A major Wall Street firm cut Constellation Energy Group's credit rating yesterday after the Baltimore-based company recently revised its estimate of how much collateral it would need to address such a downgrade.
Corporate credit rating agency Standard & Poor's cut Constellation's rating from BBB+ to BBB and gave it a "stable" outlook for maintaining the rating. It previously had a negative outlook for the higher rating. The rating downgrade triggers about $106 million in collateral requirements from certain company contracts.
If the ranking falls two notches lower, the parent of Baltimore Gas & Electric Co. said it must provide up to $3.6 billion, according to a filing this week with the U.S. Securities and Exchange Commission. The filing corrected an earlier estimate of $1.6 billion.
Constellation, which is considering adding a third nuclear reactor at Calvert Cliffs in Lusby for up to $10 billion, relies heavily on its borrowing power.
"The disclosure points to a lapse in the company's risk management and control process," S&P analysts Aneesh Prabhu and Arthur F. Simpson concluded in a report issued yesterday.
Constellation representatives declined to comment yesterday.
The company filed a quarterly report with the SEC on Monday that outlined a 47 percent increase in profits amid rising prices for gas and electricity in its trading business. But Constellation also disclosed mistakes from an earlier filing, when it underestimated the amount of collateral obligation that credit downgrades required.
After one analyst highlighted the revisions and another questioned the company's accounting, Constellation's stock sank 16 percent Tuesday, the largest one-day drop since 2001.
The shares rebounded somewhat yesterday in heavy trading that was nearly four times the normal volume. Constellation stock closed up $3.50, or 5.7 percent, at $64.75 on the New York Stock Exchange.
Still, UBS analyst Shalini Mahajan downgraded the stock yesterday to "neutral" from "buy."
The S&P analysts said several factors contributed to the credit downgrade, including Constellation's financial profile, which they said "lags behind [their] expectations" and "the growing scope of riskier unregulated activities."
The Maryland General Assembly deregulated the state's energy industry in 1999, which eventually led to higher electricity rates for BGE customers.
The analysts also acknowledged that their downgrade creates more risk for the company.
"We have noted in the past that the company could face a credit cliff if it is downgraded to below investment grade," they wrote. "Such a scenario could affect Constellation's ability to conduct its customer supply and global commodities businesses."
In a separate announcement yesterday, Europe's largest power producer said it would exercise an option to gradually double its stake in Constellation up to 9.9 percent, which would make it the company's largest shareholder.
The companies signed an investor agreement last year giving EDF the right to acquire that much stock, though they've also discussed expanding their relationship. EDF currently holds 4.97 percent of Constellation.
The two companies also have a joint venture, called UniStar, to develop and deploy new nuclear power plants in the U.S.
The Maryland Public Service Commission is holding hearings to assess the feasibility of adding a plant at Calvert Cliffs.