Fitch: FirstEnergy's Ratings Unchanged by Recent PJM Developments

NEW YORK--(BUSINESS WIRE)-- The ratings of FirstEnergy Corp. (FE; Issuer Default Rating [IDR] 'BB+'; Outlook Stable) are unchanged by the higher realized prices and cleared megawatts (MW) in recently held PJM transition auctions for generating capacity, according to Fitch Ratings. While a constructive development from a credit point of view leading to improved earnings and cash flows at the margin, it will not be sufficient to move FE up the rating scale from its current 'BB+' IDR.

FE's debt to EBITDA was 7.7x for the year-ended 2014 and improved to 6.6x for the latest 12 months (LTM) ended June 30, 2015. Fitch projects EBITDA based leverage will approximate 5x in 2015 and 2016, consistent with FE's current strong 'BB' credit rating. Fitch projections incorporate improved pricing at FE's competitive unit and the positive effects from management's cash flow improvement initiative.

On Tuesday, Sept. 8, 2015, PJM announced results of its 2017/2018 capacity transition auction. The 2017/2018 transition auction price of $151.50 per MW-day compares to $120 per MW-day in the original auction. The 2017/2018 auction follows PJM's 2016/2017 capacity transition auction, the results of which were posted Aug. 31, 2015. The 2016/2017 clearing price of $134 per MW-day in the transition auction compares to $59.37 per MW-day in PJM's initial auction.

In addition, all of FE's available generation units cleared the 2016/2017 and 2017/2018 PJM transition auctions, including 2,875-MW and 2,835-MW of respective generation capacity that did not clear the initial auctions.

Results of the 2018/2019 base residual auction were released Aug. 21, 2015 with a rest of RTO clearing price of $164.77 per MW-day. This is the first auction to incorporate the FERC-approved tariff reforms. The approved reforms are being implemented by PJM over a five-year transition period that will be completed with the 2020/2021 base residual auction.

More material to FE's credit profile, proceedings continue before the Public Utilities Commission of Ohio (PUCO) to consider its electric security plan (ESP) IV. Under the latest PUCO schedule, staff testimony is expected prior to completion of hearings, which are currently underway. A final decision is likely in the first quarter of 2016. Approval of the FE's ESP IV, including its purchase power agreement (PPA), by the PUCO would meaningfully improve FE's consolidated business risk and financial profile, in Fitch's opinion.

The ESP IV rate case filing proposes a distribution base rate freeze June 1, 2016 through May 31, 2019 for Ohio Edison (OE), Toledo Edison (TE) and Cleveland Electric and Illuminating (CEI). The plan, as filed with the PUCO, continues the utilities' delivery capital rider with a $30 million annual incremental revenue cap. FE's filing also proposes a 3,200-MW 15-year PPA with First Energy Solutions (FES) in a bid to reregulate certain generating assets and provide commodity price stability to ratepayers.

Under the proposal, FES would sell power through a PPA to OE, CEI and TE from its Sammis coal-fired generating facility, the Davis-Besse nuclear facility and its portion of the Ohio Valley Electric Company's generation output beginning June 1, 2016 through May 31, 2031. FE's Ohio utilities would in turn sell the purchased power in wholesale markets passing through charges or credits to customers to reflect purchase power costs embedded in the PPA.

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

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150911005743/en/

Fitch Ratings
Primary Analyst
Philip W.Smyth, CFA
Senior Director
+1-212-908-0531
Fitch Ratings, Inc.
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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