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NUMBER R-1357 MAY 23, 1997 MAIL LOG NO. 56561 TO: H. Russell Frisby, Jr., Chairman Claude M. Ligon, Commissioner E. Mason Hendrickson, Commissioner Susanne Brogan, Commissioner Gerald L. Thorpe, Commissioner FROM: Gregory V. Carmean, Executive Director Baltimore Gas and Electric Company’s and Constellation Energy Corporations’ application to execute a tax exempt long-term financing agreement, promissory note and related documents to finance the installation of scrubbers and related equipment at the Conemaugh Generating Station. CASE NO.8758 RE: ______________________________________________________________ Description of the Applications: Baltimore Gas and Electric Company is seeking authority to enter into a loan agreement, issue a promissory note, and related documents so as to obtain long-term tax exempt financing for scrubbers installed at the Conemaugh Generating Station. Groups which should receive a copy of Staff’s Recommendations: Office of People’s Counsel Recommended Action (Including Conditions) Staff Recommends Approval _______________________ Alan Haymes Director, Rate Research & Economics Division ____________________ Andrew Katz Staff Counsel Commission Action on ____________ Approved__ Disapproved__ Accept for Filing __ Comments of the Rate Research and Economics Division (R-1357 RE: Baltimore Gas and Electric Company’s and Constellation Energy Corporation’s filed application to obtain long-term tax exempt financing for installation of scrubbers at Conemaugh Generation Station. Mail Log No. : 56561 Page No. : 2 I Background: On April 28, 1997, Baltimore Gas and Electric Company (BGE) and Constellation Energy Corporation (Constellation) jointly filed an application requesting Commission authorization to enter into a long-term tax exempt agreement with the Indiana County Industrial Development Authority (Authority) for funds to finance the costs for the installation of scrubbers at Conemaugh Generating Station . The closing date for this financing is to be on or before June 10, 1997. In order to comply with the Clean Air Act Amendments of 1990, BGE, Potomac and Electric Power Company (PEPCO) and other Co-owners of the Conemaugh Generation Station have installed scrubbers and related equipment to reduce sulfur dioxide emissions at Conemaugh Generation Station. BGE and PEPCO are part of two interim short-term tax exempt financings made available by the Authority. These short term financings agreements totaled $76 million. BGE and PEPCO’s share of the costs were $16,875,000. The utility owners which are part of the short term financing agreement desire to convert these interim short-term financing agreement into long-term financing through bonds issued by the Authority. Under the proposal, the Authority will issue tax exempt bonds which will be either fixed rate or variable, and will loan the proceeds of these bonds to the utilities. The utilities will in turn issue promissory notes to the Authority pursuant to a pollution control facilities agreement that mirrors the indenture The utilities will also obtain credit support, bond insurance or other credit enhancements to equalize the credit quality among the utilities. BGE and Constellation have filed this application jointly because it is possible that the merger of BGE and PEPCO (Constellation). will be consummated prior to the expected closing date (June 10, 1997). If the merger is not completed by the closing date, BGE will need authorization from the Commission to go forward with the long-term financing agreement for its portion of the costs or $8,785,000. If the merger is completed by the closing date, then Constellation will need authorization from the Commission to go forward with the long-term financing agreement for the combined (BGE and PEPCO) costs of $16,875,000. BGE and Constellation state that they are asking for this authority jointly so that if the merger is consummated prior to the closing date, then Constellation will not have to file a separate application. Comments of the Rate Research and Economics Division (R-1357 RE: Baltimore Gas and Electric Company’s and Constellation Energy Corporation’s filed application to obtain long-term tax exempt financing for installation of scrubbers at Conemaugh Generation Station. Mail Log No. : 56561 Page No. : 3 COMMENTS Staff notes that interest rate spreads between tax exempt fixed rate local and state bonds and A rated public Utility bonds is approximately 200 basis points. Thus, the use of tax exempt bonds for the pollution control costs demonstrate potential savings to the utility owners and thus to the ratepayers. Also the acquisition of the bond proceeds from the Authority will not result in any significant change to either BGE’s or Constellation’s capital structure, or in either company’s ability to service its debt. Staff further notes that BGE and PEPCO (Constellation) have not yet submitted the installation of the scrubbers and related equipment for Conemaugh Generating Station project to the Commission for approval. Consequently, staff’s recommendation is only for the financing of this project, and not a finding for approval of the project itself. RECOMMENDATIONS According to BGE’s and Constellation’s joint application, the proceeds of the bonds received from the Authority will be used for the retirement of debt, the acquisition of property, construction and improvement of facilities, and the lawful discharge of obligations relating to BGE’s and or Constellation’s utility business expended by the companies within five years prior to the filing of this application. Although the bonds to be issued by the Authority may be fixed rate or variable, projected interest rate levels and the fact that the bonds will be tax exempt make the acquisition of this additional debt favorable. Accordingly, Staff recommends that the Commission approve the joint application of BGE and Constellation for authority to execute the loan agreement, promissory note and related documents in regard to the long-term tax exempt financing for the installation of scrubbers and related equipment at the Conemaugh Generating Station. _____________________ Gunter J. Elert Financial Analyst cc: Bryan G. Moorhouse, General Counsel Daniel P. Gahagen, Executive Secretary O. Ray Bourland, Chief Hearing Examiner Chrys Wilson, Director of External Relations