AEP reaches settlement agreement in NSR case

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Company admits no violations of law, all claims released

AEP will install additional emissions control equipment, pay $60 million for environmental projects and $15 million penalty

- Consent decree (PDF: 767KB: get viewer)

COLUMBUS, Ohio, Oct. 9, 2007 – American Electric Power (NYSE: AEP) has reached a settlement agreement with the U.S. Environmental Protection Agency (U.S. EPA), eight states and 14 environmental organizations, bringing an end to almost eight years of litigation regarding alleged violations of the New Source Review (NSR) provisions of the Clean Air Act. AEP admits no violations of law, and all claims against AEP were released.

Under terms of the settlement agreement, filed today in the U.S. District Court for the Southern District of Ohio, AEP agreed to annual sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions limits for its fleet of 16 coal-fueled power plants in Indiana, Kentucky, Ohio, Virginia and West Virginia. Additionally, the company agreed to install additional emissions control equipment on two plants.

AEP also will provide $36 million for environmental projects coordinated with the federal government and $24 million to the states that were parties to the agreement for environmental mitigation. AEP will pay a civil penalty of $15 million.

The NSR provisions require new major sources of emissions or existing sources that undergo major modifications to install additional environmental controls. The complaint alleged that AEP made major modifications at some of its coal-fueled generating units without obtaining the necessary permits and without installing controls required by the Clean Air Act to reduce SO2, NOx and particulate matter emissions.

“Since November 1999, when the initial complaint was filed by the government, we have remained firm in our belief that we operated our plants in compliance with the New Source Review provisions,” said Michael G. Morris, AEP’s chairman, president and chief executive officer. “That remains our position today.

“But we have also said that we would be willing to consider ways to reasonably resolve these issues,” Morris said. “This consent decree represents such a resolution. It recognizes the billions we have spent on environmental retrofits at our plants as part of ongoing business and the significant emissions reductions achieved at our plants. It also takes into account our existing plans for additional environmental retrofits on other plants. The mitigation projects included in the agreement are the types of activities that we have often undertaken on our own. And most importantly, this agreement enables us to make much-needed efficiency improvements at our plants without fear of additional NSR allegations.

“While we would have preferred that the agreement not include a civil penalty – a position we argued vigorously during our discussions with the plaintiffs – this settlement is an excellent outcome for our shareholders. It eliminates the potentially significant financial risk of pursuing the litigation to its conclusion while still achieving the environmental improvements that both we and the government want,” Morris said.

The consent decree will not change AEP’s recently announced 2007 ongoing earnings guidance range of $2.90 to $3.00 per share. AEP’s 2007 earnings, as prepared in accordance with Generally Accepted Accounting Principles (GAAP), will include an expense of approximately $50 million to $55 million after tax. The consent decree will not impact AEP’s recently announced 2008-2010 capital expenditure program.

The claims, initially filed on Nov. 3, 1999, by the U.S. Department of Justice on behalf of the U.S. EPA, eventually included allegations involving nine AEP plants: Amos, Cardinal, Clinch River, Conesville, Kammer, Mitchell, Muskingum River, Sporn and Tanners Creek. New York, Connecticut, New Jersey, Vermont, New Hampshire, Maryland, Rhode Island and Massachusetts intervened. Complaints were filed by Ohio Citizen Action, Citizens Action Coalition of Indiana, Hoosier Environmental Council, Valley Watch, Ohio Valley Environmental Coalition, West Virginia Environmental Council, Clean Air Council, Izaak Walton League of America, U.S. Public Interest Research Group, National Wildlife Federation, Indiana Wildlife Federation, League of Ohio Sportsmen, Sierra Club and Natural Resources Defense Council.

A trial on liability was held in July 2005 in U.S. District Court for the Southern District of Ohio, but no decision has been rendered.

In the settlement, AEP agreed to annual SO2 and NOx emissions limits for its fleet of 16 coal-fueled power plants in Indiana, Kentucky, Ohio, Virginia and West Virginia. AEP also agreed to install selective catalytic reduction (SCR) and flue gas desulfurization emissions control equipment (scrubbers) on both generating units at its Rockport Plant in Rockport, Ind. Unit 1 at Rockport will be retrofitted with an SCR system to reduce NOx and a scrubber to reduce SO2 by the end of 2017. Unit 2 at Rockport will receive the same equipment by the end of 2019.

As part of its NOx reductions, AEP committed to operate its SCRs year-round on generating units at Amos, Mountaineer and Muskingum River Plants in 2008. SCR equipment is currently operated to reduce NOx emissions only during the May to September ozone season. AEP also agreed to install selective non-catalytic reduction, a NOx-reduction technology, at its Clinch River Plant in Cleveland, Va., by the end of 2009.

To reduce SO2 emissions, AEP committed to complete the previously announced scrubbers for its Big Sandy and Muskingum River plants by Dec. 31, 2015. AEP also agreed to plant-specific SO2 emission limits for its Clinch River Plant, and its Kammer Plant near Moundsville, W.Va.

Since 2004, AEP has spent nearly $2.6 billion on installation of emissions control equipment on its coal-fueled plants in Kentucky, Ohio, Virginia and West Virginia as part of a larger plan to invest more than $5.1 billion by 2010 to reduce the emissions of its generating fleet. The cost of the additional environmental controls for Rockport and Clinch River agreed to in the settlement will be approximately $1.6 billion (net present value).

American Electric Power is one of the largest electric utilities in the United States, delivering electricity to more than 5 million customers in 11 states. AEP ranks among the nation’s largest generators of electricity, owning more than 38,000 megawatts of generating capacity in the U.S. AEP also owns the nation’s largest electricity transmission system, a nearly 39,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined. AEP’s transmission system directly or indirectly serves about 10 percent of the electricity demand in the Eastern Interconnection, the interconnected transmission system that covers 38 eastern and central U.S. states and eastern Canada, and approximately 11 percent of the electricity demand in ERCOT, the transmission system that covers much of Texas. AEP’s utility units operate as AEP Ohio, AEP Texas, Appalachian Power (in Virginia and West Virginia), AEP Appalachian Power (in Tennessee), Indiana Michigan Power, Kentucky Power, Public Service Company of Oklahoma, and Southwestern Electric Power Company (in Arkansas, Louisiana and east Texas). AEP’s headquarters are in Columbus, Ohio.

- Consent decree (PDF: 767KB: get viewer)

This report made by AEP and its Registrant Subsidiaries contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although AEP and each of its Registrant Subsidiaries believe that their expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Among the factors that could cause actual results to differ materially from those in the forward-looking statements are: electric load and customer growth; weather conditions, including storms; available sources and costs of, and transportation for, fuels and the creditworthiness of fuel suppliers and transporters; availability of generating capacity and the performance of AEP’s generating plants; AEP’s ability to recover regulatory assets and stranded costs in connection with deregulation; AEP’s ability to recover increases in fuel and other energy costs through regulated or competitive electric rates; AEP’s ability to build or acquire generating capacity when needed at acceptable prices and terms and to recover those costs through applicable rate cases or competitive rates; new legislation, litigation and government regulation including requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances; timing and resolution of pending and future rate cases, negotiations and other regulatory decisions (including rate or other recovery for new investments, transmission service and environmental compliance); resolution of litigation (including pending Clean Air Act enforcement actions and disputes arising from the bankruptcy of Enron Corp. and related matters); AEP’s ability to constrain operation and maintenance costs; the economic climate and growth in AEP’s service territory and changes in market demand and demographic patterns; inflationary and interest rate trends; AEP’s ability to develop and execute a strategy based on a view regarding prices of electricity, natural gas and other energy-related commodities; changes in the creditworthiness of the counterparties with whom AEP has contractual arrangements, including participants in the energy trading market; actions of rating agencies, including changes in the ratings of debt; volatility and changes in markets for electricity, natural gas and other energy-related commodities; changes in utility regulation, including the potential for new legislation in Ohio and membership in and integration into regional transmission organizations; accounting pronouncements periodically issued by accounting standard-setting bodies; the performance of AEP’s pension and other postretirement benefit plans; prices for power that AEP generates and sell at wholesale; changes in technology, particularly with respect to new, developing or alternative sources of generation; other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes and other catastrophic events.

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Pat D. Hemlepp
Director, Corporate Media Relations

Julie Sloat
Vice President, Investor Relations & Strategic Initiatives