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Rating Action:

Moody's Affirms Ratings of Three AEP Operating Subsidiaries

06 Feb 2013

Approximately $6 billion of securities affected

New York, February 06, 2013 -- Today Moody's Investors Service affirmed the ratings of Appalachian Power Company (APCo: Baa2 Senior Unsecured), Indiana Michigan Power Company (I&M: Baa2 Senior Unsecured) and Kentucky Power Company (KPCo: Baa2 Senior Unsecured). The outlook for all three issuers remains stable. APCo, I&M and KPCo are all operating subsidiaries of American Electric Power Company, Inc. (AEP: Baa2 Senior Unsecured, stable outlook).

"APCo, I&M and KPCo are similar in that their regulators have been, on balance, reasonably supportive of long-term credit quality, and all will have cases in front of their respective commissions over the next 12-24 months relating to material planned increases in rate base, resulting from capital expenditures for required plant retro-fits at I&M and for plant acquisitions to address substantial reserve shortfalls at APCo and KPCO in conjunction with plant closures and the upcoming termination of AEP's Interconnection Agreement," said Bill Hunter, Vice President and Senior Analyst.

"While our ratings for all three issuers incorporate a view that they will receive reasonable regulatory outcomes, we will be most focused on decisions relating to APCo and KPCo. APCO has had financial metrics that score below the mid-Baa level for several years. As a result, any downward re-assessment of APCo's Ability to Recover Costs and Earn Returns (an important component in our methodology) would likely precipitate a negative ratings action. While KPCo's recent historical metrics have been in line with its rating, the need to replace all of its owned generation in the 2015-2016 timeframe due to the retirement of Big Sandy has the potential to materially stress its metrics and test its ability to obtain rate increases sufficient to recover the additional costs."

RATINGS RATIONALE:

APCO's ratings and stable outlook reflect a vertically integrated electric utility company operating in states that have been somewhat restrictive but are, on balance, currently viewed as reasonably supportive to long term credit quality, financial metrics (especially leverage as measured by CFO Pre-WC/Debt) that are weak for the rating but have improved relative to their 2007-2008 low point, and an announced plan to alleviate APCO's substantial reserve margin deficit. These positive factors are balanced against the financial requirements that the capacity acquisition plan will create, a need for positive rate actions in the next 18-24 months, and a traditionally weak service territory that has demonstrated some inflection risk.

I&M's ratings and stable outlook reflect the generally supportive regulatory jurisdiction in both Indiana and Michigan, a low-cost generating fleet, and historical financial metrics that have been strong for the rating category, balanced against significant upcoming expenditures at both its coal and nuclear plants that have the potential to pressure metrics, and an industrialized and recession-sensitive service territory.

KPCo's ratings and stable outlook primarily reflect its reasonably constructive relationship with the Kentucky Public Service Commission, historical financial metrics that have improved to a level that is consistent with the rating, and the company's position as one of the smaller members the AEP family, balanced against a reserve deficit that will need to be addressed in serial rate filings, rates that are already high relative to in-state peers, and financial metrics that will likely be materially stressed as a result of planned asset acquisitions and other capacity purchases/construction that will be required to replace Big Sandy.

Rating upgrades for APCo appear unlikely over the near to intermediate term horizon, primarily due to our expectation that APCo's financial profile, and especially its ratio of cash from operations before changes in working capital (CFO Pre-WC) to debt, will not become robust, especially in light of major planned asset purchases. However, APCo's ratings could be upgraded if the credit supportiveness of its combined regulatory environments were to continue to improve, if it were able to purchase capacity that materially decreased its reserve margin deficit while maintaining a balanced Debt/Capitalization ratio around 45%, and if its cash flow financial metrics were to strengthen on a sustainable basis such that CFO Pre-WC to debt approached 20% and CFO Pre-W/C + Interest to Interest (Coverage Ratio) approached 4.5x.

Given the size and scope of the environmental and nuclear capital spending program at I&M, a ratings upgrade in the near-to-medium term appears unlikely. Nevertheless, I&M's rating could be upgraded if it were to maintain a strong financial profile during this period. More specifically, if I&M generated a ratio of CFO Pre-W/C to Debt near 20% and a Coverage Ratio near 4.5x while keeping Debt/Capitalization near or below 50% on a sustainable basis, there would be upward rating pressure.

For KPCo, rating upgrades also appear unlikely over the near to intermediate term horizon, primarily due to our expectation that it will be challenged to maintain its financial profile in light of its plant acquisition plans. However, KPCo could be considered for a rating upgrade if it were to achieve improvements in key financial credit metrics on a sustainable basis, including a Coverage Ratio of approximately 4.5x and CFO pre-W/C to Debt of approximately 20%.

APCo's ratings could be downgraded if it were to encounter a more contentious regulatory environment in either Virginia or West Virginia as it seeks approval for the acquisition of new capacity, securitization and fuel-change retro-fits. Any downward change in the scoring of the Ability to Recover Costs and Earn a Return factor, which represents 25% of the grid-implied rating, would most likely cause a negative rating action. Furthermore, ratings could be downgraded if APCo's capacity purchases resulted in an unbalanced capital structure, or if its financial profile deteriorated such that CFO Pre-WC to Debt remained in the low-teens level or the Coverage Ratio fell to 3.0x for a sustained period after completion of the asset purchase.

I&M's ratings could fall under pressure if its capex budget were materially accelerated or there were material cost over-runs in plant retro-fits, if it were to experience an increased lag in cost recovery in future rate case decisions (including for environmental and nuclear expenditures) or if the key financial metrics were to deteriorate over a sustained period such that CFO Pre-W/C to debt reached the low-to-mid teens range or the Coverage Ratio declined to around 3.0x, especially if Debt/Capitalization were in the mid-high 50% range.

KPCo's ratings could be downgraded if the regulatory environment were to take a more adversarial tone, especially with respect to the recent asset acquisition filing; if material progress were not made in the next 12 months in meeting KPCo's post-Big Sandy capacity shortfall; if equity contributions from AEP were not forthcoming in a manner to maintain an appropriate capital structure; if there were a material, sustained decrease in retail sales and revenues (especially from industrial customers); or if there were a sustained deterioration in key financial credit metrics, for instance, a Coverage Ratio below 3.0x or CFO Pre-WC to debt in the low-teens.

The following ratings of Appalachian Power Company are affirmed with stable outlook:

Long-term Issuer Rating Baa2

Senior Unsecured Baa2

Senior Unsecured Medium Term Note Program (P)Baa2

Senior Unsecured Shelf (P)Baa2

BACKED Senior Unsecured Baa2

Underlying Senior Unsecured Baa2

The following ratings of Indiana Michigan Power Company are affirmed with stable outlook:

Long-term Issuer Rating Baa2

Senior Unsecured Rating Baa2

Senior Unsecured Medium Term Note Program (P)Baa2

Secured Lease Obligation Bonds Baa2

The following ratings of Kentucky Power Company are affirmed with stable outlook:

Long-term Issuer Rating Baa2

Senior Unsecured Rating Baa2

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William Hunter
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms Ratings of Three AEP Operating Subsidiaries
No Related Data.
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