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Consultant suggests ring-fencing FirstEnergy utilities to protect credit ratings

Anindependent consultant recommended that FirstEnergy Corp. be required to study the possibilityof ring-fencing its Ohio utilities to protect them from the parent company'sfinancial problems.

MatthewKahal, a consultant testifying on behalf of the Office of the Ohio Consumers'Counsel, submitted his recommendation July 15 to the Public UtilitiesCommission of Ohio as part of the debate over income guarantees for FirstEnergy.

Inlate June, PUCO staff recommendeda $131 million annual distribution modernization rider be imposed on customersof FirstEnergy's Ohio electric utilities for at least three years in an effortto save the company's investment grade credit rating.

Theproposal is part of the staff's recommendation that the PUCO reject FirstEnergy's Ohioutilities have sought to save their PUCO-approvedgeneration rider.

FirstEnergy'sutilities have proposed eliminating a power purchase agreement with corporateaffiliate FirstEnergy SolutionsCorp. in response to FERC's decision that it must the agreement. (Case No.14-1297-EL-SSO)

WallStreet analysts have said that FirstEnergy will likely need to issueapproximately $2 billion of equity to support its balance sheet and creditmetrics absent an income guarantee for its Ohio generation.

PUCOstaff witness Joseph Buckley told regulators that FirstEnergy's current bondrating is Baa3 at Moody's and BBB- at S&P Global Ratings, the "finalnotch of investment grade rating" for each agency. He added that the staffbelieves that FirstEnergy, its shareholders and employees should join customersin ensuring the long-term financial health of the company.

Kahalcontends that "protecting and improving" FirstEnergy's credit ratingis management's responsibility.

"Thecaptive Ohio customers of the [FirstEnergy] Ohio utilities should not be forcedto shoulder that responsibility," Kahal wrote in his testimony.

Theconsultant recommended that the utilities be required to prepare and file areport with the PUCO identifying measures to address the credit rating problem.

"Ata minimum, this should include possible measures to strengthen the [FirstEnergyCorp.] balance sheet (as needed) and ring-fencing measures to protect the Ohioutilities (and their customers) from parent and affiliate financial andbusiness risks, particularly those of its merchant power plant operations,"Kahal wrote.

ThePUCO is rehearing the case and has not yet indicated when it may rule on theproposals.

S&P Global Ratings andS&P Global Market Intelligence are owned by S&P Global Inc.