AEP’s credit profile
At the end of second quarter of 2016, American Electric Power (AEP) had total debt of $21.6 billion. Its DE (debt-to-equity) ratio stands at 1.2x, while its debt-to-market-capitalization ratio is at 0.7x.
AEP operating territory includes Ohio, West Virginia, Kentucky, Michigan, Texas, Indiana, Arkansas, Louisiana, and Oklahoma—one of the most diverse in the industry. Its recent agreement to selling competitive generation capacity bodes well for its credit profile.
On June 30, 2016, AEP’s net 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 these companies. AEP’s debt-to-EBITDA ratio, for example, is better than Duke Energy’s (DUK) 5x and Exelon’s (EXC) 4.6x.
The debt-to-asset ratio also represents the portion of a company’s assets that are financed by debt and assesses a company’s financial risk. AEP has a debt-to-asset ratio of 0.3x, whereas Duke Energy has a debt-to-asset ratio of 0.4x. Like AEP’s, Exelon’s ratio 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. By 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.
Now let’s discuss AEP’s diminishing yield.