NEW YORK - (Business Wire) Fitch Ratings does not expect a ratings impact from Constellation Energy Group's (CEG) sale of its nuclear power fleet to Electricite de France (EDF). CEG announced the decision by its Board of Directors to proceed with the sale of a 49.99% interest in its nuclear power fleet to EDF based on an Oct. 30, 2009 order by the Maryland Public Service Commission (MPSC) that imposed certain conditions. The transaction is now expected to close in the fourth quarter of 2009. After reviewing the conditions of the MPSC's Oct. 30 order, Fitch does not anticipate any adverse rating consequences for CEG from the EDF transaction nor from the conditions of the MPSC order, and carrying out the order's conditions could have favorable credit implications for Baltimore Gas and Electric Co. (BGE). Fitch's Iissuer Default Rating (IDR) of CEG is 'BBB-', while the current IDR of BGE is 'BBB', and the Rating Outlook for both entities is Stable.
The conditions imposed in the MPSC's Oct. 30 order include:
--Instituting ring-fencing and governance provisions (such as legal isolation of BGE as a subsidiary of a bankruptcy-remote special purpose entity and no participation by BGE in a cash pool with affiliates) to better insulate BGE from risks of its parent or affiliates;
--A limit on BGE dividend payments to CEG if BGE's ratio of equity to total capitalization would be below 48% after giving effect to the payment or if BGE's credit rating is rated below investment grade by two of three rating agencies;
--One-time rebate of $110 million to BGE residential ratepayers funded by CEG;
--Infusion of $250 million of equity to BGE from CEG by June 30, 2010;
--Periodic reporting requirements on BGE's ratio of equity to capitalization and on compliance with the ring-fencing provisions; annual officer's certificates on ring-fencing.
Significantly, BGE will be able to initiate an electric base rate case at any time after Jan. 1, 2010 and thereafter not before Jan. 1, 2011, and gas base rate cases are to occur no earlier than electric cases. The January 2010 rate increase is subject to a 5% cap contained in the 2008 settlement between MPSC and CEG, but thereafter no cap applies to BGE's future rate cases. Given the MPSC's insistence on the equity infusion and the provisions that require maintenance of 48% equity to capital in order for BGE to pay dividends, Fitch infers that BGE will have the opportunity in the future to earn on an equity capital base of 48% or greater.
Funding the $110 million rate rebates (approximately $70 million after-tax effect) and $250 million equity infusion does not appear problematic as CEG stands to receive after-tax transaction proceeds of nearly $3 billion. CEG had previously stated that its potential uses of the EDF transaction net proceeds (after tax and mandatory debt reduction) plus cash on hand include: replacing some part of the $3.3 billion of credit facilities that will terminate upon the closing of EDF transaction; acquiring generation assets in regions in which CEG's energy supply business has an existing customer base unsupported by physical capacity; or voluntary debt reductions. CEG's recent third quarter disclosure indicates that its working capital and contingent collateral needs have continued to decline as trading exposures settle or positions are novated to the buyers of the London and Houston trading businesses; furthermore, CEG has added at least $750 million of new credit facilities in the past few months.
For more information on the credit of CEG and BGE, please refer to Fitch's credit analyses of Constellation Energy Group Inc., dated Oct. 1, 2009, and Baltimore Gas and Electric Co. dated Aug. 26, 2009.
Additional information is available at 'www.fitchratings.com'.
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