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11 Feb 2010
Approximately $21 billion of debt securities affected
New York, February 11, 2010 -- Moody's Investors Service affirmed the ratings and stable outlooks of
FirstEnergy Corporation (FE:Baa3 senior unsecured) and its subsidiaries
(listed below) as well as the ratings and stable outlooks of Allegheny
Energy, Inc. (AYE: Ba1 unsecured bank facility) and
its subsidiaries (listed below) following today's announcement that the
boards of FE and AYE had agreed to combine in a stock-for-stock
transaction that values AYE's equity at $4.7 billion.
FE will be the surviving parent company upon consummation of the transaction.
"The affirmation of both companies' ratings considers the
use of stock as the currency for the proposed merger thereby allowing
the companies to combine operations without negatively impacting the combined
entities balance sheet" said Moody's Vice President Scott
Solomon. "The rating affirmation also considers the complementary
nature of FE and AYE's operations and the synergistic benefits that
the combination should provide, particularly for the large unregulated
wholesale generation business", added A.J. Sabatelle,
Senior Vice President of Moody's.
Pro-forma consolidated credit metrics for the combined FE-AYE
are expected to result in cash flow (CFO-pre WC) to debt of around
16% and cash flow coverage of interest expense of 3.6x.
Moody's also calculates that the companies' generation subsidiaries,
a significant driver of credit quality, are expected to generate
pro-forma cash flow to debt that exceeds 24% and cash flow
coverage of interest expense in excess of 6.0x. These pro-forma
credit metrics position the merged FE and the combined generation subsidiaries
reasonably well in their current respective rating category.
In addition to shareholder approval, the merger will require the
approval of four state regulatory commissions and the Federal Energy Regulatory
Commission (FERC). While it is premature to predict the outcome
of any of these proceedings, it remains possible that additional
merger conditions will be imposed by one or more of the state regulators
in order for merger approval to occur. It is also possible that
today's merger announcement could have implications for other regulatory
proceedings currently underway by both companies in various states,
particularly given the current economic challenges that exist in their
respective service territories.
Notwithstanding the clear fit that exists by merging the two companies,
these regulatory issues make the consummation of the merger under the
current terms less certain at this juncture. As greater clarity
concerning the regulatory and shareholder approvals are known, including
the impact, if any, on existing regulatory filings,
Moody's will comment accordingly. Also, as the companies
provide more transparency around legal structures, integration plans
and synergy benefits, particularly as it relates to the unregulated
power businesses, rating refinements, if needed, may
All ratings at the following listed entities and their subsidiaries are
- FirstEnergy Solutions Corp. (Baa2 senior unsecured)
- 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
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 (Baa3 senior unsecured)
- Trans-Allegheny Interstate Line Company (TrAILCo:
Baa2 senior unsecured)
The last rating action taken on FE occurred on November 2, 2007
when the rating outlook was changed to stable from positive. The
last rating action taken on AYE occurred on December 2, 2008 when
we affirmed the ratings.
The principal methodologies used in rating FE and AYE was Rating Methodology:
Regulated Electric & Gas Utilities, published in August 2009
and Rating Methodology: Unregulated Utilities and Power Companies,
published in August 2009, and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Headquartered in Akron, Ohio, FE is a utility holding company
with total assets of $37.2 billion at 09/30/3009.
Headquartered in Greensburg, PA, AYE is a utility holding
company with total assets of $11.3 billion at 09/30/2009.
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
Moody's affirms FirstEnergy and Allegheny following merger announcement
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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