S&P: FirstEnergy Solutions Corp. And Affiliates Removed From CreditWatch Negative; Downgraded To 'BB-'; Debt Ratings Lowered
We lowered the corporate credit ratings on FES, AYE Supply, and AEG to 'BB-' from 'BBB-'. The outlook is stable.
We also lowered the senior secured debt ratings on FEG, FENG, and AYE Supply to 'BB+' from 'BBB-'. We assigned a '1' recovery score to the senior secured debt at these companies, indicating our expectation for very high recovery (90%-100%) under a payment default.
We also lowered the issue-level ratings on the senior unsecured debt at all affiliates to 'BB-'. We assigned our '3' recovery rating to this debt at FES, FENG, and FEG, indicating our expectation for meaningful (50%-70%; lower end of the range) recovery in a default. We also assigned our '3' recovery rating for the unsecured debt at AYE Supply and AEG, indicating our expectation for meaningful (50%-70%; higher end of the range) recovery in a default scenario.
The rating actions affect about $3.6 billion of debt at FES and affiliates.
"The downgrade stems from our reassessment of FES' and affiliates' business risk profile to fair from satisfactory, reflecting that economic generation has progressively declined--and we expect it to be under further pressure--as a result of higher production costs relative to market peers and the loss of parental support uplift in the rating as per our conclusion that the subsidiaries are no longer strategic to parent FirstEnergy," said S&P Global Ratings credit analyst Aneesh Prabhu.
As core subsidiaries, their 'BBB-' ratings have been driven by ratings on FirstEnergy on a consolidated basis.
The stable outlook on FES and affiliates reflects financial measures that we expect to weaken. We expect FFO to debt to weaken to 16% by 2018, from about 25% in 2016 under the prevailing forward prices as legacy hedges roll off. We expect the financial risk profile to remain aggressive, with FFO to debt above 15% through 2018. Under a base-case forecast, cash flow measures decline, but we expect the company to be free cash flow positive through 2017 and cash flow neutral to modestly negative in 2018. FES' ability to manage its load and generation mix and a potential weaker-than-expected economic recovery are important factors for the stable outlook.
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