In propping up Constellation, don't let BGE customers fall

The Baltimore Sun

No wonder Constellation Energy CEO Mayo Shattuck wanted to merge two years ago with FPL Group of Florida.

Just as Merrill Lynch sought solace in the arms of Bank of America over the weekend, just as Lehman Brothers looked in vain for a stable partner, Shattuck knew even back then he might need to tether his own indebted financial empire to something solid.

As this week's sobering events have proven, companies relying on market bets for big pieces of their profits are iffy long-term prospects. Hence Constellation's dance with FPL and its large Florida Power & Light utility, which Shattuck admitted in 2006 would "provide steady cash generation and financial ballast needed to satisfy the credit rating agencies and Wall Street."

Constellation never found a partner, and what Shattuck apparently feared has come to pass. The credit agencies are closing in. He's looking at another match - only under duress instead of at leisure.

The Wall Street Journal reported late yesterday that Electricite de France, a state-owned French company that already owns 9.5 percent of Constellation, is contemplating buying another chunk or maybe the whole concern. It would certainly make sense for FPL to take another look, too. As fast as this is happening, they may be the only parties that know Constellation well enough to do a quick deal.

No matter whom Constellation pairs up with, the same worries that prompted the General Assembly to resist and ultimately kill an FPL merger two years ago are still a concern. It's important for Constellation to find the "strategic partner" it needs to benefit shareholders, lenders and employees.

Just don't let customers of Constellation's Baltimore Gas & Electric utility get lost in the shuffle. They've already suffered enough from deregulation and freewheeling markets.

Few people realize it, but Constellation has more in common with Wall Street outfits like Merrill Lynch than with the boring, predictable utilities whose dividends used to furnish your grandmother's bingo money.

Enormous portions of its profits have come from borrowing at low, short-term rates and taking big positions in commodities markets. Favorite bets have included coal, natural gas and wholesale electricity, all of which soared in the year's first half and helped pile up profits.

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.

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