MOODY'S DOWNGRADES AMERICAN ELECTRIC POWER COMPANY (AEP: Sr. Uns. to Baa3 from Baa2) & SUBSIDIARIES. AEP'S COMMERCIAL PAPER DOWNGRADED TO PRIME-3 FROM PRIME-2. RATING REVIEW IS COMPLETED AND RATING OUTLOOK IS STABLE.
Approximately $16 Billion of Debt Securities Affected.
New York, February 10, 2003 -- Moody's Investors Service downgraded American Electric Power Company's
(AEP) senior unsecured rating to Baa3 from Baa2, and lowered its
short-term rating for commercial paper to Prime-3 from Prime-2.
This rating action concludes the review of AEP for possible downgrade.
Moody's also downgraded the long-term ratings of AEP subsidiaries
Public Service Company of Oklahoma (PSO: Senior Secured to A3 from
A1), Southwestern Electric Power Company (SWEPCO: Sr.
Sec. to A3 from A1), AEP Texas Central Company (formerly
Central Power and Light Company, Sr. Sec. to Baa1
from A3), AEP Texas North Company (formerly West Texas Utilities
Company, Sr. Sec. to A3 from A2), and Appalachian
Power Company (Sr Sec. to Baa1 from A3). These ratings are
removed from review for possible downgrade.
Additionally, the ratings of subsidiaries Ohio Power Company (Sr.
Sec. A3), Columbus Southern Power Company (Sr. Sec.
A3), Kentucky Power Company (Sr. Sec. Baa1),
and Indiana Michigan Power Company (Sr. Sec. Baa1) are confirmed.
The rating outlook for AEP and its subsidiaries is stable.
These rating actions reflect:
(1) Weak operating cash flow relative to consolidated debt levels at AEP;
(2) Modest free cash flow levels expected to be generated from AEP's core
(3) Continued expectations for poor returns from substantial non-regulated
investments, some of which may require additional funding and may
prove to be difficult to sell in the current environment;
(4) Execution risk associated with AEP's plan to strengthen the company's
balance sheet, particularly as it relates to asset sales;
(5) A continuing financial drag, particularly during 2003,
from the large energy trading business while the company winds down its
speculative trading activity;
(6) A degree of regulatory uncertainty for AEP's two Texas subsidiaries
as these utilities transition to a deregulated marketplace;
(7) A narrowing of the rating range for the AEP operating utilities,
given the degree to which AEP manages the utilities as a single system.
AEP's operating results for 2002 were weak, including the large
asset impairment taken at year-end, and its cash from operations
was significantly lower relative to 2001. These results reflect
substantial declines in earnings and cash flow for the wholesale power
business, write-downs of investments in the wholesale business,
and increased costs. Core operating results for 2003 and 2004 are
likely to mirror this past year's results, with the exception that
the company's decision to exit the speculative energy trading business
should reduce working capital requirements for the company's large energy
trading and marketing platform. Moody's notes that the actual unwinding
of the bulk of this portfolio will likely occur over next two years,
and may require additional funding from AEP to satisfy counter-party
obligations, particularly in its natural gas trading book.
Free cash flow is anticipated to be approximately $300 million
annually over the next two years, a timeframe when the company has
substantial debt maturities that will need to be repaid or refinanced.
Moody's also notes that a number of AEP's underperforming non-regulated
assets, including its investment in Fiddlers Ferry and Ferrybridge,
will continue to be a drag on earnings and cash flow during 2003.
The company announced on January 24th that it would be taking actions
to strengthen the weakened company's balance sheet. These actions
include a recommendation to the board to reduce the common dividend by
approximately 40%, a plan to shed non-core assets,
and the consideration of common equity issuance. With modest free
cash flow anticipated for the next two years, AEP's ability to de-lever
will depend upon the improvement initiatives outlined by the company,
including asset sales and equity issuance. The stable outlook reflects
the expectation that AEP will maintain or increase cash flow from operations
relative to its debt, and will also improve its balance sheet.
Moody's believes that improvements will entail reductions in O&M expense
and capital expenditures, issuance of equity, and substantial
asset sales. If improvements in cash flow and balance sheet improvements
do not occur, this could have an adverse rating impact.
The rating actions taken on AEP Texas North and AEP Texas Central recognize
that both companies will ultimately become transmission and distribution
businesses under the company's current plan. The rating action
also incorporates a degree of regulatory uncertainty and execution risk
as these companies transition to transmission and distribution businesses,
particularly as it relates to their plans to exit the generation business
and to address remaining stranded costs.
The rating actions relating to PSO, SWEPCO, and Appalachian
Power reflect some credit deterioration at each subsidiary along with
Moody's view that the rating range of the AEP subsidiaries should narrow
since the company substantially manages all of the operating subsidiaries
as a single system.
The rating confirmation for Columbus Southern and Ohio Power reflects
both companies stable credit profile, and considers the fact that
both companies will remain functionally separate while continuing to legally
operate as vertical integrated utilities.
The ratings of the following issuers were downgraded:
· AEP, senior unsecured and issuer rating to Baa3 from Baa2,
short-term rating for commercial paper to Prime-3 from Prime-2,
shelf registration for the issuance of senior unsecured debt and junior
subordinate debt to (P)Baa3 from (P)Baa2 and to (P)Ba1 from (P)Baa3,
· AEP Resources (gtd. by AEP), senior unsecured and
issuer rating to Baa3 from Baa2
· AEP Texas Central Company (formerly Central Power and Light Company),
senior secured to Baa1 from A3, senior unsecured and issuer rating
to Baa2 from Baa1, trust preferred issued by CPL Capital to Baa3
from Baa2, preferred stock to Ba1 from Baa3
· AEP Texas North Company (formerly West Texas Utilities Company),
senior secured to A3 from A2, issuer rating to Baa1 from A3,
preferred stock to Baa3 from Baa2
· Appalachian Power Company, senior secured to Baa1 from
A3, senior unsecured and issuer rating to Baa2 from Baa1,
preferred stock to Ba1 from Baa3
· Public Service Company of Oklahoma, senior secured to A3
from A1, senior unsecured and issuer rating to Baa1 from A2,
junior subordinate debt issued by PSO Capital to Baa2 from A3, preferred
stock to Baa3 from Baa1, shelf registration for senior unsecured
debt to (P)Baa1 from (P)A2
· Southwestern Electric Power Company, senior secured to
A3 from A1, issuer rating to Baa1 from A2, junior subordinate
debt issued by SWEPCO Capital to Baa2 from A3, preferred stock to
Baa3 from Baa1, shelf registration for senior unsecured debt to
(P)Baa1 from (P)A2
The ratings of the following issuers were confirmed.
· Ohio Power Company, senior secured, senior unsecured,
and issuer rating at A3, preferred stock at Baa2, shelf registration
for preferred stock at (P)Baa2
· Columbus Southern Power Company, senior secured,
senior unsecured, and issuer rating at A3, preferred stock
at Baa2, shelf registration for the issuance of senior unsecured
debt and junior subordinate debt at (P)A3 and (P)Baa1, respectively.
· Indiana Michigan Power Company, senior secured at Baa1,
senior unsecured and issuer rating at Baa2, junior subordinate debt
at Baa3, preferred stock at Ba1, shelf registration for senior
secured, senior unsecured debt, and junior subordinate debt
at (P)Baa1, (P)Baa2, and (P)Baa3, respectively.
· Kentucky Power Company, senior secured at Baa1, senior
unsecured and issuer rating at Baa2, junior subordinate debt at
Baa3, shelf registration for senior secured and senior unsecured
debt at (P)Baa1 and (P)Baa2, respectively.
· RGS (I&M) Funding Corporation, senior secured lease
obligation bonds at Baa2
· RGS (AEGCO) Funding Corporation, senior secured lease obligation
bonds at Baa2
Moody's expects to assign a rating of A3 to Ohio Power Company planned
issuance of $500 million of senior unsecured debt and a rating
of A3 to Columbus Southern's planned issuance of $500 million of
senior unsecured debt. Proceeds from both offerings will be used
to retire short-term debt and to retire virtually all of each company's
first mortgage bonds, with the near-term expectation to extinguish
each company's first mortgage indenture. For this reason,
the senior secured debt rating and senior unsecured debt rating are the
same for these issuers. Also, to the extent that legal separation
occurs, these securities are expected to become obligations of transmission
and distribution companies.
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.
Moody's Investors Service
VP - Senior Credit Officer
Moody's Investors Service