Columbus, Ohio-based American Electric Power Co. Inc. (AEP) took one on the chin when Moody’s downgraded its utility subsidiary Southwestern Electric Power Co.’s (SWEPCo) ratings this Monday. SWEPCo provides power to the states of Louisiana, Arkansas, East Texas and the Panhandle area of North Texas.
Moody’s downgraded SWEPCo’s long-term issuer and senior unsecured ratings from Baa1 to Baa3. However, the ratings outlook was revised to stable from being on watch for downgrade.
This is precariously close to being labeled as junk, since anything less than Baa is junk in Moody’s book. Since early 2009, Moody’s had placed SWEPCo on review for a possible downgrade on concerns over its financial health and risk over recovery of capital cost.
The nail in the coffin was an Arkansas Court of Appeals ruling on June 24, which reversed a 2007 approval of the construction of John W. Turk Jr. plant in Texarkana by the Arkansas Public Service Commission. The protest against the $1.6 billion 600MW coal plant came mainly from local hunting clubs and property owners.
SWEPCo is already estimated to have invested $713 million in the plant and procured 90% of the major equipments, while signing contracts to the tune of $1.3 billion.
There has been no change in SWEPCo’s ratings by S&P and Fitch, both of which maintain a stable outlook. The Moody’s downgrade will affect about $1.7 billion of the company’s debt and may limit SWEPCo’s access to new debt while raising its borrowing cost. However, over the long-term horizon, Moody’s still views SWEPCo as “fundamentally an investment-grade utility” for its stable base of operations.
We maintain our market-neutral Hold rating on American Electric Power.
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