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Rating Action:

Moody's affirms Baa3 unsecured rating at First Energy Solutions Corp. and Allegheny Energy Supply Co; outlook stable

21 Mar 2016

Approximately $5 billion of debt affected

New York, March 21, 2016 -- Moody's today affirmed the Baa3 senior unsecured rating on FirstEnergy Solutions Corp. (FES) and Allegheny Energy Supply Company, LLC (AES). The outlook is stable. The affirmation follows a review of the entire merchant power sector in the wake of commodity prices that have continued to fall and are significantly lower than late-2015.

Outlook Actions:

..Issuer: FirstEnergy Solutions Corp.

....Outlook, Remains Stable

Outlook Actions:

..Issuer: Allegheny Energy Supply Company, LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: FirstEnergy Solutions Corp.

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

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

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

..Issuer: Allegheny Energy Supply Company, LLC

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

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

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: Bruce Mansfield Unit 1

....Senior Secured Pass-Through, 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

"We continue to rate FES and AES on the assumption that the companies will win regulatory approval for their PPAs in Ohio without material changes", said Swami Venkataraman Vice President -- Senior Credit Officer at Moody's. "With the benefit of the PPA and existing hedges, Moody's estimates that the impact of lower power prices since the last rating affirmation in December 2015 are less than $50 million annually", he added

We evaluate the credit quality of FES and AES on a consolidated basis. Given the relatively minor impact of commodity price changes, we expect consolidated cash flow coverage of debt to be in the range of 25-28%, while parent FirstEnergy Corp (FE, Baa3 stable) is also expected to have consolidated cash flow coverage of debt to be in the range of 14-16%. These ratios are adequate for the Baa3 rating at FES and AES. Although power prices have fallen for the past few months, FES' retail and wholesale hedges plus our assumption that the PPA will be approved imply that the decline in margins is expected to under $50 million by our estimate. Less than 10% of generation is exposed to merchant pricing in 2016. Although a greater share is exposed in 2017 and 2018, price declines have been much lower farther out in the forward curve and margin declines are still expected to be under $50 million.

The approval of the Electric Security Plan (ESP) filed by FE's Ohio utilities (Ohio Edison, The Illuminating Company and Toledo Edison) following their comprehensive settlement agreement with the staff of the Public Utilities Commission of Ohio (PUCO) and many other parties remains critical to FES and AES' credit quality. The PUCO is expected to rule on the settlement in March 2016, 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).

The PPA eliminates merchant risks for these power plants, which account for about 20 TWh of generation (on a full-year basis) out of a total of 80 TWh. 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.

In our opinion, FES and AES' ratings are tied very closely to that of parent FE and thus their ability to maintain their rating also hinges upon FE maintaining its Baa3 credit rating and FE management's continued commitment to the merchant business. FE's support was demonstrated by the transfer of $1.5 billion of debt from FES to FirstEnergy in 2013. Further, AES benefited from the $1.1 billion sale of its Harrison plant to Monongahela Power. FES and AES also have flexibility over the level of dividends to FE, which relies almost exclusively on its regulated utilities to meet its debt service and dividend obligations (a significant difference from many peers).

Liquidity Profile

FES and AES maintain adequate liquidity, provided by a $1.5 billion revolving credit facility they share. FES has the ability to draw the entire $1.5 billion under this facility (AES has a $1.0 billion sub-limit), which may be used for general corporate purposes and the issuance of letters of credit (LOC's). The FES/AES facility contains a 65% debt to capitalization covenant, applicable to both borrowers. FES/AES also have access to the $3.5 billion revolver at FirstEnergy if necessary. As of Dec 31, 2015, there was $1.44 billion available under the FES/AE Supply facility and $1.60 billion under the FE facility. Normally, the facility at FES/AE Supply is mostly undrawn as its primary purpose is to provide contingent liquidity should a credit event occur. As of Dec 31, 2015, FES and AES combined exposure to collateral demands under a "material adverse event" was $379 million, of which up to $204 million may be triggered from one credit rating agency's downgrade of FES/AES to Ba1 or BB+. Given the size of the FES\AES credit facility, this potential collateral requirement is manageable and has declined materially over the past year, when it exceeded $700 million.

In 2016, assuming the Ohio PPA's are approved, we expect FES and AES to generate approximately $1.3 billion of operating cash flow and approximately $300 million of free cash flow after capital expenditures. FES has no material debt maturities in 2016.

Rating Outlook

FES/AES rating outlook is stable and supported by our assumption that the Ohio PPAs will be approved, and an evaluation of their credit in conjunction with the FE family and that FES will be free cash flow positive for the next 2-3 years.

What Could Change the Rating - Up

Upward rating movement is not expected in the medium-term, even if FES were to be successful in obtaining PPAs in Ohio, though that would strengthen FE and FES' positioning at the current rating level. Longer term, we would likely need to see a sustained improvement in merchant power market conditions and an increase in FES/AES consolidated ratio of CFO pre-W/C to debt to the high twenties percentage on a sustainable basis to consider an upgrade.

What Could Change the Rating - Down

FES is closely linked to FE currently and FES' rating is likely to move down if FE's rating moves down or if management indicates that the merchant business is no longer as core to their operations as it has been historically. A downgrade may result from FE's failure to achieve financial metrics consistent with its Baa3 rating, i.e., CFO-pre WC to debt of at least 13-15%, CFO-pre WC interest coverage of about 3.5x, and retained cash flow to debt of about 10-12%. A negative rating action for FE and FES is also possible if the Ohio PPAs are not approved and the combination of cost reductions and capacity prices in the next PJM auction are not sufficient to maintain each company's financial profile.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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 unsecured rating at First Energy Solutions Corp. and Allegheny Energy Supply Co; outlook stable
No Related Data.
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