Download Catherine I. Riley, Chairman - Maryland Public Service Commission

NUMBER: R-1627
DATE: April 18, 2001
MAIL LOG No.: 76618
TO:
Catherine I. Riley, Chairman
Claude M. Ligon, Commissioner
Susanne Brogan, Commissioner
J. Joseph Curran, III, Commissioner
Gail C. McDonald, Commissioner
FROM:
Anthony Myers, Assistant Executive Director
RE:
In the matter of Baltimore Gas and Electric Company’s Application
to Issue $500 Million Principal Amount of Long Term Debt. Case
No. 8884
Description of Application:
On March 2, 2001, Baltimore Gas and Electric Company (“BGE” or “the
Company”) filed a request for authority to issue up to $500 million of long-term
debt. BGE states that this authority will give the Company flexibility to structure
its financing plans consistent with market conditions. The Company will
determine whether to issue the debt in one or more forms based upon market
conditions in effect and anticipated at the time of issuance.
Parties which should receive a copy of Staff Recommendations:
Case List for Case Nos. 8794/8804
Recommended Action (Including Conditions):
Staff recommends that the Commission grant Baltimore Gas and Electric
Company’s request for authority to issue up to $500 million in long term debt.
__________________
Calvin Timmerman
Director, RR&E
_________________
Randy M. Allen
Director, of Accounting
Commission Action on ___________________:
Approved __ Disapproved __ Accept for Filing __
___________________
M. Catherine Dowling
Staff Counsel
Background:
On March 2, 2001, Baltimore Gas and Electric Company (“BGE” or “the
Company”) filed with the Commission an Application for authority to issue up to
$500 million in long term debt. BGE states that the authority requested in its
application will give it more flexibility by enabling the Company to structure its
financing plans consistent with changing market conditions. The authorization
request is supported by schedules that detail net property expenditures, and debt
retirement or redemption totaling $500 million. The Company made its
application request pursuant to Section 6-102(b) of the Public Utility Companies
Article of the Maryland Annotated Code that requires a public service company to
obtain authorization from the Commission before issuing stocks, bonds and other
securities payable more than 12 months after the date of issuance.
The Company, as part of its application, provided a detailed listing of the physical
property and facilities, along with the accompanying expenditures. The property
and facilities list, for which $250 million in funds were expensed, includes
property and facilities, which are used by the Company in: (1) the provision of
electric transmission and distribution services; (2) natural gas production, storage
and distribution, and (3) related general and common plant. The Company also
provided a listing of six (6) series of Bonds and the accompanying expenditures
for each series for the retirement, redemption or repurchase of said debt and
redeemable preference stock. The stipulated Bond Notes for which the funds
were expensed total $250 million, per the application.
The Company notes that the application is a request to issue debt to cover the
total expenditures for the physical plant acquired and financial instruments retired
by the Company. The moneys are required for the reimbursement of money
expended by BGE within the last five years for the (i) the acquisition of property,
(ii) the construction, completion, extension and improvements of its facilities, and
(iii) the discharge of lawful refunding of its obligations. Furthermore, the
Company adds that upon sale of the debt, the proceeds will be used for general
corporate purposes relating to BGE’s (regulated) utility business. The Company
is requesting that this matter be addressed expeditiously, so that BGE can be
positioned to act rapidly, should market conditions warrant.
Comments:
Staff has reviewed the Company’s Application. In order to ascertain the
appropriateness of the Company’s request, Staff also conducted discussions with
the Company. During these discussions, Staff inquired about a number of issues
including: (a) the eventual recovery of any long-term loan costs through rates; (b)
the impact of these loans on future rates; (c) the impact on the Company’s capital
structure if the loan authorization request were approved by the Commission, and
(d) an explanation of transfers of debt to Constellation Energy Group (CEG) non-
regulated affiliates in the amounts of $7.6 million and $269.9 million, as noted in
the footnotes on Page No. 4 of BGE’s application (total of about $278 million).
The discussions with the Company helped explain why BGE was making the debt
Application request. The Company explained that BGE was not expanding its
current capital base by seeking the debt authorization. The debt will be used to
replace current debt through retirement or redemption, or to replace current shortterm obligations used to finance capital expenditures for facilities and/or
equipment used in the provision of regulated services. Debt that is issued
replaces other more expensive debt, or is balanced by capital assets acquired to
provide regulated services. The issuance of new debt will not impact BGE’s
current capital structure.
With respect to the transfers of the $278 million debt to CEG affiliates, BGE
informed Staff that the debt primarily reflected costs related to the purchase of
pollution control facilities and equipment attached as property to the generating
plants transferred to CEG affiliates. BGE informed Staff that the affiliates would
be responsible for making the required payments on the bond debt that was
transferred. BGE informed Staff that since the application was made, the $7.1
million debt has been retired, leaving $269.9 million of this debt outstanding. 1
Staff also conducted an analysis of the application, including financial data and
additional supporting material provided by the Company. Staff adds that this type
of request (i.e. an application for the issuance of debt) by the utility companies
that this Commission regulates is not unusual. Moreover, this activity is normal
practice, as these companies retire older more expensive debt, and acquire new
replacement debt, particularly when interest rates are decreasing or are expected
to decrease further.
Technical Analysis:
As part of its review, Staff looked at the Company’s financial data for the last
three years. Staff used a traditional template employed by the Standard and
Poor’s Financial Rating Company (S&P), namely (1) the pretax interest coverage
(of fixed charges such as interest payments on debt), and (2) the total debt to
capital ratio. 2 These two ratings methods applied to BGE for the years 19982000 are depicted below:
1
Even though the debt has been transferred to the CEG affiliates and these affiliates hold the primary
liability, BGE will be the secondarily liable party for these debts, since BGE is the original executor of the
loan agreements. In case of default by the primarily liable parties, BGE would assume responsibility for
repaying the loans. However, BGE would have a claim against the CEG affiliate, in case of default by any
one of the affiliates holding this transferred debt. BGE also informed Staff that a separate amount of shortterm debt (issued as notes on unsecured debt) not a part of this application was also paid.
2
Two other ratings benchmarks are (1) Funds Flow From Operations (to) Interest Coverage, and (2) Funds
Flow From operations (to) Total Debt (ratio).
Pretax Interest Coverage
$ Millions
2000
1999
1998
Income
419.9
Interest Charges
184.0
Pretax Interest Coverage (ratio)
2.28
712.7
205.9
3.46
744.2
238.8
3.12
Total Debt/ Total Capital
$ Millions
Total Debt
Total Capital
Debt/Capital (ratio)
2000
1999
1998
1,864.4
2,856.7
0.65
2,206.0
4,751.4
0.49
3,128.1
6,299.6
0.50
As seen above, the calculated Pretax Interest Coverage and the Total Debt to
Total Capital ratios for the Company changed dramatically in the year 2000 (one
of Staff’s initial concerns). For example, the Pretax Interest Coverage ratios for
the years 1998 and 1999 (over 3.0) were good indicators that the Company would
be able to cover fixed expense items such as its interest due on Bonds and or
preference stock. These ratios were consistent with an ‘A’ rated company such
as BGE. The Pretax Interest coverage for the year 2000 (of 2.28) was noticeably
lower than for the prior two years.
Likewise, the Total Debt to Total Capital ratios of about 0.50 and 0.49 for the
years 1998 and 1999, respectively are ratios indicative of an ‘A’ rated company,
by S&P’s traditional measures. The debt/capital ratio for the year 2000 (of 0.65)
on the other hand, was indicative of a company that may be too heavily leveraged
by debt using the traditional S&P standard.
BGE’s Pretax Interest Coverage and Total Debt to Total Capital ratios for the year
2000 changed dramatically because the Company as well as the parent company
Constellation Energy Group, was undergoing a substantial reorganization due in
large part to the restructuring of the electric and gas industry in the State of
Maryland.
One consequence of the electric and gas industry restructuring is that the
traditional technical measures such as the Pretax Interest Coverage and Total
Debt to Total Capital ratios are no longer applicable, by themselves, as effective
measures for the economic strength and vitality for economic entities (such as
BGE). This is especially true while the industry is undergoing substantial change,
and particularly if the economic entity is undergoing a major reorganization as is
the case with BGE and the parent company CEG.
The Company provided a copy of a rating of BGE and CEG performed by S&P as
depicted in the S&P publication “Standard and Poor’s Creditwire”. S&P is one of
several prominent credit rating companies that perform this type of analysis. S&P
reaffirmed BGE’s ratings with [a] “positive implications” [rating] for the current and
going forward time period. The credit rating by S&P was developed using a more
extensive analysis than the one traditionally used by Staff and by S&P. 3
In response to a Staff inquiry concerning a transfer of financial assets related to
the Company’s reorganization, 4 BGE informed the Staff that during the electric
restructuring transition period, BGE plans to manage its finances to enable BGE’s
financial capital structure at the end of this period to mirror the capital structure
that existed prior to the transfer of generation related assets. This will have the
net effect of restoring BGE’s debt to total capital ratio to previous levels (i.e. in
the 40% to 45% range), consistent with the traditional S&P benchmarks. 5
Moreover, the Company noted that the information that was requested (i.e. the
schedule breakdown of the financial transfers), was being prepared for a May 1,
2001, filing that is to be made by BGE in its separations proceeding (Case No.
8883). The Company stated that the requested information needed to be
extensively reviewed in order to make the May 1 filing date, and that this
information could not be made available any sooner than the May 1 date. In its
response, the Company also stated that any issues related to the requested
information, could be addressed in Case No. 8883, and that the Company felt that
the issues surrounding the debt request application were independent of the
issues attendant to Case No. 8883. Staff believes that the issues related to
actual asset transfers while indirectly related to the debt request application are
not central to the Commission’s disposition of this application. Further, Staff is of
the opinion that issues related to the actual asset transfers are best addressed in
the separations proceeding (i.e. Case Number 8883).
Staff notes that the proposed bond debt issuance will not impact BGE’s current
capital structure. In addition, Staff’s own analysis and review of documents
provided by the Company, and by S&P, supports the Company’s request.
Further, Staff adds that these types of debt request applications by utility
companies are normal practice in nature, and are generally related not only to
internal financial re-balancing undertaken by these companies, but are also
related to the level and/or trend of interest rates. Lastly, while the Company was
not able to respond to all the questions raised by Staff (e.g. those related to the
schedule breakdown of non-debt asset transfers) at this time, Staff does not
believe that this particular information would change Staff’s recommendation, with
3
Staff contacted S&P and we were given additional information and further explanation of the
methodology(ies) employed by S&P. S&P’s expanded analysis incorporates additional business
characteristics and factors of analysis, which include a “10-point business profiles” analysis.
4
Staff had asked the Company to provide a schedule breakdown of the non-debt financial assets that would
become part of the reorganized BGE Corporation after the separation of CEG into two independent
companies.
5
As part of a separate case before this Commission BGE will be presenting a comprehensive report with
respect to the reorganization (of Constellation Energy Group) into two holding companies. (See Case No.
8883). BGE’s transition period for electric restructuring will end on June 30, 2006.
respect to the debt request application. 6 Moreover, we believe that the
Commission will have ample opportunity to address any concerns or questions
that it may have with regard to debt issues and any nexus with the asset transfer
issue(s) during the separations case proceedings (Case No. 8883).
Consequently, for all the foregoing reasons, Staff believes that granting BGE’s
debt application request is appropriate. 7
Recommendation:
Staff recommends that the Commission grant Baltimore Gas and Electric
Company’s request for Authority to issue up to $500 million in Long Term Debt.
____________________
Gunter J. Elert
Regulatory Economist
cc:
Susan Stevens Miller, General Counsel
Felecia L. Greer, Executive Secretary
Andrew P. Mosier, Jr., Chief Hearing Examiner
Chrys Wilson, Manager, External Affairs
However, regardless of Staff’s comments, we do not presuppose nor foreclose on the types of questions
the Commission may raise in an Administration Meeting format.
7
Staff notes that the recent Federal Reserve actions reducing the short-term interest rates by a total of 1.5%
(150 basis points) should give BGE, if this application is granted, the ability to position itself for access to
better (lower cost) interest terms in any subsequent debt issue.
6