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Rating Action:

Moody's downgrades Exelon and Exelon Generation; outlook negative

Global Credit Research - 12 Mar 2012

Approximately $8.7 billion of Debt Securities and Bank Credit Facilities Affected

New York, March 12, 2012 -- Moody's Investors Service downgraded the long-term ratings of Exelon Corporation (Exelon: senior unsecured to Baa2 from Baa1) and its primary subsidiary, Exelon Generation Company, LLC (ExGen: senior unsecured to Baa1from A3) following today's closing of Exelon's merger with Constellation Energy Group, Inc. (CEG). Concurrently, Moody's affirmed the short-term rating for commercial paper at Prime-2 for Exelon and ExGen. This rating action concludes the rating review which initiated on April 28, 2011 when the merger was announced. The rating outlook for Exelon and ExGen is negative.

"Today's rating action factors in Exelon's expansion of its unregulated business platform through the merger with financially weaker CEG," said A. J. Sabatelle, Senior Vice President at Moody's. "While the merger benefits are notable, particularly from a commercial and liquidity standpoint, the transaction increases the potential for earnings and cash flow volatility during the current down commodity cycle". Added Sabatelle, "Of particular concern to Moody's is the manner in which the expected negative free cash flow will be financed in light of Exelon's sizeable common dividend and capital spending program."

RATINGS RATIONALE

The rating downgrade for Exelon and ExGen reflects our expectation for a decline in financial metrics following the merger driven in part by sustained low power prices. While the rating action recognizes the strategic benefits of linking a company that is long on generation with a company that is long on customer load, Moody's believes that the combined entity will still be exposed to earnings and cash flow volatility due to the large unregulated business platform whose financial performance is influenced by market determined commodity pricing levels. Moreover, the transaction, in our opinion, increases the likelihood that future growth opportunities at Exelon will center around the unregulated power space given the company's position as the largest unregulated generation company in terms of production and the largest retail energy supplier in North America. In that vein, we believe that it will be very challenging for Exelon in the future to easily transform the company's business mix into one that is materially more balanced across regulated operations given the sheer size of the existing unregulated footprint. For these reasons, we believe the merged company's credit metrics may need to be stronger than similarly rated peers while maintaining access to amply sized liquidity sources.

The rating action also considers the likelihood that Exelon will be negative free cash flow for the next several years, a change from recent historical results, due to the current outlook for power prices coupled with sizeable capital requirements for growth investments and maintenance of the common dividend. Based on SEC filings (including CEG's), Exelon's consolidated capital budget for 2012 could exceed $6.6 billion, a more than $1 billion increase above 2011 levels. Some of this incremental increase is due to planned investments associated with its nuclear fleet "uprate" program which, if fully implemented, could add up to 1,300 megawatts of incremental nuclear capacity, as well as investments in solar and wind resources. Also, Exelon has a sizeable annual common dividend requirement of approximately $1.8 billion. In light of the relative size of Exelon's regulated operations, the capital requirements at each of the regulated utilities, and specific regulatory limits imposed on dividends, we anticipate that the majority of the common dividend may be funded by the more volatile unregulated business platform under most scenarios examined.

Balancing these rating concerns are the expected benefits that this merger should produce as the linkage of Exelon's generation with CEG's retail business should considerably reduce consolidated liquidity requirements and enable the company to secure somewhat better and more sustainable margins for its electric output given the stickiness of customer load. We further recognize that completing the transaction enables Exelon gain access to end-use customers within the retail supply chain at a much faster pace and in a more efficient way than it could have otherwise achieved from building it internally. While these factors add support for the merger, we observe that certain of the businesses being added have little to do with matching generation with load but could impact the potential capital and liquidity requirements of the firm and increase the associated volatility with operating a commodity business. To that end, we note the $245 million settlement announced on March 9th by CEG and FERC relating to alleged market manipulation as a stark reminder of the pitfalls of operating a commodity business.

As part of the merger agreement, Exelon has assumed all of CEG's obligations, including CEG's $1.8 billion of senior Fixed-Rate Notes, its $1.5 billion syndicated bank revolver, and the $450 million of Series A junior subordinated debentures. In light of Exelon's assumption of all CEG obligations, Moody's has upgraded the long-term rating one notch (to Baa2 from Baa3) on three series of CEG senior unsecured debt (described below) to be in-line with the senior unsecured rating at Exelon. Similarly, the rating on a $1.5 billion senior unsecured syndicated bank revolver was raised to Baa2 from Baa3, and the rating on the Series A junior subordinated debentures to Baa3 from Ba1.

The ratings and outlook for Exelon's regulated utilities, Commonwealth Edison Company (ComEd: Baa2 sr unsecured; stable ) and PECO Energy Company (A3: Issuer Rating; stable outlook) are unaffected by today's downgrade at Exelon and ExGen reflecting in both cases an expectation for strong credit metrics for the respective rating category at these utilities and a view that the boards of both companies will continue to follow a responsible dividend policy that first considers the capital and infrastructure needs of each utility. For more information, please review the most recent Credit Opinion on moodys.com.

The rating affirmation of Exelon and ExGen's Prime-2 short-term rating for commercial paper considers the substantial liquidity arrangements that will remain at the company which factor in the expected reduction in future collateral requirements. Moody's understands that the consolidated multi-year liquidity arrangements at Exelon are anticipated to decline in the near-term by $2.7 billion to $9.8 billion, of which $2.2 billion will be dedicated for the regulated utilities under separate syndicated arrangements. Separately, commercial paper investors at Exelon should be aware of the negative rating outlook that accompanies the holding company's Baa2 senior unsecured rating. To the extent that Exelon's Baa2 long-term rating was placed under review for possible downgrade, the probability of a downgrade of Exelon's commercial paper to Prime-3 would increase.

Exelon's rating outlook is negative reflecting the likelihood of negative free cash over the next several years due to the expected maintenance of the company's sizeable common dividend, the size of capital investment program across the company, and the prospects for weak margins and operating cash flow caused by low power prices. The negative rating outlook also considers the sizeable unregulated platform that the merger provides which increases the likelihood that future acquisitions that augment this platform will be pursued. The negative outlook further consider the degree to which Exelon chooses to implement various levers that we believe exist over the next two years to address the expected negative free cash flow at the corporation.

In light of the negative rating outlook, Exelon's rating is not likely to be upgraded in the near-term. The rating outlook could be stabilized once greater clarity is known about the company's commercial strategy around retail including the implication for hedging forward in light of today's weak commodity cycle. An important factor to the future direction of the rating will be the manner in which the company finances its expected negative free cash flow.

The rating is likely to be downgraded if Exelon chooses to finance the majority of its negative free cash with substantial incremental debt thereby permanently weakening credit metrics during this down cycle. Of particular concern to Moody's is the reliance on unregulated operations for the ongoing payment of a sizeable dividend, particularly given the firm's substantial capital spending program. Moreover, should the consolidated credit profile decline such that cash flow to debt is below 25%, retained cash flow to debt below 15%, and cash flow interest coverage approaches 5.5x, downward rating pressure could surface.

Affirmations:

..Issuer: Exelon Corporation

.Short-Term Rating for Commercial Paper at Prime-2

..Issuer: Exelon Generation Company, LLC

.Short-Term Rating for Commercial Paper at Prime-2

Downgrades:

..Issuer: Exelon Corporation

.... Senior Unsecured and Issuer Rating, Downgraded to Baa2 from Baa1

....Multiple Seniority Shelf, Downgraded to a range of (P)Ba1 to (P)Baa2 from a range of (P)Baa3 to (P)Baa1

..Issuer: Exelon Generation Company, LLC

....Senior Unsecured and Issuer Rating, Downgraded to Baa1 from A3

....Multiple Seniority Shelf, Downgraded to (P)Baa3, (P)Baa1 from (P)Baa2, (P)A3

..Issuer: Pennsylvania Economic Dev. Fin. Auth. (for the benefit of Exelon Generation Company, LLC)

....Senior Unsecured Revenue Bonds, Downgraded to Baa1 from A3

..Issuer: Exelon Capital Trust I

....Preferred Stock Shelf, Downgraded to (P)Baa3 from (P)Baa2

..Issuer: Exelon Capital Trust II

....Preferred Stock Shelf, Downgraded to (P)Baa3 from (P)Baa2

..Issuer: Exelon Capital Trust III

....Preferred Stock Shelf, Downgraded to (P)Baa3 from (P)Baa2

Upgrades:

..Issuer: Constellation Energy Group, Inc. (Assumed by Exelon Corporation)

.4.55% Senior Unsecured Notes due 2015, Upgraded to Baa2 from Baa3

.7.0% Senior Unsecured Notes due 2020, Upgraded to Baa2 from Baa3

.7.60% Senior Unsecured Notes due 2032, Upgraded to Baa2 from Baa3

.Bank Credit Facility, Upgraded to Baa2 from Baa3

.8.625% Senior Unsecured Notes due 2063, Upgraded to Baa2 from Baa3

.MTN program rating, Upgraded to (P)Baa2 from (P)Baa3

.Short-Term Rating for Commercial Paper, Upgraded to Prime-2 from Prime-3

The merger documents contemplate that upon merger close CEG's corporate existence will cease. As such, Moody's will withdraw CEG's (P)Baa2 MTN program rating and its Prime-2 short-term rating for commercial paper as these programs have terminated.

Outlook Changes:

..Issuer: Exelon Corporation

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Exelon Generation Company, LLC

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Exelon Capital Trust I

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Exelon Capital Trust II

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Exelon Capital Trust III

....Outlook, Changed To Negative From Rating Under Review

The principal methodology used in these ratings was Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although these credit ratings have been issued in a non-EU country which has not been recognized as endorsable at this date, the credit ratings are deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Exelon and Exelon Generation; outlook negative
No Related Data.

 

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