Blackout investigation a factor
New York, Feb. 10, 2004 — Moody’s Investor’s Service downgraded FirstEnergy Corp.’s (FE) senior unsecured rating to Baa3 from Baa2. Moody’s also downgraded the ratings of utility subsidiaries Jersey Central Power & Light Company (JCP&L; senior secured to Baa1 from A2), Metropolitan Edison Company (Met-Ed; senior secured to Baa1 from A2), and Pennsylvania Electric Company (Penelec; senior secured to Baa1 from A2).
Moody’s confirmed the ratings of utility subsidiaries Ohio Edison Company (OE; senior secured Baa1), Pennsylvania Power Company (PP; senior secured Baa1), Cleveland Electric Illuminating Company (CEI; senior secured Baa2), and Toledo Edison Company (TE; senior secured Baa2). This action concludes the review of the ratings of FE and its subsidiaries for possible downgrade.
The ratings outlook for FE and all of its subsidiaries is stable.
Moody’s also assigned ratings for the syndicated bank credit facilities of FE and OE as follows: Baa3 to FE’s three unsecured revolving credit facilities that total $1.25 billion; and Baa2 to OE’s three unsecured revolving credit facilities that total $500 million.
Moody’s rating action reflects:
(1) High consolidated leverage with significant holding company debt
(2) A degree of regulatory uncertainty in the service territories in which the company operates;
(3) Risks associated with investigations of the causes of the August 2003 blackout, and related securities litigation;
(4) A narrowing of the ratings range for the FE operating utilities, given the degree to which FE increasingly manages the utilities as a single system and the significant financial interrelationship among subsidiaries.
The downgrade of three of FEs regulated utility subsidiaries reflects the potential for on-going pressure for dividends to support the cash needs of the parent which currently extracts a high dividend pay-out from these three subsidiaries, state regulatory uncertainties, and greater recognition of the degree of financial and operational interrelationship between FE’s regulated utility subsidiaries. The downgrade of JCP&L reflects regulatory uncertainty in New Jersey as well as Moody’s view that the rating differentials between FE’s utility subsidiaries should be narrowed.
The downgrades of Met-Ed and Penelec reflect regulatory risk in Pennsylvania and the short supply position of these entitites to meet their provider of last resort (POLR) obligations in that state, as well as the narrowing of subsidiary rating differentials. Moody’s has narrowed the ratings range of FE’s regulated utilities because FE effectively manages all of its regulated operating subsidiaries as a single system, and these subsidiaries increasingly share their cash resources through a regulated money pool.
The stable outlook reflects the expected recovery of FE’s financial profile over time due to continued debt reduction from free cash flow, and the relatively low risk profile of its primarily regulated businesses.
The stable outlook also takes into consideration the expectation of a restart of the Davis-Besse nuclear plant in the first half of this year, a reasonably successful outcome for the Ohio Rate Stabilization Plan currently pending before the Public Utility Commission of Ohio, and the expectation that litigation related to the 2003 Blackout will not result in a financial impact on the company that is substantial from a credit standpoint. The ratings could be reevaluated if these expectations are not met.
The ratings of the following issuers were downgraded:
FirstEnergy Corp — senior unsecured and Issuer Rating to Baa3 from Baa2
Jersey Central Power & Light Company — senior secured rating to Baa1 from A2, Issuer Rating to Baa2 from A3, and Preferred Stock rating to Ba1 from Baa2
Metropolitan Edison Company — senior secured rating to Baa1 from A2, Senior Secured Shelf to (P)Baa1 from (P)A2, Issuer Rating to Baa2 from A3, and Preferred Shelf to (P)Ba1 from (P)Baa2
Pennsylvania Electric Company — senior secured rating to Baa1 from A2, senior unsecured rating to Baa2 from A2, and Issuer Rating to Baa2 from A3
The ratings of the following FirstEnergy subsidiaries and affiliates were confirmed:
Ohio Edison Company — senior secured Baa1, senior secured shelf (P)Baa1, Issuer Rating Baa2, Preferred Stock Ba1
Cleveland Electric Illuminating Company — senior secured rating Baa2, Issuer Rating Baa3, Preferred Stock Ba2
Toledo Edison Company — Senior Secured Baa2, Issuer Rating Baa3, Preferred Stock Ba2
Pennsylvania Power Company — senior secured Baa1, senior secured shelf (P)Baa1, Issuer Rating Baa2, Preferred Stock Ba1
PNPP II Funding Corp. — Backed Senior Secured Baa2
BVPS II Funding Corp. — Backed Senior Secured Baa2
CTC Beaver Valley Funding Corp. — Backed Senior Secured Baa3
CTC Mansfield Funding Corp. — Backed Senior Secured Baa3
Beaver Valley II Funding Corp. — Backed Senior Secured Baa3
FirstEnergy Corp. is a utility holding company headquartered in Akron, Ohio. Its seven electric utility operating companies comprise the nation’s 4th largest investor-owned electric system, serving over 4 million customers in Ohio, Pennsylvania and New Jersey.