Investing.com -- Moody’s Ratings has confirmed the Baa2 rating of American Electric Power Company, Inc. (NASDAQ: AEP ), and the ratings of its utility subsidiary, Indiana Michigan Power Company (I&M), affecting approximately $17 billion of debt. While AEP’s rating outlook remains stable, I&M’s has been upgraded to positive from stable. In contrast, AEP Texas Inc., another subsidiary, saw its ratings downgraded to Baa3 from Baa2, with its outlook adjusted to stable from negative.

The affirmation of AEP’s Baa2 rating with a stable outlook is due to the scale and diversity of the company’s predominantly rate-regulated utility operations across multiple regulatory jurisdictions and service territories. Despite instances of regulatory contention, AEP benefits from numerous riders and trackers that facilitate the recovery of investments and reduce regulatory lag.

Over the next five years, AEP plans to spend $54 billion on capital investments to ensure the resilience and reliability of its infrastructure, replace retiring fossil generation, and support growth in its service territories. About 63% of this amount will be allocated to transmission and distribution investments, and about 26% for new generation investments. Rising debt to finance this capital spending will continue to pressure AEP’s credit profile. However, the company’s financing plans also include non-debt sources such as common equity, and a pending transmission minority interest sale.

On March 26, AEP completed a public offering of $2.3 billion of common stock with a forward component. The offering represents about 90% of the planned equity issuances in AEP’s financing plan post minority interest sale transaction. The remainder is expected to come from the company’s dividend re-investment plan (DRIP).

On January 9, AEP announced the sale of a 19.9% equity interest in its Ohio and Indiana & Michigan Transmission Companies to a partnership between global investment firm KKR & Co (NYSE: KKR ). Inc. and Canadian pension fund Public Sector Pension Investment Board (PSP Investments) for $2.82 billion. The proceeds from the common equity issuance and minority sale will enhance the company’s financial flexibility and improve its ability to maintain credit metrics appropriate for its Baa2 rating.

The downgrade of AEP Texas to Baa3 with a stable outlook is driven by elevated capital expenditures that will be funded primarily with debt. Despite a supportive rate case outcome last year, AEP Texas’ regulatory allowed equity layer remains low, and at 42.5% is among the lowest of its peers in other US regulatory jurisdictions. Consequently, AEP Texas’ ratio of CFO pre-WC to debt is expected to be in the 11%-12% range over the next two years.

The positive outlook on Indiana Michigan Power reflects the expectation that the utility’s credit supportive regulatory frameworks will enable it to sustain a strong financial performance. The company is expected to generate robust credit metrics over the next two years, including a CFO pre-WC to debt ratio in the 22%-24% range. I&M’s 2025-2027 capital expenditure program is expected to total $4.2 billion, including investments to replace generation from its coal-fired Rockport Plant.

AEP’s stable outlook reflects expectations that it will continue to benefit from regulatory frameworks with numerous cost recovery riders and trackers, while also improving regulatory relationships to reduce instances of regulatory contention. AEP Texas’ stable outlook reflects its low risk business and operating profile as a T&D utility with transparent cost recovery. I&M’s positive outlook reflects credit supportive regulatory environments which incorporate a significant number of automatic and transparent rate recovery mechanisms to reduce regulatory lag.

A reduction in leverage, or changes to the company’s capital or operating plans that lead to an increase in cash flow and a ratio of CFO pre-WC to debt consistently above 15%, could put upward pressure on the rating. Conversely, a more contentious regulatory environment, inability to recover ongoing capital investments on a timely basis, or deterioration in financial metrics could result in downward pressure on the ratings.

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