Fitch Affirms Public Service Co. of Oklahoma's Ratings; Outlook Stable

Business Wire, April 09, 2009

CHICAGO -- Fitch Ratings has affirmed the outstanding debt ratings for Public Service Company of Oklahoma (PSO) as follows:

-- Issuer Default Rating (IDR) at 'BBB';

-- Senior unsecured debt at 'BBB ';

-- Preferred stock at 'BBB';

-- Pollution control revenue bonds (PCRBs) at 'BBB '.

The Rating Outlook is Stable. Approximately $956 million of debt is affected.

PSO's ratings take into consideration the company's relatively stable cash flow generation from regulated electric operations, credit protection measures that are solid for the 'BBB' rating category, a moderately constructive regulatory environment in Oklahoma and affiliation with parent company, American Electric Power Co. (AEP, IDR 'BBB', Outlook Stable). PSO benefits from the operational and financial ties with AEP, including participating in AEP's power pool and money pool. Due to AEP's highly centralized electric and treasury operations, any deterioration in the credit quality of the parent could impair the ratings of PSO. Rating concerns facing the company primarily relate to the longer term impact of a protracted period of low commodity prices on the local economy, which is heavily dependent on the natural resources industry, predominantly oil and natural gas, as well as the need to fund cash contributions for pension obligations.

In January 2009, the Oklahoma Commerce Commission (OCC) issued a final order approving an $81 million in PSO's base revenues, and a return on equity (ROE) of 10.5%. The rate increase includes a $59 million increase in base rates and a $22 million increase for costs to be recovered through riders, including purchased power, investment in distribution infrastructure and generation maintenance expenses. PSO filed its request for a $133 million base rate increase, and 11.25% ROE, in July 2008.

In March 2009, AEP announced it had reduced its 2010 capital budget to $1.8 billion from the previous planned capital budget of $3.4 billion. The reductions in capital spending for 2010 are spread across AEP's utility operating companies in generation, transmission and distribution. Discretionary projects are being deferred until the economic climate and emissions regulation warrant the additional investment. PSO is conducting a request for proposal for capacity as an alternative to the Red Rock plant. As a result of reduced capital spending, PSO's expected credit protection measures are stronger and debt leverage is lower than in prior forecasts. However, should economic conditions improve or environmental standards become stricter in the near- to medium-term, the capital budget is expected to be revised upwards.

PSO, a wholly owned subsidiary of AEP, is a vertically integrated electric utility that serves approximately 527,000 customers in eastern and southwestern Oklahoma. PSO owns and operates more than 4,281 MW of primarily natural gas generation capacity, with the balance from coal and oil sources.

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.