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Rating Action:

Moody's affirms Indiana Michigan Power at Baa1; assigns short-term rating of P-2; revises outlook to positive

Global Credit Research - 01 Mar 2017

Approximately $2.5 billion of long-term debt outstanding

New York, March 01, 2017 -- Moody's Investors Service, ("Moody's") has affirmed the long term ratings of Indiana Michigan Power Company (I&M, Baa1) and revised the outlook to positive from stable. Concurrently, Moody's assigned a long-term rating of Baa1, and a short-term rating of P-2, to $77 million of 2008 City of Lawrenceburg, Indiana Pollution Control Revenue Refunding Bonds (Indiana Michigan Power Company Project), Series H and I. The refunding bonds are being remarketed in weekly mode without letter of credit support.

RATINGS RATIONALE

"Today's outlook revision recognizes the significant number of automatic and transparent rate recovery mechanisms that have been put in place at I&M over the years which greatly enhance cash flow predictability for the utility", said Laura Schumacher, Vice President/Senior Credit Officer. The positive outlook also recognizes financial credit metrics that have been historically strong for the company's Baa1 rating. Although now moderating, when considered in light of the cash flow predictability produced by I&M's numerous rider and tracking recovery mechanisms, metrics are expected to remain robust.

Our analysis considers I&M's relatively low-risk operating profile as a vertically integrated electric utility company operating under two above average state regulatory jurisdictions, in Indiana (about 65% of system demand) and Michigan (15%), as well as the Federal Energy Regulatory Commission (FERC) (20%). Both state jurisdictions offer a transparent suite of recovery mechanisms which provide consistent cash flows for I&M while rates for its FERC jurisdictional wholesale contracts are set via predictable formula rates. Over the next several years, approximately one third of the company's capital budget will be recovered via various automatic adjustment mechanisms, while the balance is almost entirely covered by depreciation and deferred taxes.

In both Indiana and Michigan, I&M's approved rate structures incorporate a comprehensive suite of formulaic recovery mechanisms, including adjustment clauses and trackers for recovery of fuel and purchased power, energy efficiency initiatives, the cost of renewable energy, and recovery of open access transmission tariffs. Indiana also allows tracking mechanisms for a wide range of capital projects including the state's portion of I&M's ongoing $1.2 billion Cook nuclear life cycle management project, its investments in pollution control equipment (dry sorbent injection and selective catalytic reduction) at its Rockport coal-fired plant, and for investment in utility scale solar projects. These mechanisms adjust annually and provide for timely recovery and return on these investments. Indiana law also allows recovery of investment in transmission and distribution assets via a transmission distribution and storage system improvement charge (TDSIC) which several utilities in the state have already successfully implemented.

In Michigan, in accordance with credit supportive energy legislation passed at the end of 2016, rate cases must be decided in ten months, and utilities are able to set rates using a forward test year. Major generating projects, such as the Cook nuclear life cycle project, go through a certificate of necessity (CON) process which includes pre-construction approval and determination of rate making parameters. I&M's costs for the Nuclear Regulatory Commission mandated project were approved for deferral and will be recovered in rates as portions of the project come on line.

The 2016 Michigan energy legislation broadened the CON process to an integrated resource planning (IRP) process intended to provide additional assurance of recovery of utility investment as the state transitions to a cleaner energy economy. The IRP process will encompass a wide range of factors including fuel cost, demand forecasts, resource adequacy, competitive pricing, environmental mandates and transmission options before constructing major projects. The legislation also lowers the threshold for major projects to $100 million from $500 million and, in our opinion, provides a supportive framework for future investment.

The FERC jurisdictional portion of I&M's capital investments are recovered via the formula rates incorporated in its wholesale power sales contracts as the individual projects are put in service.

Historically, I&M's key financial credit metrics have been strong for its Baa1 rating. For example, as of December 2015, the ratio of CFO pre-W/C to debt was about 23%, which is at the low end of the "A" scoring range for this factor as indicated in our rating methodology for regulated electric and gas utilities. In 2016, cash flow was negatively impacted by a one-time payment made to dispose of an asset retirement obligation from a coal plant that closed in 2015. As a result, the ratio of CFO pre-W/C to debt declined to around 17%; absent this payment, the ratio is about 20%. These more recent financial metrics are also reflective of the additional debt load created by I&M's significant capital plan. Going forward, we anticipate I&M's ratio of CFO pre-W/C to debt financial metrics will remain in the high teens to low twenty percent range. The utility's financial metrics are viewed against a backdrop of supportive regulatory environments and predictability of cash flow generated by automatic recovery mechanisms. As such, we expect I&M's credit metrics will remain supportive of a higher rating.

Liquidity

I&M's liquidity is adequate. For the twelve months ending December 31, 2016, I&M generated approximately $530 million of cash from operations (CFO), invested $725 million in capital expenditures (including $129 million for nuclear fuel), and up streamed $125 million in dividend payments to parent AEP, resulting in a negative free cash flow (FCF) of approximately $320 million. Given I&M's ongoing capital programs, we anticipate the utility will remain FCF negative for the next few years. We expect shortfalls will be primarily debt financed.

I&M does not have a dedicated credit facility to support its liquidity needs. The utility does however have access to its parent company, American Electric Company, Inc.'s (AEP, Baa1 stable) liquidity through participation in its utility money pool with a borrowing limit of $500 million. As of December 31, 2016, I&M had borrowed approximately $203 million from the money pool. I&M also utilizes AEP's $750 million receivable securitization facility; as of December 31, 2016, I&M had about $137 million of receivables accrued under its agreement with AEP Credit. AEP's liquidity is supported by two syndicated credit facilities totaling $3.5 billion, a $3.0 billion facility expiring in June 2021 with a $1.2 billion letter of credit sub-limit, and a $500 million facility expiring in June 2018. As of December 31, 2016, AEP had $1.0 billion of commercial paper outstanding and no letters of credit outstanding. I&M's next debt maturity is May of 2018 when a $200 million term loan is due.

Rating Outlook

The rating outlook is positive, reflecting the potential for upward movement in I&M's long-term ratings over the next twelve to eighteen months.

Factors that Could Lead to an Upgrade

In light of I&M's supportive regulatory environments, and availability of automatic recovery mechanisms, if the ratio of cash flow pre-working capital (CFO pre-W/C) to debt were to be maintained in the high teens to low twenty percent range, there could be upward pressure on the rating. An increased use of tracking mechanisms could also put upward pressure on the rating.

Factors that Could Lead to a Downgrade

Although unlikely given the positive outlook, an adverse change in either Indiana or Michigan's regulatory support leading to increased lag or reduced assurance of cost recovery, or a significant deterioration in financial metrics, including CFO pre-W/C to debt below 15% for a sustained period, could put downward pressure on the rating.

Indiana Michigan Power Company (I&M) is a vertically integrated electric utility company headquartered in Fort Wayne, Indiana, and is a wholly owned subsidiary of American Electric Power Company (AEP, Baa1 stable).

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Assignments:

..Issuer: Lawrenceburg (City of) IN

....Short Term Senior Unsecured Revenue Bonds, Assigned P-2

....Senior Unsecured Revenue Bonds, Assigned Baa1

Outlook Actions:

..Issuer: Indiana Michigan Power Company

....Outlook, Changed To Positive From Stable

..Issuer: RGS (AEGCO) Funding Corporation

....Outlook, Changed To Positive From Stable

..Issuer: RGS (I&M) Funding Corporation

....Outlook, Changed To Positive From Stable

Affirmations:

..Issuer: Indiana Michigan Power Company

.... Issuer Rating, Affirmed Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: RGS (AEGCO) Funding Corporation

....Senior Secured Sec. Lease Oblig. Bond, Affirmed Baa1

..Issuer: RGS (I&M) Funding Corporation

....Senior Secured Sec. Lease Oblig. Bond, Affirmed Baa1

..Issuer: Rockport (City of) IN

....Senior Unsecured Revenue Bonds, Affirmed Baa1

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Laura Schumacher
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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