VISTRA CORP.

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Fitch Affirms Exelon Generation at 'BBB'; Removes from RWN; Withdraws All ExGen Ratings

01/06/2022 | 05:09am EDT

Fitch Ratings has affirmed the ratings for Exelon Generation Company, LLC (ExGen) including its Long-Term Issuer Default Rating (IDR) at 'BBB' and its Short-Term IDR at 'F2'.

The ratings have been removed from Rating Watch Negative (RWN). The Rating Outlook is Stable.

Fitch placed ExGen's ratings on RWN on Feb. 24, 2021 following Exelon Corporation's (EXC; BBB+/RWN) announced plans to spin-off ExGen to its shareholders. The rating affirmation reflects the ExGen's stronger than originally anticipated post-spin balance sheet as well as the expectation for increased cash flow generation post Illinois' Clean Energy Law.

Fitch has withdrawn ExGen's ratings for commercial reasons.

Key Rating Drivers

Expected Completion of Separation: EXC and ExGen have achieved all required regulatory approvals for separation. As such, Fitch expects separation will be completed as expected by 1Q22.

Illinois Clean Energy Law: Illinois passed legislation in September 2021, which establishes carbon mitigation credits (CMC) to be paid to qualifying nuclear plants for a five-year period. ExGen'sByron, Dresden and Braidwood nuclear plants are eligible for the credits. As a result, the company has reversed its decision to retire Byron and Dresden Station in 2021. The CMCs increase the amount of ExGen cash flow that is contracted under state programs, increasing stability of cash flow. ExGen is expected to produce 86% of zero carbon energy in the State of Illinois, 97% in Maryland, 51% in Pennsylvania and 43% in New York. As such, the company is expected to continue to enjoy broad-based policy support at the state level.

Improved Balance Sheet: As per the separation agreement, EXC will make a cash payment of $1.750 billion to ExGen on or before the spin. ExGen will use the cash primarily for debt reduction, which will significantly reduce leverage. Lower debt balances coupled with increased cash flow due to Illinois legislation and improved power prices is expected to result in leverage at or below gross debt/EBITDA (excluding non-recourse debt) of 1.5x, which was the threshold for stabilizing the current rating. Fitch expects that management will implement capital allocation policies to maintain metrics within this threshold and maintain adequate liquidity.

Integrated Business Model: ExGen has focused on balancing power generation with customer load to reduce volatility, capture higher margins, and produce stable financial results. ExGen's retail unit, Constellation Energy, sells electricity and natural gas in competitive energy markets to both wholesale and retail customers. Constellation is one of the largest competitive retail providers in the U.S., with a focus on commercial and industrial customers. Constellation serves approximately two million customers, including two-thirds of the Fortune 100, and is well diversified across industries. While the commercial and industrial (C&I) customer base is more stable than the mass market, margins are generally much lower than the mass market. The retail business provides ExGen a stable source of cash flow and load for generation output.

Hedging Strategy: To moderate cash flow volatility and commodity price risk, ExGen is expected to continue to employ an integrated, three-year ratable hedging strategy.

Large Nuclear Portfolio: ExGen is the largest operator of civilian nuclear power plants in the U.S., deriving a significant majority of its generation output from nuclear facilities and the remainder from renewables and oil and gas. Nuclear plants operations require significant operations and maintenance costs, must operate around the clock regardless of market conditions (unless permanently closed), and are subject to significant scrutiny by the NRC, which is the industry's safety regulator. ExGen's nuclear operating risk is mitigated by the diversity of owning 23 operating nuclear units at 13 sites in three regions, and ExGen's long record of strong nuclear performance. Over the past three years, the nuclear capacity factor averaged roughly 95%, compared with the industry average of about 93%. As a result of its large nuclear asset base, ExGen is the largest producer of zero carbon electricity in the U.S.

Parent/Subsidiary Rating Linkage: Upon separation from EXC, parent subsidiary linkage will not apply between EXC and ExGen. ExGen's ratings are being assigned on a standalone basis.

Derivation Summary

ExGen and Vistra Corp. (BB+/Negative) have similar business strategies of combining generation and retail businesses and a load match book. While Vistra has a larger generation portfolio than ExGen, it is predominately in ERCOT, which does not benefit from capacity prices, and includes coal assets. Vistra benefits from a diversified fuel mix which includes natural gas and coal assets, while ExGen has mainly nuclear-heavy baseload profile which runs at nearly 95% capacity. Both Vistra and ExGen benefit from their ownership of large retail electricity businesses, which are typically countercyclical to wholesale generation given the length and stickiness of customer contracts.

Vistra has an incumbent position with Texas residential customers with historically high margin mass retail market, while ExGen's retail unit, Constellation, serves a C&I customer base with margins that are generally lower and a customer base more stable. ExGen and Vistra have a weaker business mix than Southern Power Co, (BBB+/Stable), which sells power primarily under longer-term contracts to creditworthy counterparties and does not take on commodity exposure. Fitch expects ExGen's gross debt/EBITDA (excluding non-recourse debt) to be at or below 1.5x over the forecast period. In contrast, Vistra's gross debt/EBITDA is expected to be to 3.5x in 2022, after spiking to approximately 7.5x in 2021 due to the February storm impact and preferred stock issuance.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer

ExGen capex of approximately $1.5 billion in 2021, including nuclear fuel;

ZEC plans in Illinois, New York and New Jersey remain in effect;

Implementation of CMCs in Illinois;

Continuation of ExGen's three-year ratable hedging strategy;

Receipt of $1.75 billion from EXC to be used for ExGen debt repayment;

ExGen separation completed 1Q22.

RATING SENSITIVITIES

Rating sensitivities are no longer relevant given the rating withdrawal.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: As of Sept. 30, 2021. ExGen had a cash balance of $1.957 billion and $6.6 billion in aggregate total commitments of which $4.3 billion is available to support the issuance of CP. Also, as of Sept. 30, 2021, ExGen has $1.023 billion corporate debt due in 2022 and three term loans outstanding totaling $1.38 billion that mature in 2022. The company is expected to have adequate liquidity post separation, aided by the $1.75 billion cash contribution by EXC, which is expected to be used for debt reduction. The company reported that as of Sept. 30, 2021, a downgrade to below investment grade would have required $3.0 billion in incremental collateral.

Issuer Profile

ExGen is a large U.S. competitive electric generation company and marketer of electricity and natural gas to whole sale and retail customers.

Summary of Financial Adjustments

As of Sept. 30, 2021, Fitch has removed $1.7 billion of non-recourse project debt and associated EBITDA from ExGen's leverage calculation.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Following the withdrawal of ratings for ExGen, Fitch will no longer be providing the associated ESG Relevance Scores.

RATING ACTIONS

Entity / Debt

Rating

Prior

Exelon Generation Company, LLC

LT IDR

BBB

Affirmed

BBB

LT IDR

WD

Withdrawn

BBB

ST IDR

F2

Affirmed

F2

ST IDR

WD

Withdrawn

F2

senior unsecured

LT

WD

Withdrawn

BBB

senior unsecured

ST

WD

Withdrawn

F2

Page

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2022 Electronic News Publishing, source ENP Newswire

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Sales 2022 15 694 M - -
Net income 2022 802 M - -
Net Debt 2022 10 424 M - -
P/E ratio 2022 11,3x
Yield 2022 2,71%
Capitalization 11 361 M 11 361 M -
EV / Sales 2022 1,39x
EV / Sales 2023 1,44x
Nbr of Employees 5 060
Free-Float 81,4%
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Number of Analysts 10
Last Close Price 26,31 $
Average target price 31,00 $
Spread / Average Target 17,8%
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Managers and Directors
Curtis A. Morgan Chief Executive Officer & Director
James A. Burke President & Chief Financial Officer
Scott B. Helm Chairman
Tom Farrah Chief Information Officer & Senior Vice President
Stephanie Zapata Moore Chief Compliance Officer, EVP & General Counsel
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