Approximately $ 17 Billion of Debt Securities Affected.
New York, April 28, 2011 -- Moody's Investors Service placed the long-term ratings of Exelon
Corporation (EXC: Baa1 senior unsecured) and Exelon Generation Company,
LLC (ExGen: A3 senior unsecured) under review for possible downgrade
following today's announced plan to merge with Constellation Energy
Group, Inc. (CEG: Baa3 senior unsecured) in a stock-for-stock
transaction. Concurrent with this rating action, Moody's
affirmed all of the ratings of CEG and changed CEG's rating outlook
to positive from stable. EXC and ExGen's short-term
ratings for commercial paper are affirmed at Prime-2, while
CEG's short-term rating for commercial paper is affirmed
at Prime-3.
At the same time, Moody's affirmed all of the ratings for
EXC's regulated subsidiaries and their subsidiaries and maintained
the stable rating outlook at Commonwealth Edison Company (CWE: Baa3
senior unsecured), PECO Energy Company (PECO: A3 senior unsecured),
ComEd Financing III (Ba1 subordinated debt) and PECO Energy Capital Trust
III (Baa1 subordinated debt). Moody's also affirmed all of
the ratings of Baltimore Gas and Electric Company (BGE: Baa2 senior
unsecured) and subsidiary, BGE Capital Trust II (Baa3 subordinated
debt). The rating outlook for BGE and BGE Capital Trust II is positive.
"The rating review for EXC and ExGen reflects the pending acquisition
of a lower-rated entity and the expected increase in leverage,
particularly off-balance sheet debt, at a time when electric
margins are compressed," said Moody's Senior Vice President
A.J. Sabatelle.
The review for possible downgrade for EXC and ExGen considers our expectation
for a decline in consolidated financial metrics following the merger driven
in part by reduced power prices. The review also considers the
substantial increase in off-balance leverage that accompanies this
merger due in large part to the addition of third party guarantees and
other potential calls on capital, including tolling obligations.
Moody's estimates that off-balance obligations for the combined
EXC could nearly triple from the current level at EXC.
While acknowledging the strategic benefits of linking a company that is
long on generation resources with a company that is long on customer load,
Moody's believes that the combined entity will still be exposed to earnings
and cash flow volatility due to a large unregulated business platform
whose financial performance is influenced by market determined commodity
pricing levels. We also believe that completion of this transaction
increases the likelihood that EXC will remain more focused on maintaining
its leadership position among unregulated power companies. As the
largest unregulated generation company in terms of production and the
largest retail energy supplier in North America, we calculate that
the company's unregulated operations will collectively represent
at least 65% of the combined operations during periods of low power
prices and likely represent at least 80% of consolidated results
when more robust power generation margins exists. As such,
we believe that it will be very challenging for EXC to easily transform
the company's business mix into one that is materially more balanced
across regulated operations given the sheer size of the existing unregulated
footprint. Moreover, given the competitive position that
this merger reinforces, we believe that management, along
with the board, will be more inclined in the future to pursue acquisitions
of additional unregulated properties as a natural extension of an existing
strategy, particularly given the more streamlined and less challenging
regulatory approval requirements that tend to accompany unregulated acquisitions.
Balancing these factors are the expected benefits that this merger should
produce as the linkage of EXC's generation with CEG's load
should considerably reduce consolidated liquidity requirements and enable
the merged company to receive somewhat better margins for its electric
output given the stickiness of customer load. We further recognize
that completing the transaction enables EXC to gain access to end-use
customers within the retail supply chain at a much faster pace and in
a more efficient way than it could have otherwise achieved from building
it internally. While these factors add support for the rationale
behind the merger, we observe that certain of the businesses being
added have little to do with matching generation with load but add to
the potential capital and liquidity requirements of the firm and increase
the associated volatility with operating a commodity business.
As such, we view the merged company as embracing a higher risk tolerance
than what may have existed in the past at EXC given the commodity platform
that accompanies this transaction. For that reason, we believe
the merged company's credit metrics may need to be stronger than similarly
rated peers and maintain access to amply sized sources of liquidity.
"For CEG, the rating affirmation and change in rating outlook
to positive from stable reflects the expected benefits with being integrated
into a larger, more diverse, and more financially robust company,"
added Moody's Vice President Scott Solomon.
We believe the acquisition would be a credit positive event for CEG's
debt holders. The company's growth prospects have been challenged
by its short generation position relative to the load obligation of its
retail energy supply business. We view EXC's large electric
generating footprint as aligning well with CEG's multi-state
retail business and would expect the combination to reduce CEG's
existing sizable liquidity requirements while providing a platform for
growth.
The rating affirmation and maintenance of a stable outlook at CWE and
at PECO reflects the credit neutral impact that we believe this transaction
will have on both utilities' financial performance. At CWE,
the rating affirmation incorporates the strong credit metrics that exist
for the rating category balanced against a very challenging regulatory
environment for electrics in the state. To that end, future
rating actions are focused in the near-term on the outcome of the
company's electric rate case expected in May 2011, along with
greater clarity around the prospects of statewide legislation being passed
that could transform the current regulatory framework to one that would
be more transparent and would reduce regulatory lag. At PECO,
we believe the company is well-positioned in its rating category
given the strong credit metrics and fairly predictable regulatory environment
in Pennsylvania. While we anticipate strong cash flow generation
at PECO over the next several years, we also expect the company
to pay all of its earnings as dividends over the next couple of years
which tempers the possibility for a higher rating.
The outlook for BGE remains positive due to recent improvement in its
standalone credit quality. We are not considering further positive
rating actions at this time, however, due to uncertainty on
conditions that may be required to secure regulatory support from the
Maryland Public Service Commission. While EXC and CEG have proposed
certain benefits to BGE residential customers, including a $100
credit within 90 days of closing, we view the merger approval process
in Maryland as a material obstacle and that garnering support for the
transaction could potentially require additional concessions.
The rating review for EXC and ExGen will focus on around gaining greater
insights into the components of the combined company's off-balance
obligations, particularly the existing CEG guarantees that support
the commodity and retail business, the strategic direction of the
merged company as it relates to businesses being acquired that are not
directly linked to the supply of electricity to end-use customers,
the appropriate amount of reliable liquidity resources under different
scenarios, and the prospects for incremental operating expenses
and capital requirements mandated by various oversight groups following
the nuclear accident in Japan. Additionally, the rating review
will examine the details concerning the manner in which CEG's operations
are folded into EXC's unregulated platform from a organizational,
legal, and counterparty perspective.
The transaction requires approval by the stockholders of both EXC and
CEG and various regulatory approvals, including the Federal Energy
Regulatory Commission, Nuclear Regulatory Commission, Maryland
Public Service Commission, the New York Public Service Commission
and the Public Utility Commission of Texas. The companies anticipate
closing in early 2012.
The principal methodology used in rating EXC, ExGen, and CEG
was Rating Methodology: Unregulated Utilities and Power Companies,
published August 2009, and the principal methodology used in rating
CWE, PECO, and BG&E was Rating Methodology: Regulated
Electric and Gas Utilities, published in August 2009. Both
are available on www.moodys.com in the Rating Methodologies
sub-directory under the Research and Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating these issuers can also be found in the Rating Methodologies
sub-directory on Moody's website.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
On Review for Possible Downgrade:
..Issuer: Exelon Corporation
.... Issuer Rating, Placed on Review
for Possible Downgrade, currently Baa1
....Multiple Seniority Shelf, Placed
on Review for Possible Downgrade, currently a range of (P)Baa3 to
(P)Baa1
....Senior Unsecured Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently Baa1
..Issuer: Exelon Generation Company, LLC
.... Issuer Rating, Placed on Review
for Possible Downgrade, currently A3
....Multiple Seniority Shelf, Placed
on Review for Possible Downgrade, currently (P)Baa2, (P)A3
....Senior Unsecured Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently A3
..Issuer: Pennsylvania Economic Dev. Fin.
Auth.
....Senior Unsecured Revenue Bonds,
Placed on Review for Possible Downgrade, currently A3
..Issuer: Exelon Capital Trust I
....Preferred Stock Shelf, Placed on
Review for Possible Downgrade, currently (P)Baa2
..Issuer: Exelon Capital Trust II
....Preferred Stock Shelf, Placed on
Review for Possible Downgrade, currently (P)Baa2
..Issuer: Exelon Capital Trust III
....Preferred Stock Shelf, Placed on
Review for Possible Downgrade, currently (P)Baa2
Outlook Actions:
..Issuer: BGE Capital Trust II
....Outlook, Changed To Positive From
Negative
..Issuer: Constellation Energy Group, Inc.
....Outlook, Changed To Positive From
Stable
..Issuer: Exelon Capital Trust I
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Exelon Capital Trust II
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Exelon Capital Trust III
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Exelon Corporation
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Exelon Generation Company, LLC
....Outlook, Changed To Rating Under
Review From Stable
Headquartered in Chicago, IL, EXC is the holding company for
unregulated subsidiary, ExGen, a large competitive power generator,
which owns and operates 25,619 megawatts (MW) of capacity and controls
6,139 MW of capacity under long-term contracts. EXC
also owns CWE and PECO, both regulated subsidiaries. At December
31, 2010, Exelon had total assets of approximately $52.2
billion.
Headquartered in Baltimore, MD, CEG is a diversified energy
company whose operating segments include merchant energy generation (Generation),
customer supply (NewEnergy) and transmission and distribution (BG&E).
Generation owns and operates approximately 12,000 MW of generating
capacity, including CEG's 50.01% interest in Constellation
Energy Nuclear Group, and manages 6 terawatt hours of capacity through
long-term tolling agreements. At December 31, 2010,
CEG had total assets of approximately $20 billion.
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
Scott Solomon
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's reviews Exelon and Exelon Generation for possible downgrade; Affirms Constellation, outlook positive
