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Rating Action:

Moody's affirms FE and regulated subsidiaries ratings; places FirstEnergy Solutions under review for possible downgrade

Global Credit Research - 25 Feb 2011

New York, February 25, 2011 -- Moody's Investors Service today affirmed the ratings and stable rating outlooks of FirstEnergy Corp. (FE: Baa3 senior unsecured rating) and its regulated utilities (listed below) and placed the ratings for FirstEnergy Solutions Corp. (FES: Baa2 senior unsecured), FE's unregulated generating subsidiary, under review for possible downgrade.

Separately, Moody's upgraded the bank facility rating at Allegheny Energy, Inc. (AYE) to Baa3 from Ba1 and affirmed the ratings and stable rating outlooks for its operating subsidiaries (listed below).

RATINGS RATIONALE

Today's rating action reflects our expectation that the merger between FE and AYE will be consummated shortly. The merger, which was announced on February 11, 2010, has received all needed regulatory approvals.

"The affirmation of FE's and AYE's ratings considers the increased scale and scope of the merged entity and the potential to achieve significant synergies" said Moody's Vice President Scott Solomon. "The rating affirmation also reflects an expectation for near-term improvement in the company's consolidated balance sheet through debt reduction" added Solomon.

Upon closing of the merger, FE will own twelve regulated utility subsidiaries (including two transmission-only entities) that operate in seven states and that have an aggregate rate base of approximately $10 billion. Generally speaking, the utility subsidiaries operate in jurisdictions that provide adequate regulatory supportiveness in the form of allowed rates of returns and cost recovery mechanisms. It is our expectation that FE's regulated utility subsidiaries will provide FE parent with an aggregate dividend that exceeds FE's annual dividend to shareholders, estimated at $920 million, through at least 2011. Combined, the twelve utility subsidiaries provided approximately $1,100 million in distributions to their respective parents during the twelve month period ended December 31, 2010.

Today's rating action also considers management's commitment to strengthen FE's consolidated balance sheet through a debt reduction initiative. We expect debt to be reduced by a minimum of $1,000-$1,500 million over the next 15 months. The debt reduction will be funded through cash (combined, AYE and FE had approximately $1,500 million of cash at 12/31/2010), internally generated cash flows, and possibly proceeds from asset sales. Internal cash flow will be positively impacted in 2011-2013 by reduced cash taxes resulting from the utilization of bonus depreciation. The potential asset sales most discussed by FE's management is Fremont Energy Center and the company's stake in Signal Peak, a coal mine in Montana.

Pro forma consolidated financial metrics for the trailing twelve months ended September 30, 2010 included cash from operations pre-working capital (CFO pre-W/C) to debt and interest coverage of approximately 16% and 3.8 times, respectively. We believe that the combination of reduced debt balances and improved near-term consolidated cash flows, driven in large part by the impact of bonus depreciation and system wide synergies, could help improve 2011 financial metrics to approximately 19% and 4.0 times, respectively. Given FE's mix of regulated and unregulated businesses, we view consolidated metrics that include CFO pre-WC to debt in the range of 16-20% as appropriate for the Baa3 rating category for a parent holding company that has significant merchant generation.

The rating affirmation for AYE's regulated utilities reflect financial metrics which are expected to remain in line with existing ratings along with the benefits of being a part of a larger and more diverse organization. Similarly, the rating affirmation of AYE Supply reflects the maintenance of financial metrics that are in-line with a low investment grade rated unregulated power company and factor in management's plan to de-leverage which should help to mitigate the impact of weaker commodity prices.

The rating upgrade of AYE's bank credit facility to Baa3 from Ba1 reflects the lack of any funded debt at the holding company level, the diversification benefits that will come to AYE as being a part of larger and more diverse organization, and the expectation that AYE's modest holding company working capital needs will be satisfied in the future at the FE level.

The review for possible downgrade for FES has been triggered by a reduction in the price for electricity that has impacted the company's financial performance. Specifically, FES' ratio of CFO pre-WC to debt and interest coverage declined to approximately 18% and 5 times for the twelve month period ended September 30, 2010 from 22% and 7 times, respectively, during the twelve months ended December 31, 2009.

FES' cash flow in 2011, however, is expected to be in line with 2010 levels due in part to the impact of bonus depreciation. Internal cash flow, combined with a reduction in capital expenditure requirements and no near-term dividend requirement from FE, should provide FES an opportunity to meaningfully reduce its debt load. While this may be the case, the outlook for power prices and the impact on FES' future financial performance is such that the company's current rating may no longer be warranted.

The review for possible downgrade will focus on FES' debt reduction targets, its expected financial performance beyond 2011 and FE's dividend requirement for the business. Furthermore, we plan to assess the likelihood post-2011 for FES and AYE Supply to legally merge and the impact such action may have on the combined operational and financial performance.

The rating affirmation for FE takes into consideration the possibility that FES' ratings could be downgraded. In reaching this determination, Moody's concluded that any downward movement in FES' rating would be limited to one notch and that such rating action would not trigger additional rating actions at FE or within the combined FE family.

All ratings at the following listed subsidiaries are affirmed with a stable outlook:

FirstEnergy Corp

- Cleveland Electric Illuminating Company (Baa3 senior unsecured)

- Jersey Central Power & Light Company (Baa2 senior unsecured)

- Metropolitan Edison Company (Baa2 senior unsecured)

- Ohio Edison Company (Baa2 senior unsecured)

- Pennsylvania Electric Company (Baa2 senior unsecured)

- Pennsylvania Power Company (Baa2 senior unsecured)

- Toledo Edison Company (Baa3 senior unsecured)

- American Transmissions Systems, Inc. (Baa1 senior unsecured)

Allegheny Energy, Inc.

- Allegheny Energy Supply, LLC. (Baa3 senior unsecured)

- Allegheny Generating Company (Baa3 senior unsecured)

- Monongahela Power Company (Baa3 senior unsecured)

- Potomac Edison Company (Baa3 senior unsecured)

- West Penn Power Company (Baa2 senior unsecured)

- Trans-Allegheny Interstate Line Company (TrAILCo: Baa2 senior unsecured)

Upgrades:

..Issuer: Allegheny Energy, Inc.

....Multiple Seniority Shelf, Upgraded to (P)Baa3, (P)Ba1 from (P)Ba1, (P)Ba2

....Multiple Seniority Shelf, Upgraded to (P)Baa3, (P)Ba1 from (P)Ba1, (P)Ba2

....Senior Unsecured Bank Credit Facility, Upgraded to Baa3 from Ba1

On Review for Possible Downgrade:

..Issuer: Beaver County Ind. Dev. Auth, PA

....Senior Unsecured Revenue Bonds, Placed on Review for Possible Downgrade, currently Baa2

..Issuer: Bruce Mansfield Unit 1

....Senior Secured Pass-Through, Placed on Review for Possible Downgrade, currently Baa2

..Issuer: FirstEnergy Solutions Corp.

.... Issuer Rating, Placed on Review for Possible Downgrade, currently Baa2

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently Baa2

..Issuer: Ohio Air Quality Development Authority

....Senior Secured Revenue Bonds, Placed on Review for Possible Downgrade, currently Baa1

....Senior Unsecured Revenue Bonds, Placed on Review for Possible Downgrade, currently Baa2

..Issuer: Ohio Water Development Authority

....Senior Secured Revenue Bonds, Placed on Review for Possible Downgrade, currently Baa1

....Senior Unsecured Revenue Bonds, Placed on Review for Possible Downgrade, currently Baa2

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

....Senior Unsecured Revenue Bonds, Placed on Review for Possible Downgrade, currently Baa2

Outlook Actions:

..Issuer: Bruce Mansfield Unit 1

....Outlook, Changed To Rating Under Review From Stable

..Issuer: FirstEnergy Solutions Corp.

....Outlook, Changed To Rating Under Review From Stable

The principal methodologies used in this rating were Regulated Electric & Gas Utilities published in August 2009, and Global Unregulated Utilities and Power Companies published in August 2009.

Headquartered in Akron, Ohio, FE is a utility holding company.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating. However, the credit rating action was based on limited historical data.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Scott Solomon
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms FE and regulated subsidiaries ratings; places FirstEnergy Solutions under review for possible downgrade
No Related Data.
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