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Commonwealth Edison Company -- Moody's affirms ComEd's A3 rating with stable outlook

Rating Action: Moody's affirms ComEd's A3 rating with stable outlook

Global Credit Research - 06 Aug 2020

Approximately $9.7 billion of debt affected

New York, August 06, 2020 -- Moody's Investors Service, ("Moody's") today affirmed Commonwealth Edison Company's (ComEd) A3 senior unsecured rating and its A1 senior secured rating. The rating outlook is stable. See below for a list of rating actions.

The affirmation follows the company's announcement in July that the company and its parent Exelon Corporation (Exelon, Baa2 stable) have reached a deferred prosecution agreement with the U.S. Attorney's Office for the Northern District of Illinois (USAO) regarding a bribery scheme [1].

"We see the prosecution agreement as a blemish on both ComEd and Exelon's governance track record," said Toby Shea VP -- Sr Credit Officer, "but we also think it's a one-time event and formulaic rate structures will provide the utility with financial stability over the longer term horizon."

Affirmations: ..Issuer: ComEd Financing III

....Pref. Stock Preferred Stock, Affirmed Baa2

..Issuer: Commonwealth Edison Company

....Issuer Rating, Affirmed A3

....Commercial Paper, Affirmed P-2

....Senior Secured First Mortgage Bonds, Affirmed A1

....Underlying Senior Secured First Mortgage Bonds, Affirmed A1

....Senior Unsecured Revolving Credit Facility, Affirmed A3

Outlook Actions:

..Issuer: ComEd Financing III

....Outlook, Remains Stable

..Issuer: Commonwealth Edison Company

....Outlook, Remains Stable

RATINGS RATIONALE

The deferred prosecution agreement provides that the USAO will dismiss all charges after a three-year period, under the condition that ComEd pays a $200 million fine, cooperates fully with the government's ongoing investigations, and provides regular compliance reporting as envisioned in the agreement.

In the deferred prosecution agreement, ComEd admitted that certain former ComEd officials provided jobs and payments to associates of a public official. ComEd also admitted that the purpose of the jobs and payments was to influence legislation.

In response to this incident, Exelon hired a new chief compliance officer and revised its legal and compliance process. Going forward, we think Exelon's utility subsidiaries will take the necessary action to avoid triggering any additional legal ramifications.

The agreement raises near-term regulatory and political risks. We see the Illinois regulatory environment as being both supportive and constructive to credit quality. For utilities that do not operate under formulaic rates, Illinois' regulatory framework includes a forward test year, decoupling mechanisms and bad debt expense riders. These types of provisions accelerate the cash cycle, which is credit positive.

We note that ComEd's formulaic rate structures are up for legislative reauthorization in 2022. For ComEd, we view formulaic rates as a strong credit positive. The formulaic rate structure provides a high level of cash flow transparency and predictability, and we think it has been a benefit for customers since its original adoption in 2011.

ComEd's allowed ROE for its distribution assets in Illinois is among the lowest in the U.S. for investor-owned electric utilities. ComEd's current authorized ROE under distribution formulaic rates is 8.91%. Its equity ratio is about 48%. Formulaic rate regulation hurts ComEd's profitability ratios compared to similar utility peers because the authorized ROE is set at 580 basis points above the 30-year treasury rate two years ago. The 30-year treasury interest rate has averaged 1.59% and if it stays at this level, the authorized distribution ROE for 2022 will be 7.4%.

We expect ComEd's CFO pre-WC to debt ratios to be around 17% on a run rate basis, but that includes an energy efficiency spending add-back of approximately $325 million. Excluding the add-back, the ratio would be closer to 14%. A one-time, $200 million fine will further hurt ComEd's ratio of CFO pre-WC to debt by about 180 basis points.

With respect to the energy efficiency expenses, we note that GAAP accounting categorizes most energy efficiency spending as an operating expense. But because ComEd can earn a return on the spending, we view the amount more like a capital expenditure. From a credit perspective, adding back energy efficiency spending improves ComEd's CFO pre-WC to debt ratio by about 300 basis points.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions, and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

We are watching for electricity usage declines, utility bill payment delinquency, and the regulatory response to counter these effects on earnings and cash flow. As the events related to the coronavirus unfold, we are taking into consideration a wider range of potential outcomes, including more severe downside scenarios.

Nevertheless, we expect ComEd to be resilient to recessionary pressures related to the coronavirus because of its regulated business model. Moreover, ComEd has a decoupling mechanism that eliminates volume risk and a bad debt rider. In Illinois, the moratorium was officially lifted in July. However, ComEd voluntarily decided to continue to hold on customer disconnects through August 31st to allow customers additional time to enroll in bill assistance programs and payment arrangements

Rating outlook

The stable outlook reflects the transparent and predictable cash flows under the formula rate plan (FRP). The stable outlook incorporates the expectation that if formulaic rates expire at the end of 2022 a more traditional ratemaking process will remain credit supportive for ComEd. The stable outlook also incorporates a view that ComEd will not violate any of the terms of its prosecution agreement.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

We may upgrade ComEd if the FRP is established permanently and its CFO pre-WC to debt ratio rises to above 20% with energy efficiency spending added back.

Factors that could lead to a downgrade

We may downgrade ComEd if it becomes evident that the FRP will not be extended beyond 2022, and Illinois' regulatory environment presents itself to be more challenging than expected for ComEd. We could also downgrade ComEd if its CFO pre-WC to debt ratio falls below 16% on a sustained basis with the energy efficiency spending added back.

Company Profile

ComEd is a fully regulated electric transmission and distribution company with service territory in northern Illinois, including the City of Chicago. Its distribution assets are regulated by the Illinois Commerce Commission and its transmission assets are regulated by the Federal Energy Regulatory Commission.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Company Interim Report, Form 8-K dated 17-Jul-2020

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.

Toby Shea VP - Senior Credit Officer Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infrastructure Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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