News Column

Fitch Affirms FirstEnergy Corporation & Subsidiaries; Plans to Withdraw Subs' Ratings

May 1, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed FirstEnergy Corporation's (FE) Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BB+'. Fitch has also affirmed the ratings of FE's subsidiaries. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

Fitch expects to withdraw its ratings on FE's subsidiaries at the end of a 30-day period (around May 30, 2014) for business reasons. Fitch will continue to rate FE's IDR and senior unsecured debt ratings.

Key rating drivers for FE include:

--The extended downturn in U.S. power prices and its adverse effect on operating profits;

--Future rate case outcomes at FE's operating utilities;

--High capex directed primarily toward utility and transmission operations;

--Relatively stable electric utility operations and cash flows, but weakening credit metrics at Jersey Central Power & Light (JCP&L).

Low Power Prices

The ratings and Stable Outlook for FE reflect the prolonged downturn in power prices driven by a surfeit of natural gas supply, strong reserve margins and a sluggish economic recovery. Low, albeit gradually improving, power prices are expected by Fitch to continue to constrain margins and cash flows at FE's merchant operations along with more stringent environmental rules.

Strategy and Restructuring

The ratings consider debt restructuring and asset transfers and sales at FES, Supply and Allegheny Generation Company (AGC) with affiliated utility, Monongahela Power Company (MP) and third parties implemented in 2013. Fitch also considers historic and expected plant closures at FE and its efforts to reduce environmental capex and operating costs.

In January 2014, FE announced a 35% common stock dividend reduction to better align its payout with utility cash flows and power market realities. All else equal, the reduced dividend should result in approximately $318 million of incremental retained earnings to support FE's transmission investment initiative.

Capex

FE's 2014 capex is targeted at $3.3 billion, 50% higher than the $2.2 billion invested by the company in 2013. The year-over-year increase is driven primarily by a sharp uptick in transmission investment to $1.35 billion (40% of total 2014 capex) from $495 million in 2013.

FE plans to invest approximately $4.2 billion in transmission investments 2014 through 2017. Transmission capex is expected to improve FE system reliability and customer service initially focusing on American Transmission System Inc.'s 69 kilovolt system in Ohio and Trans-Allegheny Interstate Line Co. and moving across the remainder of FE's regional footprint over time.

Future Rate Case Outcomes

Key rate case proceedings include final resolution of FE subsidiary JCP&L's pending general rate case and storm cost recovery proceeding and Monongahela Power Company's (MP) general rate case filing.

Monongahela Power Company (MP)

In 2013, the West Virginia Public Service Commission (WVPSC) approved a settlement agreement facilitating the transfer of the Allegheny Energy Supply Company's (Supply) approximate 80% ownership interest in the Harrison Generating Station to MP.

In adopting the settlement, the WVPSC also approved the transfer of MP's approximate 20% ownership interest in the Pleasants Generating Station to Supply.

In addition, the settlement authorized the implementation of a temporary surcharge and required that MP file a rate case no later than April 30, 2014. MP filed the rate case yesterday. Earlier this month, the West Virginia Supreme Court upheld the WVPSC order approving the asset transfer.

In a constructive development, the New Jersey Board of Public Utilities (BPU) approved in March 2014 a settlement agreement between JCP&L, the BPU and Division of Rate Counsel (DRC) in the utility's storm cost proceeding. The settlement authorizes recovery of $736 million of JCP&L's $744 million of storm costs relating to several storms that occurred in 2011 and 2012. However, Fitch notes that details as to the timing of cost recovery remain uncertain.

JCP&L filed its pending general rate case (GRC) in November 2012 supporting a $31.5 million rate increase based on a 2011 test year and an 11.53% return on equity. The BPU ordered JCP&L to file the base rate case in July 2012. Parties to the proceeding have filed testimony supporting a rate decrease of more than $200 million.

Fitch has assumed no rate decrease in the JCP&L's pending GRC. An unanticipated, adverse outcome in JCP&L's and/or MP's pending rate cases could trigger future credit rating downgrades at FE. Fitch expects a final BPU decision in JCP&L's base rate case in July or August 2014.

FE Utility Operations

FE's electric utility subsidiaries are primarily distribution operating companies serving significant portions of Ohio, Pennsylvania, New Jersey, Maryland and West Virginia. The utilities benefit from relatively low risk business profiles and credit metrics that are generally consistent with the rating categories. Ohio, Pennsylvania and New Jersey account for approximately 85% of FE's total 2013 electric distribution deliveries.

Fitch expects management to invest significant capital in its distribution and transmission businesses over the next several years to enhance service quality and reliability.

FE's consolidated debt leverage is high, and Fitch estimates adjusted leverage will weaken to 4.5x during 2014 - 2016. Deterioration to 4.75x or worse would likely trigger future credit rating downgrades.

Parent/Subsidiary Linkage

FE and its operating subsidiaries' ratings are closely linked in accordance with Fitch criteria. IDR linkage reflects FE's reliance on its operating subsidiary dividends to meet its financial obligations, centrally managed operations and treasury functions including money pools and sub-limits on revolving credit agreements.

Liquidity

Fitch believes FE's consolidated liquidity position is solid. As of Dec. 31, 2013, FE had approximately $2.9 billion of total consolidated liquidity including $218 million of cash and cash equivalents and $2.7 billion in unused facilities.

In addition to sub-limit borrowing under FE's credit facility, FE's integrated and distribution utility subsidiaries also participate in a money pool to meet their short-term working capital requirements.

RATING SENSITIVITIES

A rating upgrade at this juncture appears unlikely for FE and its subsidiaries. A credit rating downgrade could be triggered by: lower than expected margins and volumes at FE's competitive business; continued deterioration at JCP&L; an unsupportive final decision in MP's pending GRC filing; an unexpected adverse operating event at one of FE's nuclear or large coal-fired generating units and/or a weakening of FE's leverage to 4.75 or worse on a sustained basis.

Fitch has affirmed the following ratings:

FirstEnergy Corp.

--IDR at 'BB+';

--Senior unsecured debt at 'BB+';

--Short-term IDR and commercial paper ratings at 'B'.

FirstEnergy Solutions

--IDR at 'BB+';

--Senior unsecured debt at 'BB+';

--Short-term IDR and commercial paper ratings at 'B'.

Allegheny Energy Supply Co., LLC

--IDR at 'BB+';

--Senior unsecured debt and revenue bonds at 'BB+';

--Short-term IDR at 'B'.

Allegheny Generating Co.

--IDR at 'BBB';

--Short-term IDR at 'B'.

Jersey Central Power & Light

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB';

--Short-term IDR and commercial paper at 'B'.

Ohio Edison Company

--IDR at 'BBB-';

--Senior secured debt at 'BBB+';

--Senior unsecured debt and revenue bonds at 'BBB';

--Short-term IDR and commercial paper at 'B'.

Pennsylvania Power Company

--IDR at 'BBB-';

--Senior secured debt at 'BBB+';

--Short-term IDR at 'B'.

Cleveland Electric Illuminating Co.

--IDR at 'BB+';

--Senior secured debt at 'BBB';

--Senior unsecured debt at 'BBB-'.

Toledo Edison Company

--IDR at 'BB+';

--Senior secured debt at 'BBB'.

BVPS II Funding Corp.

--Secured debt at 'BBB'.

Beaver Valley II Funding Corp.

--Secured Debt at 'BBB'.

PNPP II Funding Corp.

--Secured debt at 'BBB-'.

Pennsylvania Electric Company

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB';

--Short-term IDR and commercial paper at 'B'.

Metropolitan Edison Company

--IDR at 'BBB';

--Senior unsecured at 'BBB+';

--Short-term IDR and commercial paper at 'B'.

Monongahela Power Company

--IDR at 'BBB'

--Senior secured debt at 'A-';

--Secured revenue bonds at 'A-';

--Senior unsecured revenue bonds at 'BBB+';

--Short-term IDR at 'B'.

Potomac Edison

--IDR at 'BBB';

--Senior secured debt at 'A-';

--Secured revenue bonds at 'A-'

--Short-term IDR at 'B'.

West Penn Power Co.

--IDR at 'BBB';

--Senior Secured Debt at 'A-';

-Short-term IDR at 'B'.

Trans-Allegheny Interstate Line Co.

--IDR at 'BBB';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'B'.

American Transmission Systems Inc.

--IDR at 'BBB';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'B'.

The Rating Outlook is Stable for all of the above entities.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);

--'Rating U.S. Utilities, Power, and Gas Companies' (March 11, 2014);

--Parent and Subsidiary Rating Linkage (Aug. 8, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Philip W. Smyth, CFA

Senior Director

+1 212-908-0531

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analysts

Shalini Mahajan, CFA

Senior Director

+1 212-908-0351

or

Committee Chairperson

Glen Grabelsky

Managing Director

+1 212-908-0577

or

Media Relations

Brian Bertsch, New York, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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