CHICAGO--()--Fitch Ratings has assigned a 'BBB-' rating to FirstEnergy Corporation's (FE) $1.5 billion notes offering. The debt offering is composed of two tranches: $650 million of 5-year 2.75% notes due March 2018 and $850 million of 10-year 4.25% notes due March 2023. The Rating Outlook is Stable.
KEY RATING DRIVERS
--The extended downturn in U.S. power prices and its adverse effect on operating profits at FE and its competitive generation subsidiaries, FirstEnergy Solutions (FES) and Allegheny Energy Supply (Supply);
--Significant capex and rising operating costs due to environmental compliance standards and related margin pressure at FES and Supply;
--An expected, moderate recovery in price realizations and volumes in FE's competitive business beginning in 2014.
--FE's planned asset transfer/sales and debt reduction;
--Relatively predictable electric utility operations and cash flows, but weakening credit metrics at JCP&L;
--High relative debt leverage;
The Stable Rating Outlook for FE assumes debt reduction of $1.5 billion at FES/Supply funded by planned asset sales and a recently announced $300 million equity issuance. Fitch expects moderate post-2013 margin recovery based on modestly stronger power prices and higher volumes at FES/Supply.
The inability to reduce debt, as planned, through asset sales/transfers would likely lead to adverse credit rating actions. Moreover, lower than expected power price and volume realizations at FES and Supply would also pressure creditworthiness.
The ratings consider the FE's relatively high consolidated debt leverage. Fitch estimates consolidated FFO/debt of 19% in both 2013 and 2014. Debt-to-EBITDA in 2013 and 2014 is estimated at 4.4x and 4.5x, respectively, and is projected to improve to under 4x in 2016.
Anticipated Margin Improvement
The current, extended period of low power prices has pressured operating margin and cash flows at FE's competitive generation subsidiaries. In addition, more stringent EPA air emission rules are likely to result in higher operating costs at FES and Supply. However, moderate rebound in power prices and volumes during the forecast period should lead to improving post-2013 margins at FE's competitive business.
FE's planned debt restructuring is contingent upon the transfer of Supply's 1,576-mw ownership interest in the Harrison generating plant to Monongahela Power Co. (MP) at book value. MP will also sell its 100-mw interest in the Pleasants facility to Supply.
The planned asset transfer is subject to regulatory approval. In November 2012, MP and Potomac Edison (PotEd) filed a request with the West Virginia Public Service Commission (PSC) to approve the Harrison acquisition by MP from Supply for approximately $1.1 billion (net of the sale of the Pleasants plant to Supply).
FE also intends to sell unregulated hydro assets to third parties, using the proceeds to reduce debt at FES and Supply.
PSC Surcharge Filing
As proposed, the asset transfer would require the implementation of a temporary transaction surcharge concomitant with the close 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. A final order is expected in the third quarter 2013.
On Feb. 28, 2013, FE subsidiaries FES and Supply announced cash tender offers to repurchase up to $1.080 billion of aggregate principal amount of certain debt securities. The cash tender applies to the following series of debt securities: the Supply 5.75% notes due 2019 and 6.75% notes due 2039; and, FES 6.05% senior notes due 2021 and 6.80% due 2039. The tender offers are expected to settle later this month.
Increasing debt and deteriorating credit metrics at FE utility subsidiary, Jersey Central Power and Light (JCP&L; IDR 'BBB'; Rating Outlook Stable) are a credit concern. JCP&L's service territory has been battered by several large storms including, most recently, Hurricane Sandy.
FE's ratings and Stable Rating Outlook are based on a continuation of current base rates at JCP&L and anticipated recovery of Hurricane Sandy costs.
On Friday, Feb. 22, 2013, JCP&L updated its base rate case filing to request recovery of $603 million of Hurricane Sandy-related costs over a six-year period. JCP&L filed its base rate case in December 2012 in compliance with a New Jersey Board of Public Utilities (BPU) order.
If approved by the BPU, JCP&L's annual revenues would increase $112 million. A final order is expected in the fourth quarter 2013.
What Could Trigger an Upgrade:
--An upgrade at this juncture appears unlikely.
What Could Trigger a Downgrade:
--FE's inability to execute its planned debt reduction and asset transfer and hydro 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;
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