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Rating Action:

Moody's lowers Edison Mission's senior unsecured notes to B3; outlook negative

Global Credit Research - 29 Jun 2010

Approximately $6.1 Billion of Debt Securities and Bank Facilities Affected.

New York, June 29, 2010 -- Moody's Investors Service downgraded the long-term ratings of Edison Mission Energy (EME) and its subsidiary, Midwest Generation Company, LLC (MWG), including EME's senior unsecured notes to B3 from B2 , and EME's Corporate Family Rating (CFR) and Probability of Default Rating to B2 from B1. Moody's also affirmed EME's speculative grade liquidity rating at SGL-3. This rating action concludes the review for possible downgrade that commenced on April 6, 2010. The rating outlook for EME and MWG is negative.

The downgrade reflects our belief that EME's cash flow credit metrics will decline in future years due to continued high leverage and lower future sustainable cash flow generation due to weaker operating margins driven principally by low energy and capacity prices. While the company's electric generation output has remained fairly constant during the recession, operating margins have weakened and are expected to remain soft given the impact that the recession continues to have on wholesale electric demand in the Midwest and in PJM coupled with low natural gas prices. Also, EME's open, unhedged commercial strategy leaves the company's operating margin and related cash flows more exposed to the softer on-peak and off-peak power prices that exist today which are likely to remain for the foreseeable future.

The downgrade also reflects the substantial degree of uncertainty that persists concerning the manner in which EME will satisfy significant state and federal environmental requirements across its generation fleet, particularly given a more active US Environmental Protection Agency. These environmental challenges represent a large overhang issue for EME and MWG's credit quality as the possible outcomes are quite varied, with some potentially becoming quite adverse for the company.

Moody's acknowledges that the company's recent financial results and expected outlook for the rest of 2010 are indicative of a higher rating than the company's current B2 CFR. A driving force behind the recent financial performance is the fairly successful execution of its growth strategy principally centered around wind-generation development. Importantly, this strategy has benefitted EME's near-term cash flows through the receipt of tax benefits and tax grants from the federal government derived from these wind investments. Also, EME's business strategy continues to benefit from a fairly receptive bank project finance market which we calculate has provided approximately $342 million of permanent debt financing for EME's wind generation projects which in most cases has resulted in a return of capital for EME and an accompanying enhancement to liquidity. Maintaining access to this specialized bank market is an important element of the company's current financing plans. Notwithstanding these material near-term benefits from this strategy as well as the longer-term source of equity that may surface from some form of portfolio monetization, we question the sustainability of this strategy in light of the potential environmental challenges and the weakened commodity environment that exists today for the majority of the company's generation fleet.

The downgrade also acknowledges the relationship that EME has with its parent, Edison International (EIX: Baa2 senior unsecured; stable), and the parent's clear position of not providing any direct credit support for EME and its subsidiaries. Moody's views EIX's position as negative to EME's credit quality since it limits the prospect of any third party equity being available for EME which increases the likelihood that future capital requirements will be largely debt financed adding further to the company's high leverage. Notwithstanding EIX management's view towards providing direct support at EME, we believe that EIX views EME as an important holding that is critical to its broader diversified business strategy particularly given the tax benefits that EME's wind investments have provided to the consolidated corporation. That said, today's rating action, which results in a very wide (6-notch) rating differential between EIX's senior unsecured rating and EME's CFR, further substantiates the degree of separateness that we believe exists between EIX and EME.

Moody's downgrade at MWG is prompted by the close interrelationship that exists between EME and MWG through the Powerton and Joliet sale leaseback agreement and by MWG's dominant position as the primary source of earnings and cash flow for EME.

EME's speculative grade liquidity rating of SGL-3 reflects Moody's expectation for the maintenance of an adequate liquidity position for the next four quarters. The SGL-3 reflects our view that the approximate $1 billion of balance sheet cash at March 31, 2010 will fund any negative free cash flow generated by EME. At March 31, 2010, EME had $465 million of availability under its $564 million revolving credit facility (reflects a $36 million reduction related to a Lehman commitment), and Midwest Generation had $497 million of availability under its $500 million revolving credit facility. Both facilities do not mature until June 2012 while EME's next bullet bond maturity of $500 million occurs in June 2013. Extension of these bank credit facilities are important milestones for EME. Both credit facilities have financial covenants which EME and MWG should be able to maintain over the next twelve months. The EME revolver requires recourse debt to total capitalization not exceed 75% and requires interest coverage (as defined in the credit agreement) be greater than 1.20x. At March 31, 2010, EME's recourse debt to total capitalization was 53% and its interest coverage ratio was 1.99x. The MWG revolver requires debt to total capitalization not to exceed 60%. At March 31, 2010, MWG's total debt to total capitalization was 16%. In addition to the covenants described above, there is a distribution test in the financing documents for the Homer City lease which can prohibit distributions from being paid to EME. Specifically, in order for EME Homer City to pay the equity portion of the lease rent, EME Homer City is required to meet historical and projected senior rent service coverage ratios of 1.70x. At 12/31/09 and 03/31/10, the senior rent service coverage ratio was 2.96x and 3.10x, respectively. To the extent that cash is trapped at EME Homer City, covenant compliance under the above-referenced EME revolver will become tighter. Moody's observes that many of the company's assets are pledged to creditors limiting the near-term potential for additional liquidity from asset sales.

The negative rating outlook for EME and MWG reflects our belief that weaker future cash flow generation and the likelihood that under most reasonable scenarios, existing high leverage is likely to further increase placing downward pressure on financial metrics going forward. The negative outlook also acknowledges the uncertainty surrounding the environmental challenges for the company. Even in the best case scenario, where EME elects to fund environmental requirements from internal sources with lower capital cost alternatives, we believe debt levels are still likely to increase on a consolidated basis to fund wind related growth investments.

The last rating action on EME and MWG occurred on April 6, 2010 when EME and MWG's ratings were placed under review for possible downgrade.

The principal methodology used in rating EME and MWG 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.

Downgrades:

..Issuer: Edison Mission Energy

....Probability of Default Rating, Downgraded to B2 from B1

....Corporate Family Rating, Downgraded to B2 from B1

....Senior Secured Bank Credit Facility, Downgraded to B2 from B1

....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 from B2

..Issuer: Midwest Generation, LLC

....Senior Secured Bank Credit Facility, Downgraded to Ba2 from Ba1

....Senior Secured Pass-Through, Downgraded to Ba2 from Ba1

Upgrades:

..Issuer: Midwest Generation, LLC

....Senior Secured Pass-Through, Upgraded to LGD2, 12% from LGD2, 13%

Outlook Actions:

..Issuer: Edison Mission Energy

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

..Issuer: Midwest Generation, LLC

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

Headquartered in Irvine, California, EME is an unregulated generation company and an indirect wholly-owned subsidiary of EIX. At December 31, 2009, EME had an ownership or leased interests of 10,072 megawatts (MW) of electric capacity, of which MWG owned 5,776 MW of base load and mid-merit coal-fired assets and oil/gas peaking assets in the Midwest and EME Homer City, had a leasehold interest in the Homer City Generation Station, a 1,884 MW coal-fired base load plant in Western PA.

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Managing Director
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers Edison Mission's senior unsecured notes to B3; outlook negative
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