Fitch Ratings has assigned a 'BBB' rating to Exelon Corp.'s (EXC) new
$1.8 billion issue of notes to be offered in multiple tranches maturing
in five, 10 and 30 years. Proceeds will be used to retire short-term
debt incurred to complete the funding of the recently closed Pepco
Holdings LLC acquisition and for general corporate purposes. The notes
will rank equally with all other senior unsecured debt and will be
senior in right of payment to all subordinated debt. The Rating Outlook
is Stable.
KEY RATING DRIVERS
Growing Utility Earnings Contribution: The recent acquisition of Pepco
Holdings LLC furthers EXC's goal of increasing regulated earnings and
lowering business risk. Post-merger regulated earnings are expected to
account for roughly 65% of consolidated earnings from its six regulated
utilities compared to an estimated 55% - 60% without the acquisition.
Even without the PHI acquisition the regulated earnings contribution was
expected to increase due to the significant amount of planned utility
investment, particularly at Commonwealth Edison Co (ComEd).
Increased leverage: The increase in regulated earnings was accompanied
by an increase in leverage to fund the Pepco Holdings LLC acquisition.
Fitch estimates adjusted debt-to-EBITDAR will be approximately 4.25x -
4.5x in the first full year after the merger compared to about 3.0x -
3.5x on a stand-alone basis.
Competitive Generation Business: The ratings also consider the more
volatile earnings and cash flow contribution of EXC's competitive
generation business. The operating environment is challenging with
sluggish demand and low natural gas and power prices expected by Fitch
to persist for several years. Partly offsetting the low energy prices is
the recent rise in forward capacity prices in the PJM interconnection
where the majority of EXC's merchant generating assets are located. The
business is well capitalized and employs a three-year hedging strategy
that moderates commodity exposure and the associated volatility.
Growing Utility Investments: Going forward, the majority of capital
investment is allocated to EXC's utility subsidiaries, which should
provide a more stable earnings base. The majority of the regulated
investments are at ComEd, its largest utility, which operates with a
constructive formula rate plan that provides timely recovery of invested
capital.
Regulatory Concessions: To gain merger approval, EXC agreed to a number
of rate concessions in each of PHI's four regulatory jurisdictions
aggregating an estimated $350 million - $400 million, including customer
rate credits and deferral of rate increases and funding for a variety of
customer investment funds largely related to energy efficiency,
renewable energy programs, and low-income customer programs.
Ring Fencing: Each of the utility commissions imposed several
ring-fencing provisions to protect the Pepco Holdings LLC utilities, but
none are considered to be onerous or likely to impair EXC's credit
quality.
The requirements include:
--Potomac Electric Power Co. (Pepco), Delmarva Power & Light Co. (DPL)
and Atlantic City Electric Co. (ACE) maintaining a rolling 48% equity
ratio (no other dividend restrictions)
--Creation of a bankruptcy-remote special purpose entity (SPE) to hold
100% of PHI equity
--Maintenance of separate books and records
--Pepco, DPL and ACE will maintain separate debt
--The Board of Directors of the SPE will have four directors, one of
which will be independent
--The seven-member PHI board will include one director from each of
PHI's utility subsidiaries
KEY ASSUMPTIONS
--Relatively flat load growth
--Each of the PHI subsidiaries to file rate cases in 2016 and every
12-15 months thereafter
--Commonwealth Edison Co. formula rate plan updated annually
--$1 billion in cash from the remarketing of junior subordinated debt
received in 2017
--Henry Hub Natural gas prices as of Dec. 31, 2015
--Nihub and PJM forward power prices as of Dec. 31, 2015
RATING SENSITIVITIES
Positive Rating Action: An upgrade seems unlikely over the next few
years given the rise in leverage associated with the recent acquisition,
but could occur if on a sustained basis debt/EBITDAR is reduced below
3.5x while lease-adjusted FFO leverage is below 4.25x.
Negative: Ratings could be lowered if lease adjusted FFO leverage
exceeds 4.5x on a sustained basis. A renewed emphasis on non-regulated
investments could also have an adverse impact on ratings.
LIQUIDITY
Cash flow from operations, commercial paper (CP) borrowings and
committed bank credit facilities provide ample liquidity. EXC's
syndicated credit facilities aggregate $8 billion (excluding minority
and community banks) and bilateral agreements an additional $400
million. Pepco Holdings LLC has an additional $1.5 billion facility. The
syndicated facilities support CP programs throughout the EXC
organization.
Date of Relevant Rating Committee: March 24, 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001968
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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