2009-11-10 16:21:06 -

Fitch Ratings has assigned a rating of 'BBB+' to Public Service Co. of Oklahoma's (PSO) $250 million issuance of 5.15% senior unsecured notes, due Dec. 1, 2019. Proceeds from the sale will be used to repay short-term debt, fund capital expenditures and for other corporate purposes. The Rating Outlook for PSO is Stable.

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; Issuer Default Rating [IDR] 'BBB' with a Stable Outlook). 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. Credit metrics are solid for the 'BBB' category, with the ratios of EBITDA to interest and funds flow to interest coverage at 3.6 times (x) and 4.0x, respectively, for the 12-month period ended Sept. 30, 2009.

Rating concerns facing the company primarily relate to the need to fund cash contributions for pension obligations, as well as 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. The pension issue is particularly important due to the January 2009 Oklahoma Commerce Commission (OCC) order that removed prepaid pension fund contributions from rate base.

PSO has filed an appeal with the Oklahoma Supreme Court challenging this adjustment, and the case has been assigned to the Court of Civil Appeals. The pension amendment was part of the OCC's final order authorizing the company an $81 million increase (compared with $133 million requested) in its non-fuel base rates based on a 10.5% return on equity.

In August 2009, PSO filed an application with the OCC requesting a Capital Reliability Rider (CRR) to recover depreciation, taxes and return on the company's net capital investment for generation, transmission and distribution assets that have been placed into service between Sept. 1, 2008 to June 30, 2009. As of October 2009, all but two of the parties to the filing agreed to a stipulation to collect no more than $30 million of CRR revenues on an annual basis beginning January 2010 until PSO's next base rate order. These revenues are subject to refund with interest pending the OCC's audit. Currently, PSO operates under riders for fuel and purchased power, investment in distribution infrastructure and generation maintenance expenses. Most recently, the company received OCC approval for cost recovery associated with a ten-year purchased power agreement with Exelon Generating Company for 520 MW beginning in June 2012.

PSO, a wholly-owned subsidiary of AEP, is a vertically integrated electric company that serves approximately 527,000 retail customers in eastern and southwestern Oklahoma.

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Fitch RatingsKaren Anderson, +1-312-368-3165 (Chicago)Sharon
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