Fitch Ratings has assigned a ‘BBB+’ rating to Exelon Generation Company, LLC’s (Exgen) $775 million dual-tranche debt offering comprised of a $275 million, 4.25% senior notes due June 15, 2022 and $500 million, 5.60% senior notes due June 15, 2042.
The notes are being offered under Rule 144A. Net proceeds will be used for general corporate purposes.
The Rating Outlook is Stable.
Key Rating Drivers
Favorable Competitive Position: Exgen’s long position in low marginal cost nuclear generation provides the company with a competitive advantage and assures a high level of dispatch in both high and low gas scenarios. In addition, the low emission nuclear generating capacity is well positioned to benefit from any rise in power prices attributable to environmental regulations that impose additional compliance costs on fossil-fueled electric generating plants.
Generation and Load Match: The addition of Constellation Energy Group, Inc.’s (CEG) retail energy business complements the cash flow profile of Exelon Corp.’s (EXC) wholesale generation business; high wholesale power prices result in wider margins and greater cash flow for the generation segment and compressed margins for the retail segment while the opposite holds true for the retail business.
Credit Profile: Exgen’s post-merger credit profile is sound, but including the debt assumed by EXC, which Fitch expects will ultimately be refinanced at Exgen, leverage measures are weaker than historical levels. Moreover, the previous headroom in leverage and interest coverage measures has largely been absorbed by the impact of recent financings, including the current new debt issue and the likely premium to be paid on a simultaneous debt exchange offer, and from tightening margins on retail and wholesale power sales. Fitch estimates 2013 adjusted debt/EBITDA and EBITDA/interest to approximate 3.0 times (x) and 7.0x, respectively.
Merger Impact: The recently closed CEG merger provides the opportunity for meaningful cost synergies. Management estimates the run rate of unregulated operating and maintenance savings to be an estimated $375 million by 2014. The primary drivers are labor savings from corporate and commercial consolidations, lower collateral postings with an associated reduction in the size of liquidity facilities, information technology consolidation and supply chain savings.
Ample Liquidity: Internal cash generation bank credit facilities aggregating $5.6 billion (including a $5.3 billion syndicated credit facility expiring in March 2016 and a $300 million bi-lateral agreement) provide ample liquidity to meet working capital needs. Debt maturities are well laddered and there are no maturities before 2014.
Rising Capital Expenditures: Credit quality measures and ratings will be pressured by an aggressive growth strategy that will require substantial external funding to supplement internal cash generation. The planned growth strategy includes discretionary investments in nuclear uprates and wind and solar projects. The ratings impact will depend on the mix of debt and equity used to fund the growth initiatives relative to the incremental earnings and cash flow stream.
Management has indicated it will consider the use of non-recourse project debt to fund a portion of the renewable investments or possibly scale back or defer the new investments, including the nuclear uprates, to manage its credit profile and maintain investment grade ratings. Proceeds from planned asset sales required by the Federal Energy Commission (FERC) as a condition of the CEG merger may also be used to fund investments.
Unfavorable Operating Environment: The operating environment is expected to remain challenging for competitive generators given the persistently low power prices. The combination of low forward natural gas prices and weak electricity demand is expected by Fitch to prevent any meaningful recovery of wholesale power prices at least through 2013 keeping downward pressure on credit quality measures.