Fitch Affirms FirstEnergy Corporation's 'BB+' IDR and Sr. Unsecured Debt Ratings
KEY RATING DRIVERS
--Strategic efforts to reduce risk at FE's competitive business;
--High parent-only and consolidated debt;
--The extended downturn in U.S. power prices and its adverse effect on operating profits;
--Recent and future rate case outcomes;
--High capex directed primarily toward utility and transmission operations;
--Relatively stable electric utility operations and cash flows.
Improving Risk Profile
Fitch views positively FE's pivot to a more conservative strategy at its competitive energy segment (CES) following spiking prices and unscheduled outages during the polar vortex in 1Q 2014. The revamped strategy ended its short capacity position relative to CES' contractual obligations and FE will reserve generation for contingencies prospectively.
In addition, FE is exiting certain riskier, more weather sensitive retail sales channels. FE does not intend to renew contracts with mass market and weather sensitive commercial and industrial customers. Rather, FE will target non-weather sensitive large commercial and industrial and provider-of-last-resort customers.
FE's proposed PPA, if adopted by the Public Utilities Commission of Ohio (PUCO) in pending rate proceedings (discussed further below) would be a constructive credit event, providing contracted, more predictable earnings for approximately 3,200 megawatts (mw) of generating capacity.
Focus on Regulated Assets
At the same time, FE is focused on improving its regulated utility and transmission returns while investing significant capital in these assets. Investment in regulated transmission and distribution assets are expected to account for nearly three-quarters of projected 2015 consolidated FE capex and provide approximately 80% of EBITDA.
High Leverage
FE's consolidated debt leverage is high with total debt approximating \$22 billion on a consolidated basis, including parent-only long-term debt of \$4.2 billion as of Dec. 31, 2014. Fitch estimates FFO-adjusted leverage at 5.2x in 2015 and 5.9x in 2016. Further weakening of FFO-adjusted leverage to worse than 6.5x could trigger future adverse credit rating actions.
Low Power Prices
FE's ratings and Stable Outlook reflect the prolonged downturn in power prices driven by a surfeit of natural gas supply, strong reserve margins and sluggish residential demand. Low, albeit gradually improving, power prices are expected by Fitch to continue to constrain margins and cash flows at FE's merchant operations.
Proposed PJM Market Reform
Finalization of PJM Interconnection LLC's (PJM's) proposed capacity performance product is potentially a credit supportive development, in Fitch's opinion. The capacity product is being developed by PJM to ensure greater operational availability and diversity during peak power system conditions.
Potential incremental revenue to FE's competitive energy supply business segment from incentives in the proposed rule could lead to improved future credit metrics for FE versus Fitch's current expectations. PJM's capacity performance proposal, if approved by FERC, would also contain a no excuses policy and increased penalties for non-performance.
On April 24, 2015, the Federal Energy Regulatory Commission (FERC) issued and order granting PJM's request to delay its 2015 base residual auction (BRA) for the 2018 - 2019 delivery year. PJM expects to conduct the BRA 30 - 75 days following a FERC ruling on the merits of its proposal and has requested a decision by June 9, 2015.
Separately, court challenges to the inclusion of demand response in PJM's BRA could, if upheld, result in higher capacity revenues for FE's competitive business.
FE Utility Operations
FE's electric utility subsidiaries are primarily distribution operating companies serving portions of Ohio, Pennsylvania, New Jersey, West Virginia and Maryland. The utilities benefit from relatively low risk business profiles. Ohio (36%), Pennsylvania (35%) and New Jersey (14%) accounted for approximately 85% of FE's total 2014 electric distribution deliveries.
Fitch expects management to invest significant capital in its distribution and transmission businesses over the next several years to enhance service quality and reliability.
Regulatory Developments
FE's Ohio-based distribution operating utilities, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE), submitted base rate filings with the PUCO seeking approval of the Ohio companies' Electric Security Plan (ESP), dubbed ESP IV: 'Powering Ohio's Progress' by FE.
The filing proposes a distribution base rate freeze June 1, 2016 through May 31, 2019. The plan, as filed with the PUCO, continues the utilities' delivery capital rider with a \$30 million annual incremental revenue cap. FE's 'Powering Ohio's Progress' also proposes a 3,200 mw 15-year PPA with FirstEnergy Solutions (FES) in a bid to 're-regulate' certain generating assets and provide commodity price stability to ratepayers.
Under the proposal, FES would sell power through a PPA to OE, CEI and TE from its Sammis coal-fired generating facility, the Davis-Besse nuclear facility and its portion of the Ohio Valley Energy Company's (OVEC) generation output beginning June 1, 2016 through May 31, 2031.
FE's Ohio utilities would in turn sell the purchased power in wholesale markets passing through charges or credits to customers to reflect purchase power costs embedded in the PPA. Under the latest PUCO schedule, staff testimony is expected May 29, 2014, hearings in June and a final decision 4Q 2015.
Approval of the ESP IV PPA as proposed by the PUCO would meaningfully improve FE's consolidated business risk and financial profile, in Fitch's opinion.
FE's Pennsylvania distribution utilities filed base rate cases with the Pennsylvania Public Utility Commission (PUC) in Aug. 2014. FE reached a settlement agreement with major intervenors to the distribution rate cases, which was filed with the PUC in February 2015.
The PUC approved the stipulation on April 9, 2015, authorizing rate increases totaling \$292.8 million, representing 70% of the total rate increase request of \$415.7 million. Fitch views the PUC order as credit supportive.
The West Virginia Public Service Commission (PSC) approved a settlement agreement authorizing a \$124.3 million rate increase in Monongahela Power Co. (MP) and Potomac Edison's (PotEd's) joint rate case filing. The rate increase represents approximately 60% of the \$212.6 million rate increase request supported by the companies and is a balanced outcome in Fitch's view.
In an adverse credit development, the New Jersey Board of Public Utilities (BPU) in March 2015 ordered JCP&L to reduce base rates \$115 million. The final BPU order includes the impact of the commission's updated consolidated tax policy and authorizes recovery of deferred storm costs over six years.
The annual rate reduction amounts to \$34 million including storm cost recovery and is based on a 9.75% authorized ROE and a 46% equity ratio. Fitch's projections incorporate the effects of the BPU ordered rate reduction.
Operating EBITDA at JCP&L declined 23% to \$522 million in 2014 from \$675 million in 2011. The financial deterioration evident at JCP&L in recent years is an unfavorable development for FE from a credit rating perspective.
In October 2014, ATSI filed a proposal with the Federal Energy Regulatory Commission (FERC) to adopt a forward looking transmission formula rate with and effective date of Jan. 1, 2015. In December 2014, FERC accepted the filing effective Jan. 1, 2015 subject to refund pending hearings and settlement proceedings.
At the same time, FERC initiated an inquiry into ATSI's return on equity citing a refund date of Jan. 12, 2015, if a refund is ordered. A procedural schedule has not been established and settlement discussions are ongoing. A final decision is expected in 4Q 2015 or 1Q 2016.
Capex
FE's 2015 capex is targeted at \$2.9 billion, 12% below the \$3.3 billion invested in 2014. In 2015 capex is earmarked primarily for FE's regulated distribution and transmission operations, accounting for 74% of total FE capex.
FE plans to invest approximately \$4.2 billion in transmission investments 2014 - 2017. Transmission capex designed to improve FE system reliability and customer service will initially focus on northern Ohio, moving across the remainder of FE's regional footprint over time.
Liquidity
Fitch believes FE's consolidated liquidity position is solid. As of Dec. 31, 2014, FE had approximately \$4 billion of total consolidated liquidity including \$85 million of cash and cash equivalents and \$3.9 billion in unused committed revolving credit facilities.
FE's operating utilities rely on sub-limits under FE's credit facility for liquidity, FE's integrated and distribution utility subsidiaries also participate in a money pool to meet their short-term working capital requirements.
KEY ASSUMPTIONS
--Revenue increases of \$292.8 million of for its Pennsylvania distribution utilities as recently authorized by the PUC;
--Incremental distribution capital recovery revenue of \$15 million per annum for its Ohio operating utilities;
--No benefit for FE's proposed PPA in ESP IV;
--A net rate reduction of \$34 million for JCP&L as recently authorized by the BPU;
--A 10.7% FERC authorized ROE for ATSI, 11.75% at TrAIL;
--Capacity prices reflect actual PJM auctions held and no benefit from capacity reform initiatives currently underway.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Meaningful debt reduction at the FE parent level and/or its merchant business in combination with improving revenue and cash flows;
--Long-term contracts for a significant proportion of FE's merchant output with creditworthy counterparties or divestiture of the business;
--Sustained improvement in FE's FFO-adjusted and EBITDAR leverage to 5.5x and 4.0x, respectively, or better.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Lower than expected margins and volumes and continued high leverage at FE and its competitive business;
--An unsupportive final decision in its ESP IV filing in Ohio;
--An unexpected adverse operating event at one of FE's nuclear or large coal-fired generating units;
--Weakening of FE's FFO leverage to 6.5x or worse on a sustained basis.
Fitch has affirmed the following ratings:
FirstEnergy Corp.
--IDR at 'BB+';
--Senior unsecured debt at 'BB+/RR4';
--Short-term IDR at 'B'.
The Rating Outlook is Stable.
Fitch has affirmed and withdrawn FE's 'B' commercial paper rating.
Комментарии