MOODY'S CONFIRMS AMERICAN ELECTRIC POWER AND CENTRAL AND SOUTH WEST UTILITY RATINGS UPON MERGER CLOSING
Moody's Investors Service has confirmed the ratings of the US electric utilities owned by American Electric Power (AEP) and Central and South West Corporation (CSW) upon today's completion of the merger of these two large electric utility holding companies. The US utilities' first mortgage bond ratings span from Baa1 to Aa3. The rating outlooks for most of them are stable, although that of Indiana Michigan Power has been, and remains, negative, and that of Southwestern Electric Power was today changed to negative.
Moody's also assigned a P-1 rating to the new asset-backed commercial paper program established by the combined companies. The new vehicle, which factors electric receivables of 11 US-based utilities' retail customers, will soon issue commercial paper under the name AEP Credit and supercedes a similarly structured program administered by CSW.
The merger of AEP and CSW creates a holding company, retaining the name American Electric Power, with $35 billion in assets and serving markets across a broad section of the mid-US. The merger has served as a watershed within the industry due to its size and the non-contiguous service territories of the merger partners, both of which are registered electric utility holding companies under the Public Utility Holding Company Act of 1935. Parallel to obtaining the numerous approvals needed to close the merger, the managements of both companies have also had to navigate through electric restructuring in numerous states.
Legal disaggregation (the separation of generation from transmission and distribution) and competitive developments will likely drive most, if not all, ratings changes and new ratings assigned within the AEP corporate organization over the next few years. Texas restructuring legislation requires legal disaggregation of the now vertically-integrated electric utilities on January 1, 2002. Oklahoma nearly passed a restructuring bill within recent weeks that would have required such separation in mid-2002, so legal separation may become a requirement in Oklahoma, too.
The company intends to refinance all or substantially all its debt in these jurisdictions and should have the financial means to do so. Current investors in this debt, therefore, should not face the risks of the new market structure.
Although customer choice of generation supplier arrives more quickly in Ohio, another state that dominates AEP's franchised service territories, that state is allowing some flexibility in how quickly legal, as opposed to functional, disaggregation becomes a requirement so as to minimize transition costs. The company intends to restructure in a fashion that protects taxable debt from a credit standpoint until it can be refinanced.
Given these assumptions concerning the pace of restructuring, the company's plans to meet these challenges, and its financial ability to execute these plans, Moody's is maintaining a stable outlook on most of the ratings. The outlook on the ratings of Indiana Michigan Power (senior secured Baa1) will remain negative until both Cook nuclear units are returned to service within the estimated timeframe and cost. Cook unit 2 should be in service shortly, having gained the Nuclear Regulatory Commission's approval to restart. The outlook on the ratings of Southwestern Electric Power (senior secured Aa3) is being changed today to negative as competition and restructuring in neighboring jurisdictions continue to pressure the credit profile. The outlooks of Ohio Power (senior secured A3), Appalachian Power (senior secured A3), Columbus Southern Power (senior secured A3), Kentucky Power (senior secured Baa1), Central Power and Light (senior secured A3), Public Service Company of Oklahoma (senior secured A1), and West Texas Utilities (senior secured A2) are still stable.
Ratings will be re-examined in light of restructuring details as they become known.
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