Fitch Affirms American Electric Power Co Subsidiaries.

NEW YORK -- Fitch affirms the ratings of American Electric Power Co's (AEP) Texas utilities: AEP Texas North Co (TNC), AEP Texas Central Company (TCC), and Southwestern Electric Power Co. (SWEPCO). The Rating Outlook for TNC is revised to Negative from Stable, while the Rating Outlooks for TCC and SWEPCO remain Stable.

The revised Rating Outlook for TNC reflects Fitch's expectations of reduced cash flow coverage of debt going forward as wholesale energy sales decline. TNC, like the other utilities within the Electric Reliability Council of Texas (ERCOT), was required under Texas legislation to disaggregate its transmission and distribution (T&D) operations from its retail energy sales and generation activities. It sold its retail energy sales provider (REP) business to Centrica but retained the right to sell to customers with more than one megawatt of demand. Currently TNC has contracts to large customers that are expected to roll off for the most part over the next two years. In addition to experiencing reduced revenues from its own legacy contracts, TNC may see a further decline in wholesale power revenues, as AEP has a proposal before FERC that will reduce TNC's and TCC's allocation of profits from the overall AEP power pool.

TNC's ratings recognize that the company's regulated T&D business generates stable cash flow and limited commodity risk exposure. The concentration of receivables among a relatively small group of counterparties is also of concern. Unlike distribution companies in other states, TNC's customers are not endusers of electricity but rather retail electric providers (REPs) that procure power for end-users and make payments to the local utility for T&D services. The concentration of counterparty risk is mitigated by the Electric Reliability Council of Texas (ERCOT) requirement that REPs have either an investment-grade credit profile (or a guarantee from an investment-grade entity) or post collateral. TNC's three largest obligors include subsidiaries of Centrica plc (not rated by Fitch), Reliant Energy, Inc. (senior unsecured rated 'B+' by Fitch) and TXU Energy Co. LLC (senior unsecured rated 'BBB' by Fitch) and account for more than 90% of receivables.

The ratings of TCC take into consideration the company's strong and stable cash flow and the limited commodity risk exposure from its regulated T&D business. TCC, like TNC, was forced to disaggregate its activities and sold its REP business to Centrica. Additionally, TCC has sold almost all of its generation assets. Leverage is high for the ratings category with debt-to-EBITDA at 4.3 times (x) but is expected to decline to a level appropriate for the company, as the company is expected to be able to use $700 million to $800 million of the proceeds from a stranded asset securitization to pay down recourse debt. Like TNC, TCC receivables are concentrated among the same three counterparties, but this is likewise mitigated by ERCOT's credit requirements for market participants.

SWEPCO's credit quality is derived from its adequate liquidity and moderate leverage. Unlike its affiliates in Texas, SWEPCO is outside of ERCOT and was not included in the Texas legislation that required TNC and TCC to disaggregate their activities. Accordingly, SWEPCO remains a vertically integrated utility. There is no expectation at this time that the company will be required to offer open access in Texas or the other two jurisdictions (Louisiana and Arkansas) in which it operates. Leverage is expected to increase over the next few years as the company borrows funds to purchase and/or build additional needed generation; however, credit metrics including leverage are expected to remain within the ratings category. The ratings also take into consideration the stabilizing effect upon earning and cash flow of fuel adjustment mechanisms in all three of its state regulatory jurisdictions. The company's credit quality is further enhanced by its affiliation with its parent, AEP which enables SWEPCO to participate in the AEP power pool. Given AEP's highly centralized treasury and electric operations, any deterioration in the credit quality of AEP (senior unsecured debt rated 'BBB' by Fitch) could impair the ratings of its subsidiaries.

TNC is a wholly owned indirect subsidiary of AEP and is engaged primarily in the transmission and distribution of electric power in western Texas. TCC is a wholly owned indirect subsidiary of AEP and is currently engaged in the transmission and distribution of electricity in southern Texas including the metropolitan area of Corpus Christi. SWEPCO is a wholly owned indirect subsidiary of AEP and is engaged in the generation, transmission and distribution of electricity in northeastern Texas, northwestern Louisiana, and western Arkansas.

Fitch affirms the following TNC ratings; Outlook revised to Negative from Stable:

-- Issuer Default Rating (IDR) 'BBB+';

-- Senior secured 'A';

-- Senior unsecured 'A-';

-- Preferred stock 'BBB+'.

Fitch affirms the following TCC ratings, with a Stable Outlook:

-- IDR 'BBB+';

-- Senior secured 'A';

-- Senior unsecured 'A-';

-- Preferred stock 'BBB+'.

Fitch affirms the following SWEPCO ratings, with a Stable Outlook:

-- IDR 'BBB+';

-- Senior secured 'A';

-- Senior unsecured 'A-';

-- Preferred stock 'BBB+'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.