TEXT-Fitch affirms Exelon Corp and subsidiaries ratings

Fri Feb 8, 2013 12:37pm EST

Feb 8 - Fitch Ratings has affirmed the Issuer Default Ratings (IDR) and
instrument ratings of Exelon Corp. (EXC) and each of its existing
operating subsidiaries, including Exelon Generation Company (Exgen),
Commonwealth Edison Company (Comed), PECO Energy Company (PECO) and Baltimore
Gas and Electric Co. (BG&E). The Rating Outlook for Comed has been revised to
Positive from Stable. The Rating Outlook for all other entities remains Stable.

The ratings of EXC and Exgen reflect recent steps taken by management to
solidify their credit quality and ratings in the face of a persistently low
power price environment that is pressuring wholesale and retail profit margins.
The positive actions include substantial reductions in both capex and the common
stock dividend. Consequently, credit protection measures are expected by Fitch
to remain strong during a low point in the commodity cycle and compare favorably
to Fitch's target ratios and their respective peer groups.

The EXC and Exgen ratings also reflect ample liquidity, and a competitive
nuclear fleet that is low on the dispatch curve and stands to benefit from new
and existing environmental regulations that impose additional costs on coal
plants. The consolidated rating also benefits from the earnings contribution of
three regulated utilities, which account for about 50% of earnings and cash


EXC and Exgen

Dividend Reduction: EXC's dividend was reduced 40%, saving approximately $700
million annually. Fitch expects Exgen will be the primary beneficiary of the
dividend reduction and to apply a significant portion of the savings to debt
reduction. The new dividend takes effect in the second quarter of 2013.

Reduced Capex: In November 2012, management lowered Exgen's capex budget by $2.3
billion over the five year period 2013 - 2017. The capex reduction includes
approximately $1.025 billion from the deferral of planned nuclear uprates and
$1.25 billion from eliminating unidentified wind and solar investments. The
reductions meaningfully reduced pressure on credit quality measures.

Financial Position: The combined reductions of the common stock dividend and
capex have strengthened the financial positions of both EXC and Exgen. Cash flow
measures are particularly strong. Fitch estimates EXC's adjusted ratio of
FFO/interest to be in excess of 6.0x over the next several years and FFO/debt
approximately 30%. Fitch estimates Exgen's adjusted ratio of FFO/interest to be
in excess of 7.0x over the next several years and FFO/debt in excess of 40%.

Liquidity: Liquidity is ample and debt maturities should be manageable. On a
consolidated basis committed credit facilities aggregate $8.4 billion, including
$5.7 billion at Exgen and $500 million at EXC, and extend to 2017. Moreover,
Fitch expects Exgen to be free cash flow positive over the next several years.

Low Commodity Price Environment: Low power prices, weak demand and aggressive
competitive pricing behavior have adversely affected Exgen's wholesale and
retail margins and are expected by Fitch to persist for several more years. It
does appear however, that we are in the low point of the commodity cycle with
limited downside risk. Moreover, the lower dividend and spending plan have
positioned both EXC and Exgen to withstand further stresses.

Credit Metrics: Over the next several years, Fitch expects Comed to sustain the
improvement in credit metrics achieved in 2012, largely due to a rate increase
implemented Jan. 1, 2013 and a new regulatory paradigm in Illinois that allows
for annual rate adjustments to earn a return on new investments and recover
changes in the cost of service. Fitch estimates the ratio of EBITDA/interest
will average about 5.0x and FFO/interest about 4.5x over the next several years.
Over the same period FFO/debt is expected by Fitch to average about 18% and
Debt/EBITDA about 3.9x.

Regulatory Environment: Illinois implemented a formula based rate plan (FRP) in
October 2011 that fundamentally changed regulation of electric delivery service
in Illinois. While the FRP remains less favorable than initially expected by
Fitch, it does provide for annual rate adjustments, recognizes planned capital
additions and includes a true-up mechanism that combine to reduce, albeit not
eliminate, rate lag. The primary negatives are a relatively low formula based
return on equity (ROE) and reliance on an average, rather than year-end rate
base, which reduces the revenue requirement.

FRP Appeal: Following its initial FRP decision, Comed filed an appeal with the
Illinois Commerce Commission (ICC) and in October 2012 the ICC reversed its
position on the treatment of the Comed's pension asset. The reversal restored
about $135 million of revenue in 2012. The ICC maintained its position on the
use of an average, rather than year-end, rate base and capital. Following the
rehearing order, Comed filed an appeal in state court regarding the use of an
average rate base and the interest rate used to calculate the carrying cost on
reconciliation adjusted balances.

Recent Comed Rate Case: On Dec. 19, 2012, the ICC issued an order in Comed's
second FRP filing. The decision was more constructive than the previous order,
but continues to rely on an average rate base and capital structure. The ICC
granted Comed a $72.6 million rate increase compared to $74.2 million supported
by the company. The allowed ROE was 9.71% based on the pre-established formula
(3.91% Treasury yield plus 580 basis points), compared to 10.05% in the prior
case. Prospectively, Comed will file an annual FRP each May with new rates
effective the following January. Since Treasury rates are unlikely to fall there
is limited downside on the ROE.

Rising Capex: Capital expenditures are forecasted to rise to approximately $4.3
billion over the three-year period 2013-2015, compared to $3.3 billion in the
prior three-year period. The higher outlays are primarily driven by the Illinois
Energy Infrastructure Modernization Act (EIMA), which requires Comed to invest
an incremental $1.3 billion on electric system upgrades over five years and an
additional $1.3 billion for smart grid deployment over 10 years. The legislation
provides for recovery through the FRP filings.

Commodity Price Exposure: Ratings benefit from the absence of commodity price
exposure and the associated cash flow volatility.

Liquidity: A $1 billion unsecured credit facility provides ample liquidity.
Annual debt maturities will require on-going capital market access.

Like-Kind-Exchange: Comed's exposure to the IRS's disallowance of the tax
benefits associated with a like-kind-exchange is a credit concern, however the
issue is not likely to be resolved for several years and was not factored into
the rating decision. As of Jan. 28, 2013, EXC's potential tax and after-tax
interest that could become payable, excluding penalties, is $860 million, of
which $260 million would be paid by Comed.


Financial Position: Historical and projected credit measures are well in excess
of Fitch's target ratios for the current rating category and the companies' peer
group of 'BBB+' distribution utilities. In 2013, Fitch estimates EBITDA/interest
of approximately 7.0x, FFO/interest 5.0x and FFO/Debt about 20%.
Regulatory Environment: In February 2012, HB 1294 was signed into law. The
legislation is intended to encourage utilities to invest in infrastructure by
providing cost recovery through an automatic adjustment mechanism. Under the
law, utilities will file a long-term infrastructure improvement plan starting in
2013 and the Pennsylvania Public Utility Commission (PUC) will establish a
distribution system investment charge (DSIC) to recover the invested capital.
The DSIC will be updated quarterly. The new legislation also allows rate filings
to include fully forecasted test years, significantly reducing regulatory lag.

Commodity Price Exposure: Ratings benefit from the absence of commodity price
exposure and the associated cash flow volatility.


Financial Position: The BG&E rating reflects historical and projected credit
measures that are consistent with the rating category. In 2013, Fitch estimates
EBITDA/interest of approximately 5.5x, FFO/interest 4.5x and FFO/Debt about 20%.

Regulatory Recovery Mechanisms: Rate adjustment mechanisms outside of base rate
cases tend to stabilize BG&E's on-going cash flow. These include decoupling for
both residential and certain commercial gas and electricity deliveries and
purchased gas and purchased power recovery mechanisms.

Regulatory Environment: The regulatory environment in Maryland remains
challenging largely due to regulatory lag and the authorization of equity
returns that are among the lowest in the industry. The MPSC has been resistant
to adopting forward looking test years or other approaches to shorten regulatory

Rate Filing: On July 27, 2012, BG&E filed a request with the MPSC for electric
and gas distribution rate increases. Including updates during the rate
proceedings the electric and gas rate requests were $130.1 million and $45.6
million, respectively. The increases are premised on a 10.5% return on equity
(ROE). A decision is required in February 2013.


What could trigger a negative rating action:

--Lack of rate support for utility infrastructure investments or changes in the
commodity cost recovery provisions in Illinois, Pennsylvania or Baltimore.
--More aggressive growth strategy that increased business risk and/or leverage.
--Sustained nuclear outage.
--Increase in risk appetite as evidenced by change in hedging strategy at Exgen.

What could trigger a positive rating action:

--Other than an unexpected change in business strategy (i.e. additional sources
of regulated earnings and cash flow), positive rating action at parent is
unlikely at the present rating level.
--For Comed, a constructive decision in Comed's next FRP proceeding that
supports infrastructure investments and strengthens cash flow could lead to a
one-notch upgrade.

Fitch has affirmed the following ratings with a Stable Outlook:

Exelon Corp.
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Junior Subordinated Notes at 'BBB-'
--Commercial paper at 'F2';
--Short-term IDR at 'F2'.

Exelon Generation Co., LLC
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Commercial paper at 'F2';
--Short-term IDR at 'F2'.

PECO Energy Co.
--Issuer Default Rating (IDR) at 'BBB+';
--First mortgage bonds at 'A';
--Senior unsecured debt at 'A-';
--Preferred stock at 'BBB';
--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'.

Baltimore Gas and Electric Company
--Issuer Default Rating (IDR) at 'BBB;
--First mortgage bonds at 'A-';
--Senior unsecured debt at 'BBB+';
--Pollution Control Bonds at 'BBB+'
--Preferred stock to at 'BBB-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.

Fitch has affirmed the following ratings with a Positive Outlook:

Commonwealth Edison Company
--Issuer Default Rating (IDR) at 'BBB-;
--First mortgage bonds at 'BBB+';
--Senior unsecured debt at 'BBB';
--Preferred stock at 'BB+';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.

ComEd Financing Trust III
--Preferred stock at 'BB+'.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011)
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Utilities
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