Fitch Affirms Kentucky Power Co.'s Ratings; Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed the outstanding ratings for Kentucky Power Co. (KPC) as follows:

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

--Senior unsecured debt at 'BBB';

--Short-term IDR at 'F2'.

The Rating Outlook for KPC is Stable. Approximately $550 million of debt is affected.

The ratings for KPC take into consideration the company's stable utility operations, relatively constructive regulatory environment and affiliation with parent American Electric Power Co., ([AEP], IDR rated 'BBB', Stable Outlook by Fitch). While the utility benefits from participation in the AEP power pool and AEP money pool given AEP's highly centralized treasury and electric operations, any deterioration in the credit quality of the parent company could impair the ratings of KPC. Favorably KPC has no debt maturities until 2015, a solid liquidity position, declining capital expenditures through 2011, as well as a cost control program in place.

KPC's credit metrics are currently below average for its current rating category with the ratio of EBITDA to interest and funds flow coverage at 2.9 times (x) and 2.7x, respectively, for the 12 month period ended June 30, 2009. Leverage, as measured by debt to EBITDA, was high at 5.1x for the same time period. Recent financial performance at the company has been negatively impacted by higher levels of fuel and purchased power expense, partially offset by slightly lower operating and maintenance expenses. Additionally, cash flows have been impacted by pension contributions in 2008. Further contributions to the pension plan are forecasted in 2010 and 2011, which will continue to place pressure on cash from operations. Fitch forecasts KPC to continue to have weakened credit projection measures until the company is able to receive rate relief. KPC plans to file for base rate increases in 2010 and 2011; with the first round of rate increases to be in effect by year-end 2010. Fitch notes that the company is dependent on reasonable outcomes in its planned rate cases over the next two years and/or continuing parent company support to maintain current rating levels.

The primary rating concerns facing KPC relate to its exposure to a struggling local economy, particularly the industrial sector which comprises 36% of retail revenues, as well as stricter environmental legislation, in particular because the company's generation is a single 1,060 megawatt coal-fired unit. Fitch expects adequate recovery of additional environmental costs through the company's environmental cost compliance (ECC) surcharge, but there could be a recovery lag. While the ECC is not an automatic pass-through, it allows the company to request recovery of environmental costs outside of a full rate case. Significant cost recovery delays or disallowances of future environmental costs could place downward pressure on ratings.

The Stable Outlook for KPC takes into consideration Fitch's expectation that the company will improve credit metrics following rate relief, and obtain reasonable outcomes to future rate cases and recovery environmental compliance costs through regulatory mechanisms in Kentucky. In addition, Fitch assumes on-going parent company support.

Earlier this year, AEP announced it had reduced its 2009 capital budget to $2.6 billion from $3.3 billion and its 2010 capital budget to $1.8 billion from $3.4 billion to manage through the economic downturn. The reductions in capital spending for 2009 and 2010 are spread across AEP's utility operating companies in generation, transmission and distribution. Discretionary projects are being deferred until the economic climate warrants the additional investment. KPC's capital spending budget for 2009-2011 has been reduced to $167 million from $334 million from the prior forecast by deferring environmental emissions projects. Additionally, AEP executed a common equity offering, which resulted in net proceeds of $1.69 billion. The parent company used $1.44 billion to repay outstanding balances on its credit facilities; the remainder of the equity proceeds is expected to be used to repay parent and other affiliate operating company debt. With the pay down of the credit facilities, the operating companies, including KPC, have significant borrowing capacity under the AEP money pool; approximately $244 million as of June 30, 2009. KPC has no debt maturities over the next five years, with the next scheduled maturity of $20 million due in 2015.

KPC experienced severe storms in its service territory in January, February, and May of this year, which caused significant damage to the company's electrical facilities. KPC incurred approximately $11 million in storm costs, and expects to file for related recovery during the third quarter of 2009.

KPC, a wholly owned subsidiary of AEP, is an integrated electric utility that serves approximately 176,000 customers in eastern Kentucky, including the cities of Ashland, Pikeville and Hazard.

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.