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Global Credit Research - 27 Sep 2010
Approximately $900 million of debt securities affected
New York, September 27, 2010 -- Moody's Investors Service assigned a rating of A3 to Exelon Generation
Company, LLC (ExGen) planned issuance of senior unsecured notes.
Concurrent with this rating assignment, Moody's affirmed all
of the ratings of ExGen and its parent company, Exelon Corporation
(Exelon) and maintained the stable rating outlook for ExGen and Exelon.
Ratings affirmed include all ExGen senior unsecured debt, ExGen's
Issuer Rating and its senior unsecured bank credit facility at A3;
ExGen's short-term rating at Prime-2, and the
rating for ExGen's shelf registration for the issuance of all senior
unsecured debt and all preferred stock at (P)A3 and (P)Baa2, respectively.
Moody's also affirmed the ratings on all Exelon senior unsecured
debt, Exelon's Issuer Rating and its senior unsecured bank
credit facility at Baa1; Exelon's short-term rating
at Prime-2, and the rating for Exelon's shelf registration
for the issuance of all senior unsecured debt, all subordinated
debt and all preferred stock at (P)Baa1, (P)Baa2 and (P)Baa3,
Proceeds from the financing will be used to fund a portion of the acquisition
of John Deere Renewables (JDR), which owns and operates 735 megawatts
(MW) of wind operating assets as well as project development assets,
including three wind generation projects totaling 230 MW in advanced development
in Michigan. The purchase price for the acquisition is $860
million with up to an additional $40 million payable upon commencement
of construction of the three Michigan projects.
The A3 rating assignment for the new notes and the related rating affirmation
at ExGen reflects the company's historical strong credit metrics
and factors in the financial and business risks associated with managing
a commodity business. ExGen's rating further considers the degree
of holding company debt that exists at Exelon, its parent,
as most of the company's holding company debt continues to gradually
be refinanced at ExGen. The rating recognizes the strong competitive
position of ExGen's assets, the bulk of which are nuclear generation,
which are among the first units dispatched in most wholesale markets.
The rating acknowledges ExGen's strong operating performance that helps
to underpin the company's financial metrics, as well as the company's
fairly disciplined hedging strategy. This strong competitive advantage
of its generation fleet coupled with the company's relatively conservative
capital structure currently positions ExGen reasonably well from a rating
perspective relative to peers.
The Baa1 rating affirmation for Exelon reflects strong consolidated credit
metrics, driven in large part by ExGen's financial performance
and the generally predictable cash flows at its T&D subsidiaries,
while factoring in the degree of structural subordination that exists
at the holding company. At year-end 2009 and for the last
12 months ending June 30, 2010, Moody's calculates the ratio
of Exelon's cash flow (CFO pre-W/C) to debt at nearly 36%
and 32.6%, respectively, and its cash flow coverage
of interest expense at 7.1x and 6.3x, respectively.
These financial metrics, which incorporate all of Moody's standard
adjustments, are expected to be near 30% and 6x in the intermediate
term, positioning the company reasonably well within the Baa1 rating
Moody's views several aspects of the JDR acquisition favorably from
a credit perspective, including the operating history, the
level and degree of contracted cash flow within the portfolio, and
the expected incremental earnings and cash flow contribution, including
the related tax benefits. Notwithstanding these favorable considerations,
we observe that the 100% debt financing approach being used by
Exelon to complete the acquisition will weaken credit metrics at ExGen
and Exelon. Moreover, we observe that, beginning in
2012, financial performance is expected to decline relative to recent
historical results due principally to lower operating margins from its
unregulated power business due to an expected continuation of relatively
weak power prices. While we believe that Exelon's financial
metrics should remain at the lower end of the range for the respective
rating during this period, we believe that the financing approach
associated with this acquisition has reduced some of the financing flexibility
that currently supports the Exelon and ExGen rating. On a prospective
basis, the company's ability to maintain these ratings during
this low commodity cycle will depend upon the degree to which low operating
margins for electricity persists, the company's dividend policy,
and the manner in which future capital programs are financed, including
those related to nuclear up-rates.
The acquisition is subject to receipt of federal and state regulatory
approvals and is expected to close sometime during fourth quarter 2010.
The financing will have a 10-year maturity and a 31-year
maturity. While the bond financing will close several months in
advance of the expected acquisition close, if the acquisition is
not consummated prior to March 31, 2011, the indenture will
have a special mandatory redemption on the 10-year tranche of the
bonds requiring ExGen to redeem the 10-year tranche at par plus
101% premium and pay any accrued interest. We observe that
ExGen is not required to escrow the net proceeds of the bond offering
prior to acquisition close.
The rating outlook for ExGen is stable, reflecting its continued
strong financial performance driven by its position as a large,
multi-region, low-cost wholesale generator of electricity.
The stable outlook incorporates our belief that ExGen will focus on executing
existing internal growth opportunities and that the generation fleet will
continue to meet or exceed historical operating performance. The
stable rating outlook assumes that Exelon management will remain disciplined
in any subsequent external growth initiatives financing them in a manner
that is attentive to credit quality.
In light of the near-term prospects for wholesale power prices,
the rating is not likely to be upgraded without a substantial de-levering
of the balance sheet.
A substantial increase in leverage, a sudden shift in management's
view toward returning capital to shareholders, poor operating plant
performance for an extended period resulting in significantly higher replacement
power costs and O&M expenses, or an extended period of weak
energy prices could negatively impact ExGen's ratings, particularly
if ExGen's cash flow to debt falls below 40%, ExGen's retained
cash flow to debt drops below 25% and ExGen's cash flow interest
coverage falls below 7.0x for a sustained period. Moreover,
given ExGen's annual dividend requirements, to the extent that power
prices remain weak in the future and the company finances the negative
free cash flow associated with completing the nuclear up-rate program
with incremental debt, the rating would likely come under pressure.
Given the reliance that Exelon has on ExGen for earnings and cash flow
and the company's reliance on the commodities business as the primary
driver of future results, any rating change at ExGen is likely to
result in a similar rating change at Exelon.
..Issuer: Exelon Generation Company, LLC
....Senior Unsecured Regular Bond/Debenture,
The last rating action on ExGen and Exelon occurred on July 23,
2009 when the ratings were confirmed with a stable outlook.
The principal methodology used in rating ExGen and Exelon was Rating Methodology:
Unregulated Utilities and Power Companies, published in August 2009
and available on www.moodys.com in the in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
ExGen is one of the largest competitive electric generation companies
in the US, as measured by owned and controlled MW. At December
31, 2009, ExGen owned generation assets with a net capacity
of 24,850 MW, including 17,009 MW of nuclear capacity.
In addition, ExGen controlled another 6,153 MW of capacity
through long-term contracts.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns A3 to Exelon Generation's senior notes; outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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