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Rating Action:

Moody's affirms Exelon Generation Company, LLC's Baa2 senior unsecured rating and its P-2 commercial paper rating; rating outlook is stable

06 Mar 2017

New York, March 06, 2017 -- Moody's Investors Service, ("Moody's") today affirmed Exelon Generation Company, LLC's (ExGen) Baa2 senior unsecured rating and its P-2 commercial paper rating. ExGen's ratings reflect the favorable cash cost position of its nuclear fleet in a highly volatile, commodity-driven merchant power generation business. The rating outlook is stable.

Outlook Actions:

..Issuer: Exelon Generation Company, LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: Exelon Generation Company, LLC

.... Issuer Rating, Affirmed Baa2

....Preferred Shelf, Affirmed (P)Ba1

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Senior Unsecured Bank Credit Facility Affirmed Baa2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Maryland Economic Development Corporation

....Revenue Bonds, Affirmed Baa2

..Issuer: Montgomery County Industrial Dev Auth, PA

....Revenue Bonds, Affirmed Baa2

..Issuer: Pennsylvania Economic Dev. Fin. Auth.

....Revenue Bonds, Affirmed Baa2

..Issuer: Salem (County of) NJ, Pollution Ctrl Fin Auth

....Revenue Bonds, Affirmed Baa2

..Issuer: York County Industrial Development Auth., PA

....Revenue Bonds, Affirmed Baa2

RATINGS RATIONALE

"ExGen's ratio of cash flow to debt was weak in 2015 and 2016," said Toby Shea, Vice President -- Senior Credit Officer "but we see improvement in 2017 and 2018."

Further improvement could occur in 2019 and 2020 with the company's plan to reduce $3 billion of debt by 2020, the majority of which will occur in 2020. ExGen's parent, Exelon Corporation (Baa2 stable), views ExGen as an integral part of its business and has repeatedly declared its commitment to support and maintain ExGen's investment grade rating. However, ExGen's ratings reflect its stand-alone credit profile with no uplift related to parent support. In addition, Exelon will continue to rely on ExGen for upstream dividend payments over the next few years to meet its holding company interest expense and shareholder dividend requirements.

ExGen's business activities mainly involve the highly volatile and cyclical business of merchant power generation and retail energy supply. ExGen's generation assets have a strong cost position compared to its peers because it has a large fleet of low-cost nuclear generation facilities in good locations where the markets are designed with capacity payments and nuclear subsidy payments. The retail operation maximizes the value of its generation fleet by earning additional margin while reducing risk for both the generation and the retail operation. ExGen also owns a significant amount of gas and renewable assets, however they are not an integral part of ExGen's strategy and may be sold or acquired opportunistically.

ExGen's nuclear plants are located in the Mid-Atlantic states and Illinois. The current dominant driver affecting this market region is low natural gas prices, which is a result of technological advancements in the drilling of the Marcellus shale. The low gas prices in the region have made it very cheap to generate power using gas-fired power plants. Wholesale power prices have declined significantly in the region as a result, and could decline further as developers build more gas plants. The low power prices have forced out many coal plants and smaller nuclear plants. The larger nuclear plants, which comprise most of ExGen's fleet, have also suffered in terms of profitability but are still safe from early closure risk.

Nevertheless, ExGen owns four smaller nuclear plants, which are not economic in the current market environment. ExGen is in the process of acquiring a fifth one (Fitzpatrick) from Entergy Corporation (Baa3, rating under review for upgrade). ExGen has been actively seeking subsidies for these smaller plants, and in 2016, both New York and Illinois agreed to provide an annual subsidy of roughly $525 million. These subsidies, known as zero emission credits, are under legal challenges from non-nuclear generators. A successful challenge, with all else equal, could negatively affect ExGen's forecast future cash flow to debt in the order of 200 basis points.

For the past two years, ExGen's cash flow leverage, as measured by CFO Pre-WC/debt, has weakened, falling from 37% in 2014 to 31% in 2015 and to 28% in 2016. The declining CFO in 2016 was attributable to, among other things, a falling commodity price environment and additional commercial paper issued to fund back taxes associated with an adverse IRS tax ruling in 2016. We expect ExGen's CFO Pre-WC/debt to improve to the low-30% range in 2017 and 2018, due to a combination of nuclear subsidies and operating cost reductions. ExGen's CFO Pre-WC/debt is projected to improve in 2019 and 2020, as the bulk of its $3 billion debt reduction plan will not take place until 2019 and 2020.

Our standard CFO Pre-WC/debt calculation reflects the GAAP accounting treatment for nuclear fuel, which is capitalized and then depreciated over time. To ensure comparability with other generators who do not capitalize their fuel cost, we also calculate ExGen's nuclear fuel cost as if they are a cash expense. Using this approach, ExGen CFO Pre-WC to debt would be lowered to 28% in 2014, 22% in 2015 and 18% in 2016. Our CFO Pre-WC to debt projection would be in the mid-20% range in 2017 and 2018.

Liquidity

ExGen has a heavy demand for liquidity because it is a large volume user of commodity forwards and futures for its hedging strategy. Based on modelled results, we believe that the company has adequately demonstrated that it has sufficient liquidity to handle severe credit and market events.

The company's main source of liquidity is $5.8 billion of revolving credit facility and bilateral credit facilities. ExGen's cash holding is not an important source of liquidity as it only had about $290 million of unrestricted cash at year end 2016.

ExGen's liquidity demands are mostly from trade collaterals. Most of the $1.5 billion usage under the credit facilities at year end 2016 are used to issue letter of credits to support trade collaterals.

ExGen also had about $620 million of commercial paper outstanding at the end of 2016 but we anticipate ExGen to refinance it into long-term debt in the near future. The next scheduled debt maturity is in October 2017 when $700 million in senior unsecured notes come due.

ExGen's capital expenditure program also creates a significant demand for liquidity. According to Exelon's fourth quarter earnings call, the company forecast capital expenditure (base plus committed growth) to be about $1.9 billion in 2017. We, however, expect that the company will be able to fund these capital expenditures using cash flow from operations.

Outlook

Our outlook on ExGen is stable. Despite our expectation that the power markets will deteriorate further, we project ExGen's cash flow to debt metrics to improve enough for us to maintain the rating.

Factors that Could Lead to an Upgrade

ExGen's ratings could improve with substantially reducing debt leverage, to the point where CFO Pre-WC to debt rose to above the 40% range for a sustained period of time, or low 30% range counting nuclear fuel as a cash expense.

Factors that Could Lead to an Downgrade

Failure to maintain CFO-Pre WC/debt in the low 30% range for 2017, or low 20% range on a nuclear fuel adjusted basis, could result in downward pressure for the rating.

Despite its reputation as a competent nuclear operator, ExGen is nevertheless vulnerable to the development of industry-wide safety or operational issues.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. 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 or category/class of debt, this announcement provides certain 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 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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jim Hempstead
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

No Related Data.
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