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Rating Action:

Moody's revises outlook on FirstEnergy Corp and merchant subsidiaries to negative following FERC order

28 Apr 2016

New York, April 28, 2016 -- Moody's Investors Service today revised the outlook on Baa3 senior unsecured ratings at FirstEnergy Corp. (FirstEnergy), FirstEnergy Solutions Corp (FES), Allegheny Energy Supply Company LLC (AES) and Allegheny Generating Company (AGC) to negative from stable. The outlook revision follows an order by the FERC late on April 27, 2016, revoking the affiliate waiver between FirstEnergy's Ohio utilities and FES. This would imply that the PPA between FES and FirstEnergy's Ohio utilities can no longer go into effect on June 1, 2016. If desired, FirstEnergy must submit the PPA to FERC for consideration, and the FERC Commission will commence a review process which could take 6-12 months but potentially longer. The negative outlook on AGC reflects the fact that AES it is the majority owner and main source of cash flow.

Outlook Actions:

..Issuer: Allegheny Generating Company

....Outlook, Changed To Negative From Stable

..Issuer: FirstEnergy Corp.

....Outlook, Changed To Negative From Stable

..Issuer: FirstEnergy Solutions Corp.

....Outlook, Changed To Negative From Stable

..Issuer: Allegheny Energy Supply Company, LLC

....Outlook, Changed To Negative From Stable

..Issuer: Bruce Mansfield Unit 1

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Allegheny Generating Company

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

..Issuer: FirstEnergy Corp.

.... Issuer Rating, Affirmed Baa3

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

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

....Senior Unsecured Shelf Affirmed (P)Baa3

..Issuer: FirstEnergy Solutions Corp.

.... Issuer Rating, Affirmed Baa3

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

....Backed 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(Supported by FirstEnergy Solutions Corp.)

....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.(Supported by FirstEnergy Solutions Corp.)

....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

"It is possible that the FERC may yet approve a PPA at the conclusion of its hearings but the strength of the language in the FERC order and the lengthy, unpredictable timetable makes a negative outlook more appropriate at this time", said Swami Venkataraman, Vice President -- Senior Credit Officer at Moody's. "Should the FERC eventually reject the PPA, any alternative business or financial measures to improve FirstEnergy's credit profile would need to be announced promptly and take effect in the near term"

FERC ordered FirstEnergy to revise their market-based rate tariffs within 30 days to clarify that affiliate sales restrictions will apply to the PPA, and to file a "notice of change in status" caused by the Ohio Commission's approval of the PPA.

Under FERC's affiliate power sales restrictions, any wholesale energy or capacity contract between a utility with captive customers (as defined by FERC) and a merchant affiliate requires approval under section 205 of the Federal Power Act, unless granted a waiver which FES and the Ohio Utilities have had until now. FERC's standards provide the following ways for FirstEnergy to demonstrate lack of affiliate abuse: (1) evidence of head-to-head competition; (2) evidence of prices which non-affiliated buyers were willing to pay FirstEnergy for similar services in the same market; and (3) prices, terms, and conditions of sales made by non-affiliated sellers to FirstEnergy utilities or other buyers in the same market.

Given that 20-30% of FirstEnergy's consolidated cash flows come from the merchant business, we expect the company to maintain consolidated CFO pre-WC coverage of debt and retained cash flow coverage of debt in the range of 14-16% and 12-14%, respectively, in order to maintain a Baa3 rating. In the absence of a PPA, our expectations for these ratios over the next 2-3 years are about 12-13% and 10-11%, respectively. These ratios include the benefits from ongoing cost reduction efforts at FirstEnergy and higher PJM capacity pricing owing to the "capacity performance" product introduced in the 2015 auctions.

It is still possible that FERC may approve this PPA at the end of its process, or FES may obtain some sort of accommodation from the state of Ohio, whether via a revised PPA or some other regulatory mechanism. However, the timeline for such action, and consequently for an improvement in FirstEnergy's financial ratios, becomes uncertain. We expect that FirstEnergy may undertake other actions to support its credit profile in the absence of a PPA, including issuance of equity. However, there is greater uncertainty as to the timeliness and sufficiency of such measures.

Liquidity Analysis

FE's liquidity is adequate for its operations. FE has a revolver sized at $3.5 billion while FES and AES have a combined $1.5 billion revolver. All the regulated utility operating subsidiaries, with the exception of FE's transmission utilities, are named co-borrowers in the FE facility with contractually defined sub-limits. In addition, FirstEnergy Transmission (FET) has its own $1 billion revolver. The maturity on all three revolvers is March 2019. As of Jan 31, 2016, there was $1.595 billion, $1.442 billion and $1 billion, respectively, available under the FE, FES/AES and FET revolvers. Normally, the facility at FES/AES is mostly undrawn as its primary purpose is to provide contingent liquidity in the event of a credit or market shock.

As of Dec 31, 2015, FE's combined exposure under the collateral provisions under a "material adverse event" was $420 million. Specifically, up to $204 million may be triggered from one credit rating agency's downgrade of FES/AE Supply to Ba1. Given the size of FES/AES credit facility and its full availability, this potential collateral requirement appears manageable. We expect usage of the FE facility to continue to remain high, as such credit facility drawings often support FE's investments into its utilities. Each revolving credit facility contains only one financial covenant, applicable to each listed borrower separately, which is a requirement to maintain a consolidated debt to total capitalization ratio of no more than 65% (FET's requirement is 75%). All borrowers were in compliance with this requirement as of Dec 31, 2015.

Had the PPA been in effect, we expected FE's CFO pre-WC to exceed capex spending in 2016 -- anticipated at about $3 billion based on historical levels. This is more uncertain now. While CFO pre-WC maybe lower, it is also likely that FirstEnergy may undertake other measures to cut costs or reduce capex. 2016 debt maturities total about $550 million at the utilities and about $400 million at the merchant business.

Rating Outlook

FE's negative rating outlook incorporates our expectation that without the benefit of the Ohio PPAs, FirstEnergy's financial profile will no longer meet our expectations for the Baa3 rating. Such ratios include CFO-pre WC to debt of 14-16%, CFO-pre WC interest coverage of about 3.5-4x, and retained cash flow to debt of about 12-14%.

Factors that Could Lead to an Upgrade

FirstEnergy's outlook could be stabilized if the PPAs are upheld at the end of the FERC process or if the company were able to implement alternative measures that result in a financial profile in line with our expectations. However, any alternative business or financial measures to improve FirstEnergy's credit profile would need to be announced promptly and take effect in the near term.

Upward rating movement at FE is currently unlikely. A significantly stronger financial profile will likely require a substantial improvement in merchant market conditions. Financial ratios that would be consistent with an upgrade include a sustainable ratio of CFO pre-W/C to debt in excess of 19% and CFO pre-W/C interest coverage of greater than 4.0x.

Factors that Could Lead to a Downgrade

A negative rating action may result if the PUCO rejects or materially modifies the PPA and alternative measures do not enable FE to achieve an appropriate credit profile in a timely manner as indicated above. Lower ratings may also result if a continued weakening of the merchant markets causes financial ratios to fall below our benchmarks despite the PPA being ultimate approved.

The principal methodology used in rating FirstEnergy Corp. and Allegheny Generating Company was Regulated Electric and Gas Utilities published in December 2013. The principal methodology used in rating FirstEnergy Solutions Corp. and Allegheny Energy Supply Company, LLC 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
Corporate 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
Corporate 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 revises outlook on FirstEnergy Corp and merchant subsidiaries to negative following FERC order
No Related Data.
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