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Rating Action:

Moody's upgrades Exelon's T&D utilities; rating outlooks stable

30 Jan 2014

Approximately $9 Billion of Debt Affected

New York, January 30, 2014 -- Moody's Investors Service today upgraded the senior unsecured ratings of Baltimore Gas & Electric Company (BGE) to A3 from Baa1, Commonwealth Edison Company (CWE) to Baa1 from Baa2, and PECO Energy Company (PECO) to A2 from A3. Moody's also upgraded the short-term rating at PECO to Prime 1 from Prime 2. This rating action completes our review of BGE, CWE and PECO initiated on November 8, 2013. The outlooks for BGE, CWE and PECO are stable.

"Exelon's three electric transmission and distribution utilities are financially secure and operate under supportive regulatory environments in Maryland, Illinois and Pennsylvania. All three jurisdictions provide a good suite of timely cost recovery mechanisms." said Jim Hempstead, Associate Managing Director.

RATINGS RATIONALE

The primary driver of today's rating action was Moody's more favorable view of the relative credit supportiveness of the US regulatory environment, as detailed in our September 2013 Request for Comment titled "Proposed Refinements to the Regulated Utilities Rating Methodology and our Evolving View of US Utility Regulation."

The rating upgrades for BGE and CWE reflect the improved regulatory frameworks in Maryland and Illinois, where formulaic or forward looking recovery mechanisms, rate riders or other single-issue special purpose trackers exist. The upgrade for PECO reflects the continued supportive regulatory framework in Pennsylvania. All three utilities benefit from a reasonably transparent regulatory framework.

"Evidence of supportive regulatory decisions can be found in recent rate orders in Maryland and Illinois," added Hempstead "states where the utilities were often a party in more contentious proceedings."

In Maryland, BGE's upgrade reflects the existence of a more constructive political and regulatory environment. The merger conditions, which included a 3-year share-holder dividend holiday, also help lay the foundation to a more constructive relationship. Over the next 3-5 years, BGE's ratio of cash flow to debt is expected to remain in the high-teen's range. Next year, in 2015, shareholder dividends will recommence with a 70% payout range.

In December, BGE received a rate increase of about $46 million with an authorized return on equity of 9.6% for the gas distribution business and an authorized return on equity of 9.75% for the electric business. BGE also received a small infrastructure tracker.

In Illinois, Commonwealth Edison's upgrade reflects a more constructive political and regulatory environment, which will provide greater predictability. Recent legislations, Energy Infrastructure and Modernization Act (EIMA) and Senate Bill 9, established a framework to adopt more formulaic cost recovery mechanisms. In the formula's first material regulatory proceeding, CWE was authorized a revenue increase of $341 million, as compared to the $353 million request. The small difference appears to indicate that the utility and commission have a shared understanding of how utilities should apply for cost recovery for these types of distribution investments, a credit positive.

In fact, CWE's suite of recovery mechanisms, taken as a whole, actually look better than both BGE and PECO. The rating is one-notch lower than BGE and two-notches lower than PECO because the regulatory lag in Illinois had been running almost twice as long as that of Maryland and Pennsylvania. Nonetheless, allowed returns are on par with the broader peer groups of T&D utilities as well as with vertically integrated electrics that do not operate in states that legislatively enacted the unbundling of the traditional electric utility framework.

In Pennsylvania, PECO operates with a good suite of recovery mechanisms and riders. These include recovery for fuel and purchased power, and investments for generation, environmental and natural gas T&D infrastructure, among others. PECO is not expected to file for a revenue increase for a few years.

RATING OUTLOOK

The rating outlook for all three utilities is stable. BGE, CWE and PECO own and operate critical infrastructure around the greater Baltimore, Chicago and Philadelphia metro-regions, respectively. In all three states, Moody's expects regulators and politicians to provide a reasonably supportive and constructive framework for the utilities to pursue, submit and ultimately receive authorization to recover the vast majority of their prudently incurred costs and investments. The financial profile for the three T&D utilities is strong, and cash flows (combined for all three utilities) should grow to roughly $2.8 -- $3.0 billion over the next 3 years. Assuming the three utilities can keep their total debt outstanding near $15 billion, the ratio of CFO to debt should remain in the high-teen's range over the next five years.

WHAT COULD CHANGE RATING -- UP

All three utilities could be upgraded as the new formulaic rate setting framework and other positive legislative intervention (such as the Illinois EIMA law) starts to build a track record. It will take a few years to fully understand the credit impacts associated with new trackers and recovery mechanisms as they experience different economic and financial cycles. For now, we incorporate a view that the regulatory environment will remain supportive for at least the next 2 -- 3 years, and that the suite of recovery mechanisms will not be materially diminished.

WHAT COULD CHANGE RATING -- DOWN

All three utilities could be downgraded if the ratio of cash flow to debt fell below the 15% threshold for a sustained period of time, especially if the decline was in cash flow and associated with an unexpected regulatory or political intervention. Mis-managing liquidity or an unbalanced shareholder rewards policy, where the dividend payout ratio was near 100%, could also create negative rating pressure. At this point, the biggest credit rating exposure appears to reside in the three utility's relationship with their unregulated affiliate, Exelon Generation.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

LIST OF RATING CHANGES

Ratings Upgraded

Commonwealth Edison Company

Long-term Issuer Rating -- Baa1 from Baa2

Senior Secured Rating -- A2 from A3

Senior Unsecured Rating -- Baa1 from Baa2

Senior Unsecured Shelf Rating -- (P)Baa1 from (P)Baa2

Preferred Shelf Rating -- (P)Baa3 from (P)Ba1

Outlook -- Stable

Baltimore Gas & Electric

Long-term Issuer Rating -- A3 from Baa1

Senior Unsecured Rating -- A3 from Baa1

Senior Secured Shelf Rating -- (P)A1 from (P)A2

Senior Unsecured Shelf Rating -- (P)A3 from (P)Baa1

Preferred Shelf Rating -- (P)Baa2 from (P)Baa3

Outlook -- Stable

PECO Energy Company

Long-term Issuer Rating -- A2 from A3

Senior Secured Rating -- Aa3 from A1

Senior Unsecured Rating -- A2 from A3

Preferred Stock Rating -- Baa1 from Baa2

Senior Secured Shelf Rating -- (P)Aa3 from (P)A1

Subordinated Shelf Rating -- (P)A3 from (P)Baa1

Preferred Shelf Rating -- (P)Baa1 from (P)Baa2

Commercial Paper Rating -- Prime 1 from Prime 2

Outlook -- Stable

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

James Hempstead
Associate Managing Director
Infastructure 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

William L. Hess
MD - Utilities
Infastructure 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

Moody's upgrades Exelon's T&D utilities; rating outlooks stable
No Related Data.
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