Fitch Rates Commonwealth Edison First Mortgage Bonds 'A'
KEY RATING DRIVERS
Strong Credit Metrics: Comed's financial position is consistent with its recently upgraded rating. A formula rate plan (FRP) that allows for annual rate adjustments should allow Comed to sustain its sound financial position over the next few years. Fitch estimates debt/EBITDAR and fund from operations (FFO) leverage will average approximately 3.75x and 3.5x, respectively over the next two years and FFO fixed charge coverage 6.0x, which is well positioned within the current rating level.
Regulatory Predictability: The FRP implemented in October 2011 provides increased regulatory predictability in Illinois. The FRP is filed annually and recognizes forward looking capital additions and includes a true-up mechanism reducing, albeit not eliminating, rate lag. One draw-back is the formulaic return on equity (ROE) calculation that in the current low interest rate environment results in a below average ROE, somewhat mitigated by the forward looking capital additions.
Commodity Price Exposure: Ratings and credit quality benefit from the absence of commodity price exposure, which limits cash flow volatility and reduces business risk. Comed retains the provider of last resort obligation for customers that do not choose an alternative energy provider, but recovers its energy supply costs from customers through a monthly fuel adjustment mechanism.
Rising Capex: Capex is forecasted to rise to $6.5 billion over the 2016-2018 period, about 18% higher than the $5.5 billion invested in the prior three years. The higher outlays, which peak at $2.4 billion in 2016, are primarily driven by the Energy Infrastructure Modernization Act (EIMA), which requires investments in system reliability and smart grid deployment and provides for recovery through the FRP filings. The higher capex also reflects an increase in transmission expenditures, which are subject to credit-supportive Federal Energy Regulatory Commission (FERC) policies.
Like-Kind Exchange: Comed's exposure to the IRS's disallowance of the tax benefits associated with a like-kind exchange continues to linger. As of Dec. 31, 2015, Comed's potential tax exposure is $280 million after consideration of parent Exelon Corp.'s (EXC) agreement to hold Comed harmless for interest and penalties. Though significant, this exposure should be manageable within the current rating level.
Positive: Future Developments that may, individually or collectively lead to a positive rating action include:
A positive rating action may be considered if debt/EBITDAR is below 3.4x on a consistent basis, while maintaining FFO leverage below 4.5x and FFO fixed charge coverage above 4.7x.
Negative: Future Developments that may, individually or collectively lead to a negative rating action include:
Negative rating action would be considered if FFO lease-adjusted leverage rose above 5.0x and/or and FFO fixed charge coverage fell below 4.5x on a sustained basis.
A change in the FRP or other regulatory policies that inhibit Comed's ability to recover invested capital or commodity costs on a timely basis could also lead to lower ratings.
--Relatively flat electric load growth;
--Formula Rate Plan updated annually;
--Three-year capex plan of $6.5 billion.