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Rating Action:

Moody's affirms the ratings of Potomac Edison and Monongahela Power, outlooks stable

28 Jan 2020

Approximately $1.3 billion of debt affected

New York, January 28, 2020 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Potomac Edison Company (The) (Potomac Edison) and Monongahela Power Company (Mon Power), including their Baa2 Issuer Ratings and Mon Powers' A3 First Mortgage bond rating. The rating outlook for both companies is stable.

RATINGS RATIONALE

"While both Potomac Edison's and Mon Power's service territories are prone to economic challenges, and their traditional rate recovery mechanisms tend to result in longer regulatory lag, both utilities are expected to maintain stable financial profiles," stated Jairo Chung, Vice President -- Senior Analyst. Moody's expects the regulatory environments in Maryland and West Virginia will remain generally supportive of credit quality, and that the utilities' modest capital investment programs will help them produce consistent credit metrics.

The affirmation of Potomac Edison's Baa2 rating considers the 2019 outcome of its latest distribution rate case in Maryland, which was consistent with the Moody's expectations and should allow Potomac Edison to generate stable cash flows and credit metrics. For example, Moody's expects the company will maintain a ratio of cash flow from operations before changes in working capital (CFO pre-WC) to debt in the mid-teens.

Although Potomac Edison does not own any generation assets, a power purchase arrangement with affiliate, Mon Power, allows the company to operate as a vertically-integrated utility in West Virginia. Mon Power supplies power for all of Potomac Edison's customers in West Virginia, and the Public Service Commission of West Virginia (PSCWV) views these companies on a combined basis for regulatory filings. Thus, the rating of Potomac Edison is closely aligned with the rating of Mon Power.

The affirmation of Mon Power's Baa2 rating considers vertically integrated utility operations that are fully regulated by the PSCWV. The rating reflects Mon Power's elevated carbon transition risk within the regulated utility sector as its generation portfolio primarily consists of older coal-fired power plants. The company is required to file its next integrated resource plan by 2021 but Moody's does not expect significant changes to its generation portfolio. As a result, capital spending should remain fairly consistent, and Mon Power should be able to produce CFO pre-WC to debt ratios in the mid-to-high teens range.

Rating outlook

The stable outlooks for Potomac Edison and Mon Power reflect their steady utility operations and Moody's expectation that the companies will maintain constructive relationships with their regulators. The stable outlook also incorporates Moody's belief that the utilities will generate stable financial metrics, including ratios of CFO pre-WC to debt in at least the mid-teens.

Factors that could lead to an upgrade

Rating upgrades for Potomac Edison and Mon Power could be considered if there is a material improvement in their regulatory relationships, demonstrated perhaps by a shortening of the lag associated with investment cost recovery or the ability to earn higher returns on investments. If Potomac Edison and Mon Power were to exhibit stronger cash flow or reductions in leverage leading their ratios of CFO pre-WC to debt remain above 17% and 18%, respectively, a rating upgrade could be possible. For Potomac Edison, an upgrade of Mon Power's ratings could also lead to a rating upgrade.

Factors that could lead to a downgrade

Rating downgrades for Potomac Edison and Mon Power could be possible if their regulatory relationships deteriorate, demonstrated perhaps by increased lag in recovery of investments or increased regulatory contentiousness. If credit metrics weaken, for example if their ratios of CFO pre-WC to debt decline to 14% and 15% for Potomac Edison and Mon Power, respectively, for a sustained period, there could be a rating downgrade. Also, if Mon Power's rating is downgraded, there could be downward pressure on the rating of Potomac Edison.

Affirmations:

..Issuer: Potomac Edison Company (The)

.... Issuer Rating, Affirmed Baa2

..Issuer: Monongahela Power Company

.... Issuer Rating, Affirmed Baa2

....Senior Secured First Mortgage Bonds, Affirmed A3

..Issuer: Harrison (County of) WV, County Commission

....Senior Unsecured Revenue Bonds, Affirmed Baa2

Outlook Actions:

..Issuer: Potomac Edison Company (The)

....Outlook, Remains Stable

..Issuer: Monongahela Power Company

....Outlook, Remains Stable

Potomac Edison is a transmission and distribution utility serving approximately 270,000 customers in Maryland, and an integrated electric utility serving 145,000 customers in West Virginia. It also owns transmission assets in Virginia. Potomac Edison does not own any generation assets directly. Its affiliate Mon Power in West Virginia provides power for Potomac Edison's West Virginia customers. Potomac Edison is a wholly-owned subsidiary of FirstEnergy Corp.

Mon Power is a vertically integrated utility, serving approximately 393,000 electric customers in West Virginia and is the only utility within the FirstEnergy Corp. family with coal-fired generation assets.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Jairo Chung
VP-Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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