Wall Street weighs in on BGE rate fight

Reaction to legislative fight may mean higher electric bills

General Assembly

April 07, 2006|By PAUL ADAMS | PAUL ADAMS,SUN REPORTER

A major credit agency's decision to downgrade Baltimore Gas and Electric's debt rating is the most tangible evidence so far that Maryland lawmakers' push for electric rate cuts from the state's largest utility has rippled to Wall Street.

The credit downgrade to A3, from the higher grade of A2, from Moody's Investors Service will likely increase the cost of borrowing for BGE by millions, financial experts said. That could potentially filter through to higher electric bills for the same consumers whom lawmakers are hoping to protect from a 72 percent rate increase this summer.

"To the extent that the bond rating is lower, it makes it typically more expensive to raise capital for the utility," said Paul Fremont, a utilities analyst with Jefferies & Co. in New York.

Industry analysts said the General Assembly's willingness to supersede state regulators and take on BGE in an unpredictable political forum has created uncertainty in financial markets. That's even having an impact on other utilities that serve parts of the state beyond BGE's footprint in Central Maryland.

Potomac Electric Power Co. and Delmarva Power & Light Co. were placed under review by Moody's for a possible downgrade late last month. Moody's highlighted the political fight in a news release announcing the moves.

Analysts note that BGE continues to have a strong credit rating, despite the one-step downgrade of its senior unsecured debt.

The Maryland Office of the People's Counsel said that the downgrade is unlikely to have any immediate effect on BGE customers, although the utility could ask regulators for permission to raise rates to recover higher borrowing costs.

The earliest that could happen is July 1, when rate caps imposed as part of a 1999 move toward deregulation are set to expire. It's impossible to say at this point how much the lower rating could cost BGE, but estimates range from as little as $1 million to several million dollars annually, assuming no further downgrades are announced.

That might translate into as little as a few dollars a year per customer, but some analysts think the Moody's announcement Wednesday may be just the opening salvo in what could turn into a series of credit downgrades depending on how the situation plays out.

The announcement by Moody's comes at a bad time for BGE, which is about to refinance more than $700 million in debt. The interest on that borrowing will likely go up. And the higher borrowing costs won't just affect electricity customers. BGE gas customers also will feel the pinch.

The company has repeatedly warned lawmakers in legislative hearings that a hard-line stance in Annapolis could weaken the company's financial standing and hurt customers.

"There's no question that by virtue of the legislature's actions, BGE ratepayers will be spending more dollars in the long run," said Rob Gould, a spokesman for the utility. "Also, these downgrades for the state's largest taxpayer cannot be good for the state's overall rating with credit agencies."

Lawmakers have passed several bills recently designed to beat back BGE's much-publicized rate increase, which is set to take effect July 1.

One would require the company to give back $528 million in so-called stranded costs that customers paid the utility as part of the move toward electric deregulation.

Another seeks to fire the five appointed members of the Public Service Commission and replace them with commissioners considered more consumer-friendly.

A third proposal would give lawmakers authority to approve the pending merger of BGE parent Constellation Energy Group with Florida's FPL Group.

Lawmakers have said they want $750 million in concessions from the utility.

Constellation has offered a package totaling $375 million in aid and deferments.

In a worst-case scenario, utilities analyst Fremont said, the legislative moves could go beyond increased borrowing costs and kill the $11.4 billion merger between Constellation and FPL, or perhaps result in FPL lowering its offering price.

Moody's also downgraded its outlook on Constellation to "developing" from "positive," which is often a precursor to a ratings downgrade.

A downgrade could have serious ramifications for Constellation, analysts said.

The company has an immense power trading and merchant energy business that requires it to take huge positions in volatile energy markets. Currently, financial markets don't require the company to put up collateral for such borrowing.

But if its credit rating is cut, it might be forced to put up company assets to continue such trading.

Constellation's energy-trading arm is the main engine driving the company's record profits and is the primary reason for FPL's interest in a merger.

"I don't think [the Moody's announcement] is a big event," said Michael Worms, a utilities analyst with Harris Nesbitt in New York. "I think the material event will be what comes out of all this stuff going on with the PSC and the legislature. That will have more of an impact than Moody's."

Constellation Chief Executive Mayo A. Shattuck III told employees in a letter yesterday that if the legislative bills become law, the company might be forced to sue the state on constitutional grounds.

The company has explained to lawmakers that the rate increases reflect rising fuel costs that are beyond the control of the utility, he said in the letter, but that negotiations for a settlement could fail.

"These [legislative proposals] would put unreasonable strains on our balance sheet and threaten the merger, but there is an even more important issue at stake," Shattuck wrote. "We can't allow the future of our company to be overly influenced by an election-year political debate."

paul.adams@baltsun.com

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