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Rating Action:

Moody's affirms Baa3 rating on FirstEnergy Corp on Ohio ESP settlement; Outlook stable

10 Dec 2015

Note: On March 18, 2016, the press released was corrected as follows:
In the debt list, under Affirmations, the following was added:
..Issuer: Beaver (County of) PA, Industrial Devel Auth (Supported by FirstEnergy Solutions Corp.)
....Senior Unsecured Revenue Bonds, Affirmed Baa3
..Issuer: Ohio Air Quality Development Authority (Supported by FirstEnergy Solutions Corp.)
....Senior Secured Revenue Bonds, Affirmed Baa2
....Senior Unsecured Revenue Bonds, Affirmed Baa3
..Issuer: Ohio Water Development Authority (Supported by FirstEnergy Solutions Corp.)
....Senior Secured Revenue Bonds, Affirmed Baa2
....Senior Unsecured Revenue Bonds, Affirmed Baa3
..Issuer: Pennsylvania Economic Dev. Fin. Auth.
....Senior Unsecured Revenue Bonds, Affirmed Baa3
..Issuer: Pleasants (County of) WV, County Commission (Supported by Allegheny Energy Supply Company, LLC)
....Senior Unsecured Revenue Bonds, Affirmed Baa3

New York, December 10, 2015 -- Moody's today affirmed the Baa3 issuer and senior unsecured ratings at FirstEnergy Corp. (FE), FirstEnergy Solutions Corp (FES) and Allegheny Energy Supply Co. (AES). The outlook on all three companies is stable.

Affirmations:

..Issuer: FirstEnergy Corp.

.... Issuer Rating, Affirmed Baa3

....Senior Unsecured Bank Credit Facility, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Shelf, Affirmed (P)Baa3

Outlook Actions:

..Issuer: FirstEnergy Corp.

....Outlook, Remains Stable

..Issuer: FirstEnergy Solutions Corp.

.... Issuer Rating (Local Currency), Affirmed Baa3

....Senior Unsecured Bank Credit Facility, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

..Issuer: FirstEnergy Solutions Corp.

....Outlook, Remains Stable

..Issuer: Allegheny Energy Supply Company, LLC

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

..Issuer: Allegheny Energy Supply Company, LLC

....Outlook, Remains Stable

..Issuer: Beaver (County of) PA, Industrial Devel Auth (Supported by FirstEnergy Solutions Corp.)

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: Ohio Air Quality Development Authority (Supported by FirstEnergy Solutions Corp.)

....Senior Secured Revenue Bonds, Affirmed Baa2

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: Ohio Water Development Authority (Supported by FirstEnergy Solutions Corp.)

....Senior Secured Revenue Bonds, Affirmed Baa2

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: Pennsylvania Economic Dev. Fin. Auth.

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: Pleasants (County of) WV, County Commission (Supported by Allegheny Energy Supply Company, LLC)

....Senior Unsecured Revenue Bonds, Affirmed Baa3

RATINGS RATIONALE

The affirmation follows the comprehensive settlement agreement filed by FE's Ohio utilities (Ohio Edison, The Illuminating Company and Toledo Edison) on their proposed Electric Security Plan (ESP) at the Public Utilities Commission of Ohio (PUCO) on December 1, 2015. The PUCO is expected to rule on the settlement early next year, with the settlement going into effect starting June 1, 2016.

A key aspect of the settlement is that it calls for FE's Ohio Utilities to enter into an 8-year PPA from June 2016 to May 2024 for 100% of the output of two power generating stations (and FES partial ownership in OVEC) in Ohio totaling 3244 MW. The PPA will permit FE's merchant subsidiary FES to sell output from these stations on a cost-plus basis that would allow for a 10.38% return on equity (ROE).

"Our affirmation assumes that PUCO will approve the settlement without any material changes", said Moody's Vice-President Senior Credit Officer Swami Venkataraman. "As a result of higher cash flows from the PPA, improved capacity revenues and cost reductions, we believe FE will be able to maintain CFO pre-WC to debt ratios of 14-15% over the next few years".

The PPA eliminates merchant risks for these power plants and reduces exposure to commodity prices. It also ensures a significantly higher price for power than current market prices, thereby resulting in stronger financial metrics for FES as well as FE. The settlement is expected to significantly increase FE's consolidated cash from operations pre-working capital (CFO pre-WC) will significantly increase in 2017, the first full year of operations under the PPA.

"The affirmation also incorporates management's more conservative approach to running the merchant business and the reduced risk profile on account of the PPAs", Mr. Venkataraman said. "The fact that FE's regulated subsidiaries have recently completed major regulatory proceedings in all of their jurisdictions -- Ohio (pending), PA, NJ and FERC -- further stabilizes cash flow expectations for the next few years", he added.

We expect FE's consolidated ratio of CFO Pre-WC to debt to range between 14-16% starting in 2017. The ratio could be slightly below 14% in 2016 because the PPA will be in effect for only 7 months. We expect the combined merchant business (FES + AES) to have CFO pre-WC to debt ratios in the range of 25-28% in the 2016-18 period.

As part of its efforts to strengthen financial metrics and maintain a cushion over minimum expectations for the rating, FE has indicated it may issue equity over and above its ongoing DRIP program. However, unlike expectations that such equity will be used to "repair the balance sheet", the benefits of the PPA will likely allow FE to time and direct such equity issuance towards ongoing capital expenditures, especially in the regulated businesses.

The PPA will function with a charge or credit being assessed on the electric bills of all distribution customers equal to the difference between wholesale power prices and the price under the PPA. A Risk-sharing mechanism under the settlement guarantees customer credits in years 5 through 8 totaling $100 million.

The settlement also has other credit positive features for the Ohio Utilities. First, it freezes base distribution rates for the Ohio utilities through May 31, 2024, protecting earnings and cash flows at those utilities and precluding any reviews for earnings tests. At the same time, the freeze will not affect riders for distribution capital investment which have also been approved through May 2024. The settlement also includes a grid modernization plan (including smart meters and battery storage) with costs recovered through forward-looking formula rates (10.38% ROE and 50 basis point adder). Finally, while the settlement reactivates suspended energy efficiency programs, the OH utilities will also file with PUCO to get a decoupling mechanism to make revenues indifferent to volumes, with a 3-year transition to decoupled rates, beginning in 2019.

Overall, the settlement caps a series of credit positive developments in 2015 for FE. This includes:

• A change in senior management that has resulted in a significant change in strategy and a lower risk profile for the merchant business

• The rate case and storm cost recovery proceedings at Jersey Central Power & Light (JCP&L). The final outcome of the much contested and long-drawn proceeding was better than worst case expectations and JCP&L's Baa2 CFR was affirmed. The outlook is stable.

• New base rates effective in PA starting May 2015 after a settlement was approved in that state. This was the first distribution rate increase for FE's PA utilities in over 20 years. While no ROE was disclosed, all utilities received substantially all requested rate increases totaling over $200 million in cumulative revenue increases.

• The PJM capacity market auctions incorporating the new "capacity performance" product resulted in higher capacity prices in 2015. Crucially for FE, the transition auctions for the 2016-17 and 2017-18 years saw the company clear nearly 2500 MW of capacity that did not clear in the base auctions for those years resulting in substantial additional revenue.

• A cost reduction initiative that is expected to yield about $150 million in benefits in 2016 and over 240 million in 2017

• A material reduction in the risk profile of the merchant business. New management has significantly reduced retail sales in favor of less risky wholesale sales. Total sales targets have also been reduced to meet expected generation rather than maintain a net short position in the market

• FE's $4.2 billion Transmission capex program continues on time and budget. FE has also filed to create a new transmission entity MAIT from Med-Ed, Penelec and JCP&L.

Liquidity

FE's liquidity is adequate for its operations. FE and FES/AES have revolvers sized at $3.5 billion and $1.5 billion, respectively. In addition to FE, all the regulated utility operating subsidiaries, with the exception of its transmission utilities, are named co-borrowers in the FE facility with contractually defined sub-limits. In addition, FirstEnergy Transmission has its own $1 billion revolver. The maturity on all three revolvers is March 2019. As of Sept 30, 2015, there was $1.62 billion, $1.45 billion and $950 million, respectively, available under the FE, FES/AE Supply and FET revolvers. Normally, the facility at FES/AE Supply is mostly undrawn as its primary purpose is to provide contingent liquidity in the event of a credit or market shock.

As of Sept 30, 2015, FE's combined exposure under the collateral provisions under a "material adverse event" was $387 million. Specifically, up to $252 million may be triggered from one credit rating agency's downgrade of FES/AE Supply to Ba1. Given the size of FES/AE Supply's credit facility and its full availability, this potential collateral requirement appears manageable.

We expect usage of the FE facility to continue to remain high, as such credit facility drawings often support FE investments into its utilities. Each revolving credit facility contains only one financial covenant, applicable to each listed borrower separately, which is a requirement to maintain a consolidated debt to total capitalization ratio of no more than 65% (FET's requirement is 75%). All borrowers were in compliance with this requirement as of Sept 30, 2015.

In 2016, we expect FE's CFO pre-WC to exceed about $3.2 billion in planned capex. Net borrowings will largely be needed only to fund dividend payments at FE and to refinance debt maturities, which total about $550 million at the utilities and about $400 million at the merchant business with mandatory put options which will be refinanced.

Rating Outlook

FE's stable rating outlook incorporates our expectation that PUCO will approve the proposed ESP IV settlement in all material aspects and that FE will achieve financial ratios consistent with its investment grade ratings in a timely and credible manner. Such ratios include CFO-pre WC to debt of at least 14-15%, CFO-pre WC interest coverage of about 3.5x, and retained cash flow to debt of about 10-12%.

What Could Change the Rating - Up

Upward rating movement at FE is currently unlikely. At present, we do not expect any material deleveraging at the company given its capital expenditure plans and cash flow expectations. A significantly stronger financial profile will likely require a substantial improvement in merchant market conditions. Financial ratios that would be consistent with an upgrade include a sustainable ratio of CFO pre-W/C to debt in excess of 19% and CFO pre-W/C interest coverage of greater than 4.0x.

What Could Change the Rating - Down

A negative outlook may result if the PUCO rejects or materially modifies the ESP settlement, especially the 8-year PPA that FE's Ohio merchant plants enjoy under the proposed settlement. A negative outlook will likely be an outcome of our expectation that any modified settlement or approved ESP will not be adequate for FE to maintain financial metrics adequate for its investment grade ratings, chiefly a CFO pre-WC/debt of at least 14-15%. Lower ratings may also result if a continued weakening of the merchant markets causes financial ratios to fall below our benchmarks despite the PPA.

The methodologies used in these ratings were Regulated Electric and Gas Utilities published in December 2013, and Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Swami Venkataraman, CFA
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's affirms Baa3 rating on FirstEnergy Corp on Ohio ESP settlement; Outlook stable

No Related Data.
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