Reuters
Moody's cuts American Electric Power rating
Wednesday December 11, 3:02 pm ET
(The following statement was released by the rating agency)
Approximately $13 Billion of Debt Securities Affected
NEW YORK, Dec 11 - Moody's Investors Service downgraded
American Electric Power Company's (AEP) senior unsecured rating
to Baa2 from Baa1, and placed its Prime-2 rating for commercial
paper under review for possible downgrade.
AEP's Baa2 long-term rating remains under review for
possible downgrade. Moody's also placed the long-term ratings
of subsidiaries Public Service Company of Oklahoma (Senior
Secured A1) and Appalachian Power Company (Senior Secured A3)
under review for possible downgrade.
The ratings of subsidiaries Ohio Power Company (Sr. Sec.
A3), Columbus Southern Power Company (Sr. Sec. A3), Central
Power and Light Company (Sr. Sec. A3), West Texas Utilities
Company (Sr. Sec. A2), and Southwestern Electric Power Company
(Sr. Sec. A1), all remain under review for possible downgrade.
Additionally, the ratings of Indiana Michigan Power Company
(Sr. Sec. Baa1) and Kentucky Power Company (Sr. Sec. Baa1) are
confirmed with a stable outlook.
These rating actions reflect: (1) Declining earnings and
operating cash flow on a consolidated basis; (2) Weaker
operating performance and cash flow generation at a number of
the operating utilities relative to their respective debt
obligations; (3) Poor returns from substantial non-regulated
investments, some of which may require additional funding
requirements, while others could eventually result in
impairment charges; (4) A high dividend pay-out ratio which
reduces financial flexibility at AEP and at its operating
subsidiaries; (5) A continuing financial drag from the large
energy trading business while the company winds down its
speculative trading activity.
The company's results have weakened in 2002, with
substantial declines in funds from operations and cash from
operations. Volatility in operating performance and working
capital requirements partly result from the company's large
trading and marketing platform. While the company has decided
to exit the speculative energy trading business, the actual
unwinding of the bulk of this portfolio will likely occur over
at least a two year period, and will require additional funding
from AEP to satisfy counter-party obligations, particularly in
its natural gas trading book. Additionally, AEP has sizeable
investments in a number of underperforming assets in the US and
abroad. These assets include its investment in the
communications business as well as its investment in the UK
generation sector, through Fiddlers Ferry and Ferrybridge. A
number of these underperforming investments may also require
additional capital and potentially could be written-down,
impacting AEP's balance sheet.
The company continues to pay a large dividend to
shareholders, which weakens the balance sheet of the holding
company and of each of the operating subsidiaries. While a
portion of AEP's short-term obligations relate to the AEP money
pool established to fund its regulated utilities, a sizeable
amount of remaining holding company debt exists, and is
structurally subordinated to the secured and unsecured
obligations at AEP's subsidiaries. Moody's further notes that
the operating performance and cash flow generation of a number
of the regulated utilities has been weak relative to the
companies' individual debt burden and capital requirements.
AEP appears to have reasonably strong liquidity to support
its businesses. The company has taken steps to strengthen
liquidity and to reduce leverage through the sale of common
equity and the sale of two large international investments,
CitiPower and Seeboard The ratings review will also consider
the rating implications for the Texas and Ohio subsidiaries
that will be separated into generation and transmission and
distribution companies. Additionally, Moody's anticipates that
the rating differential among the AEP operating utilities is
likely to narrow relative to the current ratings because of the
degree to which AEP operates the regulated businesses as a
single system, which enhances the benefits of diversification
but also more closely links the various member companies.
Moody's does not currently anticipate that the rating of AEP's
senior unsecured debt would fall below investment grade.
The long term ratings of the following issuers were downgraded
and remain under review for further possible downgrade:
AEP, senior unsecured and issuer rating to Baa2 from Baa1
AEP Resources (gtd. by AEP), senior unsecured and issuer
rating to Baa2 from Baa1
The following ratings were placed under review for possible
downgrade:
American Electric Power Company, commercial paper at Prime-2
Public Service Company of Oklahoma, senior secured at A1,
senior unsecured and issuer rating at A2, junior
subordinate debt issued by PSO Capital at A3, preferred
stock at Baa1
Appalachian Power Company, senior secured at A3, senior
unsecured and issuer rating at Baa1, preferred stock at
Baa3
The ratings of the following issuers remain under review for
possible downgrade:
Ohio Power Company, senior secured, senior unsecured, and
issuer rating at A3, preferred stock at Baa2
Columbus Southern Power Company, senior secured, senior
unsecured, and issuer rating at A3, preferred stock at
Baa2
Central Power and Light Company, senior secured at A3, senior
unsecured and issuer rating at Baa1, trust preferred
issued by CPL Capital at Baa2, preferred stock at Baa3
West Texas Utilities Company, senior secured at A2, issuer
rating at A3, preferred stock at Baa2
Southwestern Electric Power Company, senior secured at A1,
issuer rating at A2, junior subordinate debt issued by
SWEPCO Capital at A3, preferred stock at Baa1
The ratings of the following issuers were confirmed:
Indiana Michigan Power Company, senior secured at Baa1, senior
unsecured and issuer rating at Baa2, junior subordinate
debt at Baa3, preferred stock at Ba1
Kentucky Power Company, senior secured at Baa1, senior
unsecured and issuer rating at Baa2, junior subordinate
debt at Baa3, preferred stock at Ba1
RGS (I&M) Funding Corporation, senior secured lease obligation
bonds at Baa2
RGS (AEGCO) Funding Corporation, senior secured lease
obligation bonds at Baa2
Headquartered in Columbus Ohio, AEP is an energy company
that owns and operates more than 42,000 megawatts of generating
capacity in the US and in certain international markets and is
the largest electricity generator in the U.S. It sells
electricity to almost 5 million customers linked through the
company's 11-state electricity transmission and distribution
grid. |
