Moody’s Investors Service downgraded American Electric Power Co.’s (AEP) senior unsecured rating to Baa2 from Baa1, affecting $13 billion of debt, and placed its Prime-2 rating for commercial paper under review for possible downgrade. AEP’s Baa2 long-term rating and the long term ratings of the company’s utility subsidiaries, except Indiana Michigan Power and Kentucky Power, remain under review for possible downgrade. However, Moody’s said that it doesn’t expect AEP’s debt ratings to fall below investment grade.

Moody’s said the downgrades and negative outlook reflect the following:

“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 counterparty obligations, particularly in its natural gas trading book,” Moody’s said.

It also said AEP has “sizeable investments in a number of underperforming assets in the United States and abroad,” including its communications business and power generation in the United Kingdom. “A number of these underperforming investments may also require additional capital and potentially could be written down, impacting AEP’s balance sheet.”

Despite the negative news, AEP said it was “encouraged” by some of the positive assessments Moody’s made, particularly regarding the company’s strong liquidity and investment-grade quality.

“Although we are disappointed with the negative actions taken by Moody’s, there were several important positive observations in their report,” said Susan Tomasky, AEP CFO. “In addition to affirming the ratings of Indiana Michigan Power and Kentucky Power, Moody’s noted that AEP appears to have reasonably strong liquidity. Their statement also clarifies for the marketplace that the ratings for AEP’s senior unsecured debt are not currently anticipated to fall below investment grade.

“We will continue to work with Moody’s as they complete their review in the next few weeks to facilitate an accurate understanding of the company’s credit,” Tomasky said. “In the meantime, the company expects to continue to market its commercial paper. Because we anticipate that the company will remain at investment grade, we expect to continue to refinance upcoming maturities as they fall due.”

AEP has approximately $1 billion in commercial paper maturing by Dec. 31. About $500 million has already been placed over year-end. The company also has $5 billion available in its liquidity portfolio and plans to draw on the portfolio to have sufficient cash on hand to retire its commercial paper maturities if necessary.

Columbus, OH-based AEP has more than 42,000 MW of generating capacity and sells electricity to almost five million customers through an 11-state electricity transmission and distribution grid.

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