BGE cuts costs, adjusts bookkeeping in drive to rebuild its credit position

November 27, 1994|By John E. Woodruff | John E. Woodruff,Sun Staff Writer

Cutting costs and rejiggering some of its bookkeeping, Baltimore Gas & Electric Co. has begun to rebuild its credit position from the battering it and most other utilities took a year ago, when Wall Street analysts began to look at the implications of partial deregulation.

Over the past three months, key national bond rating agencies have either upgraded their analytical comments on BGE or reaffirmed ratings of "A" or higher that had been in serious doubt about this time last year.

The recovery could mean hundreds of millions of dollars in savings to the company's electric-power customers, in the form of lower interest rates, as the firm refinances portions of its total of about $3 billion in long-term debt.

"The big shock came last fall, when Standard & Poor's announced a new set of ratings criteria for utility companies, taking into account the fact that under the Energy Act of 1993, big industrial accounts were now open to competition from other power suppliers," said Charles W. Shivery, BGE's vice president and chief financial officer.

Those new standards included an assessment of each company's "competitive position," -- in effect, how much risk S&P saw that the firm might lose some of its biggest industrial customers.

For most of this century, stock and bond investors alike have valued regional power companies mainly for the fact that their rates were regulated and their territories guaranteed.

S&P threw the industry's managers and investors alike into turmoil when it said the changing regulatory climate meant the companies now must fight for "competitive position" for some of their most lucrative customer base, just like any other manufacturer.

"For stocks and bonds alike, it's taking investors and analysts some time to get comfortable with the idea of competition in what has always been a regulated industry," said Alex Hart, an analyst who covers BGE and the utility industry for Ferris Baker Watts.

S&P divided electric utilities into three categories -- those in above-average, average and below-average "competitive positions." Along with about one-third of the industry, BGE went to the below-average category.

Although this did not immediately cut BGE from its "A" bond rating, S&P's third-highest, the agency said it threw the company's ratings "outlook" -- its chances of keeping its high rating -- into the "negative" one-third of the nation's utilities.

"S&P said one reason for that was our 'high concentration of industrial customers,' and when we began to study that, we discovered that we were still classifying customers in ways the rest of the industry had dropped," Mr. Shivery said.

"Most of the industry was now classifying customers according to the Census Bureau categories of various kinds of businesses, and when we tried doing that, our share of industrial customers ** dropped from nearly 50 percent to about 14 percent," he said. "Last December, we set about notifying analysts that we were starting to do it the way everyone else did."

At the same time, BGE embarked on a far-reaching cost-cutting plan, including early retirements that attracted 826 employees and a buyout that attracted 225 more. The total reduction of force by the time the program was in full force early this year was about 1,200 employees, about 13 percent of the 9,100 the company had in January 1993.

That streamlining was aimed more at the bottom line than at bond ratings, but its first payoff may have come with reports from the rating agencies this fall.

In recent weeks, two of the four major rating agencies, Fitch Investors Services and S&P have reaffirmed existing high "A" ratings for BGE's bonds. The cuts in work force were high on the list of factors both agencies cited.

Perhaps more importantly, S&P, which touched off the turmoil in the industry a year ago, upgraded its "outlook" from "negative" to "stable" and cited the company's "small proportion of industrial sales" as a factor favoring a strong bond rating -- in effect, buying into BGE's reclassification of its customers.

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