Fitch Affirms AEP & Units; Outlook Negative for AEP, Kentucky Power, & Ohio Power Company

  Fitch Affirms AEP & Units; Outlook Negative for AEP, Kentucky Power, & Ohio
  Power Company

Business Wire

NEW YORK -- February 22, 2013

Fitch Ratings has affirmed the ratings of American Electric Power Company
(AEP) and subsidiaries and revised the Outlook of AEP and Kentucky Power
Company (KPCO) to Negative from Stable. Fitch has maintained Negative Outlook
for Ohio Power Company (OPCO). All other subsidiary Outlooks remain Stable. A
complete list of rating actions is provided at the end of this release.

OPCO is AEP's largest subsidiary. The Negative Outlook for both entities
reflects uncertainty around increased financial and business risks with the
restructuring of OPCO's regulated 13,300MW of, mostly coal fired power output
in Ohio under a regulatory business separation order (Corporate Separation).
Approximately 2,427MW of the total 13,300MW generation capacity is expected to
be transferred to regulated affiliates KPCO and Appalachian Power Company
(APCO) with the remainder to be transferred to AEP's independent generation
business. Separately, approximately 1,900MW of generation capacity will be

Following the corporate separation, regulatory orders provide cash flow
certainty from these plants under the transitional arrangements until
mid-2015. Beyond that date, these facilities must operate as merchant power
plants within the PJM wholesale electricity market, increasing the
consolidated business risk profile of AEP. Thus, AEP will lose a stable source
of regulated earnings and cash flows. Fitch does not expect power prices to
recover before 2015, adding uncertainty to earnings and cash flows. Fitch will
monitor management's plans to mitigate financial and business risks with
increased investment in the federal energy regulatory commission (FERC)
regulated transmission assets and potential deleveraging at AEP and OPCO.

For OPCO, the financial profile in 2015 is uncertain especially regarding its
capital structure and securitization of deferred regulatory costs. OPCO's
historical financial profile was strong providing some leeway during the
transition period and Fitch would expect to resolve the Negative Outlook prior
to 2015 once regulatory approvals and financing orders are finalized.

KPCO relied on AEP's eastern power pool to meet its electricity supply. The
pool will terminate at the end of 2013 requiring KPCO to seek replacement
power. Fitch believes that KPCO's capital expenditures are likely to increase
as the company may replace its power supply with new generation capacity.
KPCO's financing plans and requisite regulatory approvals will be key in
resolving the Outlook.

The Stable Outlooks at other subsidiaries reflect the stable earnings and cash
flows from their primary regulated utility businesses.


Diversified Business Profile: AEP's earnings and cash flows are predominantly
derived from eight regulated electric utilities in 11 separate regulatory
jurisdictions. Liquidity is good and debt maturities are manageable.
Approximately 83% of consolidated assets will remain within regulated

Increased Business Risk Profile: In Fitch's opinion, AEPs risk profile will
increase with the pending transfer of about 8,900 MW of generating capacity
from its Ohio based regulated integrated utility (Ohio Power Company, 'BBB+',
Negative Outlook) to a higher-risk, competitive merchant generation status. As
merchant plants, Fitch believes AEP will recognize lower profits after 2015 as
power prices are unlikely to recovery over the intermediate term. Transfer of
regulated generating assets from OPCO will also adversely affect the river
operations which currently benefit from regulatory cost recovery mechanisms.

Uncertainty Over Long-Term Leverage: The corporate separation alters AEP's
consolidated capital structure with debt retirement expected at the regulated
OPCO subsidiary and new debt issued at AEP or its new IPP. Positively, the
company plans to use lower leverage to manage its merchant operations in Ohio.
Longer term performance of these assets is expected to be affected by,
compliance with stricter environmental regulations, low capacity utilization,
and a low electricity commodity price environment adversely affecting
operating cash flow. Additionally, AEP may have to provide for margin
calls/cash postings against the adverse movement in its hedged electricity
sales positions if AEP's generation business fails to obtain standalone credit
facilities at reasonable costs on its own.

Dividend Policy: The company has increased its dividend payout ratio to
60%-70% from 50%-60% and it will adversely affect cash flow during uncertainty
and increased business risk profile.

Large Capital Expenditure Program: Average capital expenditures are forecast
to range between $3.6 billion and $3.8 billion annually through 2015, a level
that is significantly higher than historical capital expenditure. Fitch
expects capital expenditures to be funded with a combination of internal cash
flow and debt. Negative free cash flow at the subsidiary levels will be
financed with a mixture of cash flow from operations, debt, and equity to
maintain the regulatory capital structures at its regulated subsidiaries.
Major projects include installation of new equipment to comply with the
environmental regulations; distribution system enhancements, and investment in
new FERC regulated transmission networks. AEP's direct transmission capex
budget is expected to total approximately $2.1 billion over the next three
years. FERC regulated transmission project earn a current return on
construction work in progress and ROEs are typically above regulated utility
ROEs. Regulated earnings from future transmission investments provide some
offset to the lost earnings from the generation asset transfer.

Movement In Credit-Metrics: AEP's current credit metrics are consistent with
Fitch's 'BBB' IDR guidelines for a utility parent company. However, going
forward, Fitch expects funds from operation (FFO) based credit metrics for
consolidated operations to decline; Fitch expects FFO to interest ratio to be
approximately 3.5x and FFO to debt ratio to approximate about 15% at the end
of 2015,levels modestly below Fitch 'BBB' guidelines. Fitch understands that
these ratios reflect transitioning of its largest regulated subsidiary from an
integrated utility to an electricity distribution company, but the Negative
Outlook reflects that the credit metrics could decline on a sustainable basis
once the transition is complete.

Financial Metrics At AEP And Its Regulated Operating Subsidiaries:

American Electric Power Company (AEP): Historical FFO based credit metrics
were in line with its current IDR, but the business risk profile was low (with
over 95% earnings from regulated businesses) and its coal fired generating
capacity helped the company to be a low-cost electricity provider in the
majority of its service territories. Fitch expects FFO based interest coverage
(FFO/interest) to decline to around 3.5x from 4.0x and FFO to adjusted debt
ratio to decline to just under 15% from approximately 17% in recent periods.

Ohio Power Company (OPCO): Historical FFO to interest ratio has averaged
higher than 5x and FFO to adjusted debt ratio was about 23%, but Fitch expects
FFO to interest ratio to fall to below 4x and FFO to adjusted debt decline
below 15%. The credit metrics have been adversely affected by customer
switching under open access to lower cost electricity providers in Ohio. Fitch
expects the customer switching will continue, albeit at a slower pace as over
50% customer were switched by the end of 2012.

Kentucky Power Company (KPCO): KPCO benefitted from AEP's eastern power pool
and above average volume growth. Its FFO based interest cover (FFO/interest
expenses) has been around 3.7x and FFO to adjusted debt ratio has been over
17%. Lack of fuel diversity, additional capacity needs, and retirement of its
only coal fired facility will result in unusually higher capital expenditure
at least through 2015. Fitch expects FFO based interest coverage ratio to
decline to below 3x and FFO to adjusted debt to fall to around 10%. The
company will require rate relief to improve its credit metrics and will be the
source of Fitch's resolution of the Negative Outlook that it has currently
assigned to KPCO's IDR.

Appalachian Power Company (APCO): APCO operates as an integrated utility in
Virginia and West Virginia and benefits from a constructive regulatory
environment and has also benefitted from AEP's eastern power pool that will be
terminated at the end of this year. The company's historical FFO to interest
ratio has been around 3.5x and FFO to adjusted debt ratio around 16%. Fitch
expects the company's credit metrics to remain with the guidelines for its IDR
- FFO/interest around 3.9x and FFO/adjusted debt around 16%. Capex will likely
increase as the company replaces power sourced from AEP's eastern power pool.

AEP Texas Central Company (AEPTC): AEPTC, an electric distribution company in
Texas. Fitch expects FFO/interest expenses and FFO/debt to remain at 3.5x and
16% respectively over the rating horizon.

AEP Texas North Company (AEPTN): Like AEPTC, AEPTN benefits from a low risk
profile and stable cash flow. FFO/interest expenses and FFO/adjusted debt,
have been strong for its current IDR - 5x and over 23% respectively. Fitch
expects FFO to interest expense ratio to remain over 4.5x and FFO to adjusted
debt to be between 18% and 19% - well within the current rating guidelines.

Indiana Michigan Power Company (IMPCO): Cash flow over the rating horizon
(2013-2015) will benefit from recently concluded general rate case order in
Indiana providing an additional $85 million in cash flow. Historical
FFO/interest expense has been over 4.2x and FFO/adjusted debt ratio has been
around 17%. IMPCO expects higher than normal capital expenditure to comply
with new environmental regulations and to upgrade its nuclear plant capacity.
Fitch expects FFO based credit measures to decline through 2015 but credit
profile should remain within its current rating with management deferring some
of its environmental capital expenditure.

Public Service Company of Oklahoma (PSCO): Historically, PSCO's credit metrics
has been strong for its credit ratings. With increased capital expenditure
over the forecast period ending 2015, the company's FFO to interest ratio
should taper to around 4x from about 5x and FFO/adjusted debt ratio should be
about 16% - remaining within the guidelines for PSCO's current IDR.

Southwestern Electric Power Company (SWEPCO): SWEPCO's cash flow will benefit
from approval of a new general rate case in Texas and inclusion of its new
generating capacity in Louisiana's formula base rate. The historical credit
metrics of SWPECO has been in line with its current IDR, with FFO to interest
ratio exceeding 3.5x and FFO based leverage (FFO/adjusted debt) remaining
around 16%. Fitch expects these ratio to remain around 3.5x and 16%
respectively through 2015.

Strong Liquidity: AEP currently has approximately $4.2 billion of total
liquidity available under their respective credit agreements, including $279
million of cash and cash equivalents. $1.75 billion of the consolidated
revolving credit facilities will mature in June 2016, $1.75 billion will
mature in June 2017 and the remaining $1.0 billion credit line established to
fund OPCO maturities will expire in 2015. The company is in compliance with
the financial covenants of the bank facilities. Current liquidity should be
sufficient to meet its short-term debt obligations - $981 million at the end
of December 2012.

Manageable Maturities: Debt maturities over next three years are manageable
and include $1.792 billion in 2013, $995 million in 2014, and $1.405 billion
in 2015. Maturing debt will be funded through a combination of internal cash
flow and debt.

Bonus Depreciation for 2013: AEP expects to generate approximately $792
million of cash in 2013 from bonus depreciation deductions at its
subsidiaries. The Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 provided for a special allowance for bonus depreciation
in 2011 and 2012. As part of the budget compromise, bonus depreciation rules
allow a tax deduction of 50% in 2013, the same as 2012.

Fitch affirms the following ratings with the Negative Outlook:

American Electric Power Company

--Long-term IDR at 'BBB';

--Senior unsecured at 'BBB';

--Junior subordinated 'withdrawn';

--Short-term IDR and commercial paper 'F2'.

Ohio Power Company (OPCO)

--Long-term IDR at 'BBB+';

--Senior unsecured and pollution control revenue bonds (PCRBs) at 'A-';

-- Short-term IDR at 'F2';

Kentucky Power Company (KPCO)

--Long-term IDR 'BBB-';

--Senior unsecured at 'BBB';

--Short-term IDR 'withdrawn'.

Fitch has affirmed the following ratings with a Stable Outlook:

AEP Texas Central Company (AEPTC)

--Long-term IDR at 'BBB+';

--Senior unsecured and PCRBs at 'A-';

--Short-term IDR 'F2'

AEP Texas North Company (AEPTN)

--Long-term IDR at 'BBB+';

--Senior unsecured at 'A-';

--Short-term IDR at 'F2'.

Appalachian Power Company (APCO)

--Long-term IDR at 'BBB-';

--Senior unsecured and PCRBs at 'BBB';

--Short-term IDR 'withdrawn'.

Indiana Michigan Power Company (IMPC)

--Long-term IDR at 'BBB-';

--Senior unsecured and PCRBs at 'BBB';

--Short-term IDR 'withdrawn'.

Public Service Company of Oklahoma (PSCO)

--Long-term IDR at 'BBB';

--Senior unsecured and PCRBs at 'BBB+';

-- Short-term IDR at 'F2'.

Southwestern Electric Power Company (SWEPCO)

--Long-term IDR at 'BBB-';

--Senior unsecured at 'BBB';

--Short-term IDR 'withdrawn'.


Positive: An ugrade of AEP, OPCO or KPCO is considered unlikely given they
each have Negative Rating Outlooks.

--For AEPTN and APETC: Increase in FFO/adjusted debt ratio to over 21% on a
sustainable basis and FFO/interest ratio of 4.5x or higher on a sustainable

--For all other rated operating subsidiaries: Increase in FFO/adjusted debt
ratio to over 18% on a sustainable basis and FFO/interest ratio of 4x or
higher on a sustainable basis.

Negative: Future developments that may, individually or collectively, lead to
negative rating action include:

--For AEP : Decline in the FFO based credit metrics on a sustainable basis
with FFO/interest expenses declining below 3.5x and FFO/adjusted debt ratio
declining to or below 16%.

--For OPCO, AEPTN and APETC: Decline in the FFO based credit metrics on a
sustainable basis with FFO/interest expenses declining below 3.8x and
FFO/adjusted debt ratio declining to or below 18%.

--For all rated other operating subsidiaries: Decline in the FFO based credit
metrics on a sustainable basis with FFO/interest expenses declining below 3.2x
and FFO/adjusted debt ratio declining to or below 13%.

Additionally, new environmental rules or changes to the regulatory framework
of the individual regulated operating company could lead to a negative rating

Additional information is available on The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 8, 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology



Fitch Ratings
Primary Analyst
Roshan Bains
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Secondary Analyst
Glen Grabelsky
Managing Director
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
Media Relations
Brian Bertsch
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