of its nuclear business to EDF or from the PSC’s order. Fitch said the PSC’s conditions could have a positive impact on BGE’s rating.

In particular, Fitch said it infers that the condition requiring BGE to have an equity capital base of 48 percent or better before it pays dividends to Constellation, will mean that BGE will have the opportunity to earn on a bigger equity capital base.

Fitch rates Constellation BBB- and BGE is rated BBB.