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Rating Action:

Moody's affirms ratings for American Electric Power Company; changes rating outlooks for Southwestern Electric Power Company, AEP Texas North and AEP Texas Central to positive from stable

16 Sep 2013

Approximately $22 billion of debt affected

New York, September 16, 2013 -- Moody's Investors Service affirmed the ratings and stable rating outlook for American Electric Power Company and changed the rating outlooks for subsidiaries AEP Texas North Company (TNC, Baa2), AEP Texas Central Company (TCC, Baa2) and Southwestern Electric Power Company (SWEPCO, Baa3) to positive from stable.

"The positive rating outlook for SWEPCO reflects its supportive and diversified regulatory environments" said Jim Hempstead, Associate Managing Director. "We see last Thursday's decision in Texas as basically removing the last remaining overhang risks related to SWEPCO's Turk power plant. We think the Texas decision is positive for SWEPCO, as it brings a new coal-fired generating facility into rate base in the presence of today's increasingly stringent environmental mandates."

"The positive rating outlooks for AEP's two Texas based transmission and distribution utilities also reflect the supportive regulatory framework in the state," Hempstead added "Although there are material differences between AEP Texas North Company and AEP Texas Central Company's financial profiles, we see the two companies increasingly being operated as a system, and we incorporate a view that the financials will eventually converge."

RATINGS RATIONALE

American Electric Power's Baa2 rating and stable outlook reflect its predominantly rate regulated utility operations, which exhibit good diversity in customer mix, geographic market exposure, and supportive regulatory frameworks. Although AEP will soon need to separate its Ohio generation assets from its current transmission and distribution utility operations overall business risk may increase modestly; however, the company is expected to continue to invest heavily into its FERC regulated transmission only operations. Together these rate-regulated utility operations should continue to produce stable and predictable revenues and cash flows allowing AEP to continue to produce a ratio of cash flow to debt in the mid- to high-teen's range for a sustained period of time. AEP's more risky and volatile unregulated generation businesses, which includes the pending Ohio generation assets, constrain the rating, but are viewed as non-core. Moody's incorporates a view that AEP will eventually exit the unregulated generation business over the next 3 to 5 years.

SWEPCO's Baa3 ratings and positive outlook reflect its position as a diversified, vertically integrated electric utility, with supportive regulatory environments in Arkansas, Louisiana and Texas. The ratings and positive outlook benefit from the continued reduction in regulatory overhang risks associated with the completed construction of the coal-fired Turk power plant in Arkansas. Moody's incorporates a view that the remaining regulatory recovery approvals, including the pending resolution in Texas, will be concluded within a reasonable timeframe and will include reasonable recovery authorizations that are manageable for SWEPCO. The ratings remain somewhat constrained by SWEPCO's current large environmental capital expenditure plan, estimated to be roughly $1.5 to $1.8 billion over the next 3 years. While these investments will strain the financial profile of SWEPCO temporarily, Moody's incorporates a view that these investments will be recovered in a relatively timely manner, given the supportive regulatory jurisdictions.

AEP TNC and AEP TCC's Baa2 ratings and positive outlooks reflect the low risk transmission and distribution business model in Texas, coupled with a very supportive regulatory framework which provides timely recovery of costs and investments. Although the financial profile of TNC is materially stronger than TCC, Moody's believes both utilities are essentially being operated as a system. That said, both TNC and TCC are projected to produce a stable and predictable stream of revenues and cash flows.

Rating upgrades for AEP will be driven by the company's steady execution and de-risking of its business plan, which includes a successful transition of the planned Ohio separation; continued investment into higher return FERC regulated transmission along with the timely execution of appropriate capital investment into its regulated utilities. An important consideration behind a ratings upgrade will be the transparency behind the mitigation of the risks associated with the unregulated generation business. The current stable outlook incorporates a view that the unregulated generation business, and potentially other non-core operations will be exited in a disciplined fashion over the medium term.

Rating upgrades for SWEPCO are likely, by at least one notch, as the remaining Turk plant regulatory proceedings are resolved, and with additional transparency behind the financing plans associated with the large environment spending program over the next few years. Ratings could also be upgraded if SWEPCO were able to maintain the recent trends in its key financial metrics on a sustainable basis excluding one-time bonus depreciation impacts, including CFO pre-WC to Debt in the mid-to-high teens, CFO pre-WC less Dividends to Debt in the low-to-mid teens range, and Debt/Capitalization below 50%.

Rating upgrades for AEP TNC and TCC are likely to be upgraded if the regulatory environment continues to be supportive, or if their financial profiles exhibit a more rapid and sustained improvement; for example, if CFO pre-WC to debt (including securitization debt) were to be positioned comfortably above the mid-teens level while TCC's dividend policy permits other key ratios to register similar improvements. Moody's notes that TNC is already well above these financial thresholds.

AEP's rating could be downgraded if a more contentious regulatory / political environment were to materialize in Ohio or other important jurisdictions; for instance, if regulatory decisions for any material subsidiary challenged our assumption that environmental and nuclear capex costs will be recovered on a reasonably timely basis. Ratings could also be downgraded if concerns about structural subordination were heightened due to a material addition of permanent debt at the parent as a percentage of total consolidated debt, 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 Ohio transition period, including a ratio CFO Pre-WC to debt in the low teens range.

Ratings are unlikely to be downgraded for SWEPCO barring any material disallowances with respect to expected Turk Plant base rate filings in Texas or with the Louisiana prudency review. If SWEPCO's key financial credit metrics evidenced a sustained projected decline, including CFO pre-WC to Debt below 10% for a sustained period of time would create downward rating pressure .

Ratings for AEP TNC and AEP TCC could be downgraded over the intermediate term horizon if there were a deterioration in the regulatory environment for T&D utilities in Texas (which we do not believe is likely), if their financial profile were to weaken, or if the expected resumption of improvement in its key financial metrics were to stall. This would include having the ratio of CFO pre-WC to debt decline to below 10% (including the impact of securitization bonds)over an extended period.

The following ratings of American Electric Power Company are affirmed with a stable outlook:

Senior Unsecured Baa2

Senior Unsecured Shelf (P)Baa2

Junior Subord. Shelf (P)Baa3

Commercial Paper P-2

The following ratings of Southwestern Electric Power Company are affirmed with a positive outlook:

Long-term Issuer Rating Baa3

Senior Unsecured Rating Baa3

The following ratings of AEP Texas North Company are affirmed with a positive outlook:

Long-term Issuer Rating Baa2

The following ratings of AEP Texas Central Company are affirmed with a positive outlook:

Long-term Issuer Rating Baa2

Senior Unsecured Baa2

The principal methodology used in this rating 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

James Hempstead
Associate Managing Director
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 for American Electric Power Company; changes rating outlooks for Southwestern Electric Power Company, AEP Texas North and AEP Texas Central to positive from stable
No Related Data.
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