Research: Rating Action: Moody’s downgrades Cleveland Electric to Baa3 and Toledo Edison to Baa2; stable outlook

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About $2 billion in debt securities affected

New York, September 13, 2022 — Moody’s Investors Service (“Moody’s”) has downgraded the ratings of Cleveland Electric Illuminating Company (The) (Cleveland Electric) and Toledo Edison Company (Toledo Edison), including the senior unsecured rating of Cleveland Electric at Baa3 from Baa2 and Toledo Edison’s Issuer Rating at Baa2 from Baa1. The rating outlook changed from negative to stable.

A full list of rating actions appears below.

RATINGS RATIONALE

“Although last year’s Ohio regulatory settlement agreement removed certain regulatory risks for Cleveland Electric and Toledo Edison, their financial condition will be affected by the negative customer refunds stipulated by the agreement,” said Moody’s analyst Jairo Chung. Although both companies have taken proactive steps to reduce leverage to offset the pressure on their cash flows, we expect each utility to continue to produce credit metrics significantly below historical levels and below the respective downgrade thresholds that we had indicated to them to maintain their previous ratings.

For Cleveland Electric, we expect its operating cash flow before changes in working capital (CFO before WC) to debt ratio to be between 12% and 13% in 2023 and 2024, significantly below the level of 15% to 16% of the public service. had exhibited historically, and more characteristic of a Baa3 rated utility. Similarly, we estimate Toledo Edison’s ratio to average below 16% in 2023 and 2024, well below the 20%+ ratios the company produced from 2019 to 2021. two utilities, in particular Toledo Edison, will show low retained cash. flows (CFO before WC after dividends) over the debt ratio over the same period, a further indication that there has been a weakening in the overall financial profile of utilities.

The next opportunity for each of these utilities to materially improve their credit metrics and for us to verify the continued support of their regulatory frameworks will not present itself until their current Electrical Safety Plan (ESP) expires on May 31. 2024, when a basic distribution rate case is expected to be filed by May 2024.

In addition to lower credit metrics, the small size and scale of their utility operations could make them vulnerable and limit their ability to mitigate macroeconomic pressures. These potential external pressures come at a time when the financial condition of parent company FirstEnergy Corp. (FirstEnergy, Ba1 positive) has weakened, although we do not expect the downgrades of Cleveland Electric or Toledo Edison to materially affect the improvement in the parent’s credit trajectory.

Rating outlook

The stable outlook for Toledo Edison and Cleveland Electric reflects our view that each utility’s financial metrics will remain at their current levels and their regulatory frameworks will continue to be supportive after their current ESP expires in 2024.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Factors that can lead to an upgrade

A rating upgrade is unlikely until there is clarity on their regulatory frameworks beyond May 31, 2024 when their current ESP will expire. An upgrade could be possible for Toledo Edison and Cleveland Electric at this time if new regulations allow their financial profiles to improve so that their pre-WC CFO at debt is above 16% and 13 %, respectively, on a sustainable basis. In addition, if Toledo Edison and Cleveland Electric have a retained cash flow (CFO before WC after dividends)/debt ratio above 10%, a rating upgrade could also be considered. Finally, if Ohio’s regulatory environment improves in a way that significantly reduces the regulatory time to cost recovery, a rating upgrade may be possible.

Factors that may lead to a downgrade

A downgrade could be possible if Toledo Edison and Cleveland Electric’s financial ratios continue to deteriorate such that their pre-WC CFO on debt falls below 13% and 11%, respectively, on a sustainable basis. Additionally, if there are adverse regulatory developments in Ohio that increase regulatory lag or create a litigious environment, a rating downgrade may be considered.

The following scoring actions were taken:

Downgrades:

..Transmitter: Cleveland Electric Illuminating Company (The)

…. Issuer rating, downgraded from Baa2 to Baa3

….Senior Secured First Mortgage Bonds, downgraded from A3 to Baa1

….Senior regular unsecured bond/debenture, downgraded from Baa2 to Baa3

..Transmitter: Toledo Edison Company

…. Issuer rating, downgraded from Baa1 to Baa2

….Senior regular bond/debenture, downgraded from A2 to A3

Outlook Actions:

..Transmitter: Cleveland Electric Illuminating Company (The)

….Outlook, changed to stable from negative

..Transmitter: Toledo Edison Company

….Outlook, changed to stable from negative

The main methodology used in these ratings is Regulated Electric and Gas Utilities published in June 2017 and available on https://ratings.moodys.com/api/rmc-documents/68547. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Jairo Chung
VP – Senior Credit Officer
Infrastructure Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Michael G. Haggarty
Associate General Manager
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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