FirstEnergy Corp. And Subsidiaries Ratings Affirmed On Distribution Rider Impl Outlook Remains Negative

Stocks and Financial Services Press Releases Wednesday March 8, 2017 08:48
NEW YORK--8 Mar--S&P Global Ratings

NEW YORK (S&P Global Ratings) March 7, 2017--S&P Global Ratings today affirmedits ratings, including the 'BBB-' issuer credit ratings, on Akron, Ohio-basedFirstEnergy Corp. and its regulated utility subsidiaries American TransmissionSystems Inc., Cleveland Electric Illuminating Co., FirstEnergy TransmissionLLC, Jersey Central Power & Light Co., Metropolitan Edison Co., MonongahelaPower Co., Ohio Edison Co., Pennsylvania Electric Co., Pennsylvania Power Co.,Potomac Edison Co., Toledo Edison Co., Trans-Allegheny Interstate Line Co.,and West Penn Power Co. The outlook remains negative.

At the same time, we revised our stand-alone credit profile for FirstEnergysubsidiary Ohio Edison Co. to 'a' from 'a-', reflecting the recentimplementation of the Distribution Modernization Rider (DMR) in Ohio that weexpect will provide improved cash flow generation for Ohio Edison Co. We alsorevised the financial risk profile for FirstEnergy subsidiary Toledo EdisonCo. one category higher to intermediate, reflecting the effect of the DMR inOhio, but our stand-alone credit profile on Toledo is unchanged.

"The ratings affirmation follows the recent implementation of the DMR in Ohiothat we expect will bolster the cash flows of certain FE subsidiaries,including OE and TE, for the next three years," said S&P Global Ratings creditanalyst Obioma Ugboaja. The expected DMR revenues along with OE's ownership ofPennsylvania Power Co., whose own financial profile remains robust, shouldsupport OE's financial profile and the revision of OE's stand-alone creditprofile.

Our issuer credit rating on parent FE incorporates the company's strongbusiness and significant financial risk profiles. Importantly, current ratingsreflect the company's exposure to its unregulated merchant generation businessand the risks relating to its efforts to divest this business.

Our strong business risk assessment on FE reflects the company's low—riskregulated utility operations primarily consisting of regulated distributionand generation operations located in Ohio, Pennsylvania, New Jersey, WestVirginia, and Maryland, and regulated transmission operations that areregulated by the Federal Energy Regulatory Commission (FERC). Our businessrisk assessment further reflects FE's effective management of regulatory riskin most of its jurisdictions. Key regulatory developments have been favorable,including the recent implementation of the DMR in Ohio, general rate caseoutcomes in Pennsylvania and New Jersey, and the company's focus on growingits regulated transmission business over time, all factors that support stablecash flow generation.

The benefits of FE's low-risk regulated utility operations are offset by itshigher-risk merchant generation business that remains challenged primarilybecause of lower energy and capacity power prices that increases the company'sexposure to lower generation volumes and commodity prices. FE is in theprocess of exiting its merchant generation business, a task that remainschallenged by several issues, including persistent low energy and capacityprices, significant FirstEnergy Solutions Corp. (FES) refinancing risksthrough 2019, and the pending resolution of certain coal transportationcontract disputes that taken together, increases the likelihood of a potentialFES bankruptcy filing in 2018. In addition, we view FE's recent committed lineof credit to FES, and FE's proposed conditional credit support for the benefitFES' nuclear merchant assets as further complicating FE's efforts to achieve a

clean separation from its merchant business, raising uncertainties for FE.

The negative outlook reflects the potential for lower ratings on FirstEnergyand its regulated utility subsidiaries by one notch within the next 12 months,primarily as a result of the risks involved in the company's efforts to divestits merchant generation business including contingent risks associated with apotential FirstEnergy Solutions Corp. (FES) bankruptcy that could be complex,lengthy, and costly, and if not well managed, could distract management'sfocus to the detriment of overall credit quality.

We could lower the rating by one notch if financial measures modestly weaken,reflecting FFO to debt consistently below 13%, given FE's current businessrisk assessment. This could occur if FES is filed into bankruptcy, and if anFES bankruptcy filing results in a lengthy and costly legal process for FE,

weakening the company's credit metrics, despite any potential improvement toFE's business risk.

We could revise the outlook to stable if the company is able to materiallyreduce contingent risks associated with its strategy to exit its merchantbusiness, including an FES restructuring process that is well managed. Furtherratings upside could result from a material improvement in FE's business risk,

incorporating a strategy that fully reflects regulated utility operationsgoing forward.

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