Fitch Upgrades ComEd; Affirms BGE, PECO and Exgen's Ratings

NEW YORK--()--Fitch Ratings has upgraded Commonwealth Edison Co.'s (ComEd) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB' and revised the Rating Outlook to Stable from Positive. Fitch has also affirmed the 'BBB+' IDRs of PECO Energy Co. (PECO) and Baltimore Gas and Electric Co. (BGE) and the 'BBB' IDR of Exelon Generation Co., LLC (Exgen). The Rating Outlook for each entity is Stable.

The ratings of EXC and its newly acquired subsidiaries Pepco Holdings LLC, Potomac Electric Power Co., Delmarva Power and Light Co. and Atlantic City Electric Co. were previously addressed in a Rating Action Commentary dated March 25, 2016, and are unaffected by these actions.

A full list of the rating actions is shown at the end of this release.

ComEd's upgrade to 'BBB+' from 'BBB' reflects its sound credit profile and the regulatory predictability in Illinois due to a formula rate plan (FRP) that provides for annual rate adjustments. The FRP mitigates the impact of a rising capex program that is primarily driven by infrastructure modernization investments required by Illinois' Energy Infrastructure modernization Act.

The rating affirmations of PECO and BGE reflect credit metrics that are strong within the ratings level.

Exgen's rating affirmation reflects solid financial metrics that are consistent with the greater earnings and cash flow volatility of its competitive generation business.

Key Rating Drivers for Commonwealth Edison Company

Strong Credit Metrics: Fitch expects the annual FRP rate adjustments to allow ComEd to sustain and moderately improve its currently sound financial position over the next few years. Fitch estimates debt/EBITDAR and funds from operations (FFO) leverage will average approximately 3.75x and 3.5x, respectively over the next two years and FFO fixed charge coverage 6x, which is well positioned within the current rating level.

Regulatory Predictability: The FRP implemented in October 2011 provides increased regulatory predictability in Illinois. The FRP, which is filed annually, recognizes forward looking capital additions and includes a true-up mechanism reducing, albeit not eliminating, rate lag. The FRP was enacted into law by the Illinois Energy Infrastructure Modernization Act (EIMA).

Commodity Price Exposure: Ratings and credit quality benefit from the absence of commodity price exposure, which limits cash flow volatility and reduces business risk. Comed retains the provider of last resort obligation for customers that do not choose an alternative energy provider, but recovers its energy supply costs from customers through a monthly fuel adjustment mechanism.

Elevated Capex: Capex is forecasted to rise to $6.5 billion over the three-year period 2016-2018, approximately 18% above the $5.5 billion invested in the prior three years. The higher outlays, which peak at $2.4 billion in 2016, are primarily driven by the EIMA, which requires investments in system reliability and smart grid deployment and provides for recovery through the FRP filings. The higher capex also reflects an increase in transmission expenditures, which are subject to credit supportive Federal Energy Regulatory Commission (FERC) regulatory policies. The rise in expenditures began in 2015 and begins to trend downward starting in 2017.

Like-Kind-Exchange: Comed's exposure to the IRS's disallowance of the tax benefits associated with a like-kind-exchange continues to linger. As of Dec. 31, 2015, Comed's potential tax exposure is $280 million after consideration of EXC's agreement to hold Comed harmless for interest and penalties, which although significant should be manageable within the current rating.

Key Rating Drivers for PECO Energy Company

Strong Credit Profile: Aided by a rate increase implemented in January 2016, Fitch expects PECO's credit measures to remain strong relative to both Fitch's target ratios for the current rating level and the company's peer group of 'BBB+' rated distribution utilities, but moderately weaker than recent historical results. Over the next few years, Fitch estimates debt/EBITDAR and FFO-adjusted leverage will approximate 3.5x and 3.75x, respectively in 2018 compared to 3.0x and 3.1x in 2015. The modest increase reflects a rising capex plan and relatively flat sales growth.

Low Business Risk: Ratings and credit quality benefit from the absence of commodity price exposure and the associated cash flow volatility. PECO retains the provider of last resort obligation for customers that do not choose an alternative energy provider, but recovers its' electric and gas supply costs from customers through monthly fuel adjustment mechanisms. The constructive regulatory environment in Pennsylvania and the alternative regulatory model implemented to recover certain capital costs also reduces business risk.

Alternative Regulatory Model: Fitch considers the regulatory legislation enacted in Pennsylvania in February 2012 (HB 1294) to be supportive of credit quality. The law allows the Pennsylvania Public Utility Commission (PUC) to establish a distribution system investment charge (DSIC) to provide timely recovery of certain capital costs incurred to enhance electric and gas distribution systems. Once implemented, the DSIC is updated quarterly. The legislation also allows traditional rate filings to include fully forecasted test years further reducing regulatory lag.

Constructive Rate Order: PECO implemented a $127 million rate increase effective Jan. 1, 2016 following the approval of a settlement agreement by the PUC. The approved increase equates to about two-thirds of PECO's $190.1 million rate request. The settlement agreement also includes implementation of a DSIC for the company's electric operations, but not until eligible investments exceed the Dec. 31, 2016 levels projected by PECO.

Demand Reduction: Pennsylvania Act 129 (Act 129) requires Pennsylvania utilities to reduce electric consumption with the companies absorbing the associated revenue loss between rate cases. The PUC recently approved phase III of the energy efficiency and consumption plan requiring PECO to further reduce consumption by 2021. PECO met the initial consumption reduction targets of 1% by 2011 and 3% by May 31, 2013. Importantly, Act 129 provides a surcharge to recover implementation costs (other than lost sales) on a timely basis.

Rising Capex: Capex is forecasted to rise to $2.2 billion over the next three years compared to $1.8 billion over the prior three years. The expenditures reflect investments in energy efficiency and modernization of its electric and gas systems. The financial impact is moderated by the extension of bonus depreciation and the surcharge mechanism associated with Act 129.

Key Rating Drivers for Baltimore Gas and Electric Company

Strong Credit Metrics: Baltimore Gas and Electric Company's (BGE) credit metrics strengthened materially in 2015 and are strong for the current rating level. The improvement is due to electric and gas base rate increases effective December 2014, lower interest and storm related expenses and modest rise in debt. Fitch expects credit metrics to weaken moderately in 2016 due to an expanded capex budget, but to remain strong for the rating level, with debt/EBITDAR and FFO lease-adjusted leverage to average about 3.25x and 3.50x, respectively, over the next two years.

Regulatory Recovery Mechanisms: Rate adjustment mechanisms outside of base rate cases tend to stabilize BGE's cash flow. These include decoupling for residential and commercial gas and electricity sales, and purchased gas and purchased power recovery mechanisms. In 2014, Maryland regulators approved a rider to recover gas infrastructure improvements and have approved three subsequent surcharges (2014, 2015 and 2016). Certain capex is also subject to tracking mechanisms, including energy efficiency.

Pending Rate Case: A decision in BGE's pending rate case is expected in June 2016. BGE requested electric and gas base rate increases aggregating $200.4 million (revised to $196.7 million), equal to approximately 11% of 2015 net revenue. The majority of the rate requests are to recover smart grid investments based on equity returns of 10.6% and 10.5% for the electric and gas operations, respectively.

Rate Strategy: BGE has implemented a series of electric and gas base rate increases since early 2013 that have materially strengthened its credit profile. The most recent increases were implemented in December 2014, when BGE was permitted electric and gas rate increases aggregating $60 million, the third increase in 22 months. Due to the frequent rate increases and absence of major storms the return on common equity, on a GAAP basis, improved to 10.5% in 2015.

Key Rating Drivers for Exelon Generation Company, LLC

Challenging Operating Environment: Weak natural gas and power prices continue to restrict Exgen's earnings power with little relief in sight. Demand is also expected to remain sluggish due in large part to energy efficiency measures and slow economic growth. Although actual and planned coal retirements have the potential to drive up power prices in the next few years it is not yet evident in the forward power curve. Favorably, capacity prices have improved materially.

Improving Capacity Prices: Capacity market reforms instituted in PJM, where the majority of Exgen's generating capacity is located resulted in a significant increase in the clearing price for the 2018/2019 delivery year that Fitch estimates will boost EBITDA by roughly $375 million. Capacity prices were particularly strong in the Comed zone where Exgen's generating resources are concentrated. Capacity prices were also higher in two subsequent transition auctions for the 2016/2017 and 2017/2018 delivery years.

Sound Financial Position: Exgen's financial position has stabilized in recent years, and remains solidly within the investment grade category. Fitch estimates adjusted debt/EBITDAR to approximate 2.5x in 2016 and then trend downward as free cash flow (FCF) is used to retire debt. FFO lease adjusted leverage and FFO fixed charge coverage are equally strong.

Hedging Strategy: To moderate cash flow volatility and commodity price risk, Exgen employs a three-year ratable hedging strategy. The strategy targets a financial hedge range of 90%-98% in the prompt year, 70%-90% in year two and 50%-70% year three. When forward market prices are below Exgen's expectation the company has operated below its ratable hedging policy, which has been the case recently in the outer years. The hedging strategy includes forward power contracts and financial hedges, primarily natural gas options.

Competitive Position: Exgen's largely nuclear-fueled generating fleet is positioned low on the dispatch curve and likely to be dispatched under most price scenarios. The emission free nuclear portfolio also stands to benefit from any uplift in power prices from higher environmental costs or coal retirements. However, due to their high fixed costs several nuclear units, particularly those that compete with renewable energy resources and/or receive inadequate capacity payments are at risk of closure. Closure of these under-performing assets would boost EBITDA and cash flow.

Strong Nuclear Operator: Exgen has a long record of strong nuclear performance. Over the past three years, the nuclear capacity factor averaged approximately 93% and re-fueling outages have averaged about 30 days, in each case setting the industry standard.

KEY ASSUMPTIONS

Commonwealth Edison Company

--Relatively flat electric load growth;

--Formula Rate Plan updated annually;

--Three-year capex plan of $6.5 billion.

PECO Energy Company

--Relatively flat electric load growth;

--Retail gas load growth ranging between 0.5% and 1.0%;

--Electric distribution rate increase of $127 million effective Jan. 1, 2016;

--Equity capital of 53%-54% of total capital;

--Three-year capex plan of $2.1 billion.

Baltimore Gas and Electric Company

--Customer growth: 0.4% (Electric), 0.0% (Gas);

--June 2016 rate increase;

--Three-year capex plan of $2.7 billion.

Exelon Generation Co., LLC

--Forward gas and power prices as of Dec. 31, 2015;

--Oyster Creek retirement in 2020 (no other changes in nuclear portfolio);

--Three-year capex plan of $7.6 billion

RATING SENSITIVITIES

Rating Sensitivities for Commonwealth Edison Co.

Positive Rating Action: A positive rating action may be considered if debt/EBITDAR is below 3.4x on a consistent basis, while maintain FFO leverage below 4.5x and FFO fixed charge coverage above 4.7x.

Negative Rating Action: Negative rating action would be considered if FFO adjusted leverage rose above 5x and/or FFO fixed charge coverage fell below 4.5x on a sustained basis .

A change in the FRP or other regulatory policies that inhibit Comed's ability to recover invested capital or commodity costs on a timely basis could also lead to lower ratings.

Rating Sensitivities PECO Energy Co.

Positive Rating Action: Positive rating action could be considered if adjusted debt/EBITDAR and FFO lease adjusted debt remains comfortably below 3.4x and 4.0x, respectively.

Negative Rating Action: Given the headroom in existing ratings a downgrade is not likely, but could be considered if debt/EBITDAR and FFO lease-adjusted debt exceeded 3.7x and 4.75x, respectively, on a consistent basis.

Rating Sensitivities Baltimore Gas and Electric Co.

Positive Rating Action: Positive rating action may be considered if, following the resolution of its' pending rate case, BGE is able to maintain debt/EBITDAR and FFO lease adjusted leverage comfortably below 3.4x and 4.0x, respectively.

Negative Rating Action: Given the headroom in existing ratings a downgrade is not likely, but could occur if adjusted debt/EBITDAR and FFO lease adjusted leverage exceed 3.7x and 4.75x on a consistent basis.

Rating Sensitivities Exelon Generation Co., LLC

Positive Rating Action: Positive rating action is not likely given the inherent cash flow volatility in the competitive generation business.

Negative Rating Action: Ratings could be lowered if debt/EBITDAR exceed 3.25x and FFO adjusted leverage exceeds 3.5x on a sustained basis. Ratings could also be lowered if management were to pursue a more aggressive growth strategy.

LIQUIDITY

EXC and its subsidiaries have ample liquidity. Comed and BG&E meet their short-term liquidity needs through the issuance of commercial paper (CP) and Exgen and PECO through the issuance of CP and borrowings from the inter-company money pool. Comed and BG&E are excluded from the money pool due to ring fencing measures. All CP borrowings are supported by committed credit facilities at each entity including $5.725 billion at Exgen, $1 billion at Comed and $600 million at both PECO and BGE (EXC has an additional $500 million). As of Dec. 31, 2015, there were no borrowings under the credit facilities. Available cash was $438 million at Exgen, $67 million at Comed, $295 million at PECO and $9 million at BGE.

FULL LIST OF RATING ACTIONS

Fitch upgraded the following ratings:

Commonwealth Edison Company

--Long-Term IDR to 'BBB+' from 'BBB';

--First mortgage bonds to 'A' from 'A-';

--Senior unsecured debt to 'A-' from 'BBB+';

--Preferred stock to 'BBB' from 'BBB-'.

The Rating Outlook is Stable.

ComEd Financing III

--Preferred stock to 'BBB' from 'BBB-'.

Fitch has affirmed the following ratings:

Exelon Generation Co., LLC

--Long-Term IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Commercial paper at 'F2';

--Short-Term IDR at 'F2'.

The Rating Outlook is Stable.

Commonwealth Edison Company

--Short-Term IDR at 'F2';

--Commercial paper at 'F2'.

Baltimore Gas and Electric Company

--Long-Term IDR at 'BBB+';

--First mortgage bonds at 'A';

--Senior unsecured debt at 'A-';

--Pollution Control Revenue Bonds at 'A-';

--Preferred stock at 'BBB';

--Short-Term IDR at 'F2';

--Commercial paper at 'F2'.

BGE Capital Trust II

--Preferred stock at 'BBB'.

The Rating Outlook is Stable.

PECO Energy Co.

--Long-Term IDR at 'BBB+';

--First mortgage bonds at 'A';

--Senior unsecured debt at 'A-';

--Commercial paper at 'F2';

--Short-Term IDR at 'F2'.

PECO Energy Capital Trust III

--Preferred stock at 'BBB'.

PECO Energy Capital Trust IV

--Preferred stock at 'BBB'.

The Rating Outlook is Stable.

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

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Contacts

Fitch Ratings
Primary Analyst:
Robert Hornick, +1-212-908-0523
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Shalini Mahajan, +1-212-908-0351
Managing Director
or
Committee Chairperson:
Alex Bumazhny, +1-212-908-0738
Senior Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Robert Hornick, +1-212-908-0523
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Shalini Mahajan, +1-212-908-0351
Managing Director
or
Committee Chairperson:
Alex Bumazhny, +1-212-908-0738
Senior Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com