Columbus Southern Power Company -- Moody's downgrades Ohio Power to Baa1, outlook stable

Rating Action: Moody's downgrades Ohio Power to Baa1, outlook stableGlobal Credit Research - 22 Aug 2022Approximately $3 billion of debt affectedNew York, August 22, 2022 -- Moody's Investors Service ("Moody's") downgraded Ohio Power Company's (Ohio Power) Issuer and senior unsecured ratings to Baa1 from A3 and changed its outlook to stable from negative. Ohio Power is a transmission and distribution utility subsidiary of American Electric Power Company, Inc. ("AEP", Baa2 stable).RATINGS RATIONALE"We expect Ohio Power's credit metrics to remain weak relative to those of other A3 rated utility peers for at least the next two years" said Nana Hamilton, Vice President - Senior Analyst. Significant increases in debt to finance Ohio Power's high capital expenditures continue to exert negative pressure on a credit profile already weakened by the loss of commission approved transition riders in 2018. Ohio Power's next Electric Security Plan (ESP), which will become effective in June 2024, will be an important factor in determining the utility's longer term credit quality beyond 2024.Although Ohio Power benefits from the use of riders/tracking mechanisms approved under its current ESP, the utility's credit metrics have been materially weaker than levels achieved prior to 2018. This is in part due to a rise in debt to fund heavy investments in its transmission and distribution infrastructure. The utility's reported long-term debt has increased 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 be maintained close to recent highs of about $800 million at a minimum and anticipate that the utility will continue to fund its negative free cash flow with incremental debt.As Ohio Power's debt has increased, its cash flow has been negatively impacted by the expiration of credit supportive legacy riders associated with the transition to competition in Ohio. In 2016-2018, these riders generated about $250 million of cash flow per year, contributing substantially to strong CFO pre-WC to debt ratios that were above 30%. With their expiration, we had expected the CFO pre-WC to debt ratio to be maintained in the 16%-20% range. However, with higher debt balances incurred to fund elevated capital expenditures, Moody's now anticipates that Ohio Power's CFO pre-WC to debt ratio will be maintained in the 14%-16% range, which are more indicative of a Baa1 rating.OutlookOhio Power's stable outlook reflects our expectation that regulation in the state will continue to be supportive of utility credit quality, including the use of riders for the recovery of most costs and a return on distribution investment and that there will be a credit supportive new ESP implemented in 2024. The outlook reflects our view that, going forward, the company will generate ratios of CFO pre-WC to debt in the 14%-16% range as it executes its sizable capital expenditure plan.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgradeAn increase in cash flow and/or reduction in leverage that reverses recent trends and leads to a ratio of CFO pre-WC to debt consistently above 16% could put upward pressure on the rating.Factors that could lead to a downgradeIf the Ohio regulatory environment, or new 2024 ESP in particular, become less credit supportive, leading to lower certainty of recovery or increased regulatory lag, or if CFO pre-W/C to debt remains below 14% for an extended period, the rating could move downward.Downgrades:..Issuer: Ohio Power Company.... Issuer Rating, Downgraded to Baa1 from A3....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3....Senior Unsecured Shelf, Downgraded to (P)Baa1 from (P)A3..Issuer: Columbus Southern Power Company....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3 (Assumed by Ohio Power Company)Outlook Actions:..Issuer: Ohio Power Company....Outlook, Changed To Stable From NegativeHeadquartered 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 its customers who have not switched to a competitive generation supplier. Ohio Power has approximately $6.3 billion in rate base (approximately 11% of AEP's total rate base).The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://ratings.moodys.com/api/rmc-documents/68547. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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