Pennsylvania Power Company — Moody's affirms ratings of Ohio Edison and Pennsylvania Power; changes outlooks to stable
Rating Action: Moody’s affirms ratings of Ohio Edison and Pennsylvania Power; changes outlooks to stable
Global Credit Research – 14 Aug 2020
Approximately $725 million debt securities affected
New York, August 14, 2020 — Moody’s Investors Service (“Moody’s”) affirmed the ratings of Ohio Edison Company (Ohio Edison, A3 senior unsecured and Issuer Rating) and Pennsylvania Power Company (Penn Power, A3 Issuer Rating) and changed their outlooks to stable from positive. A complete list of rating actions is included below.
RATINGS RATIONALE
“Both Ohio Edison and Penn Power maintain strong financial metrics under the credit supportive regulatory environments of Ohio and Pennsylvania which is reflected in their A3 ratings,” stated Jairo Chung, Moody’s analyst. “However, their credit profiles are constrained by the much lower credit quality of parent company FirstEnergy, which precludes any near term upward movement of the ratings,” added Chung. Barring any new positive developments at FirstEnergy Corp. (FirstEnergy, Baa3 negative) or at the utilities themselves, we expect both utilities to remain well positioned at their current rating levels over the next several years.
As the largest Ohio based utility subsidiary of FirstEnergy, we expect Ohio Edison to continue to generate stable cash flow from operations and maintain moderate debt levels. Along with two other FirstEnergy Ohio utilities, Toledo Edison Company (Baa1 stable) and the The Cleveland Electric Illuminating Company (Baa2 stable), Ohio Edison plans to invest approximately $516 million in grid modernization over the next three years. The regulatory framework in Ohio allows timely recovery of these investments and we expect the company to fund them mostly with its internally generated cash flow.
Ohio Edison’s A3 rating reflects our expectation that the company will continue to produce a robust cash flow from operations excluding changes in working capital (CFO pre-WC) to debt ratio above 30%. However, we also expect FirstEnergy to lean on Ohio Edison more than it has done in the past to service its parent-level obligations. Thus, we anticipate Ohio Edison’s CFO pre-WC excluding dividends to debt ratio to be much weaker in the mid-teens range.
As a fully-owned subsidiary of Ohio Edison, Penn Power also continues to exhibit stable metrics with CFO pre-WC to debt projected to be in the low-20% range over the next few years. We expect the regulatory environment in Pennsylvania to remain credit supportive over this period. For example, in early 2019, the Pennsylvania Public Utility Commission (PAPUC) approved an increase in the maximum revenue allowed under the distribution system improvement charge (DSIC) to 7.5% from 5% through 2024 for Penn Power only.
Similar to Ohio Edison, we expect dividends from Penn Power to FirstEnergy to be higher than historical levels, resulting in the utility’s CFO pre-WC to debt excluding dividends to debt ratio to be relatively low at close to 10%. Given its small size, modest changes in its financials often lead to larger volatility in credit metrics.
The rapid spread of the coronavirus outbreak, severe global economic shock, low oil prices and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. We expect Ohio Edison and Penn Power to be resilient to pressures related to the coronavirus because of their rate regulated business models. Nevertheless, we are watching for utility bill payment delinquency and the regulatory response to counter these effects on earnings and cash flow.
ESG considerations incorporated into the credit analysis of Ohio Edison and Penn Power include their low carbon transition risk, as they do not own any power generation assets; and social risks associated with the safety and reliability of their utility operations, regulatory relationships as well as the changes in societal trends and customer behavior. For governance considerations, we continue to monitor developments related to a possible corporate governance failure at the FirstEnergy parent related to a recent criminal complaint filed by the US Attorney in Ohio.
Rating outlook
The stable outlook for Ohio Edison and Penn Power reflects our expectation that the regulatory environments in Ohio and Pennsylvania will remain credit supportive, allowing both companies to produce consistent and predictable financial metrics. Also, the stable outlook incorporates our view that any corporate governance risks arising from the pending criminal complaint in Ohio will be limited to the FirstEnergy parent company.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade
A rating upgrade could be considered for Ohio Edison and Penn Power if parent company FirstEnergy is upgraded or if they become more independent of the parent company. Also, a rating upgrade could be possible if Ohio Edison’s CFO pre-WC to debt ratio remains above 20% and CFO pre-WC excluding dividends to debt ratio is above 15% on a sustained basis.
For Penn Power, an upgrade could be possible if Ohio Edison is upgraded and if its CFO pre-WC to debt ratio is above 22% on a sustained basis.
Factors that could lead to a downgrade
A rating downgrade could be possible if the regulatory environment in their respective states becomes contentious, resulting in greater regulatory lag; or if the credit quality of FirstEnergy deteriorates, putting downward credit pressure on Ohio Edison and Penn Power; or if Ohio Edison’s CFO pre-WC to debt ratio falls below 16% or CFO pre-WC excluding dividends to debt ratio falls below 10% on a sustained basis.
For Penn Power, a downgrade could occur if Ohio Edison is downgraded; or if its CFO pre-WC to debt ratio falls below 18% or CFO pre-WC excluding dividends to debt falls below 10% on a sustained basis.
Affirmations:
..Issuer: Ohio Edison Company
….Issuer Rating, Affirmed A3
….Senior Secured First Mortgage Bonds, Affirmed A1
….Senior Unsecured Regular Bond/Debenture, Affirmed A3
..Issuer: Pennsylvania Power Company
….Issuer Rating, Affirmed A3
….Senior Secured First Mortgage Bonds, Affirmed A1
Outlook Actions:
..Issuer: Ohio Edison Company
….Outlook, Changed To Stable From Positive
..Issuer: Pennsylvania Power Company
….Outlook, Changed To Stable From Positive
Ohio Edison Company is the largest Ohio distribution utility within the FirstEnergy Corp. family, serving over one million customers. Ohio Edison also owns Pennsylvania Power Company, a Pennsylvania-based distribution utility that serves approximately 165,000 customers in western Pennsylvania.
The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Jairo Chung Vice President - Senior Analyst Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infrastructure Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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