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Rating Action:

Moody's changes outlooks of FirstEnergy and FirstEnergy Transmission to stable

27 Jul 2021

Approximately $11 billion of debt securities outstanding

New York, July 27, 2021 -- Moody's Investors Service ("Moody's") affirmed the ratings of FirstEnergy Corp. (FirstEnergy) including its Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default (PD) rating, and Ba1 senior unsecured rating. FirstEnergy's Speculative Grade Liquidity (SGL) rating was upgraded to SGL-1 from SGL-2 as the company has repaid previous borrowings under its credit facility. Additionally, Moody's affirmed FirstEnergy Transmission's (FET) Baa2 senior unsecured rating. The outlook of both entities was changed to stable from negative.

Moody's also affirmed the ratings of FirstEnergy's Ohio regulated utility subsidiaries Cleveland Electric Illuminating Company(The)(Baa2, senior unsecured), Ohio Edison Company (A3, senior unsecured), and Toledo Edison Company (Baa1,issuer rating) and maintained their negative outlooks.

A complete list of rating actions is included below.

RATINGS RATIONALE

"We see the deferred prosecution agreement between FirstEnergy and the US Department of Justice (DOJ) as an important positive step in resolving external investigations related to payments made by the company to Ohio public officials," stated Jairo Chung, Moody's Vice President -- Senior Credit Officer. Although the company still faces other external investigations and litigation, as well as ongoing regulatory and political risk in Ohio, the resolution of the DOJ criminal investigation removes a major overhang and makes it less likely that the company's ratings will decline further, barring unexpected new developments. The DOJ agreement also provides the company with clarity on the financial impact resulting from the criminal investigation.

As part of the agreement, FirstEnergy will pay a fine of $230 million and has agreed to a single charge of conspiracy to commit honest services wire fraud, which will be dismissed after three years if the company abides by the agreement, including continuing to cooperate fully with the government's ongoing investigations and providing regular compliance reporting.

In accordance with the provisions of the agreement, FirstEnergy issued a statement admitting that it used a 501(c)(4) corporate entity as a mechanism to conceal payments for the benefit of public officials and in return for official action.

In addition, over the last several months, FirstEnergy has made tangible changes to its governance structure and compliance program to address the material weaknesses in its internal controls. These governance changes, along with the deferred prosecution agreement, are a key driver of the change in outlook to stable from negative. However, the effectiveness of the measures taken by the company to address its governance shortcomings will take time to gauge and may not be evident immediately.

Despite the resolution of the DOJ investigation, FirstEnergy's Ba1 rating continues to reflect uncertainty around the outcome of other external investigations and pending litigation. The company remains under investigation by the Federal Energy Regulatory Commission (FERC),the Securities and Exchange Commission (SEC) and the Public Utilities Commission of Ohio (PUCO), and faces multiple lawsuits filed by shareholders and customers.

The stable outlook on FirstEnergy Transmission reflects the diminished contagion risk affecting the transmission intermediate holding company as a result of developments at the parent company. When the above mentioned payments and DOJ investigation were originally disclosed last November, FirstEnergy required covenant waivers from its bank group and fully drew down FET's $1 billion credit facility in an effort to preserve the overall organization's liquidity. FirstEnergy has since repaid the full draw on the FET facility and FET has also successfully accessed the capital markets with a $500 million long-term debt issuance in March 2021.

The rating of FET is supported by its low risk FERC regulated transmission subsidiaries: American Transmission Systems, Inc (ATSI, A3 stable), Mid-Atlantic Interstate Transmission LLC (MAIT, A3 stable) and Trans-Allegheny Interstate Line Company (TrailCo, A3 stable), which operate under a credit supportive regulatory environment and provide predictable cash flows. Unlike FirstEnergy's Ohio regulated utility subsidiaries, FET is not subject to and will not be affected by regulatory developments at the PUCO. We expect FET to maintain stable consolidated credit metrics with funds from operations (FFO) to net debt ranging between 15%-17% over the next 2-3 years.

The negative outlooks on Cleveland Electric, Ohio Edison and Toledo Edison reflect the continued uncertainty over the impact that these developments will have on the political and regulatory environment of these utilities. The PUCO is in the midst of a corporate separation audit of the three utilities as well as an investigation into their political and charitable spending. In addition, the DOJ criminal probe lead the Ohio legislature to introduce and pass House Bill 128, which was signed into law on 31 March 2021. The bill repealed the nuclear support provisions and decoupling measures authorized in the previously passed House Bill 6, which had been credit supportive for these utilities. House Bill 128 became effective 30 June 2021.

The Ohio utilities also face greater scrutiny of their rate structure and level of returns in general distribution rate cases and under a significantly excessive earnings test (SEET) review being conducted by the PUCO. The PUCO could order a rate reset as part of a distribution rate case for the Ohio utility subsidiaries at any time. The utilities are required to file for their next general rate case before the current energy security plan (ESP) expires in May 2024. An unsupportive outcome of any rate case could bring about a significant reduction in the utilities' current return on equity (ROE) of 10.5% and their respective equity capitalization.

The upgrade of FirstEnergy's Speculative Grade Liquidity rating to SGL-1 from SGL-2 reflects very good liquidity as a result of robust dividends from a large, diverse group of utility subsidiaries; a very strong cash position with about $1.3 billion of cash on hand at the end of the second quarter of 2021 after it repaid short-term borrowings under its bank credit facility, which is now nearly fully available; headroom under the single debt to capital financial covenant in its credit facility; and considerable ability to raise cash from asset sales or the issuance of common equity, preferred, hybrid equity, or secured debt at its utilities, if necessary.

FirstEnergy's $2.5 billion credit facility matures on 6 December 2022 and, as of 21 July 2021, $2,496 million was available. The credit facility has a one-year extension option and each regulated utility, excluding FET and its subsidiaries, is a co-borrower with its own sub-limit. In November 2020, following disclosure the above mentioned payments and DOJ investigation, FirstEnergy and five of its utility subsidiaries (Jersey Central Power & Light Company, Metropolitan Edison Company, Pennsylvania Power company, Toledo Edison Company and West Penn Power Company) drew $950 million under their credit facility sub-limits in an effort to preserve liquidity. FirstEnergy and its subsidiaries subsequently repaid $850 million as of 30 June 2021, leaving $350 million drawn on the facility at the end of the second quarter, which has since decreased to a nominal $4 million as of 21 July 2021.

FET and its subsidiaries have their own five-year $1 billion syndicated credit facility which also matures on 6 December 2022. In November 2020, FET and ATSI drew down aggregate $1 billion from the credit facility; $850 million for FET and $150 million for ATSI. Over the last two quarters, FET repaid the $850 million at FET, leaving $150 million borrowed under ATSI at the end of the second quarter. As of 21 July 2021, FET and its subsidiaries had the full $1 billion available under the facility.

Environmental, Social and Governance Considerations

FirstEnergy's ESG Credit Impact Score is CIS-4 (highly negative), reflecting a combination of the high social and governance risk as described below and moderately negative environmental risk.

FirstEnergy's moderately negative environmental risks (E-3 issuer profile score) primarily reflect utility exposure to physical climate risks. These risks are somewhat offset by FirstEnergy's overall low carbon transition risk.

High social risks (S-4 issuer profile score) reflect FirstEnergy's ongoing external investigations involving alleged bribery and other illegal activities of former executives. Also, it reflects the fundamental utility risk that demographics and societal trends could include public concerns over affordability, or increase utility reputational risk that could lead to an adverse political intervention or regulatory response.

High governance risk (G-4 issuer profile score) is based on FirstEnergy's internal control weaknesses and the pending external investigations and lawsuits as a result of the criminal investigation in Ohio. FirstEnergy reached a deferred prosecution agreement with the US Department of Justice. The company agreed to pay a fine of $230 million and agreed to a single charge of conspiracy to commit honest services wire fraud, which will be dismissed after three years if the company abides by the agreement.

Rating Outlook

FirstEnergy's stable outlook reflects the conclusion of the DOJ investigation and management's progress thus far towards strengthening internal controls and corporate governance, both developments making it less likely that its rating will decline further from its current level. Although the company continues to face elevated regulatory and political risk in Ohio, other external investigation and pending litigation, we expect the company to continue strengthening its internal controls and corporate governance, improve its relationship with its regulators and take measures to improve its financial profile.

For FET, the stable outlook incorporates the reduced leverage given the repayment of $500 million of draws under its bank credit facility. The stable outlook further incorporates the change in outlook of parent FirstEnergy to stable.

The negative outlooks on Cleveland Electric, Ohio Edison and Toledo Edison reflect the continued uncertainty related to regulatory developments in Ohio, which could potentially have a negative financial impact on the utilities.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

A positive outlook or rating upgrade of FirstEnergy could be considered if other pending investigations are resolved, including the SEC, FERC and PUCO; if there is continued progress on the part of the company to eliminate material weaknesses in internal controls and improve corporate governance; or if there is additional clarity on the regulatory and political environment for the Ohio utilities, leading to stable outlooks at these utilities. Upward momentum on the rating would also be supported by improved credit metrics, such that FirstEnergy's cash flow from operations before changes in working capital (CFO pre-WC) to debt is above 12% on a sustained basis and a strengthened balance sheet at the parent company.

For FET, a rating upgrade could be considered if parent debt at FET is reduced significantly or if its transmission subsidiaries are upgraded. Also, if the regulatory environment for its transmission subsidiaries improves significantly or its financial profile strengthens such that FET consistently produces consolidated FFO to net debt above 20%, a rating upgrade could be possible.

The outlooks of Cleveland Electric, Ohio Edison and Toledo Edison could return to stable if there is clarity on any potential changes to the political and regulatory environment for these utilities as a result of developments at the parent or if regulatory changes made do not materially affect the cash flow coverage metrics at these utilities.

Factors that could lead to a downgrade

The ratings of FirstEnergy could be downgraded if there are new or unexpected developments that heighten corporate governance risk at the parent or regulatory and political risk at its Ohio or other material utility subsidiaries, or if FirstEnergy's financial metrics or balance sheet deteriorates further.

FET's rating could be downgraded if the regulatory environment for transmission companies deteriorates; or if the balance sheet or liquidity of FET is used to support FirstEnergy or its other businesses. A rating downgrade could also be considered if FirstEnergy is downgraded; or if FET's FFO to net debt falls below 15% on a sustained basis.

A downgrade of Cleveland Electric, Ohio Edison, and Toledo Edison could occur if there are adverse regulatory developments in Ohio that materially affect the financial metrics at these utilities.

Affirmations:

..Issuer: FirstEnergy Corp.

.... Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

....Senior Unsecured Bank Credit Facility, Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

....Senior Unsecured Shelf, Affirmed (P)Ba1

..Issuer: Cleveland Electric Illuminating Company (The)

.... Issuer Rating, Affirmed Baa2

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

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Ohio Edison Company

.... Issuer Rating, Affirmed A3

....Senior Secured First Mortgage Bond, Affirmed A1

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: Toledo Edison Company

.... Issuer Rating, Affirmed Baa1

....Senior Secured Regular Bond/Debenture, Affirmed A2

..Issuer:FirstEnergy Transmission

....Issuer Rating, Affirmed Baa2

.....Senior Unsecured Bank Credit Facility, Affirmed, Baa2

.....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Upgrades:

..Issuer: FirstEnergy Corp.

....Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2

Outlook Actions:

..Issuer: FirstEnergy Corp.

....Outlook, Changed To Stable From Negative

..Issuer: Cleveland Electric Illuminating Company (The)

....Outlook, Remains Negative

..Issuer: Ohio Edison Company

....Outlook, Remains Negative

..Issuer: Toledo Edison Company

....Outlook, Remains Negative

..Issuer:FirstEnergy Transmission

....Outlook, Changed To Stable From Negative

FirstEnergy Corp., headquartered in Akron, Ohio is a fully regulated utility holding company, serving approximately six million customers in five states through its utility operations. FirstEnergy's total rate base is approximately $23 billion with about $8 billion of FERC-regulated transmission.

FET is a wholly owned subsidiary of FirstEnergy and is an intermediate transmission holding company for transmission subsidiaries American Transmission System, Inc (ATSI), Mid-Atlantic Interstate Transmission, LLC (MAIT), and Trans-Allegheny Interstate Line Company (TrailCo).

Ohio Edison Company is the largest Ohio distribution utility within the FirstEnergy family, serving over 1 million customers. Cleveland Electric Illuminating Company is also an Ohio distribution utility within the FirstEnergy family. It serves approximately 750,000 in northeastern Ohio. Toledo Edison Company, the smallest Ohio distribution utility within the FirstEnergy family, serves approximately 310,000 customers in northwestern Ohio. All three Ohio utilities are regulated by the Public Utility Commission of Ohio.

The principal methodology used in rating FirstEnergy Corp., Cleveland Electric Illuminating Company (The), Ohio Edison Company and Toledo Edison Company was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. The principal methodology used in rating FirstEnergy Transmission was Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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 Credit Officer
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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