Fitch Downgrades AEP Texas Central to 'BBB'; Outlook to Negative; Affirms AEP & Subs; Outlook Stable.

CHICAGO -- Fitch has downgraded the ratings of AEP Texas Central (TCC) and affirmed the outstanding ratings for American Electric Power Co. (NYSE: AEP) and the remaining eight subsidiaries. The Rating Outlook for TCC is revised to Negative from Stable. Fitch has concurrently revised the Rating Outlook for AEP Texas North (TNC) to Stable from Negative. The Rating Outlook for all other entities is Stable. A detailed list of ratings is shown below. Approximately $14.5 billion of debt is affected.

Ratings downgraded:

TCC

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

--Senior Secured Debt to 'A-' from 'A';

--Senior Unsecured Debt to 'BBB+' from 'A-';

--Preferred Stock to 'BBB' from 'BBB+'.

Ratings affirmed:

AEP

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

--Senior Unsecured Debt at 'BBB';

--Commercial Paper at 'F2'.

TNC

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

--Senior Secured Debt at 'A';

--Senior Unsecured Debt at 'A-';

--Preferred Stock at 'BBB+'.

Appalachian Power Co. (APC)

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

--Senior Secured Debt at 'A-';

--Senior Unsecured Debt at 'BBB+';

--Preferred Stock at 'BBB';

Columbus Southern Power Co. (CSP)

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

--Senior Unsecured Debt at 'A-';

--Commercial Paper at 'F2'.

Indiana Michigan Power Co. (IMP)

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

--Senior Unsecured Debt at 'BBB';

--Commercial Paper at 'F2'.

Kentucky Power Co. (KPC)

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

--Senior Unsecured Debt at 'BBB';

--Commercial Paper at 'F2'.

Ohio Power Co. (OPC)

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

--Senior Unsecured Debt at 'BBB+';

--Preferred Stock at 'BBB';

--Commercial Paper at 'F2'.

Public Service Company of Oklahoma (PSO)

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

--Senior Unsecured Debt at 'A-';

--Preferred Stock at 'BBB+'.

Southwestern Electric Power Co. (SWEPCO)

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

--Senior Secured Debt at 'A';

--Senior Unsecured Debt at 'A-';

--Preferred Stock at 'BBB+'.

TCC's downgrade reflects credit protection measures that are more consistent with the lower rating category. TCC experienced reduced earnings and cash flow due to a decline in wholesale revenues as contracts with large customers expired. At the same time, the company had non-cash carrying costs related to the delays in completing its planned securitization that negatively impacted credit coverages. TCC's $1.7 billion securitization was completed in October 2006. Additionally, TCC's cash flow declined in 2006 following the company's exit from the generation business and associated removal of AEP power pool profits. The Negative Rating Outlook reflects Fitch's expectation that credit metrics at the company will continue to be weak for the 'BBB' rating category absent a favorable outcome in TCC's pending rate case in Texas, where the company has requested an $82.7 million increase. Fitch views the Texas regulatory environment as being somewhat challenging for wires companies operating in the state. A final order is expected in October 2007.

The ratings affirmation for AEP and the remaining subsidiaries take into account the stable cash flow and earnings base generated from the regulated utility operations, a solid competitive position derived from low-cost coal-fired generation assets. The ratings also reflect leverage that is at the high end for the ratings category at the parent company and at some of the subsidiaries. Consolidated leverage, as measured by the ratio of Debt to EBITDA, was 4.1x at year-end 2006, and is forecasted by Fitch to remain near those levels over the next several years. This increase in leverage has been anticipated as a sizeable portion of the company's large capital expenditure program will likely be funded with debt. However, Fitch notes that AEP's current and forecasted credit metrics should be able to withstand these higher levels of debt at current ratings, assuming reasonable rate recovery in various rate filings.

Annual consolidated capital investments are expected to average $3.3 billion through 2010, the bulk of which will be spent on ongoing infrastructure replacement and environmental compliance. Inadequate rate recovery of these costs at the utility subsidiary level could place ratings pressure on the affected subsidiaries (APC, CSP, KPC, OPC, PSO and SWEPCO) and possibly the parent. Additionally, while AEP has had resolution to several rate issues over the past year, several outstanding regulatory issues remain, in particular in Virginia, West Virginia, Texas, Indiana, Oklahoma and at the FERC. In addition, the market structure in Ohio following the expiration of the current rate stabilization plans in 2009 is uncertain. Fitch's ratings and Stable Outlook include an expectation of reasonable outcomes to these issues, however adverse regulatory decisions may negatively impact the affected subsidiaries and potentially the parent.

The Stable Rating Outlook also reflects Fitch's expectation that AEP will continue to benefit from stable and predictable cash flows from its regulated operations, an overall continuation of generally balanced regulatory environments, and that the company will receive timely and appropriate recovery of capital expenditures during the more active construction period.

AEP delivers electricity to more than five million customers in 11 states, including Ohio, Indiana, West Virginia, Virginia, Kentucky, Michigan, Tennessee, Oklahoma, Texas, Louisiana and Arkansas.

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.