Research: Action Rating: Moody’s downgrades Ohio Power to Baa1, outlook stable

Around $3 billion in affected debt

New York, August 22, 2022 — Moody’s Investors Service (“Moody’s”) has downgraded the issuer and senior unsecured ratings of Ohio Power Company (Ohio Power) to Baa1 from A3 and changed its outlook from negative to stable. Ohio Power is a transmission and distribution utility subsidiary of American Electric Power Company, Inc. (“AEP”, stable Baa2).

RATINGS RATIONALE

“We expect Ohio Power’s credit metrics to remain weak relative to other A3-rated utilities for at least the next two years,” said Nana Hamilton, vice president – principal analyst. Significant increases in debt to fund Ohio Power’s high capital expenditures continue to put negative pressure on a credit profile already weakened by the loss of the commission-approved transition endorsements in 2018. The next security plan (ESP) from Ohio Power, which will become effective in June 2024, will be an important factor in determining the utility’s long-term credit quality beyond 2024.

Although Ohio Power benefits from the use of approved riders/tracking mechanisms under its current ESP, utility credit metrics have been significantly lower than levels achieved prior to 2018. This is partly due to an increase in debt to finance heavy investments in its transmission. and distribution infrastructure. The utility’s reported long-term debt has grown rapidly over this period and is now 70% higher than it was in 2018. Over the next three years, we expect annual capital expenditures to hold steady. near recent highs of around $800 million minimum. and projecting that the utility will continue to fund its negative free cash flow with additional debt.

As Ohio Power’s debt has grown, its cash flow has been negatively impacted by the expiration of old credit support covenants associated with Ohio’s transition to competition. In 2016-18, these endorsements generated approximately $250 million in cash flow per year, contributing significantly to strong pre-WC CFO/debt ratios above 30%. With their expiration, we expected the pre-WC CFO/leverage ratio to remain in the 16% to 20% range. However, with higher debt balances incurred to fund high capital expenditures, Moody’s now expects Ohio Power’s pre-WC CFO-to-debt ratio to be maintained in the 14% to 16% range, which is more indicative of a Baa1 rating.

Outlook

Ohio Power’s stable outlook reflects our expectation that regulation in the state will continue to support utility credit quality, including the use of covenants to recover most costs and a return on investment of distribution and that there will be a new credit support PSE implemented in 2024. The outlook reflects our view that, going forward, the company will generate CFO pre-WC to debt ratios in the range 14% to 16% as it executes its major capital expenditure plan.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Factors that can lead to an upgrade

An increase in cash flow and/or a reduction in leverage that reverses recent trends and leads to a pre-WC CFO/debt ratio consistently above 16% could put upward pressure on the rating.

Factors that may lead to a downgrade

If Ohio’s regulatory environment, or the new ESP 2024 in particular, becomes less credit-friendly, resulting in less recovery certainty or increased regulatory lag, or if the pre-W/C CFO to debt remains lower at 14% for an extended period, the rating could move down.

Downgrades:

..Transmitter: Ohio Power Company

…. Issuer rating, downgraded to Baa1 from A3

….Senior regular unsecured bond/debenture, downgraded from A3 to Baa1

….Senior Unsecured Shelf, Downgraded to (P)Baa1 from (P)A3

..Transmitter: Columbus Southern Power Company

….Senior regular unsecured bond/debenture, downgraded to Baa1 from A3 (assumed by Ohio Power Company)

Outlook Actions:

..Transmitter: Ohio Power Company

….Outlook, changed to stable from negative

Based in Columbus, Ohio, Ohio Power is a wholly owned subsidiary of AEP and provides transmission and distribution services to approximately 1.5 million customers in Ohio. Ohio Power also purchases energy and capacity at auction to serve customers who have not switched to a competitive generation provider. Ohio Power has a rate base of approximately $6.3 billion (approximately 11% of AEP’s total rate base).

The main methodology used in these ratings is Regulated Electric and Gas Utilities published in June 2017 and available on https://ratings.moodys.com/api/rmc-documents/68547. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Nana Hamilton
Vice President – Senior Analyst
Infrastructure Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Michael G. Haggarty
Associate General Manager
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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