Fitch Rates American Electric Power's Senior Unsecured Notes 'BBB'; Outlook
NEW YORK -- November 29, 2012
Fitch Ratings has assigned a 'BBB' rating to American Electric Power Company's
(AEP) $850 million issuance of senior unsecured notes. The notes will be
issued in five-year and 10-year tranches. The $550 million, 1.65% five-year
series E notes will mature on Dec. 15, 2017. The $300 million, 2.95% 10-year
series F notes will mature on Dec. 15, 2022.
The Rating Outlook is Stable.
Proceeds from the issuance will be used for general corporate purposes. Such
purposes include the redemption of AEP's $242.775 million, 5.25% senior
unsecured series D notes due June 1, 2015 and $315 million, 8.75% junior
subordinated debentures due March 1, 2063.
The issuance is expected to close on Dec. 3, 2012.
Key rating factors for AEP include:
--AEP's regulatory and geographic diversification from ownership of electric
utilities with operations in 11 states;
--Generally balanced regulatory environments;
--Challenges associated with the transition to market-based rates for power in
--Exposure to federal environmental regulation that will result in increased
expenditures to many of AEP's coal-fired electric generation plants and the
retirement of older, less efficient plants.
Regulatory and Geographic Diversification:
AEP benefits from its ownership of eight regulated electric utilities. The
utilities have operations in 11 states, providing regulatory and geographic
diversification. AEP's combination of electric utilities that are exposed to
different operating environments helps provide some stability to consolidated
AEP and its utilities have a favorable competitive position due to their
ownership of low-cost, coal-fired electric generation plants. AEP's utilities
are able to keep their fuel costs low through at-cost coal delivery contracts
with affiliated company AEP River Operations LLC (not rated), a wholly owned
AEP subsidiary that also barges agricultural products, coal, construction
materials, and other products to third parties.
Environmental Regulatory Concerns:
AEP's integrated utilities are exposed to environmental regulation, which is a
concern for credit quality. The AEP family of utilities operates the largest
coal-fired electric generation fleet in the U.S. AEP expects the pending
implementation of various environmental regulations to result in roughly $6
billion-$7 billion of capex through 2020, along with the retirement of more
than 5,000 MW of older, less-efficient, coal-fired electric generation plants.
Fitch would expect the utilities to be able to recover their environmental
capital spending in a timely manner given the various environmental cost
recovery mechanisms allowed by the regulatory commissions in AEP's states of
operation. The expected timely recovery of these costs mitigates the concerns
associated with such large capital outlays.
Fitch expects AEP's EBITDA to interest coverage to average more than 4.0x and
FFO to debt to average around 18%. Significant cash contributions in recent
years to the company's pension plan have shored up the funding level of AEP's
pension plan and should mitigate the need for large cash contributions during
the next few years.
AEP's liquidity position is solid, with the company's $1.5 billion credit
facility maturing in June 2015 and $1.75 billion credit facility maturing in
June 2016. Ample amounts are available under these facilities, which back up a
commercial paper program that is used to support short-term needs at the
utilities not funded by the internal money pool.
A positive rating action on AEP is unlikely given the decreasing cash flows at
the company's largest utility subsidiary, Ohio Power Company (OPCo). The
weakening financial profile at OPCo is associated with the Public Utility
Commission of Ohio (PUCO)-mandated transition to market-based pricing for
power in Ohio.
A negative rating action on AEP could occur if Fitch's forecasted FFO to debt
ratio for AEP were to drop below 15% over a multi-year period.
Fitch currently rates AEP as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Junior subordinated debt 'BB+';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Following redemption of AEP's $315 million, 8.75% junior subordinated
debentures, Fitch will withdraw AEP's 'BB+' junior subordinated debt rating.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16,
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
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Philip W. Smyth, CFA
One State Street Plaza
New York, NY 10004
Brian Bertsch, +1-212-908-0549 (New York)
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