FirstEnergy Corp. — Moody’s revises rating outlook to negative; affirms FirstEnergy Corp.’s Baa3 rating | #corporatesecurity |

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Rating Action: Moody’s revises rating outlook to negative; affirms FirstEnergy Corp.’s Baa3 rating

New York, July 24, 2020 — Moody’s Investors Service, (“Moody’s”) revised FirstEnergy Corp.’s (FirstEnergy) rating outlook to negative from stable. FirstEnergy’s ratings, including its Baa3 senior unsecured rating, were affirmed.

On Tuesday, 21 July, a criminal complaint was filed in the U.S. District Court for the Southern District of Ohio by the U.S Attorney that alleges illegal activities were conducted with respect to House Bill 6, legislation that provides financial support for two nuclear power plants in Ohio with a total generating capacity of 2,176 MW.[1] FirstEnergy, along with a former subsidiary, FirstEnergy Solutions Corp., are implicated in the illegal activity. FirstEnergy Solutions emerged from bankruptcy reorganization on 27 February 2020, and now operates as an independent organization, Energy Harbor Corp.

“We see the criminal complaint as a potential sign of higher corporate governance risk and we expect more information will become available over the next few months,” stated Jairo Chung, Moody’s analyst. “But we see the current set of facts as being insufficient to derail the fundamental improvements across FirstEnergy’s underlying regulated utilities.”

The possible corporate governance failure is directly related to the board’s organizational structure, compliance and reporting standards, policies and procedures. The complaint also raises questions around management’s credibility and track record. However, the level of uncertainty around the complaint remains very high.

FirstEnergy’s Baa3 rating incorporates our view that the company will maintain an improving credit profile. FirstEnergy is a large utility holding company with regulated utility operations across six regulatory jurisdictions, including the Federal Energy Regulatory Commission (FERC), all of which we see as being credit supportive. FirstEnergy has approximately $23 billion of rate base, including 33% under FERC, 25% in Pennsylvania, 17% of which is in Ohio, and roughly 11% in and New Jersey. FirstEnergy remains highly leveraged, with approximately $24.7 billion of debt, with more than 35% of debt issued at the parent holding company level. Post 2020, we expect FirstEnergy to produce financial credit metrics, including cash flow from operations excluding working capital (CFO pre-WC) to debt around 12% over the next two years.

The negative outlook reflects the high levels of uncertainty around FirstEnergy’s potential corporate governance risk, specifically related to the complaint. However, we expect FirstEnergy’s large and diversified regulated utility operations to remain stable, and that the investigation will not materially change the constructive regulatory relationships on a permanent basis.

A rating could be upgraded if FirstEnergy’s financial metrics improve such that its CFO pre-WC to debt is above 14% on a sustained basis; and if parent debt is reduced below 25% of consolidated debt.

A rating could be downgraded if FirstEnergy’s corporate governance risk is higher than we understood through the ongoing investigation of the criminal complaint filed on 21 July; or the company is found to be engaged in illegal activities, resulting in significant financial pressure. Also, a rating downgrade could be considered if FirstEnergy’s financial metrics deteriorate such that its CFO pre-WC to debt falls below 11% on a sustained basis; or if the parent debt level increases significantly.

FirstEnergy Corp. is a fully regulated utility holding company, serving approximately six million customers in five states through its utility operations. FirstEnergy’s total rate base is approximately $23 billion with about $8 billion of FERC-regulated transmissions.

..Issuer: FirstEnergy Corp.

Outlook Actions:

..Issuer: FirstEnergy Corp.

….Outlook, Changed To Negative From Stable

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

REFERENCES/CITATIONS

[1] United States District Court for the Southern District of Ohio, Case No. 1:20-MJ-00526 17-Jul-2020

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 VP - 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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