Credit analyst advises avoiding AEP as troubles mount

New York, Jan. 27 - American Electric Power Co. is now on a familiar path taken by many other energy names, according to Gimme Credit analyst Carol Levenson and she advises avoiding the name.

She noted that on Friday AEP "finally faced the music" and cut its dividend 40% - while also reporting disappointing earnings, announcing a huge and somewhat unexpected write-off and lowering its earnings guidance.

AEP (Baa2/BBB+) also said it intended to strengthen its balance sheet further but, Levenson noted "frustratingly refused to quantify the amount of asset sales and/or equity issuance it is contemplating."

"Thus AEP, which was one of the more conservative of the energy merchant pack, is now following a familiar path - unpredictable earnings caused by its unregulated holdings, and attempts to plug its funding gap with asset sales and equity issuance," Levenson commented.

The analyst said she believes AEP will have to issue equity to avoid a downgrade to junk.

Even using management's prediction of a $1.1 billion positive swing in free cash flow this year, Levenson projects that the dividend and capital spending cuts will not reduce the company's leverage while $1 billion in net proceeds from asset sales (assuming no gain or loss on the sales) would only result in a two percentage point improvement.

She also noted that "essentially all" of AEP's non-core businesses are losing money and the company faces a buyer's market for similar assets.

While this is happening, the company needs to roll over $1.4 billion of commercial paper as its CP rating is on review for downgrade and meet $1.3 billion in 2003 maturities.

Levenson estimated short-term debt at year-end was about $4.3 billion while available liquidity was only $3.5 billion.

Most of AEP's bank facilities mature in the spring although there is a term-out option on its $2.5 billion revolver, "giving the company a modicum of negotiating strength with its banks," the analyst commented.

Management wants to negotiate smaller, multi-year facilities but the banks may demand tougher terms, Levenson observed.

"Although we believe AEP will be able to borrow at the utility subsidiary level, parent level obligations could prove difficult to refinance," the analyst said.

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