Fitch Rates Commonwealth Edison First Mortgage Bonds 'A-'

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to Commonwealth Edison Co.'s (Comed) $450 million new issue of first mortgage bonds series 119 due 2045. The Rating Outlook is Positive. Proceeds will be used to repay a portion of outstanding commercial paper and for general corporate purposes. As of Sept. 30, 2015 outstanding commercial paper was $604 million.

KEY RATING DRIVERS

Strong Credit Metrics: Higher rates effective Jan. 1, 2015 and a formula rate plan (FRP) that allows for annual rate adjustments should allow Comed to sustain its currently sound financial position over the next few years. Fitch estimates adjusted debt/EBITDAR and FFO lease adjusted leverage will approximate 3.75x and FFO fixed charge coverage 5.0x over the next two years, which is strong 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. Due to the formulaic ROE determination, Comed is substantially impacted by changes in long-term treasury rates, which have declined since the last ROE determination. The most recently filed FRP to be implemented in January 2016 proposes a $50 million rate reduction. The FRP was enacted into law by the Illinois Energy Infrastructure Modernization Act (EIMA).

Constructive Rate Decision: In response to Comed's December 2014 FRP rate filing, the Illinois Commerce Commission (ICC) approved a $232 million increase in distribution rates or approximately 86% of the company's rate request. An additional $23 million is recoverable through other rider mechanisms. Although the legislatively set return on equity (ROE) of 9.2% (including a five basis point penalty) is below the industry average, Comed should have a reasonable opportunity to earn the allowed ROE.

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.

Rising Capex: Capex is forecasted to rise to $7.1 billion over the three-year period 2015 - 2017, a significant increase over the $4.4 billion invested in the prior three years. The higher outlays 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 Federal Energy Regulatory Commission (FERC) regulatory policies.

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 Sept. 30, 2015, Comed's potential tax exposure, excluding penalties, is $165 million, which although significant should be manageable within the current rating. Parent Exelon Corp. has indicated that it will hold Comed harmless for any after-tax interest related expenses.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Comed include:

--Electric load growth of about 0.5%

--FRP updated annually

--Capex of $7.1 billion over the three-year period 2015 - 2017

Rating Sensitivities

[Positive Rating Action: Reducing debt/EBITDAR below 3.6x, while sustaining the improvement in other credit metrics could lead to higher ratings in the near-term.

Negative Rating Action: While not expected, FFO adjusted leverage above 5.0x and/or FFO fixed charge coverage below 4.5x on a sustained basis could lead to lower ratings.]

LIQUIDITY

A $1 billion 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 March 28, 2019 and allows for an additional one-year extension. As of Sept. 30, 2015 there were $604 million of commercial paper borrowings and $2 million of outstanding letters leaving available borrowing capacity of $394 million. Available cash was $51 million.

Date of Relevant Rating Committee: April 28, 2015

Additional information is available on 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

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Contacts

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