OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Exelon Corp.'s (EXC) new issue of senior notes to be offered in multiple tranches. Proceeds will be used for to fund a portion of EXC's pending acquisition of Pepco Holdings, Inc. (PHI), with any remaining balance to be used 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 new issues are placed on Rating Watch Negative, as are EXC's outstanding securities.

The Negative Watch for EXC reflects the increased leverage that results from its pending acquisition of PHI (Fitch Issuer Default Rating [IDR] of 'BBB'). The higher leverage is a product of the acquisition financing plan and the consolidation of the more levered PHI. The rise in leverage is mitigated in part by an increase in regulated earnings.

KEY RATING DRIVERS

Pending Merger: The proposed PHI acquisition increases consolidated leverage compared to EXC's stand-alone financial position. The additional leverage reflects the financing plan which includes a significant debt component and the consolidation of the higher-levered PHI. The financing plan for the roughly \$7.2 billion acquisition includes \$3.5 billion of new EXC corporate debt, \$1 billion from Exgen asset sales (completed in 2014), \$1.7 billion of common equity, and \$1 billion of mandatorily convertible debt (issued in 2014). Under Fitch criteria the convertible debt issued by EXC, in the form of equity units, receives no equity credit. In addition EXC will assume approximately \$5.8 billion of PHI consolidated debt. The merger is expected to close in the third quarter of 2015.
Utility Earnings Contribution: EXC's ratings benefit from the predictable and growing earnings and cash flow contributions of its three regulated utilities. The utilities accounted for approximately 53% of 2014 adjusted operating income growing to an estimated 60% (excluding the pending PHI acquisition) by 2019. The utilities have sound and/or improving credit profiles, limited commodity price risk and relatively predictable earnings, balancing the more volatile earnings and cash flow of the commodity-sensitive competitive generation business.
Competitive Generation Business: The operating environment for EXC's competitive generation business is expected to remain challenging with sluggish demand and low natural gas and power prices likely to persist for several years. Favorably, the business is well capitalized and its credit profile has stabilized during a low point in the commodity cycle. In addition, management employs a three-year hedging strategy that moderates earnings and cash flow volatility.
Sound Financial Position: Despite the reduced earnings contribution of its competitive generation business, EXC has maintained a solid credit profile. Fitch estimates EXC's adjusted ratio of debt/EBITDAR and funds from operations (FFO)-adjusted leverage will average approximately 3.5x and 3.0x, respectively, over the next two years and FFO fixed-charge coverage at about 6x, all of which supports existing ratings. Pro forma for the PHI acquisition, 2015 debt/EBITDAR, FFO-adjusted leverage, and FFO fixed-charge coverage are estimated to be approximately 4.2x, 3.5x and 5x, respectively. The pro forma adjustments do not reflect the customer credits related to the proposed merger, which will weaken the credit metrics of PHI and its subsidiaries in the near term.
KEY ASSUMPTIONS

--Commonwealth Edison Co. formula rate plan updated annually;
--PECO Energy Co. electric distribution rate increase effective Jan. 1, 2016;
--On-going rate support for capital investments;
--Existing regulatory recovery mechanisms remain in place;
--No change to pro rata three-year hedging strategy;
--Forward natural gas and power prices as of Dec. 31, 2014.

RATING SENSITIVITIES

Positive Rating Action: Positive rating action is not likely at the present rating level given the meaningful earnings and cash flow contribution from Exelon's competitive generation business and the additional merger-related leverage. However, ratings could be affirmed if post-acquisition debt/EBITDAR remains at or below 3.6x and FFO-adjusted leverage at or below 4.5x.
Negative Rating Action: Ratings could be lowered if post-acquisition debt EBITDAR exceeds 3.6x and FFO-adjusted leverage exceeds 4.5x on a sustained basis.
Onerous regulatory concessions or a renewed emphasis on non-regulated investments could also have an adverse effect on ratings.
Ratings could also be lowered if the ratings of EXC's merchant generation business, Exgen, fall below 'BBB'.
LIQUIDITY

EXC has ample liquidity. EXC and each of its operating subsidiaries maintain committed bank credit facilities aggregating \$8.5 billion. The credit facilities support commercial paper borrowings and letters of credit. As of March 31, 2015, consolidated cash aggregated \$1.8 billion.