Did the company prepare for the plunge in energy prices that began in mid-July? Nobody knows, and that's part of the problem. Until Constellation reports its complex trading profits and derivatives positions each quarter, it's hard to tell where things stand. This opacity has certainly not helped reassure lenders.
People were already whispering "Enron" and "Constellation" in the same sentence a month ago. Not that Constellation is acused of breaking laws like Enron; rather, the worry is that Constellation will be hit by the same kind of evaporation of lender confidence that ultimately sent Enron into bankruptcy.
Loan contracts require borrowers such as Constellation to post more collateral if their credit rating is downgraded by major ratings services. But sometimes the financial reverses that cause a downgrade in the first place leave a highly leveraged company unable to come up with extra collateral.
That leads to further downgrades and - in Enron's case - collapse.
Constellation first spooked markets a month ago when it revealed it had underestimated the collateral it would have to post in the event of theoretical downgrades by almost $2 billion.
The mistake couldn't have come at a worse time, as the housing crisis was deepening and investors worried about the next financial blowup. The mere fact of the miscalculation seemed to play a large role in Standard & Poor's decision a few days later to downgrade Constellation's debt from BBB+ to BBB.
This week, as financial giants teetered left and right, Constellation's stock plunged. Yesterday, Standard & Poor's said it was considering a further Constellation downgrade.
Make no mistake, a solvent parent is in the interest of BGE and its customers. A healthy Constellation, one of Maryland's few Fortune 500 companies, is in the interest of Baltimore.
But let's remember that the federal safeguards protecting utilities from being damaged by market shenanigans disappeared a few years ago. A while back there were concerns that Constellation diverted BGE assets into a cut-rate lending pool for its unregulated subsidiaries. (Constellation denies this.)
And don't forget the worry two years ago that FPL would siphon money from BGE to pay for hurricane damage in Florida. French ownership or some other international partnership brings its own set of tough questions.
There is no sign yet that Constellation's distress or similar mayhem will hurt BGE customers. Maryland's regulators and legislators need to make sure it stays that way.
