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Announcement:

Moody's Disclosures on Credit Ratings of American Electric Power Company, Inc.

16 Mar 2012

New York, March 16, 2012 -- The following release represents Moody's Investors Service's summary credit opinion on American Electric Power Company, Inc. and includes certain regulatory disclosures regarding its ratings. This release does not constitute any change in Moody's ratings or rating rationale for American Electric Power Company, Inc. and its affiliates.

Moody's current ratings on American Electric Power Company, Inc. and its affiliates are:

American Electric Power Company, Inc.

Senior Unsecured domestic currency ratings of Baa2

Junior Subordinate domestic currency ratings of Baa3

Senior Unsec. Shelf domestic currency ratings of (P)Baa2

Junior Subord. Shelf domestic currency ratings of (P)Baa3

Commercial Paper domestic currency ratings of P-2

Appalachian Power Company

Senior Unsecured domestic currency ratings of Baa2

Senior Unsecured MTN domestic currency ratings of (P)Baa2

LT Issuer Rating ratings of Baa2

Senior Unsec. Shelf domestic currency ratings of (P)Baa2

BACKED Senior Unsecured domestic currency ratings of Baa2

Underlying Senior Unsecured domestic currency ratings of Baa2

AEP Texas Central Company

Senior Unsecured domestic currency ratings of Baa2

LT Issuer Rating ratings of Baa2

Columbus Southern Power Company

BACKED Senior Unsecured domestic currency ratings of Baa1

BACKED LT IRB/PC domestic currency ratings of Baa1

Indiana Michigan Power Company

Senior Unsecured domestic currency ratings of Baa2

Senior Unsecured MTN domestic currency ratings of (P)Baa2

LT Issuer Rating ratings of Baa2

Kentucky Power Company

Senior Unsecured domestic currency ratings of Baa2

LT Issuer Rating ratings of Baa2

Ohio Power Company

Senior Unsecured domestic currency ratings of Baa1

LT Issuer Rating ratings of Baa1

Senior Unsec. Shelf domestic currency ratings of (P)Baa1

BACKED Senior Unsecured domestic currency ratings of Baa1

Public Service Company of Oklahoma

Senior Unsecured domestic currency ratings of Baa1

Senior Unsecured MTN domestic currency ratings of (P)Baa1

LT Issuer Rating ratings of Baa1

Southwestern Electric Power Company

Senior Unsecured domestic currency ratings of Baa3

LT Issuer Rating ratings of Baa3

Senior Unsec. Shelf domestic currency ratings of (P)Baa3

AEP Texas North Company

Senior Unsecured domestic currency ratings of Baa2

LT Issuer Rating ratings of Baa2

SUMMARY RATING RATIONALE

AEP's Baa2 senior unsecured rating is based on the size and diversity associated with owning and operating ten rate-regulated electric utilities across 11 states, financial metrics that over the past several years have supported the rating, a consolidated financial profile that is balanced and includes a very moderate amount of parent holding company debt, and adequate liquidity. These positive factors are balanced against risks associated with a transition to deregulated generation in Ohio, a gradual change in business mix that will increase the financial metrics threshold for the current rating over time, and material increases in capital expenditures to meet environmental mandates.

DETAILED RATING CONSIDERATIONS

- SUBSTANTIAL RETIREMENTS AND CAPEX DUE TO ENVIRONMENTAL MANDATES

AEP has announced retirements of 5,100 MW of coal fired generation (13% of total capacity), with the largest portion taking place at Ohio Power Company (OPCo, Baa1 senior unsecured, stable outlook, about 2,500 MW) and Appalachian Power Company (APCo, Baa2 senior unsecured, stable outlook, about 1,300 MW). The primary driver is the Mercury and Air Toxics Standard (MATS) - long-expected, with final rules announced in late 2011. Most of the retirements are expected to occur at the end of 2014, unless they would cause local/regional capacity constraints.

AEP's February 2012 forecast for environmental capital expenditures for MATS and other expected mandates is $5.9-6.9 billion from 2012-2020 (excluding allowance for funds used during construction, or AFUDC), down from a June 2011 forecast of $6-8 billion. The largest portion is expected to be spent at Indiana Michigan Power Company (Baa2, stable outlook, 25%) and Southwestern Electric Power Company (Baa3, stable outlook, 21%). Of the $5.9-6.9 billion, AEP forecasts about $0.5 billion will be spent in 2012. Moody's believes the heaviest expenditures will be in 2013-2016, which presumes that AEP will be successful in obtaining state-level and potentially even federal-level extensions for compliance. If AEP is not successful, the schedule may be accelerated, which could stress intermediate term metrics.

We expect that AEP's subsidiaries will be successful in obtaining reasonably timely recovery for the capital and operating expenditures associated with their environmental upgrades.

- BUMPY TRANSITION TO COMPETITIVE GENERATION IN OHIO

Although AEP had filed an Electric Security Plan (ESP) in Ohio in early 2011 based the retention of regulated generation assets, it eventually entered a Stipulation Agreement in September 2011 that was negotiated and signed by 23 parties, including the staff of the Public Utilities Commission of Ohio (PUCO), and approved with modifications by the PUCO in December 2011. The Stipulation Order approved the merger of Columbus Southern Company into OPCo (which occurred in late December 2011) as well as a plan to separate OPCo into an Ohio wires company (OPCo will retain that business) and a competitive generation company, AEP Generation Resources Inc. (AGR). AEP filed applications with FERC in February 2012 to execute various parts of the transition plan, including the transfer of two plants from OPCo to APCo and Kentucky Power Company (KPCo, Baa2, stable outlook) at a total asset value of about $2.2 billion. After retirements and proposed transfers, AGR would have about 9,000 MW of capacity, of which 64% is coal fired and scrubbed.

The Stipulation Agreement provided a transition to market by setting gradually increasing limits in 2012-2015 on the percentage of customers who could switch generation providers while paying a (much lower) capacity payment based on a PJM capacity auction price. Customer switching above those levels would have been discouraged by the much higher cost-based capacity payment that the competitive generation supplier would pay and, most likely, pass along to the customer. These provisions would have helped provide some clarity and stability of cash flows during the transition period. The Stipulation Agreement also increased and re-designed generation rates, while decreasing certain other rate components.

In 2012 the PUCO modified and then rescinded its December 2011 order, creating uncertainty. In its January 2012 modification, the PUCO materially expanded the customers who could switch at the lower capacity price, which decreased the clarity of cash flows. On February 23, 2012, the PUCO rescinded its December order, which it stated would permit the PUCO to start the process over. Reasons cited for the rescission included the severe (above 30%) and unexpected rate impact of the rate re-design on certain customer classes, and OPCo's FERC filing to sell its ownership share in Amos Unit 3 and the Mitchell plant to APCo and KPCo, which the PUCO has stated was a surprise. In the meantime, OPCo was ordered to re-establish its prior rate structure, under which the capacity payments that OPCo would receive from competitive suppliers for all switching customers decreased from the cost-based $255 per MW-day to about $110 per MW-day for from 1/1/12 through 5/31/12 and to about $17 per MW-day for 6/1/12 through 5/31/13. AEP has estimated the negative earnings impact in 2013 at about $220 million, in the absence of other rate modifications by the PUCO. On March 7, 2012, the PUCO provided an expedited ruling that set a limit on the switching customers that would qualify for the $110 per MW-day capacity rate, with customers above the limit paying $255 per MW-day.

We have historically viewed the Ohio regulatory environment as reasonably supportive, leading to a Factor 1 scoring of mid-Baa for OPCo. Recent events cause concern that OPCo's regulatory framework may be heading toward less consistency and greater unpredictability. The customer complaints that were one catalyst for the PUCO rescission indicate both the non-acceptance of higher rates and a failure by both AEP and the PUCO staff to gauge the impact of the Stipulation Agreement on each affected rate class. The PUCO's expressed surprise at the proposed sale of assets to APCo and KPCo contrasts to AEP's discussions of capacity transfers on investor calls starting in September 2011 and indicates sub-optimal communication between the utility and regulator at a time when many sensitive decisions need to be made regarding the transition to market. While the PUCO's stated intent is to enforce the terms of the Stipulation Agreement and the PUCO's orders, including any contractually agreed terms about how generation would be bid into the market, the implication that AEP's Generation Resources' de-regulated assets could be limited to the Ohio market is also cause for concern.

However, OPCo's ESP filing is ongoing and may yet be resolved in a manner that provides stability of cash flows during the transition to market-based rates. Recent public filings indicate AEP will propose an ESP that does not create a two-tier capacity pricing system with limits on the less expensive tier, but rather a non-bypassable generation stability charge similar in concept to one that the PUCO approved for Duke Energy Ohio, Inc. (Baa1, stable outlook). Statements by the PUCO and its March 7 order indicate a current intention to resolve the ESP prior to 6/1/12.

We view the transition period as extremely important to OPCo and to AEP, as OPCo represented about 31% of AEP's Cash from Operations before Working Capital changes (CFO Pre-W/C) in 2011. A higher portion of unregulated business in AEP's mix (AEP estimates that unregulated assets will increase from about 4% of total to about 14%; however, we do not have clarity on the anticipated unregulated margin and cash flow) will tend to require somewhat higher cash flow to debt metrics to maintain the current rating in light of the expected higher overall business risk for the company. In AEP's recently announced financing plan, this strengthening of 3 year average metrics would occur as a result of strong Cash from Operations, essentially stable with the 2011 level, combined with an essentially flat dividend, the expectation of about $100 million/year from dividend reinvestments, and a very limited increase in debt other than securitization debt. Factors that materially decreased our expectations of consolidated cash flow relative to consolidated debt during the transition period could negatively impact ratings.

- DIVERSITY OF RATE REGULATED CASH FLOWS

AEP's electric utility operations are diversified in terms of regulatory jurisdictions (11 states) and service territory economies. The eastern utilities are a bit more than twice as large as the western utilities in terms of gross margin contribution. The largest states ranked by utility gross margin are Ohio, Indiana, Texas, Virginia, West Virginia and Oklahoma. These jurisdictions translate into quite good diversity in revenues (by state and operating utility), cash flows, assets and customers. From a credit perspective, Moody's views AEP's size and diversity as a meaningful credit strengths, as they provide the parent company a degree of insulation from any unexpected negative development occurring at one of its companies, with one of its state regulators or in one state's economy. During the past two years of tepid recovery from the recession in the US, AEP's western service territories, with their greater leverage to the energy economy, have registered a much stronger recovery than those in the east, which have generally been more challenged. Overall, AEP's KWh sales grew 4.9% in 2011 and 5.3% in 2010 after falling 11.2% in 2009.

In light of substantial planned Capex, continued regulatory support will be important to AEP's rating.

- MAINTAINING THE FINANCIAL PROFILE IS KEY TO MAINTAINING RATINGS

AEP's financial metrics in 2009-2011 were significantly higher than in 2007-2008. The ratio of CFO Pre-WC plus interest to interest and the ratio of CFO Pre-WC to debt improved from 3.4x and 13.5%, respectively, in 2008 to 3.9x and 17.1%, respectively, in 2010 and 4.3x and 18.4%, respectively, in 2011. Debt/Capitalization decreased to 47.8% at 12/31/2011 from 58.1% at 12/31/2008 due in part to a total of $1.9 billion on equity issuances in 2009-2011. Prospectively, AEP will need to exhibit a financial profile that continues to be consistent with its rating category and that transitions, during the next three years of what we assume will be a gradual deregulation in Ohio, to a financial profile that is robust for its rating category. We expect AEP's CFO Pre-WC to debt to remain solidly in the high teens over the next 2-3 years. Factors that could challenge AEP during this period include adverse regulatory decisions on the re-filed ESP in Ohio, the impacts of capacity prices, power prices and a recently expanded retail business on replacement revenues for customers who switch generation suppliers, and regulatory decisions throughout the AEP system related to environmental Capex and other general rate matters.

- HOLDING COMPANY NOTCHING CONSIDERATIONS

Despite AEP's structural subordination relative to the debt of its subsidiaries, Moody's does not notch AEP's rating down below the Baa2 senior unsecured rating assigned to the majority of the operating subsidiaries , based on the diversity and stability of cash flows, in addition to the relatively modest debt level at the parent company (about 8% at 12/31/11). Structural subordination pressure on the rating could increase if parent level debt increased materially or if there were downgrades of material subsidiaries. Conversely, rating upgrades at material subsidiaries would benefit the credit positioning of AEP.

Liquidity

AEP's liquidity is adequate. AEP has two syndicated credit facilities totaling $3.25 billion that were renewed and extended in mid-2011. One is a $1.5 billion facility expiring June 2015. The other is a $1.75 billion facility (upsized from $1.5 billion) expiring in July 2016. The combined letter of credit sub-limits under these facilities is $1.35 billion. The facilities contain a covenant requiring that AEP's consolidated debt to capitalization (as defined) will not exceed 67.5% (AEP states the actual ratio was 51.1% at 12/31/11, indicating substantial headroom). AEP is not required to make a representation with respect to either material adverse change or material litigation in order to borrow under the facility. Default provisions exclude payment defaults and insolvency/bankruptcy of subsidiaries that are not significant subsidiaries per the SEC definition (in general, this would exclude subsidiaries representing less than 10% of assets or income, but AEP Texas Central and Southwestern Electric Power Company are also effectively excluded as significant subsidiaries due to definitional adjustments in the credit facilities). Also in 2011, AEP allowed a $478 million letter of credit facility to expire but renewed its $750 million accounts receivable securitization (only the multi-year portion of the latter is included as an available source in Moody's liquidity testing).

As of 12/31/11, AEP had $221 million of cash on hand and approximately $2.1 billion of availability under the syndicated revolving credit facilities after giving effect to $967 million of commercial paper outstanding and $134 million of issued letters of credit.

For the 12 months ended 12/31/11, AEP generated approximately $4.3 billion in cash from operations, made approximately $3.1 billion in capital investments and net asset purchases and paid about $900 million in dividends, resulting in roughly $300 million of positive free cash flow.

Including securitization bonds and other amortizations, AEP has approximately $690 million of maturing long-term debt due in 2012, $1.7 billion in 2013, and $1.3 billion in 2014. Over the next two years, we estimate that AEP will generate roughly $3.5 billion annually in cash from operations, spend about $3.3 billion annually in capital expenditures and pay approximately $900-925 million in dividends annually, yielding negative free cash flow of about $700 million per year.

Rating Outlook

The stable rating outlook reflects the good credit profiles of AEP's diverse portfolio of electric utility operating subsidiaries. We believe AEP will continue to demonstrate a reasonably conservative approach towards its financial policies throughout this period of transition in Ohio and environmental spending, leading to continued improvements in its cash flow generation in relation to debt.

What Could Change the Rating - Up

Ratings upgrades appear unlikely over the near term, primarily due to our view that the gradual change in business mix will ratchet upward the metrics threshold for the Baa2 unsecured rating. Nevertheless, if AEP were successful in producing a stronger set of key financial credit metrics on a sustainable basis, including a ratio of CFO Pre-WC plus interest of at least 4.5x, a ratio of CFO Pre-WC to debt in the low 20% range and debt to capitalization of around 45%, ratings could be upgraded.

What Could Change the Rating - Down

AEP's ratings could be downgraded if the regulatory environment in Ohio showed further deterioration or if a more contentious regulatory / political environment materialized in other important jurisdictions, for instance if regulatory decisions for any material subsidiary challenged our assumption that environmental Capex costs will be recovered on a reasonably timely basis. Ratings could also be downgraded if concerns about structural subordination were heightened due to material additional debt at the parent as percentage of total, or if the ratings of its larger subsidiaries (which are mostly in the Baa2/Baa1 range) were downgraded. In addition, ratings could be downgraded if AEP's financial metrics were weaker or more volatile than expected during the transition period, including a ratio CFO Pre-WC to debt in the low-to mid teens range or debt to capitalization above about 50%.

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

Although these credit ratings have been issued in a non-EU country which has not been recognized as endorsable at this date, the credit ratings are deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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 Disclosures on Credit Ratings of American Electric Power Company, Inc.
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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