A proposed plan by Constellation Energy Group Inc. to split into two independent companies later this year will saddle Baltimore Gas and Electric Co. with too much debt and leave the regulated utility vulnerable to a takeover bid, the state regulatory agency's chief economist said yesterday in testimony that sent company officials scrambling.
Regardless of whether a suitable plan is in place to pay off BGE's $2.4 billion debt after the split, there will be no guarantee that goal will be completed by new management if the company is sold or taken over, said Calvin L. Timmerman, a key witness who is also director of the research and economics division of the Maryland Public Service Commission.
The testimony was, by far, the most critical of the company's separation strategy heard during the four days of a hearing held by the PSC to determine the financial health of BGE after the split. The separation will create a new Constellation, a fast-growth national power producer and marketer with $6 billion in assets, and BGE Corp., a slow-growing regional delivery company with $5.5 billion in assets that would include BGE.
"If all things remain the same, we have heard other witnesses testify that this plan [to pay off debt] looks like an acceptable plan, but as we all know, things do not always stay the course," Timmerman said. "Certainly, this corporation is a likely candidate for a merger or a takeover. [BGE Corp.] will be an inviting company with a lot of cash.
"There is a very real possibility of a merger or an acquisition, and I'd say in the relatively near future, for BGE Corp.," Timmerman said. "I'm not saying it will happen, but I am saying it is troubling. ... By leaving these choices entirely up to management, or new management, it could be that this critical path plan might not be followed."
It was a surprising turn of events in what was expected to be a routine, final day of the hearing. Just a day earlier, other witnesses had expressed growing confidence in a proposed, confidential blueprint to lower BGE's debt level.
But most of those witnesses also raised questions about guarantees. A financially weakened BGE could have problems providing electricity at rates frozen through 2006 should unexpected problems arise, they said.
But Timmerman's testimony introduced a new anxiety with far-reaching and possibly long-term implications.
Recommending one technique to avoid such a scenario, Timmerman said the commission could place conditions on the separation and possibly require Constellation to provide BGE with a cash infusion before the split.
Company attorneys requested a brief recess and rushed from the hearing room. About 15 minutes later, a solemn Edward A. Crooke, who will become chairman of BGE Corp., unexpectedly strode into the room, followed shortly by BGE President and Chief Executive Officer Frank O. Heintz.
Company attorneys then moved to have Timmerman's statement stricken from the record, calling it "inappropriate, improper and unlawful."
BGE Associate General Counsel Daniel P. Gahagan argued that Timmerman's new statement veered sharply from his testimony filed with the commission July 6, in which there was no mention of merger or acquisition fears resulting from the split.
Gahagan also pointed out that at the time Timmerman had said, "The business separation should have no adverse effect on BGE's ability to continue to provide safe and reliable transmission and distribution services to its customers. ... The business separation is likely to have a positive effect on the Maryland economy."
Timmerman said his opinion of the separation had not changed, but that as a general policy witness he was merely completing the record and clarifying the issues for the commissioners. The future success of BGE hinges on a number of conditions, he added.
Gahagan withdrew the motion, but countered Timmerman's testimony by recalling Crooke to the stand.
Crooke, who is currently vice chairman of Constellation, proceeded quickly to reassure the commissioners.
Maryland laws make it difficult for unwelcome takeovers to occur, and the board of directors of any company has considerable power to repel such offers, Crooke said. Also, he said, the commission would have the authority to prevent as little as a 10 percent ownership of the utility from changing hands.
"BGE, the utility, will be 100 percent owned by BGE Corp.," Crooke said. "I, as chairman of BGE Corp., am saying it is not for sale. Any change in ownership would have to be an unfriendly takeover attempt."
While Constellation officials are cooperating with the PSC, they have maintained that the company does not need PSC approval to proceed with the separation. The PSC is expected to issue a decision in October.