Fitch Rates PECO Energy Co.'s First and Refunding Bonds 'A'

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to PECO Energy Co.'s (PECO) new $350 million issue of 10-year first-mortgage and refunding-mortgage bonds. Proceeds will be used for general corporate purposes. The Rating Outlook is Stable.

KEY RATING DRIVERS

Strong Credit Profile: 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. Over the next few years Fitch estimates debt/EBITDAR and FFO-adjusted leverage to approximate 3.2x and 3.7x, respectively.

Manageable Capital Spending: Forecast capex of approximately $1.6 billion over the next three years is relatively unchanged from the prior three-year period. However, unlike the prior period, PECO no longer has a large cash balance to help fund the expenditures and will be more reliant on external funding.

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 new regulatory paradigm in Pennsylvania 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 capital costs incurred to enhance electric and gas distribution systems. The DSIC will be updated quarterly. The PUC approved a DSIC for PECO's natural gas delivery business in September 2015. However, the company did not request an initial revenue requirement associated with the DSIC. The new legislation also allows traditional rate filings to include fully forecasted test years, further reducing regulatory lag.

Pending Rate Case: The parties to PECO's pending rate case filed a settlement agreement with the PUC in September 2015 that if approved should bolster credit metrics beginning in 2016. The settlement provides for a $127 million rate increase or 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. PECO met the initial consumption reduction targets of 1% by 2011 and 3% by May 31, 2013. Act 129 also requires the installation of smart-meter technology and the implementation of time of use rates and real time price plans (See Act 129 below). Importantly, Act 129 provides a surcharge mechanism to recover the implementation costs (other than lost sales) on a timely basis.

RATING SENSITIVITIES

[Positive Rating Action: Positive rating action is not likely prior to the resolution of the Negative Rating Watch of its corporate parent Exelon Corp., which is driven by the pending merger with Pepco Holdings. Inc. and the challenging operating environment of its merchant generation subsidiary.

Negative Rating Action: An increase in parent company leverage or risk profile could adversely affect ratings. However, given that PECO's credit profile is strong within its rating level, it likely could withstand a one-notch parent downgrade.]

KEY ASSUMPTIONS

--Constructive resolution of pending rate case

--Capital structure with approximately 53% equity

--Electric sales growth of about 0.5% annually

--Capex of $1.6 billion over the 2015-2017 time period

LIQUIDITY

A $600 million committed credit facility provides ample liquidity. The credit facility supports a commercial paper program of equal size and also provides for direct borrowings. The credit facility extends to May 2019 and allows for a one-year extension. PECO also participates in a corporate money pool along with its affiliates Exelon Generation Company, LLC and Exelon Business Services Co., LLC. Parent Exelon Corp. can lend to, but not borrow from, the money pool. At June 30, 2015, PECO had no short-term borrowings and available cash of $26 million.

Date of Relevant Rating Committee: April 28, 2015

Additional information is available on www.fitchratings.com

Additional Disclosures

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Contacts

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

Contacts

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