Fitch: Exelon merger setback bad news for Pepco

Prior to the merger announcement the three operating utilities had pursued an aggressive strategy of annual rate filings

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Fitch Ratings considers the District of Columbia Public Service Commission's denial of the proposed merger between Exelon Corp. and Pepco Holdings Inc. (PHI; 'BBB' IDR, Outlook Stable) to be negative for PHI and its operating units.

Each of the operating units deferred rate case filings during the 16 months the merger was under review, which has and will weaken credit metrics, which were only marginally supportive of the existing ratings before the rate case avoidance.

Prior to the merger announcement the three operating utilities had pursued an aggressive strategy of annual rate filings to combat regulatory lag. The strategy had the intended effect of improving credit metrics leading up to the April 2014 merger announcement.

In affirming the ratings of PHI and its units in April 2015, Fitch noted the expected deterioration of credit metrics through 2016 being mitigated by the financial flexibility afforded by the anticipated Exelon ownership. Without the Exelon ownership the financial deterioration is a greater credit concern.

It should be noted that Exelon is likely to request reconsideration of the PSC decision that may include additional customer benefits.

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