Squeezed between revenue shortfalls resulting from deregulation of the power industry in Maryland and escalating capital spending and debt servicing needs, Baltimore Gas & Electric is planning a $635 million deferred energy balance ABS deal.
The electric company is pushing to complete its securitization deal by March 2007, unusual timing for an asset class wherein deals can take up to a year to price. The company filed its initial application on Nov. 3, and the commission, by state law, must make a decision on the plan by Jan. 2.
The securitization deal is already entangled in heated state-level politics, according to market sources. Baltimore Gas & Electric requested a 72% residential rate increase, igniting fierce public anger. The General Assembly voted to dissolve the Public Service Commission of Maryland, a move that survived ousted Rep. Governor Robert Ehrlich's veto. Eventually, the Court of Special Appeals in Maryland ruled that the General Assembly's move to fire the commissioners was unconstitutional, keeping them safe, at least temporarily. Democratic governor-elect Martin O'Malley, who takes over in January, said he planned to fire the four commissioners, according to press reports.
The utility, a division of Constellation Energy, recruited Morgan Stanley as its advisor in the application phase, although at press time, the investment bank had not officially been named lead manager. RBS Greenwich is also apparently involved in the deal, although its exact role is unclear.
The commission is interviewing financial advisors to represent it during deal negotiations, although it can represent itself. Bear Stearns, Saber Partners, Pathfinder Capital and Public Resources Advisory Group are among the firms being considered to represent the commission.
Specifically, the funds will allow Baltimore Gas & Electric to finance electricity costs that have been deferred since July 1, 2006.
Like many other states, Maryland deregulated its utility industry in 2000, which required that rates charged to customers reflected actual market rates. Retail rates were frozen from 2000 through July 1, 2006. To avert the 72% rate increase, the Maryland General Assembly, in a special session, required the company to limit the increase in total residential electric rates to 15%, and to defer charging customers for the balance of the new costs. That statute was known as S.B. 1. Therefore the deal is considered a deferred energy balance transaction, not a stranded cost.
Meanwhile, the company said it expects its capital expenditures in 2007 to reach $445 million, while its debt financing needs - apart from the securitization - will reach about $177 million in 2007. Since April 2006, the company withstood a series of downgrades in its senior unsecured debt, partially due to S.B. 1.
In October 2006, a merger agreement between Constellation Energy and FPL Group fell through. This prompted Fitch Ratings to say that it expected the firm's cash flow and credit metrics to deteriorate until the utility company completes its debt securitization, according to testimony from Mark Case, Baltimore Gas & Electric's vice president of business performance, strategy and regulatory services.
If chosen as lead manager, Morgan Stanley expects to structure the floating-rate deal into four tranches, with average lives ranging from two to 9.4 years. Initial price talk put the two-year tranche at seven basis points below swaps, with the 9.4-year piece coming in at six basis points over, according to the bank's testimony to the commission.
Aside from state politics, the deal's cost structure could be another point of contention, said market sources. Underwriting and structuring fees could total $5.5 million, representing 87.4 basis points on the issue, David Vahos, Baltimore Gas & Electric's director of finance said before the commission.
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