File No. 70-9021
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
AMENDMENT NO. 2
TO
FORM U-1
__________________________________
APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of company or companies filing this statement
and addresses of principal executive offices)
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of top registered holding company
parent of each applicant or declarant)
* * *
John F. Di Lorenzo, Jr., Associate General Counsel
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)
Jeffrey D. Cross, General Counsel
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)
American Electric Power Company, Inc., a registered holding
company under the Public Utility Holding Company Act of 1935, as
amended, and its subsidiary, AEP Resources, Inc., hereby amend
their Application or Declaration on Form U-1 in File No. 70-9021.
1. The first paragraph of Item 1. Description of Proposed
Transaction is amended and restated as follows:
"American Electric Power Company, Inc. ('American'), a
holding company registered under the Public Utility Holding
Company Act of 1935 ('1935 Act'), and AEP Resources, Inc.
('Resources'), a wholly-owned nonutility subsidiary of American,
request that the Commission exempt American from the requirements
of Rule 53(a)(1) such that American may use the net proceeds of
currently authorized financings and issue Guarantees (as defined
herein) in an aggregate amount at any one time outstanding which,
when added to American's direct and indirect aggregate investment
in all Exempt Projects (as defined herein), would not at any time
exceed American's consolidated retained earnings. American and
all of its subsidiaries1 are collectively referred to herein as
the 'American System' and American and Resources are sometimes
collectively referred to herein as the 'Applicants'."
1Appalachian Power Company ('APCo'), Columbus Southern Power
Company ('CSPCo'), Kentucky Power Company ('KPCo'), Kingsport
Power Company ('KgpCo'), Indiana Michigan Power Company ('I&M'),
Ohio Power Company ('OPCo') and Wheeling Power Company ('WPCo'),
electric utility subsidiaries of American (sometimes collectively
referred to herein as 'Operating Companies').
2. Section B of Item 1 is amended and restated as follows:
"B. Exempt Projects Presently Owned or Under Investigation
by American
American's consolidated retained earnings (as defined under
Rule 53(a) of the 1935 Act) as of June 30, 1997 were
approximately $1.574 billion and, accordingly, its Investment
Limit was about $787 million. As of June 30, 1997, American had
invested $359 million in Yorkshire Electricity Group plc. In
addition, it has $110 million designated for Nanyang General
Light Electric Co. Ltd., of which approximately $22 million was
invested as of June 30, 1997. American is considering further
investment opportunities, some of which would require an
'investment' in excess of the approximately $318 million of
undesignated Investment Limit.
(1) Yorkshire Electricity Group plc
On February 24, 1997 American and Public Service
Company of Colorado ('PSCo'), indirectly through Yorkshire
Holdings plc ('Yorkshire Holdings'), announced their intention to
commence an offer in the United Kingdom to acquire all of the
outstanding share capital of Yorkshire Electricity Group plc
('Yorkshire Electricity') for an aggregate purchase price of
approximately $2.4 billion. Yorkshire Electricity, which is a
FUCO, serves approximately 2.1 million customers in England.
Yorkshire Electricity's distribution territory covers
approximately 4,180 square miles of northeast England. It was
one of the 12 regional electricity companies created in 1990 by
the British government as part of the privatization of the
electric utility industry in England and Wales. Yorkshire
Electricity is primarily a distribution and supply company,
purchasing most of its electricity requirements from third-party
generators.
The purchase price for the outstanding shares of
Yorkshire Electricity was financed by loans made by Yorkshire
Holdings' sole shareholder, Yorkshire Power Group Limited
('YPG'), a company organized under the laws of the United
Kingdom. YPG financed its loans to Yorkshire Holdings by
borrowing approximately 1 billion UK pounds (US $1.5 billion)
through a term loan and revolving facility and by equity
contributions from its shareholders, Resources and New Century
International, Inc. The loan facility is neither guaranteed by,
nor otherwise provides for recourse to, American, Resources or
any of American's operating utility subsidiaries.
Resources invested 220 million UK pounds (US $357
million) for 50% of the equity of YPG. Resources funded its
investment with a $50 million cash investment from American, $7
million of short term borrowing and a $300 million adjustable
rate term loan under a revolving credit agreement with Bank of
New York as agent. Resources' borrowings are guaranteed by
American. American's cash investment was funded by proceeds of
the sale of its Common Stock under its dividend reinvestment and
savings plans. As of June 30, 1997, American's 'aggregate
investment' (as defined under Rule 53(a) of the 1935 Act) in
Yorkshire Electricity was $359 million, including $2 million of
capitalized expenses.
American anticipates that, with the exception of the
loss associated with the windfall profit tax discussed below,
Yorkshire Electricity will make a contribution to American's
earnings per share. In addition to providing American with a
relatively stable source of income in the future, the acquisition
of Yorkshire Electricity will enable the grouping of all three
companies to:
* add to the established achievements of Yorkshire
Electricity's management team. Yorkshire Holdings
believes that there are further opportunities in the
United Kingdom electricity market which it can assist
Yorkshire Electricity in pursuing;
* promote further competition in each of the companies'
markets to the benefit of customers;
* share effective best practice initiatives between the
three companies across the areas of customer service,
cost-to-customer, operational and financial
disciplines;
* add proven expertise from American and PSCo in trading,
generation, transmission and gas marketing; and
* bring the financial resources and technical marketing
awareness of American and PSCo to bear on Yorkshire
Electricity's approach to the deregulation of the
United Kingdom supply market post-1998.
Prior to the announcement of the intention of Yorkshire
Holdings to offer to acquire the outstanding shares of Yorkshire
Electricity, Standard & Poor's and Moody's Investors Service
rated the senior unsecured debt of Yorkshire Electricity AA and
Aa3, respectively. As customary, after the announcement of the
takeover bid, both rating agencies placed these ratings on review
for possible downgrade. These announcements recognized the
uncertainties concerning the financial implications for Yorkshire
Electricity of the bid. Standard & Poor's, however, noted that
it expected sufficient regulatory protection to maintain a rating
in the investment-grade range. See Exhibit C-1.
(2) Nanyang General Light Electric Co., Ltd.
On September 22, 1996, AEP Pushan Power LDC ('AEPP'), a
special purpose subsidiary of Resources (formed as a Project
Parent under the laws of the Cayman Islands), signed a joint
venture agreement together with two local Chinese partners in
connection with the formation of the Nanyang General Light
Electric Co. Ltd. ('Nanyang'), a cooperative joint venture
company formed under the laws of the People's Republic of China.
Nanyang was established to own, construct, finance and
operate a coal-fired electric generating station in Nanyang,
Henan Province China, with two units of 125 megawatts each
('Nanyang Project'). On November 4, 1996, Nanyang was granted
its business license and its initial Board of Directors meeting
was held on November 13-14, 1996. AEPP owns 70% of Nanyang, and
special purpose financing companies established by the Henan
Electric Power Company ('Henan Electric') and the City of
Nanyang, respectively, each own 15%. Under the joint venture
agreement, AEPP's total commitment in U.S. Dollars will not
exceed $110 million. It is anticipated that this commitment will
take the form of approximately $40 million as a direct equity
investment, and approximately $70 million in the form of a
shareholder loan provided from Resources. As of June 30, 1997,
$6 million and $13 million of equity and debt, respectively, had
been provided and American's 'aggregate investment' (as defined
in Rule 53(a) of the 1935 Act) in Nanyang was $22 million,
including $3 million of capitalized expenses.
Henan Electric will construct the Nanyang Project under
an engineering, construction and procurement contract, will
operate the Nanyang Project under an operating and maintenance
contract and will purchase the electric output from the Nanyang
Project under a 20 year power purchase contract. These contracts
were executed between Nanyang and Henan Electric on November 14,
1996. Unit 1 of the Nanyang Project is expected to be
operational by June 1999 with Unit 2 following 5 months later.
(3) Additional Investments in Exempt Projects
Although American is considering further investments in
Exempt Projects, its ability to invest in, or begin development
of, additional projects is restricted by the approximately $318
million that it has available. Projects under consideration
include generation opportunities in Europe, China, Central Asia
and the United States as well as privatizations of electric
utilities in Australia and Brazil."
3. The following is added at the end of Item 1, Section C,
Paragraph 2(d), Financial risks:
"As of June 30, 1997, the aggregate amount of
nonrecourse debt applicable to Exempt Projects owned directly or
indirectly by American was approximately $2.27 billion, of which
approximately $1.135 billion is related to American's
proportionate ownership interests in these Exempt Projects."
4. Paragraph (3) of Section C of Item 1 is amended and
restated as follows:
"(3) Application of Review Process and Risk Factors to
Specific Investment Decisions
American's acquisition activity in China and the United
Kingdom provides an illustration of the review process and risk
analysis outlined above.
(a) Nanyang Project.
The Nanyang Project was developed and executed by
a Resources team with several years' experience in the China
electricity market. In September of 1994, Resources was invited
to visit Northeast China in connection with a potential
development opportunity of a large coal-fired power project.
Although those meetings have not yet led to a project there,
Resources' personnel have met many times with numerous senior
central and provincial level government officials throughout
China and sent engineering teams to visit various Chinese design
and manufacturing facilities. The Nanyang Project arose as an
opportunity from these various contacts.
Once the preliminary terms of the Nanyang Project
were discussed with the Chinese parties, including affiliates of
Henan Electric, representing the power bureau for Henan Province,
and the City of Nanyang in July 1995, senior management of
Resources discussed this matter with the Finance Committee of
American's board of directors. This Committee reviewed and
approved the conditions for making this investment into China
including the maximum dollar commitment for the Nanyang Project.
Resources then entered into a series of negotiations with Henan
Electric and the City of Nanyang over the next 14 months leading
to the signing of the Joint Venture Contract in September 1996.
Henan Electric is the legal entity responsible for the
operation, administration and development of the power industry
in Henan Province, which has a population of approximately 90
million. Henan Electric is also part of the Central China Power
Grid Network, which coordinates the supply of electricity in the
four provinces in Central China (Henan, Hebei, Hubei and Jingxi).
Henan Electric is also responsible for monitoring all the major
power plant construction projects in Henan Province. Henan
Electric owns or controls 13 coal-fired power plants and other
major power distribution and administration centers throughout
Henan Province.
Resources sought to minimize operating risks for
the Nanyang Project by developing coal-fired generation - a
technology with which the American System has existing
competencies. Due diligence was carried out by Resources'
engineers with experience in coal-fired generation. The risk of
changes in the price of fuel is passed through to Henan Electric
under the power purchase contract. Henan Electric is responsible
for the operations of the Nanyang Project, reducing the operating
risk further.
Construction risks are minimized under a fixed-
price construction contract with milestones and performance
guarantees (e.g., guaranteed heat rates, availability factors),
backed by appropriate levels of liquidated damages, again with
Henan Electric. The creditworthiness and 'track record' of Henan
Electric was an important consideration. The 20-year power
purchase contract with Henan Electric also reduced commercial
risks of the project.
'Political' or country risk was mitigated by
partnering with both the City of Nanyang and Henan Electric in
this project and ensuring that the project had broad governmental
support at every level, including Beijing and Premier Li Peng.
Although initially the Nanyang Project could not
be financed with non-recourse debt, it is the intent of Resources
to refinance the loan with long-term non-recourse debt as soon as
the capital markets will provide such funding. To facilitate
this, the Nanyang Project documentation is in a form Resources
believes will be acceptable for an international project
financing. To address currency risk, Resources is paid under the
power purchase contract in U.S. Dollars.
(b) Yorkshire Electricity
The Yorkshire acquisition was very different from
Nanyang. First, it contributed to portfolio diversification
because it is located in a different region of the world, has
primarily distribution not generation assets and consists of
existing operating assets rather than ones under construction.
Operating, construction and commercial risks were minimized
because Yorkshire Electricity is an existing profitable business
with a strong management team.
Resources engaged in a substantial due diligence
effort prior to the acquisition of Yorkshire Electricity. It
employed financial and operational personnel from American System
companies as well as retaining U.S. and U.K. financial, legal and
accounting advisors. It concluded that all relevant risks were
adequately mitigated.
Yorkshire Electricity supplies and distributes
electricity to 2.1 million customers in England. Yorkshire
Electricity has been licensed under the Electricity Act to
distribute and supply electricity in an authorized area. The
Office of Electricity Regulations ('OFFER') regulates Yorkshire
Electricity and other regional electric companies.
The distribution of electricity is Yorkshire
Electricity's core business and provides approximately 75% of its
profitability. Regulation of the distribution business is
subject to an annual rate cap formula based on changes in
inflation less an efficiency factor. Regulatory review and reset
of the formula is scheduled for 2000. The formula provides a
partial price hedge against increased expenses and so helps
reduce operating risk. Efficiency gains and cost reductions
below the rate cap formula benefit shareholders.
The supply business in the United Kingdom
currently is subject to competition for loads in excess of 100
kw. The business is scheduled to become competitive for all
loads in 1998. Yorkshire Electricity currently has the lowest
supply prices in the United Kingdom. Yorkshire Electricity
purchases electricity in the wholesale market for its supply
business and uses hedge contracts to minimize exposure to
fluctuating electric prices. Yorkshire Electricity's policy is
to substantially hedge its forecasted load by entering into
hedging contracts with individual generators. This mitigates
operating risk on the supply side.
Financial risk was a key area of focus for
Resources in acquiring Yorkshire Electricity. First, over 70% of
the acquisition price was funded with non-recourse debt. YPG
borrowed approximately 1 billion UK pounds (US $1.5 billion)
through a nonrecourse loan and revolving facility. Resources'
financial risk was then limited to its equity investment.
Although the acquisition was initially funded with
variable rate debt by both YPG and Resources, it is expected that
70%-80% portions of the debt will be refunded with fixed-rate
long-term debt in the near future. In anticipation of that
refunding, YPG has fixed the interest rate on 60% of the bank
facility through interest rate swaps.
Foreign currency risk has been and will continue
to be minimized by borrowing in pounds sterling or if in U.S.
Dollars, hedging the conversion rate. For example, the current
YPG credit facility is denominated in pounds. In addition, when
Resources made its commitment to invest in YPG, it hedged the
conversion rate.
Legal risks were deemed minimal because Resources
did not believe that the United Kingdom presented any country
specific political risks due to its established legal and
regulatory framework."
5. The following is added at the end of Section D of Item
1:
"(3) The actual use of the expanded investment
authority cannot be determined at this time. Although the
potential opportunities are numerous, until the authority is
received, firm commitments cannot be made to the early
development of projects. As a result of various factors,
however, it is expected that a majority of the funds will be
invested in FUCOs whose principal activities are subject to some
sort of price regulation in the local country. These factors
include the fact that more of these opportunities appear to be
available and that both of Resources current investments are of
this type. However, Resources also may consider investments in
generation plants which sell their output in a spot price power
market as opposed to under long term contracts."
6. Section E. of Item 1 is amended and restated as
follows:
"E. Proposed Increase in Financing of Exempt Projects
For the reasons stated above, American and Resources hereby
requests that the Commission exempt American and Resources from
the requirements of Rule 53(a)(1) under the 1935 Act such that
American and Resources may use the net proceeds from the issuance
of recourse debt and equity securities and issue Guarantees, each
in accordance with and upon the terms of the Financing Orders, in
an aggregate amount at any time outstanding which, when added to
American's direct and indirect aggregate investment in all Exempt
Projects, would not at any time exceed American's consolidated
retained earnings. Based on the $359 million of investment in
Yorkshire Electricity and the $110 million designated for the
Nanyang Project and American's consolidated retained earnings as
of June 30, 1997 (approximately $1.574 billion), such limitation
would allow financing of investments in additional Exempt
Projects of approximately $1.105 billion. The authority
requested herein will be sufficient to enable American to make
investments in all Exempt Projects it is presently developing, as
well as in Exempt Projects that are under investigation at
present or that arise in the future."
7. Paragraph 1 of Item 3. Applicable Statutory Provisions
is amended and restated as follows:
"(1) The use of proceeds from the issuance of debt and
equity securities of American to make investments in EWGs (as
well as in FUCOs), and the issuance of, or provision for,
Guarantees in connection therewith by American, in amounts of up
to American's consolidated retained earnings will not have a
'substantial adverse impact' on the financial integrity of the
American System.
The lack of any 'substantial adverse impact' on
American's financial integrity as a result of increased levels of
investments in Exempt Projects can be demonstrated in several
ways, including by analyses of historic trends in American's
consolidated capitalization ratios and retained earnings and the
market view of American's securities. Consideration of these and
other relevant factors supports the conclusion that the issuance
of securities and Guarantees by American to finance investments
in Exempt Projects exceeding the 50% consolidated retained
earnings limitation in Rule 53(a)(1) will not have any
'substantial adverse impact' on the financial integrity of the
American System.
American has a low-cost core electric utility business
and is developing an international presence and other diversified
businesses that will provide benefits to its core utility
business, as well as enhance the potential for substantial long-
term earnings growth. American's consolidated retained earnings
have grown on average almost 7% per year over the previous three
years. American's consolidated capitalization and interest
coverage ratios are within industry ranges for A-/BBB+ rated
companies. After announcement of the offer to acquire Yorkshire
Electricity, the rating agencies reaffirmed these ratings.
Finally, the market's assessment of American's prospect for
future growth and earnings compares favorably to other electric
utility companies and its dividend payout ratio is improving.
(a) Aggregate investments in Exempt Projects in
amounts up to 100% of American's consolidated retained earnings
(as defined in Rule 53(a)), which were $1.574 billion as of June
30, 1997, would still represent a relatively small commitment of
capital for a company the size of American, based on various key
financial ratios at June 30, 1997. For example, investments of
this amount would be equal to only 15.9% of American's total
capitalization ($9.9 billion), 13.7% of consolidated net utility
plant ($11.5 billion), 9.7% of total consolidated assets ($16.3
billion), and 19.9% of the market value of American's outstanding
common stock ($7.9 billion). Such percentages are lower than
those of Southern as of December 31, 1995 (16.3%, 15.4%, 11.0%
and 20.4%, respectively) and those of CSW as of June 30, 1995
(23%, 23%, 14% and 31%, respectively) described by the Commission
in their Orders as 'a relatively small commitment of capital'.
Taken together with the credit strength of the five
major Operating Companies (which are presently rated at the
equivalent of BBB+ or higher by the three major credit rating
agencies), American's actual consolidated capitalization and
interest coverage ratios for 1996 are well within industry ranges
set by independent debt rating agencies for BBB+ rated companies,
as shown below:
Actual 1996 Capitalization and Interest Coverage Ratios
(Excluding Non-Recourse Project Debt)
Total Debt/Capital 50.3%
Pre-Tax Interest Coverage 3.6
Funds from Operating Income Interest Coverage 4.2
1996 Industry Ratios for BBB+ Rated Investor-Owned
Utilities*
High Average Low
Total Debt/Capital 59.2% 50.4% 41.3%
Pre-Tax Interest Coverage 3.8 3.1 2.3
Funds for Operating Income
Interest Coverage 5.3 4.1 2.8
___________
* Source: Moody's Investor Service - Electric Utility
Sourcebook, October 1996.
American's consolidated capitalization ratio as of June
30, 1997 was 44.6% common and preferred equity and 55.4% debt
(including approximately $639 million of short term debt). No
nonrecourse debt of Exempt Projects is consolidated for financial
reporting purposes. This ratio continues to be within industry
ranges set by independent debt rating agencies for BBB+ rated
companies.
(b) American's consolidated retained earnings
have grown on average almost 7% per year over the previous three
years. Consolidated retained earnings increased $56 million
during 1994, a 4.4% increase; by $84 million during 1995, a 6.3%
increase; by $138 million during 1996, a 9.8% increase; and by
$67 million during the first half of 1997, a 4.3% increase.
(c) The market's assessment of American's future
growth and earnings also compares favorably to other electric
utility issuers in the 1994 to present time frame. This can be
shown by comparison of price-earnings and market-to-book ratios,
both of which show a significant strengthening when compared with
the electric utility industry average in that period. These
measures indicate investor confidence in American's ability to
deliver shareholder value.
Twelve
Months
Ended
1993 1994 1995 1996 6/30/97
P/E Ratio:
American 13.7 12.1 14.2 13.1 13.4
Electric Industry2 14.0 11.7 13.8 12.4 12.3
Market-to-Book Ratio:
American 165% 144% 174% 169% 170%
Electric Industry3 167% 136% 140% 145% N/A
(d) In recent years, American's dividend payout
ratio (percentage of earnings paid out in dividends), has been
slightly above the electric utility industry average, but has
been improving.
Twelve
Months
Ended
1993 1994 1995 1996 6/30/97
American Payout Ratio %: 88.8* 88.6 84.1 76.5 76.7
Electric Industry %4 78.5 79.5 75.7 74.1 N/A
________________
* Restated to eliminate the disallowance of Zimmer Generating
Station costs.
(e) None of the conditions described in paragraph
(b) of Rule 53 is applicable. Specifically, (1) there has been
no bankruptcy of any American associate company; (2) American's
2Average of Standard & Poor's 26 Electric Power Company
Index as reported by Goldman Sachs Selected Electric Industry
Statistics, July 1997, Table 13.
3Goldman Sachs Selected Electric Industry Statistics, July
1997, Table 16.
4Goldman Sachs Selected Electric Industry Statistics, July
1997, Tables 11 and 12.
consolidated retained earnings, as previously indicated, have
increased in recent years; and (3) to date, American has not
reported an 'operating loss' attributable to its Exempt Projects.
SFAS 121 requires a listing of all assets of a
utility that a company plans to write down and take as a loss.
American presently has no assets listed pursuant to SFAS 121.
Based on American's current knowledge, no assets with respect to
any Exempt Project presently owned (directly or indirectly) by
American are expected to be placed on such list pursuant to SFAS
121. Finally, no associate Exempt Project has ever defaulted
under the terms of any financing document. None of the
circumstances described in Rule 53(b) has occurred. American
undertakes to notify the Commission by filing a post-effective
amendment in this proceeding in the event that any of the
circumstances described in Rule 53(b) occurs during the
authorization period.
In the general election held in the United Kingdom
on May 1, 1997, as was expected, the Labour Party won control of
the government with a considerable majority. Prior to the
general election, the Labour Party had announced, and Resources
was aware, that, if elected the Labour Party would impose a
windfall profits tax on certain industries in the United Kingdom,
including certain privatized business entities. On July 2, 1997,
the one-time windfall profits tax was introduced in the Labour
Party's Budget and on July 31, 1997, it became law. The windfall
tax liability for Yorkshire Electricity is estimated to be 135
million pounds sterling ($220 million). The tax will be payable
in two equal installments with the first in December 1997 and the
second installment a year later. American expects that Yorkshire
Electricity will have sufficient cash resources to pay the tax
without the need for additional long-term borrowings or equity
contributions from Resources.
The net earnings effect on American of the
windfall profits tax is expected to be $110 million and is
expected to be recorded in the third quarter. Nonetheless, the
net loss attributable to American's investment in EWGs and FUCOs
for 1997 should not exceed 5% of American's consolidated retained
earnings as at December 31, 1997. Therefore, the conditions of
Rule 53(b)(2) and (3) should continue to be satisfied.
(f) Numerous financial indicators show the
financial strength of American. For example, American's earnings
per share and return on equity were $3.14 and 13.2%,
respectively, for the year ended 1996 and $2.85 and 12.4%,
respectively, for the year ended 1995."
8. Paragraphs 2(d) and (e) of Item 3 are amended and
restated as follows:
"(d) The major Operating Companies' ability to
issue debt and equity securities in the future depends upon
earnings coverages at the time such securities are issued; that
is, they must comply with certain coverage requirements
designated in their mortgage bond indentures. The Operating
Companies should have more than adequate earnings coverages for
financing requirements in the foreseeable future.5
(e) The major Operating Companies' coverages have
generally been within the A and BBB+ ranges set by the major
rating agencies in recent years. The Operating Companies
continue to show adequate financial statistics as measured by the
rating agencies (pre-tax interest coverage, debt ratio, funds
from operations to debt, funds from operations interest coverage,
and net cash flow to capital expenditures).
S&P Rating: 1993 1994 1995 1996 Current
APCo A- A- A- A- A-
CSPCo BBB+ BBB+ A- A- A-
I&M BBB+ BBB+ BBB+ BBB+ BBB+
KPCo BBB+ BBB+ BBB+ BBB+ BBB+
OPCo A- A- A- A- A-
Moody's Rating: 1993 1994 1995 1996 Current
APCo A2 A2 A2 A3 A3
CSPCo Baa2 Baa2 Baa1 A3 A3
I&M Baa1 Baa1 Baa1 Baa1 Baa1
KPCo Baa1 Baa1 Baa1 Baa1 Baa1
OPCo A3 A3 A3 A3 A3
Duff & Phelps Rating: 1993 1994 1995 1996 Current
APCo A A A A A
CSPCo BBB BBB+ BBB+ A- A
I&M BBB BBB+ BBB+ BBB+ N/A
KPCo BBB+ BBB BBB BBB N/A
OPCo A A A A A
5June 30, 1997 indenture earnings coverages for the
Operating Companies range from about 3.65 to 8.44, in each case
well above the required coverages of 2x.
In addition, the rating agencies consider the
Operating Companies to have relatively favorable competitive
positions, with Standard & Poor's ranking them 'somewhat above
average' business position. See Standard & Poor's Global Sector
Review, November 1996. Fitch Investors Service's Competitive
Indicator scores for the Operating Companies are 2.30, 2.38,
2.65, 2.60 and 2.45 for APCo, CSPCo, I&M, KPCo and OPCo,
respectively, relatively favorable as compared to the average
score of 2.73. See Fitch Report on American Electric Power,
October 14, 1996. (A lower score indicating relatively less
vulnerability to competition.)
American does not believe that investments made in
Exempt Projects have negatively affected the first mortgage bond
ratings of its operating utility subsidiaries, APCo, CSPCo, I&M,
KPCo and OPCo. Upon announcement of the acquisition of Yorkshire
Electricity, the credit ratings of the operating utility
subsidiaries were affirmed by Moody's, Standard & Poor's and Duff
& Phelps. In a separate action at that time, Duff & Phelps
downgraded the preferred stock of APCo and OPCo, but the
downgrade is not reflective of either recent financial
performance or the participation of American in the bid to
acquire Yorkshire Electricity." See Exhibit C-2.
9. The following additional exhibits are filed in Item 6:
Exhibit B-1 Pro forma financial statements
Exhibit B-2 American Capitalization Summary as of June
30, 1997
Exhibit B-3 American Quarterly Report on Form 10-Q for
the Quarter ended June 30, 1997 (SEC File No.
1-3525) is incorporated by reference herein.
Exhibit C-1 Rating Agency Announcements re Yorkshire
Electric Group
Exhibit C-2 Rating Agency Announcements re American and
Operating Companies
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused
this statement to be signed on their behalf by the undersigned
thereunto duly authorized.
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
By_/s/ G. P. Maloney______
Vice President
Dated: September 19, 1997
Exhibit B-1
DESCRIPTION OF THE TRANSACTION
The following discussion describes the pro forma effects on
the historical consolidated financial statements of American of
the acquisition of Yorkshire Electricity by Yorkshire Power Group
Limited ("Yorkshire Power"), a joint venture formed by
subsidiaries of American and Public Service Company of Colorado
("PSCo"). The acquisition of Yorkshire Electricity was made by
Yorkshire Holdings plc ("Yorkshire Holdings"), a wholly-owned
subsidiary of the joint venture. The total consideration paid by
Yorkshire Holdings to acquire Yorkshire Electricity is estimated
to be approximately $2.4 billion (1.5 billion pounds sterling).
The funds for the acquisition were obtained from American's and
PSCo's subsidiaries' investment in Yorkshire Power of
approximately $360 million (220 million pounds sterling) each,
with the remainder obtained by Yorkshire Power through the
issuance of non-recourse debt. Yorkshire Power, in turn, funded
Yorkshire Holdings for the purpose of the acquisition.
American's subsidiary initially funded its equity investment in
Yorkshire Power with a $50 million cash investment from American,
$10 million of short-term borrowing and a $300 million adjustable
rate term loan under a long-term revolving credit agreement with
Bank of New York as agent. American's investment in Yorkshire
Power will be accounted for under the equity method of
accounting.
A limited number of adjustments are required to reflect the
pro forma effects of the transaction; therefore, the information
is being furnished in a narrative format as permitted by Article
11 of Regulation S-X.
PERIODS PRESENTED
Unaudited pro forma income statement information is provided
for the twelve months ended December 31, 1996, and for the three
months ended March 31, 1997, as if the transaction had been
consummated on January 1, 1996, and January 1, 1997,
respectively. Unaudited pro forma balance sheet information is
provided as of March 31, 1997, as if the transaction had been
consummated on such date. Pro forma income statement adjustments
related to Yorkshire Power for the year ended December 31, 1996,
reflect the twelve months ended December 31, 1996, and for the
quarter ended March 31, 1997, reflect the three months ended
December 31, 1996. Consequently, the pro forma income statement
adjustments for the three month period ended March 31, 1997, are
reflected in both periods.
EFFECTS OF PRO FORMA ADJUSTMENTS ON AMERICAN'S STATEMENTS OF
INCOME
The pro forma items necessary to reflect the acquisition of
Yorkshire Electricity on American's statement of income include
the recognition of equity in the estimated earnings of Yorkshire
Power, an adjustment for interest expense on debt associated with
American's investment in Yorkshire Power, and related income
taxes. The estimated earnings of Yorkshire Power include the
historical earnings of Yorkshire Electricity adjusted for the
effects of purchase accounting (including increased depreciation
on the revalued fixed assets and the amortization of goodwill),
interest expense on debt issued by Yorkshire Power in connection
with the acquisition, and related income taxes. American's
equity in the resulting earnings is 50%, the same as its
ownership interest in Yorkshire Power.
Yorkshire Electricity's historical earnings, based on United
Kingdom generally accepted accounting principles, totaled 102.4
million pounds sterling ($159.8 million) for the twelve months
ended December 31, 1996 and 19.6 million pounds sterling ($32.1
million) for the three months ended December 31, 1996. Included
in Yorkshire Electricity's earnings is the effect of a
nonrecurring adjustment related to the write-off of certain
computer development costs which totaled 22.2 million pounds
sterling (net of tax) for the twelve months and three months
ended December 31, 1996.
The estimated effect of purchase accounting by Yorkshire
Power and the conversion to United States generally accepted
accounting principles would increase American's net income on a
pro forma basis by approximately $19.4 million and $0.7 million
for the twelve months ended December 31, 1996 and three months
ended March 31, 1997, respectively. American's pro forma share
of Yorkshire Power's earnings for the twelve months ended
December 31, 1996 and three months ended March 31, 1997 would
include, among other things, (a) increased depreciation of $5.2
million and $1.4 million, respectively, due to the revaluation of
assets; (b) the amortization of goodwill of $21.1 million and
$5.4 million, respectively; and (c) interest expense of $62.4
million and $16.4 million, respectively, on the non-recourse debt
issued by Yorkshire Power in connection with the acquisition.
(All dollar amounts have been converted using the average
exchange rates for the twelve month period and three month period
of $1.561/pound sterling and $1.636/pound sterling,
respectively.)
The following table shows the effect of the aforementioned
pro forma adjustments on American's net income and earnings per
share.
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
December 31, 1996 March 31, 1997
Net Income Earnings Net Income Earnings
(millions) Per Share* (millions) Per Share*
<C> <C> <C> <C>
<S> (unaudited) (unaudited)
American . . . . . . . . . . . . $587.4 $3.14 $172.6 $0.92
Pro forma adjustments:
Equity in Earnings
of Yorkshire Power** . . . . . 19.4 0.7
Interest expense, net of tax . . (11.3) (2.9)
Pro forma result . . . . . . . . $595.5 $3.18 $170.4 $0.90
</TABLE>
* Based on the average number of common shares outstanding of 187,321,000
and 188,347,000 for the twelve months ended December 31, 1996, and
three months ended March 31, 1997, respectively.
** Includes $12.3 million, net of tax ($0.07 per share) for the twelve
months ended December 31, 1996 and three months ended March 31, 1997
for a nonrecurring write-off by Yorkshire Electricity of certain computer
development costs.
EFFECTS OF PRO FORMA ADJUSTMENTS ON AMERICAN'S BALANCE SHEET
The only pro forma adjustments needed to reflect the
acquisition of Yorkshire Electricity on American's balance sheet
are the incorporation of American's investment in Yorkshire Power
of $360 million and the inclusion of the associated short-term
and long-term debt. There is no pro forma impact on total common
shareholders' equity. At March 31, 1997, American's unaudited
balance sheet reported total assets of $15,905.7 million, other
property and investments of $917.5 million, cash and cash
equivalents of $86.1 million, short-term debt of $334.3 million
and long-term debt of $4,786.6 million. After adjusting for
American's estimated investment in Yorkshire Power, the pro forma
March 31, 1997 balance sheet would report total assets of
$16,215.7 million, other property and investments of $1,277.5
million, cash and cash equivalents of $36.1 million, short-term
debt of $344.3 million and long-term debt of $5,086.6 million.
Exhibit B-2
AMERICAN ELECTRIC POWER COMPANY, INC.
CAPITALIZATION
Actual
June 30, 1997
<TABLE>
<CAPTION>
$ Millions Percentage
<S> <C> <C>
Debt:
First Mortgage Bonds . . . . . . $ 3,159
Other Long-Term Debt . . . . . . 2,185
Short-Term Debt . . . . . . . . . 639
$ 5,983 55.4%
Preferred:
Stock . . . . . . . . . . . . . . $ 174 1.6%
Common Equity:
Common Stock . . . . . . . . . . $ 1,288
Paid-in Capital . . . . . . . . . 1,746
Retained Earnings . . . . . . . . 1,615
$ 4,649 43.0%
Total Capitalization . . . . . . . $10,806 100.0%
</TABLE>
The foregoing table includes no non-recourse debt related to
Exempt Entities that is consolidated for financial reporting
purposes. The following table sets forth American's pro forma
capitalization, including the additional amount of outstanding
non-recourse debt ($1.135 billion) related to American's
proportionate ownership interest in Exempt Entities.
Pro Forma
June 30, 1997
<TABLE>
<CAPTION>
$ Millions Percentage
<S> <C> <C>
Debt:
First Mortgage Bonds . . . . . . $ 3,159
Other Long-Term Debt . . . . . . 3,320
Short-Term Debt . . . . . . . . . 639
$ 7,118 59.6%
Preferred:
Stock . . . . . . . . . . . . . . $ 174 1.5%
Common Equity:
Common Stock . . . . . . . . . . $ 1,288
Paid-in Capital . . . . . . . . . 1,746
Retained Earnings . . . . . . . . 1,615
$ 4,649 38.9%
Total Capitalization . . . . . . . $11,941 100.0%
</TABLE>
Exhibit C-1
Moody's Investors Service Rating Action
Global Credit Research
Yorkshire Electricity Group plc Published on 02/24/97
London London
Richard Stephan Simon Atkinson
Managing Director Senior Analyst
European Corporates European Corporates
Moody's Investors Service Moody's Investors Service
Journalists: Journalists:
(171)772-5454 (171)772-5454
Subscribers: (171)772-5366 Subscribers:
(171)772-5366 (171)772-5454
MOODY'S PLACES Aa3 SENIOR DEBT RATINGS OF YORKSHIRE ELECTRICITY
GROUP PLC AND ITS PRIME-1 RATING FOR COMMERCIAL PAPER ON REVIEW
FOR POSSIBLE DOWNGRADE
Approximately GBP350 Million of Long Term Debt Securities
Affected
London, 2/24/1997 -- Moody's Investors Service placed the Aa3
senior debt ratings and Prime-1 rating for commercial paper of
Yorkshire Electricity plc (Yorkshire) on review for possible
downgrade in response to a potentially large increase in debt
service requirements following the announcement of a proposed
acquisition by AEP and PS Colorado of 100% of Yorkshire's share
capital. The offer is recommended by the board of Yorkshire but
has yet to receive clearance from the regulatory authorities.
Moody's review will focus on the implications for Yorkshire's
business and financial strategies of the proposed change in
ownership and an assessment of any assurances given by
Yorkshire's proposed new owners to address any regulatory
concerns of the Director General of Electricity Supply.
Ratings under review for possible downgrade are:
Yorkshire Electricity Group plc--9.25% Eurobonds due 2020; 8.625%
Eurobonds due 2005 at Aa3: short term rating for commercial
paper at Prime-1.
Yorkshire Electricity Group plc is one of the UK regional
electricity companies and has its head office in Leeds,
Yorkshire, United Kingdom. The company had turnover of
approximately 1.3 billion UK pounds, excluding National Grid
Group, for the year ended 31st March, 1996.
Balance Sheet Statistics
Yorkshire Electricity Group plc
(1) 1996 1995 1994
Total debt % capital 49.7 38.7 24.4
Equity % capital 50.3 61.3 75.6
Total capital (million UK pounds) 1,035 1,023 923
(1) Years ending March 31
Opinion
Rating Rationale
YEG is a medium-sized UK REC, and the Aa3 rating reflects YEG's
strong and stable earnings and cash flow resulting from its
monopoly distribution business, which is the predominant
contributor to earnings and cash flow. YEG has retained a strong
balance sheet relative to its business risk, and net cash flows
have benefitted from efficiency gains in the operation of its
distribution business.
In common with other RECs, YEG faces growing pressures in energy
markets, emerging regulatory policy and the political environment
leaning towards retrospective taxation. Regulation centres on
prices, and the ringfencing regime for distribution utilities
allows for dividend distributions from distributable earnings, so
major restructurings are permissible.
Value has been distributed to shareholders via special dividends,
but YEG retains a strong balance sheet relative to its business
risk. YEG's strategy is now to focus strongly on the efficiency
of its core distribution business, although its earnings stream
is expected to benefit in the future from core-related activities
in electricity generation, electricity sales, and the pending
deregulated gas market.
Rating Outlook
Negative. The ratings were placed under review for possible
downgrade in response to the large increase in debt service
requirements following the announcement of the acquisition by AEP
and PS Colorado of 100% of YEG's share capital. The review will
focus on the implications for YEG's business and financial
strategies of the proposed change in ownership and an assessment
of any assurances given by the new owners to address any
regulatory concerns of the Director General of Electricity
Supply.
Yorkshire Electricity Ratings Placed on CreditWatch, Negative
Standard & Poor's placed its 'AA' senior unsecured debt and
corporate credit ratings and 'A-1+' commercial paper rating of
Yorkshire Electricity plc on CreditWatch with negative
implications.
The CreditWatch placement followed the announcement by Yorkshire
Electricity that it is recommending a takeover bid by American
Electric Power Company, Inc. and Public Service Company of
Colorado (bidding jointly as Yorkshire Holdings plc), valuing the
company at 1.5 billion UK pounds.
The CreditWatch announcement acknowledges uncertainties
concerning the financial implications for Yorkshire Electricity
if the bid clears regulatory hurdles. Standard & Poor's
recognizes that the funding of such a takeover may lead to weaker
debt servicing capacity than would be consistent with its current
rating.
Yorkshire Electricity's current ratings reflect the company's
cash generative core business, a stable regulatory environment,
and a relatively strong financial profile. Yorkshire distributed
23,223 gigawatt-hours to its two million customers in the year
ended March 1996. Revenues are regulated through distribution
and supply price caps linked to inflation.
Standard & Poor's will review the credit implications of a
successful bid for Yorkshire Electricity. Specifically, Standard
& Poor's will assess:
* Any regulatory or governmental actions that may have
implications for the proposed takeover;
* The effects on the financial profile of Yorkshire
Electricity of the acquisition;
* The group structure and the location of the debt financing
within that structure; and
* Any operational benefits that may arise from the takeover.
Following an assessment of these and other factors, Standard &
Poor's will adjust the current ratings as appropriate. Given the
recent statements of the government in relation to other recent
bids in this sector, Standard & Poor's would expect sufficient
regulatory protection to maintain the resultant rating in the
investment-grade range. (See related News Comment on American
Electric Power Company, Inc. and Public Service Company of
Colorado).
Michael Wilkins, London (44)171-826-3528
Marc Watton, London (44)171-826-3641
Judith Waite, New York (1)212-208-1663
Exhibit C-2
Moody's Investors Service Rating Action
Global Credit Research
Yorkshire Electricity Group plc Published on 02/24/97
New York New York
Susan D. Abbott A. Tucker Hackett Jonathan Cohen
Managing Director Senior Analyst Associate Analyst
Energy Energy Communications &
Speculative Grade
Moody's Investors Service Moody's Investors Service
Journalists: (212)553-0376 Journalists: (212)553-0376
Subscribers: (212)553-1653 Subscribers: (212)553-1653
MOODY'S AFFIRMS CREDIT RATINGS OF AEP (P-2) AND SUBSIDIARIES;
AFFIRMS CREDIT RATINGS OF PUBLIC SERVICE COMPANY OF COLORADO BUT
CHANGES OUTLOOK TO NEGATIVE
Approximately $10.7 Billion of Securities Affected
NEW YORK, February 24, 1997 -- Moody's Investors Service has
affirmed the Prime-2 short-term rating of American Electric Power
Company (AEP) and the ratings of its subsidiaries. Moody's
concurrently affirmed the ratings of Public Service Company of
Colorado (senior secured at A3), but changed the outlook for
Public Service of Colorado (PSCo) to negative. The change in
outlook is in response to the proposed $2.4 billion tender offer
for Yorkshire Electricity plc (Aa3 senior unsecured) by Yorkshire
Holdings plc, a 50-50 joint venture newly formed by AEP and PSCo.
The acquisition will be financed with a $1.9 billion non-recourse
bank facility and with equity contributions of $360.2 million
each from AEP and PSCo.
The proposed tender offer for Yorkshire Electricity will not
trigger a review by Moody's of AEP's or PSCo's credit ratings.
However, the rating agency believes that the issue of incremental
leverage by PSCo to finance its $360 million equity investment
justifies a negative outlook for PSCo's ratings until this
financing is replaced with equity or other non-debt mechanism.
Failure to reduce leverage within the 18 months contemplated
would put pressure on the company's ratings.
While AEP's proposed timetable for taking out the additional
leverage is not as aggressive as PSCo's, the impact on AEP's
credit profile is less dramatic than the impact of additional
leverage on PSCo, a smaller company. AEP will finance its equity
investment largely with debt and proceeds from the company's $70
million per year dividend reinvestment program.
AEP system ratings affirmed are the Prime-2 short-term
ratings of AEP and its operating subsidiaries, the long-term
ratings of Appalachian Power Company, Columbus Southern Power
Company, and Ohio Power Company (A3 senior secured); of Indiana
Michigan Power Company and Kentucky Power Company (Baa1 senior
secured); and of RGS (AEGCO) Funding Corporation and RGS (I&M)
Funding Corporation (Baa2 senior secured).
PSCo's ratings (A3 senior secured) are affirmed with a
negative outlook, as are that of its subsidiary, PS Colorado
Credit Corporation (Baa1 senior unsecured).
Yorkshire Electricity plc is headquartered in Leeds, United
Kingdom. Its senior unsecured Aa3 rating and P-1 commercial
paper ratings have been watchlisted for potential downgrade.
AEP is headquartered in Columbus, Ohio and PSCo is
headquartered in Denver, Colorado.
American Electric Power Units' Ratings Affirmed; PSCo Still on
CreditWatch
Standard & Poor's affirmed its 'A-' senior secured debt rating on
Appalachian Power Company, Columbus Southern Power Company, and
Ohio Power Company, as well as its 'BBB+' senior secured ratings
on Indiana Michigan Power Company and Kentucky Power Company, all
of which are American Electric Power Company (AEP) operating
units. The outlook on all five AEP operating units is still
stable.
In addition, the 'A-' senior secured debt rating of Public
Service Company of Colorado (PSCo) is affirmed and remains on
CreditWatch, with positive implications.
This action follows the announcement by AEP and PSCo that they
will acquire the British regional electric distribution company
(REC) Yorkshire Electricity Group plc ('AA' senior unsecured
debt; CreditWatch, negative) for $2.4 billion. Yorkshire's board
of directors has agreed to the offer. As of December 31, 1996,
AEP had about $8 billion of consolidated debt and PSCo had about
$1.6 billion of debt outstanding.
To execute the acquisition, AEP and PSCo have formed a 50/50
joint venture company, Yorkshire Holdings plc, under their
unregulated entities, AEP Resources, Inc. and New Century
International, Inc. About $1.7 billion will be borrowed by
Yorkshire Electricity Group plc, without legal recourse to any of
the domestic entities. The remaining $720 million, or about $360
million each, will be borrowed by domestic units of AEP and PSCo
to fund their equity investment in Yorkshire.
Yorkshire is one of 12 RECs in the U.K. Headquartered in Leeds
(about 250 miles northeast of London), it serves 2.1 million
customers in northeast England, in an area having a population of
about 4.4 million. Overall, it appears that Yorkshire is a
relatively low-risk investment, with solid earnings, sales growth
potential, and a stable regulatory environment. And, the bulk of
the acquisition debt is legally nonrecourse to AEP and PSCo.
However, Standard & Poor's will attribute at least a portion of
this debt to the consolidated financials of the buyers, premised
on the assumption that neither AEP nor PSCo would permit
Yorkshire to default on debt service. Moreover, the borrowing
costs associated with short-term financing of the equity portion
will lower consolidated coverage ratios over the near term for
both utilities. AEP is expected to use the proceeds from its new
issuedividend reinvestment program - about $70 million per year -
to pay down this $360 million recourse transaction-related debt.
PSCo is expected to pay down its domestic borrowing with proceeds
from the sale of equity within the next six to 18 months.
Although AEP and PSCo have the debt capacity to finance this
acquisition without significant credit impact, this potentially
large acquisition may restrain both utilities' domestic financing
flexibility and divert management attention. This offer is
subject to final approval by British regulators and Yorkshire
shareholders. Standard & Poor's assessment of this proposed
acquisition will be reviewed as details and events unfold. (See
related News Comment on Yorkshire Electricity Group plc.)
Steve Zimmerman, New York (1)212-208-1658
Judith Waite, New York (1)212-208-1663
DCR Reaffirms Most Ratings of Selected AEP Subsidiaries;
Downgrade Preferred Stock Ratings of APC and OPC
Chicago (March 7, 1997) -- Duff & Phelps Credit Rating Co. (DCR)
has reaffirmed the credit ratings of Appalachian Power Company
(APC), Columbus Southern Power Company (CSPC) and Ohio Power
Company (OPC) excluding the ratings on the preferred stock of APC
and OPC which have been downgraded following the recent
redemption of the majority of same and the expected debt
financings needed to fund these transactions. The preferred
stock downgrades reflect only the strategic proportional changes
in each of the two companies' capital structures and is not
reflective of either recent financial performance of the recently
announced participation of American Electric Power Company, Inc.
(AEP, the parent company of APC, CSPC and OPC) in a bid to
acquire Yorkshire Electricity Group plc.
APC's ratings include: First mortgage bonds and secured MTN's at
A (Single-A), junior subordinated deferred interest debentures at
A- (single-A-minus), preferred stock at BBB+ (triple-B-plus), and
commercial paper at D-1 (D-One). APC's preferred stock had been
rated A- (single-A-minus). CSPC's ratings include: First
mortgage bonds and secured MTN's at A- (Single-A-minus), junior
subordinated deferred interest debentures and preferred stock at
BBB+ (triple-B-plus), and commercial paper at D-1- (D-One-minus).
OPC's ratings include: First mortgage bonds (Single-A),
debentures and junior subordinated deferred interest debentures
at BBB+ (triple B-plus), preferred stock at BBB (triple-B), and
commercial paper at D-1 (D-One). OPC's preferred stock had been
rated BBB+ (triple-B-plus).
The ratings reflect the overall strong performance and solid
credit protection measures of each company. The ratings also
reflect each company's improving capital structure and
expectations of greater future emphasis on common equity and
unsecured debt, principally junior subordinated, and reduced
reliance on preferred equity. APC and OPC have redeemed 59 and
80 percent, respectively, of their respective outstanding
preferred stock which will be funded through unsecured debt
consisting of junior subordinated debentures and short term
borrowings. This proportional shift toward unsecured debt and
away from preferred stock in the capital structure creates the
need at APC and OPC to differentiate the ratings of such debt
relative to the preferred stock. While CSPC has also redeemed
most of its outstanding preferred stock, its reliance on
unsecured debt, including both senior and junior subordinated, in
its capital structure is expected to be proportionally less than
that of APC and OPC, thus its preferred stock rating remains
unchanged.
AEP recently announced that it will be a 50 percent partner,
along with Public Service Company of Colorado, in a joint venture
to acquire Yorkshire Electricity Group, plc, an electric utility
company based in Leeds, England. Each company will contribute
$360 million in equity capital with AEP funding its share through
a combination of debt and equity. The debt will initially be
raised via a bank facility at AEP Resources, Inc., a subsidiary
of AEP, while the equity will come from AEP's dividend
reinvestment plan.
The acquisition is not expected to have a significant financial
impact on APC, CSPC or OPC. Yorkshire is not anticipated to
require any additional capital from AEP beyond its initial
investment. Yorkshire will be operated independent from the
operating utility companies in the U.S. Yorkshire's internal
cash flow is expected to be sufficient to cover its capital
expenditures as well as the associated debt requirements of the
U.K. parent holding company and the U.S. parent companies.
APC's credit protection measures are expected to remain stable in
the future due to its low cost structure and resulting
competitive rates. Internal cash flow is insufficient to cover
capital expenditures thus continued access to the capital markets
is needed which could pressure leverage. APC benefits from its
affiliation with AEP in terms of balancing power generation
needs. The company also benefits from low Clean Air Act
compliance costs.
CSPC's credit protection measures are solid and are expected to
remain stable going forward. Costs remain near the regional
average primarily due to amortization of costs associated with
the Zimmer plant resulting in competitive pricing pressure. The
company benefits from strong regional economic growth, a
relatively low industrial load, its affiliation with the highly
efficient AEP system and strong internal cash flow sufficient to
cover capital expenditures and limit the need to access the
capital markets.
OPC's credit protection measures have shown improvement and are
expected to remain stable going forward. OPC benefits from a low
cost structure, competitive rates, strong regional economic
growth, its affiliation with the AEP system and strong internal
cash flow sufficient to cover capital expenditures and limit the
need to access the capital markets. Significant off-balance
sheet, debt-like obligations associated with scrubbers at its
Gavin plant create a leveraging effect which increases financial
risk when such obligations are reflected in an adjusted capital
structure.
APC, CSPC and OPC are three of the seven operating electric
utility subsidiaries of AEP, which all together serve seven
million retail customers in seven states. APC serves 865
thousand retail customers in Virginia and West Virginia. CSPC
serves over 600 thousand retail customers in central and southern
Ohio including the city of Columbus. OPC serves 673 thousand
retail customers throughout Ohio. All three companies are also
involved in the generation, purchase and transmission of electric
power.
DCR Contacts: Brian M. Youngberg Daniel R. Kastholm, CFA
(312)368-3332 (312)368-2070
[email protected] [email protected]
