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���������ֳ� - New York - 28 Jul 2020: ���������ֳ� has affirmed the ratings of FirstEnergy Corporation (FE) and revised its Rating Outlook to Negative from Stable, and has affirmed FE's subsidiary ratings. In addition, ���������ֳ� has revised FE's subsidiaries' Rating Outlooks to Negative from Stable, with the exception of Monongahela Power Company (MP), Allegheny Generating Company (AG) and Potomac Edison Company (PE), reflecting parent-subsidiary rating linkage considerations. The Rating Outlook for MP, AG and PE is Stable.

The rating actions reflect credit concerns regarding potential illicit activity at FE in connection with an ongoing federal bribery/racketeering investigation. The investigation has resulted in criminal charges against Ohio Assembly Speaker Larry Householder, four associates and a non-profit organization, Generation Now. Among other things, the affidavit alleges that Householder and his associates engaged in bribery and other illegal actions designed to ensure House Bill (H.B.) 6 was enacted and remained in effect (in light of a referendum effort to repeal the legislation).

While the indictment does not explicitly name FE or its affiliates, pseudonyms referred to in the affidavit are widely-believed to refer to FE, its corporate services subsidiary, FirstEnergy Service Company (FESC), and former subsidiary, Energy Harbor. FE plans to cooperate with the Department of Justice (DOJ) investigation. Former FE subsidiary FirstEnergy Solutions emerged from bankruptcy as a separate entity February 2020 and was renamed Energy Harbor.

Key Rating Drivers

Criminal Investigation: While FE and its subsidiaries have not been named in the DOJ investigation, future criminal charges against FE and its corporate service subsidiary, FirstEnergy Service Company (FESC), cannot be ruled out in light of pay-to-play allegations contained in the affidavit. If FE or FESC become targets of the criminal investigation and are ultimately convicted, FE could be subject to fines and penalties and resulting financial pressure, reputational risk, regulatory and political challenges, higher cost of capital and erosion of confidence in current management and the effectiveness of its corporate governance and internal controls.

On the political front, H.B. 6 appears to be in play in Ohio in the wake of the investigation. If the legislation is overturned, decoupling in Ohio may be rolled back, which would negatively impact the business risk profiles of Ohio Edison, Cleveland Electric Illuminating and Toledo Edison.

Parent-Subsidiary Rating Linkage: ���������ֳ� considers FE's subsidiary utility operating companies (Opcos) to be generally stronger than their corporate parent, reflecting the utilities' relatively low business risk profile, balanced rate regulation and FFO-adjusted leverage. While operational and strategic ties are robust, prescribed regulatory capital structures for FE's Opcos leads to moderate rating linkage, allowing the utilities' Issuer Default Ratings (IDRs) to be notched above FE's IDR. ���������ֳ� applies a bottom-up approach rating FE's Opcos. FE's utility subsidiary IDRs reflect their standalone credit profiles and moderate rating linkage with FE, while FE's IDR incorporates a consolidated approach.

���������ֳ� typically rates FE's stronger operating subsidiary IDRs one notch above FE's IDR, reflecting centralized funding and operating strategies currently deployed at the company and relatively robust standalone credit metrics. As a result, all of FE's 'BBB+' rated subsidiaries' Rating Outlooks have been revised to Negative from Stable, driven by parent subsidiary rating linkage considerations. ���������ֳ� has affirmed 'BBB' rated FE subsidiaries MP, AG and PE with Stable Rating Outlooks.

ESG Considerations

FE has Environmental, Social and Governance (ESG) Relevance Scores (RS) of '4' for management strategy, '4' for governance structure and 4 for group structure. The scores are linked to uncertainties associated with the ongoing DOJ investigation discussed above.

Coronavirus Pressures C&I Sales: ���������ֳ� expects the coronavirus pandemic will have an adverse effect on projected credit metrics in 2020 and 2021 that will prove manageable for FE. ���������ֳ�'s conservative rating case assumes that sales fluctuations in 2020 will result in flat yoy residential revenue and a decline of 5%-6% in commercial and industrial revenue with weak, albeit improving, revenue trends extending into 2021. In this scenario, ���������ֳ� estimates FFO leverage of 6.0x in 2021 and 5.8x in 2022, well inside ���������ֳ�'s 6.3x downgrade trigger for FE.

In the second quarter 2020, FE system-wide load declined almost 4% compared to the second quarter of 2019. However, the increase in residential revenues related to stay-at-home orders in FE's service territory more than offset commercial and industrial customer class revenue declines.

Improving Business Risk Profile: FE's ratings reflect its strategic focus on low-risk, regulated utility and transmission operations, credit-supportive state and federal price regulation, exit from its competitive energy supply business and the resulting meaningful improvement to its consolidated business risk profile. FE's core utility and transmission operations benefit from relatively low business risk and predictable earnings and cash flows by providing essential electricity services through quasi-monopolistic franchises in Midwest and Mid-Atlantic markets.

Pure Utility Business Model: With the emergence of FirstEnergy Solutions from bankruptcy as Energy Harbor on Feb. 27, 2020, and divestiture of Allegheny Energy Supply Company LLC's generating capacity, virtually all of FE's consolidated earnings and cash flows will be provided by 10 electric operating utilities and its regulated transmission business. ���������ֳ� believes recent approvals of grid modernization and infrastructure improvement plans by Ohio, Pennsylvania and New Jersey regulators and authorization of revenue decoupling for FE's three Ohio operating utilities are supportive credit developments.

Manageable Leverage: ���������ֳ�'s ratings and Stable Outlook consider FE's high consolidated and parent-only leverage. FE's consolidated balance sheet debt totalled $22.2 billion as of June 30, 2020 including $7.8 billion of parent-only debt. FE's parent-only debt represented approximately 35% of consolidated debt as of June 30, 2020.

Focus on Regulated Growth: FE's strategic focus on investing significant capital in and improving returns from its core distribution utility and regulated transmission units, is credit-supportive, in ���������ֳ�'s view. FE's utility distribution system capex is expected to average approximately $1.7 billion per year in 2020-2023. Transmission investment is forecast at $1.2 billion in 2020 and $1.2 billion-$1.5 billion per annum during 2021 through 2023. FE's combined utility and transmission planned capex is expected to approximate $2.9 billion-$3.2 billion per year 2020 through 2023. Management foresees $20 billion of post-2023 transmission investment opportunities.

Concern regarding FE's large capex program are mitigated by constructive Federal Energy Regulatory Commission (FERC) regulation from a credit perspective and perceived improvement in regulation across FE's jurisdictional service territory, as evidenced by constructive outcomes in New Jersey, Ohio, Pennsylvania and West Virginia in recent years. Management is positioning the company's regulated operations to provide earnings per share growth of 6%-8% in 2018-2021 and 5%-7% through 2023.

Derivation Summary

FE's 'BBB'/Outlook Negative IDR is lower than peers American Electric Power (AEP: BBB+/Stable); Exelon Corporation (EXC: BBB+/Stable) and WEC Energy Group, Inc. (WEC: BBB+/Stable), reflecting FE's relatively high parent-only and consolidated leverage. FE and peers AEP, EXC and WEC are large utility holding companies with operations spanning several states. Common FE peer characteristics include relatively low business risk profiles, generally supportive price regulation and management focus on rate base growth and maximizing operating utility returns.

FE's parent-only debt is approximately 35%, somewhat higher than WEC's parent-only leverage (approximately 30%) and significantly higher than AEP's and EXC's parent company debt, both of which are less than 20%. With the emergence of FES from bankruptcy and divestiture of Allegheny Energy Supply (Supply—which did not file in bankruptcy), FE has recast itself as a pure utility holding company composed of regulated utility and transmission businesses. In achieving this strategic goal, ���������ֳ� believes FE has meaningfully improved its business risk profile and creditworthiness on a stand-alone basis and relative to its peers.

While EXC continues to operate a large merchant generation business, its consolidated earnings and cash flows are predominantly regulated. AEP has exited the merchant generation business and virtually all other diversified businesses to focus on its core regulated operations. WEC's operations are predominantly integrated, combination electric and natural gas and gas local distribution utilities. FE, AEP, EXC and WEC have a legacy of expanding utility operations through M&A activity. FE's and EXC's utility operations are primarily lower risk pure T&D utilities operating in the Midwest and Mid-Atlantic regions. Compared to FE, AEP and WEC have a greater proportion of somewhat higher risk, integrated electric utilities, including coal-fired generation. FE is more highly levered than AEP, EXC or WEC. ���������ֳ� estimates FE FFO adjusted leverage of 6.0x in 2021 and 5.8x in 2022, which compares to 5.0x or better for AEP, EXC and WEC.

Key Assumptions

���������ֳ�'s Key Assumptions Within its Rating Case for the Issuer

--���������ֳ� estimates declines in 2020 commercial and industrial customer class revenue of 6% in 2020 and gradual recovery through YE 2021.

--Baseline load is flat at FE's electric distribution business before considering the effect of the coronavirus pandemic.

--Distribution and transmission utility rate base growth of 4.5% and 8.5%, respectively.

--Transmission capex of approximately $1.2 billion in 2020 and $1.2 billion-$1.45 billion annually during 2021-2023.

--Distribution utility capex approximates $1.7 billion per annum 2020-2023.

--Continuation of generally balanced rate regulation.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade for FirstEnergy Corp.

--Better than expected operations resulting in FFO leverage of 5.5x or better.

--Meaningful, secular improvement in jurisdictional rate regulation across FE's service territory.

--Continued FE strategic focus on relatively low risk utility and transmission businesses.

Factors that could, individually or collectively, lead to negative rating action/downgrade for FirstEnergy Corp.

--An adverse outcome in the DOJ's ongoing bribery investigation.

--A change in corporate strategy embracing investment in businesses with higher risk profiles.

--Significant deterioration in FE's rate regulation or unanticipated operating or other developments resulting in lower than expected earnings and cash flows and higher leverage, including greater than expected impact from the coronavirus pandemic.

--These or other factors resulting in sustained FFO leverage greater than 6.3x.

Factors that could, individually or collectively, lead to positive rating action/upgrade for OE, PP, CE, or TE include:

--A credit rating upgrade at the utilities' corporate parent, FE.

--FFO leverage of 4.0x or better on a sustained basis.

--Continued balanced jurisdictional price regulation.

Factors that could, individually or collectively, lead to negative rating action/downgrade for OE, PP, CE or TE include:

--An adverse credit rating action at FE.

--FFO leverage of higher than 5.0x.

--Significant deterioration in jurisdictional price regulation.

--An unexpected, catastrophic event resulting in a prolonged outage.

Factors that could, individually or collectively, lead to positive rating action/upgrade for ME, PN, or WP include:

--A credit rating upgrade at the utilities' corporate parent, FE.

--FFO leverage of 4.0x or better on a sustained basis.

--Continued balanced jurisdictional price regulation.

Factors that could, individually or collectively, lead to negative rating action/downgrade for ME, PN, or WP include:

--An adverse credit rating action at FE.

--FFO leverage of higher than 5.0x.

--Significant deterioration in jurisdictional price regulation.

--An unexpected, catastrophic event resulting in a prolonged outage.

Factors that could, individually or collectively, lead to positive rating action/upgrade for JCP&L include:

--A credit rating upgrade at the utility's corporate parent.

--FFO leverage of 4.0x or better on a sustained basis.

--Continued balanced jurisdictional price regulation.

Factors that could, individually or collectively, lead to negative rating action/downgrade for JCP&L include:

--An adverse credit rating action at FE.

--FFO leverage of higher than 5.0x.

--Deterioration in jurisdictional price regulation.

--An unexpected, catastrophic event resulting in a prolonged grid outage.

Factors that could, individually or collectively, lead to positive rating action/upgrade for FET, ATSI, MAIT, and TrAIL include:

--An upgrade at FE along with FFO leverage sustaining at 4.5x or lower.

--Continued balanced FERC rate regulation.

Factors that could, individually or collectively, lead to negative rating action/downgrade for FET, ATSI, MAIT and TrAIL include:

--An adverse rating actions at FE.

--FFO leverage sustaining at 5.5x or higher due to deterioration in regulatory oversight or other factors.

--An unexpected catastrophic outage or event.

Factors that could, individually or collectively, lead to positive rating action/upgrade for MP and PE include:

--FFO leverage of 4.5x or better.

--Continued balanced jurisdictional price regulation.

Factors that could, individually or collectively, lead to negative rating action/downgrade for MP and PE include:

--FFO leverage of worse than 5.5x on a sustained basis.

--Deterioration in jurisdictional price regulation.

--An unexpected, catastrophic event resulting in prolonged outages.

Factors that could, individually or collectively, lead to positive rating action/upgrade for Allegheny Generating Co.

--An upgrade at MP along with FFO leverage of 4.5x or lower at AGC.

Factors that could, individually or collectively, lead to negative rating action/downgrade for Allegheny Generating Co.

--Deterioration in AGC's FFO leverage to above 5.5x.

--Meaningful deterioration in AGC's regulatory compact.

--Downgrade of corporate parent and off taker MP.

--A prolonged catastrophic outage at Bath County Project.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.

Liquidity and Debt Structure

Solid Liquidity: FE's liquidity position is solid. The company renegotiated its revolving credit agreements in October 2018, reducing its consolidated borrowing capacity to $3.5 billion from $5.0 billion and extending its committed revolving bank facilities through December 2022. FE also entered into two term loans totaling $1.75 billion comprised of a $1.25 billion 364-day facility and the other a $500 million two year facility. As of March 31, 2020, FE had total liquidity of approximately $3.5 billion composed of undrawn FE and FET credit facilities of $2.5 billion and $825 million, respectively, plus approximately $212 million of cash and cash equivalents.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

FirstEnergy Corporation: Management Strategy: 4, Group Structure: 4, Governance Structure: 4

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.

Additional information is available on

Applicable Models

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

Additional Disclosures

• Dodd-Frank Rating Information Disclosure Form
• Solicitation Status
• Endorsement Policy

Endorsement Status