TEXT-Fitch cuts FirstEnergy ratings to 'BBB-'
Feb 22 - Fitch Ratings has lowered the Issuer Default Ratings (IDR) of FirstEnergy Corporation (FE) and its wholly owned merchant generation subsidiary FirstEnergy Solutions (FES) to 'BBB-' from 'BBB'. At the same time, Fitch has affirmed the ratings of Allegheny Energy Supply (Supply) and Allegheny Generating Co. (AGC) at 'BBB-'. The Rating Outlook for FE, FES, Supply and AGC is Stable. Fitch has also affirmed their short-term ratings at 'F3'. Approximately $7 billion of debt is affected by today's action. A full list of ratings is shown at the end of this release. KEY RATING DRIVERS: --The extended downturn in U.S. power prices and its adverse effect on operating profits at consolidated FE, FES and Supply; --Significant capex and rising operating costs due to environmental compliance standards, which further pressure margins and cash flows at FES and Supply; --FE's planned asset restructuring and debt reduction at FES and Supply; --Relatively high debt leverage; --Relatively stable electric utility operations and cash flows, but weakening credit metrics at JCP&L; --Significant improvement in FE's PJM reliability pricing model capacity auction for the 2015/2016 year; --Solid liquidity position. Concurrently, Fitch has taken several rating actions on FE's regulated utility and transmission companies. Please refer to Fitch's press release titled 'Fitch Lowers ATSI/TrAIL's Ratings; Affirms Remaining FE Utility Ratings' dated Feb. 22, 2013. The credit ratings downgrade at FE and FES primarily reflects high debt leverage and pressure on companies' credit metrics due to weak power prices. The ratings also incorporate more stringent EPA air emission rules and associated higher capex and operating costs. The Stable Rating Outlook assumes moderately higher realized power prices and debt reduction of $1.5 billion at FES/Supply and improving credit metrics during 2013 - 2016. Asset Sales/Debt Reduction The ratings consider the planned debt restructuring and asset transfers and sales at FES, Supply and AGC with affiliated utility, Monongahela Power Co. (MP; IDR 'BBB'; Outlook Stable). Debt reduction is expected to be facilitated at FES and Supply by the transfer of the Harrison Power Station (Harrison) to Monongahela Power from Supply for approximately $1.1 billion (net of the sale of the Pleasants plant to Supply) and the sale of unregulated hydro assets to potential third parties. FE is targeting $1.5 billion of debt reduction at FES and Supply. In November 2012, Monongahela Power Co. (MP) filed its request with the West Virginia Public Service Commission (PSC) to approve the Harrison acquisition from Supply for approximately $1.1 billion. As proposed, the asset transfer would require the implementation of a temporary transaction surcharge to be implemented concomitant with closing of the transaction. The surcharge, if approved by the PSC, would remain effective until the adjudication of MP's next general rate case proceeding. The requested $192.9 million surcharge at MP would be partially offset by reductions to its expanded net energy cost (ENEC) mechanism. FE's consolidated credit metrics, as estimated by Fitch, are generally consistent with the lower rating level. The projections incorporate FE's planned asset sales and debt reduction of at least $1.5 billion at FES and Supply. The inability of FE to execute these initiatives and/or a weakening FE's coverage or leverage metrics would likely result in adverse credit rating actions. 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 function including money pools and sub-limits on revolving credit agreements. Low Power Prices The lower ratings and Stable Rating Outlooks for FE, FES, Supply and AGC also reflect the prolonged downturn in power prices driven by a surfeit of natural gas supply, strong reserve margins and a sluggish economic recovery. Low pricing has depressed margins and cash flows at FES and Supply, along with more stringent environmental requirements. Environmental Costs FE has invested heavily to comply with Environmental Protection Agency (EPA) rules. Continued compliance will require significant additional capital investment and result in higher operating costs in 2012 and beyond at FE's unregulated and regulated generating operations. These factors have resulted in a more leveraged consolidated financial profile. Storm Activity The impact of frequent, significant storm activity across parts of FE's service territory and recovery of related costs, especially at Jersey Central Power & Light (JCP&L), is also factored into FE's ratings. Costs related to Hurricane Sandy totaled $900 million for the FE system and $680 million at JCP&L. The resulting pressure on JCP&L and FE consolidated credit metrics is a source of concern for investors, in Fitch's opinion. In addition, Fitch believes earnings and cash flow volatility is mitigated by its significant electric utility and transmission company holdings and asset backed, retail-customer-oriented competitive power supply strategy. The ratings also consider the company's relatively well-positioned generating assets in its regional markets and first-mover advantage in emerging retail power supply markets. Liquidity Fitch believes FE's consolidated liquidity position is solid, with $5.5 billion of existing, committed bank facilities that mature May 2017. As of Sept. 30, 2013, FE had available liquidity of $3.8 billion. FE subsidiary AGC's $50 million revolving credit facility matures December 2013. In addition to sub-limit borrowing under FE's $2 billion credit facility, FE's integrated and distribution utility subsidiaries also participate in a money pool to meet their short-term working capital requirements. The Stable Outlook for Supply takes into consideration plans by FE management to eventually merge Supply into FES. The companies will remain separate entities for the near-to-medium term. However, FES and Supply are currently managed operationally and financially as one entity (together FE Generation). AGC's ratings and Stable Rating Outlook reflect the company's strong credit metrics relative to Fitch's 'BBB' internal guideline and linkage to FE. Operating risk at AGC is relatively low. The company's sole asset is a 40% undivided interest in a pumped storage facility and related transmission assets. All of AGC's revenues, earnings and cash flow are derived from its sales to Supply and affiliate, Monongahela Power Co. (IDR 'BBB', Outlook Stable). Revenues are provided via Federal Energy Regulatory Commission-approved tariffs. RATING SENSITIVIES: What Could Trigger an Upgrade? --An upgrade at this juncture appears unlikely. What Could Trigger a Downgrade? --The inability to execute FE's planned restructuring of debt and asset sales; --Lower than expected margins and volumes at the FES and Supply -Continued deterioration at JCP&L; --An unexpected adverse operating event at one of FE's nuclear or large coal-fired generating units; Fitch has taken the following rating actions: FirstEnergy Corp. --IDR downgraded to 'BBB-' from 'BBB'; --Senior unsecured debt downgraded to 'BBB-' from 'BBB'; --Short-term IDR and commercial paper ratings affirmed at 'F3'; Rating Outlook revised to Stable from Negative. FirstEnergy Solutions --IDR downgraded to 'BBB-' from 'BBB'; --Senior unsecured Debt downgraded to 'BBB-' from 'BBB'; --Short-term IDR and commercial paper ratings affirmed at 'F3'; Rating Outlook revised to Stable from Negative. Allegheny Energy Supply Co., LLC --IDR affirmed at 'BBB-'; --Senior unsecured debt and revenue bonds affirmed at 'BBB-'; --Senior unsecured revolving credit facility affirmed at 'BBB-'; --Short-term IDR affirmed at'F3'; The Rating Outlook is Stable. Allegheny Generating Co. --IDR affirmed at 'BBB'; --Short-term IDR downgraded at 'F3'; The Rating Outlook is Stable. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Utility Sector Notching and Recovery Ratings' (Nov. 12, 2012); --'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology Recovery Ratings and Notching Criteria for Utilities Parent and Subsidiary Rating Linkage
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