Fitch Affirms Ratings for Southwestern Electric Power Co.; Revises Outlook to Negative

Business Wire, May 29, 2009

CHICAGO -- Fitch Ratings has affirmed the ratings of Southwestern Electric Power Co. (SWEPCO) as follows:

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

--Senior Unsecured Debt at 'BBB ';

--Preferred Stock at 'BBB'.

Approximately $1.5 billion of debt is affected. The Rating Outlook for the company has been revised to Negative from Stable.

The Negative Outlook reflects a protracted period of lower cash flows because of higher interest and operating expenses and elevated levels of debt to fund new generation capacity, specifically the 480-MW natural gas fired Stall unit due to be online in mid-2010, and the 600-MW coal-fired Turk Plant, due to be in operation in 2012. Cash flows will also be affected by considerable pension funding obligations in 2010 and 2011. As a result, SWEPCO's EBITDA interest and cash flow interest coverages are projected by Fitch to average 2.9 times (x) and 3.2x, respectively, which are weak relative to guidelines for the 'BBB' rating category as well as other utility peers. Debt leverage, as measured by the ratio of Debt to EBITDA, is expected to be high, averaging more than 5.0x through 2011.

Events that could lead to further negative rating action include difficulty in receiving full and timely recovery of the Stall unit construction costs upon its completion, considerable load loss in SWEPCO's service territory, or evidence that recovery of Turk related construction costs will be delayed or disallowed.

Events that could lead to a return to a Stable Outlook include favorable changes in regulation, such as cash work in progress cost (CWIP) recovery of financing costs during construction, the timely and full recovery of the Stall unit costs in rates in 2010, as well as construction on the Turk Plant proceeding on time and on budget. SWEPCO has applied for a CWIP rider in Arkansas ($28.6 million) and intends to apply for CWIP in Texas later in 2009.

The ratings for SWEPCO take into consideration the company's regulated electric utility operations, affiliation with parent American Electric Power Co. (AEP, IDR 'BBB'; Outlook Stable) including participating in the AEP power pool and money pool, and relatively constructive regulatory environments in Arkansas and Louisiana. Due to AEP's highly centralized electric and treasury operations, any deterioration in the credit quality of the parent could impair the ratings of SWEPCO. The company has benefitted from AEP's $1.69 billion equity offering in April 2009, which allows the parent to significantly reduce money pool borrowings at the operating utilities and invest equity to maintain a balance capital structure during the build cycle. Fitch notes that the service territories served by the company in Arkansas, Texas and Louisiana have been holding up during the national economic recession with unemployment rates below the national average, but have below average income levels. Additional rating concerns facing the company include a challenging regulatory environment in Texas as well as exposure to stricter environmental regulation.

Construction is well underway at the Turk Plant in Arkansas, and the unit has received regulatory approvals of need from Arkansas, Louisiana and Texas state public service commissions. The plant is jointly owned by SWEPCO (73% or 440 MW), the Oklahoma Municipal Power Authority (7% or 40 MW), the East Texas Electric Co-op Inc. (8% or 50 MW), and the Arkansas Electric Cooperative Corp. (12% or 70 MW). Construction costs are estimated to be $1.628 billion; SWEPCO's share would be $1.2 billion. The plant is projected to come online in 2012.

Cost estimates on the Stall Plant in Shreveport, LA approximate $385 million, excluding Allowance for Funds Used During Construction (AFUDC), and the plant is expected to be in service by mid-2010. SWEPCO has received approvals from the Public Utilities Commission of Texas, the Louisiana Public Service Commission (LPSC), as well as an air permit from the Louisiana Department of Environmental Quality. The company is awaiting an order from the Arkansas Public Service Commission, although no procedural schedule has been set for this case.

In February 2009, SWEPCO filed for a $53.9 million base rate increase in Arkansas, primarily comprised of $25.3 million of costs for infrastructure and ongoing operating costs, as well as $28.6 million to recover financing costs related to the company's current power plant construction program (Turk and Stall units). SWEPCO also requested a return on equity (ROE) of 11.5% (vs. 10.75% currently). An order is expected in the fourth quarter of 2009 or the first quarter of 2010.