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American Electric Power Company, Inc. 12 June 2017 Electric Utility Holding Company

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American Electric Power Company, Inc. 12 June 2017 Electric Utility Holding Company KPSC Case No. 2017-00179 KIUC First Set of Data Requests INFRASTRUCTUREDated August AND PROJECT 14, 2017 FINANCE Item No. 56 Attachment 1 Page 1 of 181 CREDIT OPINION American Electric Power Company, Inc. 12 June 2017 Electric Utility Holding Company Update Summary Rating Rationale American Electric Power Company’s (AEP) Baa1 rating and positive outlook are underpinned by the size and diversity of its regulatory jurisdictions and service territories. AEP's nine retail utility subsidiaries operate under eleven different state regulatory bodies and its transmission subsidiaries are regulated by the Federal Energy Regulatory Commission (FERC). AEP benefits RATINGS from a very stable earnings profile which over the past several years has yielded cash flow American Electric Power Company, Inc. from operations pre-working capital (CFO pre-WC) to debt metrics in the high-teens to Domicile Columbus, Ohio, United low twenty percent range. Cash flow stability is supported by AEP's current corporate States Long Term Rating Baa1 strategy of focusing on its core utility assets with more predictable earnings. AEP has been Type Senior Unsecured - successful in de-risking its business by reducing its exposure to the volatile merchant power Dom Curr markets through its recent sale of four Midwest merchant generating plants, and agreements Outlook Positive for the consolidation and/or shutdown of others, a credit positive. Going forward, AEP’s most significant growth area will be its transmission and distribution utilities. By 2019, we Please see the ratings section at the end of this report for more information. The ratings and outlook shown anticipate these less volatile businesses will make up over 45% of AEP’s consolidated cash reflect information as of the publication date. flow. Recent Developments Analyst Contacts On January 30, 2017, AEP completed the sale of four competitive power plants, totaling about 5,200 MW, to Lightstone Generation LLC (unrated), a joint venture of Blackstone Laura Schumacher 212-553-3853 VP-Sr Credit Officer Group LP and an affiliate of ArcLight Capital Partners LLC, for approximately $2.1 billion. [email protected] After accounting for taxes, fees and debt repayments, AEP netted about $1.2 billion which Michael G. Haggarty 212-553-7172 it is investing in its regulated businesses, including transmission and contracted renewable Associate Managing projects. Director [email protected] Following the sale, AEP’s merchant generating exposure is limited to about 2,700 MW of Jim Hempstead 212-553-4318 primarily coal-fired assets in Ohio and about 350 MW in the Electric Reliability Council of Associate Managing Texas with a total current book value of about $50 million. In addition, AEP has agreed to Director sell its Zimmer station holdings of about 330 MW to Dynegy Inc. (Dynegy, B2 stable) while [email protected] simultaneously purchasing Dynegy’s 312 MW share of Conesville Unit 4. The transaction is awaiting FERC approval. AEP has also given formal consent for the shutdown of its 600 MW share of the jointly owned Stuart plant by June 2018. This will bring AEP’s remaining merchant exposure to a little over 2,000 MW. Management continues to evaluate alternatives for these assets, which could include further transfers and/or shutdowns, and will provide details later this year. KPSC Case No. 2017-00179 KIUC First Set of Data Requests MOODY'S INVESTORS SERVICE INFRASTRUCTUREDated August AND PROJECT 14, 2017 FINANCE Item No. 56 Attachment 1 Page 2 of 181 Exhibit 1 Historical CFO Pre-W/C, Total Debt, CFO Pre-W/C to Debt CFO Pre-W/C Total Debt (CFO Pre-W/C) / Debt $25,000 22.0% $23,448 $21,828 $21,952 $22,251 $21,015 21.5% 21.4% $20,000 21.5% 21.0% 20.5% $15,000 20.0% $10,000 19.6% 19.7% 19.5% 19.3% 19.0% $4,674 $4,714 $4,630 $5,000 $4,115 $4,286 18.5% $0 18.0% 12/31/2013 12/31/2014 12/31/2015 12/31/2016 3/31/2017(LTM) Source: Moody's Financial Metrics Credit Strengths » Diversity of regulatory jurisdictions and service territories provide a strong foundation for current rating » Continued regulatory support with timely and sufficient cost recovery » Decreasing business risk through exit of merchant business and focus on transmission and distribution investments Credit Challenges » Substantial investments in regulated transmission networks and for environmental mandates will likely pressure credit metrics » Weak demand growth in some large territories Rating Outlook The positive outlook for AEP assumes the positive momentum at its subsidiaries will continue as they implement their investment plans while maintaining supportive regulatory relationships. The outlook recognizes the potential for upward movement in the ratings if financial metrics remain near their current levels, for example, a ratio of CFO pre-WC to debt maintained in the high teens/low twenty percent range. Factors that Could Lead to an Upgrade » A ratio of CFO pre-WC to debt in the high teens to low twenty percent range on a sustainable basis » An upgrade of AEP’s largest utility subsidiaries Factors that Could Lead to a Downgrade » If a more contentious regulatory environment were to develop in any of its key jurisdictions » If environmental and nuclear investments cannot be recovered on a timely basis This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 12 June 2017 American Electric Power Company, Inc.: Electric Utility Holding Company KPSC Case No. 2017-00179 KIUC First Set of Data Requests MOODY'S INVESTORS SERVICE INFRASTRUCTUREDated August AND PROJECT 14, 2017 FINANCE Item No. 56 Attachment 1 Page 3 of 181 » If AEP's financial metrics were to deteriorate on a sustained basis resulting in CFO pre-WC to debt below 15%. Key Indicators Exhibit 2 KEY INDICATORS [1] American Electric Power Company, Inc. 12/31/2013 12/31/2014 12/31/2015 12/31/2016 3/31/2017(L) CFO pre-WC + Interest / Interest 5.1x 6.0x 5.8x 5.7x 5.4x CFO pre-WC / Debt 19.6% 21.4% 21.5% 19.7% 19.3% CFO pre-WC – Dividends / Debt 15.0% 16.8% 16.6% 15.0% 14.2% Debt / Capitalization 44.3% 44.1% 42.6% 44.5% 42.9% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics Detailed Rating Considerations Diversity of regulatory jurisdictions and service territories provide a strong foundation for current rating AEP's diversity in terms of regulatory jurisdictions and service territory economies is a meaningful credit strength as it provides the company with a degree of insulation from any unexpected negative developments occurring at any one of its operating companies, state regulatory bodies or state economies. This diversity has been helpful in dealing with weak demand growth in some of AEP’s service territories while it spends heavily on environmental compliance and system reliability. Going forward, the largest portion of AEP’s capital program will be for investment in its Federally regulated transmission subsidiaries along with increased investment in transmission and distribution operations at its state regulated utility subsidiaries. AEP's primary state regulated utilities and their respective authorities are as follows: Ohio Power Company (OPCo: A2 stable), which accounted for 18% of AEP's total 2016 revenues, operates under the Public Utility Commission of Ohio (PUCO); Appalachian Power Company (APCo: Baa1 stable), which accounted for 18% of AEP's total 2016 revenues, operates under the Virginia State Corporation Commission (VSCC), (covering a little over half of APCo's customers) and the more challenging Public Service Commission of West Virginia (PSC WV); Indiana Michigan Power Company (I&M: Baa1 positive), 13% of AEP's total 2016 revenues, is regulated by the Indiana Utility Regulatory Commission (IURC), (about ¾ of I&M's customers) and the Michigan Public Service Commission (MPSC); Southwestern Electric Power Company (SWEPCo: Baa2 stable), 11% of AEP's total 2016 revenues, operates under the Louisiana Public Service Commission (LPSC) (about 43% of SWEPCo customers), the Arkansas Public Service Commission (ARPSC) (22% of SWEPCo customers) and the Public Utility Commission of Texas (PUCT) (35% of SWEPCo customers); Public Service Company of Oklahoma (PSO: A3 stable), 8% of AEP's total 2016 revenues, is regulated by the Oklahoma Corporation Commission (OCC); AEP Texas (AEP Texas: Baa1 stable), which was formed by the merger of AEP Texas Central and AEP Texas North Company at year-end 2016, 9% of AEP's total 2016 revenues, is regulated by the Public Utility Commission of Texas (PUCT); and Kentucky Power Company (KPCo: Baa2 stable), 4% of AEP's total 2016 revenues, is under the Kentucky Public Service Commission (KPSC). AEP Transmission Company LLC’s (AEP Transco: A2 stable) transmission businesses are regulated by the FERC under forward looking formulaic rate plans that result in a high degree of cash flow predictability. 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. 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. For further information on these service territories and subsidiaries please refer to each utility's credit opinion on Moodys.com. Continued regulatory support with timely and sufficient cost recovery important to credit quality Given the significant amount of capital expenditures AEP has planned across its regulated business segments, it is essential that AEP maintain a supportive relationship with its regulators to sustain credit quality.
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