Moody’s sizes up FirstEnergy’s potential exit from merchant generation

Moody’s Investor System has tweaked its ratings for FirstEnergy (NYSE:FE) and certain of its subsidiaries on Nov. 4 after the holding company said it could exit the merchant generation within 18 months.

Moody’s affirmed the Baa3 issuer and senior unsecured rating at parent FirstEnergy Corp. At the same time, Moody’s changed FirstEnergy’s rating outlook to stable from negative.

In a separate rating action earlier that same day, Moody’s downgraded the Corporate Family Rating (CFR) for FirstEnergy’s unregulated merchant generation subsidiary FirstEnergy Solutions (FES) to Caa1 from Ba2 and the CFR for Allegheny Energy Supply Co., LLC (AES) to B1 from Ba1. The rating outlooks for both FES and AES remain negative, Moody’s reported.

FirstEnergy President and CEO Charles Jones said in a Nov. 4 earnings report that a “strategic review of our competitive business is underway and we are pursuing options to thoughtfully and expeditiously move away from competitive markets.” FirstEnergy could implement various options within 12-to-18 months. These include converting certain competitive generation units to a “regulated or regulated-like construct in Ohio, while seeking a solution for nuclear units in Ohio and Pennsylvania that recognizes their environmental benefits.”

“We believe FirstEnergy will exit the merchant business within eighteen months,” said Swami Venkataraman, Senior Vice President at Moody’s. “As a result, we are viewing FirstEnergy on a purely regulated basis, and lowering the financial metric threshold associated with a rating downgrade to 12% for a ratio of CFO to deb,” Venkataraman said.

“Our analysis also incorporates the likelihood that FirstEnergy will face additional liabilities related to a potential FES bankruptcy filing or restructuring,” Venkataraman said. “The Baa3 rating can accommodate up to $1 billion of contingent liabilities from a FES bankruptcy or restructuring, in addition to currently outstanding guarantees for pensions.”

The change in rating outlook to stable from negative reflects the cumulative impact of a favorable rate order in Ohio and a settlement in Pennsylvania, planned equity issuance of $2.4bn to-$2.5bn through 2019 and management’s announcement that it would exit the merchant generating business entirely within 18 months, even if that required a restructuring or bankruptcy filing at subsidiary FES.

First Energy’s Baa3 rating reflects the company’s large, diversified portfolio of regulated utility subsidiaries, which includes over $18bn in authorized rate base across six supportive regulatory jurisdictions: Ohio ($2.65bn in rate base); Pennsylvania ($4.6bn in rate base); West Virginia ($5bn in rate base); New Jersey ($2bn ), Maryland ($600m) and Federal Energy Regulatory Commission (FERC) ($3.4bn).

Over the past few weeks, a favorable rate order in Ohio and a settlement in Pennsylvania, if approved, would provide FirstEnergy with approximately $400m in incremental annual cash flows starting in 2017, Moody’s noted.

FirstEnergy has requested a $146.6m rate increase in New Jersey and disclosed this morning that they have reached a settlement in New Jersey for $80m. Over the next three years (2017 — 2019), these rate increases, coupled with the equity issuances, will enable FirstEnergy to maintain a ratio of cash from operations to debt ratio in the 12-14% range.

FirstEnergy has said that it is exploring the sale of “any or all competitive assets, particularly AE Supply’s gas and hydro units.”

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.