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Moody's lifts outlook on FirstEnergy's Ohio utilities to positive

Moody's Investors Service revised its rating outlook for FirstEnergy Corp.'s regulated utilities in Ohio to "positive," citing improving regulatory prospects and a broader corporate pivot away from unregulated holdings.

The ratings agency on May 30 revised is outlook to "positive" from "stable" for FirstEnergy's three core Ohio utilities — Ohio Edison Co., Cleveland Electric Illuminating Co. and Toledo Edison Co. — while affirming their credit ratings at Baa1, Baa3 and Baa3, respectively. The revised outlook applies to roughly $2.6 billion in debt securities for the three utilities, with Moody's citing credit enhancing regulatory outcomes at the state level as well as the knock-on effects of FirstEnergy's corporate transition to a fully regulated entity.

Specifically, Moody's noted FirstEnergy's equity contributions to the three utilities in 2016 and 2017 of $360 million as helping supply additional buffer to their cash flow credit metrics. In the case of Cleveland Electric Illuminating, which received $300 million of the equity from FirstEnergy, its cash flow from operations to debt excluding adjustments from working capital improved to 15% from 10% between 2015 and 2017, the report said.

"FirstEnergy's three Ohio utilities' key cash flow to debt metrics have improved over the last two years and are expected to be maintained at least at these higher levels over the next 2-3 years," Moody's analyst Jairo Chung said in a statement. "The increase in these utilities' key credit metrics was as a result of equity contributions from the parent company and credit supportive regulatory outcomes in Ohio."

While Moody's expects a three-year distribution modernization rider, or DMR, approved by the Public Utilities Commission of Ohio to expire in 2019, it noted that a proposed $450 million distribution platform project, if approved, could "provide visibility into the cash flow improvement from the distribution investment."

Ohio Edison, representing the largest utility of the three by rate base, is expected by Moody's to stabilize its cash flow-to-debt metrics to roughly 30% over the next two to three years, with the Toledo Edison unit improving up to 20% in the next two years from its current level of 15%, not accounting for the DMR benefit.

Still, Moody's said that dividend distributions from FirstEnergy that are sourced from its utilities in the near term could put pressure on the three utilities' ability to retain operating cash flow for debt service, making it one key variable in the credit rating status of the utilities in the coming years.

"An upgrade is possible for all three utilities, Ohio Edison, CEI and Toledo Edison, if the improved credit metrics, excluding the DMR benefit, are maintained as expected over the next several quarters," the report said. "An upgrade could also be considered if the pending distribution investment platform is approved by the PUCO. In addition, if the credit profile of FirstEnergy improves such that the parent company's reliance on these Ohio utilities declines, a rating upgrade could be considered."