Fitch Lowers ATSI/TrAIL's Ratings; Affirms Remaining FE Utility Ratings

NEW YORK--()--Fitch Ratings has lowered the long-term Issuer Default Ratings (IDR) of American Transmission Systems Inc. (ATSI) and Trans-Allegheny Interstate Line Co. (TrAIL) to 'BBB' from 'BBB+' and short-term IDRs to 'F3' from 'F2'.

Fitch has also affirmed the ratings of Jersey Central Power & Light (JCP&L) and revised its Rating Outlook to Negative from Stable.

In addition, Fitch has affirmed the ratings of: Ohio Edison Co. (OE); Pennsylvania Power Co. (Penn Power); Toledo Edison Co. (TE); Cleveland Electric Illuminating Co. (CEI); Metropolitan Edison (MetEd); Pennsylvania Electric Co. (PenElec); West Penn Power Co. (WPP), Jersey Central Power & Light Co. (JCPL); Potomac Edison (PotEd); and Monongahela Power Co. (MP).

A full list of ratings is included at the end of this release.

The Rating Outlook is Stable for all the aforementioned utilities, except JCP&L. Approximately $10 billion of debt is affected by the rating action.

KEY RATING DRIVERS

--Functional and financial ties with parent, FE;

--JCP&L's pending general rate case (GRC);

--Low risk regulated T&D operations, with no commodity exposure;

--Electric security plan (ESP) in place for Ohio utilities (OE, TE, CEI) through May 2016;

--Reasonably balanced regulatory environments in Pennsylvania and Ohio;

--Below average, albeit improving, regulatory environments in Maryland and West Virginia.

Concurrently, Fitch has taken several rating actions impacting the ratings of FE and its unregulated power supply subsidiaries. Please refer to Fitch's press release titled 'Fitch Lowers FE & FES's Ratings to 'BBB-'; Supply and AGC Affirmed; Outlook Stable.' ATSI and TrAIL are subsidiaries of FirstEnergy Transmission, LLC and ultimately owned by FirstEnergy Corporation (FE; IDR 'BBB-', Outlook Stable by Fitch)

ATSI/TrAIL

The lower ratings and Stable Rating Outlooks at ATSI and TrAIL reflect Fitch's parent/subsidiary rating linkage criteria and their operations within and ties to the FE corporate family. The companies are linked to FE through centralized management, strategic planning and treasury functions. Fitch, today, lowered the IDR of FE to 'BBB-' from 'BBB' triggering the ratings downgrades at ATSI and TrAIL.

ATSI and TrAIL benefit from constructive FERC regulation, relatively predictable operating earnings and cash flows and solid credit metrics.

Negative Outlook for JCP&L

The Negative Rating Outlook for JCP&L reflects rising leverage and significant deterioration in the utility's credit metrics.

GRC

JCP&L was ordered in July 2012 by the New Jersey Board of Public Utilities (BPU) to file a base rate case to ensure that JCP&L's rates are just and reasonable.

The company is seeking a $31 million rate increase in its pending general rate case (GRC) excluding Hurricane Sandy related storm damage costs.

Storm Damage Costs

JCP&L is expected to update its filing to seek recovery of storm related costs associated with Hurricane Sandy in the near future. Total costs to FE from Sandy were $900 million of which $680 million impacted JCP&L's service territory. A final order in JCP&L's GRC is expected in the fourth quarter of 2013 (4Q'13).

Fitch projections assume storm damage costs will be recovered in rates. Disallowance of such costs and/or a significant rate reduction would likely reduce credit quality and result in future credit rating downgrades.

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 generally balanced regulatory jurisdictions, relatively low risk business profiles and credit metrics that are generally consistent with the rating categories. Ohio, Pennsylvania and New Jersey account for more than 85% of FE's total estimated 2012 electric distribution deliveries.

Liquidity

FE's electric utility subsidiaries participate in a corporate money pool and have sub-limits that allow them to borrow under the parent company's $2 billion credit facility. In addition, ATSI and TrAIL participate as borrowers under a $1 billion committed bank facility. As of Sept. 30, 2012, FE's utility's and transmission subsidiaries had $1.4 billion of borrowing capacity available under the two revolving credit facilities.

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

Ohio Restructuring

The transition to competition in Ohio has been a slowly evolving, sometimes controversial process. FirstEnergy moved early to separate its generation from regulatory oversight. As a result, its distribution utilities in the state, OE, CEI and TE, have a less volatile business mix compared to other utilities in the state that are in the process of restructuring their generation assets.

ESPs Approved

FE's Ohio-based utilities have Public Utilities Commission of Ohio (PUCO)-approved electric security plans (ESP) in effect. The ESPs include generation supply procurement via competitive bid process and no increase in base distribution rates from June 1, 2014 through May 31, 2016. In addition, the ESP continues the Distribution Capital Recovery (DCR) rider, which allows the utilities to recover a return of and on capital investment of up to $405 million in their delivery system.

Pennsylvania Operations

FE's Pennsylvania-based utilities exited their multi-year transition-to-competition plans Dec. 31, 2010. Pennsylvania Public Utility Commission-approved default service plans are in place through May 31, 2015.

Coal Plant Acquisition

MP operates under an integrated regulatory model in West Virginia. While the regulatory environment in West Virginia has been somewhat restrictive from an investor viewpoint recent decisions have been more balanced in Fitch's view.

MP and PotEd filed with the West Virginia Public Service Commission (PSC) for approval of a surcharge. The surcharge filing seeks recovery of cost associated with MP's proposed acquisition of the Harrison coal plant. Currently, the super critical coal-fired generating facility is 80% owned by Allegheny Energy Supply (Supply). MP owns 408-megawatts (MW - 20%) of Harrison and is proposing to acquire the remaining 1,586-MW interest for approximately $1.1 billion, net of the sale of the Pleasants plant to Supply.

The filing supports a $193 million surcharge that will be offset in part by rate reductions under its fuel and purchase power recovery mechanism.

Fitch assumes that MP will fund the purchase price for Harrison, if approved by the PSC, with a balanced mix of debt and equity. MP is contractually obligated to provide generation to PotEd to meet its load obligations in West Virginia. A final order is expected in the third quarter of 2013.

PotEd provides transmission and distribution services in portions of Maryland and West Virginia.

In recent years, energy regulation has been less of a political focal point in Maryland than it had been previously. This period of relative calm in Maryland follows a multi-year period in which the regulatory environment had been highly politicized.

RATING SENSITIVITIES

What Could Trigger an Upgrade?

--Rating upgrades appear unlikely.

What Could Trigger a Downgrade?

--Future rating downgrades at ultimate parent, FE, could result in adverse rating actions;

--Deterioration in FE utilities jurisdictional regulation;

--Disallowed costs or significant rate reductions at JCP&L could result in future credit rating downgrades

Fitch has taken the following rating actions:

Ohio Edison Company

--IDR affirmed at 'BBB-';

--Senior secured debt affirmed at 'BBB+';

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

--Short-term IDR and commercial paper affirmed at 'F3';

The Rating Outlook is Stable.

Pennsylvania Power Company

--IDR affirmed at 'BBB-';

--Senior secured debt affirmed at 'BBB+';

--Short-term IDR affirmed at 'F3';

The Rating Outlook is Stable.

Cleveland Electric Illuminating Co.

--IDR affirmed at 'BB+';

--Senior secured debt affirmed at 'BBB';

--Senior unsecured debt affirmed at 'BBB-';

The Rating Outlook is Stable.

Toledo Edison Company

--IDR affirmed at 'BB+';

--Senior secured debt affirmed at 'BBB';

The Rating Outlook is Stable.

BVPS II Funding Corp.

--Secured debt affirmed at 'BBB'.

Beaver Valley II Funding Corp.

--Senior secured debt affirmed at 'BBB'.

PNPP II Funding Corp.

--Secured debt affirmed at 'BBB-'.

Jersey Central Power & Light

--IDR affirmed at 'BBB';

--Senior unsecured debt affirmed at 'BBB+';

--Short-term IDR and commercial paper affirmed at 'F3';

The Outlook is revised to Negative from Stable.

Pennsylvania Electric Company

--IDR affirmed at 'BBB-';

--Senior secured debt affirmed at 'BBB+';

--Senior unsecured debt affirmed at 'BBB';

--Short-term IDR and commercial paper affirmed at 'F3';

The Rating Outlook is Stable.

Metropolitan Edison Company

--IDR affirmed at 'BBB';

--Senior secured affirmed at 'A-';

--Senior unsecured affirmed at 'BBB+';

--Short-term IDR and commercial paper affirmed at 'F3';

The Rating Outlook is Stable.

Monongahela Power Company

--IDR affirmed at 'BBB';

--Senior secured debt affirmed at 'A-';

--Secured revenue bonds affirmed at 'A-';

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

--Short-term IDR affirmed at 'F3';

The Rating Outlook is Stable.

Potomac Edison

--IDR affirmed at 'BBB';

--Senior secured debt affirmed at 'A-';

--Secured revenue bonds affirmed at 'A-'

--Senior unsecured debt affirmed at 'BBB+';

--Senior unsecured revolving credit facility affirmed at 'BBB+';

--Short-term IDR affirmed at 'F3';

The Rating Outlook is Stable.

West Penn Power Co.

--IDR affirmed at 'BBB';

--Senior secured debt affirmed at 'A-';

--Senior unsecured revolving credit facility affirmed at 'BBB+';

--Short-term IDR affirmed at 'F3';

The Rating Outlook is Stable.

Trans-Allegheny Interstate Line Co.

--IDR downgraded to 'BBB' from 'BBB+';

--Senior unsecured debt downgraded to 'BBB+' from 'A-';

--Short-term IDR downgraded to 'F3' from 'F2'.

The Rating Outlook is Stable.

American Transmission Systems Inc.

--IDR downgraded to 'BBB' from 'BBB+';

--Senior unsecured debt downgraded to 'BBB+' from 'A-';

--Short-term IDR downgraded to 'F3' from 'F2';

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

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Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA, +1-212-908-0531
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analysts
Shalini Mahajan, CFA, +1-212-908-0351
Senior Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0557
Managing Director
or
Media Relations
Brian Bertsch, +1 212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA, +1-212-908-0531
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analysts
Shalini Mahajan, CFA, +1-212-908-0351
Senior Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0557
Managing Director
or
Media Relations
Brian Bertsch, +1 212-908-0549 (New York)
brian.bertsch@fitchratings.com