OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to Exelon Corp.'s (EXC) new $1.8 billion issue of notes to be offered in multiple tranches maturing in five, 10 and 30 years. Proceeds will be used to retire short-term debt incurred to complete the funding of the recently closed Pepco Holdings LLC acquisition and 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 Rating Outlook is Stable.

KEY RATING DRIVERS

Growing Utility Earnings Contribution: The recent acquisition of Pepco Holdings LLC furthers EXC's goal of increasing regulated earnings and lowering business risk. Post-merger regulated earnings are expected to account for roughly 65% of consolidated earnings from its six regulated utilities compared to an estimated 55% - 60% without the acquisition. Even without the PHI acquisition the regulated earnings contribution was expected to increase due to the significant amount of planned utility investment, particularly at Commonwealth Edison Co (ComEd).

Increased leverage: The increase in regulated earnings was accompanied by an increase in leverage to fund the Pepco Holdings LLC acquisition. Fitch estimates adjusted debt-to-EBITDAR will be approximately 4.25x - 4.5x in the first full year after the merger compared to about 3.0x - 3.5x on a stand-alone basis.

Competitive Generation Business: The ratings also consider the more volatile earnings and cash flow contribution of EXC's competitive generation business. The operating environment is challenging with sluggish demand and low natural gas and power prices expected by Fitch to persist for several years. Partly offsetting the low energy prices is the recent rise in forward capacity prices in the PJM interconnection where the majority of EXC's merchant generating assets are located. The business is well capitalized and employs a three-year hedging strategy that moderates commodity exposure and the associated volatility.

Growing Utility Investments: Going forward, the majority of capital investment is allocated to EXC's utility subsidiaries, which should provide a more stable earnings base. The majority of the regulated investments are at ComEd, its largest utility, which operates with a constructive formula rate plan that provides timely recovery of invested capital.

Regulatory Concessions: To gain merger approval, EXC agreed to a number of rate concessions in each of PHI's four regulatory jurisdictions aggregating an estimated $350 million - $400 million, including customer rate credits and deferral of rate increases and funding for a variety of customer investment funds largely related to energy efficiency, renewable energy programs, and low-income customer programs

Ring Fencing: Each of the utility commissions imposed several ring-fencing provisions to protect the Pepco Holdings LLC utilities, but none are considered to be onerous or likely to impair EXC's credit quality.

The requirements include:
--Potomac Electric Power Co. (Pepco), Delmarva Power & Light Co. (DPL) and Atlantic City Electric Co. (ACE) maintaining a rolling 48% equity ratio (no other dividend restrictions)
--Creation of a bankruptcy-remote special purpose entity (SPE) to hold 100% of PHI equity
--Maintenance of separate books and records
--Pepco, DPL and ACE will maintain separate debt
--The Board of Directors of the SPE will have four directors, one of which will be independent
--The seven-member PHI board will include one director from each of PHI's utility subsidiaries

KEY ASSUMPTIONS
--Relatively flat load growth
--Each of the PHI subsidiaries to file rate cases in 2016 and every 12-15 months thereafter
--Commonwealth Edison Co. formula rate plan updated annually
--$1 billion in cash from the remarketing of junior subordinated debt received in 2017
--Henry Hub Natural gas prices as of Dec. 31, 2015
--Nihub and PJM forward power prices as of Dec. 31, 2015

RATING SENSITIVITIES
Positive Rating Action: An upgrade seems unlikely over the next few years given the rise in leverage associated with the recent acquisition, but could occur if on a sustained basis debt/EBITDAR is reduced below 3.5x while lease-adjusted FFO leverage is below 4.25x.

Negative: Ratings could be lowered if lease adjusted FFO leverage exceeds 4.5x on a sustained basis. A renewed emphasis on non-regulated investments could also have an adverse impact on ratings.

LIQUIDITY

Cash flow from operations, commercial paper (CP) borrowings and committed bank credit facilities provide ample liquidity. EXC's syndicated credit facilities aggregate $8 billion (excluding minority and community banks) and bilateral agreements an additional $400 million. Pepco Holdings LLC has an additional $1.5 billion facility. The syndicated facilities support CP programs throughout the EXC organization.