Fitch Downgrades Constellation Energy to 'BBB'; Affs Baltimore G&E Ratings

2008-08-20 01:38:03 -

- Fitch has downgraded the long-term ratings of Constellation Energy Group (CEG) in consideration of the complexity of CEG's risk portfolios that combine both physical and derivative positions. The Issuer Default Rating (IDR) was lowered to 'BBB' from 'BBB+'; a full list of ratings is provided below. The short-term IDR and commercial paper ratings are affirmed at 'F2'. The new ratings recognize the significant volatility and business risk in the company's commodity energy business and the recent expansion of its global commodity business segment relative to other less volatile components of CEG's business portfolio. The management challenge associated with managing this business segment was highlighted by CEG's disclosure on August 11 that its need for additional liquidity to meet potential collateral requirements in the event of a downgrade of two or three notches is substantially higher than previously reported.

The Rating Outlook is Stable, based on Fitch's expectation that CEG will reduce its liquidity requirements and risk exposures while it continues to pursue its announced plan to seek a strategic transaction to restructure some or all of its global commodities business, such as a sale or partnership arrangement. It is difficult to predict the timing or prospects for successfully executing such a transaction, underscoring the need for near-term measures to address unbalanced or asymmetrical margining and collateral exposures of several of its most collateral-intensive business segments. The Stable Outlook and affirmation of the 'F2' short-term ratings also reflects Fitch's view that CEG has the ability either to extend some or all of $1.38 billion of credit facilities expiring on Dec. 30, 2008, out of a total of $6.13 billion or to arrange new committed liquidity back-up. Fitch notes that CEG's relatively low debt leverage and strong asset portfolio provide it flexibility to deal with both its operational and contingent liquidity needs.

Credit concerns include:

CEG's merchant business is exposed to risks surrounding market price, volumes, counterparty credit, and liquidity for collateral. Managing these risks requires strong information systems, controls, and management discipline. Furthermore, CEG has a high degree of reliance on its corporate credit rating for hedging merchant power generation, wholesale and retail energy marketing, and trading activities; a loss of market confidence among its counterparties would have unfavorable business and financial consequences.

Fitch has also taken into consideration that the company's underlying assets and businesses, including a large portfolio of power generation assets and profitable retail and wholesale energy supply businesses, have sound business fundamentals. CEG owns profitable base-load generation assets in markets with relatively constrained supply in the northeastern and western U.S., and its power fleet includes 3,869-megawatts (MW) of well-positioned nuclear capacity. After a turbulent period from 2006 through early 2008, CEG's Baltimore Gas & Electric (BGE) utility business is back on track to become a stable contributor in the coming years.

Fitch has affirmed the ratings of Baltimore Gas & Electric (BGE) with a Stable Outlook, as indicated below. In Fitch's view, BGE's financial condition has stabilized due to a Maryland settlement in April 2008. Fitch expects that after various one-time costs affecting 2008, the company's leverage and cash flow ratios going forward will be consistent with the guideline ratios for the current rating. While the April 2008 settlement subjects BGE to a freeze on any electric distribution base rate increase before Oct. 1, 2009, limited to a 5% increase, and would not be able to seek a subsequent electric distribution rate increase prior to Aug. 1 2010. However, BGE can pass through its energy and capacity supply costs to customers and seek recovery of costs resulting from change of laws or regulations during that period. Ratings linkage with its parent CEG is not particularly great, since BGE is no longer dependent on a fixed-price below-market power purchase contract with CEG for its power supply. Capital expenditures are manageable, and the company's leverage is in line with that of peer electric and gas distribution utilities in the 'BBB+' IDR category.

Fitch has downgraded the following ratings, with a Stable Outlook:

Constellation Energy Group, Inc.

--IDR to 'BBB' from 'BBB+';

--Senior unsecured notes to 'BBB' from 'BBB+';

--Junior subordinated notes to 'BBB-' from 'BBB'.

In addition, the following ratings are affirmed, with a Stable Outlook:

Constellation Energy Group, Inc.

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

Baltimore Gas and Electric Company

--IDR at 'BBB+';

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

--First-mortgage bonds at 'A';

--Unsecured notes and pollution control revenue bonds at 'A-';

--Preferred stock at 'BBB+'.

BGE Capital Trust II

--Preferred stock at 'BBB+'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

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