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15 Sep 1999
MOODY'S UPGRADES THE SECURITIES OF COMMONWEALTH EDISON COMPANY'S TO Baa1 FROM Baa2. ALSO, ASSIGNS ISSUER RATING OF Baa3 TO UNICOM CORPORATION. RATING OUTLOOK IS STABLE
Moody's Investors Service has upgraded the long-term securities of Commonwealth Edison Company (ComEd) (Senior Secured Debt to Baa1 from Baa2) and its subsidiaries, and has assigned a first-time issuer rating of Baa3 to Unicom Corporation (Unicom), the parent company of ComEd. The rating action balances the improvement in ComEd's financial condition owing to asset sales and a better operating nuclear fleet against its transmission and distribution operational difficulties resulting from a weakened infrastructure in need of major reinvestment. The rating outlook for ComEd and Unicom is stable.
Ratings upgraded and removed from review include the first mortgage bonds and the secured pollution control bonds of ComEd, both upgraded to Baa1 from Baa2; the issuer rating, the senior unsecured notes, the unsecured debentures, and the unsecured pollution control bonds of ComEd, all upgraded to Baa2 from Baa3; the junior subordinated debt of ComEd upgraded to Baa3 from Ba1; the preferred stock and preference stock of ComEd, upgraded to "baa2" from "baa3"; the preferred stock of ComEd Financing I and ComEd Financing II, both upgraded to "baa2" from "baa3"; and a shelf registration for ComEd's issuance of senior secured debt, senior unsecured debt, and preference stock, upgraded to (P)Baa1, (P)Baa2, and (P)"baa2" from (P)Baa2, (P)Baa3, and (P)"baa3", respectively. Separately, ComEd's commercial paper is confirmed at Prime-2.
The rating action reflects, among other things, the earnings and cash flow benefits derived from the continued and sustained improvement within ComEd's nuclear program. For the first time since 1993, all of the ComEd's nuclear facilities are operating at or near 100% capacity. The fleet's year-to-date capacity factor exceeds 80%, a vast improvement over 1997 levels of approximately 50%. ComEd's ability to sustain these improved efficiencies within their nuclear organization remain a key factor to continued generation of healthy cash flows and recovery of stranded costs.
The rating action also reflects the likely completion of ComEd's sale of their fossil-fuel generating plants to Edison Mission Energy for approximately $4.8 billion. Recently, the Illinois Commerce Commission unanimously approved the sale and the transaction is expected to close during mid-November 1999.
Completion of the sale provides ComEd with a number of important, strategic objectives. For one, the substantial after-tax gain helps to virtually eliminate a $2.9 billion regulatory asset. Second, the cash proceeds from the sale provide the company with the necessary financial resources to invest additional capital into its nuclear program and to accelerate the injection of sorely needed capital into its transmission and distribution infrastructure. Investments in ComEd's transmission and distribution infrastructure have received heightened attention within the past few weeks as the fragile nature of this system coupled with severe weather in the mid-west caused numerous power outages in portions of ComEd's service territory. The rating action incorporates the possibility of additional financial compensation and consideration that may be required by ComEd to adequately address this acute concern.
Finally, the fossil-fuel asset sale also provides Unicom with the necessary capital to invest in future acquisitions of electric, gas, or water utilities outside of ComEd's service territory. Unicom's ability to execute this lower risk business strategy remains an important ingredient to replacing ComEd's regulated revenue stream, which gradually declines during the transition to competition.
The rating action incorporates the changes approved in the passage of Senate Bill 24, which amended a number of the key elements relating to the original electric restructuring bill. Although the amended bill hastens the timetable for direct access and moves forward the timing of an additional 5% residential rate reduction, the bill increases the Return on Equity (ROE) cap by 200 basis points allowing ComEd to earn an ROE of 700 basis points above the U.S. Treasury Bond Yield during 1999 through 2004. This change provides ComEd with additional earnings power and gives management additional flexibility to accelerate depreciation on its remaining generating assets costs during the transition period.
Moody's assignment of a first-time issuer rating of Baa3 to Unicom reflects the dependence on ComEd's dividends as a principle source of cash flow to support holding company obligations as well as the structural subordination that exists at the parent company. The rating incorporates management's lower risk business strategy that is focused on acquiring electric, gas or water utilities outside of ComEd's service territory, a moderate common dividend pay-out ratio, and an expectation that non-regulated activities will not represent a material component of Unicom's future earnings stream. In the near-term, Unicom's rating will remain heavily dependent upon the rating of ComEd.
The rating outlook for ComEd and Unicom is stable. Although the business strategy has low risk features and the improvement in ComEd's nuclear program, if sustained, can provide significant enhancements to cash flow, the rating remains somewhat constrained by a number of issues including the concentration of nuclear assets that will remain on ComEd's balance sheet. At year-end 1999, ComEd's book value for generating assets, which largely includes the nuclear fleet, will still be approximately $7.0 billion and the company will need to aggressively accelerate depreciation over the next five to seven years in order to have its generating assets more closely reflect market values.
In addition, ComEd will need to invest significant capital in the near-term to restore a fragile transmission and distribution system within its service territory. Although the company has the financial resources to aggressively address the problem without impacting credit quality, a much tougher battle for management will be their ability to change the poor perception of the company among its customers particularly since direct access begins in a few weeks. This issue also has potential strategic implications for Unicom's growth initiatives as it attempts to acquire delivery systems outside of the Chicago area.
Headquartered in Chicago, Illinois, ComEd is a vertically integrated utility and is a wholly owned subsidiary of Unicom.
No Related Data.
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