TEXT-Fitch rates Appalachian Power's floating-rate notes 'BBB'
Aug 15 - Fitch Ratings has assigned a 'BBB' rating to Appalachian Power Company's (APCo) $275 million issuance of unsecured floating rate notes. The notes rank pari passu with APCo's other unsecured debt and will mature on August 16, 2013. The interest rate will be reset quarterly based on the three-month LIBOR rate plus 0.375%. The Rating Outlook is Stable. Proceeds from the issuance will be used for general corporate purposes. Such purposes include funding the payment of APCo's outstanding $250 million, 5.65% senior notes series O that mature on Aug. 15, 2012; funding the company's construction program; repaying advances from affiliates; and replenishing working capital. The issuance is expected to close on Aug. 15, 2012. APCo's operations are located in southwestern Virginia and southern West Virginia, and the utility is one of eight regulated electric utilities owned by American Electric Power Company, Inc. (AEP; 'BBB' Issuer Default Rating). Key rating factors for AEP include: --AEP's regulatory and geographic diversification from ownership of electric utilities with operations in 11 states; --Generally constructive regulatory environments, with the exception of Ohio; --Exposure to federal environmental regulation that will result in increased expenditures to many of AEP's coal-fired electric generation plants and the retirement of older, less efficient plants; --An improved consolidated financial profile and liquidity position. Regulatory and Geographic Diversification: AEP benefits from its ownership of eight regulated electric utilities. The utilities have operations in 11 states, providing regulatory and geographic diversification. AEP's combination of electric utilities that are exposed to different operating environments helps provide some stability to consolidated cash flows. Low-Cost Operations: AEP and its utilities have a favorable competitive position due to their ownership of low-cost, coal-fired electric generation plants. AEP's utilities are able to keep their fuel costs low through at-cost coal delivery contracts with affiliated company AEP River Operations LLC (not rated), a wholly owned AEP subsidiary that also barges agricultural products, coal, construction materials, and other products to third parties. Environmental Regulatory Concerns: AEP's integrated utilities are exposed to environmental regulation, which is a concern for credit quality. The AEP family of utilities operates the largest coal-fired electric generation fleet in the U.S. AEP expects the pending implementation of various environmental regulations to result in roughly $6 billion-$7 billion of capex through 2020, along with the retirement of more than 5,000 MW of older, less-efficient, coal-fired electric generation plants. Fitch would expect the utilities to be able to recover their environmental capital spending in a timely manner given the various environmental cost recovery mechanisms allowed by the regulatory commissions in AEP's states of operation. The expected timely recovery of these costs mitigates the concerns associated with such large capital outlays. Financial Profile: Fitch expects APCo's EBITDA to interest coverage to average around 4.0x and FFO to debt to average around 16-17% over the next three years. On a consolidated basis, Fitch expects AEP's EBITDA to interest coverage to average more than 4.0x and FFO to debt to average around 18%. AEP's liquidity position is solid, with the company's $1.5 billion credit facility maturing in June 2015 and $1.75 billion credit facility maturing in June 2016. Ample amounts are available under these facilities, which back up a commercial paper program that is used to support short-term needs at the utilities not funded by the internal money pool. Rating Triggers: A positive rating action on APCo could occur if Fitch were to expect APCo's FFO to debt ratio to increase to at least 18% on a sustainable basis. A negative rating action on APCo is unlikely but could occur if Fitch's forecasted FFO to debt ratio were to drop below 14% over a multi-year period for both AEP and APCo. APCo's ratings are as follows: --Long-term Issuer Default Rating (IDR) 'BBB-'; --Senior unsecured debt 'BBB'; --Pollution control revenue bonds 'BBB'; --Short-term IDR 'F2'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 12, 2011); --'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011); --'Recovery Ratings and Notching Criteria for Utilities' (May 12, 2011). Applicable Criteria and Related Research: Corporate Rating Methodology Rating North American Utilities, Power, Gas, and Water Companies Recovery Ratings and Notching Criteria for Utilities
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