AEP addresses factors leading to downgrade by Moody’s

Moody’s downgraded AEP’s senior unsecured rating to Baa3 from Baa2 and lowered its short-term rating for commercial paper to Prime-3 from Prime-2, but said the rating outlook for AEP and its subsidiaries is stable. The rating action concluded Moody’s review of AEP.

“We recognize that the weak results from our unregulated investments have been detrimental to overall corporate performance, but we are moving to address that,” said Susan Tomasky, AEP executive vice president and chief financial officer. “Our regulated utilities, the core of our business, are strong and stable with reliable earnings and cash flow.

“We have already taken steps that will bring measurable improvements to our balance sheet,” Tomasky said. “Last month we announced additional actions to improve performance and ensure continued financial stability during the current difficult times that have hit our industry. We believed that these actions would support the continuation of our Baa2 rating, but Moody’s didn’t agree. Now we have a stable rating from which to build.”

AEP has completed an efficiency program that should result in sustainable net operations and maintenance savings of more than $200 million when compared to 2002. The company will continue to seek ways to further reduce costs. AEP also reduced its capital forecast for 2003 to approximately $1.5 billion, a savings of approximately $200 million from previous levels.

In January, AEP management announced that it expects to recommend the company’s board of directors reduce AEP’s dividend approximately 40 percent to $0.35 per share beginning in the second quarter. The current dividend is $0.60 per share per quarter. The reduction will result in annual cash savings of approximately $340 million, immediately improve retained earnings and create free cash flow that can be used to pay down debt.

AEP also announced in January that it would divest non-core assets and return to the more traditional model of a regulated utility with a small commercial group that ensures maximum value for the output of the company’s generation assets. Funds generated from the sale of non-core assets will be used to reduce debt.

“The sustainable cost reductions we have made will improve our cash flow while we continue to execute the other elements of our plan,” Tomasky said. “We’re confident we can complete a review and orderly divestiture of non-core assets in a timely fashion while continuing the operation of our strong and stable utility businesses.

“In addition, we will continue to evaluate the potential for issuing additional equity,” Tomasky said. “We do not like the dilutive impact on earnings and the additional cash it requires for dividends, but incremental equity may be necessary to further strengthen our balance sheet and maintain credit quality.”

American Electric Power owns and operates more than 42,000 megawatts of generating capacity in the United States and select international markets and is the largest electricity generator in the U.S. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s 11-state electricity transmission and distribution grid. The company is based in Columbus, Ohio.

The comments set forth above include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including (1) statements concerning the Company´s plans, objectives, expected performance and expenditures and (2) other statements that are other than statements of historical fact. These forward-looking statements reflect assumptions, and involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from forward-looking statements are electric load and customer growth, abnormal weather conditions, availability of generating capacity, the ability to recover net regulatory assets and other stranded costs in connection with deregulation of generation, the outcome of environmental regulation and litigation, the impact of fluctuation in commodity prices and interest rates, and other risks and unforeseen events over which the Company has no control. The reader is also directed to the Company´s periodic filings with the Securities and Exchange Commission for additional factors that may impact the Company´s results of operations and financial condition. Furthermore, historical results may not be indicative of the Company´s future performance.