Fitch Downgrades Southwestern Electric Power's IDR to 'BBB'; Outlook Stable

Business Wire, March 28, 2008

CHICAGO -- Fitch Ratings has downgraded the Issuer Default Rating (IDR) and outstanding debt ratings of Southwestern Electric Power Co. (SWEPCO) as follows:

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

--Senior unsecured debt to 'BBB ' from 'A-';

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

Approximately $1.1 billion of debt is affected. The Rating Outlook for SWEPCO is Stable.

The rating action reflects debt leverage measures that are more consistent with the 'BBB' rating category. Currently, leverage, as measured by Debt to EBITDA, was 4.4 times (x) for the 12-month period ended Dec. 31, 2007. Going forward, leverage is projected to increase to more than 5.0x as SWEPCO borrows funds to meet increasing capital investments. For the year-ended Dec. 31, 2007, the ratio of EBITDA to interest was 4.5x and funds from operations interest coverage was 4.3x. In addition, SWEPCO is expected to experience significantly higher debt levels over the next several years as the company borrows funds to add additional generation investments. While Fitch's analysis assumes that SWEPCO will receive regulatory recovery for the new generation, credit fundamentals are not expected to return to historical levels associated with the prior 'BBB ' rating. An inability to reduce leverage over the longer-term may place further downward pressure on SWEPCO's credit profile.

The ratings of SWEPCO take into consideration the stable cash flows provided by regulated utility operations, an adequate liquidity position, and balanced regulatory environments in Arkansas and Louisiana. Fitch views Texas to be a somewhat challenging regulatory jurisdiction. SWEPCO has plans to file rate requests in Arkansas and Texas in the near-to medium-term. SWEPCO further benefits from the affiliation with its parent, American Electric Power Co. (AEP; IDR rated 'BBB' with a Stable Outlook by Fitch), which enables the utility to participate in the AEP power pool and AEP money pool. However, given AEP's highly centralized treasury and electric operations, any deterioration in the credit quality of AEP could impair the ratings of SWEPCO. The Stable Outlook reflects Fitch's expectation that SWEPCO will continue to post stable cash flows and achieve reasonable regulatory outcomes related to the recovery of costs associated with new generation.

On March 27, 2008, the Public Utility Commission of Texas (PUCT) declined to rule on SWEPCO/AEP's application for a certificate of convenience and necessity for its Turk Power Plant in Arkansas. The Turk plant is a proposed 600 MW, coal-fired base load plant, jointly owned by SWEPCO (73%), the Oklahoma Municipal Power Authority (7%), the East Texas Electric Co-op Inc. (8%), and the Arkansas Electric Cooperative Corp. (12%). The plant would be constructed by SWEPCO affiliate, American Electric Power Service Corp., and the construction costs are estimated to be $1.343 billion- of which SWEPCO's share would be $986 million. The plant has received approval from regulators in Arkansas, and support from the Louisiana Public Service Commission.

In Texas the proposed facility has remained controversial because of regulatory concerns regarding its potential negative impact on the development of a competitive market in SWEPCO's territory there. In January 2008, a Texas ALJ issued a report that concluded that SWEPCO failed to prove there is a need for the plant, and recommended that the application be denied. SWEPCO has indicated that even if Texas regulators were to reject the plant, the company will move forward with construction by finding an alternative customer for the respective state's share of the output. A follow-up hearing by the PUCT is tentatively scheduled in May. The plant is also awaiting an air quality permit from the Arkansas Department of Air Quality.

SWEPCO, a wholly-owned subsidiary of AEP, is engaged in the generation, transmission, and distribution of electricity to approximately 467,000 customers in Louisiana, Arkansas and East Texas.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.