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Fitch Upgrades AEP Texas Central; Affirms American Electric Power Co. & Subsidiaries.

CHICAGO -- Fitch Ratings has upgraded the ratings of AEP Texas Central (TCC) and concurrently affirmed the long-term ratings for American Electric Power Co. (AEP) and its other subsidiaries: AEP Texas North (TNC), Appalachian Power Co. (APC), Columbus Southern Power Co. (CSP), Indiana Michigan Power Co. (I&M), Kentucky Power Co. (KPC), Ohio Power Co. (OPC), Public Service Co. of Oklahoma (PSO), and Southwestern Electric Power Co. (SWEPCO). Additionally, Fitch has assigned short-term ratings to TCC, TNC, APC, PSO and SWEPCO of 'F2'.

The Rating Outlooks for TCC, AEP, CSP, APC, I&M, KPC, PSO, TNC and SWEPCO are Stable. The Rating Outlook for OPC remains Positive pending the proposed merger with CSP. Approximately $17.5 billion of debt is affected by today's rating actions. A full list of rating actions follows at the end of this release.

Key drivers of the ratings affirmations include: AEP's regulatory and geographic diversification via ownership of nine rated electric utility subsidiaries; generally balanced regulatory environments; consolidated credit metrics that are consistent with Fitch's 'BBB' Issuer Default Rating (IDR) guidelines, a solid competitive position with ownership of low-cost coal-fired assets as well as a relatively low risk strategy of investing in transmission assets. Recent financial performance at the company has been bolstered by base rate increases in Kentucky and West Virginia, favorable weather across AEP's service territories, effective cost control measures as well as continued improvement in the economy, particularly in the industrial sector. AEP's ratios of EBITDA to interest and funds from operations to interest were 4.2 times (x) and 4.3x, respectively, for the year ended Dec. 31, 2010. Consolidated leverage, as measured by the ratio of Debt to EBITDA, was 4.0x for the same time period. AEP has modest levels of parent debt. Fitch forecasts that AEP's consolidated credit metrics will remain at or near current levels through 2014, taking into account previously received and planned rate increases, normalized weather and continued economic recovery.

Rating concerns relate to: AEP's exposure to emissions regulations and legislation given the company's large coal-fired generation fleet, regulatory uncertainty in Ohio regarding the pending electric security plan (ESP) filing at AEP Ohio (CSP and OPC), increased customer switching in CSP's commercial sector and permitting and merchant price risk issues surrounding SWEPCO's Turk coal plant construction project. Of additional concern is the uncertainty related to the termination of the AEP East power pool. AEP's largest exposure to future carbon laws and other emissions regulations is in Ohio, which encompasses approximately 42% of total coal-fired generation. Fitch notes that Ohio Senate Bill 221, which was enacted in May 2008, specifically provides electric utilities with the ability to recover carbon related environmental costs.

On Jan. 27, 2011, AEP Ohio filed a petition with the Public Utilities Commission of Ohio (PUCO), to establish a new electric security plan (ESP) for the period Jan. 1, 2012 through May 31, 2014. In addition, the companies plan to file a $93.2 million joint distribution rate case in March of this year. The PUCO is expected to rule on the ESP no later than the fourth quarter of this year. AEP does have the option to file for a Market Rate Option (MRO) should the PUCO approve an ESP that is unacceptable to the company. Fitch notes that the current market structure in Ohio for electric companies makes it challenging for utilities to make longer-term investments (beyond the three-year horizon) in generation. This is not an immediate concern for AEP Ohio due to the excess capacity at OPC, which has a reserve margin of 42%. An additional issue that has recently arisen in Ohio is the increased customer switching in CSP's southern commercial jurisdiction, in total about 3% in 2010 and expected to grow to 17% in 2011. While this equates to approximately 6% of AEP Ohio's total load, and 1.5% of total AEP load, the higher shopping levels, coupled with the three-year ESP plans, could place pressure on the operating efficiencies of the Ohio utilities over the longer term.

On Jan. 4, 2011, APC made a filing with the Virginia State Corporation Commission (VSCC) that detailed the AEP East pool members' (APC, I&M, KPC, CSP and OPC) intent to terminate the interconnection agreement. The pool members now have a three-year time frame in which to work out a settlement and new arrangement. The decision to evaluate the pool was initially raised by regulatory concerns, particularly from Virginia, that the current pool arrangement resulted in a lack of transparency. At this time, Fitch believes it is unlikely that the new arrangements to replace the current pool will have material credit rating impacts and will continue to monitor developments.

AEP expects to generate about $1.1 billion of cash through accelerated depreciation, including $300 million in 2011, $550 million in 2012 and $225 million in 2013. Management has not specified how it intends to use the cash but has indicated that they are reviewing several options, including reducing parent level debt and/or funding pension expense and a lawsuit settlement.

AEP has a sufficient short-term liquidity position, with approximately $2.6 billion of net available liquidity as of Dec. 31, 2010, including $294 million of cash on hand. AEP has credit facilities totaling $3.4 billion, of which two $1.5 billion credit facilities support the company's commercial paper program. The revolving credit agreements contain a covenant that requires AEP to maintain a debt to total capitalization at or below 67.5%. The $478 million facility that matures in April 2011 is currently used to support the various variable rate debt and floating rate debt. Management plans to retire the facility and enter into bilateral agreements as a replacement. Consolidated debt maturities over the next several years are considered manageable and are as follows: $616 million in 2011, $565 million in 2012 and $1.1 billion in 2013. The next parent-only maturity is in 2015, when $243 million of senior notes becomes due. Fitch expects maturing debt to be funded through a mix of internal cash generation and external refinancings.

AEP's 2011 capital spending budget is approximately $2.6 billion, with $2.9 billion projected in 2012. Major projects and investments include transmission projects and environmental compliance. Capex financing is anticipated to be met through a combination of internally generated cash and external debt issuances.

Fitch has upgraded the following ratings with a Stable Outlook:

TCC

--IDR to 'BBB+' from 'BBB';

--Senior unsecured debt and pollution control bonds to 'A-' from 'BBB+';

--Preferred stock to 'BBB' from 'BBB-'.

Fitch has assigned the following ratings:

TCC

TNC

PSO

SWEPCO

APC

--Short-term IDR 'F2'.

Fitch has affirmed the following ratings with a Positive Outlook:

OPC

--IDR at 'BBB';

--Senior unsecured debt and pollution control bonds at 'BBB+';

--Preferred Stock at 'BBB-';

--Short-term IDR and Commercial Paper at 'F2,

Fitch has affirmed the following ratings with a Stable Outlook:

AEP

--IDR at 'BBB';

--Senior Unsecured Debt at 'BBB';

--Junior Subordinated Debentures at 'BB+';

--Short-term IDR at 'F2';

--Commercial Paper at 'F2'.

AEP Texas North

--IDR at 'BBB+';

--Senior unsecured debt at 'A-';

--Preferred stock at 'BBB'.

APC

--IDR at 'BBB-';

--Senior unsecured debt and pollution control revenue and solid waste disposal bonds at 'BBB';

--Preferred Stock at 'BB+'.

CSP

--IDR at 'BBB+';

--Senior Unsecured Debt and Pollution Control Bonds at 'A-';

--Short-term IDR and Commercial Paper at 'F2.

I&M

--IDR at 'BBB-';

--Senior Unsecured Debt at 'BBB';

--Preferred Stock at 'BB+';

--Short-term IDR at 'F2'.

KPC

--IDR at 'BBB-';

--Senior Unsecured Debt at 'BBB';

--Short-term IDR at 'F2'.

PSO

--IDR at 'BBB';

--Senior unsecured debt and pollution control revenue bonds at 'BBB+';

--Preferred stock at 'BBB-'.

SWEPCO

--IDR at 'BBB-';

--Senior Unsecured Debt at 'BBB';

--Preferred Stock at 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology (Aug. 16, 2010)

--Credit Rating Guidelines for Regulated Utility Companies (July 31, 2007)

--US Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines (Aug. 22, 2007)

--Utilities Sector Notching and Recovery Ratings (March 16, 2010)

--Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities within a Corporate Group Structure) (July 14, 2010)

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Credit Rating Guidelines for Regulated Utility Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

Utilities Sector Notching and Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546

Parent and Subsidiary Rating Linkage Criteria Report

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.
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Comment:Fitch Upgrades AEP Texas Central; Affirms American Electric Power Co. & Subsidiaries.
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Date:Feb 28, 2011
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