uploads///

A Look at American Electric Power’s Healthy Credit Profile

By

Updated

American Electric Power’s debt profile

American Electric Power (AEP) has an attractive debt profile, with the company’s debt making up just 7% of its consolidated debt. The parent debt consists of two bonds with a combined value of $850 million, plus a guarantee to AEP Generation Resources’ term loan of $500 million. This $1.4 billion loan represents only 7% of the total $21 billion debt. The lower parent-to-consolidated debt makes AEP’s credit profile one of the stronger ones in the sector (XLU).

Article continues below advertisement

Leverage

On March 31, 2016, American Electric Power had a total debt of $21 billion, of which approximately $18 billion was long-term debt. While its debt-to-equity ratio was 1.1x, its debt-to-market-capitalization ratio was 0.6x. AEP’s debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio was 4x. A debt-to-EBITDA ratio shows how many years it will take a company to repay its debt using EBITDA. As utilities are asset-rich businesses that have heavy debt, leverage is an important metric for analyzing utilities. AEP’s debt-to-EBITDA ratio is better than Duke Energy’s (DUK) 5x and Exelon’s (EXC) 4.7x. PG&E (PCG) has a ratio at 4.1x.

The debt-to-asset ratio represents the portion of a company’s assets that are financed by debt. It assesses a company’s financial risk. AEP has a debt-to-asset ratio of 0.3x. Duke Energy has a debt-to-asset ratio of 0.4x, and Exelon’s is 0.3x.

Credit rating profile

American Electric Power’s strong credit profile is reflected by its credit rating. Standard & Poor’s has given AEP a “BBB” rating with a positive outlook. In comparison, Duke Energy has an “A-“rating and a negative outlook. Exelon also has a “BBB” credit rating from S&P, with a stable outlook.

Advertisement

More From Market Realist