Despite deal, Constellation's future murky

Credit rating agencies have downgraded utility

plan's implementation not assured


A half-hour after the clock ran out on the Maryland General Assembly's 90-day session, the governor and top executives of Constellation Energy Group Inc. were already sitting down past midnight to figure out a way to salvage a deal on electricity rates.

It would take nearly two weeks, and a final 18-hour day of back and forth, before the two sides came to an agreement that would bring at least temporary relief to BGE's 1.1 million customers without crippling the state's largest utility and its corporate parent.

The result will bring a measure of calm to Constellation investors, who watched with alarm as lawmakers threatened to extract upwards of $750 million from the company and thwart its planned merger with a Florida utility group. Gov. Robert L. Ehrlich Jr. announced Thursday the plan he'd worked out with Constellation to allow residents the choice of phasing in the rate increase over several years, although all BGE customers will ultimately pay the full increase.

The company's top executive and many analysts say it won't erase the newfound uncertainty of Maryland's political and regulatory climate, or put the company back in the good graces of credit ratings agencies that were spooked by the legislature's recent moves.

It has been a dizzying month for the city's largest public company. With its growth in the modern field of energy trading, Constellation probably didn't have as much of a public profile in the region as its 190-year-old utility subsidiary, BGE. But its name has become well-known, and much criticized, in recent weeks by lawmakers and consumers upset about a 72 percent increase in electricity rates that begins in July.

"The actions that have occurred - and because of the rhetoric and legislative uncertainty - have caused severe harm in the credit markets as it affects the company," said Mayo A. Shattuck III, Constellation's chairman and chief executive. "It's going to take us several years to repair the belief that there's a regulatory and legislative compact here in the state of Maryland that is consistent and reliable."

Analysts say Constellation's future is murky in the current political environment. Threats to the company's $11.4 billion merger with Florida's FPL Group Inc. remain so long as political forces are skeptical about the deal's impact on consumers. The company has struggled to persuade lawmakers and anxious consumers that the deal will benefit them as much as it does shareholders and executives.

Assuming that state regulators approve the rate plan hammered out with the governor, the company still faces the possibility that this fall's elections will usher in a new governor who is likely to install a Public Service Commission with a different bent. Democrats have criticized current PSC commissioners as being too cozy with the businesses they regulate.

And lawmakers angry about rising electricity costs have spoken loudly in recent months about the possibility of re-regulating the electricity industry in Maryland, which creates more uncertainty for the company in the years ahead.

"I think it's definitely a positive that the dispute in Maryland was resolved, but it remains to be seen whether FPL goes through with the [merger] and under the original terms," said Paul Fremont, a utility analyst with Jefferies & Co. in New York, referring to the rate agreement.

He said the rate plan, which spreads BGE's increase over several years, would hurt the company's cash flow but not severely. The bigger question is what it means for the merger, which is the primary focus of attention on Wall Street.

Shattuck said the damage of the past 90 days can't be undone overnight, which means the company has to be prepared for the possibility that the merger "might not happen" - a concern he has raised previously in memos to employees. Nothing in the rate plan provides a guarantee that the merger will win approval from state regulators. By contrast, the deal that fell apart in the last hours of the legislative session was contingent upon the merger's winning passage.

"Given what's happened, obviously, we have to protect against its derailment," Shattuck said.

FPL officials declined to comment yesterday on whether the merger was in jeopardy but expressed optimism about a resolution in the dispute over BGE rates.

"Clearly, we continue to monitor closely what's going on in Maryland, and we think the fact that the governor and BGE have reached an agreement is a step toward keeping the merger on track," said Steve Stengel, an FPL spokesman.

The merger would create a Fortune 100 company with dual headquarters in Baltimore and Juno Beach, Fla. The combined company would have the nation's second-largest utility portfolio, with a major presence along the populous Atlantic Coast, and a formidable unregulated power-trading and marketing operation.

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