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Moody’s downgrades ComEd credit to “junk” status
Tuesday, Mar 27, 2007 - Posted by Rich Miller Somehow, I missed this one today…
The Senate is considering legislation to bring ComEd into the rollback and rate freeze bill that had been exclusively applied to Ameren, which has an extremely angry customer base right now. That bill led to Ameren’s credit downgrade, and it appears the same thing is happening to ComEd. As of yesterday, negotiations on what to do about electric rates were ongoing and nothing new was reported. Senate President Emil Jones has indicated to insiders that he wants to have an agreement by the end of this week for substantial rate relief or he’ll send the freeze bill over to the House. This downgrade news ought to spark some interest at the Statehouse.
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- VanillaMan - Tuesday, Mar 27, 07 @ 9:22 am:
YEE-HAW!
Now is the time to buy ComEd bonds!
The insiders are dealing with the State, and pushing their bonds lower so that they can fill their pockets with loot when the deal with the state is done, their bonds will no longer be “junk” and they can buy that vacation home in Santa Fe!
- Truthful James - Tuesday, Mar 27, 07 @ 9:35 am:
First, there is no doubt that CommEd dug its own hole here. (Ameren, also.) Their rate and marketing structure was designed, they thought, to maximize the return on shareholder investment, and thuis increase the price of their stock.
They failed to realized the outcome ten years out which they are seeing now, or if so they did not weight it heavily enough.
The lowering of the Bond rating has two effcts:
First, it lowers the price at which their Bonds are traded and forces Pension funds and other investors who must hold investment grade bonds only to sell those bonds at a loss.
Second, in any refunding or new issuance, CommEd must offer a higher interest rate, lowering the bottom line, perhaps affecting the dividend on which utility Stock investors rely and thus reducing the value of their shares. That might induce management to skimp on other areas within the company in order to maintain the dividend.
The Market is ruthless; the penalties, swift. As much as we would like to see a bogeyman under the bed, collusion between a rating service and a company is unthinkable. Moody’s business extends across utility companies to all corporations and most if not all municipalities issuing debt. Their reputation is their stock in trade.
- VanillaMan - Tuesday, Mar 27, 07 @ 9:43 am:
I didn’t say there was collusion between the rating services and ComEd. What I am saying is that as ComEd deals with Illinois, their bonds become “worthless” for a nice buy up. When the deal is done with Illinois, the “worthlessness” of ComEd bonds will end, and those who bought will have raked in some dough.
That isn’t bogeymen, it is capitalism.
- Southern Man - Tuesday, Mar 27, 07 @ 9:50 am:
Regardless of what’s the best system for financing utilities–the old fashioned regulatory approach or the market system the legislature approved 10 years ago–the bottom line is the General Assembly chose the market approach and authorized the utilities to enter into binding contracts for power purchases on the open market.
Now they want to go back to the freeze and some unknown regulatory approach, essentially sending Com Ed into bankruptcy because of the binding power contracts.
At some point the legislature has to make up its mind. No business, not even a utility, can operate when a fickle overseer keeps changing the rules!
- Truthful James - Tuesday, Mar 27, 07 @ 9:54 am:
Vanilla –
I did not see your reply as I placed mine. It did not respond to yours. Rather, it addressed the earlier thread where some stated that the Rating service was in cahoots with Ameren.
Beware, however, you may have to hold onto those little beauties somewhat longer. It would be highly unusual for the rating services to upgrade based on any solution coming out of yonder legislature.
Raters take a wait and see attitude. In my experience that it takes at least three years of improved performance and cash flows to get an upgrade in Bond rating. And then it will come about only by looking closely at both cash flows and the regulatory environment in Illinois.
If you can figure out the low point in bond pricing, good luck. If the general yield curve rises there will be more price dropping. The best bet is to pick a bond whose price has dropped well below 100, but which will be redeemed at par when it is matured
- So-Called "Austin Mayor" - Tuesday, Mar 27, 07 @ 10:01 am:
“ComEd Downgrades Lobbyists to “Junk” Status.”
- Yellow Dog Democrat - Tuesday, Mar 27, 07 @ 10:28 am:
And yet Exelon’s stock is up nearly 25% from just a year ago, when it closed at $54.79.
Heard a funny story last week, about a phone call placed to Exelon President John Rowe’s office. Frank Clark answered the phone.
Separate companies though, right?
- Carl Nyberg - Tuesday, Mar 27, 07 @ 10:56 am:
Speaking of lobbyists and PR flacks, what was David Axelrod’s role in ComEd’s PR campaign to jack up electric rates?
- Amy - Tuesday, Mar 27, 07 @ 2:18 pm:
Axelrod co. did pr for the “citizens group”
supporting Exelon, right? hope Claypool,
who works at Ax co. is not on this account.
- He Makes Ryan look like a saint - Tuesday, Mar 27, 07 @ 3:04 pm:
How many peoples credit is slipping because they have to pay the Gouging rates and cant afford to pay other bills?
- Team Sleep - Tuesday, Mar 27, 07 @ 3:16 pm:
Truthful, your first post reads like a JRR Tolkien passage.
HMRLLAS brings up a good point. It’s tough to feel sorry for a power company’s ratings when our credit ratings suffer. If my friends and family are reduced to junk status, does anyone really care? ComEd and Ameren sure don’t.
- ArchPundit - Tuesday, Mar 27, 07 @ 3:33 pm:
They wanted a reverse auction and they got one. And now the consequences of the reverse auction are showing up. It was a con game on the taxpayers and they got caught. Unfortunately the ICC was in on the fix, but that makes it no less of a con.
The Legislature was stupid not to identify the method for auction, but it’s not the fault of legislators’ that one was adopted. That goes to the appointees on the ICC and ultimately the Governors who appointed them.
- ArchPundit - Tuesday, Mar 27, 07 @ 3:35 pm:
===Heard a funny story last week, about a phone call placed to Exelon President John Rowe’s office. Frank Clark answered the phone.
==Separate companies though, right?
Yes, kind of like Bruce Wayne and Batman.
- Truthful James - Tuesday, Mar 27, 07 @ 4:02 pm:
I was not in the least sympathetic to the corporate fools. They did it to themselves through mismanagement. Thought I pointed that out. I work in finance, work with Bonds. I did want to piece out what I thought was the effect of their foul-up, in a dispassionate manner.
- Dooley Dudright - Tuesday, Mar 27, 07 @ 4:20 pm:
Following SCAM’s lead — another fantasy headline:
“Exelon directors downgrade CEO John Rowe’s $27 million compensation package to $2.7 million ‘junk’ status.”
- Squideshi - Tuesday, Mar 27, 07 @ 4:30 pm:
Not to extend the rate freeze would be tantamount to providing corporate welfare to ComEd. Let’s not bail out this private, for-profit company when they only have themselves to blame for their bad management decisions.
- Steve Brown - Tuesday, Mar 27, 07 @ 4:57 pm:
Speaking of competition, Speaker Madigan has introduced HB4091 which establishes the Illinois Power Authority. The Authority will be a not for profit generator. The Authority will help provide some real competition in Illinois.
It will be an important development in the debate
- Little Egypt - Tuesday, Mar 27, 07 @ 5:23 pm:
Truthful James, is it correct that Ameren’s rating prior to being downgraded to junk status was just one notch above junk. And is the same true for Com-Ed? If so for either or both companies, is this really a big deal?
- Truthful James - Tuesday, Mar 27, 07 @ 5:47 pm:
Little Egypt –
see my comments at the 9:35 a.m. post.
The drop from investment grade to junk is much more significant than a drop from one investment grade rating to the next. If our pension funds hold CommEd Bonds it is likely the funds will be required to divest themselves.
Pension funds routinely buy and hold bonds and do not trade. Simply put, they try to match the interest payments snd maturities within their portfolio to the expected dates of outflow of moneys to retirees. Forced divestiture under their regulations means replacing prt of the fabric of their investment.
- Little Egypt - Tuesday, Mar 27, 07 @ 6:15 pm:
Truthful James, thanks for the info but I still have a simple question. Is it correct that Ameren’s rating prior to being downgraded to junk status was just one notch above junk? I understand the implications but just wanted to know if it is true about Ameren’s previous bond rating.
- Disgusted - Tuesday, Mar 27, 07 @ 9:34 pm:
Dooley: The compensation given to these demi-gods of commerce is a big part of the problem. If these utilities made an honest effort to cut costs before soaking their customers, perhaps they would have gotten less grief over their huge increases. But the guys at the top never suffer and for doing what? - schmoozing with the stockholders, thinking great thoughts and signing off on ideas, schemes and inventions, all thought up and designed by the rank and file earning middle class wages. Then the CEOs get the credit and the golden parachutes. It’s sickening. Even when companies are in bankruptcy, these “leaders” have iron-clad contracts that pay them even when the company is in serious trouble. I realize we are a capitalistic society but the “let ‘em eat cake” attitude of CEOs in this country, especially now, is disgusting.
- Dooley Dudright - Wednesday, Mar 28, 07 @ 7:48 am:
Disgusted: amen to all that. I was trying to be sarcastic — the poor dears struggling to live on single digit millions rather than double digit millions, dontcha know.
- Tired of paying more for less - Wednesday, Mar 28, 07 @ 8:12 am:
Bottom line is that Ameren’s (can’t speak about ComEd) leadership has run the company as though the only constituancy they have is the shareholders. They do have customers, paying customers who have been beseiged with paying substantially higher rates and getting less service. Two major power outages in 2006, and a good part of the cause is their own decision to cut back on line maintenance. They threaten they will cut back on services if the rates are rolled back, but how much more can they cut back?
Instead, if they operated the company as a business serving their customers and maintained the infrastructure, maybe their realized costs would not have so high. Maybe then they wouldn’t have had the negative publicity and the operational woes they are now facing. I really question the wisdom of a public utility being publicly traded on the market.
- Truthful James - Wednesday, Mar 28, 07 @ 8:38 am:
Little Egypt: In clarification, the AMEREN ratings from Moodys are as follows, They separate out because certain securities, still outstanding, were issed by a Corporate Unit and secured by revenues from that unit. So, here we go, as of 3/12:
The ratings of Ameren, Central Illinois Public Service, CILCORP, Central Illinois Light, and Illinois Power remain on review for possible further downgrade.
Ratings downgraded and remaining under review for possible downgrade include:
Ameren’s senior unsecured debt and Issuer Rating to Baa2 from Baa1;
Central Illinois Public Service Company’s senior secured to Baa3 from Baa2, Issuer Rating to Ba1 from Baa3, and preferred stock to Ba3 from Ba2;
Illinois Power Company’s senior secured debt to Baa3 from Baa2, Issuer Rating to Ba1 from Baa3, and preferred stock to Ba3 from Ba2.
Baa3 is the lowest of the investmen grade ratings. Junk bonds start at Ba1, thereafter going downward Ba2, Ba3, and lower.
The reason the Bonds have a higher rating than the Issuer or the Preferred stock is that the Bonds have first call on the Company’s revenues — Senior secured bonds, first priority; Junior Bonds, second.
Now with respect to Exelon and COMED. Moody’s issued the following report, which by inference shows why Exelon stock trended upwards.
“New York, March 26, 2007 — Moody’s Investors Service downgraded the senior unsecured debt and Issuer Rating of Commonwealth Edison Company (ComEd) to Ba1 from Baa3 and downgraded the company’s short-term rating for commercial paper to Not-Prime from Prime-3.
The ratings on ComEd’s senior secured debt and secured bank facility remain unchanged at Baa2; however, all of ComEd’s long-term ratings remain under review for possible downgrade.
The ratings and outlook are unchanged for ComEd’s parent, Exelon Corporation (Baa2 senior unsecured) and for affiliates, Exelon Generation Company (Baa1 senior unsecured) and PECO Energy (A3 Issuer Rating). These ratings reflect the fairly strong performance trends for these two operating subsidiaries, which represent the substantial majority of Exelon Corporation’s consolidated earnings and cash flow, and the belief that any near term potential financial stress will be largely isolated to ComEd.