MOODY'S UPGRADES CLEVELAND ELECTRIC ILLUMINATING AND TOLEDO EDISON RATINGS
NEW YORK, 08-01-97 -- Moody's Investors Service upgraded the ratings of the Cleveland Electric Illuminating Company and the Toledo Edison Company, both subsidiaries of Centerior Energy. The rating agency also confirmed the ratings of Ohio Edison Company and its subsidiary, Penn Power. These actions completed a review begun in September 1996 when the companies announced their intention to merge, forming a new company called FirstEnergy. In completing the review, Moody's assumes that the companies will take measures needed to address a few specific market power concerns recently raised by the Federal Energy Regulatory Commission and that the FERC will ultimately approve the merger, allowing it to close by year end.
The Cleveland Electric and Toledo Edison ratings affected by this action are the senior secured rating, raised to Ba1 from Ba2; the senior unsecured and counterparty ratings, raised to Ba3 from B1; the preferred stock rating, raised to "b1" from "b2"; the CTC Mansfield Funding secured lease obligation bond rating, raised to Ba2 from Ba3; and the Beaver Valley II Funding secured lease obligation bond rating, raised to Ba3 from B1. The ratings reflect the two utilities' weak financial profile and significant potentially stranded costs, or costs incurred under a regulated regime which may not be recoverable under competition. The outlook on these ratings is stable and reflects Moody's assumption that legislative action to impose customer choice of generation supplier will not occur until 1999 and will allow a moderate transition and the reasonable opportunity to recover stranded costs. Moody's estimates that the two Centerior Energy utilities have $5.7 billion in potentially stranded costs, a more significant exposure to competition than Ohio Edison's. A rate plan that will go into effect at the merger's close will help reduce stranded costs by the year 2000, but will not produce its greatest benefits until the years beyond that date. Moody's estimate assumes an immediate transition to full choice, whereas the transition is more likely to begin in the year 2000 at the earliest.
The Ohio Edison and Penn Power ratings confirmed include the senior secured rating at Baa2, the senior unsecured rating at Baa3, the preferred stock rating at "b1", the Ohio Edison Financing Trust rating at "b1", the BVPS II Funding secured lease obligation bond rating at Ba1, the PNPP II Funding secured lease obligation bond rating at Ba1, and the OES Fuel rating at P-2. The ratings reflect the company's strong momentum under a 1995 settlement agreement that provides the means to prepare for competition and to reduce substantial potentially stranded costs. Under the settlement agreement Ohio Edison has cut operating costs, using the savings to reduce debt, and has also accelerated the recovery of expensive nuclear investment and associated regulatory assets. Penn Power operates under a similarly-structured settlement agreement. The company reduced total adjusted debt over $600 million in the past two years, resulting in a decline in Moody's estimates of potentially stranded costs from 175% of equity in 1995 to 157% in 1996 for Ohio Edison and from 148% of equity to 124% of equity for Penn Power. Ohio Edison expects to generate even greater free cash flow in subsequent years and to use the proceeds primarily to reduce debt. The outlook for the Ohio Edison and Penn Power ratings is stable, assuming a moderate pace of transition to customer choice in both Ohio and Pennsylvania, the reasonable opportunity to recover stranded costs, and continued substantial reduction of debt.
Moderation marks the transition to full customer choice in both the state jurisdictions in which these companies operate. Pennsylvania passed customer choice legislation at the end of 1996. Customers in that state will be able to choose their generation supplier beginning in 1999. The legislation allows for full recovery of stranded costs which cannot be mitigated and freezes rates over the transition period. The larger jurisdiction, Ohio, is not likely to pass legislation on customer choice until 1999, in Moody's opinion, due to the wide range of stranded cost positions among utilities in the state and due to the political challenges of addressing these high-cost utilities' role in generating both state and local tax revenues. The legislature is distracted this year by a state supreme court mandate to change school funding mechanisms, and 1998 is an election year for the governor and state legislators.
Centerior Energy, through its subsidiaries Cleveland Electric Illuminating and Toledo Edison, and Ohio Edison provide electricity to customers in northern Ohio. Penn Power serves customers in western Pennsylvania.
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