Fitch Ratings has assigned a 'BBB+' rating to Exelon Generation Company, LLC's (Exgen) proposed $550 million issue of senior notes due 2020. The Rating Outlook is Negative.
Proceeds for the debt offering will be used to fund the optional redemption of $550 million, 4.55% senior notes due June 15, 2015 and for general corporate purposes.
KEY RATING DRIVERS
Operating environment: The operating environment for Exgen's competitive generation business is challenging with sluggish demand and relatively low natural gas and power prices likely to persist for several years. Favorably, Exgen is expected to be free cash flow positive due to reduced capex and dividend requirements, easing the pressure on credit quality measures.
Competitive Position: Exgen's largely nuclear-fueled generating fleet is positioned low on the dispatch curve and likely to be dispatched under any price scenario. The emission free nuclear portfolio is also well positioned to benefit from any uplift in power prices from higher environmental costs or coal retirements. Nonetheless, absent an improvement in power and capacity prices the company has identified three nuclear plants in Illinois that are uneconomic and at risk for closure.
Financial Position: Exgen's financial position has weakened in recent years, but remains solidly within the investment grade category. Fitch expects expense and debt reductions to offset on-going declines in gross margin and to stabilize credit metrics at or near current levels. Fitch estimates Exgen's adjusted ratio of Debt/EBITDAR and FFO adjusted leverage to approximate 2.3x and 1.7x, respectively and fixed charge coverage 8.0x over the next several years.
Asset Divestitures: Exgen has signed definitive agreements to sell five generating assets for approximately $1.4 billion, net of taxes. Approximately $1 billion of sale proceeds are expected to be used to fund a portion of parent Exelon Corp.'s pending acquisition of Pepco Holdings, Inc. and the remainder to fund other investments.
Capacity Market Reforms: The PJM Interconnection LLC (PJM) has proposed a new capacity performance product that would reward resources capable of sustained operations during peak load periods and extreme weather events. With their base load dispatch profile and high capacity factors, nuclear units are likely beneficiaries of the incentive payments, which may be sufficient to prevent or limit further early retirements. The state of Illinois is also considering legislative reforms that would support nuclear generation.
Rating Outlook: The Negative Outlook primarily reflects the challenging business environment faced by Exgen's competitive wholesale and retail electric supply businesses and a decline in credit metrics over the past few years. Despite the decline credit protection measures remain solidly within the investment grade category.
RATING SENSITIVITIES
Positive: Given the current operating environment, positive rating action is unlikely at the present rating level.
Negative: Continued weakness in forward power and natural prices and/or capacity market reforms within the next year is likely to result in a one notch downgrade.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 18, 2014);
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813608
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=965555
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