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11 Dec 2002
MOODY'S DOWNGRADES AMERICAN ELECTRIC POWER COMPANY (Sr.Uns. to Baa2 from Baa1) AND PLACES PRIME-2 COMMERCIAL PAPER RATING UNDER REVIEW FOR POSSIBLE DOWNGRADE
Approximately $13 Billion of Debt Securities Affected
New York, December 11, 2002 -- 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
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
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
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
· 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
· 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.
Moody's Investors Service
VP - Senior Credit Officer
Moody's Investors Service
No Related Data.
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