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Fitch Affirms FirstEnergy & Subs; Assigns First Time Ratings to Mid-Atlantic Transmission, LLC.

New York: Fitch Ratings has affirmed FirstEnergy Corporation's (FE) ratings, including its 'BBB-' Issuer Default Rating (IDR), and the IDRs and issuer ratings of its subsidiaries. In addition, Fitch assigns first-time long- and short-term Issuer Default Ratings of 'BBB' and 'F3', respectively, to Mid-Atlantic Interstate Transmission, LLC (MAIT). The Rating Outlook is Stable for FE and its subsidiaries. A full list of rating actions is provided below.

The affirmation reflects FE's strategic focus on its core, relatively low-risk electric distribution and transmission businesses; constructive rate regulation; anticipated exit from competitive generation markets; and strong parent-subsidiary rating linkage. Fitch assumes the sale of Allegheny Energy Supply (AE Supply) generating assets and transfer of the 1,300MW Pleasants super critical coal fired generating facility to Monongahela Power Company (MP) will be completed by the end of the first quarter of 2018.

Fitch expects FirstEnergy Solutions (FES) to file for bankruptcy protection by the end of the first quarter of 2018 and could file a pre-packaged restructuring in bankruptcy sooner. It is our understanding that negotiations between FES and its creditors are continuing. Fitch expects a Federal Energy Regulatory Commission (FERC) decision in the commission's pending wholesale electricity market resiliency review, and Ohio and Pennsylvania nuclear plant legislation could meaningfully impact the value of FES assets in a restructuring scenario. In its analysis Fitch assumes $700 million to settle claims in a contentious FES bankruptcy scenario in addition to other expenses and drawdown by FES of its $500 million secured credit agreement provided by FE. Fitch estimates FE debt-to-EBITDAR of 4.3x and 4.4x in 2018 and 2019, respectively.

MAIT's ratings reflect the transmission utility's relatively low business risk profile, constructive regulation, large capital investment program and projected FFO-adjusted leverage of 3.8x in 2018 and 4.0x in 2019. MAIT has reached a settlement agreement in its formula-based rate case at FERC. A final FERC decision is expected around year-end.

KEY RATING DRIVERS

Utility-Only Strategy: The ratings and Stable Rating Outlook consider FE's strategy to become a fully regulated utility holding company, exiting its competitive energy business by mid-2018. FE's competitive business has struggled for years with the prolonged downturn in power prices, which reflect a surfeit of natural gas supply driven by advances in drilling technology, strong reserve margins and sluggish residential demand. Low natural gas and power prices are expected to continue to pressure margins and cash flows at FE's merchant operations, a trend underscored by lower rest-of-RTO prices in the most recent PJM Interconnect, LLC capacity auction. With prospects low for a meaningful rebound in power prices in the near to intermediate term, FE has decided to exit this underperforming business segment to focus on regulated growth opportunities.

Rating Linkage: While FE's rated subsidiaries access capital markets independently, they have strong strategic, legal and operational links to their corporate parent. Subsidiary funding is facilitated via sub-limits under FE's fully committed bank facilities, and its subsidiary companies participate in separate utility and competitive segment money pools. These factors underscore the relatively strong parent-subsidiary linkage throughout the FE corporate family. As a result, Fitch generally limits notching between FE and its stronger regulated utility and transmission subsidiary IDRs to one notch. The multi-notch differential between FE and its rated nonutility subsidiaries is a function of FE's strategic decision to exit its competitive energy business and its refusal to infuse additional equity.

Credit Supportive Restructuring: FE is seeking to maximize the value of the competitive energy supply business through legislative and regulatory means in Ohio, Pennsylvania and West Virginia. If FE's competitive generation assets cannot be sold, a restructuring of its competitive business in bankruptcy is likely to be triggered by approximately $500 million of maturing or putable FES debt in 2018 or other factors. FES is in discussions with creditors that could lead to a pre-packaged restructuring in bankruptcy. Divestiture of FE's competitive segment through asset sales, plant closures, reregulation or restructuring in bankruptcy resulting in permanent separation of the competitive business would result in a meaningfully improved business risk profile for consolidated FE and is credit supportive.

FE's ratings and Stable Outlook also reflect Fitch's expectations for new equity issuance of at least $1.8 billion 2017-2019 and credit supportive final decisions in Ohio, New Jersey and Pennsylvania base rate cases. Fitch estimates FE 2018 and 2019 debt/EBITDAR will approximate 4.3x and 4.4x, respectively, and FFO-adjusted leverage is expected to improve from 7.3x in 2018 to 5.2x in 2019, excluding FES. The 2018 spike in FFO-adjusted leverage to 7.3x reflects non-recurring FES restructuring charges of $1.5 billion.

Restructuring Initiatives Underway: In December 2016, FE announced several initiatives to facilitate the rationalization of its competitive generation business. These initiatives include renegotiated bank facilities, covenant modifications and changes in FES's board of directors. In addition, FE increased the size of its corporate bank facility to $4 billion from $3.5 billion under its previous revolving credit facility and terminated FES's and Allegheny Energy Supply's (Supply) credit facilities. FE will provide a two-year $700 million secured revolving credit ($500 million) and surety credit support facility ($200 million) to FES as borrower and FirstEnergy Generation (FG) and FirstEnergy Nuclear Generation (NG) as guarantors.

Focus on Regulated Growth: Fitch views FE's focus on improving its regulated utility and transmission returns while investing significant capital in these assets and exiting its competitive business as credit supportive. Distribution utility capex is estimated at $1.3 billion per year through 2019. In addition, FE is targeting $3.2 billion - $4.8 billion of investment in its regulated transmission business in 2018-2021. Fitch's concerns regarding FE's large capex program are mitigated by perceived improvement in regulation across the company's service territory as evidenced by constructive outcomes in New Jersey, Ohio, Pennsylvania and West Virginia in recent years. Management is positioning FE's regulated operations to provide earnings per share growth of 5%-7%.

MAIT Rate Case Update: In October 2017, MAIT filed a settlement agreement with FERC in its formula transmission rate proceeding. Signatories to the agreement include the Pennsylvania Public Utility Commission, the Pennsylvania Office of Consumer Advocate, Exelon and IMG Midstream, among others. The settlement, if approved by the commission, would establish a formula-based rate template, incorporate a 10.3% authorized return on equity (9.8% base plus RTO participation adder of 0.50%) and 50% equity - 50% debt hypothetical capital structure for 2017 and 2018 and a 60% equity ceiling for 2019 - 2021. The 60% equity ceiling will remain in effect until changed through a subsequent rate case filing. Under the terms of the settlement, no party to the settlement, including MAIT, may file for a change in ROE or capital structure until Dec. 31, 2021. A final FERC decision is expected to be issued around year-end.

DOE NOPR: In September 2017, the Department of Energy (DOE) requested that FERC issue a rule in 60 days requiring grid operators to allow full cost recovery for generators with at least a 90-day fuel supply that are not subject to cost-of-service regulation. It appears that the directive would re-regulate large swaths of the competitive U.S. generation market ostensibly to enhance grid reliability by avoiding closure of uneconomic nuclear and coal-fired generation. Fitch believes FES would benefit from such a rule, which could meaningfully enhance the value of its generating assets. FERC's response to the unusual interagency initiative and prospects for ultimate implementation of such a rule is highly uncertain. Incoming FERC commissioner McIntyre's recent request for a 30-day extension to respond to the DOE Notice of Proposed Rulemaking (NOPR) was granted by the DOE. A FERC ruling is expected by Jan. 10, 2018. If FE's competitive generation assets cannot be sold, a restructuring of its competitive business in bankruptcy is likely. A key concern in an FES bankruptcy is the ability of creditors to clawback value from FE. Fitch's base rating case assumes $1.5 billion of costs associated with an FES bankruptcy.

Legislative/Regulatory Initiatives: FE's strategy to maximize the value of FES's primarily coal and nuclear generation through legislative and regulatory means while negotiating possible plant sales to third parties has encountered headwinds. Legislative efforts in Ohio to provide economic support to nuclear generation threatened by low power and natural gas prices have stalled and progress in Pennsylvania on the issue of nuclear subsidies has been slow with enactment of legislation uncertain.

Power Prices: FES's weak credit profile reflects the prolonged downturn in U.S. power prices driven by burgeoning natural gas supply, strong reserve margins, proliferation of renewable energy and sluggish demand. A meaningful reversal in power prices seems unlikely in light of these factors, and Fitch expects low power prices will continue to constrain FES's margins and cash flow. Weak PJM Interconnection, L.L.C.'s base residual auction capacity prices will pressure post-2018 credit metrics. Moreover, FES's ability to hedge generation with forward kilowatt-hour sales is challenged by significantly higher collateral requirements, increasing FES's exposure to volatile spot market prices for wholesale power.

High Leverage: Fitch's ratings consider FE's high leverage on both a consolidated and parent-only basis. As of June 30, 2017, FE's consolidated adjusted debt totalled $23.4 billion. Parent-only FE long-term debt at the end of second-quarter 2017 was $7.5 billion, representing 32% of total adjusted debt at consolidated FE. Debt/EBITDAR was 5.0x in 2016 and is estimated by Fitch to improve to 4.3x - 4.4x during 2018-2020 with divestiture of its commodity exposed business.

Recovery Analysis: The individual security ratings at FES, Supply and Allegheny Generating Co. are notched above or below their respective IDRs as a result of the power companies' relative recovery prospects in a default scenario. Fitch values the power generation assets for each entity using a net present value (NPV) analysis. Generation asset NPVs in Fitch's analysis vary based on future gas price assumptions and other variables, such as the discount rate and heat rate and Fitch may further adjust these estimates to reflect prevailing market conditions. In its analysis, Fitch uses plant valuations provided by third-party power market consultant, Wood Mackenzie, as well as Fitch's own gas price deck and other assumptions regarding prevailing market conditions. Fitch's NPV analysis values FES's generating assets at $248 per kilowatt (kw), AE Supply's generating assets at $287/kw and AGC's at $312/kw, on average. Among other things, Fitch's analysis assumes Henry Hub natural gas price realizations of $3.00 per billion cubic feet (Bcf) in 2018 and 2019 increasing to $3.25 per Bcf in 2020.

DERIVATION SUMMARY

FE's 'BBB-' IDR is lower than peers Duke Energy (DUK, BBB+/Negative); Exelon Corporation (EXC, BBB/Stable) and American Electric Power (AEP, BBB+/Stable), reflecting FE's relatively high consolidated and parent-only leverage and uncertainty associated with its competitive generation business. FE and its peers, EXC, DUK and AEP, provide electric utility service across several state jurisdictions through operating utility subsidiaries with generally supportive regulation and low business risk profiles. FE, similar to AEP, is focused on exiting the merchant generation business and maximizing regulated returns. FE is rated one notch lower and is commensurately more highly levered than either EXC, which continues to operate a large commodity exposed generation business, or AEP on an FFO-adjusted or debt/EBITDAR basis. FE's FFO-adjusted and EBITDA leverage ratios of 5.1x and 5.3x compare favorably with DUK's 5.9x and 5.3x, respectively, for the TTM ended June 30, 2017. Successful exit from the competitive generation business and focus on its core utility business would meaningfully improve FE's consolidated business risk profile relative to its peers.

FirstEnergy Solutions' credit profile is weak relative its peers. Unlike Calpine's well diversified generating base, FES's primarily nuclear- and coal-fueled generating facilities are located exclusively in PJM Interconnection LLC and lack geographic diversity. Exelon Generation Co.'s (Exgen, BBB/Stable) and PSEG Power LLC's (Power, BBB+/Negative) operations are similarly concentrated geographically and have meaningful exposure to nuclear and/or coal generation. However, both Exgen and Power have lower leverage compared to FES. For the TTM ended June 30, 2017, Exgen's FFO-adjusted leverage was 2.5x and Power's 1.8x. CPN's FFO-adjusted leverage was weaker than FES's at 6.7x. However, Fitch expects FES's post-2017 credit metrics to erode meaningfully.

As a result of strong parent-subsidiary linkage throughout the FE corporate family, Fitch generally limits notching between FE and its stronger regulated utility and transmission subsidiary IDRs to one notch. The multi-notch differential between FE and its rated non-utility subsidiaries is a function of FE's strategic decision to exit its competitive energy business and its refusal to infuse additional equity.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Exit from FE's commodity exposed business by the end of the first half of 2018 and FES bankruptcy-related cash obligations of approximately $1.5 billion including drawdown of FE's $500 million revolver with FES and settlement of bankruptcy related and other obligations.

--Issuance of at least $1.8 billion of new equity 2017 - 2019.

--No meaningful benefit to FE/FES from legislative/regulatory initiatives, including Department of Energy's grid resiliency notice of proposed rulemaking under consideration at FERC.

--Continuation of generally constructive jurisdictional regulatory trends at the state and federal levels.

--Our projections reflect base rate increases in Ohio in 2016 and Pennsylvania in early 2017 and assume no state jurisdictional base rate changes through 2020. FE's Ohio utilities are precluded from filing a base rate case through May 2024. In Pennsylvania, FE's last base rate case order included a stay-out until Jan. 2019.

--Utility sales growth of 0.5% at FE's core utility business.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action for FE include:

--Rating upgrades are not anticipated in the near term. However, continued rate base growth along with constructive regulatory outcomes and successful exit from its merchant generation business could result in future credit upgrades in the intermediate to long term. These factors along with secular improvement in debt to EBITDAR and FFO-adjusted leverage to better than 4x and 5x, respectively, could lead to credit rating upgrades.

Future developments that may, individually or collectively, lead to a negative rating action at FE include:

--Larger than expected exposure to creditor clawbacks in a FES bankruptcy scenario could result in credit rating downgrades.

--Inability of FE to exit the competitive generation business consistent with management's strategic focus on its core regulated utility and transmission operations.

--Significant deterioration in regulatory compacts across FE's six-state service territory could result in credit rating downgrades.

--These or other factors resulting in sustained debt to EBITDAR leverage of greater than 5.0x and FFO-adjusted leverage of greater than 6.0x than could lead to future credit rating downgrades at FE.

Future developments that may, individually or collectively, lead to a positive rating action for FES, NG and FG include:

--Credit rating upgrades are not likely ahead of evolving restructuring and other challenges.

Future developments that may, individually or collectively, lead to a negative rating action at FES, NG and FG include:

--A bankruptcy filing at FES, NG and FG.

--Increased cash calls related to pending maturities, collateral requirements or other unanticipated developments.

--Inability to execute regulatory/legislative initiatives to enhance the ultimate value realized for generating assets to be divested.

--Issuance of incremental first lien debt could result in downgrades to senior unsecured obligations .

Future developments that may, individually or collectively, lead to a positive rating action for Supply and AG include:

--A sharp, sustained increase in power prices resulting in meaningful improvement in Supply's debt to EBITDAR sustaining below 6.0x.

Future developments that may, individually or collectively, lead to a negative rating action at Supply and AG include:

--Weaker power prices or prolonged major plant outage(s).

--Inability to divest assets at reasonable price levels.

--Sustained debt to EBITDAR of significantly more than 6.5x.

Future developments that may, individually or collectively, lead to a positive rating action for OE, CEI and TE include:

--A credit rating upgrade at the utilities' corporate parent, FE, would likely trigger future credit rating upgrades at OE, CEI and TE along with debt-to-EBITDAR of better than 3.6x.

Future developments that may, individually or collectively, lead to a negative rating action at OE, CEI and TE include:

--Significant deterioration in the Ohio regulatory compact, capex cost overruns, disallowances or other unanticipated factors leading to a secular weakening of debt-to-EBITDAR at OE, CEI or TE to 4.1x or greater.

Future developments that may, individually or collectively, lead to a positive rating action for ME, PN, WP and PP include:

--A credit rating upgrade at the utilities' corporate parent, FE, would likely trigger future credit rating upgrades at ME, PN, WP and PP along with sustained debt-to-EBITDAR of better than 3.6x.

Future developments that may, individually or collectively, lead to a negative rating action at ME, PN, WP and PP include:

-Significant deterioration in the Pennsylvania regulatory compact, capex cost overruns, disallowances or other unanticipated factors leading to a secular weakening of debt-to-EBITDAR at ME, PN, WP and PP to 4.1x or greater.

Future developments that may, individually or collectively, lead to a positive rating action for JCP&L include:

--Improvement in JCP&L's debt to EBITDAR to 3.8x or better on a sustainable basis driven by better than expected regulatory outcomes, operating efficiencies or other factors.

Future developments that may, individually or collectively, lead to a negative rating action at JCP&L include:

--Deterioration in the New Jersey regulatory compact or disruptive events such as storm activity that would result in debt to EBITAR sustaining at 4.4x or higher.

Future developments that may, individually or collectively, lead to a positive rating action for MP include:

--Improvement in MP's debt to EBITDAR to 3.8x or better on a sustainable basis driven by better than expected regulatory outcomes in West Virginia, operating efficiencies or other factors.

Future developments that may, individually or collectively, lead to a negative rating action at MP include:

--Deterioration in the regulatory compact in West Virginia or disruptive events such as storm activity or prolonged major plant outages that would result in debt to EBITAR sustaining at 4.4x or higher.

Future developments that may, individually or collectively, lead to a positive rating action for PE include:

--Improvement in PE's debt to EBITDAR to 3.8x or better on a sustainable basis driven by better than expected regulatory outcomes in West Virginia and Maryland, operating efficiencies or other factors.

Future developments that may, individually or collectively, lead to a negative rating action at PE include:

--Deterioration in the regulatory compact in West Virginia and Maryland or disruptive events such as storm activity that would result in debt to EBITAR sustaining at 4.4x or higher.

Future developments that may, individually or collectively, lead to a positive rating action for FET include:

--Improved margins resulting in debt to EBITDAR sustaining at levels lower than 3.8x.

Future developments that may, individually or collectively, lead to a negative rating action at FET include:

--Deterioration in the regulatory compact or other factors that would cause debt to EBITDAR to sustain above 4.4x beyond 2019

Future developments that may, individually or collectively, lead to a positive rating action for, ATSI, MAIT and TrAIL include:

--An upgrade at FE along with sustained debt to EBITDAR of 3.6x or better.

Future developments that may, individually or collectively, lead to a negative rating action at ATSI, MAIT and TrAIL include:

--Margin pressure due to cost overruns or other factors including unexpected deterioration resulting in sustained debt to EBITDAR of 4.1x.

LIQUIDITY

FE's consolidated liquidity position is solid. FE had approximately $4.9 billion of total consolidated liquidity as of June 30, 2017, including $114 million of cash and cash equivalents and unused borrowing capacity under its total $5 billion of committed revolving credit facilities. In December 2016 FE increased the size of its corporate bank facility to $4 billion from $3.5 billion under its previous revolving credit facility and terminated FES's and Allegheny Energy Supply's (Supply) credit facilities. In addition, FirstEnergy Transmission, LLC (FET) has a $1 billion revolving credit facility. FE's and FET's revolving credit facilities are scheduled to terminate on Dec. 6, 2021. FE also provides a two-year $700 million secured revolving credit ($500 million) and surety credit support facility ($200 million) to FES as borrower and FG and NG as guarantors.

FE's utility subsidiaries rely on sub-limits under FE's $4 billion revolving credit agreement to meet their liquidity requirements and FET's transmission subsidiaries also have borrowing sub-limits under FET's $1 billion revolving credit facility. FE's integrated and distribution utility and transmission operating subsidiaries also participate in FE's corporate utility money pool to meet their short-term working capital requirements. A separate money pool is available for FE's competitive businesses and includes FES and its subsidiaries (FirstEnergy Nuclear Generation, LLC and FirstEnergy Generation, LLC), Allegheny Energy Supply, LLC, Allegheny Generating Company and FE's intermediate transmission holding company, FirstEnergy Transmission. As of June 30, 2017 FES had $173 million borrowed under FE's unregulated money pool.

FE's consolidated debt leverage is high, with total debt approximating $23 billion on a consolidated basis, including parent-only long-term debt of $7.5 billion as of June 30, 2017. Consolidated FE FFO-adjusted leverage was 5.1x for the TTM June 30, 2017.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

FirstEnergy Corp.

--Long-Term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

--Short-term IDR at 'F3'.

The Rating Outlook is Stable.

FirstEnergy Solutions Corp.

--Long-Term IDR at 'CC';

--Senior unsecured notes at 'C/RR5'.

FirstEnergy Generation LLC

--Long-Term IDR at 'CC'

--Senior secured pollution control notes at 'CCC+/RR1';

--Senior unsecured pollution control notes at 'C/RR5';

--Bruce Mansfield sale-leaseback certificates at 'C/RR5'.

FirstEnergy Nuclear Generation

--Long-Term IDR at 'CC';

--Senior secured pollution control notes at 'CCC+/RR1';

--Senior unsecured pollution control notes at 'C/RR5'.

Allegheny Energy Supply Company, LLC

--Long-Term IDR at 'B',

--Senior secured pollution control notes at 'BB/RR1';

--Senior unsecured notes at 'BB-/RR2'.

The Rating Outlook is Stable.

Allegheny Generating Company

--Long-Term IDR 'B+',

--Senior unsecured notes 'BB'/RR2'.

The Rating Outlook is Stable.

Ohio Edison Company

--Long-Term IDR 'BBB,

--First mortgage bonds 'A-';

--Senior unsecured notes 'BBB+';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

The Cleveland Electric Illuminating Company

--Long-Term IDR 'BBB',

--First mortgage bonds 'A-';

--Senior secured notes 'A-';

--Senior notes 'BBB+';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

The Toledo Edison Company

--Long-Term IDR 'BBB',

--Senior secured notes 'A-';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Pennsylvania Power Company

--Long-Term IDR 'BBB',;

--First mortgage bonds 'A-';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

West Penn Power Co.

--Long-Term IDR 'BBB',

--First mortgage bonds 'A-';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Pennsylvania Electric Company

--Long-Term IDR 'BBB',

--Senior notes 'BBB+';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Metropolitan Edison Company

--Long-Term IDR 'BBB',

--Senior notes 'BBB+';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Jersey Central Power and Light Company

--Long-Term IDR 'BBB-',

--Senior notes 'BBB';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Monongahela Power Company

--Long-Term IDR 'BBB-',

--First mortgage bonds 'BBB+';

--Senior secured pollution control notes 'BBB+';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Potomac Edison Co.

--Long-Term IDR 'BBB-',

--First mortgage bonds 'BBB+';

--Short-Term IDR 'F3'.

FirstEnergy Transmission, LLC

--Long-Term IDR 'BBB-',

--Senior unsecured notes 'BBB-';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

American Transmission Systems, Incorporated

--Long-Term IDR 'BBB',

--Senior unsecured notes 'BBB+';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Trans-Allegheny Interstate Line Company

--Long-Term IDR 'BBB',

--Senior unsecured notes 'BBB+';

--Short-Term IDR 'F3'.

The Rating Outlook is Stable.

Fitch has assigned the following first time ratings:

Mid-Atlantic Interstate Transmission, LLC

Long-Term IDR 'BBB';

Short-Term IDR 'F3'.

The Rating Outlook is Stable.
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