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Rating Action:

Moody's affirms Commonwealth Edison's A3 senior unsecured ratings

03 Mar 2020

Approximately $9.7 billion of debt affected

New York, March 03, 2020 -- Moody's Investors Service, ("Moody's") today affirmed Commonwealth Edison Company's (ComEd) senior unsecured rating of A3 and senior secured rating of A1. The rating outlook is stable. See below for a list of rating actions.

"ComEd's A3 rating is affirmed despite the falling cash flows," said Vice President - Senior Credit Officer Toby Shea, "The company has a strong business profile because of the formulaic rate design in Illinois. Moreover, spending for energy efficiency creates a drag on operating cash flows, but we think of it as more akin to capital expenditures."

Affirmations:

..Issuer: ComEd Financing III

....Pref. Stock Preferred Stock, Affirmed Baa2

..Issuer: Commonwealth Edison Company

....Commercial Paper, Affirmed P-2

....Issuer Rating, Affirmed A3

....Senior Secured First Mortgage Bonds, Affirmed A1

....Underlying Senior Secured First Mortgage Bonds, Affirmed A1

....Senior Secured Regular Bond/Debenture, Affirmed A1

....Senior Unsecured Revolving Credit Facility, Affirmed A3

..Issuer: ComEd Financing III

....Outlook, Remains Stable

..Issuer: Commonwealth Edison Company

....Outlook, Remains Stable

RATINGS RATIONALE

ComEd is one of the largest regulated electric transmission and distribution (T&D) companies in the US, serving the greater Chicago area with about 4.1 million customers. The T&D business has an inherently low business risk profile. Because ComEd operates under a formulaic rate regulatory construct in Illinois, its business risk is lower than most of the T&D utilities in the US. Moody's views formulaic rate regulation to be a significant credit positive because it provides a high level of regulatory transparency and cash flow predictability.

The strong business risk profile created by formula rate regulation is, however, counterbalanced by ComEd's weak cash flow to debt ratios. Moody's expects the company's ratio of CFO pre-WC to debt to be in the 13% to 15% range over the next three years, which is extremely low for the A3 senior unsecured rating. ComEd's low cash flows are partly driven by a low authorized return on equity (ROE) in Illinois (8.91% for 2020) and a high level of energy efficiency spending, each negatively affecting CFO pre-WC to debt ratio by about 300 bp. While ComEd targets 100% funded status on its pension liability overtime and adjusts contributions accordingly, it currently has $1.5B in underfunded liability based on Moody's standard adjustments, which lowers the ratio of CFO pre-WC to debt by another 130 bps.

Rate-base like treatment of energy efficiency spending under Illinois law could also be viewed as being somewhat akin to capital expenditure investments, rather than operating expenses as it is currently classified under US GAAP. In Illinois, investor-owned electric utilities, under the Future Energy Jobs Act (FEJA) of 2017, are allowed to accumulate, amortize, and earn a return on energy efficiency spending, just like rate-based assets that involve capital spending. Reallocating energy efficiency spending from cash flows from operations to cash flows from investing activities results in an approximately 300 basis point increase to the ratio of cash flow to debt.

The low interest rate environment could worsen ComEd's CFO pre-WC to debt ratio because, as a part of the formula rate construct, the authorized ROE in Illinois is calculated to be 580 bp above the 30-year treasury rate. A lower interest rate may also worsen ComEd's underfunded pension liability because a lower discount rate will be applied to the net present value calculation of its future pension obligations.

ComEd generally scores well with its environmental, social, and governance (ESG) risks, though there is one negative development. In October 2019, news reports indicated the US Attorney for the Northern District is investigating payments between ComEd lobbyists and state political operatives and has subpoenaed information related to ComEd's lobbying activities in Illinois. Subsequently, the CEO of Exelon's regulated electric utilities abruptly retired in the same month, a negative sign from a governance perspective. These events are credit negative, but the extent of credit ramification is unclear at this time because we have a minimal amount of information about the investigation or how it implicates ComEd.

Outlook

The stable outlook reflects the transparent and predictable cash flows under the formula rate plan (FRP) and our view that ComEd will fund capital investments with a balanced mix of debt and equity. The stable outlook also reflects the expectation that ComEd will generate low but sufficient financial ratios.

Factors that could lead to an upgrade to ComEd

An upgrade ComEd if the FRP is established permanently and its CFO pre-WC to debt ratio rises to above 20% on a sustained basis, or 23% assuming energy efficiency spending is reallocated to capital expenditures.

Factors that could lead to a downgrade to ComEd

A downgrade ComEd if it becomes evident that the FRP will not be extended beyond 2022 or its CFO pre-WC to debt ratio falls below 13%, or 16% with the energy efficiency spending reallocated as capital expenditures.

Company Profile

ComEd is a fully regulated electric transmission and distribution company with a service territory in northern Illinois, including the City of Chicago. Its distribution assets are regulated by the Illinois Commerce Commission and its transmission assets are regulated by the Federal Energy Regulatory Commission.

ComEd's ultimate parent company is Exelon Corporation (Exelon, Baa2 stable), one of the largest utility holding companies in the US with a market capitalization of about $46 billion.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Toby Shea
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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