Fitch Rates FirstEnergy Transmission, LLC's Senior Notes 'BB+'

(The following statement was released by the rating agency)

Fitch Ratings-New York-17 March 2021:

Fitch Ratings has assigned a 'BB+' instrument rating to FirstEnergy Transmission LLC's (FET) senior unsecured debt issuance. The notes are FET's senior unsecured obligations and rank equally with FET's outstanding unsecured and unsubordinated debt. Proceeds from the transaction will be used to maintain FET's capital structure, finance capital improvements, repay short-term borrowings outstanding under FET's revolving credit facility and for general corporate purposes, including funding working capital needs and day-to-day operations. FET's Long-Term IDR is 'BB+'/Negative.

FET is an intermediate holding company subsidiary of FE. Fitch downgraded FET's IDR in October 2020 to 'BBB-'and again in November 2020 to 'BB+'. The rating actions and Rating Outlook Negative reflect rating linkage with FE and credit concerns regarding potential illicit activity at FE in connection with an ongoing federal bribery/racketeering investigation.

Key Rating Drivers

Criminal Investigation: Concerns regarding potential illicit activity at FE emerged in July 2020 with the indictment of Ohio Assembly Speaker Larry Householder; four associates; and a nonprofit organization, Generation Now, in connection with a continuing Department of Justice (DOJ) investigation. The complaint alleges Householder and his associates engaged in bribery and other illegal actions designed to ensure House Bill (H.B.) 6 would be enacted and remain in effect in light of a referendum effort to repeal the legislation.

The indictment does not explicitly name FE or its affiliates. However, pseudonyms referred to in the affidavit are widely believed to refer to FE; its corporate services subsidiary, FirstEnergy Service Company and former subsidiary, Energy Harbor. FE received subpoenas and is cooperating with the DOJ investigation. Former FE subsidiary FirstEnergy Solutions emerged from bankruptcy as a separate entity in February 2020 and was renamed Energy Harbor.

While FE and its subsidiaries have not been named in the DOJ investigation, Fitch believes future criminal charges against FE cannot be ruled out in light of pay-to-play allegations contained in the affidavit.

If FE becomes a target of the criminal investigation and is ultimately convicted, it could be subject to fines and penalties, civil litigation and resulting financial pressure, reputational risk, regulatory, political and liquidity challenges, higher cost of capital, and erosion of confidence in management and the effectiveness of its corporate governance and internal controls.

The SEC also initiated investigations of FE and an ongoing audit is being conducted by FERC's (Federal Energy Regulatory Commission) Division of Audits and Accounting, including activities related to lobbying and governmental affairs activities concerning H.B.6.

Liquidity Challenges: In November 2020, FE disclosed a $4.3 million payment to an individual who at the time of the disclosure was a government official involved in regulating FE's Ohio-based utility distribution subsidiaries. The payment was discovered during an ongoing internal investigation initiated by the company as the result of the DOJ investigation and materially worsened, in Fitch's view, regulatory, political, legal and liquidity risks already heightened by investigations underway at the DOJ and SEC.

As a result of the disclosure, FE and FET were out of compliance with representations and warranties contained in the companies' credit facilities, specifically Section 4.01 (m) Anti-Corruption Laws and Sanctions. FE, FET and its bank group subsequently entered into a waiver agreement and amendments that restored FE's and FET's ability to draw on the credit facilities.

A central concern from a credit perspective remains the inability to rule out discovery of corrupt activity in the course of ongoing investigations that could similarly block borrowings under the company's credit facilities. In November 2020, FET and its regulated subsidiary, American Transmission Systems Inc. (IDR: BBB-/Negative) borrowed the entire $1 billion available under FET's revolving credit agreement to enhance financial flexibility.

Parent and Subsidiary Rating Linkage: FET is an intermediate holding company for FE's transmission business, with moderate to strong rating linkage with its corporate parent reflecting close strategic, operational and financial ties and a centralized management structure, including a centralized treasury function. FET participates in FE's unregulated companies' money pool. As a result, FET's ratings are impacted by linkage with its corporate parent under Fitch criteria.

Coronavirus Impact Manageable: Fitch does not expect the impact of the coronavirus pandemic on FET as a FERC-regulated transmission entity to be significant as revenue is not volume dependent under FERC's tariff structure.

Supportive Credit Metrics: Factors supporting FET's ratings include projected credit metrics and business risk profile consistent with its current rating category. While FFO leverage is expected to weaken due to drawdown of FET's $1 billion revolver in 4Q20 and elevated capex, Fitch expects leverage to remain below Fitch's 6.0x downgrade trigger in 2022 and 2023.

Constructive Rate Regulation: FET's ratings reflect constructive rate regulation for its three operating transmission utilities. FERC regulation is balanced, in Fitch's opinion, and includes forward-looking test years, formula-based rates with annual true-ups and relatively attractive ROEs. These factors mitigate risk associated with regulatory lag and FET's large investment program. While pending challenges to ROE determinations by FERC is a somewhat negative development, Fitch expects returns for FET's transmission utilities to remain competitive.

Large Capex Program: FE is targeting 2021-2023 transmission capex of $3.6 billion-$4.1 billion, of which Fitch expects approximately 65% to be focused on transmission investment in Ohio and Pennsylvania through FET operating subsidiaries ATSI and MAIT. The transmission buildout is designed to improve FE's system reliability and customer service and consist of a large number of relatively small projects. Targeted transmission investment is expected to drive compound annual rate base growth of up to 8%.

Derivation Summary

FET is an intermediate holding company for FE's transmission business with moderate-to-strong rating linkage with FE. FET's transmission business benefits from a relatively low operating risk profile and constructive FERC economic regulation. FET's ratings are well-positioned relative to higher-rated peer AEP Transmission Company, LLC (A-/Stable).

Fitch's base rating case estimates FET's debt/EBITDA at just below 5.0x in 2021, which compares with AEP Transmission's 5.0x in 2021. Credit concerns regarding FET's relatively high leverage are mitigated by the transmission utility's relatively low-risk business model and relatively predictable earnings and cash flows.

Key Assumptions

--Investment of $3.6 billion to $4.1 billion during 2021-2023;

--Continued balanced FERC regulation;

--Rate base growth of up to 8% on a compound annual basis.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--An upgrade at FE along with FFO leverage sustaining at 5.0x or lower;

--Continued balanced FERC rate regulation.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--An adverse rating actions at FE;

--FFO leverage sustaining at 6.0x or higher due to deterioration in regulatory oversight or other factors;

--An unexpected catastrophic outage or event.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

While FET's liquidity position is generally solid in Fitch's opinion, recent disclosure of the FE's and FET's lack of compliance with covenants contained in the Representations and Warranties section of its credit agreements injects a measure of uncertainty with regard to liquidity. If further lapses emerge unrelated to the waiver provided by FE's and FET's bank group regarding the $4.3 million payment discussed above, FE and FET could again be unable to comply with their Representation and Warranties regarding corrupt activity and be required to seek another waiver. In this scenario, FE's and FET's access to their revolvers would be restricted until such a waiver is granted by the companies' bank group, underscoring contagion risk for FET from FE.

In November 2020, FET and operating subsidiary ATSI borrowed all $1 billion available under FET's credit facility resulting in no remaining availability. FET proactively drew down its revolving credit facility as a preemptive measure to increase its cash position and preserve financial flexibility. FET and FE have credit agreements with borrowing capacity of $1 billion and $2.5 billion, respectively. Both facilities mature December 2022.

Date of Relevant Committee 19 November 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

FirstEnergy Transmission, LLC
----senior unsecured; Long Term Rating; New Rating; BB+

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Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

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