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Rating Action:

Moody's assigns A2 rating to AEP Transmission Company

01 Aug 2016

Approximately $1.5 billion of debt outstanding

New York, August 01, 2016 -- Moody's Investors Service, ("Moody's") assigned a first time Issuer Rating of A2 to American Electric Power Company's (AEP: Baa1 stable) intermediate transmission holding company subsidiary AEP Transmission Company, LLC (AEP Transco). The operating subsidiaries held by AEP Transco are wholly owned by AEP and operate as transmission only utilities within the AEP's electric utility service territories. The outlook for AEP Transco is stable.

RATINGS RATIONALE

"AEP Transco's A2 Issuer Rating is driven by its lower business risk profile as a transmission only holding company operating under the credit supportive regulatory framework established by the Federal Energy Regulatory Commission (FERC)", said Laura Schumacher, Senior Credit Officer. The rating reflects the predictable and timely nature of cash flows that are derived from forward looking formula based rates and the resulting solid credit metrics. The rating also recognizes the relatively low level of leverage employed at AEP Transco and the minimal amount of structural subordination between the issuer and its wholly owned subsidiary operating companies. The rating considers the substantial capital expenditure programs that are underway at all of AEP Transco's operating subsidiaries as well as the experience and long track record of its parent company, AEP, in building and operating transmission projects.

The operations of the AEP Transco subsidiaries are limited to transmission, which we view as having a lower level of business risk compared to vertically integrated electric utilities. The assets are long-lived with low operating risk and very predictable cash flows owing to the supportive forward looking formulaic FERC regulatory framework under which they operate. The AEP Transco operations are also geographically diverse, covering six states with participation in two regional transmission organizations (RTOs), the PJM Interconnection, L.L.C. (PJM: Aa3 stable) and the Southwest Power Pool (SPP unrated).

Transmission rates for the AEP Transco subsidiaries are determined annually via FERC approved formulas that provide for the full recovery of actual expenses for operations, maintenance, depreciation and taxes plus a return on a forward looking rate base. The PJM subsidiaries have been authorized an 11.49% return on equity (ROE) based on actual capital structure including up to 50% equity. The SPP subsidiaries are allowed to earn 11.2% on 50% equity capital. Both ROEs include a 50 basis point incentive for RTO membership. The revenue requirements of the transmission companies are provided annually to the RTO and allocated to all transmission customers (electric distribution systems and direct wholesale customers) based on load. The revenue requirements include a true-up for any under/over collection in the prior year thus assuring actual cost are ultimately recovered. The customers within the AEP Transco service territories are primarily the investment grade electric utility subsidiaries of AEP (approximately 80% of load). Credit risk is further mitigated by RTO practices of allocating costs to all customers of the system and requiring all participants to share in payment defaults.

AEP Transco strives to maintain both its consolidated capital structure, and the capital structure of its operating subsidiaries, at its FERC authorized 50/50 debt/equity level. All of the company's long term borrowing is done at the AEP Transco level and allocated to the subsidiaries via intercompany notes. As a result, unlike some independent transmission holding companies in our rated portfolio, the debt at AEP Transco is not structurally subordinate to a meaningful amount of third party debt at its operating subsidiaries. Therefore we view the debt at AEP Transco as more akin to an operating company obligation. The organization's priority debt obligations consist entirely of short-term subsidiary borrowings from the AEP utility money pool and are limited to 10% of consolidated tangible net assets (about $355 million as of December 2015).

The combination of AEP Transco's relatively conservative capital structure, and FERC formula rates, results in cash flow credit metrics that are appropriate for its rating. As of December 2015, AEP Transco's ratio of funds from operations to adjusted debt was approximately 17%. Going forward, we anticipate the ratio will improve to slightly above 18% which is at the lower end of the "A" scoring range for this factor in our methodology for Regulated Electric and Gas Networks. When considering the supportive and predictable nature of the FERC regulatory framework, this metric is appropriate for AEP Transco's A2 rating.

AEP Transco plans to complete about $4.5 billion of capital projects during 2016-2019. The pipeline includes a combination of projects that are regional in nature, planned by the RTO, as well as local projects identified by AEP for reliability, customer growth or to replace aging assets. Projects that are add-ons or improvements to existing systems have more flexibility with regards to timing and are less likely to need additional siting or regulatory approvals. Certain RTO mandated projects may be more complex, requiring new rights of way or approvals. The current capital plan includes about 25% of RTO mandated projects. At approximately $1.2 billion per year, the amount of AEP Transco's annual capital investment is over 20% of its current approximate $4 billion asset base. This ratio is the lower threshold of the "B" scoring range for the scale of capital program factor in our rating methodology. As the company is growing rapidly, we anticipate this metric will move below 20% in 2017, and will continue to decline.

Liquidity

AEP Transco's significant capital expenditure program is reliant upon external financing and continuing equity contributions from its parent. The subsidiaries may also borrow directly from the AEP utility money pool. In 2015, AEP Transco generated about $200 million of cash from operations, and made about $1 billion of capital investment, generating negative free cash flow of about $800 million. The shortfall was funded with around $280 million of equity contributions from AEP, $450 million of long-term debt and about $70 million of short-term subsidiary borrowing from the AEP utility money pool. Going forward we anticipate capital expenditures of about $1.2 billion per year will continue to be funded via a combination of internal and external sources, with an increasing percentage provided by cash from operations. AEP Transco is not expected to pay any dividends to its parent over the 2016-2019 forecast period.

AEP's liquidity is supplemented by $3.5 billion of syndicated credit facilities consisting of a $3 billion five-year facility expiring in June 2021 and a two-year $500 million facility expiring in June 2018. As of June 30, 2016, there was about $2.0 billion of availability under AEP's revolving credit facilities.

Rating Outlook

AEP Transco's stable outlook reflects the stability and predictability of cash flows that result from its FERC regulatory framework and our expectation that the company will continue to generate cash flow credit metrics that are appropriate for the rating. For example we anticipate AEP Transco's ratio of funds from operations to debt will remain in the high teens. The outlook assumes a continued supportive relationship with the regulator and an expectation that the AEP Transco operating subsidiaries will be successful in executing their significant capital expenditure programs.

Factors that Could Lead to an Upgrade

To the extent AEP Transco were to demonstrate a ratio of funds from operations to debt consistently above 20% while executing on its capital program and reducing its dependence on external financing, there could be upward pressure on the rating.

Factors that Could Lead to a Downgrade

A change in the regulatory framework or regulatory relationship that is not supportive of credit quality, or an expansion of capital spending that leads us to anticipate that the ratio of capital expenditures to fixed assets would remain above 20% beyond 2017, could put downward pressure on the rating. If the ratio of funds from operations to debt were to remain below 15% for an extended period, there could also be downward pressure on the rating.

AEP Transco is an intermediate holding company that owns AEP's wholly owned transmission utilities. Operations are actively conducted through five subsidiaries within AEP's electric utility service territories in six states, Ohio, West Virginia, Kentucky, Oklahoma, Indiana and Michigan. About 85% of AEP Transco's approximately $4 billion of net transmission plant is located in the PJM RTO, the remainder is located in the SPP RTO. The company is growing rapidly; net plant has more than doubled since 2013 and the company anticipates continued investment across its subsidiaries will result in another doubling by 2019.

The principal methodology used in this rating was Regulated Electric and Gas Networks published in November 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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

James Hempstead
Associate Managing Director
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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