Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from ____ to ____
Commission
 
Registrants; States of Incorporation;
 
I.R.S. Employer
File Number
 
Address and Telephone Number
 
Identification Nos.
 
 
 
 
 
1-3525
 
AMERICAN ELECTRIC POWER COMPANY, INC. (A New York Corporation)
 
13-4922640
333-221643
 
AEP TEXAS INC. (A Delaware Corporation)
 
51-0007707
333-217143
 
AEP TRANSMISSION COMPANY, LLC (A Delaware Limited Liability Company)
 
46-1125168
1-3457
 
APPALACHIAN POWER COMPANY (A Virginia Corporation)
 
54-0124790
1-3570
 
INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation)
 
35-0410455
1-6543
 
OHIO POWER COMPANY (An Ohio Corporation)
 
31-4271000
0-343
 
PUBLIC SERVICE COMPANY OF OKLAHOMA (An Oklahoma Corporation)
 
73-0410895
1-3146
 
SOUTHWESTERN ELECTRIC POWER COMPANY (A Delaware Corporation)
 
72-0323455
 
 
1 Riverside Plaza, Columbus, Ohio 43215-2373
 
 
 
 
Telephone (614) 716-1000
 
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x     No ¨
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). Yes x     No ¨
Indicate by check mark whether American Electric Power Company, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large Accelerated filer x             Accelerated filer ¨             Non-accelerated filer ¨
 
 
 
 
 
 
 
Smaller reporting company ¨
 
Emerging growth company ¨
 
 
 
Indicate by check mark whether AEP Texas Inc., AEP Transmission Company, LLC, Appalachian Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company are large accelerated filers, accelerated filers, non-accelerated filers, smaller reporting companies, or emerging growth companies.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large Accelerated filer ¨              Accelerated filer ¨             Non-accelerated filer   x
 
 
 
 
 
 
 
Smaller reporting company ¨
 
Emerging growth company ¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes ¨      No x
AEP Texas Inc., AEP Transmission Company, LLC, Appalachian Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.






 
Number of shares
of common stock
outstanding of the
Registrants as of
 
October 25, 2018
 
 
American Electric Power Company, Inc.
493,108,827

 
($6.50 par value)

AEP Texas Inc.
100

 
($0.01 par value)

AEP Transmission Company, LLC (a)
NA

 
 
Appalachian Power Company
13,499,500

 
(no par value)

Indiana Michigan Power Company
1,400,000

 
(no par value)

Ohio Power Company
27,952,473

 
(no par value)

Public Service Company of Oklahoma
9,013,000

 
($15 par value)

Southwestern Electric Power Company
7,536,640

 
($18 par value)


(a)
100% interest is held by AEP Transmission Holding Company, LLC, a wholly-owned subsidiary of American Electric Power Company, Inc.
NA
Not applicable.




AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
INDEX OF QUARTERLY REPORTS ON FORM 10-Q
September 30, 2018
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
Number
Glossary of Terms
 
 
 
 
 
Forward-Looking Information
 
 
 
 
 
Part I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
Items 1, 2, 3 and 4 - Financial Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk, and Controls and Procedures:
 
 
 
 
 
 
American Electric Power Company, Inc. and Subsidiary Companies:
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
AEP Texas Inc. and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
AEP Transmission Company, LLC and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
Appalachian Power Company and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
Indiana Michigan Power Company and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
Ohio Power Company and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
Public Service Company of Oklahoma:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Financial Statements
 
 
 
 
 
Southwestern Electric Power Company Consolidated:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
Index of Condensed Notes to Condensed Financial Statements of Registrants
 
 
 
 
 
Controls and Procedures




Part II.  OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
  Legal Proceedings
 
Item 1A.
  Risk Factors
 
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
  Defaults Upon Senior Securities
 
Item 4.
  Mine Safety Disclosures
 
Item 5.
  Other Information
 
Item 6.
  Exhibits:
 
 
 
Exhibit 4
 
 
 
 
Exhibit 10
 
 
 
 
Exhibit 12
 
 
 
 
Exhibit 31(a)
 
 
 
 
Exhibit 31(b)
 
 
 
 
Exhibit 32(a)
 
 
 
 
Exhibit 32(b)
 
 
 
 
Exhibit 95
 
 
 
 
Exhibit 101.INS
 
 
 
 
Exhibit 101.SCH
 
 
 
 
Exhibit 101.CAL
 
 
 
 
Exhibit 101.DEF
 
 
 
 
Exhibit 101.LAB
 
 
 
 
Exhibit 101.PRE
 
 
 
 
 
 
SIGNATURE
 
 
 
 
 
 
 
 
 
 
 
 
This combined Form 10-Q is separately filed by American Electric Power Company, Inc., AEP Texas Inc., AEP Transmission Company, LLC, Appalachian Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company.  Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.




GLOSSARY OF TERMS

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below. 
Term
 
Meaning
 
 
 
AEGCo
 
AEP Generating Company, an AEP electric utility subsidiary.
AEP
 
American Electric Power Company, Inc., an investor-owned electric public utility holding company which includes American Electric Power Company, Inc. (Parent) and majority owned consolidated subsidiaries and consolidated affiliates.
AEP Credit
 
AEP Credit, Inc., a consolidated variable interest entity of AEP which securitizes accounts receivable and accrued utility revenues for affiliated electric utility companies.
AEP System
 
American Electric Power System, an electric system, owned and operated by AEP subsidiaries.
AEP Texas
 
AEP Texas Inc., an AEP electric utility subsidiary.
AEP Transmission Holdco
 
AEP Transmission Holding Company, LLC, a wholly-owned subsidiary of AEP.
AEPEP
 
AEP Energy Partners, Inc., a subsidiary of AEP dedicated to wholesale marketing and trading, hedging activities, asset management and commercial and industrial sales in the deregulated Ohio and Texas markets.
AEPRO
 
AEP River Operations, LLC, a commercial barge operation sold in November 2015.
AEPSC
 
American Electric Power Service Corporation, an AEP service subsidiary providing management and professional services to AEP and its subsidiaries.
AEPTCo
 
AEP Transmission Company, LLC, a subsidiary of AEP Transmission Holdco, is an intermediate holding company that owns seven wholly-owned transmission companies.
AEPTCo Parent
 
AEP Transmission Company, LLC, the holding company of the State Transcos within the AEPTCo consolidation.
AFUDC
 
Allowance for Funds Used During Construction.
AGR
 
AEP Generation Resources Inc., a competitive AEP subsidiary in the Generation & Marketing segment.
ALJ
 
Administrative Law Judge.
AOCI
 
Accumulated Other Comprehensive Income.
APCo
 
Appalachian Power Company, an AEP electric utility subsidiary.
Appalachian Consumer Rate Relief Funding
 
Appalachian Consumer Rate Relief Funding LLC, a wholly-owned subsidiary of APCo and a consolidated variable interest entity formed for the purpose of issuing and servicing securitization bonds related to the under-recovered ENEC deferral balance.
APSC
 
Arkansas Public Service Commission.
ARAM
 
Average Rate Assumption Method, an IRS approved method used to calculate the reversal of Excess ADIT for ratemaking purposes.
ASC
 
Accounting Standard Codification.
ASU
 
Accounting Standards Update.
CAA
 
Clean Air Act.
CO2
 
Carbon dioxide and other greenhouse gases.
Conesville Plant
 
A generation plant consisting of three coal-fired generating units totaling 1,695 MW located in Conesville, Ohio. The plant is jointly owned by AGR and a non-affiliate entity.
Cook Plant
 
Donald C. Cook Nuclear Plant, a two-unit, 2,278 MW nuclear plant owned by I&M.
CWIP
 
Construction Work in Progress.
DCC Fuel
 
DCC Fuel VII, DCC Fuel VIII, DCC Fuel IX, DCC Fuel X, DCC Fuel XI and DCC Fuel XII consolidated variable interest entities formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.
Desert Sky
 
Desert Sky Wind Farm, a 168 MW wind electricity generation facility located on Indian Mesa in Pecos County, Texas.

i



Term
 
Meaning
 
 
 
DHLC
 
Dolet Hills Lignite Company, LLC, a wholly-owned lignite mining subsidiary of SWEPCo.
DIR
 
Distribution Investment Rider.
EIS
 
Energy Insurance Services, Inc., a nonaffiliated captive insurance company and consolidated variable interest entity of AEP.
ENEC
 
Expanded Net Energy Cost.
Energy Supply
 
AEP Energy Supply LLC, a nonregulated holding company for AEP’s competitive generation, wholesale and retail businesses, and a wholly-owned subsidiary of AEP.
ERCOT
 
Electric Reliability Council of Texas regional transmission organization.
ESP
 
Electric Security Plans, a PUCO requirement for electric utilities to adjust their rates by filing with the PUCO.
ETR
 
Effective tax rates.
ETT
 
Electric Transmission Texas, LLC, an equity interest joint venture between AEP Transmission Holdco and Berkshire Hathaway Energy Company formed to own and operate electric transmission facilities in ERCOT.
Excess ADIT
 
Excess accumulated deferred income taxes.
FASB
 
Financial Accounting Standards Board.
Federal EPA
 
United States Environmental Protection Agency.
FERC
 
Federal Energy Regulatory Commission.
FGD
 
Flue Gas Desulfurization or scrubbers.
FTR
 
Financial Transmission Right, a financial instrument that entitles the holder to receive compensation for certain congestion-related transmission charges that arise when the power grid is congested resulting in differences in locational prices.
GAAP
 
Accounting Principles Generally Accepted in the United States of America.
Global Settlement
 
In February 2017, the PUCO approved a settlement agreement filed by OPCo in December 2016 which resolved all remaining open issues on remand from the Supreme Court of Ohio in OPCo’s 2009 - 2011 and June 2012 - May 2015 ESP filings. It also resolved all open issues in OPCo’s 2009, 2014 and 2015 SEET filings and 2009, 2012 and 2013 Fuel Adjustment Clause Audits.
I&M
 
Indiana Michigan Power Company, an AEP electric utility subsidiary.
IRS
 
Internal Revenue Service.
IURC
 
Indiana Utility Regulatory Commission.
KGPCo
 
Kingsport Power Company, an AEP electric utility subsidiary.
KPCo
 
Kentucky Power Company, an AEP electric utility subsidiary.
KPSC
 
Kentucky Public Service Commission.
kV
 
Kilovolt.
KWh
 
Kilowatthour.
LPSC
 
Louisiana Public Service Commission.
MISO
 
Midcontinent Independent System Operator.
MMBtu
 
Million British Thermal Units.
MPSC
 
Michigan Public Service Commission.
MTM
 
Mark-to-Market.
MW
 
Megawatt.
MWh
 
Megawatthour.
Nonutility Money Pool
 
Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain nonutility subsidiaries.
NO2
 
Nitrogen dioxide.
NOx
 
Nitrogen oxide.
NSR
 
New Source Review.
OATT
 
Open Access Transmission Tariff.
OCC
 
Corporation Commission of the State of Oklahoma.

ii



Term
 
Meaning
 
 
 
Ohio Phase-in-Recovery Funding
 
Ohio Phase-in-Recovery Funding LLC, a wholly-owned subsidiary of OPCo and a consolidated variable interest entity formed for the purpose of issuing and servicing securitization bonds related to phase-in recovery property.
Oklaunion Power Station
 
A single unit coal-fired generation plant totaling 650 MW located in Vernon, Texas. The plant is jointly owned by AEP Texas, PSO and certain non-affiliated entities.
OPCo
 
Ohio Power Company, an AEP electric utility subsidiary.
OPEB
 
Other Postretirement Benefit Plans.
OSS
 
Off-System Sales.
OTC
 
Over the counter.
OVEC
 
Ohio Valley Electric Corporation, which is 43.47% owned by AEP.
Parent
 
American Electric Power Company, Inc., the equity owner of AEP subsidiaries within the AEP consolidation.
PJM
 
Pennsylvania – New Jersey – Maryland regional transmission organization.
PM
 
Particulate Matter.
PPA
 
Purchase Power and Sale Agreement.
PSO
 
Public Service Company of Oklahoma, an AEP electric utility subsidiary.
PUCO
 
Public Utilities Commission of Ohio.
PUCT
 
Public Utility Commission of Texas.
Racine
 
A generation plant consisting of two hydroelectric generating units totaling 47.5 MW located in Racine, Ohio and owned by AGR.
Registrant Subsidiaries
 
AEP subsidiaries which are SEC registrants: AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO and SWEPCo.
Registrants
 
SEC registrants: AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO and SWEPCo.
Risk Management Contracts
 
Trading and nontrading derivatives, including those derivatives designated as cash flow and fair value hedges.
Rockport Plant
 
A generation plant, consisting of two 1,310 MW coal-fired generating units near Rockport, Indiana. AEGCo and I&M jointly-own Unit 1. In 1989, AEGCo and I&M entered into a sale-and-leaseback transaction with Wilmington Trust Company, an unrelated, unconsolidated trustee for Rockport Plant, Unit 2.
ROE
 
Return on Equity.
RPM
 
Reliability Pricing Model.
RSR
 
Retail Stability Rider.
RTO
 
Regional Transmission Organization, responsible for moving electricity over large interstate areas.
Sabine
 
Sabine Mining Company, a lignite mining company that is a consolidated variable interest entity for AEP and SWEPCo.
SCR
 
Selective Catalytic Reduction, NOx reduction technology at Rockport Plant.
SEC
 
U.S. Securities and Exchange Commission.
SEET
 
Significantly Excessive Earnings Test.
SNF
 
Spent Nuclear Fuel.
SO2
 
Sulfur dioxide.
SPP
 
Southwest Power Pool regional transmission organization.
SSO
 
Standard service offer.
State Transcos
 
AEPTCo’s seven wholly-owned, FERC regulated, transmission only electric utilities, each of which is geographically aligned with AEP’s existing utility operating companies.
SWEPCo
 
Southwestern Electric Power Company, an AEP electric utility subsidiary.
Tax Reform
 
On December 22, 2017, President Trump signed into law legislation referred to as the “Tax Cuts and Jobs Act” (the TCJA). The TCJA includes significant changes to the Internal Revenue Code of 1986, including a reduction in the corporate federal income tax rate from 35% to 21% effective January 1, 2018.
TCC
 
Formerly AEP Texas Central Company, now a division of AEP Texas.
Texas Restructuring Legislation
 
Legislation enacted in 1999 to restructure the electric utility industry in Texas.

iii



Term
 
Meaning
 
 
 
Transition Funding
 
AEP Texas Central Transition Funding II LLC and AEP Texas Central Transition Funding III LLC, wholly-owned subsidiaries of TCC and consolidated variable interest entities formed for the purpose of issuing and servicing securitization bonds related to Texas Restructuring Legislation.
Transource Energy
 
Transource Energy, LLC, a consolidated variable interest entity formed for the purpose of investing in utilities which develop, acquire, construct, own and operate transmission facilities in accordance with FERC-approved rates.
Trent
 
Trent Wind Farm, a 154 MW wind electricity generation facility located between Abilene and Sweetwater in West Texas.
Turk Plant
 
John W. Turk, Jr. Plant, a 600 MW coal-fired plant in Arkansas that is 73% owned by SWEPCo.
UMWA
 
United Mine Workers of America.
UPA
 
Unit Power Agreement.
Utility Money Pool
 
Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain utility subsidiaries.
VIE
 
Variable Interest Entity.
Virginia SCC
 
Virginia State Corporation Commission.
Wind Catcher Project
 
Wind Catcher Energy Connection Project, a joint PSO and SWEPCo project that was cancelled in July 2018. The project included the acquisition of a wind generation facility, totaling approximately 2,000 MW of wind generation, and the construction of a generation interconnection tie-line totaling approximately 350 miles.
WPCo
 
Wheeling Power Company, an AEP electric utility subsidiary.
WVPSC
 
Public Service Commission of West Virginia.

iv



FORWARD-LOOKING INFORMATION

This report made by the Registrants contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  Many forward-looking statements appear in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2017 Annual Report, but there are others throughout this document which may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “project,” “continue” and similar expressions, and include statements reflecting future results or guidance and statements of outlook.  These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected.  Forward-looking statements in this document are presented as of the date of this document.  Except to the extent required by applicable law, management undertakes no obligation to update or revise any forward-looking statement.  Among the factors that could cause actual results to differ materially from those in the forward-looking statements are:
Ÿ
Economic growth or contraction within and changes in market demand and demographic patterns in AEP service territories.
Ÿ
Inflationary or deflationary interest rate trends.
Ÿ
Volatility in the financial markets, particularly developments affecting the availability or cost of capital to finance new capital projects and refinance existing debt.
Ÿ
The availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material.
Ÿ
Electric load and customer growth.
Ÿ
Weather conditions, including storms and drought conditions, and the ability to recover significant storm restoration costs.
Ÿ
The cost of fuel and its transportation, the creditworthiness and performance of fuel suppliers and transporters and the cost of storing and disposing of used fuel, including coal ash and spent nuclear fuel.
Ÿ
Availability of necessary generation capacity, the performance of generation plants and the availability of fuel, including processed nuclear fuel, parts and service from reliable vendors.
Ÿ
The ability to recover fuel and other energy costs through regulated or competitive electric rates.
Ÿ
The ability to build renewable generation, transmission lines and facilities (including the ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms and to recover those costs.
Ÿ
New legislation, litigation and government regulation, including oversight of nuclear generation, energy commodity trading and new or heightened requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances that could impact the continued operation, cost recovery and/or profitability of generation plants and related assets.
Ÿ
Evolving public perception of the risks associated with fuels used before, during and after the generation of electricity, including nuclear fuel.
Ÿ
Timing and resolution of pending and future rate cases, negotiations and other regulatory decisions, including rate or other recovery of new investments in generation, distribution and transmission service, environmental compliance and Excess ADIT.
Ÿ
Resolution of litigation.
Ÿ
The ability to constrain operation and maintenance costs.
Ÿ
Prices and demand for power generated and sold at wholesale.
Ÿ
Changes in technology, particularly with respect to energy storage and new, developing, alternative or distributed sources of generation.
Ÿ
The ability to recover through rates any remaining unrecovered investment in generation units that may be retired before the end of their previously projected useful lives.
Ÿ
Volatility and changes in markets for capacity and electricity, coal and other energy-related commodities, particularly changes in the price of natural gas.
Ÿ
Changes in utility regulation and the allocation of costs within regional transmission organizations, including ERCOT, PJM and SPP.
Ÿ
Changes in the creditworthiness of the counterparties with contractual arrangements, including participants in the energy trading market.
Ÿ
Actions of rating agencies, including changes in the ratings of debt.
Ÿ
The impact of volatility in the capital markets on the value of the investments held by the pension, other postretirement benefit plans, captive insurance entity and nuclear decommissioning trust and the impact of such volatility on future funding requirements.

v



Ÿ
Accounting pronouncements periodically issued by accounting standard-setting bodies.
Ÿ
Impact of federal tax reform on customer rates, income tax expense and cash flows.
Ÿ
Other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes, cyber security threats and other catastrophic events.

The forward-looking statements of the Registrants speak only as of the date of this report or as of the date they are made.  The Registrants expressly disclaim any obligation to update any forward-looking information.  For a more detailed discussion of these factors, see “Risk Factors” in Part I of the 2017 Annual Report and in Part II of this report.

Investors should note that the Registrants announce material financial information in SEC filings, press releases and public conference calls. Based on guidance from the SEC, the Registrants may use the Investors section of AEP’s website (www.aep.com) to communicate with investors about the Registrants. It is possible that the financial and other information posted there could be deemed to be material information. The information on AEP’s website is not part of this report.

vi





AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Customer Demand

AEP’s weather-normalized retail sales volumes for the third quarter of 2018 increased by 0.3% compared to the third quarter of 2017. AEP’s third quarter 2018 industrial sales increased by 2.4% compared to the third quarter of 2017. The growth in industrial sales was spread across most operating companies and driven by growth in the oil and gas sector. Weather-normalized residential sales decreased 0.8% in the third quarter of 2018 compared to the third quarter of 2017. Weather-normalized commercial sales decreased by 0.5% in the third quarter of 2018 compared to the third quarter of 2017.

AEP’s weather-normalized retail sales volumes for the nine months ended September 30, 2018 increased by 1.2% compared to the nine months ended September 30, 2017. AEP’s industrial sales volumes for the nine months ended September 30, 2018 increased 2.6% compared to the nine months ended September 30, 2017. The growth in industrial sales was spread across many industries and most operating companies. Weather-normalized residential and commercial sales increased 0.7% and 0.2%, respectively, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

Wind Catcher Project

In July 2017, PSO and SWEPCo submitted filings with the OCC, LPSC, APSC and PUCT requesting various regulatory approvals needed for the companies to proceed with the Wind Catcher Project. The Wind Catcher Project included the acquisition of a wind generation facility, totaling approximately 2,000 MWs of wind generation, and the construction of a generation interconnection tie-line totaling approximately 350 miles. Total investment for the project was estimated to be $4.5 billion and would serve both retail and FERC wholesale load. PSO and SWEPCo would have had 30% and 70% ownership shares, respectively, in these assets.

In July 2018, the PUCT denied SWEPCo’s request for a Certificate of Public Convenience and Necessity to proceed with the Wind Catcher Project. PSO and SWEPCo subsequently cancelled the Wind Catcher Project.

Other Renewable Generation

The growth of AEP’s renewable generation portfolio reflects the company’s strategy to diversify generation resources to provide clean energy options to customers that meet both their energy and capacity needs.

Contracted Renewable Generation Facilities

AEP continues to develop its renewable portfolio within the Generation & Marketing segment.  Activities include working directly with wholesale and large retail customers to provide tailored solutions based upon market knowledge, technology innovations and deal structuring which may include distributed solar, wind, combined heat and power, energy storage, waste heat recovery, energy efficiency, peaking generation and other forms of cost reducing energy technologies.  Generation & Marketing also develops and/or acquires large scale renewable generation projects that are backed with long-term contracts.  As of September 30, 2018, subsidiaries within AEP’s Generation & Marketing segment have approximately 400 MWs of contracted renewable generation projects in operation.  In addition, as of September 30, 2018, these subsidiaries have approximately 10 MWs of new renewable generation projects under construction with total estimated capital costs of $27 million related to these projects.


1



In January 2018, AEP admitted a nonaffiliate as a member of Desert Sky Wind Farm LLC and Trent Wind Farm LLC (collectively “the LLCs”) to own and repower Desert Sky and Trent.  The nonaffiliated member contributed full turbine sets to each project in exchange for a 20.1% interest in the LLCs. AEP has contributed substantially all of its cash equity capital commitment of $235 million related to its 79.9% share of the LLCs, or 257 MW. The wind farms are fully repowered and in-service as of September 30, 2018. AEP is subject to a put and a call option after certain conditions are met, either of which would liquidate the nonaffiliated member’s interest. See Note 13 - Variable Interest Entities for additional information.

Regulated Renewable Generation Facilities

In July 2017, APCo submitted filings with the Virginia SCC and the WVPSC requesting regulatory approval to acquire two wind generation facilities totaling approximately 225 MWs of wind generation. In April 2018, the Virginia SCC denied APCo’s application to acquire the two wind generation facilities. APCo filed a petition for reconsideration with the Virginia SCC, which was denied. In May 2018, the WVPSC also denied APCo’s application to acquire the two wind generation facilities.

In September 2018, OPCo, consistent with its commitment in the previously approved PPA application, submitted a filing with the PUCO demonstrating a need for up to 900 MWs of economically beneficial renewable resources in Ohio. This filing was followed by a separate filing for two solar Renewable Energy Purchase Agreements totaling 400 MWs. The solar generation facilities, if approved, are expected to be in-service by the end of 2021.

Federal Tax Reform

In December 2017, Tax Reform legislation was signed into law. Tax Reform includes significant changes to the Internal Revenue Code of 1986, as amended, and had a material impact on the Registrants’ financial statements in the reporting period of its enactment. Tax Reform lowered the corporate federal income tax rate from 35% to 21%. Tax Reform provisions related to regulated public utilities generally allow for the continued deductibility of interest expense, impact bonus depreciation for certain property acquired and placed in service after September 27, 2017 and continue certain rate normalization requirements for accelerated depreciation benefits.

The mechanism and time period to provide the benefits of Tax Reform to customers varies by jurisdiction. Tax Reform did not have a material impact on net income in the third quarter of 2018 and is not expected to have a material impact on future net income. However, the Registrants will experience a decrease in future cash flows primarily due to the elimination of bonus depreciation, the reduction in the federal tax rate from 35% to 21% and the flow back of Excess ADIT. Further, the Registrants expect that access to capital markets will be sufficient to satisfy any liquidity needs that result from any such decrease in future cash flows.

Provisional Amounts

The Registrants applied Staff Accounting Bulletin 118 (SAB 118), issued by the SEC staff in December 2017, and made reasonable estimates for the measurement and accounting of the effects of Tax Reform which are reflected in the financial statements as provisional amounts based on the best information available. While the Registrants were able to make reasonable estimates of the impact of Tax Reform in 2017, the final impact may differ from the recorded provisional amounts to the extent refinements are made to the estimated cumulative differences or as a result of additional guidance or technical corrections that may be issued by the IRS that may impact management’s interpretation and assumptions utilized. The Registrants expect to complete the analysis of the provisional items during the fourth quarter of 2018.

Reduction in the Corporate Federal Income Tax Rate - Pending Rate Reductions

State utility commissions have issued orders or instructions requiring public utilities, including the Registrants, to record liabilities to reflect the impact of the reduction in the corporate federal income tax rate in excess of the enacted corporate federal income tax rate of 21% beginning in 2018. As described in Note 4 - Rate Matters, certain Registrants

2



have received state utility commission orders and have reflected the lower corporate federal income tax rate in current customer rates. As of September 30, 2018, AEP has recorded estimated provisions for revenue refunds totaling $150 million as a result of the reduction in the corporate federal tax rate.

Excess ADIT - Pending Rate Reductions

As of September 30, 2018, the Registrants have approximately $4.3 billion of Excess ADIT, as well as an incremental liability of $1.1 billion to reflect the $4.3 billion Excess ADIT on a pretax basis, presented in Regulatory Liabilities and Deferred Investment Tax Credits on the balance sheets.  The Excess ADIT is reflected on a pretax basis to appropriately contemplate future tax consequences in the periods when the regulatory liability is settled.  As of September 30, 2018, approximately $3.4 billion of the Excess ADIT relates to temporary differences associated with certain depreciable property subject to rate normalization requirements.

As reflected in the Registrants’ respective estimated annual ETR for 2018, AEP’s regulated public utilities began amortizing the Excess ADIT associated with certain depreciable property subject to rate normalization requirements using the ARAM during the first quarter of 2018. As a result of state utility commission orders or instructions, the Registrants have recorded estimated provisions for revenue refund offsetting the amortization of the Excess ADIT to the extent not yet reflected in current customer rates. As of September 30, 2018, AEP has recorded estimated provisions for revenue refunds totaling $36 million.

In addition, with respect to the remaining $0.9 billion of Excess ADIT recorded in Regulatory Liabilities and Deferred Investment Tax Credits that are not subject to rate normalization requirements, the Registrants have received state utility commission orders or instructions and a filed FERC settlement agreement to begin amortization.

Merchant Coal Generation Assets

In September 2018, management announced plans to close Oklaunion Power Station by October 2020. In October 2018, management announced plans to close Conesville Plant in May 2020.  The closures are not expected to have a material impact on net income, cash flows or financial condition.

Racine

A project to reconstruct a defective dam structure at Racine began in the first quarter of 2017. In December 2017, an impairment analysis was triggered by the expected costs of the dam reconstruction activities, resulting in a pretax impairment charge equal to Racine’s net book value of $43 million as of December 31, 2017.

Construction activities at Racine continued through 2018, accumulating new capital expenditures of $35 million as of September 30, 2018. Due to a significant increase in estimated costs to complete the reconstruction project, in the third quarter of 2018, an impairment analysis was performed resulting in an impairment of $35 million. AEP expects to incur additional capital expenditures to complete the reconstruction project, at which point the fair value of Racine, as fully operational, is expected to approximate the amount of those remaining estimated capital expenditures. Future revisions in cost estimates could result in additional losses which could reduce future net income and cash flows.

Hurricane Harvey

In August 2017, Hurricane Harvey hit the coast of Texas, causing power outages in the AEP Texas service territory. Rebuilding efforts are expected to continue through the end of 2018 and AEP Texas’ total costs related to this storm are not yet final. AEP Texas has a PUCT approved catastrophe reserve which allows for the deferral of incremental storm expenses as a regulatory asset, and currently recovers approximately $1 million of storm costs annually through base rates. As of September 30, 2018, the total balance of AEP Texas’ regulatory asset for deferred storm costs is approximately $150 million, inclusive of approximately $127 million of incremental storm expenses related to Hurricane Harvey. As of September 30, 2018, AEP Texas has recorded approximately $205 million of capital expenditures related to Hurricane Harvey. Also, as of September 30, 2018, AEP Texas has received $10 million in

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insurance proceeds, and has recorded a receivable for an additional $4 million that will be received in the fourth quarter of 2018, which were applied to the Hurricane Harvey related regulatory asset and property, plant and equipment balances. Management, in conjunction with the insurance adjusters, is reviewing all damages to determine the extent of coverage for additional insurance reimbursement. Any future insurance recoveries received will be applied to, and will offset, the regulatory asset and property, plant and equipment, as applicable.

Management believes the amount recorded as a regulatory asset is probable of recovery and is in the process of requesting securitization of the distribution portion of the regulatory asset. The standard process for securitization of storm cost recovery in Texas requires two filings with the PUCT. In August 2018, AEP Texas filed a Determination of System Restoration Costs with the PUCT for total estimated storm costs in the amount of $425 million, which includes estimated carrying costs. The estimated value of the total storm costs net of insurance proceeds, tax credits and Excess ADIT is $370 million. AEP Texas intends to request securitization for distribution related assets of $253 million while the remaining $117 million of transmission related assets will be recovered through interim transmission filings or an upcoming base rate case. The request for securitization is expected to occur by the first quarter of 2019.

In October 2018, intervenors filed testimony requesting a $24 million reduction in AEP Texas’ Determination of System Restoration Costs. Also in October 2018, the PUCT staff filed testimony requesting a $4 million reduction AEP Texas’ Determination of System Restoration Costs. Settlement negotiations are ongoing. If the ultimate costs of the incident are not recovered by insurance or through the regulatory process, it could have an adverse effect on future net income, cash flows and financial condition.

June 2015 - May 2018 ESP Including PPA Application and Proposed ESP Extension through 2024

In April 2018, the PUCO issued an order approving the ESP extension through May 2024 which includes: (a) an extension of the OVEC PPA rider, (b) a 10% return on common equity on capital costs for certain riders, (c) the continuation of riders previously approved in the June 2015 - May 2018 ESP, (d) revenue caps related to OPCo’s DIR ranging from $215 million to $290 million for the periods 2018 through 2021, (e) the addition of various new riders, including a Smart City Rider and a Renewable Generation Rider, (f) a decrease in annual depreciation rates, effective June 1, 2018, based on a depreciation study using data through December 2015 and (g) amortization of approximately $24 million annually beginning June 2018 of OPCo’s excess distribution accumulated depreciation reserve, which was $239 million as of December 31, 2015. Upon the issuance of the PUCO order, OPCo stopped recording $39 million in annual amortization of excess distribution accumulated depreciation reserve in June 2018, which was previously approved to end in December 2018 in accordance with PUCO’s December 2011 OPCo distribution base rate case order. OPCo and intervenors agreed that OPCo can request in future proceedings a change in meter depreciation rates due to retired meters pursuant to the smart grid Phase 2 project. DIR rate caps will be reset in OPCo’s next distribution base rate case which must be filed by June 2020.

In May 2018, OPCo and various intervenors filed requests for rehearing with the PUCO. In June 2018, these requests for rehearing were approved to allow further consideration of the requests. In August 2018, the PUCO denied all requests for rehearing. In October 2018, an intervenor filed an appeal with the Ohio Supreme Court challenging various approved riders. See “Ohio Electric Security Plan Filings” section of Note 4 for additional information.

2016 SEET Filing

In December 2016, OPCo recorded a 2016 SEET provision of $58 million based upon projected earnings data for companies in the comparable utilities risk group. In determining OPCo’s return on equity in relation to the comparable utilities risk group, management excluded the following items resolved in OPCo’s Global Settlement: (a) gain on the deferral of RSR costs, (b) refunds to customers related to the SEET remands and (c) refunds to customers related to fuel adjustment clause proceedings.

In May 2017, OPCo submitted its 2016 SEET filing with the PUCO in which management indicated that OPCo did not have significantly excessive earnings in 2016 based upon actual earnings data for the comparable utilities risk group.

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In January 2018, the PUCO staff filed testimony that OPCo did not have significantly excessive earnings. Also in January 2018, an intervenor filed testimony recommending a $53 million refund to customers. In February 2018, OPCo and PUCO staff filed a stipulation agreement in which both parties agreed that OPCo did not have significantly excessive earnings in 2016.

A 2016 SEET hearing was held in April 2018 and management expects to receive an order in the first half of 2019. While management believes that OPCo’s adjusted 2016 earnings were not excessive, management did not adjust OPCo’s 2016 SEET provision due to risks that the PUCO could rule against OPCo’s proposed SEET adjustments, including treatment of the Global Settlement issues described above, adjust the comparable risk group or adopt a different 2016 SEET threshold. If the PUCO orders a refund of 2016 OPCo earnings, it could negatively affect future SEET filings, reduce future net income and cash flows and impact financial condition. See “2016 SEET Filing” section of Note 4 for additional information.

Rockport Plant, Unit 2 SCR

In October 2016, I&M filed an application with the IURC for approval of a Certificate of Public Convenience and Necessity (CPCN) to install SCR technology at Rockport Plant, Unit 2. The equipment will allow I&M to reduce emissions of NOx from Rockport Plant, Unit 2 in order for I&M to continue to operate that unit under current environmental requirements and is expected to be placed in service in May 2020. The estimated cost of the SCR project is $274 million, excluding AFUDC, to be shared equally between I&M and AEGCo.  The filing included a request for authorization for I&M to defer its Indiana jurisdictional ownership share of costs including investment carrying costs at a weighted average cost of capital (WACC), depreciation over a 10-year period as provided by statute and other related expenses. I&M proposed recovery of these costs using the existing Clean Coal Technology Rider in a future filing subsequent to approval of the SCR project.

In March 2018, the IURC issued an order approving: (a) the CPCN, (b) the $274 million estimated cost of the SCR, excluding AFUDC, (c) deferral of the Indiana jurisdictional ownership share of costs, including investment carrying costs, (d) depreciation of the SCR asset over 10 years and (e) recovery of these costs using an I&M Indiana rider.

In April 2018, a group of intervenors filed a Petition for Reconsideration and Rehearing of the March 2018 IURC order.  In June 2018, the IURC denied the Petition for Reconsideration and Rehearing.

Management intends to request recovery of the Michigan jurisdictional share of the SCR project in a future base rate case. The AEGCo ownership share of the SCR project will be billable under the Rockport UPA to I&M and KPCo and will be subject to future regulatory approval for recovery.

2017 Indiana Base Rate Case

In July 2017, I&M filed a request with the IURC for a $263 million annual increase in Indiana rates based upon a proposed 10.6% return on common equity with the annual increase to be implemented after June 2018. Upon implementation, this proposed annual increase would be subject to a temporary offsetting $23 million annual reduction to customer bills through December 2018 for a credit adjustment rider related to the timing of estimated in-service dates of certain capital expenditures.  The proposed annual increase includes $78 million related to increased annual depreciation rates and an $11 million increase related to the amortization of certain Cook Plant and Rockport Plant regulatory assets. The increase in depreciation rates includes a change in the expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028 combined with increased investment at the Cook Plant, including the Cook Plant Life Cycle Management Project.

In February 2018, I&M filed a Stipulation and Settlement Agreement for a $97 million annual increase in Indiana rates effective July 1, 2018 subject to a temporary offsetting reduction to customer bills through December 2018 for a credit rider related to the timing of estimated in-service dates of certain capital expenditures.  The difference between I&M’s requested $263 million annual increase and the $97 million annual increase in the Stipulation and Settlement Agreement

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is primarily a result of: (a) the reduction in the federal income tax rate due to Tax Reform, (b) the feedback of credits for Excess ADIT, (c) a 9.95% return on equity, (d) longer recovery periods of regulatory assets, (e) lower depreciation expense primarily for meters, (f) an increase in the sharing of off-system sales margins with customers from 50% to 95% and (g) a refund of $4 million from July through December 2018 for the impact of Tax Reform for the period January 2018 through June 2018. 
In May 2018, the IURC issued an order approving the Stipulation and Settlement Agreement in its entirety.
2017 Michigan Base Rate Case

In May 2017, I&M filed a request with the MPSC for a $52 million annual increase in Michigan base rates based upon a proposed 10.6% return on common equity with the increase to be implemented no later than April 2018. The proposed annual increase included $23 million related to increased annual depreciation rates and a $4 million increase related to the amortization of certain Cook Plant regulatory assets. The increase in depreciation rates is primarily due to the proposed change in the expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028 combined with increased investment at the Cook Plant related to the Life Cycle Management Project.

In February 2018, an MPSC ALJ issued a Proposal for Decision and recommended an annual revenue increase of $49 million, including an intervenor’s proposal for up to 10% of I&M’s Michigan retail customers to choose an alternate supplier for generation and a proposed capacity rate based on PJM’s net cost of new entry value of $289/MW-day, as well as the MPSC staff’s recommended calculation of depreciation expense for both units of Rockport Plant through 2028 and a return on common equity of 9.8%.  If the maximum 10% of customers choose an alternate supplier starting in February 2019, the estimated annual pretax loss due to the reduced capacity rate would be approximately $9 million.  In October 2018, I&M filed a request with the MPSC seeking authority to defer costs related to customers choosing an alternate supplier starting in February 2019.

In April 2018, the MPSC issued an order that generally approved the ALJ proposal resulting in an annual revenue increase of $50 million, effective April 2018 based on a 9.9% return on common equity.  The MPSC also approved the ALJ’s recommendation related to the capacity rate.

In May 2018, I&M filed a Petition for Rehearing on the capacity rate issue. In June 2018, the MPSC denied I&M’s request.

Merchant Portion of Turk Plant

SWEPCo constructed the Turk Plant, a base load 600 MW pulverized coal ultra-supercritical generating unit in Arkansas, which was placed into service in December 2012 and is included in the Vertically Integrated Utilities segment. SWEPCo owns 73% (440 MWs) of the Turk Plant and operates the facility.

The APSC granted approval for SWEPCo to build the Turk Plant by issuing a Certificate of Environmental Compatibility and Public Need (CECPN) for the SWEPCo Arkansas jurisdictional share of the Turk Plant (approximately 20%). Following an appeal by certain intervenors, the Arkansas Supreme Court issued a decision that reversed the APSC’s grant of the CECPN. In June 2010, in response to an Arkansas Supreme Court decision, the APSC issued an order which reversed and set aside the previously granted CECPN. This share of the Turk Plant output is currently not subject to cost-based rate recovery and is being sold into the wholesale market. Approximately 80% of the Turk Plant investment is recovered under cost-based rate recovery in Texas, Louisiana and through SWEPCo’s wholesale customers under FERC-based rates. As of September 30, 2018, the net book value of Turk Plant was $1.5 billion, before cost of removal, including materials and supplies inventory and CWIP. If SWEPCo cannot ultimately recover its investment and expenses related to the Turk Plant, it could reduce future net income and cash flows and impact financial condition.


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2012 Texas Base Rate Case

In July 2018, the Texas Third Court of Appeals reversed the PUCT’s judgment affirming the prudence of the Turk Plant and remanded the issue back to the PUCT. In August 2018, SWEPCo filed a Motion for Reconsideration at the Court of Appeals. In October 2018, the Court of Appeals denied SWEPCo’s request. SWEPCo intends to file an appeal with the Texas Supreme Court in the fourth quarter of 2018. If SWEPCo cannot ultimately recover its investment and expenses related to the Turk Plant, it could reduce future net income and cash flows and impact financial condition. See “2012 Texas Base Rate Case” section of Note 4.

2016 Texas Base Rate Case

In December 2016, SWEPCo filed a request with the PUCT for a net increase in Texas annual revenues of $69 million based upon a 10% return on common equity. In January 2018, the PUCT issued a final order approving a net increase in Texas annual revenues of $50 million based upon a return on common equity of 9.6%, effective May 2017. The final order also included: (a) approval to recover the Texas jurisdictional share of environmental investments placed in service, as of June 30, 2016, at various plants, including Welsh Plant, Units 1 and 3, (b) approval of recovery of, but no return on, the Texas jurisdictional share of the net book value of Welsh Plant, Unit 2, (c) approval of $2 million in additional vegetation management expenses and (d) the rejection of SWEPCo’s proposed transmission cost recovery mechanism.

As a result of the final order, in 2017 SWEPCo: (a) recorded an impairment charge of $19 million, which included $7 million associated with the lack of return on Welsh Plant, Unit 2 and $12 million related to other disallowed plant investments, (b) recognized $32 million of additional revenues, for the period of May 2017 through December 2017, that will be surcharged to customers and (c) recognized an additional $7 million of expenses consisting primarily of depreciation expense and vegetation management expense, offset by the deferral of rate case expense. SWEPCo implemented new rates in February 2018 billings. The $32 million of additional 2017 revenues will be collected by the end of 2018. In March 2018, the PUCT clarified and corrected portions of the final order, without changing the overall decision or amounts of the rate change. The order has been appealed by various intervenors.

In April 2018, SWEPCo made an income tax rate refund tariff filing which includes an annual revenue reduction of approximately $18 million to reflect the difference between rates collected under the final order and the rates that would be collected under Tax Reform. The filing did not address the return of Excess ADIT benefits to customers. In June 2018, the ALJ issued an order approving interim rates that provided for a reduction of residential rates of $8 million. In September 2018, the ALJ issued an order approving interim rates for the remaining customers. The matter has been sent to the PUCT for final approval.

2017 Louisiana Formula Rate Filing

In April 2017, the LPSC approved an uncontested stipulation agreement that SWEPCo filed for its formula rate plan for test year 2015.  The filing included a net annual increase not to exceed $31 million, which was effective May 2017 and includes SWEPCo’s Louisiana jurisdictional share of Welsh Plant and Flint Creek Plant environmental controls which were placed in service in 2016. In October 2017, SWEPCo filed testimony in Louisiana supporting the prudence of its environmental control investment for Welsh Plant, Units 1 and 3 and Flint Creek power plants. These environmental costs are subject to prudence review by the LPSC. In May 2018, LPSC staff filed testimony that the environmental control investment for Welsh Plant, Units 1 and 3 and Flint Creek power plants is prudent. In August 2018, the LPSC issued an order affirming prudence and approved the settlement agreement for the environmental control investment. In October 2018, the LPSC staff filed a report approving the $31 million increase as filed. The net annual increase is subject to refund pending commission approval. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.


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2018 Louisiana Formula Rate Filing

In April 2018, SWEPCo filed its formula rate plan for test year 2017 with the LPSC.  The filing included a net $28 million annual increase, which was effective August 2018 and includes SWEPCo’s Louisiana jurisdictional share of Welsh Plant and Flint Creek Plant environmental controls. The filing also included a reduction in the federal income tax rate due to Tax Reform but did not address the return of Excess ADIT benefits to customers.

In July 2018, SWEPCo made a supplemental filing to its formula rate plan with the LPSC to reduce the requested annual increase to $18 million. The difference between SWEPCo’s requested $28 million annual increase and the $18 million annual increase in the supplemental filing is primarily the result of the return of Excess ADIT benefits to customers.
In October 2018, the LPSC staff issued a recommendation that SWEPCo refund $11 million of excess federal income taxes collected, as a result of Tax Reform, from January 1, 2018 through July 31, 2018. A decision by the LPSC is expected in the fourth quarter of 2018.

If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2018 Oklahoma Base Rate Case

In October 2018, PSO filed a request with the OCC for an $88 million annual increase in Oklahoma retail rates based upon a 10.3% return on common equity. PSO also proposed to implement a performance based rate plan that combines a formula rate with a set of customer-focused performance incentive measures related to reliability, public safety, customer satisfaction and economic development. The proposed annual increase includes $13 million related to increased annual depreciation rates and $7 million related to increased storm expense amortization. The requested increase in annual depreciation rates includes the recovery of Oklaunion Power Station through 2028 (currently being recovered in rates through 2046).  Management has announced plans to retire Oklaunion Power Station by October 2020. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2017 Kentucky Base Rate Case

In January 2018, the KPSC issued an order approving a non-unanimous settlement agreement with certain modifications resulting in an annual revenue increase of $12 million, effective January 2018, based on a 9.7% return on equity. The KPSC’s primary revenue requirement modification to the settlement agreement was a $14 million annual revenue reduction for the decrease in the corporate federal income tax rate due to Tax Reform. The KPSC approved: (a) the deferral of a total of $50 million of Rockport Plant UPA expenses for the years 2018 through 2022, with the manner and timing of recovery of the deferral to be addressed in KPCo’s next base rate case, (b) the recovery/return of 80% of certain annual PJM OATT expenses above/below the corresponding level recovered in base rates, (c) KPCo’s commitment to not file a base rate case for three years with rates effective no earlier than 2021 and (d) increased depreciation expense based upon updated Big Sandy Plant, Unit 1 depreciation rates using a 20-year depreciable life.

In February 2018, KPCo filed with the KPSC for rehearing of the January 2018 base case order and requested an additional $2.3 million of annual revenue increases related to: (a) the calculation of federal income tax expense, (b) recovery of purchased power costs associated with forced outages and (c) capital structure adjustments.  Also in February 2018, an intervenor filed for rehearing recommending that the reduced corporate federal income tax rate be reflected in lower purchased power expense related to the Rockport UPA.

In April 2018, KPCo and the intervenor filed a settlement agreement with the KPSC in which KPCo withdrew its requested increase related to the recovery of purchased power costs associated with forced outages and the intervenor withdrew its claim regarding the impact of the reduced corporate federal income tax rates on purchased power costs related to the Rockport UPA.


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In June 2018, the KPSC issued an order approving the settlement agreement including KPCo’s requested additional revenue increase of $765 thousand related to the calculation of federal income tax expense. This rate increase was effective June 28, 2018.

Virginia Legislation Affecting Earnings Reviews

In 2015, amendments to Virginia law governing the regulation of investor-owned electric utilities were enacted. Under the amended Virginia law, APCo’s existing generation and distribution base rates were frozen until after the Virginia SCC ruled on APCo’s next biennial review. These amendments also precluded the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017.

In March 2018, new Virginia legislation impacting investor-owned utilities was enacted, effective July 1, 2018, that: (a) on a one-time basis, required APCo to exclude $10 million of incurred fuel expenses from the July 2018 over/under recovery calculation, (b) reduced APCo’s base rates by $50 million annually effective July 30, 2018, on an interim basis and subject to true-up, to reflect the reduction in the federal income tax rate due to Tax Reform, (c) will require APCo to file its next generation and distribution base rate case by March 31, 2020 using 2017, 2018 and 2019 test years (“triennial review”), (d) will require an adjustment in APCo’s base rates on April 1, 2019 to reflect actual annual reductions in corporate income taxes due to Tax Reform, (e) will require APCo to seek approval from the Virginia SCC for energy efficiency programs with projected costs in the aggregate of at least $140 million over the 10-year period ending July 1, 2028 and (f) will require APCo to construct and/or acquire solar generation facilities in Virginia, as approved by the Virginia SCC, of at least 200 MW of aggregate capacity by July 1, 2028. Triennial reviews are subject to an earnings test which provides that 70% of any over earnings would be refunded or may be reinvested in approved energy distribution grid transformation projects and/or new utility-owned solar and wind generation facilities. The Virginia SCC’s triennial review of 2017-2019 APCo earnings could reduce future net income and cash flows and impact financial condition.

2018 West Virginia Base Rate Case

In May 2018, APCo and WPCo filed a joint request with the WVPSC to increase their combined West Virginia base rates by $115 million ($98 million related to APCo) annually based on a 10.22% return on common equity. The proposed annual increase includes $32 million ($28 million related to APCo) due to increased annual depreciation rates and also reflects the impact of the reduction in the federal income tax rate due to Tax Reform. In October 2018, APCo and WPCo filed updated schedules supporting a $95 million ($80 million related to APCo) annual increase in West Virginia base rates primarily due to the impact of the approved settlement agreement with the WVPSC. See “West Virginia Tax Reform” section of Note 4 for additional information.

In October 2018, WVPSC staff and intervenors filed testimony. WVPSC staff recommended a $2 million annual net revenue increase based on a 9.25% return on common equity while intervenors recommended a $14 million annual net revenue decrease based on an 8.75% return on common equity. The difference between APCo and WPCo’s requested annual base rate increase and the WVPSC staff and intervenors recommendations are primarily due to: (a) a reduction in the requested return on common equity, (b) the rejection of updates to the rate base calculation methodology, (c) the rejection of updates to rate base for certain known plant in service increases in 2018 and (d) a reduction in annual depreciation rates primarily related to continuing with a 2040 retirement date for Clinch River Plant rather than APCo’s proposed retirement date of 2025. A hearing at the WVPSC is scheduled for November 2018. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

FERC Transmission Complaint - AEP’s PJM Participants

In October 2016, seven parties filed a complaint at the FERC that alleged the base return on common equity used by AEP’s transmission owning subsidiaries within PJM in calculating formula transmission rates under the PJM OATT is excessive and should be reduced from 10.99% to 8.32%, effective upon the date of the complaint.  In November 2017, a FERC order set the matter for hearing and settlement procedures.  In March 2018, AEP’s transmission owning subsidiaries within PJM and six of the complainants filed a settlement agreement with the FERC (the seventh

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complainant abstained).  If approved by the FERC the settlement agreement: (a) establishes a base ROE for AEP’s transmission owning subsidiaries within PJM of 9.85% (10.35% inclusive of the RTO incentive adder of 0.5%), effective January 1, 2018, (b) requires AEP’s transmission owning subsidiaries within PJM to provide a one-time refund of $50 million, attributable from the date of the complaint through December 31, 2017, which was credited to customer bills in the second quarter of 2018 and (c) increases the cap on the equity portion of the capital structure to 55% from 50%.  As part of the settlement agreement, AEP’s transmission owning subsidiaries within PJM also filed updated transmission formula rates incorporating the reduction in the corporate federal income tax rate due to Tax Reform, effective January 1, 2018 and providing for the amortization of the portion of the Excess ADIT that is not subject to the normalization method of accounting, ratably over a ten-year period through credits to the federal income tax expense component of the revenue requirement. In April 2018, an ALJ accepted the interim settlement rates, which included the $50 million one-time refund that occurred in the second quarter of 2018. These interim rates are subject to refund or surcharge, with interest.

In April 2018, certain intervenors filed comments at the FERC recommending a base ROE of 8.48% and a one-time refund of $184 million. The FERC trial staff filed comments recommending a base ROE of 8.41% and one-time refund of $175 million. Another intervenor recommended the refund be calculated in accordance with the base ROE that will ultimately be approved by the FERC. In May 2018, management filed reply comments providing further support for the 9.85% base ROE agreed to in the settlement agreement.

If the FERC orders revenue reductions in excess of the terms of the settlement agreement, it could reduce future net income and cash flows and impact financial condition.  A decision from the FERC is pending.

Modifications to AEP’s PJM Transmission Rates

In November 2016, AEP’s transmission owning subsidiaries within PJM filed an application at the FERC to modify the PJM OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to projected expenses. In March 2017, the FERC accepted the proposed modifications effective January 1, 2017, subject to refund, and set this matter for hearing and settlement procedures. The modified PJM OATT formula rates are based on projected calendar year financial activity and projected plant balances. In December 2017, AEP’s transmission owning subsidiaries within PJM filed an uncontested settlement agreement with the FERC resolving all outstanding issues. In April 2018, the FERC approved the uncontested settlement agreement and rates were implemented effective January 1, 2018.

FERC Transmission Complaint - AEP’s SPP Participants

In June 2017, several parties filed a complaint at the FERC that states the base return on common equity used by AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.36%, effective upon the date of the complaint through September 5, 2018. In November 2017, a FERC order set the matter for hearing and settlement procedures. The parties were unable to settle and the proceeding is currently in the hearing phase.

In September 2018, the same parties filed another complaint at the FERC that states the base return on common equity used by AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.71%, effective upon the date of the second complaint.

Management believes its financial statements adequately address the impact of these complaints. If the FERC orders revenue reductions as a result of these complaints, including refunds from the date of the complaint filings, it could reduce future net income and cash flows and impact financial condition.


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Modifications to AEP’s SPP Transmission Rates

In October 2017, AEP’s transmission owning subsidiaries within SPP filed an application at the FERC to modify the SPP OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to projected expenses.  The modified SPP OATT formula rates are based on projected calendar year financial activity and projected plant balances. In December 2017, the FERC accepted the proposed modifications effective January 1, 2018, subject to refund, and set this matter for hearing and settlement procedures. If the FERC determines that any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Welsh Plant - Environmental Impact

Management currently estimates that the investment necessary to meet proposed environmental regulations through 2025 for Welsh Plant, Units 1 and 3 could total approximately $550 million, excluding AFUDC. As of September 30, 2018, SWEPCo had incurred costs of $399 million, including AFUDC, related to these projects.  Management continues to evaluate the impact of environmental rules and related project cost estimates. As of September 30, 2018, the total net book value of Welsh Plant, Units 1 and 3 was $621 million, before cost of removal, including materials and supplies inventory and CWIP.

In 2016, as approved by the APSC, SWEPCo began recovering $79 million related to the Arkansas jurisdictional share of these environmental costs, subject to prudence review in the next Arkansas filed base rate proceeding. In April 2017, the LPSC approved recovery of $131 million in investments related to its Louisiana jurisdictional share of environmental controls installed at Welsh Plant, effective May 2017. SWEPCo’s approved Louisiana jurisdictional share of Welsh Plant deferrals: (a) are $10 million, excluding $6 million of unrecognized equity as of September 30, 2018, (b) is subject to review by the LPSC and (c) includes a WACC return on environmental investments and the related depreciation expense and taxes. See “2017 Louisiana Formula Rate Filing” and “2018 Louisiana Formula Rate Filing” disclosures above.

If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. See “Welsh Plant - Environmental Impact” section of Note 4 for additional information.

Westinghouse Electric Company Bankruptcy Filing

In March 2017, Westinghouse filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Westinghouse and I&M have a number of significant ongoing contracts relating to reactor services, nuclear fuel fabrication and ongoing engineering projects.  The most significant of these relate to Cook Plant fuel fabrication.  As part of the reorganization, the bankruptcy court approved Westinghouse’s sale of its nuclear business to Brookfield WEC Holdings (Brookfield), a nonaffiliated third party. Pursuant to the sale, Brookfield will assume all of I&M’s contracts with Westinghouse. In August 2018, the sale closed.

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LITIGATION

In the ordinary course of business, AEP is involved in employment, commercial, environmental and regulatory litigation. Since it is difficult to predict the outcome of these proceedings, management cannot predict the eventual resolution, timing or amount of any loss, fine or penalty. Management assesses the probability of loss for each contingency and accrues a liability for cases that have a probable likelihood of loss if the loss can be estimated.  For details on the regulatory proceedings and pending litigation see Note 4 – Rate Matters and Note 5 – Commitments, Guarantees and Contingencies. Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

Rockport Plant Litigation

In July 2013, the Wilmington Trust Company filed a complaint in the U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it would be unlawfully burdened by the terms of the modified NSR consent decree after the Rockport Plant, Unit 2 lease expiration in December 2022.  The terms of the consent decree allow the installation of environmental emission control equipment, repowering or retirement of the unit.   The plaintiffs seek a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiffs.  The New York court granted a motion to transfer this case to the U.S. District Court for the Southern District of Ohio.

AEGCo and I&M sought and were granted dismissal of certain of the plaintiffs’ claims, including claims for compensatory damages, breach of contract, breach of the implied covenant of good faith and fair dealing and indemnification of costs. The court permitted plaintiffs to move forward with their claim that AEGCo and I&M failed to exercise prudent utility practices in the maintenance and operation of Rockport Plant, Unit 2. Plaintiffs voluntarily dismissed the surviving claims with prejudice, and the court issued a final judgment. The plaintiffs subsequently filed an appeal in the U.S. Court of Appeals for the Sixth Circuit on whether the trial court erred in dismissing plaintiffs’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing.

In April 2017, the U.S. Court of Appeals for the Sixth Circuit issued an opinion reversing the district court’s decisions in part. In June 2017, on rehearing, the court of appeals issued an amended opinion reversing the district court’s dismissal of certain of plaintiffs’ claims for breach of contract, vacating the denial of the plaintiffs’ motion for partial summary judgment and remanding the case to the district court for further proceedings.  The amended opinion and judgment affirmed the district court’s dismissal of the owners’ breach of good faith and fair dealing claim as duplicative of the breach of contract claims and removed the instruction to the district court in the original opinion to enter summary judgment in favor of the owners.

In July 2017, AEP filed a motion with the U.S. District Court for the Southern District of Ohio in the original NSR litigation, seeking to modify the consent decree to eliminate the obligation to install certain future controls at Rockport Plant, Unit 2 if AEP does not acquire ownership of that Unit, and to modify the consent decree in other respects to preserve the environmental benefits of the consent decree. Responsive and supplemental filings have been made by all parties. In November 2017, the district court granted the owners’ unopposed motion to stay the lease litigation to afford time for resolution of AEP’s motion to modify the consent decree. See “Proposed Modification of the NSR Litigation Consent Decree” section below for additional information. In September 2018, the district court granted AEP’s unopposed motion to stay further proceedings regarding the consent decree to facilitate settlement discussions among the parties to the consent decree.

Management will continue to defend against the claims. Given that the district court dismissed plaintiffs’ claims seeking compensatory relief as premature, and that plaintiffs have yet to present a methodology for determining or any analysis supporting any alleged damages, management is unable to determine a range of potential losses that are reasonably possible of occurring.

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ENVIRONMENTAL ISSUES

AEP has a substantial capital investment program and is incurring additional operational costs to comply with environmental control requirements.  Additional investments and operational changes will need to be made in response to existing and anticipated requirements such as new CAA requirements to reduce emissions from fossil fuel-fired power plants, rules governing the beneficial use and disposal of coal combustion by-products, clean water rules and renewal permits for certain water discharges.

AEP is engaged in litigation about environmental issues, was notified of potential responsibility for the clean-up of contaminated sites and incurred costs for disposal of SNF and future decommissioning of the nuclear units.  AEP, along with various industry groups, affected states and other parties challenged some of the Federal EPA requirements in court.  Management is also engaged in the development of possible future requirements including the items discussed below.  Management believes that further analysis and better coordination of these environmental requirements would facilitate planning and lower overall compliance costs while achieving the same environmental goals.

AEP will seek recovery of expenditures for pollution control technologies and associated costs from customers through rates in regulated jurisdictions.  Environmental rules could result in accelerated depreciation, impairment of assets or regulatory disallowances.  If AEP is unable to recover the costs of environmental compliance, it would reduce future net income and cash flows and impact financial condition.

Environmental Controls Impact on the Generating Fleet

The rules and proposed environmental controls discussed below will have a material impact on the generating units in the AEP System.  Management continues to evaluate the impact of these rules, project scope and technology available to achieve compliance.  As of September 30, 2018, the AEP System had a total generating capacity of approximately 25,600 MWs, of which approximately 13,500 MWs were coal-fired.  Management continues to refine the cost estimates of complying with these rules and other impacts of the environmental proposals on the fossil generating facilities. Based upon management estimates, AEP’s investment to meet these existing and proposed requirements ranges from approximately $650 million to $1.5 billion through 2025.

The cost estimates will change depending on the timing of implementation and whether the Federal EPA provides flexibility in finalizing proposed rules or revising certain existing requirements.  The cost estimates will also change based on: (a) the states’ implementation of these regulatory programs, including the potential for state implementation plans (SIPs) or federal implementation plans (FIPs) that impose more stringent standards, (b) additional rulemaking activities in response to court decisions, (c) the actual performance of the pollution control technologies installed on the units, (d) changes in costs for new pollution controls, (e) new generating technology developments, (f) total MWs of capacity retired and replaced, including the type and amount of such replacement capacity, (g) the outcome of the pending motion to modify the NSR consent decree and (h) other factors.  In addition, management is continuing to evaluate the economic feasibility of environmental investments on both regulated and competitive plants.


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The table below represents the plants or units of plants previously retired that have a remaining net book value. As of September 30, 2018, the net book value before cost of removal, including related materials and supplies inventory, of the plants/units listed below was $190 million. Management is seeking or will seek recovery of the remaining net book value of $190 million in future rate proceedings.
 
 
 
 
Generating
 
Amounts Pending
Company
 
Plant Name and Unit
 
Capacity
 
Regulatory Approval
 
 
 
 
(in MWs) 
 
(in millions)
APCo
 
Kanawha River Plant
 
400

 
$
44.8

APCo
 
Clinch River Plant, Unit 3
 
235

 
32.6

APCo (a)
 
Clinch River Plant, Units 1 and 2
 
470

 
31.8

APCo
 
Sporn Plant, Units 1 and 3
 
300

 
17.2

APCo
 
Glen Lyn Plant
 
335

 
13.4

SWEPCo
 
Welsh Plant, Unit 2
 
528

 
50.6

Total
 
 
 
2,268

 
$
190.4


(a)
APCo obtained permits following the Virginia SCC’s and WVPSC’s approval to convert its 470 MW Clinch River Plant, Units 1 and 2 to natural gas. In 2015, APCo retired the coal-related assets of Clinch River Plant, Units 1 and 2. Clinch River Plant, Unit 1 and Unit 2 began operations as natural gas units in February 2016 and April 2016, respectively.

To the extent existing generation assets are not recoverable, it could materially reduce future net income and cash flows and impact financial condition.

Proposed Modification of the NSR Litigation Consent Decree

In 2007, the U.S. District Court for the Southern District of Ohio approved a consent decree between AEP subsidiaries in the eastern area of the AEP System and the Department of Justice, the Federal EPA, eight northeastern states and other interested parties to settle claims that the AEP subsidiaries violated the NSR provisions of the CAA when they undertook various equipment repair and replacement projects over a period of nearly 20 years.  The consent decree’s terms include installation of environmental control equipment on certain generating units, a declining cap on SO2 and NOx emissions from the AEP System and various mitigation projects.

In July 2017, AEP filed a motion with the U.S. District Court for the Southern District of Ohio seeking to modify the consent decree to eliminate an obligation to install future controls at Rockport Plant, Unit 2 if AEP does not acquire ownership of that unit, and to modify the consent decree in other respects to preserve the environmental benefits of the consent decree.  The other parties to the consent decree opposed AEP’s motion. The district court granted AEP’s request to delay the deadline to install SCR technology at Rockport Plant, Unit 2 until June 2020.

In January 2018, AEP filed a supplemental motion proposing to install the SCR at Rockport Plant, Unit 2 and achieve the final SO2 emission cap applicable to the plant under the consent decree by the end of 2020, before the expiration of the initial lease term. Since all required emission reductions would be achieved, no unit retirements or other compensating measures were offered to maintain the benefits of the current consent decree. Responsive filings were filed in February 2018 by parties opposing AEP’s proposed modifications to the consent decree. AEP filed a detailed statement of the specific relief requested to address the changed circumstances at Rockport Plant, Unit 2, and the opposing parties responded thereto. In September 2018, the district court granted AEP’s unopposed motion to stay further proceedings on the pending motion to modify the consent decree to facilitate settlement discussions among the parties.

AEP is seeking to modify the consent decree as a means to resolve or substantially narrow the issues in pending litigation with the owners of Rockport Plant, Unit 2. See “Rockport Plant Litigation” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 5 - Commitments, Guarantees and Contingencies for additional information.


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Clean Air Act Requirements

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions. The states implement and administer many of these programs and could impose additional or more stringent requirements. The primary regulatory programs that continue to drive investments in AEP’s existing generating units include: (a) periodic revisions to the National Ambient Air Quality Standards (NAAQS) and the development of SIPs to achieve any more stringent standards, (b) implementation of the regional haze program by the states and the Federal EPA, (c) regulation of hazardous air pollutant emissions under the Mercury and Air Toxics Standards (MATS) Rule, (d) implementation and review of the Cross-State Air Pollution Rule (CSAPR), a FIP designed to eliminate significant contributions from sources in upwind states to nonattainment or maintenance areas in downwind states and (e) the Federal EPA’s regulation of greenhouse gas emissions from fossil-fueled electric generating units under Section 111 of the CAA.

In March 2017, President Trump issued a series of executive orders designed to allow the Federal EPA to review and take appropriate action to revise or rescind regulatory requirements that place undue burdens on affected entities, including specific orders directing the Federal EPA to review rules that unnecessarily burden the production and use of energy. The Federal EPA published notice and an opportunity to comment on how to identify such requirements and what steps can be taken to reduce or eliminate such burdens. Future changes that result from this effort may affect AEP’s compliance plans.

Notable developments in significant CAA regulatory requirements affecting AEP’s operations are discussed in the following sections.

NAAQS

The Federal EPA issued new, more stringent NAAQS for SO2 in 2010, PM in 2012 and ozone in 2015; the existing standards for NO2 were retained after review by the Federal EPA in 2018. Implementation of these standards is underway. In December 2017, the Federal EPA published final designations for certain areas’ compliance with the 2010 SO2 NAAQS. Additional designations will be made in 2020. States may develop additional requirements for AEP’s facilities as a result of these designations. In June 2018, the Federal EPA proposed to retain the current primary standard for SO2 of 75 parts per billion, without change.

In December 2016, the Federal EPA completed an integrated review plan for the 2012 PM standard. Work is currently underway on scientific, risk and policy assessments necessary to develop a proposed rule, which is anticipated in 2021.

Most areas of the country were designated attainment or unclassifiable for the 2015 ozone standard in November 2017. The Federal EPA finalized nonattainment designations for the remaining areas in April and July 2018. The Federal EPA has also issued information to assist the states in developing plans that address their obligations under the interstate transport provisions of the CAA for the 2008 and 2015 ozone standards. The Federal EPA has confirmed that for states included in the CSAPR program, there are no additional interstate transport obligations, as all areas of the country are expected to attain the 2008 ozone standard before 2023. State implementation plans for the 2015 ozone standard are due in October 2018. The Federal EPA had requested a stay of proceedings in the U.S. Court of Appeals for the District of Columbia Circuit where challenges to the 2015 ozone standard are pending, to allow reconsideration of that standard by the new administration. In June 2018, the court lifted the stay, allowing those challenges to proceed. Management cannot currently predict the nature, stringency or timing of additional requirements for AEP’s facilities based on the outcome of these activities.

Regional Haze

The Federal EPA issued a Clean Air Visibility Rule (CAVR), detailing how the CAA’s requirement that certain facilities install best available retrofit technology (BART) would address regional haze in federal parks and other protected areas.  BART requirements apply to facilities built between 1962 and 1977 that emit more than 250 tons per year of certain pollutants in specific industrial categories, including power plants.  CAVR will be implemented through SIPs

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or, if SIPs are not adequate or are not developed on schedule, through FIPs.  In January 2017, the Federal EPA revised the rules governing submission of SIPs to implement the visibility programs, including a provision that postpones the due date for the next comprehensive SIP revisions until 2021. Petitions for review of the final rule revisions have been filed in the U.S. Court of Appeals for the District of Columbia Circuit.

In March 2012, the Federal EPA proposed disapproval of a portion of the regional haze SIP in Arkansas. In April 2015, the Federal EPA published a proposed FIP to replace the disapproved portions, including revised BART determinations for the Flint Creek Plant that were consistent with the planned environmental controls to address other CAA requirements. In September 2016, the Federal EPA published a final FIP, retaining its BART determinations, but accelerating the schedule for implementation of certain required controls. The final rule is being challenged in the U.S. Court of Appeals for the Eighth Circuit, but has been held in abeyance to allow the parties to engage in settlement negotiations. Arkansas and other affected parties filed motions to stay the compliance deadlines pending further action from the Federal EPA and the motion was granted. Arkansas issued a proposed SIP revision to allow sources to participate in the CSAPR ozone season program in lieu of the source-specific NOx BART requirements in the FIP, and the Federal EPA approved the revision. Arkansas finalized a separate action to revise the SO2 BART determinations which has been challenged before the Arkansas Pollution Control and Ecology Commission. Management cannot predict the outcome of these proceedings.

The Federal EPA also disapproved portions of the Texas regional haze SIP and promulgated a final FIP that did not include any BART determinations in January 2016. That rule was challenged in the U.S. Court of Appeals for the Fifth Circuit and in March 2017, the court granted partial remand of the final rule. In January 2017, the Federal EPA proposed source-specific BART requirements for SO2 from sources in Texas, including Welsh Plant, Unit 1. The proposed source-specific approach for Welsh Plant, Unit 1 called for installation of a wet FGD system. In October 2017, the Federal EPA finalized a FIP that allows participation in the CSAPR ozone season program to satisfy the NOx regional haze obligations for electric generating units in Texas. Additionally, the Federal EPA finalized an intrastate SO2 emissions trading program based on CSAPR allowance allocations as an alternative to source-specific SO2 requirements. The opportunity to use emissions trading to satisfy the regional haze requirements for NOx and SO2 at AEP’s affected generating units provides greater flexibility and lower cost compliance options than the original proposal. A challenge to the FIP has been filed in the U.S. Court of Appeals for the Fifth Circuit by various intervenors. The Federal EPA and petitioners filed a joint motion to hold the case in abeyance pending the Federal EPA’s review of challengers’ petition for reconsideration. In March 2018, that motion was granted. In August 2018, the Federal EPA proposed to affirm its October 2017 FIP approval and requested comment on certain aspects of the FIP promulgation and specifically on the intrastate SO2 trading program. Management supports the intrastate trading program contained in the FIP as a compliance alternative to source-specific controls.

In June 2012, the Federal EPA published revisions to the regional haze rules to allow states participating in the CSAPR trading programs to use those programs in place of source-specific BART for SO2 and NOx emissions based on its determination that CSAPR results in greater visibility improvements than source-specific BART in the CSAPR states.  The rule was challenged in the U.S. Court of Appeals for the District of Columbia Circuit. The Federal EPA confirmed in 2017 that changes to the CSAPR program, including the removal of Texas sources, did not alter that conclusion. In March 2018, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the Federal EPA rule that found that CSAPR provides greater visibility improvements than BART. Challenges to the changes made to the scope of the program in 2016 are being held in abeyance while the Federal EPA reconsiders the Texas SO2 BART FIP.

CSAPR

In 2011, the Federal EPA issued CSAPR as a replacement for the Clean Air Interstate Rule, a regional trading program designed to address interstate transport of emissions that contributed significantly to downwind nonattainment with the 1997 ozone and PM NAAQS.  Certain revisions to the rule were finalized in 2012.  CSAPR relies on newly-created SO2 and NOx allowances and individual state budgets to compel further emission reductions from electric utility generating units.  Interstate trading of allowances is allowed on a restricted sub-regional basis.


16



Numerous affected entities, states and other parties filed petitions to review the CSAPR in the U.S. Court of Appeals for the District of Columbia Circuit. The rule was vacated, but that decision was reversed on appeal to the U.S. Supreme Court. On remand, the U.S. Court of Appeals for the District of Columbia Circuit allowed Phase I of CSAPR to take effect on January 1, 2015 and Phase II to take effect on January 1, 2017. In July 2015, the court found that the Federal EPA over-controlled the SO2 and/or NOx budgets of 14 states. The court remanded the rule to the Federal EPA for revision consistent with the court’s opinion while CSAPR remained in place.

In October 2016, the Federal EPA issued a final rule to address the remand and to incorporate additional changes necessary to address the 2008 ozone standard. The final rule significantly reduced ozone season budgets in many states and discounted the value of banked CSAPR ozone season allowances beginning with the 2017 ozone season. The rule has been challenged in the courts and petitions for administrative reconsideration have been filed. In March 2018, the U.S. Court of Appeals for the District of Columbia Circuit denied the petitions and other challenges to the rule. Management has been complying with the more stringent ozone season budgets while these petitions were pending.

Mercury and Other Hazardous Air Pollutants (HAPs) Regulation

In 2012, the Federal EPA issued a rule addressing a broad range of HAPs from coal and oil-fired power plants.  The rule established unit-specific emission rates for units burning coal on a 30-day rolling average basis for mercury, PM (as a surrogate for particles of nonmercury metals) and hydrogen chloride (as a surrogate for acid gases).  In addition, the rule proposed work practice standards, such as boiler tune-ups, for controlling emissions of organic HAPs and dioxin/furans.  Compliance was required within three years. Management obtained administrative extensions for up to one year at several units to facilitate the installation of controls or to avoid a serious reliability problem.

In April 2014, the U.S. Court of Appeals for the District of Columbia Circuit denied all of the petitions for review of the April 2012 final rule. Industry trade groups and several states filed petitions for further review in the U.S. Supreme Court.

In June 2015, the U.S. Supreme Court reversed the decision of the U.S. Court of Appeals for the District of Columbia Circuit. The court remanded the MATS rule to the Federal EPA to consider costs in determining whether to regulate emissions of HAPs from power plants. The Federal EPA issued a supplemental finding concluding that, after considering the costs of compliance, it was appropriate and necessary to regulate HAP emissions from coal-fired and oil-fired units. Petitions for review of the Federal EPA’s determination have been filed in the U.S. Court of Appeals for the District of Columbia Circuit. Oral argument was scheduled for May 2017, but in April 2017, the Federal EPA requested that oral argument be postponed to facilitate its review of the rule, which remains in effect.

Climate Change, CO2 Regulation and Energy Policy

In October 2015, the Federal EPA published the final CO2 emissions standards for new, modified and reconstructed fossil fuel fired steam generating units and combustion turbines, and final guidelines for the development of state plans to regulate CO2 emissions from existing sources, known as the Clean Power Plan (CPP).

The final rules are being challenged in the courts. In February 2016, the U.S. Supreme Court issued a stay on the final CPP, including all of the deadlines for submission of initial or final state plans. The stay will remain in effect until a final decision is issued by the U.S. Court of Appeals for the District of Columbia Circuit and the U.S. Supreme Court considers any petition for review.

In March 2017, the Federal EPA filed in the U.S. Court of Appeals for the District of Columbia Circuit notice of: (a) an Executive Order from the President of the United States titled “Promoting Energy Independence and Economic Growth” directing the Federal EPA to review the CPP and related rules, (b) the Federal EPA’s initiation of a review of the CPP and (c) a forthcoming rulemaking related to the CPP consistent with the Executive Order, if the Federal EPA determines appropriate. In this same filing, the Federal EPA also presented a motion to hold the litigation in abeyance until 30 days after the conclusion of review of any resulting rulemaking. The U.S. Court of Appeals for the District

17



of Columbia Circuit granted the Federal EPA’s motion in part and has requested periodic status reports. In October 2017, the Federal EPA issued a proposed rule repealing the CPP. In December 2017, the Federal EPA issued an advanced notice of proposed rulemaking seeking information that should be considered by the Federal EPA in developing revised guidelines for state programs. In August 2018, the Federal EPA proposed the Affordable Clean Energy (ACE) rule to replace the CPP with new emission guidelines for regulating CO2 from existing sources. ACE would establish a framework for states to adopt standards of performance for utility boilers based on heat rate improvements for such boilers. Comments on the proposed ACE rule will be accepted until the end of October 2018. Management is actively monitoring these rulemakings and participating in the development of any new guidelines.

AEP has taken action to reduce and offset CO2 emissions from its generating fleet and expects CO2 emissions from its operations to continue to decline due to the retirement of some of its coal-fired generation units, and actions taken to diversify the generation fleet and increase energy efficiency where there is regulatory support for such activities. The majority of the states where AEP has generating facilities passed legislation establishing renewable energy, alternative energy and/or energy efficiency requirements that can assist in reducing carbon emissions.  Management is taking steps to comply with these requirements, including increasing wind and solar installations, power purchases and broadening AEP System’s portfolio of energy efficiency programs.

In February 2018, AEP announced new intermediate and long-term CO2 emission reduction goals, based on the output of the company’s integrated resource plans, which take into account economics, customer demand, grid reliability and resiliency, regulations and the company’s current business strategy. The intermediate goal is a 60% reduction from 2000 CO2 emission levels from AEP generating facilities by 2030; the long-term goal is an 80% reduction of CO2 emissions from AEP generating facilities from 2000 levels by 2050. AEP’s total projected CO2 emissions in 2018 are approximately 90 million metric tons, a 46% reduction from AEP’s 2000 CO2 emissions of approximately 167 million metric tons.

Federal and state legislation or regulations that mandate limits on the emission of CO2 could result in significant increases in capital expenditures and operating costs, which in turn, could lead to increased liquidity needs and higher financing costs.  Excessive costs to comply with future legislation or regulations might force AEP to close some coal-fired facilities, which could possibly lead to impairment of assets.

Coal Combustion Residual Rule

In April 2015, the Federal EPA published a final rule to regulate the disposal and beneficial re-use of coal combustion residuals (CCR), including fly ash and bottom ash generated at coal-fired electric generating units and also FGD gypsum generated at some coal-fired plants.   The rule applies to new and existing active CCR landfills and CCR surface impoundments at operating electric utility or independent power production facilities. The rule imposes construction and operating obligations, including location restrictions, liner criteria, structural integrity requirements for impoundments, operating criteria and additional groundwater monitoring requirements to be implemented on a schedule spanning an approximate four year implementation period. Certain records must be posted to a publicly available internet site. Initial groundwater monitoring reports were posted in the first quarter of 2018, and some of AEP’s existing facilities were required to begin assessment monitoring programs to determine if unacceptable groundwater impacts will trigger future remedial actions.

In December 2016, the U.S. Congress passed legislation authorizing states to submit programs to regulate CCR facilities, and the Federal EPA to approve such programs if they are no less stringent than the minimum federal standards. The Federal EPA may also enforce compliance with the minimum standards until a state program is approved or if states fail to adopt their own programs. Oklahoma has received approval to operate its state program in lieu of the federal rules. In October 2018, the Federal EPA’s approval of the Oklahoma program was challenged in the Federal District Court for the District of Columbia and in the U.S. Court of Appeals for the District of Columbia Circuit. The Company is complying with the Oklahoma program, which remains in place.

The final 2015 rule has been challenged in the courts.  In August 2018, the U.S. Circuit Court of Appeals for the District of Columbia Circuit issued its decision vacating and remanding certain provisions of the 2015 rule.  Remaining issues

18



were dismissed. None of the parties filed a motion for rehearing.  The provisions addressed by the Court’s decision, including changes to the provisions for unlined impoundments and legacy sites, will be the subject of further rulemaking consistent with the Court’s decision.

In September 2017, the Federal EPA granted industry petitions to reconsider the CCR rule.  In March 2018, the Federal EPA issued a proposed rule to modify certain provisions of the solid waste management standards and provide additional flexibility to facilities regulated under approved state programs.  A final rule was signed in July 2018 that modifies certain compliance deadlines and other requirements in the rule.  Additional changes to the minimum performance standards that were contained in the March proposed rule, and changes to respond to the decision of the U.S. Court of Appeals for the District of Columbia Circuit will be addressed in future rulemakings.  Management supports the adoption of more flexible compliance alternatives subject to the Federal EPA or state oversight.

Other utilities and industrial sources have been engaged in litigation with environmental advocacy groups who claim that releases of contaminants from wells, CCR units, pipelines and other facilities to ground waters that have a hydrologic connection to a surface water body represents an “unpermitted discharge” under the Clean Water Act. The Federal EPA has opened a rulemaking docket to solicit information to determine whether it should provide additional clarification of the scope of Clean Water Act permitting requirements for discharges to ground water. Management is unable to predict the outcome of these cases or the Federal EPA’s rulemaking, which could impose significant additional costs on AEP’s facilities.

Because AEP currently uses surface impoundments and landfills to manage CCR materials at generating facilities, significant costs will be incurred to upgrade or close and replace these existing facilities and conduct any required remedial actions. Management recorded a $95 million increase in asset retirement obligations in 2015 based on the closure and post-closure care requirements in the final rule. This estimate does not include costs of groundwater remediation, if required. Management will continue to evaluate the rule’s impact on operations.

Clean Water Act (CWA) Regulations

In 2014, the Federal EPA issued a final rule setting forth standards for existing power plants that is intended to reduce mortality of aquatic organisms pinned against a plant’s cooling water intake screen (impingement) or entrained in the cooling water.   Compliance timeframes are established by the permit agency through each facility’s National Pollutant Discharge Elimination System permit as those permits are renewed, and have been incorporated into permits at several AEP facilities. Petitions for review were filed by industry and environmental groups in the U.S. Court of Appeals for the Second Circuit.  The court denied the petitions and upheld the final rule. AEP’s facilities are reviewing these requirements as their waste water discharge permits are renewed, and making appropriate adjustments to their intake structures.

In November 2015, the Federal EPA issued a final rule revising effluent limitation guidelines for electricity generating facilities. The rule establishes limits on FGD wastewater, fly ash and bottom ash transport water and flue gas mercury control wastewater to be imposed as soon as possible after November 2018 and no later than December 2023. These requirements will be implemented through each facility’s wastewater discharge permit. The rule has been challenged in the U.S. Court of Appeals for the Fifth Circuit. In March 2017, industry associations filed a petition for reconsideration of the rule with the Federal EPA. A final rule revising the compliance deadlines for FGD wastewater and bottom ash transport water to be no earlier than 2020 was issued in September 2017, but has been challenged in the courts. Management continues to assess technology additions and retrofits to comply with the rule and the impacts of the Federal EPA’s recent actions on facilities’ wastewater discharge permitting. Management is actively participating in the reconsideration proceedings.

In June 2015, the Federal EPA and the U.S. Army Corps of Engineers jointly issued a final rule to clarify the scope of the regulatory definition of “waters of the United States” in light of recent U.S. Supreme Court cases. The final rule was challenged in both courts of appeal and district courts. In January 2018, the U.S. Supreme Court ruled that challenges to the definition of “waters of the United States” must be filed in federal district courts. Challenges to the rule will proceed.

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In March 2017, the Federal EPA published a notice of intent to review the rule and provide an advanced notice of a proposed rulemaking consistent with the Executive Order of the President of the United States directing the Federal EPA and U.S. Army Corps of Engineers to review and rescind or revise the rule. In June 2017, the agencies signed a notice of proposed rule to rescind the definition of “waters of the United States” that was adopted in June 2015, and to re-codify the definition of that phrase as it existed immediately prior to that action. This action would effectively retain the status quo until a new rule is adopted by the agencies. A supplemental proposal was signed by the Administrator in June 2018 to provide further clarification of the impact of and support for repeal of the 2015 rule. The Federal EPA and U.S. Army Corps of Engineers also finalized a new rule to extend the applicability date of the 2015 rule to 2020. Challenges to the applicability date rule were filed by third parties in several federal district courts. In August 2018, the Federal District Court for the District of South Carolina vacated the postponement of the applicability date, allowing the 2015 rule to go into effect in 26 states. Management will participate in further rulemaking activities.

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RESULTS OF OPERATIONS

SEGMENTS

AEP’s primary business is the generation, transmission and distribution of electricity.  Within its Vertically Integrated Utilities segment, AEP centrally dispatches generation assets and manages its overall utility operations on an integrated basis because of the substantial impact of cost-based rates and regulatory oversight.  Intersegment sales and transfers are generally based on underlying contractual arrangements and agreements.

AEP’s reportable segments and their related business activities are outlined below:

Vertically Integrated Utilities

Generation, transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by AEGCo, APCo, I&M, KGPCo, KPCo, PSO, SWEPCo and WPCo.

Transmission and Distribution Utilities

Transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by AEP Texas and OPCo.
OPCo purchases energy and capacity at auction to serve SSO customers and provides transmission and distribution services for all connected load.

AEP Transmission Holdco

Development, construction and operation of transmission facilities through investments in AEPTCo. These investments have FERC-approved returns on equity.
Development, construction and operation of transmission facilities through investments in AEP’s transmission-only joint ventures. These investments have PUCT-approved or FERC-approved returns on equity.

Generation & Marketing

Competitive generation in ERCOT and PJM.
Marketing, risk management and retail activities in ERCOT, PJM, SPP and MISO.
Contracted renewable energy investments and management services.

The remainder of AEP’s activities are presented as Corporate and Other. While not considered a reportable segment, Corporate and Other primarily includes the purchasing of receivables from certain AEP utility subsidiaries, Parent’s guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.

The following discussion of AEP’s results of operations by operating segment includes an analysis of Gross Margin, which is a non-GAAP financial measure. Gross Margin includes Total Revenues less the costs of Fuel and Other Consumables Used for Electric Generation as well as Purchased Electricity for Resale and Amortization of Generation Deferrals as presented in the Registrants statements of income as applicable. Under the various state utility rate making processes, these expenses are generally reimbursable directly from and billed to customers. As a result, they do not typically impact Operating Income or Earnings Attributable to AEP Common Shareholders. Management believes that Gross Margin provides a useful measure for investors and other financial statement users to analyze AEP’s financial performance in that it excludes the effect on Total Revenues caused by volatility in these expenses. Operating Income, which is presented in accordance with GAAP in AEP’s statements of income, is the most directly comparable GAAP financial measure to the presentation of Gross Margin. AEP’s definition of Gross Margin may not be directly comparable to similarly titled financial measures used by other companies.


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The following table presents Earnings (Loss) Attributable to AEP Common Shareholders by segment:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Vertically Integrated Utilities
$
344.2

 
$
286.3

 
$
852.2

 
$
626.6

Transmission and Distribution Utilities
145.2

 
144.0

 
384.6

 
374.3

AEP Transmission Holdco
73.3

 
75.5

 
278.4

 
275.7

Generation & Marketing
5.3

 
33.7

 
62.3

 
246.3

Corporate and Other
9.6

 
5.2

 
(17.1
)
 
(11.0
)
Earnings Attributable to AEP Common Shareholders
$
577.6

 
$
544.7

 
$
1,560.4

 
$
1,511.9


AEP CONSOLIDATED

Third Quarter of 2018 Compared to Third Quarter of 2017

Earnings Attributable to AEP Common Shareholders increased from $545 million in 2017 to $578 million in 2018 primarily due to:

An increase in weather-related usage.
Favorable rate proceedings in AEP’s various jurisdictions.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Earnings Attributable to AEP Common Shareholders increased from $1,512 million in 2017 to $1,560 million in 2018 primarily due to:

An increase in weather-related usage.
Favorable rate proceedings in AEP’s various jurisdictions.

These increases were partially offset by:

A decrease in earnings in the Generation & Marketing segment primarily due to the 2017 gain resulting from the sale of certain merchant generation assets.

AEP’s results of operations by operating segment are discussed below.


22



VERTICALLY INTEGRATED UTILITIES
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 Vertically Integrated Utilities
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Revenues
 
$
2,636.7

 
$
2,482.2

 
$
7,393.7

 
$
6,893.1

Fuel and Purchased Electricity
 
1,034.6

 
868.6

 
2,700.4

 
2,368.9

Gross Margin
 
1,602.1

 
1,613.6

 
4,693.3

 
4,524.2

Other Operation and Maintenance
 
753.7

 
665.0

 
2,197.5

 
2,042.2

Depreciation and Amortization
 
340.1

 
288.8

 
966.1

 
845.1

Taxes Other Than Income Taxes
 
108.8

 
105.7

 
326.4

 
306.2

Operating Income
 
399.5

 
554.1

 
1,203.3

 
1,330.7

Interest and Investment Income
 
3.3

 
1.3

 
8.3

 
5.4

Carrying Costs Income
 
0.8

 
2.1

 
5.9

 
11.3

Allowance for Equity Funds Used During Construction
 
9.3

 
7.5

 
24.0

 
20.0

Non-Service Cost Components of Net Periodic Benefit Cost
 
18.0

 
5.9

 
53.7

 
17.7

Interest Expense
 
(149.2
)
 
(134.9
)
 
(428.0
)
 
(406.5
)
Income Before Income Tax Expense (Credit) and Equity Earnings (Loss)
 
281.7

 
436.0

 
867.2

 
978.6

Income Tax Expense (Credit)
 
(63.1
)
 
139.1

 
12.9

 
334.9

Equity Earnings (Loss) of Unconsolidated Subsidiaries
 
0.8

 
0.4

 
2.0

 
(4.5
)
Net Income
 
345.6

 
297.3

 
856.3

 
639.2

Net Income Attributable to Noncontrolling Interests
 
1.4

 
11.0

 
4.1

 
12.6

Earnings Attributable to AEP Common Shareholders
 
$
344.2

 
$
286.3

 
$
852.2

 
$
626.6


Summary of KWh Energy Sales for Vertically Integrated Utilities
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 

 
 

Residential
8,988

 
8,488

 
26,105

 
23,226

Commercial
6,799

 
6,701

 
18,988

 
18,386

Industrial
9,032

 
8,839

 
26,471

 
25,792

Miscellaneous
620

 
603

 
1,759

 
1,701

Total Retail
25,439

 
24,631

 
73,323

 
69,105

 
 
 
 
 
 
 
 
Wholesale (a)
6,432

 
6,837

 
17,156

 
19,262

 
 
 
 
 
 
 
 
Total KWhs
31,871

 
31,468

 
90,479

 
88,367

(a)
Includes off-system sales, municipalities and cooperatives, unit power and other wholesale customers.


23



Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.  In general, degree day changes in the eastern region have a larger effect on revenues than changes in the western region due to the relative size of the two regions and the number of customers within each region.

Summary of Heating and Cooling Degree Days for Vertically Integrated Utilities
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in degree days)
Eastern Region
 

 
 

 
 

 
 

Actual  Heating (a)

 

 
1,844

 
1,266

Normal  Heating (b)
5

 
4

 
1,745

 
1,757

 
 
 
 
 
 
 
 
Actual  Cooling (c)
878

 
698

 
1,364

 
1,034

Normal  Cooling (b)
730

 
731

 
1,063

 
1,060

 
 
 
 
 
 
 
 
Western Region
 

 
 

 
 

 
 

Actual  Heating (a)

 

 
974

 
539

Normal  Heating (b)
1

 
1

 
908

 
926

 
 
 
 
 
 
 
 
Actual  Cooling (c)
1,443

 
1,281

 
2,380

 
2,000

Normal  Cooling (b)
1,402

 
1,404

 
2,121

 
2,124


(a)
Heating degree days are calculated on a 55 degree temperature base.
(b)
Normal Heating/Cooling represents the thirty-year average of degree days.
(c)
Cooling degree days are calculated on a 65 degree temperature base.



24



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to AEP Common Shareholders from Vertically Integrated Utilities
(in millions)
 
 
 
Third Quarter of 2017
 
$
286.3

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
4.8

Off-system Sales
 
(3.8
)
Transmission Revenues
 
(6.5
)
Other Revenues
 
(6.0
)
Total Change in Gross Margin
 
(11.5
)
 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(88.7
)
Depreciation and Amortization
 
(51.3
)
Taxes Other Than Income Taxes
 
(3.1
)
Interest and Investment Income
 
2.0

Carrying Costs Income
 
(1.3
)
Allowance for Equity Funds Used During Construction
 
1.8

Non-Service Cost Components of Net Periodic Pension Cost
 
12.1

Interest Expense
 
(14.3
)
Total Change in Expenses and Other
 
(142.8
)
 
 
 

Income Tax Expense (Credit)
 
202.2

Equity Earnings (Loss) of Unconsolidated Subsidiaries
 
0.4

Net Income Attributable to Noncontrolling Interest
 
9.6

 
 
 
Third Quarter of 2018
 
$
344.2


The major components of the decrease in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $5 million primarily due to the following:
The effect of rate proceedings in AEP’s service territories which included:
A $47 million increase from rate proceedings for I&M, inclusive of a $22 million decrease due to the impact of Tax Reform in the Indiana jurisdiction.
A $20 million increase for PSO due to new rates implemented in March 2018, inclusive of a $9 million decrease due to the change in the corporate federal tax rate.
An $18 million increase for SWEPCo primarily due to rider and base rate revenue increases in Texas and Louisiana.
For the rate increases described above, $17 million related to riders/trackers, which had corresponding increases in expense items below.
A $61 million increase in weather-related usage across all regions.
These increases were partially offset by:
A $91 million reduction at APCo and WPCo in deferred fuel under-recovery related to the West Virginia Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.
A $13 million decrease due to lower weather-normalized wholesale margins, primarily due to SWEPCo and I&M wholesale customer load loss from contracts that expired at the end of 2017.
A $12 million decrease in weather-normalized retail margins primarily in the industrial and commercial classes.
An $11 million increase at APCo in deferred fuel related to recoverable PJM expenses that were offset below.

25



A $10 million increase at APCo in non-recoverable fuel expense related to Virginia legislation.
A $4 million decrease at PSO related to the System Reliability Rider (SRR) that ended in August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.
Margins from Off-system Sales decreased $4 million primarily due to mid-year changes in the OSS sharing mechanism at I&M.
Transmission Revenues decreased $7 million primarily due to the following:
A $16 million decrease due to current year provisions for rate refunds.
These decreases were partially offset by:
A $6 million increase primarily due to an increase in transmission investments in SPP.
A $4 million increase primarily due to an increase in transmission investments in PJM.
Other Revenues decreased $6 million primarily due to reduced rates for KPCo Demand Side Management programs beginning in 2018. This decrease was partially offset in Other Operation and Maintenance expenses below.

Expenses and Other, Income Tax Expense (Credit) and Net Income Attributable to Noncontrolling Interest changed between years as follows:

Other Operation and Maintenance expenses increased $89 million primarily due to the following:
A $40 million increase in expenses at APCo and WPCo due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.
A $25 million increase in employee-related expenses.
A $10 million increase in vegetation management expenses primarily in the east region.
A $7 million increase in plant outage and maintenance expenses primarily for APCo and KPCo.
A $4 million increase in customer-related expenses.
A $3 million increase in SPP transmission services.
A $3 million increase due to the Wind Catcher Project for SWEPCo and PSO.
This increase was partially offset by:
A $23 million decrease in PJM transmission services.
Depreciation and Amortization expenses increased $51 million primarily due to a higher depreciable base and increased depreciation rates approved at I&M, PSO and SWEPCo.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $12 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Interest Expense increased $14 million primarily due to the following:
A $7 million increase at I&M primarily due to increased long-term debt balances.
A $3 million increase at PSO due to the 2017 deferral of the debt component of carrying charges on environmental control costs for projects at Northeastern Plant, Unit 3 and Comanche Plant.
A $3 million increase in other interest expense at APCo due to the West Virginia Tax Reform settlement.
Income Tax Expense (Credit) decreased $202 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT, other book/tax differences which are accounted for on a flow-through basis and a decrease in pretax book income.
Net Income Attributable to Noncontrolling Interest decreased $10 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This decrease was offset by an increase in Income Tax Expense (Credit) above.


26



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to AEP Common Shareholders from Vertically Integrated Utilities
(in millions)
 
 
 
Nine Months Ended September 30, 2017
 
$
626.6

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
167.3

Off-system Sales
 
(6.9
)
Transmission Revenues
 
24.8

Other Revenues
 
(16.1
)
Total Change in Gross Margin
 
169.1

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(155.3
)
Depreciation and Amortization
 
(121.0
)
Taxes Other Than Income Taxes
 
(20.2
)
Interest and Investment Income
 
2.9

Carrying Costs Income
 
(5.4
)
Allowance for Equity Funds Used During Construction
 
4.0

Non-Service Cost Components of Net Periodic Pension Cost
 
36.0

Interest Expense
 
(21.5
)
Total Change in Expenses and Other
 
(280.5
)
 
 
 

Income Tax Expense (Credit)
 
322.0

Equity Earnings (Loss) of Unconsolidated Subsidiaries
 
6.5

Net Income Attributable to Noncontrolling Interest
 
8.5

 
 
 
Nine Months Ended September 30, 2018
 
$
852.2


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $167 million primarily due to the following:
A $240 million increase in weather-related usage across all regions primarily in the residential and commercial classes.
The effect of rate proceedings in AEP’s service territories which included:
An $89 million increase from rate proceedings for I&M, inclusive of a $26 million decrease due to the impact of Tax Reform in the Indiana jurisdiction.
A $57 million increase for SWEPCo due to rider and base rate revenue increases in Texas, Louisiana and Arkansas.
A $37 million increase for PSO due to new rates implemented in March 2018, inclusive of a $19 million decrease due to the change in the corporate federal tax rate.
For the rate increases described above, $4 million related to riders/trackers, which had corresponding increases in expense items below.
A $32 million increase for I&M in FERC generation wholesale municipal and cooperative revenues primarily due to changes to the annual formula rate.
A $16 million increase in weather-normalized retail margins primarily in the residential class.
These increases were partially offset by:
A $111 million decrease due to customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.
A $91 million reduction at APCo and WPCo in deferred fuel under-recovery related to the West Virginia Tax Reform settlements. This decrease was offset in Income Tax Expense (Credit) below.

27



A $39 million decrease due to lower weather-normalized wholesale margins, primarily due to SWEPCo and I&M wholesale customer load loss from contracts that expired at the end of 2017.
A $28 million increase at APCo in deferred fuel related to recoverable PJM expenses that were offset below.
A $16 million decrease primarily due to increased fuel and other variable production costs not recovered through fuel clauses or other trackers.
A $16 million decrease at PSO related to the SRR that ended in August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.
A $10 million increase at APCo in non-recoverable fuel expense related to Virginia legislation.
Margins from Off-system Sales decreased $7 million primarily due to mid-year changes in the OSS sharing mechanism at I&M.
Transmission Revenues increased $25 million primarily due to the following:
A $23 million increase due to the annual formula rate true-up and decreased RTO provisions at I&M.
A $19 million increase primarily due to an increase in transmission investments in SPP.
These increases were partially offset by:
A $16 million decrease due to current year provisions for rate refunds.
Other Revenues decreased $16 million primarily due to reduced rates for KPCo Demand Side Management programs beginning in 2018. This decrease was partially offset in Other Operation and Maintenance expenses below.

Expenses and Other, Income Tax Expense (Credit), Equity Earnings (Loss) of Unconsolidated Subsidiaries and Net Income Attributable to Noncontrolling Interest changed between years as follows:

Other Operation and Maintenance expenses increased $155 million primarily due to the following:
A $40 million increase in expenses at APCo and WPCo due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.
A $39 million increase in SPP transmission services.
A $35 million increase due to the Wind Catcher Project for SWEPCo and PSO.
A $25 million increase in employee-related expenses.
A $19 million increase in plant outage and maintenance expenses primarily for KPCo and I&M.
A $13 million increase in vegetation management.
A $9 million increase due to an increase in estimated expense for claims related to asbestos exposure.
A $7 million increase in storms primarily for APCo.
A $6 million increase in customer-related expenses.
A $5 million increase in factoring expense.
These increases were partially offset by:
A $55 million decrease in PJM transmission expenses primarily due to the annual formula rate true-up.
Depreciation and Amortization expenses increased $121 million primarily due to a higher depreciable base and increased depreciation rates approved at I&M, PSO and SWEPCo.
Taxes Other Than Income Taxes increased $20 million primarily due to:
An $8 million increase in property taxes driven by an increase in utility plant.
An $8 million increase in state and local taxes due to higher reported taxable KWh and taxable revenues and a prior period refund.
Carrying Costs Income decreased $5 million primarily due to a decrease in carrying charges for certain riders at I&M.
Allowance for Equity Funds Used During Construction increased $4 million primarily due to an increase in construction activity at APCo and SWEPCo.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $36 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

28



Interest Expense increased $22 million primarily due to the following:
A $13 million increase due to increased long-term debt balances at I&M.
A $7 million increase at PSO primarily due to the 2017 deferral of the debt component of carrying charges on environmental control costs for projects at Northeastern Plant, Unit 3 and Comanche Plant.
A $3 million increase at SWEPCo primarily due to other interest expense accruals for refunds and true-ups in 2018 and interest expense credits in 2017 on Welsh Plant and Flint Creek Plant environmental project deferrals.
Income Tax Expense (Credit) decreased $322 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT, other book/tax differences which are accounted for on a flow-through basis and a decrease in pretax book income.
Equity Earnings (Loss) of Unconsolidated Subsidiaries increased $7 million primarily due to a prior period income tax adjustment recognized in 2017.
Net Income Attributable to Noncontrolling Interest decreased $9 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This decrease was offset by an increase in Income Tax Expense (Credit) above.

29



TRANSMISSION AND DISTRIBUTION UTILITIES
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Transmission and Distribution Utilities
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Revenues
 
$
1,211.5

 
$
1,173.3

 
$
3,510.9

 
$
3,313.2

Purchased Electricity
 
218.7

 
215.7

 
660.0

 
626.0

Amortization of Generation Deferrals
 
56.9

 
58.7

 
171.9

 
172.9

Gross Margin
 
935.9

 
898.9

 
2,679.0

 
2,514.3

Other Operation and Maintenance
 
420.4

 
305.4

 
1,152.1

 
889.2

Depreciation and Amortization
 
201.4

 
182.3

 
558.4

 
502.4

Taxes Other Than Income Taxes
 
143.2

 
133.6

 
413.2

 
387.1

Operating Income
 
170.9

 
277.6

 
555.3

 
735.6

Interest and Investment Income
 
1.3

 
1.2

 
2.6

 
5.6

Carrying Costs Income
 
0.2

 
0.5

 
1.5

 
3.0

Allowance for Equity Funds Used During Construction
 
7.8

 
0.9

 
23.0

 
6.3

Non-Service Cost Components of Net Periodic Benefit Cost
 
8.3

 
2.2

 
24.6

 
6.7

Interest Expense
 
(63.5
)
 
(61.0
)
 
(185.6
)
 
(182.5
)
Income Before Income Tax Expense (Credit)
 
125.0

 
221.4

 
421.4

 
574.7

Income Tax Expense (Credit)
 
(20.2
)
 
77.4

 
36.8

 
200.4

Net Income
 
145.2

 
144.0

 
384.6

 
374.3

Net Income Attributable to Noncontrolling Interests
 

 

 

 

Earnings Attributable to AEP Common Shareholders
 
$
145.2

 
$
144.0

 
$
384.6

 
$
374.3


Summary of KWh Energy Sales for Transmission and Distribution Utilities
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 

 
 

Residential
7,948

 
7,511

 
21,154

 
19,361

Commercial
7,165

 
6,941

 
19,634

 
19,184

Industrial
5,720

 
5,575

 
17,259

 
16,992

Miscellaneous
186

 
185

 
514

 
516

Total Retail (a)
21,019

 
20,212

 
58,561

 
56,053

 
 
 
 
 
 
 
 
Wholesale (b)
634

 
585

 
1,835

 
1,749

 
 
 
 
 
 
 
 
Total KWhs
21,653

 
20,797

 
60,396

 
57,802


(a)
Represents energy delivered to distribution customers.
(b)
Primarily OPCo’s contractually obligated purchases of OVEC power sold into PJM.


30



Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.  In general, degree day changes in the eastern region have a larger effect on revenues than changes in the western region due to the relative size of the two regions and the number of customers within each region.

Summary of Heating and Cooling Degree Days for Transmission and Distribution Utilities
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in degree days)
Eastern Region
 

 
 

 
 

 
 

Actual  Heating (a)

 

 
2,158

 
1,500

Normal  Heating (b)
6

 
6

 
2,076

 
2,091

 
 
 
 
 
 
 
 
Actual  Cooling (c)
864

 
642

 
1,322

 
957

Normal  Cooling (b)
670

 
670

 
964

 
960

 
 
 
 
 
 
 
 
Western Region
 

 
 

 
 

 
 

Actual  Heating (a)

 

 
234

 
103

Normal  Heating (b)

 

 
194

 
199

 
 
 
 
 
 
 
 
Actual  Cooling (d)
1,424

 
1,393

 
2,612

 
2,640

Normal  Cooling (b)
1,367

 
1,364

 
2,413

 
2,396


(a)
Heating degree days are calculated on a 55 degree temperature base.
(b)
Normal Heating/Cooling represents the thirty-year average of degree days.
(c)
Eastern Region cooling degree days are calculated on a 65 degree temperature base.
(d)
Western Region cooling degree days are calculated on a 70 degree temperature base.


31



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to AEP Common Shareholders from Transmission and Distribution Utilities
(in millions)
 
 
 
Third Quarter of 2017
 
$
144.0

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
21.2

Off-system Sales
 
16.0

Transmission Revenues
 
(0.8
)
Other Revenues
 
0.6

Total Change in Gross Margin
 
37.0

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(115.0
)
Depreciation and Amortization
 
(19.1
)
Taxes Other Than Income Taxes
 
(9.6
)
Interest and Investment Income
 
0.1

Carrying Costs Income
 
(0.3
)
Allowance for Equity Funds Used During Construction
 
6.9

Non-Service Cost Components of Net Periodic Benefit Cost
 
6.1

Interest Expense
 
(2.5
)
Total Change in Expenses and Other
 
(133.4
)
 
 
 

Income Tax Expense (Credit)
 
97.6

 
 
 

Third Quarter of 2018
 
$
145.2


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of purchased electricity and amortization of generation deferrals were as follows:

Retail Margins increased $21 million primarily due to the following:
A $46 million net increase in Ohio Basic Transmission Cost Rider revenues and recoverable PJM expenses. This increase was partially offset by an increase in Other Operation and Maintenance below.
A $21 million increase in Ohio revenues associated with the Universal Service Fund (USF). This increase was offset by a corresponding increase in Other Operation and Maintenance expenses below.
A $7 million increase in revenues associated with smart grid riders in Ohio. This increase was partially offset by an increase in various expenses below.
A $4 million increase in Ohio rider revenues associated with the DIR. This increase was partially offset in various expenses below.
A $3 million increase in rider revenues recovering state excise taxes due to an increase in metered KWh in Ohio. This increase was offset by a corresponding increase in Taxes Other Than Income Taxes below.
A $3 million increase in Texas revenues associated with the Distribution Cost Recovery Factor revenue rider.
A $2 million increase in Texas revenues associated with the Transmission Cost Recovery Factor revenue rider. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.
These increases were partially offset by:
A $46 million decrease due to adjustments to the distribution decoupling under-recovery balance as a result of the 2018 Ohio Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.
A $12 million decrease in Ohio due to the recovery of lower current year losses from a power contract with OVEC. This decrease was offset by a corresponding increase in Margins from Off-system Sales below.
An $11 million decrease in weather-normalized margins.
Margins from Off-system Sales increased $16 million primarily due to lower current year losses from a power contract with OVEC in Ohio which was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.

32



Transmission Revenues decreased $1 million primarily due to the following:
A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers in Texas. This decrease was offset in Income Tax Expense (Credit) below.
This decrease was offset by:
A $6 million increase due to recovery of increased transmission investment in ERCOT.

Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses increased $115 million primarily due to the following:
A $51 million increase in recoverable transmission expenses that were fully recovered in rate recovery riders/trackers within Gross Margins above.
A $21 million increase in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This increase was offset by a corresponding increase in Retail Margins above.
A $10 million increase in employee-related expenses.
A $4 million increase in customer-related expenses.
Depreciation and Amortization expenses increased $19 million primarily due to the following:
A $10 million increase in depreciation expense due to an increase in the depreciable base of transmission and distribution assets.
A $4 million increase in recoverable smart grid depreciation expenses in Ohio. This increase was offset in Retail Margins above.
A $2 million increase in amortization due to capitalized software.
Taxes Other Than Income Taxes increased $10 million primarily due to the following:
A $5 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.
A $4 million increase in rider revenues recovering state excise taxes due to an increase in metered KWhs. This increase was offset in Retail Margins above.
Allowance for Equity Funds Used During Construction increased $7 million primarily due to increased transmission projects in Texas.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $6 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07. 
Income Tax Expense (Credit) decreased $98 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

33



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to AEP Common Shareholders from Transmission and Distribution Utilities
(in millions)
 
 
 
Nine Months Ended September 30, 2017
 
$
374.3

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
140.4

Off-system Sales
 
32.6

Transmission Revenues
 
(7.6
)
Other Revenues
 
(0.7
)
Total Change in Gross Margin
 
164.7

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(262.9
)
Depreciation and Amortization
 
(56.0
)
Taxes Other Than Income Taxes
 
(26.1
)
Interest and Investment Income
 
(3.0
)
Carrying Costs Income
 
(1.5
)
Allowance for Equity Funds Used During Construction
 
16.7

Non-Service Cost Components of Net Periodic Benefit Cost
 
17.9

Interest Expense
 
(3.1
)
Total Change in Expenses and Other
 
(318.0
)
 
 
 

Income Tax Expense (Credit)
 
163.6

 
 
 

Nine Months Ended September 30, 2018
 
$
384.6


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of purchased electricity and amortization of generation deferrals were as follows:

Retail Margins increased $140 million primarily due to the following:
A $155 million net increase in Ohio Basic Transmission Cost Rider revenues and recoverable PJM expenses. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.
A $61 million increase in Ohio revenues associated with the USF. This increase was offset by a corresponding increase in Other Operation and Maintenance expenses below.
An $18 million increase in Ohio rider revenues associated with the DIR. This increase was partially offset in various expenses below.
A $16 million increase in Texas revenues associated with the Distribution Cost Recovery Factor revenue rider.
A $13 million increase in Texas revenues associated with the Transmission Cost Recovery Factor revenue rider. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.
A $13 million increase in Texas weather-related usage primarily driven by a 127% increase in heating degree days partially offset by a 1% decrease in cooling degree days.
These increases were partially offset by:
A $46 million decrease due to adjustments to the distribution decoupling under-recovery balance as a result of the 2018 Ohio Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.
A $42 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.
A $30 million decrease in Ohio due to the recovery of lower current year losses from a power contract with OVEC. This decrease was offset by a corresponding increase in Margins from Off-system Sales below.


34



Margins from Off-system Sales increased $33 million primarily due to lower current year losses from a power contract with OVEC in Ohio which was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.
Transmission Revenues decreased $8 million primarily due to the following:
A $20 million decrease due to the 2018 provisions for customer refunds due to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.
A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers in Texas. This decrease was offset in Income Tax Expense (Credit) below.
These decreases were partially offset by:
A $19 million increase due to recovery of increased transmission investment in ERCOT.

Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses increased $263 million primarily due to the following:
A $195 million increase in recoverable transmission expenses that were fully recovered in rate recovery riders/trackers within Gross Margins above.
A $61 million increase in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This increase was offset by a corresponding increase in Retail Margins above.
A $7 million increase in distribution expenses.
A $7 million increase in employee-related expenses.
These increases were partially offset by:
A $55 million decrease in Ohio PJM expenses primarily related to the annual formula rate true-up that will be refunded in future periods.
Depreciation and Amortization expenses increased $56 million primarily due to the following:
A $28 million increase in depreciation expense due to an increase in the depreciable base of transmission and distribution assets.
A $13 million increase in recoverable DIR depreciation expense in Ohio. This increase was offset in Retail Margins above.
A $6 million increase in amortization due to capitalized software.
A $5 million increase due to securitization amortizations related to Texas securitized transition funding. This increase was offset in Other Revenues and in Interest Expense.
Taxes Other Than Income Taxes increased $26 million primarily due to the following:
A $14 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.
An $11 million increase in rider revenues recovering state excise taxes due to an increase in metered KWhs. This increase was offset in Retail Margins above.
Allowance for Equity Funds Used During Construction increased $17 million primarily due to increased transmission projects in Texas.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $18 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07. 
Income Tax Expense (Credit) decreased $164 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

35



AEP TRANSMISSION HOLDCO
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
AEP Transmission Holdco
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Transmission Revenues
 
$
187.2

 
$
178.5

 
$
605.2

 
$
581.9

Other Operation and Maintenance
 
30.9

 
23.2

 
76.2

 
54.7

Depreciation and Amortization
 
34.4

 
26.1

 
100.0

 
74.7

Taxes Other Than Income Taxes
 
36.3

 
28.6

 
106.5

 
85.0

Operating Income
 
85.6

 
100.6

 
322.5

 
367.5

Interest and Investment Income
 
0.4

 
0.1

 
1.1

 
0.4

Allowance for Equity Funds Used During Construction
 
13.8

 
11.6

 
45.4

 
35.9

Non-Service Cost Components of Net Periodic Benefit Cost
 
0.7

 
0.1

 
2.1

 
0.2

Interest Expense
 
(24.2
)
 
(17.9
)
 
(66.8
)
 
(52.3
)
Income Before Income Tax Expense and Equity Earnings
 
76.3

 
94.5

 
304.3

 
351.7

Income Tax Expense
 
19.2

 
38.6

 
75.0

 
142.1

Equity Earnings of Unconsolidated Subsidiaries
 
17.1

 
20.6

 
51.6

 
68.7

Net Income
 
74.2

 
76.5

 
280.9

 
278.3

Net Income Attributable to Noncontrolling Interests
 
0.9

 
1.0

 
2.5

 
2.6

Earnings Attributable to AEP Common Shareholders
 
$
73.3

 
$
75.5

 
$
278.4

 
$
275.7


Summary of Investment in Transmission Assets for AEP Transmission Holdco
 
 
September 30,
 
 
2018
 
2017
 
 
(in millions)
Plant in Service
 
$
6,307.3

 
$
5,001.4

Construction Work in Progress
 
1,823.0

 
1,392.8

Accumulated Depreciation and Amortization
 
244.3

 
156.6

Total Transmission Property, Net
 
$
7,886.0

 
$
6,237.6


36



Third Quarter of 2018 Compared to Third Quarter of 2017
 
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to AEP Common Shareholders from AEP Transmission Holdco
(in millions)
Third Quarter of 2017
 
$
75.5

 
 
 
Changes in Transmission Revenues:
 
 
Transmission Revenues
 
8.7

Total Change in Transmission Revenues
 
8.7

 
 
 
Changes in Expenses and Other:
 
 
Other Operation and Maintenance
 
(7.7
)
Depreciation and Amortization
 
(8.3
)
Taxes Other Than Income Taxes
 
(7.7
)
Interest and Investment Income
 
0.3

Allowance for Equity Funds Used During Construction
 
2.2

Non-Service Cost Components of Net Periodic Pension Cost
 
0.6

Interest Expense
 
(6.3
)
Total Change in Expenses and Other
 
(26.9
)
 
 
 
Income Tax Expense
 
19.4

Equity Earnings of Unconsolidated Subsidiaries
 
(3.5
)
Net Income Attributable to Noncontrolling Interests
 
0.1

 
 
 
Third Quarter of 2018
 
$
73.3


The major components of the increase in transmission revenues, which consists of wholesale sales to affiliates and nonaffiliates, were as follows:

Transmission Revenues increased $9 million primarily due to an increase in the formula rate revenue requirement primarily driven by continued investment in transmission assets. This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.

Expenses and Other, Income Tax Expense and Equity Earnings of Unconsolidated Subsidiaries changed between years as follows:

Other Operation and Maintenance expenses increased $8 million primarily due to increased transmission investment.
Depreciation and Amortization expenses increased $8 million primarily due to a higher depreciable base.
Taxes Other Than Income Taxes increased $8 million primarily due to higher property taxes as a result of increased transmission investment.
Interest Expense increased $6 million primarily due to higher long-term debt balances.
Income Tax Expense decreased $19 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.
Equity Earnings of Unconsolidated Subsidiaries decreased $4 million due to lower pretax equity earnings at ETT primarily due to decreased revenues driven by Tax Reform.

37



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
 
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to AEP Common Shareholders from AEP Transmission Holdco
(in millions)
Nine Months Ended September 30, 2017
 
$
275.7

 
 
 
Changes in Transmission Revenues:
 
 
Transmission Revenues
 
23.3

Total Change in Transmission Revenues
 
23.3

 
 
 
Changes in Expenses and Other:
 
 
Other Operation and Maintenance
 
(21.5
)
Depreciation and Amortization
 
(25.3
)
Taxes Other Than Income Taxes
 
(21.5
)
Interest and Investment Income
 
0.7

Allowance for Equity Funds Used During Construction
 
9.5

Non-Service Cost Components of Net Periodic Pension Cost
 
1.9

Interest Expense
 
(14.5
)
Total Change in Expenses and Other
 
(70.7
)
 
 
 
Income Tax Expense
 
67.1

Equity Earnings of Unconsolidated Subsidiaries
 
(17.1
)
Net Income Attributable to Noncontrolling Interests
 
0.1

 
 
 
Nine Months Ended September 30, 2018
 
$
278.4

 
The major components of the increase in transmission revenues, which consists of wholesale sales to affiliates and nonaffiliates, were as follows:
 
Transmission Revenues increased $23 million primarily due to the following:
An $87 million increase in revenues due to an increase in the formula rate revenue requirement primarily driven by continued investment in transmission assets. This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.
This increase was partially offset by:
A $64 million decrease in revenues due to a lower annual formula rate true-up in 2018 driven by implementing forward looking formula rates in 2017.
 
Expenses and Other, Income Tax Expense and Equity Earnings of Unconsolidated Subsidiaries changed between years as follows:
 
Other Operation and Maintenance expenses increased $22 million primarily due to increased transmission investment.
Depreciation and Amortization expenses increased $25 million primarily due to a higher depreciable base.
Taxes Other Than Income Taxes increased $22 million primarily due to higher property taxes as a result of increased transmission investment.
Allowance for Equity Funds Used During Construction increased $10 million primarily due to increased transmission investment resulting in a higher CWIP balance.
Interest Expense increased $15 million primarily due to the following:
A $19 million increase primarily due to higher long-term debt balances.
This increase was partially offset by:
A $4 million decrease due to higher AFUDC borrowed funds resulting from a higher CWIP balance.

38



Income Tax Expense decreased $67 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.
Equity Earnings of Unconsolidated Subsidiaries decreased $17 million primarily due to lower pretax equity earnings at ETT due to decreased revenues driven by Tax Reform and an ETT rate reduction implemented in March 2017.

39



GENERATION & MARKETING
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Generation & Marketing
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Revenues
 
$
521.6

 
$
465.5

 
$
1,487.4

 
$
1,467.5

Fuel, Purchased Electricity and Other
 
405.0

 
354.6

 
1,167.8

 
1,062.7

Gross Margin
 
116.6

 
110.9

 
319.6

 
404.8

Other Operation and Maintenance
 
68.2

 
58.7

 
192.6

 
218.1

Asset Impairments and Other Related Charges
 
35.0

 
(2.5
)
 
35.0

 
10.6

Gain on Sale of Merchant Generation Assets
 

 

 

 
(226.4
)
Depreciation and Amortization
 
12.0

 
6.2

 
26.4

 
17.5

Taxes Other Than Income Taxes
 
3.7

 
3.2

 
10.3

 
8.9

Operating Income (Loss)
 
(2.3
)
 
45.3

 
55.3

 
376.1

Interest and Investment Income
 
3.6

 
2.7

 
9.9

 
7.9

Non-Service Cost Components of Net Periodic Benefit Cost
 
3.8

 
2.2

 
11.5

 
6.7

Interest Expense
 
(3.8
)
 
(4.0
)
 
(11.7
)
 
(14.7
)
Income Before Income Tax Expense (Credit) and Equity Earnings
 
1.3

 
46.2

 
65.0

 
376.0

Income Tax Expense (Credit)
 
(3.6
)
 
12.5

 
3.7

 
129.7

Equity Earnings of Unconsolidated Subsidiaries
 
0.2

 

 
0.5

 

Net Income
 
5.1

 
33.7

 
61.8

 
246.3

Net Loss Attributable to Noncontrolling Interests
 
(0.2
)
 

 
(0.5
)
 

Earnings Attributable to AEP Common Shareholders
 
$
5.3

 
$
33.7

 
$
62.3

 
$
246.3


Summary of MWhs Generated for Generation & Marketing
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of MWhs)
Fuel Type:
 

 
 

 
 

 
 

Coal
4

 
2

 
10

 
10

Natural Gas

 

 

 
2

Wind

 

 
1

 

Total MWhs
4

 
2

 
11

 
12



40



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to AEP Common Shareholders from Generation & Marketing
(in millions)
 
 
 
Third Quarter of 2017
 
$
33.7

 
 
 

Changes in Gross Margin:
 
 

Generation
 
(7.5
)
Retail, Trading and Marketing
 
6.7

Other Revenues
 
6.5

Total Change in Gross Margin
 
5.7

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(9.5
)
Asset Impairments and Other Related Charges
 
(37.5
)
Depreciation and Amortization
 
(5.8
)
Taxes Other Than Income Taxes
 
(0.5
)
Interest and Investment Income
 
0.9

Non-Service Cost Components of Net Periodic Benefit Cost
 
1.6

Interest Expense
 
0.2

Total Change in Expenses and Other
 
(50.6
)
 
 
 

Income Tax Expense (Credit)
 
16.1

Equity Earnings of Unconsolidated Subsidiaries
 
0.2

Net Loss Attributable to Noncontrolling Interests
 
0.2

 
 
 

Third Quarter of 2018
 
$
5.3


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, purchased electricity and certain cost of service for retail operations were as follows:

Generation decreased $8 million primarily due to the reduction of energy margins.
Retail, Trading and Marketing increased $7 million due to increased energy volumes.
Other Revenues increased $7 million primarily due to renewable projects placed in service and the repowering of Trent and Desert Sky.

Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses increased $10 million primarily due to the following:
A $17 million increase due to severance accruals related to the announced merchant generation plant retirements.
This increase was partially offset by:
A $7 million decrease primarily due to the sale of certain merchant generation assets in 2017.
Asset Impairments and Other Related Charges increased $38 million primarily due to the $35 million impairment of Racine in the third quarter of 2018.
Depreciation and Amortization increased $6 million due to a higher depreciable base from increased investments in wind farms and renewable energy sources.
Income Tax Expense (Credit) decreased $16 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and a decrease in pretax book income.

41



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to AEP Common Shareholders from Generation & Marketing
(in millions)
 
 
 
Nine Months Ended September 30, 2017
 
$
246.3

 
 
 

Changes in Gross Margin:
 
 

Generation
 
(74.6
)
Retail, Trading and Marketing
 
(20.1
)
Other Revenues
 
9.5

Total Change in Gross Margin
 
(85.2
)
 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
25.5

Asset Impairments and Other Related Charges
 
(24.4
)
Gain on Sale of Merchant Generation Assets
 
(226.4
)
Depreciation and Amortization
 
(8.9
)
Taxes Other Than Income Taxes
 
(1.4
)
Interest and Investment Income
 
2.0

Non-Service Cost Components of Net Periodic Benefit Cost
 
4.8

Interest Expense
 
3.0

Total Change in Expenses and Other
 
(225.8
)
 
 
 

Income Tax Expense (Credit)
 
126.0

Equity Earnings of Unconsolidated Subsidiaries
 
0.5

Net Loss Attributable to Noncontrolling Interests
 
0.5

 
 
 

Nine Months Ended September 30, 2018
 
$
62.3


The major components of the decrease in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, purchased electricity and certain cost of service for retail operations were as follows:

Generation decreased $75 million primarily due to the reduction of revenues associated with the sale of certain merchant generation assets in 2017 combined with reduced energy margins in 2018.
Retail, Trading and Marketing decreased $20 million primarily due to lower margins in 2018 combined with the impact of favorable wholesale trading and marketing performance in 2017.
Other Revenues increased $10 million primarily due to renewable projects placed in service and the repowering of Trent and Desert Sky.

Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses decreased $26 million primarily due the following:
A $43 million decrease primarily due to the sale of certain merchant generation assets in 2017.
This decrease was partially offset by:
A $17 million increase due to severance accruals related to the announced merchant generation plant retirements.
Asset Impairments and Other Related Charges increased $24 million due to the $35 million impairment of Racine in the third quarter of 2018 compared to the $11 million impairment of other merchant generation assets in 2017.
Gain on Sale of Merchant Generation Assets decreased $226 million due to the sale of certain merchant generation assets in 2017.
Depreciation and Amortization increased $9 million due to a higher depreciable base from increased investments in wind farms and renewable energy sources.

42



Non-Service Cost Components of Net Periodic Benefit Cost decreased $5 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Income Tax Expense (Credit) decreased $126 million primarily due to a decrease in pretax book income driven by the gain on the sale of certain merchant generation assets in 2017 and the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform.

43



CORPORATE AND OTHER

Third Quarter of 2018 Compared to Third Quarter of 2017

Earnings Attributable to AEP Common Shareholders from Corporate and Other increased from $5 million in 2017 to $10 million in 2018 primarily due to a $25 million decrease in general corporate expenses and a $10 million decrease in federal income tax expense, partially offset by a $14 million increase in interest expense as a result of increased debt outstanding and a $12 million gain recognized on the sale of an equity investment in the third quarter of 2017.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Earnings Attributable to AEP Common Shareholders from Corporate and Other decreased from a loss of $11 million in 2017 to a loss of $17 million in 2018 primarily due to a $42 million increase in interest expense as a result of increased debt outstanding, a $20 million impairment of an equity investment and related assets in 2018 and a $12 million gain recognized on the sale of an equity investment in the third quarter of 2017. These items were partially offset by a $45 million decrease in general corporate expenses and an $18 million decrease in income tax expense related to the enactment of the Kentucky state tax legislation in the second quarter of 2018.

AEP SYSTEM INCOME TAXES

Third Quarter of 2018 Compared to Third Quarter of 2017

Income Tax Expense decreased $345 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Income Tax Expense decreased $704 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

44



FINANCIAL CONDITION

AEP measures financial condition by the strength of its balance sheet and the liquidity provided by its cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Debt and Equity Capitalization
 
September 30, 2018
 
December 31, 2017
 
(dollars in millions)
Long-term Debt, including amounts due within one year
$
22,774.0

 
51.7
%
 
$
21,173.3

 
51.5
%
Short-term Debt
2,242.6

 
5.1

 
1,638.6

 
4.0

Total Debt
25,016.6

 
56.8

 
22,811.9

 
55.5

AEP Common Equity
19,016.8

 
43.1

 
18,287.0

 
44.4

Noncontrolling Interests
30.0

 
0.1

 
26.6

 
0.1

Total Debt and Equity Capitalization
$
44,063.4

 
100.0
%
 
$
41,125.5

 
100.0
%

AEP’s ratio of debt-to-total capital increased from 55.5% as of December 31, 2017 to 56.8% as of September 30, 2018 primarily due to an increase in debt due to increasing construction expenditures for distribution and transmission investments.

Liquidity

Liquidity, or access to cash, is an important factor in determining AEP’s financial stability.  Management believes AEP has adequate liquidity under its existing credit facilities.  As of September 30, 2018, AEP had a $3 billion revolving credit facility commitment to support its operations.  In October 2018, the revolving credit facility was increased to $4 billion and extended until June 2022. Additional liquidity is available from cash from operations and a receivables securitization agreement.  Management is committed to maintaining adequate liquidity.  AEP generally uses short-term borrowings to fund working capital needs, property acquisitions and construction until long-term funding is arranged.  Sources of long-term funding include issuance of long-term debt, sale-leaseback or leasing agreements or common stock.

Commercial Paper Credit Facilities

AEP manages liquidity by maintaining adequate external financing commitments.  As of September 30, 2018, available liquidity was approximately $2.3 billion as illustrated in the table below:
 
 
Amount
 
Maturity
 
 
(in millions)
 
 
Commercial Paper Backup:
 

 
 
 
Revolving Credit Facility
$
3,000.0

 
June 2021
Cash and Cash Equivalents
788.3

 
 
Total Liquidity Sources
3,788.3

 
 
Less:
AEP Commercial Paper Outstanding
1,473.2

 
 
 
 
 
 
 
Net Available Liquidity
$
2,315.1

 
 

AEP uses its commercial paper program to meet the short-term borrowing needs of its subsidiaries.  The program is used to fund both a Utility Money Pool, which funds the utility subsidiaries, and a Nonutility Money Pool, which funds certain nonutility subsidiaries.  In addition, the program also funds, as direct borrowers, the short-term debt requirements of other subsidiaries that are not participants in either money pool for regulatory or operational reasons.  The maximum amount of commercial paper outstanding during the first nine months of 2018 was $2.3 billion.  The weighted-average interest rate for AEP’s commercial paper during 2018 was 2.25%.

45



Other Credit Facilities

An uncommitted facility gives the issuer of the facility the right to accept or decline each request made under the facility. AEP issues letters of credit on behalf of subsidiaries under four uncommitted facilities totaling $305 million. The Registrants’ maximum future payments for letters of credit issued under the uncommitted facilities as of September 30, 2018 was $72 million with maturities ranging from October 2018 to September 2019.

Securitized Accounts Receivables

AEP’s receivables securitization agreement provides a commitment of $750 million from bank conduits to purchase receivables and was amended in July 2018 to include a $125 million and a $625 million facility which expire in July 2020 and 2021, respectively.

Debt Covenants and Borrowing Limitations

AEP’s credit agreements contain certain covenants and require it to maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%. The method for calculating outstanding debt and capitalization is contractually defined in AEP’s credit agreements. Debt as defined in the revolving credit agreements excludes securitization bonds and debt of AEP Credit. As of September 30, 2018, this contractually-defined percentage was 55.1%. Nonperformance under these covenants could result in an event of default under these credit agreements. In addition, the acceleration of AEP’s payment obligations, or the obligations of certain of AEP’s major subsidiaries, prior to maturity under any other agreement or instrument relating to debt outstanding in excess of $50 million, would cause an event of default under these credit agreements.  This condition also applies in a majority of AEP’s non-exchange traded commodity contracts and would similarly allow lenders and counterparties to declare the outstanding amounts payable.  However, a default under AEP’s non-exchange traded commodity contracts would not cause an event of default under its credit agreements.

The revolving credit facility does not permit the lenders to refuse a draw if a material adverse change occurs.

Utility Money Pool borrowings and external borrowings may not exceed amounts authorized by regulatory orders and AEP manages its borrowings to stay within those authorized limits.

Dividend Policy and Restrictions

The Board of Directors declared a quarterly dividend of $0.67 per share in October 2018. Future dividends may vary depending upon AEP’s profit levels, operating cash flow levels and capital requirements, as well as financial and other business conditions existing at the time. Parent’s income primarily derives from common stock equity in the earnings of its utility subsidiaries. Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of the subsidiaries to transfer funds to Parent in the form of dividends. Management does not believe these restrictions will have any significant impact on its ability to access cash to meet the payment of dividends on its common stock. See “Dividend Restrictions” section of Note 12 for additional information.

Credit Ratings

AEP and its utility subsidiaries do not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit downgrade, but its access to the commercial paper market may depend on its credit ratings.  In addition, downgrades in AEP’s credit ratings by one of the rating agencies could increase its borrowing costs.  Counterparty concerns about the credit quality of AEP or its utility subsidiaries could subject AEP to additional collateral demands under adequate assurance clauses under its derivative and non-derivative energy contracts.

46



CASH FLOW

AEP relies primarily on cash flows from operations, debt issuances and its existing cash and cash equivalents to fund its liquidity and investing activities. AEP’s investing and capital requirements are primarily capital expenditures, repaying of long-term debt and paying dividends to shareholders. AEP uses short-term debt, including commercial paper, as a bridge to long-term debt financing. The levels of borrowing may vary significantly due to the timing of long-term debt financings and the impact of fluctuations in cash flows.
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
(in millions)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period
$
412.6

 
$
403.5

Net Cash Flows from Operating Activities
3,932.6

 
3,124.2

Net Cash Flows Used for Investing Activities
(4,688.7
)
 
(1,722.7
)
Net Cash Flows from (Used for) Financing Activities
1,281.0

 
(1,314.2
)
Net Increase in Cash, Cash Equivalents and Restricted Cash
524.9

 
87.3

Cash, Cash Equivalents and Restricted Cash at End of Period
$
937.5

 
$
490.8


Operating Activities
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
(in millions)
Net Income
$
1,566.5

 
$
1,527.1

Non-Cash Adjustments to Net Income (a)
1,728.7

 
2,030.6

Mark-to-Market of Risk Management Contracts
(95.4
)
 
(56.2
)
Pension Contributions to Qualified Plant Trust

 
(93.3
)
Property Taxes
304.8

 
291.4

Deferred Fuel Over/Under Recovery, Net
210.6

 
81.0

Recovery of Ohio Capacity Costs, Net
52.7

 
65.6

Provision for Refund - Global Settlement, Net
(5.5
)
 
(93.3
)
Change in Other Noncurrent Assets
161.6

 
(334.6
)
Change in Other Noncurrent Liabilities
141.9

 
205.7

Change in Certain Components of Working Capital
(133.3
)
 
(499.8
)
Net Cash Flows from Operating Activities
$
3,932.6

 
$
3,124.2


(a)
Non-Cash Adjustments to Net Income includes Depreciation and Amortization, Deferred Income Taxes, Allowance for Equity Funds Used During Construction, Amortization of Nuclear Fuel, Gain on Sale of Merchant Generation Assets and Gain on Sale of Equity Investments.
 
Net Cash Flows from Operating Activities increased by $808 million primarily due to the following:
A $496 million increase in cash from Change in Other Noncurrent Assets primarily due to changes in regulatory assets as a result of the impact of the FERC settlement on regulated AEP subsidiaries with rider recovery mechanisms in addition to the settlement of certain regulatory assets as a result of Ohio and West Virginia jurisdictional orders related to Tax Reform. See Note 4 - Rate Matters for additional information.
A $367 million increase in cash from Change in Certain Components of Working Capital. This increase is primarily due to lower employee-related payments, increased provisions for refund related to Tax Reform and decreased Fuel, Material and Supplies balances, partially offset by timing of receivables and payables.
A $130 million increase in cash from Deferred Fuel Over/Under Recovery, Net primarily due to fluctuations of fuel and purchase power costs at PSO and the reduction of ENEC balances at APCo and WPCo as a result of the West Virginia Tax Reform Order.
A $93 million increase in cash due to a pension contribution made in the second quarter of 2017.

47



An $88 million increase in cash due to Provision for Refund - Global Settlement, Net. Refunds were primarily issued in 2017.
These increases in cash were partially offset by:
A $263 million decrease in cash from Net Income, after non-cash adjustments. See Results of Operations for additional information.

Investing Activities
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
(in millions)
Construction Expenditures
$
(4,688.4
)
 
$
(3,778.2
)
Acquisitions of Nuclear Fuel
(26.1
)
 
(73.2
)
Proceeds from Sale of Merchant Generation Assets

 
2,159.6

Other
25.8

 
(30.9
)
Net Cash Flows Used for Investing Activities
$
(4,688.7
)
 
$
(1,722.7
)
 
Net Cash Flows Used for Investing Activities increased by $3 billion primarily due to the following:
A $2.2 billion decrease in cash due to the sale of certain merchant generation assets in 2017. See Note 6 - Dispositions and Impairments for additional information.
A $910 million decrease in cash due to increased construction expenditures, primarily due to increases in Transmission and Distribution Utilities of $653 million and AEP Transmission Holdco of $140 million.
 
Financing Activities
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
(in millions)
Issuance of Common Stock, Net
$
62.5

 
$

Issuance/Retirement of Debt, Net
2,216.5

 
(338.2
)
Dividends Paid on Common Stock
(922.5
)
 
(875.0
)
Other
(75.5
)
 
(101.0
)
Net Cash Flows from (Used for) Financing Activities
$
1,281.0

 
$
(1,314.2
)
 
Net Cash Flows from (Used for) Financing Activities increased by $2.6 billion primarily due to the following:
A $1.3 billion increase in cash from short-term debt primarily due to increased borrowings of commercial paper. See Note 12 - Financing Activities for additional information.
An $829 million increase in cash due to increased issuances of long-term debt. See Note 12 - Financing Activities for additional information.
A $468 million increase in cash due to decreased retirements of long-term debt. See Note 12 - Financing Activities for additional information.
A $62 million increase in cash due to increased proceeds from issuances of common stock.    
These increases in cash were partially offset by:
A $48 million decrease due to increased common stock dividend payments primarily due to increased dividends per share from 2017 to 2018.

In October 2018, I&M retired $4 million of Notes Payable related to DCC Fuel.





48



BUDGETED CONSTRUCTION EXPENDITURES

Management forecasts approximately $24 billion of construction expenditures for 2018 to 2021. Estimated construction expenditures are subject to periodic review and modification and may vary based on the ongoing effects of regulatory constraints, environmental regulations, business opportunities, market volatility, economic trends, weather, legal reviews and the ability to access capital.  Management expects to fund these construction expenditures through cash flows from operations and financing activities.  Generally, the Registrant Subsidiaries use cash or short-term borrowings under the money pool to fund these expenditures until long-term funding is arranged. For complete information of forecasted construction expenditures, see the “Budgeted Construction Expenditures” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2017 Annual Report.

OFF-BALANCE SHEET ARRANGEMENTS

AEP’s current guidelines restrict the use of off-balance sheet financing entities or structures to traditional operating lease arrangements that AEP enters in the normal course of business.  The following identifies significant off-balance sheet arrangements:
 
September 30,
2018
 
December 31,
2017
 
(in millions)
Rockport Plant, Unit 2 Future Minimum Lease Payments
$
664.7

 
$
738.4

Railcars Maximum Potential Loss from Lease Agreement
13.9

 
17.9


For complete information on each of these off-balance sheet arrangements, see the “Off-Balance Sheet Arrangements” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2017 Annual Report.

CONTRACTUAL OBLIGATION INFORMATION

A summary of contractual obligations is included in the 2017 Annual Report and has not changed significantly from year-end other than the debt issuances and retirements discussed in the “Cash Flow” section above.

CYBER SECURITY

The electric utility industry is an identified critical infrastructure function with mandatory cyber security requirements under the authority of FERC. The North American Electric Reliability Corporation (NERC), which FERC certified as the nation’s Electric Reliability Organization, developed mandatory critical infrastructure protection cyber security reliability standards. AEP began participating in the NERC grid security and emergency response exercises, GridEx, in 2013 and continues to participate in the bi-yearly exercises. These efforts, led by NERC, test and further develop the coordination, threat sharing and interaction between utilities and various government agencies relative to potential cyber and physical threats against the nation’s electric grid. In 2014, the U.S. Department of Energy published an Energy Sector Cyber Security Framework Implementation Guide for utilities to use in adopting and implementing the National Institute of Standards and Technology framework. AEP continues to be actively engaged in the framework process. In addition to these enterprise-wide initiatives, the operations of AEP’s electric utility subsidiaries are subject to extensive and rigorous mandatory cyber security requirements that are developed and enforced by NERC to protect grid security and reliability.

Critical cyber assets, such as data centers, power plants, transmission operations centers and business networks are protected using multiple layers of cyber security and authentication. Cyber hackers have been successful in breaching a number of very secure facilities, including federal agencies, banks and retailers. As these events become known and develop, AEP continually assesses its cyber security tools and processes to determine where to strengthen its defenses.


49



AEP has undertaken a variety of actions to monitor and address cyber-related risks. Cyber security and the effectiveness of AEP’s cyber security processes are discussed at Board and Audit Committee meetings. AEP’s strategy for managing cyber-related risks is integrated within its enterprise risk management processes.

AEP’s Chief Security Officer (CSO) leads the cyber security and physical security teams and is responsible for the design, implementation, and execution of AEP’s security risk management strategy, including cyber security. AEP operates a Cyber Security Intelligence and Response Center (cyber security team) responsible for monitoring the AEP System for cyber threats. Among other things, the CSO and the cyber security team actively monitor best practices, perform penetration testing, lead response exercises and internal campaigns, and provide training and communication across the organization.

The cyber security team constantly scans the AEP System for risks and threats. It also continually reviews its business continuity plan to develop an effective recovery strategy that seeks to decrease response times, limit financial impacts and maintain customer confidence during any business interruption. The cyber security team works closely with a broad range of departments, including legal, regulatory, corporate communications and audit services and information technology.

The cyber security team collaborates with partners from both industry and government, and routinely participates in industry-wide programs that exchange knowledge of threats with utility peers, industry and federal agencies. AEP is a member of a number of industry specific threat and information sharing communities including the Department of Homeland Security and the Electricity Information Sharing and Analysis Center.

AEP has partnered in the past with a major defense contractor with significant cyber security experience and technical capabilities developed through their work with the U.S. Department of Defense. AEP continues to work with a nonaffiliated entity to conduct several discussions each year about recognizing and investigating cyber vulnerabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See the “Critical Accounting Policies and Estimates” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2017 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets, the accounting for pension and other postretirement benefits and the impact of new accounting pronouncements.

ACCOUNTING PRONOUNCEMENTS

See Note 2 - New Accounting Pronouncements for information related to accounting pronouncements adopted in 2018 and pronouncements effective in the future.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

The Vertically Integrated Utilities segment is exposed to certain market risks as a major power producer and through transactions in power, coal, natural gas and marketing contracts. These risks include commodity price risks which may be subject to capacity risk, credit risk as well as interest rate risk. In addition, this segment is exposed to foreign currency exchange risk from occasionally procuring various services and materials used in its energy business from foreign suppliers. These risks represent the risk of loss that may impact this segment due to changes in the underlying market prices or rates.

The Transmission and Distribution Utilities segment is exposed to energy procurement risk and interest rate risk.


50



The Generation & Marketing segment conducts marketing, risk management and retail activities in ERCOT, PJM, SPP and MISO. This segment is exposed to certain market risks as a marketer of wholesale and retail electricity. These risks include commodity price risks which may be subject to capacity risk, credit risk as well as interest rate risk. These risks represent the risk of loss that may impact this segment due to changes in the underlying market prices or rates. In addition, the Generation & Marketing segment is also exposed to certain market risks as a power producer and through transactions in wholesale electricity, natural gas and marketing contracts.

Management employs risk management contracts including physical forward and financial forward purchase-and-sale contracts.  Management engages in risk management of power, capacity, coal, natural gas and, to a lesser extent, heating oil, gasoline and other commodity contracts to manage the risk associated with the energy business.  As a result, AEP is subject to price risk.  The amount of risk taken is determined by the Commercial Operations, Energy Supply and Finance groups in accordance with established risk management policies as approved by the Finance Committee of the Board of Directors.  AEPSC’s market risk oversight staff independently monitors risk policies, procedures and risk levels and provides members of the Commercial Operations Risk Committee (Regulated Risk Committee) and the Energy Supply Risk Committee (Competitive Risk Committee) various reports regarding compliance with policies, limits and procedures.  The Regulated Risk Committee consists of AEPSC’s Chief Financial Officer, Executive Vice President of Generation, Senior Vice President of Commercial Operations and Chief Risk Officer.  The Competitive Risk Committee consists of AEPSC’s Chief Financial Officer and Chief Risk Officer in addition to Energy Supply’s President and Vice President.  When commercial activities exceed predetermined limits, positions are modified to reduce the risk to be within the limits unless specifically approved by the respective committee.

The following table summarizes the reasons for changes in total MTM value as compared to December 31, 2017:
MTM Risk Management Contract Net Assets (Liabilities)
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
Vertically
Integrated
Utilities
 
Transmission
and
Distribution
Utilities
 
Generation
&
Marketing
 
Total
 
(in millions)
Total MTM Risk Management Contract Net Assets (Liabilities) as of December 31, 2017
$
42.1

 
$
(131.3
)
 
$
163.9

 
$
74.7

Gain from Contracts Realized/Settled During the Period and Entered in a Prior Period
(29.3
)
 
(3.4
)
 
(16.7
)
 
(49.4
)
Fair Value of New Contracts at Inception When Entered During the Period (a)

 

 
15.1

 
15.1

Changes in Fair Value Due to Market Fluctuations During the Period (b)

 

 
7.0

 
7.0

Changes in Fair Value Allocated to Regulated Jurisdictions (c)
94.8

 
40.6

 

 
135.4

Total MTM Risk Management Contract Net Assets (Liabilities) as of September 30, 2018
$
107.6

 
$
(94.1
)
 
$
169.3

 
182.8

Commodity Cash Flow Hedge Contracts
 
 
 

 
 

 
(23.2
)
Fair Value Hedge Contracts
 
 
 

 
 

 
(34.2
)
Collateral Deposits
 
 
 

 
 

 
(13.1
)
Total MTM Derivative Contract Net Assets as of September 30, 2018
 
 
 

 
 

 
$
112.3


(a)
Reflects fair value on primarily long-term structured contracts which are typically with customers that seek fixed pricing to limit their risk against fluctuating energy prices.  The contract prices are valued against market curves associated with the delivery location and delivery term.  A significant portion of the total volumetric position has been economically hedged.
(b)
Market fluctuations are attributable to various factors such as supply/demand, weather, etc.
(c)
Relates to the net gains (losses) of those contracts that are not reflected on the statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets or accounts payable.


51



See Note 9 – Derivatives and Hedging and Note 10 – Fair Value Measurements for additional information related to risk management contracts.  The following tables and discussion provide information on credit risk and market volatility risk.

Credit Risk

Credit risk is mitigated in wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. Management uses credit agency ratings and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

AEP has risk management contracts with numerous counterparties. Since open risk management contracts are valued based on changes in market prices of the related commodities, exposures change daily. As of September 30, 2018, credit exposure net of collateral to sub investment grade counterparties was approximately 6.5%, expressed in terms of net MTM assets, net receivables and the net open positions for contracts not subject to MTM (representing economic risk even though there may not be risk of accounting loss). As of September 30, 2018, the following table approximates AEP’s counterparty credit quality and exposure based on netting across commodities, instruments and legal entities where applicable:
Counterparty Credit Quality
 
Exposure
Before
Credit
Collateral
 
Credit
Collateral
 
Net
Exposure
 
Number of
Counterparties
>10% of
Net Exposure
 
Net Exposure
of
Counterparties
>10%
 
 
(in millions, except number of counterparties)
Investment Grade
 
$
491.4

 
$
2.2

 
$
489.2

 
3

 
$
268.7

Noninvestment Grade
 
0.6

 
0.6

 

 

 

No External Ratings:
 
 

 
 

 


 
 

 
 

Internal Investment Grade
 
122.5

 

 
122.5

 
3

 
77.8

Internal Noninvestment Grade
 
52.6

 
10.5

 
42.1

 
2

 
29.1

Total as of September 30, 2018
 
$
667.1

 
$
13.3

 
$
653.8

 


 



In addition, AEP is exposed to credit risk related to participation in RTOs. For each of the RTOs in which AEP participates, this risk is generally determined based on the proportionate share of member gross activity over a specified period of time.

Value at Risk (VaR) Associated with Risk Management Contracts

Management uses a risk measurement model, which calculates VaR, to measure AEP’s commodity price risk in the risk management portfolio. The VaR is based on the variance-covariance method using historical prices to estimate volatilities and correlations and assumes a 95% confidence level and a one-day holding period. Based on this VaR analysis, as of September 30, 2018, a near term typical change in commodity prices is not expected to materially impact net income, cash flows or financial condition.


52



Management calculates the VaR for both a trading and non-trading portfolio. The trading portfolio consists primarily of contracts related to energy trading and marketing activities. The non-trading portfolio consists primarily of economic hedges of generation and retail supply activities. The following tables show the end, high, average and low market risk as measured by VaR for the periods indicated:

VaR Model
Trading Portfolio
Nine Months Ended
 
Twelve Months Ended
September 30, 2018
 
December 31, 2017
End
 
High
 
Average
 
Low
 
End
 
High
 
Average
 
Low
(in millions)
 
(in millions)
$
0.2

 
$
1.8

 
$
0.3

 
$
0.1

 
$
0.2

 
$
0.5

 
$
0.2

 
$
0.1


VaR Model
Non-Trading Portfolio
Nine Months Ended
 
Twelve Months Ended
September 30, 2018
 
December 31, 2017
End
 
High
 
Average
 
Low
 
End
 
High
 
Average
 
Low
(in millions)
 
(in millions)
$
0.6

 
$
16.5

 
$
2.9

 
$
0.4

 
$
4.1

 
$
6.5

 
$
1.0

 
$
0.3


Management back-tests VaR results against performance due to actual price movements. Based on the assumed 95% confidence interval, the performance due to actual price movements would be expected to exceed the VaR at least once every 20 trading days.

As the VaR calculation captures recent price movements, management also performs regular stress testing of the trading portfolio to understand AEP’s exposure to extreme price movements. A historical-based method is employed whereby the current trading portfolio is subjected to actual, observed price movements from the last several years in order to ascertain which historical price movements translated into the largest potential MTM loss. Management then researches the underlying positions, price movements and market events that created the most significant exposure and reports the findings to the Risk Executive Committee, Regulated Risk Committee, or Competitive Risk Committee as appropriate.

Interest Rate Risk

AEP is exposed to interest rate market fluctuations in the normal course of business operations. AEP has outstanding short and long-term debt which is subject to a variable rate. AEP manages interest rate risk by limiting variable-rate exposures to a percentage of total debt, by entering into interest rate derivative instruments and by monitoring the effects of market changes in interest rates. For the nine months ended September 30, 2018 and 2017, a 100 basis point change in the benchmark rate on AEP’s variable rate debt would impact pretax interest expense annually by $25 million and $28 million, respectively.

53




AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions, except per-share and share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 
Vertically Integrated Utilities
 
$
2,610.2

 
$
2,453.8

 
$
7,332.4

 
$
6,819.3

Transmission and Distribution Utilities
 
1,180.9

 
1,149.7

 
3,450.0

 
3,242.7

Generation & Marketing
 
486.5

 
441.5

 
1,399.3

 
1,386.8

Other Revenues
 
55.5

 
59.7

 
212.9

 
165.7

TOTAL REVENUES
 
4,333.1

 
4,104.7

 
12,394.6

 
11,614.5

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 

 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
840.4

 
707.4

 
1,909.1

 
1,865.3

Purchased Electricity for Resale
 
784.7

 
718.1

 
2,551.7

 
2,156.9

Other Operation
 
826.0

 
644.0

 
2,332.7

 
1,884.1

Maintenance
 
316.6

 
269.0

 
911.0

 
862.6

Gain on Sale of Merchant Generation Assets
 

 

 

 
(226.4
)
Depreciation and Amortization
 
602.6

 
518.5

 
1,695.5

 
1,485.9

Taxes Other Than Income Taxes
 
294.2

 
272.6

 
863.0

 
792.0

TOTAL EXPENSES
 
3,664.5

 
3,129.6

 
10,263.0

 
8,820.4

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
668.6

 
975.1

 
2,131.6

 
2,794.1

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 

 
 

 
 

Interest and Investment Income
 
5.4

 
2.4

 
11.3

 
12.7

Carrying Costs Income
 
0.9

 
2.6

 
7.2

 
14.2

Allowance for Equity Funds Used During Construction
 
30.9

 
20.0

 
92.4

 
62.2

Non-Service Cost Components of Net Periodic Benefit Cost
 
31.9

 
11.4

 
95.3

 
34.2

Gain on Sale of Equity Investment
 

 
12.4

 

 
12.4

Interest Expense
 
(256.8
)
 
(223.3
)
 
(733.1
)
 
(668.0
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE (CREDIT) AND EQUITY EARNINGS
 
480.9

 
800.6

 
1,604.7

 
2,261.8

 
 
 
 
 
 
 
 
 
Income Tax Expense (Credit)
 
(80.7
)
 
264.0

 
93.5

 
797.8

Equity Earnings of Unconsolidated Subsidiaries
 
18.1

 
20.1

 
55.3

 
63.1

 
 
 
 
 
 
 
 
 
NET INCOME
 
579.7

 
556.7

 
1,566.5

 
1,527.1

 
 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
 
2.1

 
12.0

 
6.1

 
15.2

 
 
 
 
 
 
 
 
 
EARNINGS ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS
 
$
577.6

 
$
544.7

 
$
1,560.4

 
$
1,511.9

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF BASIC AEP COMMON SHARES OUTSTANDING
 
492,984,741

 
491,840,722

 
492,649,456

 
491,781,643

 
 
 
 
 
 
 
 
 
TOTAL BASIC EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS
 
$
1.17

 
$
1.11

 
$
3.17

 
$
3.07

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF DILUTED AEP COMMON SHARES OUTSTANDING
 
493,940,543

 
492,986,307

 
493,526,937

 
492,428,586

 
 
 
 
 
 
 
 
 
TOTAL DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS
 
$
1.17

 
$
1.10

 
$
3.16

 
$
3.07

 
 
 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER SHARE
 
$
0.62

 
$
0.59

 
$
1.86

 
$
1.77

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

54



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
579.7

 
$
556.7

 
$
1,566.5

 
$
1,527.1

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
 
 

 
 

 
 

 
 

Cash Flow Hedges, Net of Tax of $2.7 and $(8.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $3.9 and $(12.2) for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
10.2

 
(15.0
)
 
14.7

 
(22.6
)
Securities Available for Sale, Net of Tax of $0 and $0.5 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0 and $1.5 for the Nine Months Ended September 30, 2018 and 2017, Respectively
 

 
0.9

 

 
2.7

Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.4) and $0.1 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(1.1) and $0.4 for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
(1.4
)
 
0.3

 
(4.0
)
 
0.8

 
 
 
 
 
 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
 
8.8

 
(13.8
)
 
10.7

 
(19.1
)
 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
588.5

 
542.9

 
1,577.2

 
1,508.0

 
 
 
 
 
 
 
 
 
Total Comprehensive Income Attributable to Noncontrolling Interests
 
2.1

 
12.0

 
6.1

 
15.2

 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS
 
$
586.4

 
$
530.9

 
$
1,571.1

 
$
1,492.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

55



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
AEP Common Shareholders
 
 
 
 
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
Shares
 
Amount
 
Paid-in
Capital
 
Retained
Earnings
 
 
Noncontrolling
Interests
 
Total
TOTAL EQUITY – DECEMBER 31, 2016
512.0

 
$
3,328.3

 
$
6,332.6

 
$
7,892.4

 
$
(156.3
)
 
$
23.1

 
$
17,420.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 

 
 

 
 

 
(872.3
)
 
 

 
(2.7
)
 
(875.0
)
Other Changes in Equity
 

 
 

 
51.6

 
 
 
 

 
0.8

 
52.4

Net Income
 
 
 
 
 
 
1,511.9

 
 

 
15.2

 
1,527.1

Other Comprehensive Loss
 

 
 

 
 

 
 

 
(19.1
)
 
 

 
(19.1
)
TOTAL EQUITY – SEPTEMBER 30, 2017
512.0

 
$
3,328.3

 
$
6,384.2

 
$
8,532.0

 
$
(175.4
)
 
$
36.4

 
$
18,105.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
TOTAL EQUITY – DECEMBER 31, 2017
512.2

 
$
3,329.4

 
$
6,398.7

 
$
8,626.7

 
$
(67.8
)
 
$
26.6

 
$
18,313.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of Common Stock
1.1

 
7.1

 
55.4

 
 

 
 

 
 

 
62.5

Common Stock Dividends
 

 
 

 
 

 
(919.3
)
 
 

 
(3.2
)
 
(922.5
)
Other Changes in Equity
 

 
 

 
18.5

 
 
 
 

 
0.5

 
19.0

ASU 2018-02 Adoption
 
 
 
 
 
 
14.0

 
(17.0
)
 
 
 
(3.0
)
ASU 2016-01 Adoption
 
 
 
 


 
11.9

 
(11.9
)
 
 
 

Net Income
 
 
 
 
 
 
1,560.4

 
 

 
6.1

 
1,566.5

Other Comprehensive Income
 

 
 

 
 

 
 

 
10.7

 
 

 
10.7

TOTAL EQUITY – SEPTEMBER 30, 2018
513.3

 
$
3,336.5

 
$
6,472.6

 
$
9,293.7

 
$
(86.0
)
 
$
30.0

 
$
19,046.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

56



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 

 
 

Cash and Cash Equivalents
 
$
788.3

 
$
214.6

Restricted Cash
(September 30, 2018 and December 31, 2017 Amounts Include $149.2 and $198, Respectively, Related to Transition Funding, Ohio Phase-in-Recovery Funding and Appalachian Consumer Rate Relief Funding)
 
149.2

 
198.0

Other Temporary Investments
(September 30, 2018 and December 31, 2017 Amounts Include $157 and $155.4, Respectively, Related to EIS and Transource Energy)
 
164.1

 
161.7

Accounts Receivable:
 
 

 
 

Customers
 
757.9

 
643.9

Accrued Unbilled Revenues
 
241.2

 
230.2

Pledged Accounts Receivable – AEP Credit
 
1,112.2

 
954.2

Miscellaneous
 
47.2

 
101.2

Allowance for Uncollectible Accounts
 
(40.4
)
 
(38.5
)
Total Accounts Receivable
 
2,118.1

 
1,891.0

Fuel
 
282.3

 
387.7

Materials and Supplies
 
565.6

 
565.5

Risk Management Assets
 
191.9

 
126.2

Regulatory Asset for Under-Recovered Fuel Costs
 
137.5

 
292.5

Margin Deposits
 
108.8

 
105.5

Prepayments and Other Current Assets
 
186.6

 
310.4

TOTAL CURRENT ASSETS
 
4,692.4

 
4,253.1

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 

 
 

Electric:
 
 

 
 

Generation
 
21,327.3

 
20,760.5

Transmission
 
20,113.7

 
18,972.5

Distribution
 
20,763.9

 
19,868.5

Other Property, Plant and Equipment (Including Coal Mining and Nuclear Fuel)
 
3,996.9

 
3,706.3

Construction Work in Progress
 
4,995.5

 
4,120.7

Total Property, Plant and Equipment
 
71,197.3

 
67,428.5

Accumulated Depreciation and Amortization
 
17,841.6

 
17,167.0

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
53,355.7

 
50,261.5

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 

 
 

Regulatory Assets
 
3,189.9

 
3,587.6

Securitized Assets
 
1,001.4

 
1,211.2

Spent Nuclear Fuel and Decommissioning Trusts
 
2,666.0

 
2,527.6

Goodwill
 
52.5

 
52.5

Long-term Risk Management Assets
 
264.9

 
282.1

Deferred Charges and Other Noncurrent Assets
 
2,394.6

 
2,553.5

TOTAL OTHER NONCURRENT ASSETS
 
9,569.3

 
10,214.5

 
 
 
 
 
TOTAL ASSETS
 
$
67,617.4

 
$
64,729.1

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

57



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
September 30, 2018 and December 31, 2017
(dollars in millions)
(Unaudited)
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
 
 
2018
 
2017
CURRENT LIABILITIES
 
 
 
 
Accounts Payable
 
 
 
 
 
 
$
1,579.9

 
$
2,065.3

Short-term Debt:
 
 
 
 
 
 
 
 
 
Securitized Debt for Receivables – AEP Credit
 
 
 
 
 
 
750.0

 
718.0

Other Short-term Debt
 
 
 
 
 
 
1,492.6

 
920.6

Total Short-term Debt
 
 
 
 
 
 
2,242.6

 
1,638.6

Long-term Debt Due Within One Year
(September 30, 2018 and December 31, 2017 Amounts Include $420.7 and $406.9, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and Sabine)
 
 
1,904.2

 
1,753.7

Risk Management Liabilities
 
 
 
 
 
 
57.3

 
61.6

Customer Deposits
 
 
 
 
 
 
372.5

 
357.0

Accrued Taxes
 
 
 
 
 
 
774.1

 
1,115.5

Accrued Interest
 
 
 
 
 
 
299.8

 
234.5

Regulatory Liability for Over-Recovered Fuel Costs
 
 
 
 
66.9

 
11.9

Other Current Liabilities
 
 
 
 
 
 
1,128.9

 
1,033.2

TOTAL CURRENT LIABILITIES
 
 
 
 
 
 
8,426.2

 
8,271.3

 
 
 
 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt
(September 30, 2018 and December 31, 2017 Amounts Include $1,110 and $1,410.5, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, Transource Energy, and Sabine)
 
 
20,869.8

 
19,419.6

Long-term Risk Management Liabilities
 
 
 
 
 
 
287.2

 
322.0

Deferred Income Taxes
 
 
 
 
 
 
7,110.4

 
6,813.9

Regulatory Liabilities and Deferred Investment Tax Credits
 
 
8,643.5

 
8,422.3

Asset Retirement Obligations
 
 
 
 
 
 
1,975.1

 
1,925.5

Employee Benefits and Pension Obligations
 
 
 
 
 
 
350.7

 
398.1

Deferred Credits and Other Noncurrent Liabilities
 
 
807.2

 
830.9

TOTAL NONCURRENT LIABILITIES
 
 
 
 
 
 
40,043.9

 
38,132.3

 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES
 
 
 
 
 
 
48,470.1

 
46,403.6

 
 
 
 
 
 
 
 
 
 
Rate Matters (Note 4)
 
 
 
 
 
 

 

Commitments and Contingencies (Note 5)
 
 
 
 
 
 

 

 
 
 
 
 
 
 
 
 
 
MEZZANINE EQUITY
 
 
 
 
Redeemable Noncontrolling Interest
 
 
 
 
 
 
70.0

 

Contingently Redeemable Performance Share Awards
 
 
 
 
 
 
30.5

 
11.9

TOTAL MEZZANINE EQUITY
 
 
 
 
 
 
100.5

 
11.9

 
 
 
 
 
 
 
 
 
 
EQUITY
 
 
 
 
Common Stock – Par Value – $6.50 Per Share:
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
 
 
 
 
Shares Authorized
 
600,000,000
 
600,000,000
 
 
 
 
 
Shares Issued
 
513,301,636
 
512,210,644
 
 
 
 
 
(20,204,160 and 20,205,046 Shares were Held in Treasury as of September 30, 2018 and December 31, 2017, Respectively)
 
 
3,336.5

 
3,329.4

Paid-in Capital
 
 
 
 
 
 
6,472.6

 
6,398.7

Retained Earnings
 
 
 
 
 
 
9,293.7

 
8,626.7

Accumulated Other Comprehensive Income (Loss)
 
 
(86.0
)
 
(67.8
)
TOTAL AEP COMMON SHAREHOLDERS’ EQUITY
 
 
19,016.8

 
18,287.0

 
 
 
 
 
 
 
 
 
 
Noncontrolling Interests
 
 
 
 
 
 
30.0

 
26.6

 
 
 
 
 
 
 
 
 
 
TOTAL EQUITY
 
 
 
 
 
 
19,046.8

 
18,313.6

 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES, MEZZANINE EQUITY AND TOTAL EQUITY
 
$
67,617.4

 
$
64,729.1

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

58



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
1,566.5

 
$
1,527.1

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
Depreciation and Amortization
 
1,695.5

 
1,485.9

Deferred Income Taxes
 
43.0

 
740.9

Allowance for Equity Funds Used During Construction
 
(92.4
)
 
(62.2
)
Mark-to-Market of Risk Management Contracts
 
(95.4
)
 
(56.2
)
Amortization of Nuclear Fuel
 
82.6

 
104.8

Pension Contributions to Qualified Plan Trust
 

 
(93.3
)
Property Taxes
 
304.8

 
291.4

Deferred Fuel Over/Under-Recovery, Net
 
210.6

 
81.0

Gain on Sale of Merchant Generation Assets
 

 
(226.4
)
Gain on Sale of Equity Investment
 

 
(12.4
)
Recovery of Ohio Capacity Costs
 
52.7

 
65.6

Provision for Refund  Global Settlement, Net

 
(5.5
)
 
(93.3
)
Change in Other Noncurrent Assets
 
161.6

 
(334.6
)
Change in Other Noncurrent Liabilities
 
141.9

 
205.7

Changes in Certain Components of Working Capital:
 
 
 
 
Accounts Receivable, Net
 
(52.3
)
 
201.3

Fuel, Materials and Supplies
 
98.7

 
58.5

Accounts Payable
 
(45.0
)
 
(91.0
)
Accrued Taxes, Net
 
(247.5
)
 
(310.1
)
Other Current Assets
 
11.7

 
(98.2
)
Other Current Liabilities
 
101.1

 
(260.3
)
Net Cash Flows from Operating Activities
 
3,932.6

 
3,124.2

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Construction Expenditures
 
(4,688.4
)
 
(3,778.2
)
Purchases of Investment Securities
 
(1,591.2
)
 
(1,855.8
)
Sales of Investment Securities
 
1,550.9

 
1,808.6

Acquisitions of Nuclear Fuel
 
(26.1
)
 
(73.2
)
Proceeds from Sale of Merchant Generation Assets
 

 
2,159.6

Other Investing Activities
 
66.1

 
16.3

Net Cash Flows Used for Investing Activities
 
(4,688.7
)
 
(1,722.7
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Issuance of Common Stock
 
62.5

 

Issuance of Long-term Debt
 
3,572.0

 
2,742.7

Commercial Paper and Credit Facility Borrowings
 
205.6

 

Change in Short-term Debt, Net
 
604.0

 
(653.7
)
Retirement of Long-term Debt
 
(1,959.5
)
 
(2,427.2
)
Commercial Paper and Credit Facility Repayments
 
(205.6
)
 

Make Whole Premium on Extinguishment of Long-term Debt
 
(10.3
)
 
(46.1
)
Principal Payments for Capital Lease Obligations
 
(49.4
)
 
(50.5
)
Dividends Paid on Common Stock
 
(922.5
)
 
(875.0
)
Other Financing Activities
 
(15.8
)
 
(4.4
)
Net Cash Flows from (Used for) Financing Activities
 
1,281.0

 
(1,314.2
)
 
 
 
 
 
Net Increase in Cash, Cash Equivalents and Restricted Cash
 
524.9

 
87.3

Cash, Cash Equivalents and Restricted Cash at Beginning of Period
 
412.6

 
403.5

Cash, Cash Equivalents and Restricted Cash at End of Period
 
$
937.5

 
$
490.8

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 
 
 
Cash Paid for Interest, Net of Capitalized Amounts
 
$
631.3

 
$
613.8

Net Cash Paid (Received) for Income Taxes
 
(27.9
)
 
(6.8
)
Noncash Acquisitions Under Capital Leases
 
43.5

 
44.5

Construction Expenditures Included in Current Liabilities as of September 30,
 
882.3

 
791.6

Construction Expenditures Included in Noncurrent Liabilities as of September 30,
 

 
71.8

Acquisition of Nuclear Fuel Included in Current Liabilities as of September 30,
 
12.1

 
0.6

Noncash Contribution of Assets by Noncontrolling Interest
 
84.0

 

Expected Reimbursement for Spent Nuclear Fuel Dry Cask Storage
 
2.1

 
2.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

59



AEP TEXAS INC.
AND SUBSIDIARIES


60



AEP TEXAS INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 
 
 
Residential
3,893

 
3,867

 
9,679

 
9,163

Commercial
3,172

 
3,135

 
8,438

 
8,395

Industrial
2,054

 
1,867

 
6,243

 
6,025

Miscellaneous
159

 
157

 
430

 
429

Total Retail
9,278

 
9,026

 
24,790

 
24,012


Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.

Summary of Heating and Cooling Degree Days
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in degree days)
Actual – Heating (a)

 

 
234

 
103

Normal – Heating (b)

 

 
194

 
199

 
 
 
 
 
 
 
 
Actual – Cooling (c)
1,424

 
1,393

 
2,612

 
2,640

Normal – Cooling (b)
1,367

 
1,364

 
2,413

 
2,396


(a) Heating degree days are calculated on a 55 degree temperature base.
(b) Normal Heating/Cooling represents the thirty-year average of degree days.
(c) Cooling degree days are calculated on a 65 degree temperature base.

61



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income
(in millions)
 
Third Quarter of 2017
 
$
64.3

 
 
 

Changes in Gross Margin:
 
 
Retail Margins
 
(4.4
)
Off-system Sales
 
3.7

Transmission Revenues
 
(0.6
)
Other Revenues
 
(1.4
)
Total Change in Gross Margin
 
(2.7
)
 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(19.8
)
Depreciation and Amortization
 
(9.3
)
Taxes Other Than Income Taxes
 
(3.0
)
Allowance for Equity Funds Used During Construction
 
5.8

Non-Service Cost Components of Net Periodic Benefit Cost
 
2.2

Interest Expense
 
(2.0
)
Total Change in Expenses and Other
 
(26.1
)
 
 
 

Income Tax Expense
 
22.3

 
 
 

Third Quarter of 2018
 
$
57.8


The major components of the decrease in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals were as follows:

Retail Margins decreased $4 million primarily due to the following:
A $6 million decrease due to lower weather-normalized margins.
A $6 million decrease due to the 2018 provisions for customer refunds related to Tax Reform.  This decrease was offset in Income Tax Expense below.
These decreases were partially offset by:
A $3 million increase in revenues associated with the Distribution Cost Recovery Factor revenue rider.
A $2 million increase in revenues associated with the Transmission Cost Recovery Factor revenue rider. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.
A $2 million increase in weather-related usage primarily driven by a 2% increase in cooling degree days.
Margins from Off-system Sales increased $4 million primarily due to higher affiliated PPA revenues, which were offset by a corresponding increase in Other Operation and Maintenance expenses below.
Transmission Revenues decreased $1 million primarily due to the following:
A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers. This decrease was offset in Income Tax Expense below.
This decrease was offset by:
A $6 million increase due to recovery of increased transmission investment in ERCOT.


62



Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $20 million primarily due to the following:
A $7 million increase in ERCOT transmission expenses. This increase was offset by an increase in Retail Margins above.
A $6 million increase in employee-related expenses.
A $5 million increase in affiliated PPA expenses. This increase was offset by an increase in Margins from Off-system sales above.
Depreciation and Amortization expenses increased $9 million primarily due to the following:
A $4 million increase due to a prior year asset retirement obligation revision for the Oklaunion Power Station.
A $3 million increase in depreciation expense primarily due to an increase in the depreciable base of transmission and distribution assets.
Taxes Other Than Income Taxes increased $3 million primarily due to increased property taxes as a result of additional capital investment and increased tax rates.
Allowance for Equity Funds Used During Construction increased $6 million primarily due to increased transmission projects.
Interest Expense increased $2 million primarily due to the following:
An $8 million increase due to the issuances of long-term debt.
This increase was offset by:
A $4 million decrease due to a higher debt component of AFUDC and increased investment primarily in transmission projects.
A $2 million decrease in securitization assets related to Transition Funding. This decrease was offset above in Other Revenues and Depreciation and Amortization.
Income Tax Expense decreased $22 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

63



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income
(in millions)
 
Nine Months Ended September 30, 2017
 
$
146.6

 
 
 

Changes in Gross Margin:
 
 
Retail Margins
 
16.1

Off-system Sales
 
2.0

Transmission Revenues
 
1.4

Other Revenues
 
(1.2
)
Total Change in Gross Margin
 
18.3

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(45.3
)
Depreciation and Amortization
 
(21.9
)
Taxes Other Than Income Taxes
 
(9.0
)
Interest Income
 
(1.6
)
Allowance for Equity Funds Used During Construction
 
13.0

Non-Service Cost Components of Net Periodic Benefit Cost
 
6.5

Interest Expense
 
(3.3
)
Total Change in Expenses and Other
 
(61.6
)
 
 
 

Income Tax Expense
 
47.8

 
 
 

Nine Months Ended September 30, 2018
 
$
151.1


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals were as follows:

Retail Margins increased $16 million primarily due to the following:
A $16 million increase in revenues associated with the Distribution Cost Recovery Factor revenue rider.
A $13 million increase in revenues associated with the Transmission Cost Recovery Factor revenue rider. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.
A $13 million increase in weather-related usage primarily driven by a 127% increase in heating degree days partially offset by a 1% decrease in cooling degree days.
These increases were partially offset by:
An $18 million decrease due to the 2018 provisions for customer refunds related to Tax Reform.  This decrease was offset in Income Tax Expense below.
A $7 million decrease due to lower weather-normalized margins primarily in the residential class.
Transmission Revenues increased $1 million primarily due to the following:
A $19 million increase due to recovery of increased transmission investment in ERCOT.
This increase was partially offset by:
An $11 million decrease due to the 2018 provisions for customer refunds due to Tax Reform.  This decrease was offset in Income Tax Expense below.
A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers. This decrease was offset in Income Tax Expense below.


64



Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $45 million primarily due to the following:
A $20 million increase in ERCOT transmission expenses. This increase was partially offset by an increase in Retail Margins above.
A $9 million increase in distribution expenses.
A $9 million increase in employee-related expenses.
A $5 million increase in affiliated PPA expenses. This increase was offset by an increase in Margins from Off-system sales above.
Depreciation and Amortization expenses increased $22 million primarily due to the following:
An $11 million increase in depreciation expense primarily due to an increase in the depreciable base of transmission and distribution assets.
A $5 million increase in securitization amortizations related to Transition Funding. This increase was offset in Other Revenues above and Interest Expense below.
A $4 million increase due to a prior year asset retirement obligation revision for the Oklaunion Power Station.
A $3 million increase in amortization primarily due to advanced metering infrastructure projects and capitalized software.
Taxes Other Than Income Taxes increased $9 million primarily due to increased property taxes as a result of additional capital investment and increased tax rates.
Allowance for Equity Funds Used During Construction increased $13 million primarily due to increased transmission projects.
Non-Service Cost Components of Net Periodic Cost decreased $7 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Interest Expense increased $3 million primarily due to the following:
A $20 million increase due to the issuances of long-term debt.
This increase was partially offset by:
A $10 million decrease due to a higher debt component of AFUDC and increased investment primarily in transmission projects.
An $8 million decrease in securitization assets related to Transition Funding. This decrease was offset above in Other Revenues and Depreciation and Amortization.
Income Tax Expense decreased $48 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

65




AEP TEXAS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 
Electric Transmission and Distribution
 
$
404.5

 
$
411.5

 
$
1,127.0

 
$
1,111.4

Sales to AEP Affiliates
 
27.5

 
18.9

 
63.3

 
50.8

Other Revenues
 
1.4

 
0.8

 
3.0

 
2.1

TOTAL REVENUES
 
433.4

 
431.2

 
1,193.3

 
1,164.3

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 

 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
13.2

 
8.3

 
27.9

 
17.2

Other Operation
 
133.4

 
117.5

 
368.4

 
332.8

Maintenance
 
23.2

 
19.3

 
67.8

 
58.1

Depreciation and Amortization
 
133.3

 
124.0

 
364.9

 
343.0

Taxes Other Than Income Taxes
 
36.3

 
33.3

 
102.3

 
93.3

TOTAL EXPENSES
 
339.4

 
302.4

 
931.3

 
844.4

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
94.0

 
128.8

 
262.0

 
319.9

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 

 
 

 
 

Interest Income
 
0.5

 
0.5

 

 
1.6

Allowance for Equity Funds Used During Construction
 
5.8

 

 
15.2

 
2.2

Non-Service Cost Components of Net Periodic Benefit Cost
 
3.1

 
0.9

 
9.2

 
2.7

Interest Expense
 
(37.3
)
 
(35.3
)
 
(108.9
)
 
(105.6
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
66.1

 
94.9

 
177.5

 
220.8

 
 
 
 
 
 
 
 
 
Income Tax Expense
 
8.3

 
30.6

 
26.4

 
74.2

 
 
 
 
 
 
 
 
 
NET INCOME
 
$
57.8

 
$
64.3

 
$
151.1

 
$
146.6

The common stock of AEP Texas is wholly-owned by Parent.
 
See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.


66



AEP TEXAS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
57.8

 
$
64.3

 
$
151.1

 
$
146.6

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME, NET OF TAXES
 
 
 
 
 
 
 
 
Cash Flow Hedges, Net of Tax of $0.1 and $0.2 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0.2 and $0.4 for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
0.3

 
0.2

 
0.8

 
0.7

Amortization of Pension and OPEB Deferred Costs, Net of Tax of $0 and $0 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0 and $0.1 for the Nine Months Ended September 30, 2018 and 2017, Respectively
 

 
0.1

 
0.1

 
0.2

 
 
 
 
 
 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME
 
0.3

 
0.3

 
0.9

 
0.9

 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
$
58.1

 
$
64.6

 
$
152.0

 
$
147.5

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.


67



AEP TEXAS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER’S EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016
 
$
857.9

 
$
814.1

 
$
(14.9
)
 
$
1,657.1

 
 
 
 
 
 
 
 
 
Capital Contribution from Parent
 
200.0

 
 
 
 

 
200.0

Net Income
 
 

 
146.6

 
 

 
146.6

Other Comprehensive Income
 
 

 
 

 
0.9

 
0.9

TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017
 
$
1,057.9

 
$
960.7

 
$
(14.0
)
 
$
2,004.6

 
 
 
 
 
 
 
 
 
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017
 
$
1,057.9

 
$
1,124.6

 
$
(12.6
)
 
$
2,169.9

 
 
 
 
 
 
 
 
 
Capital Contribution from Parent
 
100.0

 
 
 
 
 
100.0

ASU 2018-02 Adoption
 
 
 
1.8

 
(2.7
)
 
(0.9
)
Net Income
 
 

 
151.1

 
 
 
151.1

Other Comprehensive Income
 
 

 
 
 
0.9

 
0.9

TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018
 
$
1,157.9

 
$
1,277.5

 
$
(14.4
)
 
$
2,421.0

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.


68



AEP TEXAS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
0.1

 
$
2.0

Restricted Cash for Securitized Transition Funding
 
124.2

 
155.2

Advances to Affiliates
 
8.0

 
111.9

Accounts Receivable:
 
 
 
 
Customers
 
132.9

 
105.3

Affiliated Companies
 
14.3

 
12.3

Accrued Unbilled Revenues
 
73.7

 
75.8

Miscellaneous
 
0.5

 
1.3

Allowance for Uncollectible Accounts
 
(0.9
)
 
(0.7
)
Total Accounts Receivable
 
220.5

 
194.0

Fuel
 
6.9

 
3.6

Materials and Supplies
 
51.1

 
52.0

Risk Management Assets
 
0.5

 
0.5

Accrued Tax Benefits
 
14.6

 
41.0

Prepayments and Other Current Assets
 
12.0

 
3.6

TOTAL CURRENT ASSETS
 
437.9

 
563.8

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
352.1

 
350.7

Transmission
 
3,302.3

 
3,053.6

Distribution
 
3,968.4

 
3,718.6

Other Property, Plant and Equipment
 
554.0

 
461.0

Construction Work in Progress
 
1,108.8

 
835.7

Total Property, Plant and Equipment
 
9,285.6

 
8,419.6

Accumulated Depreciation and Amortization
 
1,643.9

 
1,594.5

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
7,641.7

 
6,825.1

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
396.4

 
378.7

Securitized Transition Assets
(September 30, 2018 and December 31, 2017 Amounts Include $702.9 and $869.5, Respectively, Related to Transition Funding)
 
717.9

 
891.2

Deferred Charges and Other Noncurrent Assets
 
97.8

 
114.8

TOTAL OTHER NONCURRENT ASSETS
 
1,212.1

 
1,384.7

 
 
 
 
 
TOTAL ASSETS
 
$
9,291.7

 
$
8,773.6

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.


69



AEP TEXAS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$
77.8

 
$

Accounts Payable:
 
 
 
 
General
 
208.8

 
379.4

Affiliated Companies
 
31.7

 
30.2

Long-term Debt Due Within One Year – Nonaffiliated
(September 30, 2018 and December 31, 2017 Amounts Include $250.5 and $236.1, Respectively, Related to Transition Funding)
 
500.5

 
266.1

Accrued Taxes
 
90.8

 
77.2

Accrued Interest
(September 30, 2018 and December 31, 2017 Amounts Include $9 and $15.9, Respectively, Related to Transition Funding)
 
54.3

 
42.2

Oklaunion Purchase Power Agreement
 
22.8

 

Other Current Liabilities
 
99.5

 
76.4

TOTAL CURRENT LIABILITIES
 
1,086.2

 
871.5

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
(September 30, 2018 and December 31, 2017 Amounts Include $574.7 and $790.1, Respectively, Related to Transition Funding)
 
3,413.9

 
3,383.2

Deferred Income Taxes
 
902.3

 
913.1

Regulatory Liabilities and Deferred Investment Tax Credits
 
1,346.4

 
1,320.5

Oklaunion Purchase Power Agreement
 
28.7

 
52.0

Deferred Credits and Other Noncurrent Liabilities
 
93.2

 
63.4

TOTAL NONCURRENT LIABILITIES
 
5,784.5

 
5,732.2

 
 
 
 
 
TOTAL LIABILITIES
 
6,870.7

 
6,603.7

 
 
 
 
 
Rate Matters (Note 4)
 

 

Commitments and Contingencies (Note 5)
 

 

 
 
 
 
 
COMMON SHAREHOLDER’S EQUITY
 
 
 
 
Paid-in Capital
 
1,157.9

 
1,057.9

Retained Earnings
 
1,277.5

 
1,124.6

Accumulated Other Comprehensive Income (Loss)
 
(14.4
)
 
(12.6
)
TOTAL COMMON SHAREHOLDER’S EQUITY
 
2,421.0

 
2,169.9

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
 
$
9,291.7

 
$
8,773.6

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.


70



AEP TEXAS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
151.1

 
$
146.6

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 

 
 

Depreciation and Amortization
 
364.9

 
343.0

Deferred Income Taxes
 
(21.2
)
 
124.1

Allowance for Equity Funds Used During Construction
 
(15.2
)
 
(2.2
)
Mark-to-Market of Risk Management Contracts
 

 
0.1

Pension Contributions to Qualified Plan Trust
 

 
(8.8
)
Property Taxes
 
(19.2
)
 
(15.9
)
Change in Regulatory Asset – Catastrophe Reserve
 
(22.3
)
 
(72.3
)
Change in Other Noncurrent Assets
 
(14.2
)
 
(29.1
)
Change in Other Noncurrent Liabilities
 
67.1

 
7.4

Changes in Certain Components of Working Capital:
 
 

 
 
Accounts Receivable, Net
 
(26.5
)
 
(47.6
)
Fuel, Materials and Supplies
 
(2.4
)
 
(0.1
)
Accounts Payable
 
(19.1
)
 
77.3

Accrued Taxes, Net
 
40.0

 
1.7

Other Current Assets
 
(6.3
)
 
(2.5
)
Other Current Liabilities
 
14.1

 
(31.2
)
Net Cash Flows from Operating Activities
 
490.8

 
490.5

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(1,096.1
)
 
(617.5
)
Change in Advances to Affiliates, Net
 
103.9

 
(437.0
)
Other Investing Activities
 
31.1

 
11.5

Net Cash Flows Used for Investing Activities
 
(961.1
)
 
(1,043.0
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Capital Contribution from Parent
 
100.0

 
200.0

Issuance of Long-term Debt – Nonaffiliated
 
494.0

 
749.9

Change in Advances from Affiliates, Net
 
77.8

 
(169.5
)
Retirement of Long-term Debt – Nonaffiliated
 
(231.7
)
 
(248.4
)
Principal Payments for Capital Lease Obligations
 
(3.6
)
 
(3.0
)
Other Financing Activities
 
0.9

 
(0.3
)
Net Cash Flows from Financing Activities
 
437.4

 
528.7

 
 
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash for Securitized Transition Funding
 
(32.9
)
 
(23.8
)
Cash, Cash Equivalents and Restricted Cash for Securitized Transition Funding at Beginning of Period
 
157.2

 
146.9

Cash, Cash Equivalents and Restricted Cash for Securitized Transition Funding at End of Period
 
$
124.3

 
$
123.1

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
92.2

 
$
101.1

Net Cash Paid (Received) for Income Taxes
 
(14.2
)
 
(23.3
)
Noncash Acquisitions Under Capital Leases
 
8.9

 
5.3

Construction Expenditures Included in Current Liabilities as of September 30,
 
176.4

 
166.1

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.


71





AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES

72



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Summary of Investment in Transmission Assets for AEPTCo
 
 
As of September 30,
 
 
2018
 
2017
 
 
(in millions)
Plant In Service
 
$
5,988.7

 
$
4,664.1

Construction Work in Progress
 
1,772.9

 
1,393.0

Accumulated Depreciation and Amortization
 
234.6

 
134.0

Total Transmission Property, Net
 
$
7,527.0

 
$
5,923.1


Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income
(in millions)
 
 
 
Third Quarter of 2017
 
$
58.6

 
 
 
Changes in Transmission Revenues:
 
 
Transmission Revenues
 
28.8

Total Change in Transmission Revenues
 
28.8

 
 
 
Changes in Expenses and Other:
 
 
Other Operation and Maintenance
 
(7.5
)
Depreciation and Amortization
 
(10.3
)
Taxes Other Than Income Taxes
 
(7.6
)
Interest Income
 
0.3

Allowance for Equity Funds Used During Construction
 
6.6

Interest Expense
 
(2.7
)
Total Change in Expenses and Other
 
(21.2
)
 
 
 
Income Tax Expense
 
11.9

 
 
 
Third Quarter of 2018
 
$
78.1


The tables above reflect the revisions made to AEPTCo’s previously issued financial statements. For additional details on the revisions to AEPTCo’s financial statements, see Note 1 - Significant Accounting Matters.

The major components of the increase in transmission revenues, which consists of wholesale sales to affiliates and nonaffiliates were as follows:

Transmission Revenues increased $29 million due to an increase in the formula rate revenue requirement primarily driven by continued investment in transmission assets. This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.


73



Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $8 million primarily due to increased transmission investment.
Depreciation and Amortization expenses increased $10 million primarily due to a higher depreciable base.
Taxes Other Than Income Taxes increased $8 million primarily due to higher property taxes as a result of increased transmission investment.
Allowance for Equity Funds Used During Construction increased $7 million primarily due to increased transmission investment resulting in a higher CWIP balance.
Interest Expense increased $3 million primarily due to the following:
A $5 million increase primarily due to higher long-term debt balances.
This increase was partially offset by:
A $2 million decrease due to higher AFUDC borrowed funds resulting from a higher CWIP balance.
Income Tax Expense decreased $12 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and amortization of Excess ADIT, partially offset by an increase in pretax book income.

74



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income
(in millions)
 
Nine Months Ended September 30, 2017
 
$
212.4

 
 
 

Changes in Transmission Revenues:
 
 

Transmission Revenues
 
51.4

Total Change in Transmission Revenues
 
51.4

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(21.6
)
Depreciation and Amortization
 
(27.8
)
Taxes Other Than Income Taxes
 
(20.9
)
Interest Income
 
0.8

Allowance for Equity Funds Used During Construction
 
15.7

Interest Expense
 
(10.3
)
Total Change in Expenses and Other
 
(64.1
)
 
 
 

Income Tax Expense
 
44.5

 
 
 

Nine Months Ended September 30, 2018
 
$
244.2

 
The table above reflects the revisions made to AEPTCo’s previously issued financial statements. For additional details on the revisions to AEPTCo’s financial statements, see Note 1 - Significant Accounting Matters.
 
The major components of the increase in transmission revenues, which consists of wholesale sales to affiliates and nonaffiliates were as follows:
 
Transmission Revenues increased $51 million primarily due to the following:
A $115 million increase in revenues due to an increase in the formula rate revenue requirement primarily driven by continued investment in transmission assets. This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.
This increase was partially offset by:
A $64 million decrease in revenues due to a lower annual formula rate true-up in 2018 driven by implementing forward looking formula rates in 2017.
 
Expenses and Other and Income Tax Expense changed between years as follows:
 
Other Operation and Maintenance expenses increased $22 million primarily due to increased transmission investment.
Depreciation and Amortization expenses increased $28 million primarily due to a higher depreciable base.
Taxes Other Than Income Taxes increased $21 million primarily due to higher property taxes as a result of increased transmission investment.
Allowance for Equity Funds Used During Construction increased $16 million primarily due to increased transmission investment resulting in a higher CWIP balance.
Interest Expense increased $10 million primarily due to the following:
A $16 million increase primarily due to higher long-term debt balances.
This increase was partially offset by:
A $6 million decrease due to higher AFUDC borrowed funds resulting from a higher CWIP balance.
Income Tax Expense decreased $45 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

75




AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 
Transmission Revenues
 
$
46.0

 
$
35.6

 
$
132.3

 
$
95.7

Sales to AEP Affiliates
 
148.4

 
130.1

 
453.8

 
439.1

Other Revenues
 

 
(0.1
)
 
0.1

 

TOTAL REVENUES
 
194.4

 
165.6

 
586.2

 
534.8

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 
 
 

 
 

Other Operation
 
24.5

 
18.4

 
59.6

 
38.8

Maintenance
 
2.8

 
1.4

 
7.6

 
6.8

Depreciation and Amortization
 
34.9

 
24.6

 
97.5

 
69.7

Taxes Other Than Income Taxes
 
35.2

 
27.6

 
102.9

 
82.0

TOTAL EXPENSES
 
97.4

 
72.0

 
267.6

 
197.3

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
97.0

 
93.6

 
318.6

 
337.5

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 
 
 

 
 

Interest Income
 
0.5

 
0.2

 
1.3

 
0.5

Allowance for Equity Funds Used During Construction
 
18.0

 
11.4

 
48.7

 
33.0

Interest Expense
 
(19.8
)
 
(17.1
)
 
(60.7
)
 
(50.4
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
95.7

 
88.1

 
307.9

 
320.6

 
 
 
 
 
 
 
 
 
Income Tax Expense
 
17.6

 
29.5

 
63.7

 
108.2

 
 
 
 
 
 
 
 
 
NET INCOME
 
$
78.1

 
$
58.6

 
$
244.2

 
$
212.4

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

76



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER’S EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Paid-in
Capital
 
Retained
Earnings
 
Total
TOTAL MEMBER'S EQUITY – DECEMBER 31, 2016
 
$
1,455.0

 
$
502.6

 
$
1,957.6

 
 
 
 
 
 
 
Capital Contributions from Member
 
185.5

 
 
 
185.5

Net Income
 
 

 
212.4

 
212.4

TOTAL MEMBER'S EQUITY – SEPTEMBER 30, 2017
 
$
1,640.5

 
$
715.0

 
$
2,355.5

 
 
 
 
 
 
 
TOTAL MEMBER'S EQUITY – DECEMBER 31, 2017
 
$
1,816.6

 
$
773.3

 
$
2,589.9

 
 
 
 
 
 
 
Capital Contributions from Member
 
582.0

 
 
 
582.0

Net Income
 
 

 
244.2

 
244.2

TOTAL MEMBER'S EQUITY – SEPTEMBER 30, 2018
 
$
2,398.6

 
$
1,017.5

 
$
3,416.1

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

77



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 
 
 
Advances to Affiliates
 
$
278.0

 
$
146.3

Accounts Receivable:
 
 
 
 
Customers
 
11.9

 
15.0

Affiliated Companies
 
73.0

 
93.2

Miscellaneous
 
1.1

 
1.3

Total Accounts Receivable
 
86.0

 
109.5

Materials and Supplies
 
16.4

 
13.6

Accrued Tax Benefits
 
29.8

 
49.4

Prepayments and Other Current Assets
 
3.5

 
7.6

TOTAL CURRENT ASSETS
 
413.7

 
326.4

 
 
 
 
 
TRANSMISSION PROPERTY
 
 
 
 
Transmission Property
 
5,833.5

 
5,319.7

Other Property, Plant and Equipment
 
155.2

 
126.8

Construction Work in Progress
 
1,772.9

 
1,324.0

Total Transmission Property
 
7,761.6

 
6,770.5

Accumulated Depreciation and Amortization
 
234.6

 
152.6

TOTAL TRANSMISSION PROPERTY  NET
 
7,527.0

 
6,617.9

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
15.3

 
11.7

Deferred Property Taxes
 
38.1

 
125.0

Deferred Charges and Other Noncurrent Assets
 
4.3

 
1.1

TOTAL OTHER NONCURRENT ASSETS
 
57.7

 
137.8

 
 
 
 
 
TOTAL ASSETS
 
$
7,998.4

 
$
7,082.1

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

78



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND MEMBER’S EQUITY
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$
1.1

 
$
15.7

Accounts Payable:
 
 
 
 
General
 
237.4

 
484.5

Affiliated Companies
 
79.0

 
66.1

Long-term Debt Due Within One Year – Nonaffiliated
 
50.0

 
50.0

Accrued Taxes
 
138.7

 
231.5

Accrued Interest
 
35.9

 
15.0

Other Current Liabilities
 
4.3

 
4.1

TOTAL CURRENT LIABILITIES
 
546.4

 
866.9

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
2,822.6

 
2,500.4

Deferred Income Taxes
 
684.4

 
600.4

Regulatory Liabilities
 
509.6

 
493.8

Deferred Credits and Other Noncurrent Liabilities
 
19.3

 
30.7

TOTAL NONCURRENT LIABILITIES
 
4,035.9

 
3,625.3

 
 
 
 
 
TOTAL LIABILITIES
 
4,582.3

 
4,492.2

 
 
 
 
 
Rate Matters (Note 4)
 

 

Commitments and Contingencies (Note 5)
 

 

 
 
 
 
 
MEMBER’S EQUITY
 
 
 
 
Paid-in Capital
 
2,398.6

 
1,816.6

Retained Earnings
 
1,017.5

 
773.3

TOTAL MEMBER’S EQUITY
 
3,416.1

 
2,589.9

 
 
 
 
 
TOTAL LIABILITIES AND MEMBER’S EQUITY
 
$
7,998.4

 
$
7,082.1

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

79



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
244.2

 
$
212.4

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
Depreciation and Amortization
 
97.5

 
69.7

Deferred Income Taxes
 
76.3

 
191.9

Allowance for Equity Funds Used During Construction
 
(48.7
)
 
(33.0
)
Property Taxes
 
86.9

 
72.4

Long-term Accounts Receivable – Affiliated
 
(3.1
)
 
(13.8
)
Change in Other Noncurrent Assets
 
12.7

 
8.6

Change in Other Noncurrent Liabilities
 
18.0

 
25.7

Changes in Certain Components of Working Capital:
 
 
 
 

Accounts Receivable
 
23.5

 
(40.8
)
Materials and Supplies
 
(2.8
)
 
(11.0
)
Accounts Payable
 
3.3

 
20.4

Accrued Taxes, Net
 
(73.2
)
 
(71.2
)
Accrued Interest
 
20.9

 
18.4

Other Current Assets
 
(0.5
)
 
(5.3
)
Other Current Liabilities
 
(28.0
)
 
0.5

Net Cash Flows from Operating Activities
 
427.0

 
444.9

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(1,171.8
)
 
(1,050.7
)
Change in Advances to Affiliates, Net
 
(131.7
)
 
(223.8
)
Acquisitions of Assets
 
(13.2
)
 
(3.8
)
Other Investing Activities
 
1.2

 
0.9

Net Cash Flows Used for Investing Activities
 
(1,315.5
)
 
(1,277.4
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 

Capital Contributions from Member
 
582.0

 
185.5

Issuance of Long-term Debt – Nonaffiliated
 
321.1

 
618.3

Change in Advances from Affiliates, Net
 
(14.6
)
 
28.7

Net Cash Flows from Financing Activities
 
888.5

 
832.5

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 

 

Cash and Cash Equivalents at Beginning of Period
 

 

Cash and Cash Equivalents at End of Period
 
$

 
$

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
38.4

 
$
30.4

Net Cash Paid (Received) for Income Taxes
 
(32.1
)
 
(93.4
)
Construction Expenditures Included in Current Liabilities as of September 30,
 
237.0

 
248.9

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

80





APPALACHIAN POWER COMPANY
AND SUBSIDIARIES

81



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 

 
 

Residential
2,662

 
2,488

 
8,895

 
7,829

Commercial
1,721

 
1,673

 
4,996

 
4,805

Industrial
2,427

 
2,431

 
7,165

 
7,106

Miscellaneous
215

 
202

 
644

 
613

Total Retail
7,025

 
6,794

 
21,700

 
20,353

 
 
 
 
 
 
 
 
Wholesale
1,143

 
994

 
2,252

 
2,684

 
 
 
 
 
 
 
 
Total KWhs
8,168

 
7,788

 
23,952

 
23,037


Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.

Summary of Heating and Cooling Degree Days
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in degree days)
Actual – Heating (a)

 

 
1,518

 
1,000

Normal – Heating (b)
2

 
2

 
1,410

 
1,420

 
 
 
 
 
 
 
 
Actual – Cooling (c)
950

 
805

 
1,495

 
1,180

Normal – Cooling (b)
814

 
812

 
1,184

 
1,179


(a)
Heating degree days are calculated on a 55 degree temperature base.
(b)
Normal Heating/Cooling represents the thirty-year average of degree days.
(c)
Cooling degree days are calculated on a 65 degree temperature base.


82



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income
(in millions)
 
Third Quarter of 2017
 
$
86.0

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
(64.0
)
Off-system Sales
 
1.4

Transmission Revenues
 
2.4

Other Revenues
 
(1.2
)
Total Change in Gross Margin
 
(61.4
)
 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(56.3
)
Depreciation and Amortization
 
(2.9
)
Taxes Other Than Income Taxes
 
(1.3
)
Interest Income
 
0.1

Carrying Costs Income
 
(0.2
)
Allowance for Equity Funds Used During Construction
 
1.4

Non-Service Cost Components of Net Periodic Benefit Cost
 
3.2

Interest Expense
 
(3.6
)
Total Change in Expenses and Other
 
(59.6
)
 
 
 

Income Tax Expense (Credit)
 
122.1

 
 
 

Third Quarter of 2018
 
$
87.1


The major components of the decrease in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins decreased $64 million primarily due to the following:
A $78 million reduction in deferred fuel under-recovery related to the West Virginia Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.
An $11 million increase in deferred fuel related to recoverable PJM expenses that were offset below.
A $10 million increase in non-recoverable fuel expense related to Virginia legislation.
These decreases were partially offset by:
A $17 million increase due to an adjustment to the 2018 provisions for customer refunds related to Tax Reform. This increase was partially offset in Other Operation and Maintenance expenses and Income Tax Expense (Credit) below.
A $15 million increase in weather-related usage primarily due to an 18% increase in cooling degree days.

Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses increased $56 million primarily due to the following:
A $39 million increase in expenses due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.
An $8 million increase in employee-related expenses.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $3 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

83



Income Tax Expense (Credit) decreased $122 million primarily due to the impact of the West Virginia Tax Reform settlement, the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

84



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income
(in millions)
 
Nine Months Ended September 30, 2017
 
$
248.7

 
 
 
Changes in Gross Margin:
 
 

Retail Margins
 
(61.0
)
Off-system Sales
 
1.7

Transmission Revenues
 
2.8

Other Revenues
 
(4.6
)
Total Change in Gross Margin
 
(61.1
)
 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(57.0
)
Depreciation and Amortization
 
(15.4
)
Taxes Other Than Income Taxes
 
(7.8
)
Interest Income
 
0.2

Carrying Costs Income
 
0.2

Allowance for Equity Funds Used During Construction
 
3.4

Non-Service Cost Components of Net Periodic Benefit Cost
 
9.5

Interest Expense
 
(2.5
)
Total Change in Expenses and Other
 
(69.4
)
 
 
 

Income Tax Expense (Credit)
 
171.8

 
 
 

Nine Months Ended September 30, 2018
 
$
290.0


The major components of the decrease in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins decreased $61 million primarily due to the following:
A $78 million reduction of deferred fuel under-recovery related to the West Virginia Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.
A $41 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was partially offset in Other Operation and Maintenance expenses and Income Tax Expense (Credit) below.
A $28 million increase in deferred fuel related to recoverable PJM expenses that were offset below.
A $10 million increase in non-recoverable fuel expense related to Virginia legislation.
A $5 million decrease in weather-normalized margins occurring across all retail classes.
These decreases were partially offset by:
A $90 million increase in weather-related usage primarily driven by a 52% increase in heating degree days along with a 27% increase in cooling degree days.
A $6 million increase primarily due to increases from rate riders in Virginia. This increase was partially offset by an increase in Other Operation and Maintenance expenses.

85



Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses increased $57 million primarily due to the following:
A $39 million increase in expenses due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.
A $21 million increase in recoverable PJM expenses. This increase in expense was primarily offset within Retail Margins above.
A $13 million increase in employee-related expenses.
A $9 million increase in storm-related expenses.
A $5 million increase in estimated expenses for claims related to asbestos exposure.
These increases were partially offset by:
A $41 million decrease in PJM expenses primarily related to the annual formula rate true-up that will be refunded in future periods.
Depreciation and Amortization expenses increased $15 million primarily due to a higher depreciable base.
Taxes Other Than Income Taxes increased $8 million primarily due to an increase in property taxes due to additional investments in utility plant.
Allowance for Equity Funds Used During Construction increased $3 million due to an increase in construction activity.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $10 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Income Tax Expense (Credit) decreased $172 million primarily due to the impact of the West Virginia Tax Reform settlement, the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

86




APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 

Electric Generation, Transmission and Distribution
 
$
716.8

 
$
674.4

 
$
2,103.1

 
$
2,045.0

Sales to AEP Affiliates
 
42.9

 
41.9

 
138.7

 
130.6

Other Revenues
 
2.3

 
3.0

 
7.6

 
11.8

TOTAL REVENUES
 
762.0

 
719.3

 
2,249.4

 
2,187.4

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 
 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
263.4

 
178.6

 
487.7

 
498.3

Purchased Electricity for Resale
 
80.4

 
61.1

 
350.8

 
217.1

Other Operation
 
131.9

 
117.0

 
380.0

 
370.1

Maintenance
 
97.2

 
55.8

 
234.9

 
187.8

Depreciation and Amortization
 
105.7

 
102.8

 
319.5

 
304.1

Taxes Other Than Income Taxes
 
33.6

 
32.3

 
101.1

 
93.3

TOTAL EXPENSES
 
712.2

 
547.6

 
1,874.0

 
1,670.7

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
49.8

 
171.7

 
375.4

 
516.7

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 
 
 

 
 

Interest Income
 
0.4

 
0.3

 
1.3

 
1.1

Carrying Costs Income
 
0.2

 
0.4

 
1.2

 
1.0

Allowance for Equity Funds Used During Construction
 
4.1

 
2.7

 
9.6

 
6.2

Non-Service Cost Components of Net Periodic Benefit Cost
 
4.5

 
1.3

 
13.4

 
3.9

Interest Expense
 
(50.8
)
 
(47.2
)
 
(146.0
)
 
(143.5
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE (CREDIT)
 
8.2

 
129.2

 
254.9

 
385.4

 
 
 
 
 
 
 
 
 
Income Tax Expense (Credit)
 
(78.9
)
 
43.2

 
(35.1
)
 
136.7

 
 
 
 
 
 
 
 
 
NET INCOME
 
$
87.1

 
$
86.0

 
$
290.0

 
$
248.7

The common stock of APCo is wholly-owned by Parent.
 
 
 
 
 
 
See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

87



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
  Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
87.1

 
$
86.0

 
$
290.0

 
$
248.7

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE LOSS, NET OF TAXES
 
 
 
 

 
 

 
 
Cash Flow Hedges, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.2) and $(0.3) for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
(0.3
)
 
(0.1
)
 
(0.7
)
 
(0.5
)
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.2) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.6) and $(0.4) for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
(0.7
)
 
(0.3
)
 
(2.3
)
 
(0.9
)
 
 
 
 
 
 
 
 
 
TOTAL OTHER COMPREHENSIVE LOSS
 
(1.0
)
 
(0.4
)
 
(3.0
)
 
(1.4
)
 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
$
86.1

 
$
85.6

 
$
287.0

 
$
247.3

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

88



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER’S EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016
 
$
260.4

 
$
1,828.7

 
$
1,502.8

 
$
(8.4
)
 
$
3,583.5

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(90.0
)
 
 

 
(90.0
)
Net Income
 
 

 
 

 
248.7

 
 

 
248.7

Other Comprehensive Loss
 
 

 
 

 
 

 
(1.4
)
 
(1.4
)
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017
 
$
260.4

 
$
1,828.7

 
$
1,661.5

 
$
(9.8
)
 
$
3,740.8

 
 
 
 
 
 
 
 
 
 
 
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017
 
$
260.4

 
$
1,828.7

 
$
1,714.1

 
$
1.3

 
$
3,804.5

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(120.0
)
 
 

 
(120.0
)
ASU 2018-02 Adoption
 
 
 
 
 
0.1

 
0.3

 
0.4

Net Income
 
 

 
 

 
290.0

 
 

 
290.0

Other Comprehensive Loss
 
 

 
 

 
 

 
(3.0
)
 
(3.0
)
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018
 
$
260.4

 
$
1,828.7

 
$
1,884.2

 
$
(1.4
)
 
$
3,971.9

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

89



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
2.2

 
$
2.9

Restricted Cash for Securitized Funding
 
9.9

 
16.3

Advances to Affiliates
 
23.1

 
23.5

Accounts Receivable:
 
 
 
 
Customers
 
155.7

 
123.1

Affiliated Companies
 
70.6

 
69.3

Accrued Unbilled Revenues
 
52.6

 
74.1

Miscellaneous
 
0.9

 
1.1

Allowance for Uncollectible Accounts
 
(4.0
)
 
(3.7
)
Total Accounts Receivable
 
275.8

 
263.9

Fuel
 
37.7

 
89.3

Materials and Supplies
 
98.4

 
99.5

Risk Management Assets
 
68.4

 
24.9

Regulatory Asset for Under-Recovered Fuel Costs
 
79.9

 
88.8

Margin Deposits
 
12.5

 
14.4

Prepayments and Other Current Assets
 
23.0

 
12.7

TOTAL CURRENT ASSETS
 
630.9

 
636.2

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
6,490.0

 
6,446.9

Transmission
 
3,141.2

 
3,019.9

Distribution
 
3,897.2

 
3,763.8

Other Property, Plant and Equipment
 
461.4

 
427.9

Construction Work in Progress
 
602.1

 
483.0

Total Property, Plant and Equipment
 
14,591.9

 
14,141.5

Accumulated Depreciation and Amortization
 
4,086.2

 
3,896.4

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
10,505.7

 
10,245.1

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
475.3

 
573.9

Securitized Assets
 
264.5

 
282.3

Long-term Risk Management Assets
 
1.4

 
1.1

Deferred Charges and Other Noncurrent Assets
 
180.1

 
190.0

TOTAL OTHER NONCURRENT ASSETS
 
921.3

 
1,047.3

 
 
 
 
 
TOTAL ASSETS
 
$
12,057.9

 
$
11,928.6

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

90



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
September 30, 2018 and December 31, 2017
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(in millions)
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$
98.5

 
$
186.0

Accounts Payable:
 
 

 
 

General
 
219.1

 
264.9

Affiliated Companies
 
73.6

 
92.7

Long-term Debt Due Within One Year – Nonaffiliated
 
430.7

 
249.2

Risk Management Liabilities
 
0.9

 
1.3

Customer Deposits
 
88.0

 
86.1

Accrued Taxes
 
81.5

 
94.5

Accrued Interest
 
72.6

 
40.5

Other Current Liabilities
 
151.6

 
109.0

TOTAL CURRENT LIABILITIES
 
1,216.5

 
1,124.2

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
3,631.0

 
3,730.9

Long-term Risk Management Liabilities
 
0.7

 
0.2

Deferred Income Taxes
 
1,581.5

 
1,565.7

Regulatory Liabilities and Deferred Investment Tax Credits
 
1,423.8

 
1,454.9

Asset Retirement Obligations
 
103.2

 
100.2

Employee Benefits and Pension Obligations
 
65.7

 
73.3

Deferred Credits and Other Noncurrent Liabilities
 
63.6

 
74.7

TOTAL NONCURRENT LIABILITIES
 
6,869.5

 
6,999.9

 
 
 
 
 
TOTAL LIABILITIES
 
8,086.0

 
8,124.1

 
 
 
 
 
Rate Matters (Note 4)
 

 

Commitments and Contingencies (Note 5)
 

 

 
 
 
 
 
COMMON SHAREHOLDER’S EQUITY
 
 
 
 
Common Stock – No Par Value:
 
 
 
 
Authorized – 30,000,000 Shares
 
 

 
 
Outstanding – 13,499,500 Shares
 
260.4

 
260.4

Paid-in Capital
 
1,828.7

 
1,828.7

Retained Earnings
 
1,884.2

 
1,714.1

Accumulated Other Comprehensive Income (Loss)
 
(1.4
)
 
1.3

TOTAL COMMON SHAREHOLDER’S EQUITY
 
3,971.9

 
3,804.5

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
 
$
12,057.9

 
$
11,928.6

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

91



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
290.0

 
$
248.7

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 

 
 

Depreciation and Amortization
 
319.5

 
304.1

Deferred Income Taxes
 
(83.8
)
 
121.7

Allowance for Equity Funds Used During Construction
 
(9.6
)
 
(6.2
)
Mark-to-Market of Risk Management Contracts
 
(43.7
)
 
(28.3
)
Pension Contributions to Qualified Plan Trust
 

 
(10.2
)
Deferred Fuel Over/Under-Recovery, Net
 
12.8

 
4.9

Change in Other Noncurrent Assets
 
94.8

 
37.1

Change in Other Noncurrent Liabilities
 
3.8

 
7.9

Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
39.4

 
39.9

Fuel, Materials and Supplies
 
53.0

 
14.0

Accounts Payable
 
(21.5
)
 
6.2

Accrued Taxes, Net
 
(20.2
)
 
(44.2
)
Other Current Assets
 
(7.9
)
 
(2.5
)
Other Current Liabilities
 
64.1

 
9.1

Net Cash Flows from Operating Activities
 
690.7

 
702.2

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(575.8
)
 
(560.0
)
Change in Advances to Affiliates, Net
 
0.4

 
0.5

Other Investing Activities
 
10.0

 
11.8

Net Cash Flows Used for Investing Activities
 
(565.4
)
 
(547.7
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Issuance of Long-term Debt - Nonaffiliated
 
103.3

 
320.9

Change in Advances from Affiliates, Net
 
(87.5
)
 
(10.1
)
Retirement of Long-term Debt - Nonaffiliated
 
(24.0
)
 
(377.9
)
Principal Payments for Capital Lease Obligations
 
(5.2
)
 
(5.2
)
Dividends Paid on Common Stock
 
(120.0
)
 
(90.0
)
Other Financing Activities
 
1.0

 
0.5

Net Cash Flows Used for Financing Activities
 
(132.4
)
 
(161.8
)
 
 
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash for Securitized Funding
 
(7.1
)
 
(7.3
)
Cash, Cash Equivalents and Restricted Cash for Securitized Funding at Beginning of Period
 
19.2

 
18.5

Cash, Cash Equivalents and Restricted Cash for Securitized Funding at End of Period
 
$
12.1

 
$
11.2

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
104.5

 
$
107.1

Net Cash Paid for Income Taxes
 
26.7

 
24.4

Noncash Acquisitions Under Capital Leases
 
3.9

 
2.9

Construction Expenditures Included in Current Liabilities as of September 30,
 
87.6

 
107.2

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

92





INDIANA MICHIGAN POWER COMPANY
AND SUBSIDIARIES

93



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 

 
 

Residential
1,562

 
1,404

 
4,430

 
4,015

Commercial
1,363

 
1,313

 
3,748

 
3,640

Industrial
2,003

 
1,978

 
5,880

 
5,793

Miscellaneous
15

 
16

 
50

 
50

Total Retail
4,943

 
4,711

 
14,108

 
13,498

 
 
 
 
 
 
 
 
Wholesale
2,613

 
2,807

 
7,927

 
8,567

 
 
 
 
 
 
 
 
Total KWhs
7,556

 
7,518

 
22,035

 
22,065


Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.

Summary of Heating and Cooling Degree Days
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in degree days)
Actual – Heating (a)
2

 

 
2,523

 
1,816

Normal – Heating (b)
10

 
11

 
2,413

 
2,430

 
 
 
 
 
 
 
 
Actual – Cooling (c)
722

 
504

 
1,084

 
764

Normal – Cooling (b)
574

 
574

 
837

 
835


(a)
Heating degree days are calculated on a 55 degree temperature base.
(b)
Normal Heating/Cooling represents the thirty-year average of degree days.
(c)
Cooling degree days are calculated on a 65 degree temperature base.

94



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income
(in millions)
 
 
 
Third Quarter of 2017
 
$
64.9

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
42.4

Off-system Sales
 
(3.8
)
Transmission Revenues
 
1.8

Other Revenues
 
(1.5
)
Total Change in Gross Margin
 
38.9

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(13.0
)
Depreciation and Amortization
 
(30.2
)
Taxes Other Than Income Taxes
 
0.9

Interest Income
 
1.4

Carrying Cost Income
 
(1.6
)
Allowance for Equity Funds Used During Construction
 
0.4

Non-Service Cost Components of Net Periodic Benefit Cost
 
3.1

Interest Expense
 
(7.0
)
Total Change in Expenses and Other
 
(46.0
)
 
 
 

Income Tax Expense
 
14.9

 
 
 

Third Quarter of 2018
 
$
72.7


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $42 million primarily due to the following:
A $47 million increase from rate proceedings in the I&M service territory, inclusive of a $22 million decrease due to the impact of Tax Reform in the Indiana jurisdiction. The increase in Retail Margins relating to riders had corresponding increases in other expense items below.
A $21 million increase in weather-related usage primarily due to a 43% increase in cooling degree days.
These increases were partially offset by:
A $15 million decrease related to over/under recovery of riders.
A $4 million decrease due to timing differences in the recovery of increased fuel and other variable production costs not related to fuel clauses or other trackers.
A $3 million decrease due to customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.
A $3 million decrease due to lower weather-normalized margins primarily due to wholesale customer load loss from contracts that expired at the end of 2017.
Margins from Off-system Sales decreased $4 million primarily due to mid-year changes in the OSS sharing mechanism.


95



Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $13 million primarily due to the following:
A $5 million increase in demand-side management expenses. This increase was offset within Retail Margins above.
A $5 million increase in distribution forestry expenses.
A $4 million increase in Cook Plant refueling outage amortization expense, primarily due to increased costs of outages.
A $4 million increase in employee-related expenses.
These increases were partially offset by:
A $5 million decrease in transmission expenses primarily due to a decrease in recoverable PJM expenses. This decrease was partially offset within Retail Margins above.
Depreciation and Amortization expenses increased $30 million primarily due to a higher depreciable base and increased depreciation rates approved in the 2017 Indiana and Michigan base rate cases.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $3 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Interest Expense increased $7 million primarily due to increased long-term debt balances.
Income Tax Expense decreased $15 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

96



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income
(in millions)
 
 
 
Nine Months Ended September 30, 2017
 
$
143.8

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
105.3

Off-system Sales
 
(5.4
)
Transmission Revenues
 
23.3

Other Revenues
 
(3.2
)
Total Change in Gross Margin
 
120.0

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(2.5
)
Depreciation and Amortization
 
(52.3
)
Taxes Other Than Income Taxes
 
(4.6
)
Interest Income
 
1.2

Carrying Cost Income
 
(5.3
)
Allowance for Equity Funds Used During Construction
 
(0.1
)
Non-Service Cost Components of Net Periodic Benefit Cost
 
9.0

Interest Expense
 
(12.6
)
Total Change in Expenses and Other
 
(67.2
)
 
 
 

Income Tax Expense
 
35.0

 
 
 

Nine Months Ended September 30, 2018
 
$
231.6


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $105 million primarily due to the following:
An $89 million increase from rate proceedings in the I&M service territory, inclusive of a $26 million decrease due to the impact of Tax Reform in the Indiana jurisdiction. The increase in Retail Margins relating to riders had corresponding increases in other expense items below.
A $51 million increase in weather-related usage primarily due to a 39% increase in heating degree days and a 42% increase in cooling degree days.
A $32 million increase in FERC generation wholesale municipal and cooperative revenues primarily due to the annual formula rate true-up and changes to the formula rate.
These increases were partially offset by:
A $30 million decrease related to over/under recovery of riders.
A $14 million decrease due to customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.
A $10 million decrease due to timing differences in the recovery of increased fuel and other variable production costs not related to fuel clauses or other trackers.
Margins from Off-system Sales decreased $5 million primarily due to mid-year changes in the OSS sharing mechanism.
Transmission Revenues increased $23 million primarily due to the annual formula rate true-up and decreased RTO provisions.

97



Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $3 million primarily due to the following:
A $10 million increase in Cook Plant refueling outage amortization expense, primarily due to increased costs of outages.
A $7 million increase in employee-related expenses.
A $6 million increase in distribution forestry expenses.
A $5 million increase in demand-side management expenses. This increase was offset within Retail Margins above.
These increases were partially offset by:
A $19 million decrease in transmission expenses primarily due to the annual formula rate true-up.
A $7 million decrease due to an increased Nuclear Electric Insurance Limited distribution in 2018.
Depreciation and Amortization expenses increased $52 million primarily due to a higher depreciable base and increased depreciation rates approved in the 2017 Indiana and Michigan base rate cases.
Taxes Other Than Income Taxes increased $5 million primarily due to increased state taxes due to higher reported taxable KWh and taxable revenues and a prior period refund.
Carrying Cost Income decreased $5 million primarily due to a decrease in carrying charges for certain riders in Indiana.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $9 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Interest Expense increased $13 million primarily due to increased long-term debt balances.
Income Tax Expense decreased $35 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and amortization of Excess ADIT, partially offset by an increase in pretax book income.

98




INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 

Electric Generation, Transmission and Distribution
 
$
609.9

 
$
537.0

 
$
1,723.9

 
$
1,527.4

Other Revenues – Affiliated
 
17.1

 
17.1

 
62.2

 
48.2

Other Revenues – Nonaffiliated
 
2.7

 
3.6

 
10.1

 
9.9

TOTAL REVENUES
 
629.7

 
557.7

 
1,796.2

 
1,585.5

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 
 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
95.9

 
76.4

 
246.8

 
238.2

Purchased Electricity for Resale
 
48.9

 
32.9

 
167.7

 
101.2

Purchased Electricity from AEP Affiliates
 
60.0

 
62.4

 
181.8

 
166.2

Other Operation
 
149.3

 
142.0

 
425.8

 
438.8

Maintenance
 
57.2

 
51.5

 
169.1

 
153.6

Depreciation and Amortization
 
85.2

 
55.0

 
207.1

 
154.8

Taxes Other Than Income Taxes
 
23.0

 
23.9

 
72.9

 
68.3

TOTAL EXPENSES
 
519.5

 
444.1

 
1,471.2

 
1,321.1

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
110.2

 
113.6

 
325.0

 
264.4

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 
 
 

 
 

Interest Income
 
1.6

 
0.2

 
2.8

 
1.6

Carrying Costs Income
 
0.6

 
2.2

 
4.6

 
9.9

Allowance for Equity Funds Used During Construction
 
3.9

 
3.5

 
8.0

 
8.1

Non-Service Cost Components of Net Periodic Benefit Cost
 
4.6

 
1.5

 
13.6

 
4.6

Interest Expense
 
(34.5
)
 
(27.5
)
 
(95.6
)
 
(83.0
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
86.4

 
93.5

 
258.4

 
205.6

 
 
 
 
 
 
 
 
 
Income Tax Expense
 
13.7

 
28.6

 
26.8

 
61.8

 
 
 
 
 
 
 
 
 
NET INCOME
 
$
72.7

 
$
64.9

 
$
231.6

 
$
143.8

The common stock of I&M is wholly-owned by Parent.
 
See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

99



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
72.7

 
$
64.9

 
$
231.6

 
$
143.8

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME, NET OF TAXES
 
 

 
 
 
 

 
 

Cash Flow Hedges, Net of Tax of $0.1 and $0.1 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0.3 and $0.5 for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
0.3

 
0.3

 
1.2

 
1.0

 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
$
73.0

 
$
65.2

 
$
232.8

 
$
144.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

100



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER’S EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016
 
$
56.6

 
$
980.9

 
$
1,130.5

 
$
(16.2
)
 
$
2,151.8

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(93.7
)
 
 

 
(93.7
)
Net Income
 
 

 
 

 
143.8

 
 

 
143.8

Other Comprehensive Income
 
 

 
 

 
 

 
1.0

 
1.0

TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017
 
$
56.6

 
$
980.9

 
$
1,180.6

 
$
(15.2
)
 
$
2,202.9

 
 
 

 
 

 
 

 
 

 
 

TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017
 
$
56.6

 
$
980.9

 
$
1,192.2

 
$
(12.1
)
 
$
2,217.6

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(105.5
)
 
 

 
(105.5
)
ASU 2018-02 Adoption
 
 
 
 
 
0.3

 
(2.7
)
 
(2.4
)
Net Income
 
 

 
 

 
231.6

 
 

 
231.6

Other Comprehensive Income
 
 

 
 

 
 

 
1.2

 
1.2

TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018
 
$
56.6

 
$
980.9

 
$
1,318.6

 
$
(13.6
)
 
$
2,342.5

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

101



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
1.6

 
$
1.3

Advances to Affiliates
 
72.5

 
12.4

Accounts Receivable:
 
 
 
 
Customers
 
70.5

 
56.4

Affiliated Companies
 
51.7

 
50.0

Accrued Unbilled Revenues
 
16.1

 
7.3

Miscellaneous
 
1.9

 
2.0

Allowance for Uncollectible Accounts
 
(0.2
)
 
(0.1
)
Total Accounts Receivable
 
140.0

 
115.6

Fuel
 
28.7

 
31.4

Materials and Supplies
 
165.7

 
160.6

Risk Management Assets
 
10.9

 
7.6

Accrued Tax Benefits
 
35.4

 
58.4

Regulatory Asset for Under-Recovered Fuel Costs
 
0.1

 
15.0

Accrued Reimbursement of Spent Nuclear Fuel Costs
 
7.9

 
10.8

Prepayments and Other Current Assets
 
20.9

 
20.9

TOTAL CURRENT ASSETS
 
483.7

 
434.0

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
4,579.9

 
4,445.9

Transmission
 
1,543.3

 
1,504.0

Distribution
 
2,183.9

 
2,069.3

Other Property, Plant and Equipment (Including Coal Mining and Nuclear Fuel)
 
584.7

 
595.2

Construction Work in Progress
 
458.6

 
460.2

Total Property, Plant and Equipment
 
9,350.4

 
9,074.6

Accumulated Depreciation, Depletion and Amortization
 
3,113.9

 
3,024.2

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
6,236.5

 
6,050.4

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
545.3

 
579.4

Spent Nuclear Fuel and Decommissioning Trusts
 
2,666.0

 
2,527.6

Long-term Risk Management Assets
 
0.9

 
0.7

Deferred Charges and Other Noncurrent Assets
 
175.7

 
179.9

TOTAL OTHER NONCURRENT ASSETS
 
3,387.9

 
3,287.6

 
 
 
 
 
TOTAL ASSETS
 
$
10,108.1

 
$
9,772.0

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

102



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
September 30, 2018 and December 31, 2017
(dollars in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$

 
$
211.6

Accounts Payable:
 
 
 
 
General
 
142.6

 
154.5

Affiliated Companies
 
65.6

 
98.3

Long-term Debt Due Within One Year – Nonaffiliated
(September 30, 2018 and December 31, 2017 Amounts Include $94.2 and $96.3, Respectively, Related to DCC Fuel)
 
172.7

 
474.7

Risk Management Liabilities
 
6.4

 
3.5

Customer Deposits
 
37.0

 
37.7

Accrued Taxes
 
44.7

 
81.3

Accrued Interest
 
22.2

 
37.5

Other Current Liabilities
 
129.8

 
112.2

TOTAL CURRENT LIABILITIES
 
621.0

 
1,211.3

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
2,889.7

 
2,270.4

Long-term Risk Management Liabilities
 
0.4

 
0.1

Deferred Income Taxes
 
1,010.0

 
953.8

Regulatory Liabilities and Deferred Investment Tax Credits
 
1,791.9

 
1,708.7

Asset Retirement Obligations
 
1,365.1

 
1,321.6

Deferred Credits and Other Noncurrent Liabilities
 
87.5

 
88.5

TOTAL NONCURRENT LIABILITIES
 
7,144.6

 
6,343.1

 
 
 
 
 
TOTAL LIABILITIES
 
7,765.6

 
7,554.4

 
 
 
 
 
Rate Matters (Note 4)
 

 

Commitments and Contingencies (Note 5)
 

 

 
 
 
 
 
COMMON SHAREHOLDER’S EQUITY
 
 
 
 
Common Stock – No Par Value:
 
 
 
 
Authorized – 2,500,000 Shares
 
 
 
 
Outstanding – 1,400,000 Shares
 
56.6

 
56.6

Paid-in Capital
 
980.9

 
980.9

Retained Earnings
 
1,318.6

 
1,192.2

Accumulated Other Comprehensive Income (Loss)
 
(13.6
)
 
(12.1
)
TOTAL COMMON SHAREHOLDER’S EQUITY
 
2,342.5

 
2,217.6

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
 
$
10,108.1

 
$
9,772.0

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

103



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
231.6

 
$
143.8

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 

 
 

Depreciation and Amortization
 
207.1

 
154.8

Deferred Income Taxes
 
28.1

 
132.2

Amortization of Incremental Nuclear Refueling Outage Expenses, Net
 
13.5

 
15.5

Carrying Costs Income
 
(4.6
)
 
(9.9
)
Allowance for Equity Funds Used During Construction
 
(8.0
)
 
(8.1
)
Mark-to-Market of Risk Management Contracts
 
(0.3
)
 
(7.5
)
Amortization of Nuclear Fuel
 
82.6

 
104.8

Pension Contribution to Qualified Plan Trust
 

 
(13.0
)
Deferred Fuel Over/Under-Recovery, Net
 
29.6

 
22.0

Change in Other Noncurrent Assets
 
(7.4
)
 
(32.2
)
Change in Other Noncurrent Liabilities
 
46.3

 
40.9

Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
6.5

 
19.3

Fuel, Materials and Supplies
 
(1.1
)
 
(4.1
)
Accounts Payable
 
(34.7
)
 
16.6

Customer Deposits
 
(0.7
)
 
3.0

Accrued Taxes, Net
 
(7.1
)
 
(30.2
)
Accrued Interest
 
(15.3
)
 
(17.4
)
Other Current Assets
 
4.9

 
8.0

Other Current Liabilities
 
0.3

 
(14.2
)
Net Cash Flows from Operating Activities
 
571.3

 
524.3

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(434.5
)
 
(469.2
)
Change in Advances to Affiliates, Net
 
(60.1
)
 
(0.1
)
Purchases of Investment Securities
 
(1,589.0
)
 
(1,842.2
)
Sales of Investment Securities
 
1,550.9

 
1,808.6

Acquisitions of Nuclear Fuel
 
(26.1
)
 
(73.2
)
Other Investing Activities
 
9.2

 
7.3

Net Cash Flows Used for Investing Activities
 
(549.6
)
 
(568.8
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Issuance of Long-term Debt – Nonaffiliated
 
1,168.1

 
411.1

Change in Advances from Affiliates, Net
 
(211.6
)
 
(37.7
)
Retirement of Long-term Debt – Nonaffiliated
 
(856.1
)
 
(227.1
)
Principal Payments for Capital Lease Obligations
 
(7.3
)
 
(8.7
)
Dividends Paid on Common Stock
 
(105.5
)
 
(93.7
)
Other Financing Activities
 
(9.0
)
 
0.7

Net Cash Flows from (Used for) Financing Activities
 
(21.4
)
 
44.6

 
 
 
 
 
Net Increase in Cash and Cash Equivalents
 
0.3

 
0.1

Cash and Cash Equivalents at Beginning of Period
 
1.3

 
1.2

Cash and Cash Equivalents at End of Period
 
$
1.6

 
$
1.3

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
104.4

 
$
92.0

Net Cash Paid (Received) for Income Taxes
 
(26.5
)
 
(69.6
)
Noncash Acquisitions Under Capital Leases
 
4.4

 
5.9

Construction Expenditures Included in Current Liabilities as of September 30,
 
66.4

 
74.5

Acquisition of Nuclear Fuel Included in Current Liabilities as of September 30,
 
12.1

 
0.6

Expected Reimbursement for Capital Cost of Spent Nuclear Fuel Dry Cask Storage
 
2.1

 
2.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

104





OHIO POWER COMPANY AND SUBSIDIARIES


105



OHIO POWER COMPANY AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 

 
 

Residential
4,055

 
3,644

 
11,475

 
10,198

Commercial
3,993

 
3,806

 
11,196

 
10,789

Industrial
3,666

 
3,708

 
11,016

 
10,967

Miscellaneous
27

 
28

 
84

 
87

Total Retail (a)
11,741

 
11,186

 
33,771

 
32,041

 
 
 
 
 
 
 
 
Wholesale (b)
634

 
585

 
1,835

 
1,749

 
 
 
 
 
 
 
 
Total KWhs
12,375

 
11,771

 
35,606

 
33,790


(a)
Represents energy delivered to distribution customers.
(b)
Primarily Ohio’s contractually obligated purchases of OVEC power sold into PJM.

Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.

Summary of Heating and Cooling Degree Days
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in degree days)
Actual – Heating (a)
 

 

 
2,158

 
1,500

Normal – Heating (b)
 
6

 
6

 
2,076

 
2,091

 
 
 
 
 
 
 
 
 
Actual – Cooling (c)
 
864

 
642

 
1,322

 
957

Normal – Cooling (b)
 
670

 
670

 
964

 
960


(a)
Heating degree days are calculated on a 55 degree temperature base.
(b)
Normal Heating/Cooling represents the thirty-year average of degree days.
(c)
Cooling degree days are calculated on a 65 degree temperature base.

106



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income
(in millions)
 
 
 
Third Quarter of 2017
 
$
82.6

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
25.7

Off-system Sales
 
12.3

Transmission Revenues
 
(0.2
)
Other Revenues
 
2.1

Total Change in Gross Margin
 
39.9

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(93.8
)
Depreciation and Amortization
 
(13.1
)
Taxes Other Than Income Taxes
 
(6.5
)
Interest Income
 
0.1

Carrying Costs Income
 
(0.3
)
Allowance for Equity Funds Used During Construction
 
1.1

Non-Service Cost Components of Net Periodic Benefit Cost
 
2.7

Interest Expense
 
(0.4
)
Total Change in Expenses and Other
 
(110.2
)
 
 
 

Income Tax Expense (Credit)
 
76.4

 
 
 

Third Quarter of 2018
 
$
88.7


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of purchased electricity and amortization of generation deferrals were as follows:

Retail Margins increased $26 million primarily due to the following:
A $46 million net increase in Basic Transmission Cost Rider revenues and recoverable PJM expenses. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.
A $21 million increase in revenues associated with the Universal Service Fund (USF). This increase was offset by a corresponding increase in Other Operation and Maintenance expenses below.
A $7 million increase in revenues associated with smart grid riders. This increase was partially offset by an increase in various expenses below.
A $6 million increase due to the reversal of a portion of the 2018 provisions for customer refunds primarily related to the October 2018 Ohio Tax Reform settlement.  This increase was partially offset in Income Tax Expense (Credit) below.
A $4 million increase in rider revenues associated with the DIR. This increase was partially offset in various expenses below.
These increases were partially offset by:
A $46 million decrease due to adjustments to the distribution decoupling under-recovery balance as a result of the 2018 Ohio Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.
A $12 million decrease due to the recovery of lower current year losses from a power contract with OVEC. This decrease was offset by a corresponding increase in Margins from Off-system Sales below.
Margins from Off-system Sales increased $12 million primarily due to lower current year losses from a power contract with OVEC which was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.


107



Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses increased $94 million primarily due to the following:
A $50 million increase in recoverable PJM expenses. This increase was offset within Gross Margins above.
A $21 million increase in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This increase was offset by a corresponding increase in Retail Margins above.
Depreciation and Amortization expenses increased $13 million primarily due to the following:
A $6 million increase in depreciation expense due to an increase in the depreciable base of transmission and distribution assets.
A $4 million increase in recoverable smart grid depreciation expenses. This increase was offset in Retail Margins above.
Taxes Other Than Income Taxes increased $7 million primarily due to the following:
A $3 million increase in rider revenues recovering state excise taxes due to an increase in metered KWh. This increase was offset by a corresponding increase in Retail Margins above.
A $3 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.
Income Tax Expense (Credit) decreased $76 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

108



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income
(in millions)
 
 
 
Nine Months Ended September 30, 2017
 
$
231.1

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
121.6

Off-system Sales
 
30.5

Transmission Revenues
 
(9.0
)
Other Revenues
 
0.6

Total Change in Gross Margin
 
143.7

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(211.8
)
Depreciation and Amortization
 
(34.6
)
Taxes Other Than Income Taxes
 
(17.2
)
Interest Income
 
(1.4
)
Carrying Costs Income
 
(1.5
)
Allowance for Equity Funds Used During Construction
 
3.7

Non-Service Cost Components of Net Periodic Benefit Cost
 
8.3

Interest Expense
 
0.2

Total Change in Expenses and Other
 
(254.3
)
 
 
 

Income Tax Expense (Credit)
 
116.6

 
 
 

Nine Months Ended September 30, 2018
 
$
237.1


The major components of the increase in Gross Margin, defined as revenues less the related direct cost of purchased electricity and amortization of generation deferrals were as follows:

Retail Margins increased $122 million primarily due to the following:
A $155 million net increase in Basic Transmission Cost Rider revenues and recoverable PJM expenses. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.
A $61 million increase in revenues associated with the Universal Service Fund (USF). This increase was offset by a corresponding increase in Other Operation and Maintenance expenses below.
An $18 million increase in rider revenues associated with the DIR. This increase was partially offset in various expenses below.
A $9 million increase in usage primarily in the residential class.
An $8 million increase in rider revenues recovering state excise taxes due to an increase in metered KWh. This increase was offset by a corresponding increase in Taxes Other Than Income Taxes below.
These increases were partially offset by:
A $46 million decrease due to adjustments to the distribution decoupling under-recovery balance as a result of the 2018 Ohio Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.
A $30 million decrease due to the recovery of lower current year losses from a power contract with OVEC. This decrease was offset by a corresponding increase in Margins from Off-system Sales below.
A $24 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.
A $9 million net decrease in margin for the Phase-In-Recovery Rider including associated amortizations.
An $8 million decrease in Energy Efficiency/Peak Demand Reduction rider revenues. This decrease was offset by a decrease in Other Operation and Maintenance expenses below.


109



Margins from Off-system Sales increased $31 million primarily due to lower current year losses from a power contract with OVEC which was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.
Transmission Revenues decreased $9 million due to the 2018 provisions for customer refunds due to Tax Reform. This decrease was offset in Income Tax Expense below.

Expenses and Other and Income Tax Expense (Credit) changed between years as follows:

Other Operation and Maintenance expenses increased $212 million primarily due to the following:
A $181 million increase in recoverable PJM expenses. This increase was offset within Gross Margins above.
A $61 million increase in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This increase was offset by a corresponding increase in Retail Margins above.
These increases were partially offset by:
A $55 million decrease in PJM expenses primarily related to the annual formula rate true-up that will be refunded in future periods.
Depreciation and Amortization expenses increased $35 million primarily due to the following:
A $13 million increase in depreciation expense due to an increase in the depreciable base of transmission and distribution assets.
A $13 million increase in recoverable DIR depreciation expense. This increase was offset in Retail Margins above.
A $4 million increase in amortization due to capitalized software.
Taxes Other Than Income Taxes increased $17 million primarily due to the following:
An $8 million increase in rider revenues recovering state excise taxes due to an increase in metered KWh. This increase was offset by a corresponding increase in Retail Margins above.
An $8 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.
Non-Service Cost Components of Net Periodic Cost decreased $8 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Income Tax Expense (Credit) decreased $117 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

110




OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 

Electricity, Transmission and Distribution
 
$
772.6

 
$
736.0

 
$
2,294.8

 
$
2,127.8

Sales to AEP Affiliates
 
3.3

 
4.6

 
17.9

 
19.4

Other Revenues
 
2.4

 
1.4

 
5.3

 
4.8

TOTAL REVENUES
 
778.3

 
742.0

 
2,318.0

 
2,152.0

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 

 
 

 
 

Purchased Electricity for Resale
 
166.3

 
180.7

 
534.7

 
525.4

Purchased Electricity from AEP Affiliates
 
39.3

 
26.7

 
97.4

 
83.4

Amortization of Generation Deferrals
 
56.9

 
58.7

 
171.9

 
172.9

Other Operation
 
215.2

 
126.9

 
586.4

 
380.9

Maintenance
 
43.4

 
37.9

 
114.7

 
108.4

Depreciation and Amortization
 
70.4

 
57.3

 
200.3

 
165.7

Taxes Other Than Income Taxes
 
106.9

 
100.4

 
311.0

 
293.8

TOTAL EXPENSES
 
698.4

 
588.6

 
2,016.4

 
1,730.5

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
79.9

 
153.4

 
301.6

 
421.5

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 

 
 

 
 

Interest Income
 
0.8

 
0.7

 
2.6

 
4.0

Carrying Costs Income
 
0.2

 
0.5

 
1.5

 
3.0

Allowance for Equity Funds Used During Construction
 
2.0

 
0.9

 
7.8

 
4.1

Non-Service Cost Components of Net Periodic Benefit Cost
 
3.8

 
1.1

 
11.6

 
3.3

Interest Expense
 
(26.1
)
 
(25.7
)
 
(76.6
)
 
(76.8
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE (CREDIT)
 
60.6

 
130.9

 
248.5

 
359.1

 
 
 
 
 
 
 
 
 
Income Tax Expense (Credit)
 
(28.1
)
 
48.3

 
11.4

 
128.0

 
 
 
 
 
 
 
 
 
NET INCOME
 
$
88.7

 
$
82.6

 
$
237.1

 
$
231.1

The common stock of OPCo is wholly-owned by Parent.
 
 
 
 
 
See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

111



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
88.7

 
$
82.6

 
$
237.1

 
$
231.1

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE LOSS, NET OF TAXES
 
 

 
 

 
 

 
 

Cash Flow Hedges, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.3) and $(0.4) for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
(0.4
)
 
(0.3
)
 
(1.0
)
 
(0.8
)
 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
$
88.3

 
$
82.3

 
$
236.1

 
$
230.3

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

112



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER’S EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016
 
$
321.2

 
$
838.8

 
$
954.5

 
$
3.0

 
$
2,117.5

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(130.0
)
 
 

 
(130.0
)
Net Income
 
 

 
 

 
231.1

 
 

 
231.1

Other Comprehensive Loss
 
 

 
 

 
 

 
(0.8
)
 
(0.8
)
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017
 
$
321.2

 
$
838.8

 
$
1,055.6

 
$
2.2

 
$
2,217.8

 
 
 

 
 

 
 

 
 

 
 

TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017
 
$
321.2

 
$
838.8

 
$
1,148.4

 
$
1.9

 
$
2,310.3

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(337.5
)
 
 

 
(337.5
)
ASU 2018-02 Adoption
 
 
 
 
 
 
 
0.4

 
0.4

Net Income
 
 

 
 

 
237.1

 
 

 
237.1

Other Comprehensive Loss
 
 

 
 

 
 

 
(1.0
)
 
(1.0
)
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018
 
$
321.2

 
$
838.8

 
$
1,048.0

 
$
1.3

 
$
2,209.3

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

113



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
3.5

 
$
3.1

Restricted Cash for Securitized Funding
 
15.2

 
26.6

Accounts Receivable:
 
 
 
 
Customers
 
116.9

 
67.8

Affiliated Companies
 
72.4

 
70.2

Accrued Unbilled Revenues
 
32.7

 
29.7

Miscellaneous
 
0.9

 
1.9

Allowance for Uncollectible Accounts
 
(1.4
)
 
(0.6
)
Total Accounts Receivable
 
221.5

 
169.0

Materials and Supplies
 
38.5

 
41.9

Renewable Energy Credits
 
23.0

 
25.0

Risk Management Assets
 
0.6

 
0.6

Regulatory Asset for Under-Recovered Fuel Costs
 
34.1

 
115.9

Prepayments and Other Current Assets
 
16.7

 
15.8

TOTAL CURRENT ASSETS
 
353.1

 
397.9

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Transmission
 
2,484.5

 
2,419.2

Distribution
 
4,825.6

 
4,626.4

Other Property, Plant and Equipment
 
547.5

 
495.9

Construction Work in Progress
 
475.7

 
410.1

Total Property, Plant and Equipment
 
8,333.3

 
7,951.6

Accumulated Depreciation and Amortization
 
2,230.6

 
2,184.8

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
6,102.7

 
5,766.8

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
389.1

 
652.8

Securitized Assets
 
19.0

 
37.7

Long-term Risk Management Assets
 
0.1

 

Deferred Charges and Other Noncurrent Assets
 
254.6

 
406.5

TOTAL OTHER NONCURRENT ASSETS
 
662.8

 
1,097.0

 
 
 
 
 
TOTAL ASSETS
 
$
7,118.6

 
$
7,261.7

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

114



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
September 30, 2018 and December 31, 2017
(dollars in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$
242.9

 
$
87.8

Accounts Payable:
 
 

 
 

General
 
169.2

 
205.8

Affiliated Companies
 
95.3

 
118.2

Long-term Debt Due Within One Year – Nonaffiliated
(September 30, 2018 and December 31, 2017 Amounts Include $47.7 and $47, Respectively, Related to Ohio Phase-in-Recovery Funding)
 
47.8

 
397.0

Risk Management Liabilities
 
5.4

 
6.4

Customer Deposits
 
77.5

 
69.2

Accrued Taxes
 
293.8

 
512.5

Other Current Liabilities
 
205.9

 
196.9

TOTAL CURRENT LIABILITIES
 
1,137.8

 
1,593.8

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
(September 30, 2018 and December 31, 2017 Amounts Include $0 and $47.5, Respectively, Related to Ohio Phase-in-Recovery Funding)
 
1,668.5

 
1,322.3

Long-term Risk Management Liabilities
 
89.8

 
126.0

Deferred Income Taxes
 
742.8

 
762.9

Regulatory Liabilities and Deferred Investment Tax Credits
 
1,197.7

 
1,100.2

Deferred Credits and Other Noncurrent Liabilities
 
72.7

 
46.2

TOTAL NONCURRENT LIABILITIES
 
3,771.5

 
3,357.6

 
 
 
 
 
TOTAL LIABILITIES
 
4,909.3

 
4,951.4

 
 
 
 
 
Rate Matters (Note 4)
 

 

Commitments and Contingencies (Note 5)
 

 

 
 
 
 
 
COMMON SHAREHOLDER’S EQUITY
 
 
 
 
Common Stock – No Par Value:
 
 
 
 
Authorized – 40,000,000 Shares
 
 

 
 
Outstanding – 27,952,473 Shares
 
321.2

 
321.2

Paid-in Capital
 
838.8

 
838.8

Retained Earnings
 
1,048.0

 
1,148.4

Accumulated Other Comprehensive Income (Loss)
 
1.3

 
1.9

TOTAL COMMON SHAREHOLDER’S EQUITY
 
2,209.3

 
2,310.3

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
 
$
7,118.6

 
$
7,261.7

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

115



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
237.1

 
$
231.1

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 

 
 

Depreciation and Amortization
 
200.3

 
165.7

Amortization of Generation Deferrals
 
171.9

 
172.9

Deferred Income Taxes
 
(71.9
)
 
117.5

Carrying Costs Income
 
(1.5
)
 
(3.0
)
Allowance for Equity Funds Used During Construction
 
(7.8
)
 
(4.1
)
Mark-to-Market of Risk Management Contracts
 
(37.1
)
 
19.5

Pension Contributions to Qualified Plan Trust
 

 
(8.2
)
Property Taxes
 
191.1

 
175.9

Provision for Refund – Global Settlement, Net
 
(5.5
)
 
(93.3
)
Change in Regulatory Assets
 
180.9

 
(82.2
)
Change in Other Noncurrent Assets
 
0.8

 
(44.5
)
Change in Other Noncurrent Liabilities
 
62.5

 
43.4

Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
21.3

 
14.9

Materials and Supplies
 
(3.7
)
 
(7.1
)
Accounts Payable
 
(31.8
)
 
(31.2
)
Accrued Taxes, Net
 
(210.6
)
 
(284.3
)
Other Current Assets
 
9.1

 
(17.3
)
Other Current Liabilities
 
(4.3
)
 
(34.8
)
Net Cash Flows from Operating Activities
 
700.8

 
330.9

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(538.5
)
 
(362.5
)
Change in Advances to Affiliates, Net
 

 
24.2

Other Investing Activities
 
15.5

 
6.9

Net Cash Flows Used for Investing Activities
 
(523.0
)
 
(331.4
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Issuance of Long-term Debt – Nonaffiliated
 
392.8

 

Change in Advances from Affiliates, Net
 
155.1

 
167.6

Retirement of Long-term Debt – Nonaffiliated
 
(397.0
)
 
(46.4
)
Principal Payments for Capital Lease Obligations
 
(2.9
)
 
(3.1
)
Dividends Paid on Common Stock
 
(337.5
)
 
(130.0
)
Other Financing Activities
 
0.7

 
0.8

Net Cash Flows Used for Financing Activities
 
(188.8
)
 
(11.1
)
 
 
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash for Securitized Funding
 
(11.0
)
 
(11.6
)
Cash, Cash Equivalents and Restricted Cash for Securitized Funding at Beginning of Period
 
29.7

 
30.3

Cash, Cash Equivalents and Restricted Cash for Securitized Funding at End of Period
 
$
18.7

 
$
18.7

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
67.3

 
$
68.1

Net Cash Paid for Income Taxes
 
54.1

 
69.6

Noncash Acquisitions Under Capital Leases
 
3.0

 
3.6

Construction Expenditures Included in Current Liabilities as of September 30,
 
66.0

 
56.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

116





PUBLIC SERVICE COMPANY OF OKLAHOMA

117



PUBLIC SERVICE COMPANY OF OKLAHOMA
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 

 
 

Residential
2,005

 
1,992

 
5,133

 
4,662

Commercial
1,456

 
1,488

 
4,008

 
3,926

Industrial
1,582

 
1,472

 
4,418

 
4,249

Miscellaneous
361

 
353

 
970

 
942

Total Retail
5,404

 
5,305

 
14,529

 
13,779

 
 
 
 
 
 
 
 
Wholesale
182

 
82

 
544

 
309

 
 
 
 
 
 
 
 
Total KWhs
5,586

 
5,387

 
15,073

 
14,088


Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.

Summary of Heating and Cooling Degree Days
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in degree days)
Actual – Heating (a)

 

 
1,161

 
682

Normal – Heating (b)
1

 
1

 
1,082

 
1,104

 
 
 
 
 
 
 
 
Actual – Cooling (c)
1,433

 
1,313

 
2,352

 
2,001

Normal – Cooling (b)
1,396

 
1,395

 
2,063

 
2,064


(a)
Heating degree days are calculated on a 55 degree temperature base.
(b)
Normal Heating/Cooling represents the thirty-year average of degree days.
(c)
Cooling degree days are calculated on a 65 degree temperature base.

118



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income
(in millions)
 
 
 
Third Quarter of 2017
 
$
46.2

 
 
 
Changes in Gross Margin:
 
 
Retail Margins (a)
 
21.3

Off-system Sales
 
0.6

Transmission Revenues
 
1.0

Other Revenues
 
0.2

Total Change in Gross Margin
 
23.1

 
 
 
Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(18.9
)
Depreciation and Amortization
 
(10.6
)
Taxes Other Than Income Taxes
 
(1.0
)
Other Income (Expense)
 
(0.2
)
Non-Service Cost Components of Net Periodic Benefit Cost
 
1.2

Interest Expense
 
(3.2
)
Total Change in Expenses and Other
 
(32.7
)
 
 
 

Income Tax Expense
 
23.8

 
 
 

Third Quarter of 2018
 
$
60.4


(a)
Includes firm wholesale sales to municipals and cooperatives.

The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $21 million primarily due to the following:
A $20 million increase due to new rates implemented in March 2018, inclusive of a $9 million decrease due to the change in the corporate federal tax rate.
An $11 million increase in revenue from rate riders. This increase was partially offset by corresponding increases to riders/trackers recognized in other expense items below.
A $6 million increase in weather-related usage due to a 9% increase in cooling degree days.
These increases were partially offset by:
A $6 million decrease due to lower weather-normalized margins.
A $5 million decrease due to 2018 customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.
A $4 million decrease related to the System Reliability Rider (SRR) that ended in August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.


119



Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $19 million primarily due the following:
A $13 million increase in transmission expenses primarily due to increased SPP transmission services.
A $4 million increase in Energy Efficiency program costs. This increase was offset by an increase from rate riders in Retail Margins above.
A $3 million increase in generation expenses including employee-related expenses.
These increases were partially offset by:
A $3 million decrease in distribution expenses primarily due to the amortization of previously deferred vegetation management costs collected through the SRR. This decrease was partially offset by a corresponding decrease in Retail Margins above.
Depreciation and Amortization expenses increased $11 million primarily due to a higher depreciable base and new rates implemented in March 2018.
Income Tax Expense decreased $24 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.


120



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income
(in millions)
 
 
 
Nine Months Ended September 30, 2017
 
$
71.4

 
 
 

Changes in Gross Margin:
 
 

Retail Margins (a)
 
55.3

Off-system Sales
 
0.8

Transmission Revenues
 
0.4

Other Revenues
 
0.2

Total Change in Gross Margin
 
56.7

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(42.9
)
Depreciation and Amortization
 
(22.7
)
Taxes Other Than Income Taxes
 
(2.6
)
Other Income (Expense)
 
(0.8
)
Non-Service Cost Components of Net Periodic Benefit Cost
 
3.9

Interest Expense
 
(7.2
)
Total Change in Expenses and Other
 
(72.3
)
 
 
 

Income Tax Expense
 
34.0

 
 
 

Nine Months Ended September 30, 2018
 
$
89.8


(a)
Includes firm wholesale sales to municipals and cooperatives.

The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $55 million primarily due to the following:
A $37 million increase due to new rates implemented in March 2018, inclusive of a $19 million decrease due to the change in the corporate federal tax rate.
A $30 million increase in weather-related usage due to a 70% increase in heating degree days and an 18% increase in cooling degree days.
A $24 million increase in revenue from rate riders. This increase was partially offset by corresponding increases to riders/trackers recognized in other expense items below.
These increases were partially offset by:
A $16 million decrease related to the SRR that ended in August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.
A $15 million decrease due to 2018 customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.
A $4 million decrease due to lower weather-normalized margins.

121



Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $43 million primarily due to the following:
A $37 million increase in transmission expenses primarily due to increased SPP transmission services.
A $12 million increase in Energy Efficiency program costs. This increase was offset by an increase from rate riders in Retail Margins above.
A $10 million increase due to the Wind Catcher Project.
A $4 million increase in generation expenses including employee-related expenses.
These increases were partially offset by:
An $11 million decrease in distribution expenses primarily due to the amortization of previously deferred vegetation management costs collected through the SRR. This decrease was partially offset by a corresponding decrease in Retail Margins above.
An $11 million decrease due to a refund associated with SPP transmission expenses incurred in prior periods.
Depreciation and Amortization expenses increased $23 million primarily due to a higher depreciable base and new rates implemented in March 2018.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $4 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Interest Expense increased $7 million primarily due to the 2017 deferral of the debt component of carrying charges on environmental control costs for projects at Northeastern Plant, Unit 3 and Comanche Plant.
Income Tax Expense decreased $34 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

122




PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 

Electric Generation, Transmission and Distribution
 
$
479.1

 
$
440.6

 
$
1,209.5

 
$
1,085.1

Sales to AEP Affiliates
 
1.1

 
1.1

 
3.7

 
3.2

Other Revenues
 
1.2

 
1.1

 
3.3

 
3.3

TOTAL REVENUES
 
481.4

 
442.8

 
1,216.5

 
1,091.6

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 

 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
104.4

 
77.9

 
211.5

 
115.8

Purchased Electricity for Resale
 
116.8

 
127.8

 
352.3

 
379.8

Other Operation
 
106.3

 
84.5

 
286.8

 
228.9

Maintenance
 
22.3

 
25.2

 
73.2

 
88.2

Depreciation and Amortization
 
42.3

 
31.7

 
120.5

 
97.8

Taxes Other Than Income Taxes
 
10.8

 
9.8

 
32.6

 
30.0

TOTAL EXPENSES
 
402.9

 
356.9

 
1,076.9

 
940.5

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
78.5

 
85.9

 
139.6

 
151.1

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 

 
 

 
 

Other Income (Expense)
 
(0.2
)
 

 
(0.3
)
 
0.5

Non-Service Cost Components of Net Periodic Benefit Cost
 
2.1

 
0.9

 
6.5

 
2.6

Interest Expense
 
(16.4
)
 
(13.2
)
 
(47.4
)
 
(40.2
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
64.0

 
73.6

 
98.4

 
114.0

 
 
 
 
 
 
 
 
 
Income Tax Expense
 
3.6

 
27.4

 
8.6

 
42.6

 
 
 
 
 
 
 
 
 
NET INCOME
 
$
60.4

 
$
46.2

 
$
89.8

 
$
71.4

The common stock of PSO is wholly-owned by Parent.
 
 
 
 
 
See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

123



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
60.4

 
$
46.2

 
$
89.8

 
$
71.4

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE LOSS, NET OF TAXES
 
 

 
 
 
 

 
 

Cash Flow Hedges, Net of Tax of $0 and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.2) and $(0.3) for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
(0.2
)
 
(0.2
)
 
(0.7
)
 
(0.6
)
 
 
 

 
 
 
 

 
 

TOTAL COMPREHENSIVE INCOME
 
$
60.2

 
$
46.0


$
89.1

 
$
70.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

124



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER’S EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016
 
$
157.2

 
$
364.0

 
$
689.5

 
$
3.4

 
$
1,214.1

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 
 
 
 
(52.5
)
 
 
 
(52.5
)
Net Income
 
 

 
 

 
71.4

 
 

 
71.4

Other Comprehensive Loss
 
 

 
 

 
 

 
(0.6
)
 
(0.6
)
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017
 
$
157.2

 
$
364.0

 
$
708.4

 
$
2.8

 
$
1,232.4

 
 
 

 
 

 
 

 
 

 
 

TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017
 
$
157.2

 
$
364.0

 
$
691.5

 
$
2.6

 
$
1,215.3

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(37.5
)
 
 

 
(37.5
)
ASU 2018-02 Adoption
 
 
 
 
 
 
 
0.5

 
0.5

Net Income
 
 

 
 

 
89.8

 
 

 
89.8

Other Comprehensive Loss
 
 

 
 

 
 

 
(0.7
)
 
(0.7
)
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018
 
$
157.2

 
$
364.0

 
$
743.8

 
$
2.4

 
$
1,267.4

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

125



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
1.9

 
$
1.6

Accounts Receivable:
 
 
 
 
Customers
 
28.8

 
32.5

Affiliated Companies
 
39.8

 
32.9

Miscellaneous
 
4.4

 
4.1

Allowance for Uncollectible Accounts
 
(0.2
)
 
(0.1
)
Total Accounts Receivable
 
72.8

 
69.4

Fuel
 
12.6

 
12.5

Materials and Supplies
 
43.4

 
42.0

Risk Management Assets
 
18.5

 
6.4

Accrued Tax Benefits
 
12.5

 
28.1

Regulatory Asset for Under-Recovered Fuel Costs
 

 
36.7

Prepayments and Other Current Assets
 
8.1

 
8.6

TOTAL CURRENT ASSETS
 
169.8

 
205.3

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
1,576.3

 
1,577.2

Transmission
 
881.5

 
858.8

Distribution
 
2,543.1

 
2,445.1

Other Property, Plant and Equipment
 
308.3

 
287.4

Construction Work in Progress
 
85.7

 
111.3

Total Property, Plant and Equipment
 
5,394.9

 
5,279.8

Accumulated Depreciation and Amortization
 
1,461.2

 
1,393.6

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
3,933.7

 
3,886.2

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
352.1

 
368.1

Employee Benefits and Pension Assets
 
41.3

 
40.0

Deferred Charges and Other Noncurrent Assets
 
16.6

 
8.7

TOTAL OTHER NONCURRENT ASSETS
 
410.0

 
416.8

 
 
 
 
 
TOTAL ASSETS
 
$
4,513.5

 
$
4,508.3

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

126



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
September 30, 2018 and December 31, 2017
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(in millions)
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$
22.0

 
$
149.6

Accounts Payable:
 
 

 
 

General
 
113.0

 
102.4

Affiliated Companies
 
42.2

 
48.0

Long-term Debt Due Within One Year – Nonaffiliated
 
0.5

 
0.5

Risk Management Liabilities
 
0.6

 

Customer Deposits
 
56.1

 
54.1

Accrued Taxes
 
40.5

 
22.6

Accrued Interest
 
18.9

 
14.1

Regulatory Liability for Over-Recovered Fuel Costs
 
36.0

 

Other Current Liabilities
 
56.5

 
44.7

TOTAL CURRENT LIABILITIES
 
386.3

 
436.0

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
1,286.4

 
1,286.0

Deferred Income Taxes
 
636.6

 
642.0

Regulatory Liabilities and Deferred Investment Tax Credits
 
850.3

 
853.5

Asset Retirement Obligations
 
54.8

 
53.0

Deferred Credits and Other Noncurrent Liabilities
 
31.7

 
22.5

TOTAL NONCURRENT LIABILITIES
 
2,859.8

 
2,857.0

 
 
 
 
 
TOTAL LIABILITIES
 
3,246.1

 
3,293.0

 
 
 
 
 
Rate Matters (Note 4)
 

 

Commitments and Contingencies (Note 5)
 

 

 
 
 
 
 
COMMON SHAREHOLDER’S EQUITY
 
 
 
 
Common Stock – Par Value – $15 Per Share:
 
 
 
 
Authorized – 11,000,000 Shares
 
 

 
 
Issued – 10,482,000 Shares
 
 

 
 
Outstanding – 9,013,000 Shares
 
157.2

 
157.2

Paid-in Capital
 
364.0

 
364.0

Retained Earnings
 
743.8

 
691.5

Accumulated Other Comprehensive Income (Loss)
 
2.4

 
2.6

TOTAL COMMON SHAREHOLDER’S EQUITY
 
1,267.4

 
1,215.3

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
 
$
4,513.5

 
$
4,508.3

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

127



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
89.8

 
$
71.4

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 

 
 

Depreciation and Amortization
 
120.5

 
97.8

Deferred Income Taxes
 
(13.4
)
 
93.7

Allowance for Equity Funds Used During Construction
 
0.3

 
(0.4
)
Mark-to-Market of Risk Management Contracts
 
(11.5
)
 
(3.9
)
Pension Contributions to Qualified Plan Trust
 

 
(5.3
)
Property Taxes
 
(9.6
)
 
(9.4
)
Deferred Fuel Over/Under-Recovery, Net
 
73.3

 
(5.6
)
Provision for Refund, Net
 
3.7

 
(39.4
)
Change in Other Noncurrent Assets
 
6.9

 
(19.8
)
Change in Other Noncurrent Liabilities
 
10.9

 
(1.4
)
Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
(3.4
)
 
5.8

Fuel, Materials and Supplies
 
(1.5
)
 
13.5

Accounts Payable
 
6.9

 
(18.5
)
Accrued Taxes, Net
 
38.4

 
20.1

Other Current Assets
 
0.3

 
(8.2
)
Other Current Liabilities
 
15.1

 
1.5

Net Cash Flows from Operating Activities
 
326.7

 
191.9

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(162.8
)
 
(203.1
)
Other Investing Activities
 
3.9

 
1.5

Net Cash Flows Used for Investing Activities
 
(158.9
)
 
(201.6
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Change in Advances from Affiliates, Net
 
(127.6
)
 
66.0

Retirement of Long-term Debt – Nonaffiliated
 
(0.3
)
 
(0.3
)
Principal Payments for Capital Lease Obligations
 
(2.5
)
 
(3.2
)
Dividends Paid on Common Stock
 
(37.5
)
 
(52.5
)
Other Financing Activities
 
0.4

 
0.3

Net Cash Flows from (Used for) Financing Activities
 
(167.5
)
 
10.3

 
 
 
 
 
Net Increase in Cash and Cash Equivalents
 
0.3

 
0.6

Cash and Cash Equivalents at Beginning of Period
 
1.6

 
1.5

Cash and Cash Equivalents at End of Period
 
$
1.9

 
$
2.1

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
42.0

 
$
40.9

Net Cash Paid (Received) for Income Taxes
 
1.6

 
(46.6
)
Noncash Acquisitions Under Capital Leases
 
2.3

 
1.0

Construction Expenditures Included in Current Liabilities as of September 30,
 
24.3

 
15.1

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

128





SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED


129



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions of KWhs)
Retail:
 

 
 

 
 

 
 

Residential
1,992

 
1,887

 
5,156

 
4,547

Commercial
1,701

 
1,677

 
4,619

 
4,466

Industrial
1,340

 
1,339

 
3,962

 
3,895

Miscellaneous
19

 
19

 
59

 
60

Total Retail
5,052

 
4,922

 
13,796

 
12,968

 
 
 
 
 
 
 
 
Wholesale
1,881

 
2,105

 
5,352

 
6,286

 
 
 
 
 
 
 
 
Total KWhs
6,933

 
7,027

 
19,148

 
19,254


Heating degree days and cooling degree days are metrics commonly used in the utility industry as a measure of the impact of weather on revenues.

Summary of Heating and Cooling Degree Days
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in degree days)
Actual – Heating (a)

 

 
784

 
394

Normal – Heating (b)
1

 
1

 
733

 
747

 
 
 
 
 
 
 
 
Actual – Cooling (c)
1,453

 
1,248

 
2,408

 
1,999

Normal – Cooling (b)
1,408

 
1,414

 
2,179

 
2,185


(a)
Heating degree days are calculated on a 55 degree temperature base.
(b)
Normal Heating/Cooling represents the thirty-year average of degree days.
(c)
Cooling degree days are calculated on a 65 degree temperature base.


130



Third Quarter of 2018 Compared to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to SWEPCo Common Shareholder
(in millions)
 
 
 
Third Quarter of 2017
 
$
73.1

 
 
 

Changes in Gross Margin:
 
 

Retail Margins (a)
 
11.0

Transmission Revenues
 
5.3

Other Revenues
 
0.2

Total Change in Gross Margin
 
16.5

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(18.9
)
Depreciation and Amortization
 
(4.7
)
Taxes Other Than Income Taxes
 
(1.8
)
Interest Income
 
0.4

Allowance for Equity Funds Used During Construction
 
0.2

Non-Service Cost Components of Net Periodic Benefit Cost
 
1.3

Interest Expense
 
(0.8
)
Total Change in Expenses and Other
 
(24.3
)
 
 
 

Income Tax Expense
 
12.9

Equity Earnings (Loss) of Unconsolidated Subsidiary
 
0.4

Net Income Attributable to Noncontrolling Interest
 
9.6

 
 
 

Third Quarter of 2018
 
$
88.2


(a)
Includes firm wholesale sales to municipals and cooperatives.

The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $11 million primarily due to the following:
An $18 million increase primarily due to rider and base rate revenue increases in Texas and Louisiana.
A $14 million increase in weather-related usage primarily due to a 16% increase in cooling degree days.
These increases were partially offset by:
A $15 million decrease due to lower weather-normalized margins.
A $9 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.
Transmission Revenues increased $5 million primarily due to an increase in SPP transmission investments.

Expenses and Other, Income Tax Expense and Net Income Attributable to Noncontrolling Interest changed between years as follows:

Other Operation and Maintenance expenses increased $19 million primarily due to the following:
A $4 million increase due to employee-related expenses.
A $4 million increase in SPP transmission services.
A $3 million increase due to the Wind Catcher Project.
A $3 million increase in Energy Efficiency program costs. This increase was offset by an increase from rate riders in Retail Margins above.
A $2 million increase in distribution expenses.
Depreciation and Amortization expenses increased $5 million primarily due to a higher depreciable base.

131



Income Tax Expense decreased $13 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.
Net Income Attributable to Noncontrolling Interest decreased $10 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This decrease was offset by an increase in Income Tax Expense above.

132



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to SWEPCo Common Shareholder
(in millions)
 
 
 
Nine Months Ended September 30, 2017
 
$
113.9

 
 
 

Changes in Gross Margin:
 
 

Retail Margins (a)
 
49.4

Off-system Sales
 
(1.6
)
Transmission Revenues
 
2.8

Total Change in Gross Margin
 
50.6

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(52.8
)
Depreciation and Amortization
 
(17.8
)
Taxes Other Than Income Taxes
 
(3.7
)
Interest Income
 
1.5

Allowance for Equity Funds Used During Construction
 
2.6

Non-Service Cost Components of Net Periodic Benefit Cost
 
4.1

Interest Expense
 
(3.1
)
Total Change in Expenses and Other
 
(69.2
)
 
 
 

Income Tax Expense
 
27.3

Equity Earnings (Loss) of Unconsolidated Subsidiary
 
6.5

Net Income Attributable to Noncontrolling Interest
 
8.5

 
 
 

Nine Months Ended September 30, 2018
 
$
137.6


(a)
Includes firm wholesale sales to municipals and cooperatives.

The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased electricity were as follows:

Retail Margins increased $49 million primarily due to the following:
A $57 million increase primarily due to rider and base rate revenue increases in Texas, Louisiana and Arkansas.
A $48 million increase in weather-related usage primarily due to a 99% increase in heating degree days and a 20% increase in cooling degree days.
These increases were partially offset by:
A $36 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.
A $26 million decrease due to lower weather-normalized margins, primarily due to wholesale customer load loss from contracts that expired at the end of 2017.
Transmission Revenues increased $3 million primarily due to a $14 million increase from continued SPP transmission investments, partially offset by an $11 million decrease from a 2018 provision for refund related to revenues recorded in prior periods on certain transmission assets that management believes should not have been included in the SPP formula rate. 

133



Expenses and Other, Income Tax Expense, Equity Earnings (Loss) of Unconsolidated Subsidiary and Net Income Attributable to Noncontrolling Interest changed between years as follows:

Other Operation and Maintenance expenses increased $53 million primarily due to the following:
A $25 million increase due to the Wind Catcher Project.
A $21 million increase in SPP transmission services.
An $8 million increase in customer expenses primarily due to the following:
A $3 million increase in Energy Efficiency program costs. This increase was offset by an increase from rate riders in Retail Margins above.
A $3 million increase in customer assistance.
A $5 million increase due to employee-related expenses.
These increases were partially offset by:
An $8 million decrease due to a refund associated with transmission expenses incurred in prior periods.
Depreciation and Amortization expenses increased $18 million primarily due to a higher depreciable base and higher depreciation rates from the 2017 Texas base rate case order.
Taxes Other Than Income Taxes increased $4 million primarily due to increased franchise and property taxes.
Non-Service Cost Components of Net Periodic Benefit Cost decreased $4 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.
Interest Expense increased $3 million primarily due to other interest expense accruals for refunds and true-ups in 2018 and interest expense credits in 2017 on Welsh Plant and Flint Creek Plant environmental project deferrals.
Income Tax Expense decreased $27 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.
Equity Earnings (Loss) of Unconsolidated Subsidiary increased $7 million primarily due to a prior period income tax adjustment recognized in 2017.
Net Income Attributable to Noncontrolling Interest decreased $9 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This decrease was offset by an increase in Income Tax Expense above.

134




SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
 

Electric Generation, Transmission and Distribution
 
$
526.0

 
$
509.5

 
$
1,390.4

 
$
1,321.8

Sales to AEP Affiliates
 
8.7

 
7.7

 
20.2

 
20.4

Other Revenues
 
0.6

 
0.4

 
1.2

 
1.4

TOTAL REVENUES
 
535.3

 
517.6

 
1,411.8

 
1,343.6

 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 

 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
152.1

 
147.5

 
393.4

 
389.8

Purchased Electricity for Resale
 
36.6

 
40.0

 
132.7

 
118.7

Other Operation
 
99.1

 
81.2

 
292.0

 
234.9

Maintenance
 
33.6

 
32.6

 
102.2

 
106.5

Depreciation and Amortization
 
59.9

 
55.2

 
175.9

 
158.1

Taxes Other Than Income Taxes
 
26.9

 
25.1

 
76.4

 
72.7

TOTAL EXPENSES
 
408.2

 
381.6

 
1,172.6

 
1,080.7

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
127.1

 
136.0

 
239.2

 
262.9

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 

 
 

 
 

Interest Income
 
1.1

 
0.7

 
3.5

 
2.0

Allowance for Equity Funds Used During Construction
 
0.6

 
0.4

 
3.8

 
1.2

Non-Service Cost Components of Net Periodic Benefit Cost
 
2.3

 
1.0

 
6.9

 
2.8

Interest Expense
 
(32.7
)
 
(31.9
)
 
(95.8
)
 
(92.7
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY EARNINGS (LOSS)
 
98.4

 
106.2

 
157.6

 
176.2

 
 
 
 
 
 
 
 
 
Income Tax Expense
 
9.6

 
22.5

 
17.9

 
45.2

Equity Earnings (Loss) of Unconsolidated Subsidiary
 
0.8

 
0.4

 
2.0

 
(4.5
)
 
 
 
 
 
 
 
 
 
NET INCOME
 
89.6

 
84.1

 
141.7

 
126.5

 
 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interest
 
1.4

 
11.0

 
4.1

 
12.6

 
 
 
 
 
 
 
 
 
EARNINGS ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER
 
$
88.2

 
$
73.1

 
$
137.6

 
$
113.9

The common stock of SWEPCo is wholly-owned by Parent.
 
 
 
 
 
See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

135



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
89.6

 
$
84.1

 
$
141.7

 
$
126.5

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
 
 

 
 
 
 

 
 

Cash Flow Hedges, Net of Tax of $0.8 and $0.2 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $1 and $0.6 for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
2.7

 
0.4

 
3.6

 
1.1

Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.3) and $(0.3) for the Nine Months Ended September 30, 2018 and 2017, Respectively
 
(0.3
)
 
(0.2
)
 
(1.0
)
 
(0.5
)
 
 
 
 
 
 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME
 
2.4

 
0.2

 
2.6

 
0.6

 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
92.0

 
84.3

 
144.3

 
127.1

 
 
 
 
 
 
 
 
 
Total Comprehensive Income Attributable to Noncontrolling Interest
 
1.4

 
11.0

 
4.1

 
12.6

 
 
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER
 
$
90.6

 
$
73.3

 
$
140.2

 
$
114.5

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

136



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
  SWEPCo Common Shareholder
 
 
 
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
TOTAL EQUITY – DECEMBER 31, 2016
$
135.7

 
$
676.6

 
$
1,411.9

 
$
(9.4
)
 
$
0.4

 
$
2,215.2

 
 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 
 
 
(82.5
)
 
 
 
 
 
(82.5
)
Common Stock Dividends – Nonaffiliated
 

 
 

 
 

 
 

 
(2.7
)
 
(2.7
)
Net Income
 

 
 

 
113.9

 
 

 
12.6

 
126.5

Other Comprehensive Income
 

 
 

 
 

 
0.6

 
 

 
0.6

TOTAL EQUITY – SEPTEMBER 30, 2017
$
135.7

 
$
676.6

 
$
1,443.3

 
$
(8.8
)
 
$
10.3

 
$
2,257.1

 
 
 
 
 
 
 
 
 
 
 
 
TOTAL EQUITY – DECEMBER 31, 2017
$
135.7

 
$
676.6

 
$
1,426.6

 
$
(4.0
)
 
$
(0.4
)
 
$
2,234.5

 
 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 

 
 

 
(60.0
)
 
 

 
 

 
(60.0
)
Common Stock Dividends – Nonaffiliated
 

 
 

 
 

 
 

 
(3.2
)
 
(3.2
)
ASU 2018-02 Adoption
 
 
 
 
(0.4
)
 
(0.9
)
 
 
 
(1.3
)
Net Income
 

 
 

 
137.6

 
 

 
4.1

 
141.7

Other Comprehensive Income
 

 
 

 
 

 
2.6

 
 

 
2.6

TOTAL EQUITY – SEPTEMBER 30, 2018
$
135.7

 
$
676.6

 
$
1,503.8

 
$
(2.3
)
 
$
0.5

 
$
2,314.3

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

137



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2018 and December 31, 2017
(in millions)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents

 
$
2.5

 
$
1.6

Advances to Affiliates
 
518.6

 
2.0

Accounts Receivable:
 
 
 
 
Customers
 
29.1

 
70.9

Affiliated Companies
 
32.8

 
30.2

Miscellaneous
 
20.9

 
25.8

Allowance for Uncollectible Accounts
 
(0.9
)
 
(1.3
)
Total Accounts Receivable
 
81.9

 
125.6

Fuel
(September 30, 2018 and December 31, 2017 Amounts Include $33.4 and $41.5, Respectively, Related to Sabine)
 
117.5

 
123.6

Materials and Supplies
 
69.0

 
67.9

Risk Management Assets
 
6.5

 
6.4

Regulatory Asset for Under-Recovered Fuel Costs
 
14.5

 
14.1

Prepayments and Other Current Assets
 
32.0

 
39.2

TOTAL CURRENT ASSETS
 
842.5

 
380.4

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
4,655.6

 
4,624.9

Transmission
 
1,812.0

 
1,679.8

Distribution
 
2,146.4

 
2,095.8

Other Property, Plant and Equipment
(September 30, 2018 and December 31, 2017 Amounts Include $269.6 and $266.7, Respectively, Related to Sabine)
 
744.4

 
684.1

Construction Work in Progress
 
234.5

 
233.2

Total Property, Plant and Equipment
 
9,592.9

 
9,317.8

Accumulated Depreciation and Amortization
(September 30, 2018 and December 31, 2017 Amounts Include $174.7 and $165.9, Respectively, Related to Sabine)
 
2,798.9

 
2,685.8

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
6,794.0

 
6,632.0

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
217.8

 
220.6

Deferred Charges and Other Noncurrent Assets
 
133.1

 
109.9

TOTAL OTHER NONCURRENT ASSETS
 
350.9

 
330.5

 
 
 
 
 
TOTAL ASSETS
 
$
7,987.4

 
$
7,342.9

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

138



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
September 30, 2018 and December 31, 2017
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(in millions)
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$

 
$
118.7

Accounts Payable:
 
 
 
 
General
 
117.6

 
160.4

Affiliated Companies
 
41.3

 
63.7

Short-term Debt – Nonaffiliated
 
19.4

 
22.0

Long-term Debt Due Within One Year – Nonaffiliated
 
457.2

 
3.7

Risk Management Liabilities
 
0.2

 
0.2

Customer Deposits
 
62.7

 
62.1

Accrued Taxes
 
75.2

 
39.0

Accrued Interest
 
27.5

 
38.9

Obligations Under Capital Leases
 
10.8

 
11.2

Other Current Liabilities
 
101.6

 
78.7

TOTAL CURRENT LIABILITIES
 
913.5

 
598.6

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
2,615.5

 
2,438.2

Long-term Risk Management Liabilities
 
2.6

 

Deferred Income Taxes
 
932.9

 
917.7

Regulatory Liabilities and Deferred Investment Tax Credits
 
896.7

 
896.4

Asset Retirement Obligations
 
179.3

 
160.3

Employee Benefits and Pension Obligations
 
19.3

 
19.5

Obligations Under Capital Leases
 
52.8

 
57.8

Deferred Credits and Other Noncurrent Liabilities
 
60.5

 
19.9

TOTAL NONCURRENT LIABILITIES
 
4,759.6

 
4,509.8

 
 
 
 
 
TOTAL LIABILITIES
 
5,673.1

 
5,108.4

 
 
 
 
 
Rate Matters (Note 4)
 

 

Commitments and Contingencies (Note 5)
 

 

 
 
 
 
 
EQUITY
 
 
 
 
Common Stock – Par Value – $18 Per Share:
 
 
 
 
Authorized – 7,600,000 Shares
 
 
 
 
Outstanding – 7,536,640 Shares
 
135.7

 
135.7

Paid-in Capital
 
676.6

 
676.6

Retained Earnings
 
1,503.8

 
1,426.6

Accumulated Other Comprehensive Income (Loss)
 
(2.3
)
 
(4.0
)
TOTAL COMMON SHAREHOLDER’S EQUITY
 
2,313.8

 
2,234.9

 
 
 
 
 
Noncontrolling Interest
 
0.5

 
(0.4
)
 
 
 
 
 
TOTAL EQUITY
 
2,314.3

 
2,234.5

 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
7,987.4

 
$
7,342.9

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

139



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
(in millions)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
141.7

 
$
126.5

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
Depreciation and Amortization
 
175.9

 
158.1

Deferred Income Taxes
 
2.0

 
79.8

Allowance for Equity Funds Used During Construction
 
(3.8
)
 
(1.2
)
Mark-to-Market of Risk Management Contracts
 
2.5

 
(12.5
)
Pension Contributions to Qualified Plan Trust
 

 
(8.9
)
Property Taxes
 
(15.8
)
 
(15.4
)
Deferred Fuel Over/Under-Recovery, Net
 
4.4

 
2.4

Change in Other Noncurrent Assets
 
(8.9
)
 
(2.9
)
Change in Other Noncurrent Liabilities
 
52.1

 
(5.2
)
Changes in Certain Components of Working Capital:
 
 
 
 
Accounts Receivable, Net
 
44.3

 
12.1

Fuel, Materials and Supplies
 
5.0

 
13.6

Accounts Payable
 
(29.9
)
 
(25.7
)
Accrued Taxes, Net
 
38.4

 
69.1

Accrued Interest
 
(11.4
)
 
(20.0
)
Other Current Assets
 
3.2

 
0.7

Other Current Liabilities
 
15.6

 
(14.6
)
Net Cash Flows from Operating Activities
 
415.3

 
355.9

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Construction Expenditures
 
(336.6
)
 
(265.3
)
Change in Advances to Affiliates, Net
 
(516.6
)
 
167.8

Other Investing Activities
 
1.2

 
3.1

Net Cash Flows Used for Investing Activities
 
(852.0
)
 
(94.4
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Issuance of Long-term Debt – Nonaffiliated
 
1,015.4

 
114.6

Change in Short-term Debt – Nonaffiliated
 
(2.6
)
 
14.3

Change in Advances from Affiliates, Net
 
(118.7
)
 
48.3

Retirement of Long-term Debt – Nonaffiliated
 
(385.3
)
 
(353.6
)
Principal Payments for Capital Lease Obligations
 
(8.5
)
 
(8.4
)
Dividends Paid on Common Stock
 
(60.0
)
 
(82.5
)
Dividends Paid on Common Stock – Nonaffiliated
 
(3.2
)
 
(2.7
)
Other Financing Activities
 
0.5

 
0.4

Net Cash Flows from (Used for) Financing Activities
 
437.6

 
(269.6
)
 
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
 
0.9

 
(8.1
)
Cash and Cash Equivalents at Beginning of Period
 
1.6

 
10.3

Cash and Cash Equivalents at End of Period
 
$
2.5

 
$
2.2

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 
 
 
Cash Paid for Interest, Net of Capitalized Amounts
 
$
102.5

 
$
109.4

Net Cash Paid (Received) for Income Taxes
 
12.9

 
(70.5
)
Noncash Acquisitions Under Capital Leases
 
3.2

 
2.8

Construction Expenditures Included in Current Liabilities as of September 30,
 
37.0

 
40.7

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page 141.

140



INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANTS

The condensed notes to condensed financial statements are a combined presentation for the Registrants. The following list indicates Registrants to which the notes apply. Specific disclosures within each note apply to all Registrants unless indicated otherwise:
Note
 
Registrant
 
Page
Number
 
 
 
 
 
Significant Accounting Matters
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
New Accounting Pronouncements
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
Comprehensive Income
 
AEP, AEP Texas, APCo, I&M, OPCo, PSO, SWEPCo
 
Rate Matters
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
Commitments, Guarantees and Contingencies
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
Dispositions and Impairments
 
AEP, APCo
 
Benefit Plans
 
AEP, AEP Texas, APCo, I&M, OPCo, PSO, SWEPCo
 
Business Segments
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
Derivatives and Hedging
 
AEP, AEP Texas, APCo, I&M, OPCo, PSO, SWEPCo
 
Fair Value Measurements
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
Income Taxes
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
Financing Activities
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 
Variable Interest Entities
 
AEP
 
Revenue from Contracts with Customers
 
AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo
 

141



1.  SIGNIFICANT ACCOUNTING MATTERS

The disclosures in this note apply to all Registrants unless indicated otherwise.

General

The unaudited condensed financial statements and footnotes were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements.

In the opinion of management, the unaudited condensed interim financial statements reflect all normal and recurring accruals and adjustments necessary for a fair presentation of the net income, financial position and cash flows for the interim periods for each Registrant.  Net income for the three and nine months ended September 30, 2018 is not necessarily indicative of results that may be expected for the year ending December 31, 2018.  The condensed financial statements are unaudited and should be read in conjunction with the audited 2017 financial statements and notes thereto, which are included in the Registrants’ Annual Reports on Form 10-K as filed with the SEC on February 22, 2018.

Earnings Per Share (EPS) (Applies to AEP)

Basic EPS is calculated by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted EPS is calculated by adjusting the weighted average outstanding common shares, assuming conversion of all potentially dilutive stock options and awards.

The following tables present AEP’s basic and diluted EPS calculations included on the statements of income:
 
Three Months Ended September 30,
 
2018
 
2017
 
(in millions, except per share data)
 
 

 
$/share
 
 
 
$/share
Earnings Attributable to AEP Common Shareholders
$
577.6

 
 

 
$
544.7

 
 

 
 
 
 
 
 
 
 
Weighted Average Number of Basic Shares Outstanding
493.0

 
$
1.17

 
491.8

 
$
1.11

Weighted Average Dilutive Effect of Stock-Based Awards
0.9

 

 
1.2

 
(0.01
)
Weighted Average Number of Diluted Shares Outstanding
493.9

 
$
1.17

 
493.0

 
$
1.10

 
Nine Months Ended September 30,
 
2018
 
2017
 
(in millions, except per share data)
 
 

 
$/share
 
 
 
$/share
Earnings Attributable to AEP Common Shareholders
$
1,560.4

 
 
 
$
1,511.9

 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Basic Shares Outstanding
492.6

 
$
3.17

 
491.8

 
$
3.07

Weighted Average Dilutive Effect of Stock-Based Awards
0.9

 
(0.01
)
 
0.6

 

Weighted Average Number of Diluted Shares Outstanding
493.5

 
$
3.16

 
492.4

 
$
3.07


There were no antidilutive shares outstanding as of September 30, 2018 and 2017.

Nonconsolidated Variable Interest Entity (Applies to AEP and SWEPCo)

SWEPCo recorded prior year income tax adjustments in the second quarter of 2017 related to DHLC that impacted Equity Earnings (Loss) of Unconsolidated Subsidiary in the amount of $6 million.

142



Revisions to Previously Issued Financial Statements (Applies to only AEPTCo)
 
In the second quarter of 2018, management identified certain transmission assets that it believes should not have been included in AEPTCo’s SPP transmission formula rates. As a result, AEPTCo recorded a pretax out of period correction of an error of approximately $17 million related to revenue recorded from 2013 through March 31, 2018 in the second quarter of 2018. Subsequent to filing the second quarter 2018 Form 10-Q, AEPTCo identified an additional error in its previously issued financial statements. This error resulted from the improper capitalization of AFUDC and subsequent revenue recorded on the AFUDC. The impact of this misstatement reduced AEPTCo’s pretax income by approximately $7 million on a cumulative basis for the period 2011 through June 30, 2018.
 
Management assessed the materiality of the misstatements on all previously issued AEPTCo financial statements in accordance with SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, codified in ASC 250, Presentation of Financial Statements and concluded these misstatements were not material, individually or in the aggregate, to any prior annual or interim period. In accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), management revised the prior period AEPTCo financial statements included in this report to reflect the impact of correcting the immaterial misstatements described above. In addition, management will revise the historical 2017, March 31, 2018 and June 30, 2018 periods presented in AEPTCo’s previously issued financial statements in future SEC Form 10-Q and Form 10-K filings to reflect the impact of the misstatements. The $(18) million adjustment to pretax income for the nine months ended September 30, 2017 includes adjustments of $(12) million relating to 2016 and earlier periods. The effect of recording this adjustment of $(12) million in 2017 is not material to AEPTCo’s financial statements for 2017 or any earlier period.
 
AEPTCo has also corrected other previously recorded immaterial out of period adjustments. The impact of these additional adjustments did not impact net income in any period.
 
Management also assessed the materiality of the AEPTCo’s misstatements discussed above on all previously issued and the current year AEP financial statements in accordance with ASC 250, and concluded these misstatements were not material, individually or in the aggregate, to any prior and current interim and annual period financial statements. As a result, AEP recorded the correction in the third quarter of 2018.
 
Statements of Income
 
The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s statements of income for the three and nine months ended September 30, 2017:
 
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
 
As Reported
 
Adjustments
 
As Adjusted
 
As Reported
 
Adjustments
 
As Adjusted
 
 
(in millions)
 
(in millions)
TOTAL REVENUES
 
$
167.3

 
$
(1.7
)
 
$
165.6

 
$
549.4

 
$
(14.6
)
 
$
534.8

 
 
 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 
 
 

 
 

 
 
 
 

Depreciation and Amortization
 
24.8

 
(0.2
)
 
24.6

 
70.9

 
(1.2
)
 
69.7

TOTAL EXPENSES
 
72.2

 
(0.2
)
 
72.0

 
198.5

 
(1.2
)
 
197.3

 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
95.1

 
(1.5
)
 
93.6

 
350.9

 
(13.4
)
 
337.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 
 
 

 
 

 
 
 
 

Allowance for Equity Funds Used During Construction
 
11.7

 
(0.3
)
 
11.4

 
36.0

 
(3.0
)
 
33.0

Interest Expense
 
(16.9
)
 
(0.2
)
 
(17.1
)
 
(48.6
)
 
(1.8
)
 
(50.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
90.1

 
(2.0
)
 
88.1

 
338.8

 
(18.2
)
 
320.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Income Tax Expense
 
30.2

 
(0.7
)
 
29.5

 
114.5

 
(6.3
)
 
108.2

 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
59.9

 
$
(1.3
)
 
$
58.6

 
$
224.3

 
$
(11.9
)
 
$
212.4


143



Balance Sheet

The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s Balance Sheet as of December 31, 2017:
 
 
December 31, 2017
 
 
As Reported
 
Adjustment
 
As Adjusted
CURRENT ASSETS
 
(in millions)
Accounts Receivable:
 
 
 
 
 
 
Customers
 
$
19.1

 
$
(4.1
)
 
$
15.0

Total Accounts Receivable
 
113.6

 
(4.1
)
 
109.5

Accrued Tax Benefits
 
46.6

 
2.8

 
49.4

TOTAL CURRENT ASSETS
 
327.7

 
(1.3
)
 
326.4

 
 
 
 
 
 
 
TRANSMISSION PROPERTY
 
 
 
 
 
 
Transmission Property
 
5,336.1

 
(16.4
)
 
5,319.7

Other Property, Plant and Equipment
 
131.4

 
(4.6
)
 
126.8

Construction Work in Progress
 
1,312.7

 
11.3

 
1,324.0

Total Transmission Property
 
6,780.2

 
(9.7
)
 
6,770.5

Accumulated Depreciation and Amortization
 
170.4

 
(17.8
)
 
152.6

TOTAL TRANSMISSION PROPERTY NET
 
6,609.8

 
8.1

 
6,617.9

 
 
 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
 
 
Deferred Property Taxes
 
117.8

 
7.2

 
125.0

TOTAL OTHER NONCURRENT ASSETS
 
130.6

 
7.2

 
137.8

 
 
 
 
 
 
 
TOTAL ASSETS
 
$
7,068.1

 
$
14.0

 
$
7,082.1

CURRENT LIABILITIES
 
 
 
 
 
 
Accounts Payable:
 
 
 
 
 
 
General
 
$
473.2

 
$
11.3

 
$
484.5

Affiliated Companies
 
52.9

 
13.2

 
66.1

Accrued Taxes
 
225.4

 
6.1

 
231.5

TOTAL CURRENT LIABILITIES
 
836.3

 
30.6

 
866.9

 
 
 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
 
 
Deferred Income Taxes
 
601.7

 
(1.3
)
 
600.4

Regulatory Liabilities
 
493.7

 
0.1

 
493.8

TOTAL NONCURRENT LIABILITIES
 
3,626.5

 
(1.2
)
 
3,625.3

 
 
 
 
 
 
 
TOTAL LIABILITIES
 
4,462.8

 
29.4

 
4,492.2

 
 
 
 
 
 
 
MEMBER’S EQUITY
 
 
 
 
 
 
Retained Earnings
 
788.7

 
(15.4
)
 
773.3

TOTAL MEMBER’S EQUITY
 
2,605.3

 
(15.4
)
 
2,589.9

 
 
 
 
 
 
 
TOTAL LIABILITIES AND MEMBER’S EQUITY
 
$
7,068.1

 
$
14.0

 
$
7,082.1



144



Statement of Cash Flows
 
The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s statement of cash flows for the nine months ended September 30, 2017:
 
 
Nine Months Ended September 30, 2017
 
 
As Reported
 
Adjustments
 
As Adjusted
 
 
(in millions)
OPERATING ACTIVITIES
 
 
 
 
 
 
Net Income
 
$
224.3

 
$
(11.9
)
 
$
212.4

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
 
 
Depreciation and Amortization
 
70.9

 
(1.2
)
 
69.7

Deferred Income Taxes
 
193.0

 
(1.1
)
 
191.9

Allowance for Equity Funds Used During Construction
 
(36.0
)
 
3.0

 
(33.0
)
Change in Other Noncurrent Assets
 
7.6

 
1.0

 
8.6

Changes in Certain Components of Working Capital:
 
 
 


 
 
Accounts Receivable, Net
 
(44.4
)
 
3.6

 
(40.8
)
Accounts Payable
 
8.6

 
11.8

 
20.4

Accrued Taxes, Net
 
(66.0
)
 
(5.2
)
 
(71.2
)
Net Cash Flows from Operating Activities
 
444.9

 

 
444.9

 
 
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 


 


Net Cash Flows Used for Investing Activities
 
(1,277.4
)
 

 
(1,277.4
)
 
 
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 
 
 

Net Cash Flows from Financing Activities
 
832.5

 

 
832.5

 
 
 
 
 
 
 
Net Change in Cash and Cash Equivalents
 

 

 

Cash and Cash Equivalents at Beginning of Period
 

 

 

Cash and Cash Equivalents at End of Period
 
$

 
$

 
$

 
 
 
 


 


SUPPLEMENTARY INFORMATION
 
 
 
 
 
 
Cash Paid for Interest, Net of Capitalized Amounts
 
$
28.6

 
$
1.8

 
$
30.4

Construction Expenditures Included in Current Liabilities as of September 30,
 
239.0

 
9.9

 
248.9

 
Statement of Changes in Member’s Equity
 
The statement of changes in AEPTCo’s member’s equity reflects the adjustments to Net Income of $(1) million and $(12) million for the three and nine months ended September 30, 2017 as shown in the table under Net Income above. The statement of changes in member’s equity also reflects the adjustments to Retained Earnings of $(15) million as of December 31, 2017 as shown in the table under Balance Sheet above.
 

145



Restricted Cash (Applies to AEP, AEP Texas, APCo and OPCo)
 
Restricted Cash primarily includes funds held by trustees for the payment of securitization bonds.
 
Reconciliation of Cash, Cash Equivalents and Restricted Cash
 
The following tables provide a reconciliation of Cash, Cash Equivalents and Restricted Cash reported on the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:
 
 
September 30, 2018
 
 
AEP
 
AEP Texas
 
APCo
 
OPCo
 
 
(in millions)
Cash and Cash Equivalents
 
$
788.3

 
$
0.1

 
$
2.2

 
$
3.5

Restricted Cash
 
149.2

 
124.2

 
9.9

 
15.2

Total Cash, Cash Equivalents and Restricted Cash
 
$
937.5

 
$
124.3

 
$
12.1

 
$
18.7

 
 
December 31, 2017
 
 
AEP
 
AEP Texas
 
APCo
 
OPCo
 
 
(in millions)
Cash and Cash Equivalents
 
$
214.6

 
$
2.0

 
$
2.9

 
$
3.1

Restricted Cash
 
198.0

 
155.2

 
16.3

 
26.6

Total Cash, Cash Equivalents and Restricted Cash
 
$
412.6

 
$
157.2

 
$
19.2

 
$
29.7


146



2. NEW ACCOUNTING PRONOUNCEMENTS

The disclosures in this note apply to all Registrants unless indicated otherwise.

During FASB’s standard-setting process and upon issuance of final pronouncements, management reviews the new accounting literature to determine its relevance, if any, to the Registrants’ business. The following pronouncements will impact the financial statements.

ASU 2014-09 “Revenue from Contracts with Customers” (ASU 2014-09)

In May 2014, the FASB issued ASU 2014-09 changing the method used to determine the timing and requirements for revenue recognition on the statements of income. Under the new standard, an entity must identify the performance obligations in a contract, determine the transaction price and allocate the price to specific performance obligations to recognize the revenue when the obligation is completed. The amendments in this update also require disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts.

Management adopted ASU 2014-09 effective January 1, 2018, by means of the modified retrospective approach for all contracts. The adoption of ASU 2014-09 did not have a material impact on results of operations, financial position or cash flows. In that regard, the application of the new standard did not cause any significant differences in any individual financial statement line items had those line items been presented in accordance with the guidance that was in effect prior to the adoption of the new standard. Further, given the lack of material impact to the financial statements, the adoption of the new standard did not give rise to any material changes in the Registrants’ previously established accounting policies for revenue. See Note 14 - Revenue from Contracts with Customers for additional disclosures required by the new standard.

ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01)

In January 2016, the FASB issued ASU 2016-01 revising the reporting model for financial instruments. Under the new standard, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are required to be measured at fair value with changes in fair value recognized in net income. For equity investments that do not have a readily determinable fair value, entities are permitted to elect a practicality exception and measure the investment at cost, less impairment, plus or minus observable price changes. The new standard also amends disclosure requirements and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheets or the accompanying notes to the financial statements. The amendments also clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

Management adopted ASU 2016-01 effective January 1, 2018, by means of a cumulative-effect adjustment to the balance sheet. The adoption of ASU 2016-01 resulted in an immaterial impact on results of operations and financial position of AEP, and no impact to results of operations or financial position of the Registrant Subsidiaries. There was no impact on cash flows of the Registrants.

ASU 2016-02 “Accounting for Leases” (ASU 2016-02)

In February 2016, the FASB issued ASU 2016-02 increasing the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheets and disclosing key information about leasing arrangements. Under the new standard, an entity must recognize an asset and liability for operating leases on the balance sheets. Additionally, a capital lease will be known as a finance lease going forward. Leases with terms of 12 months or longer will be subject to the new requirements. Fundamentally, the criteria used to determine lease classification will remain the same, but will be more subjective under the new standard.


147



The new accounting guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements”, which provides an optional expedient to adopt the new lease requirements through a cumulative-effect adjustment in the period of adoption. Management plans to apply the new optional transition guidance.

New leasing standard implementation activities to date include the identification of the lease population within the AEP System as well as the sampling of representative lease contracts to analyze accounting treatment under the new accounting guidance. Based upon the completed assessments, management also prepared a gap analysis to outline new disclosure compliance requirements. A lease system was selected after reviewing multiple system options. System implementation activities of core functionality continue in the fourth quarter of 2018. Implementation of reporting functionality designed to meet new disclosure requirements is ongoing.

Management plans to elect certain of the optional practical expedients upon adoption:
Practical Expedient
 
Description
Overall Expedients (for leases commenced prior to adoption date and must be adopted as a package)
 
Do not need to reassess whether any expired or existing contracts are/or contain leases, do not need to reassess the lease classification for any expired or existing leases and do not need to reassess initial direct costs for any existing leases.
Lease and Non-lease Components (elect by class of underlying asset)
 
Elect as an accounting policy to not separate non-lease components from lease components and instead account for each lease and associated non-lease component as a single lease component.
Short-term Lease (elect by class of underlying asset)
 
Elect as an accounting policy to not apply the recognition requirements to short-term leases.
Existing and expired land easements not previously accounted for as leases
 
Elect optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840.

Evaluation of new lease contracts will continue through the fourth quarter. Management expects the new standard to impact financial position and, at this time, cannot estimate the impact. Management does not expect any impact to results of operations or cash flows. Management plans to adopt ASU 2016-02 and its related guidance effective January 1, 2019.

ASU 2016-13 “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13)

In June 2016, the FASB issued ASU 2016-13 requiring an allowance to be recorded for all expected credit losses for financial assets. The allowance for credit losses is based on historical information, current conditions and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. The amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net income. Management plans to adopt ASU 2016-13 effective January 1, 2020.


148



ASU 2017-07 “Compensation - Retirement Benefits” (ASU 2017-07)

In March 2017, the FASB issued ASU 2017-07 requiring that an employer report the service cost component of pension and postretirement benefits in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented on the statements of income separately from the service cost component and outside of a subtotal of income from operations. In addition, only the service cost component will be eligible for capitalization as applicable following labor.

Management adopted ASU 2017-07 effective January 1, 2018. Presentation of the non-service components on a separate line outside of operating income was applied on a retrospective basis, using the amounts disclosed in the benefit plan note for the estimation basis as a practical expedient. Capitalization of only the service cost component was applied on a prospective basis.

ASU 2017-12 “Derivatives and Hedging” (ASU 2017-12)

In August 2017, the FASB issued ASU 2017-12 amending the recognition and presentation requirements for hedge accounting activities. The objectives are to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and reduce the complexity of applying hedge accounting. Among other things, ASU 2017-12: (a) expands the types of transactions eligible for hedge accounting, (b) eliminates the separate measurement and presentation of hedge ineffectiveness, (c) simplifies the requirements around the assessment of hedge effectiveness, (d) provides companies more time to finalize hedge documentation and (e) enhances presentation and disclosure requirements.

Management early adopted ASU 2017-12 in the second quarter of 2018, effective January 1, 2018, by means of a modified retrospective approach. The adoption of ASU 2017-12 resulted in an immaterial impact on results of operations and financial position of AEP, and no impact to results of operations or financial position of the Registrant Subsidiaries. There was no impact on cash flows of the Registrants. Further, given the lack of material impact to the financial statements, the adoption of the new standard did not give rise to any material changes in the Registrants’ previously established accounting policies for derivatives and hedging.

ASU 2018-02 “Reclassification of Certain Tax Effects from AOCI” (ASU 2018-02)

In February 2018, the FASB issued ASU 2018-02 allowing a reclassification from AOCI to Retained Earnings for stranded tax effects resulting from Tax Reform. The accounting guidance for “Income Taxes” requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax law or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date of the tax change. This guidance is applicable for the tax effects of items in AOCI that were originally recognized in Other Comprehensive Income. As a result and absent the new guidance in this ASU, the tax effects of items within AOCI would not reflect the newly enacted corporate tax rate.

Management adopted ASU 2018-02 effective January 1, 2018, electing to reclassify the effects of the change in the federal corporate tax rate due to Tax Reform from AOCI to Retained Earnings. A portion of the reclassification was recorded to Regulatory Liabilities to adjust the tax effects of certain interest rate hedges in AEP's regulated jurisdictions that were previously deferred as a part of the accounting for Tax Reform. There were no other effects from Tax Reform that impacted AOCI. Management applied the new guidance at the beginning of the period of adoption. The adoption of the new standard did not have a material impact on the statement of financial position and did not impact results of operations or cash flows.


149



ASU 2018-15 “Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (ASU 2018-15)

In August 2018, the FASB issued ASU 2018-15 aligning the requirements for capitalizing implementation costs incurred in a cloud computing arrangement (hosting arrangement) that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires an entity (customer) in a hosting arrangement that is a service contract to follow the accounting guidance for “Internal-Use Software” to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Capitalized implementation costs of a hosting arrangement that is a service contract should be amortized over the term of the hosting arrangement. The expense related to the capitalized implementation costs should be presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement.  Payments for capitalized implementation costs in the statement of cash flows should be classified in the same manner as payments made for fees associated with the hosting element. Capitalized implementation costs in the statement of financial position should be presented in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectively to applicable implementation costs incurred after the date of adoption. Management is analyzing the impact of this new standard and at this time, cannot estimate the impact of adoption on results of operations, financial position or cash flows. Management plans to adopt ASU 2018-15 prospectively, effective January 1, 2020.


 

150



3.  COMPREHENSIVE INCOME

The disclosures in this note apply to all Registrants except for AEPTCo. AEPTCo does not have any components of other comprehensive income for any period presented in the financial statements.

Presentation of Comprehensive Income

The following tables provide the components of changes in AOCI and details of reclassifications from AOCI for the three and nine months ended September 30, 2018 and 2017.  The amortization of pension and OPEB AOCI components are included in the computation of net periodic pension and OPEB costs. See Note 7 - Benefit Plans for additional details.

AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2018
 
Cash Flow Hedges
 
 
 
 
 
Commodity
 
Interest Rate
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of June 30, 2018
$
(30.4
)
 
$
(15.3
)
 
$
(49.1
)
 
$
(94.8
)
Change in Fair Value Recognized in AOCI
12.2

 
2.3

 

 
14.5

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
 
Generation & Marketing Revenues (a)
(0.1
)
 

 

 
(0.1
)
Purchased Electricity for Resale (a)
(5.8
)
 

 

 
(5.8
)
Interest Expense (a)

 
0.4

 

 
0.4

Amortization of Prior Service Cost (Credit)

 

 
(5.0
)
 
(5.0
)
Amortization of Actuarial (Gains)/Losses

 

 
3.2

 
3.2

Reclassifications from AOCI, before Income Tax (Expense) Credit
(5.9
)
 
0.4

 
(1.8
)
 
(7.3
)
Income Tax (Expense) Credit
(1.3
)
 
0.1

 
(0.4
)
 
(1.6
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
(4.6
)
 
0.3

 
(1.4
)
 
(5.7
)
Net Current Period Other Comprehensive Income (Loss)
7.6

 
2.6

 
(1.4
)
 
8.8

Balance in AOCI as of September 30, 2018
$
(22.8
)
 
$
(12.7
)
 
$
(50.5
)
 
$
(86.0
)

AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2017
 
Cash Flow Hedges
 
 
 
 
 
 
 
Commodity
 
Interest Rate
 
Securities
Available for Sale
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of June 30, 2017
$
(36.0
)
 
$
(10.4
)
 
$
10.2

 
$
(125.4
)
 
$
(161.6
)
Change in Fair Value Recognized in AOCI
(15.8
)
 
(2.0
)
 
0.9

 

 
(16.9
)
Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
 
 
 
Generation & Marketing Revenues (a)
(0.9
)
 

 

 

 
(0.9
)
Purchased Electricity for Resale (a)
4.9

 

 

 

 
4.9

Interest Expense (a)

 
0.4

 

 

 
0.4

Amortization of Prior Service Cost (Credit)

 

 

 
(5.0
)
 
(5.0
)
Amortization of Actuarial (Gains)/Losses

 

 

 
5.4

 
5.4

Reclassifications from AOCI, before Income Tax (Expense) Credit
4.0

 
0.4

 

 
0.4

 
4.8

Income Tax (Expense) Credit
1.4

 
0.2

 

 
0.1

 
1.7

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
2.6

 
0.2

 

 
0.3

 
3.1

Net Current Period Other Comprehensive Income (Loss)
(13.2
)
 
(1.8
)
 
0.9

 
0.3

 
(13.8
)
Balance in AOCI as of September 30, 2017
$
(49.2
)
 
$
(12.2
)
 
$
11.1

 
$
(125.1
)
 
$
(175.4
)


151



AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2018
 
Cash Flow Hedges
 
 
 
 
 
 
 
Commodity
 
Interest Rate
 
Securities
Available for Sale
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of December 31, 2017
$
(28.4
)
 
$
(13.0
)
 
$
11.9

 
$
(38.3
)
 
$
(67.8
)
Change in Fair Value Recognized in AOCI
30.4

 
2.3

 

 

 
32.7

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
 
 
 
Generation & Marketing Revenues (a)
(0.1
)
 

 

 

 
(0.1
)
Purchased Electricity for Resale (a)
(23.6
)
 

 

 

 
(23.6
)
Interest Expense (a)

 
0.9

 

 

 
0.9

Amortization of Prior Service Cost (Credit)

 

 

 
(14.7
)
 
(14.7
)
Amortization of Actuarial (Gains)/Losses

 

 

 
9.6

 
9.6

Reclassifications from AOCI, before Income Tax (Expense) Credit
(23.7
)
 
0.9

 

 
(5.1
)
 
(27.9
)
Income Tax (Expense) Credit
(5.0
)
 
0.2

 

 
(1.1
)
 
(5.9
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
(18.7
)
 
0.7

 

 
(4.0
)
 
(22.0
)
Net Current Period Other Comprehensive Income (Loss)
11.7

 
3.0

 

 
(4.0
)
 
10.7

ASU 2018-02 Adoption (b)
(6.1
)
 
(2.7
)
 

 
(8.2
)
 
(17.0
)
ASU 2016-01 Adoption (b)

 

 
(11.9
)
 

 
(11.9
)
Balance in AOCI as of September 30, 2018
$
(22.8
)
 
$
(12.7
)
 
$

 
$
(50.5
)
 
$
(86.0
)

AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2017
 
Cash Flow Hedges
 
 
 
 
 
 
 
Commodity
 
Interest Rate
 
Securities
Available for Sale
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of December 31, 2016
$
(23.1
)
 
$
(15.7
)
 
$
8.4

 
$
(125.9
)
 
$
(156.3
)
Change in Fair Value Recognized in AOCI
(39.4
)
 
2.7

 
2.7

 

 
(34.0
)
Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
 
 
 
Generation & Marketing Revenues (a)
(5.6
)
 

 

 

 
(5.6
)
Purchased Electricity for Resale (a)
26.0

 

 

 

 
26.0

Interest Expense (a)

 
1.2

 

 

 
1.2

Amortization of Prior Service Cost (Credit)

 

 

 
(14.8
)
 
(14.8
)
Amortization of Actuarial (Gains)/Losses

 

 

 
16.0

 
16.0

Reclassifications from AOCI, before Income Tax (Expense) Credit
20.4

 
1.2

 

 
1.2

 
22.8

Income Tax (Expense) Credit
7.1

 
0.4

 

 
0.4

 
7.9

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
13.3

 
0.8

 

 
0.8

 
14.9

Net Current Period Other Comprehensive Income (Loss)
(26.1
)
 
3.5

 
2.7

 
0.8

 
(19.1
)
Balance in AOCI as of September 30, 2017
$
(49.2
)
 
$
(12.2
)
 
$
11.1

 
$
(125.1
)
 
$
(175.4
)


152



AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of June 30, 2018
 
$
(4.9
)
 
$
(9.8
)
 
$
(14.7
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
0.4

 

 
0.4

Amortization of Prior Service Cost (Credit)
 

 

 

Amortization of Actuarial (Gains)/Losses
 

 

 

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
0.4

 

 
0.4

Income Tax (Expense) Credit
 
0.1

 

 
0.1

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.3

 

 
0.3

Net Current Period Other Comprehensive Income (Loss)
 
0.3

 

 
0.3

Balance in AOCI as of September 30, 2018
 
$
(4.6
)
 
$
(9.8
)
 
$
(14.4
)

AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of June 30, 2017
 
$
(4.9
)
 
$
(9.4
)
 
$
(14.3
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
0.3

 

 
0.3

Amortization of Prior Service Cost (Credit)
 

 
(0.1
)
 
(0.1
)
Amortization of Actuarial (Gains)/Losses
 

 
0.2

 
0.2

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
0.3

 
0.1

 
0.4

Income Tax (Expense) Credit
 
0.1

 

 
0.1

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.2

 
0.1

 
0.3

Net Current Period Other Comprehensive Income (Loss)
 
0.2

 
0.1

 
0.3

Balance in AOCI as of September 30, 2017
 
$
(4.7
)
 
$
(9.3
)
 
$
(14.0
)


153



AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of December 31, 2017
 
$
(4.5
)
 
$
(8.1
)
 
$
(12.6
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
1.0

 

 
1.0

Amortization of Prior Service Cost (Credit)
 

 
(0.1
)
 
(0.1
)
Amortization of Actuarial (Gains)/Losses
 

 
0.2

 
0.2

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
1.0

 
0.1

 
1.1

Income Tax (Expense) Credit
 
0.2

 

 
0.2

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.8

 
0.1

 
0.9

Net Current Period Other Comprehensive Income (Loss)
 
0.8

 
0.1

 
0.9

ASU 2018-02 Adoption (b)
 
(0.9
)
 
(1.8
)
 
(2.7
)
Balance in AOCI as of September 30, 2018
 
$
(4.6
)
 
$
(9.8
)
 
$
(14.4
)

AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of December 31, 2016
 
$
(5.4
)
 
$
(9.5
)
 
$
(14.9
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
1.0

 

 
1.0

Amortization of Prior Service Cost (Credit)
 

 
(0.1
)
 
(0.1
)
Amortization of Actuarial (Gains)/Losses
 

 
0.4

 
0.4

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
1.0

 
0.3

 
1.3

Income Tax (Expense) Credit
 
0.3

 
0.1

 
0.4

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.7

 
0.2

 
0.9

Net Current Period Other Comprehensive Income (Loss)
 
0.7

 
0.2

 
0.9

Balance in AOCI as of September 30, 2017
 
$
(4.7
)
 
$
(9.3
)
 
$
(14.0
)


154



APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of June 30, 2018
 
$
2.3

 
$
(2.7
)
 
$
(0.4
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
(0.4
)
 

 
(0.4
)
Amortization of Prior Service Cost (Credit)
 

 
(1.3
)
 
(1.3
)
Amortization of Actuarial (Gains)/Losses
 

 
0.4

 
0.4

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.4
)
 
(0.9
)
 
(1.3
)
Income Tax (Expense) Credit
 
(0.1
)
 
(0.2
)
 
(0.3
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.3
)
 
(0.7
)
 
(1.0
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.3
)
 
(0.7
)
 
(1.0
)
Balance in AOCI as of September 30, 2018
 
$
2.0

 
$
(3.4
)
 
$
(1.4
)

APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of June 30, 2017
 
$
2.5

 
$
(11.9
)
 
$
(9.4
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
(0.2
)
 

 
(0.2
)
Amortization of Prior Service Cost (Credit)
 

 
(1.4
)
 
(1.4
)
Amortization of Actuarial (Gains)/Losses
 

 
0.9

 
0.9

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.2
)
 
(0.5
)
 
(0.7
)
Income Tax (Expense) Credit
 
(0.1
)
 
(0.2
)
 
(0.3
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.1
)
 
(0.3
)
 
(0.4
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.1
)
 
(0.3
)
 
(0.4
)
Balance in AOCI as of September 30, 2017
 
$
2.4

 
$
(12.2
)
 
$
(9.8
)



155



APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2018
 
 
Cash Flow Hedges
 
 
 
 
 
 
Commodity
 
Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of December 31, 2017
 
$

 
$
2.2

 
$
(0.9
)
 
$
1.3

Change in Fair Value Recognized in AOCI
 
(0.7
)
 

 

 
(0.7
)
Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
 
 
Purchased Electricity for Resale (a)
 
0.9

 

 

 
0.9

Interest Expense (a)
 

 
(0.9
)
 

 
(0.9
)
Amortization of Prior Service Cost (Credit)
 

 

 
(3.9
)
 
(3.9
)
Amortization of Actuarial (Gains)/Losses
 

 

 
1.0

 
1.0

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
0.9

 
(0.9
)
 
(2.9
)
 
(2.9
)
Income Tax (Expense) Credit
 
0.2

 
(0.2
)
 
(0.6
)
 
(0.6
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.7

 
(0.7
)
 
(2.3
)
 
(2.3
)
Net Current Period Other Comprehensive Income (Loss)
 

 
(0.7
)
 
(2.3
)
 
(3.0
)
ASU 2018-02 Adoption (b)
 

 
0.5

 
(0.2
)
 
0.3

Balance in AOCI as of September 30, 2018
 
$

 
$
2.0

 
$
(3.4
)
 
$
(1.4
)

APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of December 31, 2016
 
$
2.9

 
$
(11.3
)
 
$
(8.4
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
(0.8
)
 

 
(0.8
)
Amortization of Prior Service Cost (Credit)
 

 
(4.0
)
 
(4.0
)
Amortization of Actuarial (Gains)/Losses
 

 
2.6

 
2.6

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.8
)
 
(1.4
)
 
(2.2
)
Income Tax (Expense) Credit
 
(0.3
)
 
(0.5
)
 
(0.8
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.5
)
 
(0.9
)
 
(1.4
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.5
)
 
(0.9
)
 
(1.4
)
Balance in AOCI as of September 30, 2017
 
$
2.4

 
$
(12.2
)
 
$
(9.8
)


156



I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of June 30, 2018
 
$
(12.2
)
 
$
(1.7
)
 
$
(13.9
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
0.4

 

 
0.4

Amortization of Prior Service Cost (Credit)
 

 
(0.2
)
 
(0.2
)
Amortization of Actuarial (Gains)/Losses
 

 
0.2

 
0.2

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
0.4

 

 
0.4

Income Tax (Expense) Credit
 
0.1

 

 
0.1

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.3

 

 
0.3

Net Current Period Other Comprehensive Income (Loss)
 
0.3

 

 
0.3

Balance in AOCI as of September 30, 2018
 
$
(11.9
)
 
$
(1.7
)
 
$
(13.6
)

I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of June 30, 2017
 
$
(11.3
)
 
$
(4.2
)
 
$
(15.5
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
0.5

 

 
0.5

Amortization of Prior Service Cost (Credit)
 

 
(0.3
)
 
(0.3
)
Amortization of Actuarial (Gains)/Losses
 

 
0.3

 
0.3

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
0.5

 

 
0.5

Income Tax (Expense) Credit
 
0.2

 

 
0.2

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.3

 

 
0.3

Net Current Period Other Comprehensive Income (Loss)
 
0.3

 

 
0.3

Balance in AOCI as of September 30, 2017
 
$
(11.0
)
 
$
(4.2
)
 
$
(15.2
)


157



I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of December 31, 2017
 
$
(10.7
)
 
$
(1.4
)
 
$
(12.1
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
1.5

 

 
1.5

Amortization of Prior Service Cost (Credit)
 

 
(0.6
)
 
(0.6
)
Amortization of Actuarial (Gains)/Losses
 

 
0.6

 
0.6

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
1.5

 

 
1.5

Income Tax (Expense) Credit
 
0.3

 

 
0.3

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
1.2

 

 
1.2

Net Current Period Other Comprehensive Income (Loss)
 
1.2

 

 
1.2

ASU 2018-02 Adoption (b)
 
(2.4
)
 
(0.3
)
 
(2.7
)
Balance in AOCI as of September 30, 2018
 
$
(11.9
)
 
$
(1.7
)
 
$
(13.6
)

I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of December 31, 2016
 
$
(12.0
)
 
$
(4.2
)
 
$
(16.2
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
1.5

 

 
1.5

Amortization of Prior Service Cost (Credit)
 

 
(0.7
)
 
(0.7
)
Amortization of Actuarial (Gains)/Losses
 

 
0.7

 
0.7

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
1.5

 

 
1.5

Income Tax (Expense) Credit
 
0.5

 

 
0.5

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
1.0

 

 
1.0

Net Current Period Other Comprehensive Income (Loss)
 
1.0

 

 
1.0

Balance in AOCI as of September 30, 2017
 
$
(11.0
)
 
$
(4.2
)
 
$
(15.2
)


158



OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of June 30, 2018
 
$
1.7

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(0.5
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.5
)
Income Tax (Expense) Credit
 
(0.1
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.4
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.4
)
Balance in AOCI as of September 30, 2018
 
$
1.3


OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of June 30, 2017
 
$
2.5

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(0.5
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.5
)
Income Tax (Expense) Credit
 
(0.2
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.3
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.3
)
Balance in AOCI as of September 30, 2017
 
$
2.2



159



OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of December 31, 2017
 
$
1.9

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(1.3
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(1.3
)
Income Tax (Expense) Credit
 
(0.3
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(1.0
)
Net Current Period Other Comprehensive Income (Loss)
 
(1.0
)
ASU 2018-02 Adoption (b)
 
0.4

Balance in AOCI as of September 30, 2018
 
$
1.3


OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of December 31, 2016
 
$
3.0

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(1.3
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(1.3
)
Income Tax (Expense) Credit
 
(0.5
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.8
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.8
)
Balance in AOCI as of September 30, 2017
 
$
2.2



160



PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of June 30, 2018
 
$
2.6

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(0.2
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.2
)
Income Tax (Expense) Credit
 

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.2
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.2
)
Balance in AOCI as of September 30, 2018
 
$
2.4


PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of June 30, 2017
 
$
3.0

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(0.4
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.4
)
Income Tax (Expense) Credit
 
(0.2
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.2
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.2
)
Balance in AOCI as of September 30, 2017
 
$
2.8



161



PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of December 31, 2017
 
$
2.6

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(0.9
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(0.9
)
Income Tax (Expense) Credit
 
(0.2
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.7
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.7
)
ASU 2018-02 Adoption (b)
 
0.5

Balance in AOCI as of September 30, 2018
 
$
2.4


PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
 
(in millions)
Balance in AOCI as of December 31, 2016
 
$
3.4

Change in Fair Value Recognized in AOCI
 

Amount of (Gain) Loss Reclassified from AOCI
 
 
Interest Expense (a)
 
(1.0
)
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(1.0
)
Income Tax (Expense) Credit
 
(0.4
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(0.6
)
Net Current Period Other Comprehensive Income (Loss)
 
(0.6
)
Balance in AOCI as of September 30, 2017
 
$
2.8



162



SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of June 30, 2018
 
$
(6.4
)
 
$
1.7

 
$
(4.7
)
Change in Fair Value Recognized in AOCI
 
2.3

 

 
2.3

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
0.5

 

 
0.5

Amortization of Prior Service Cost (Credit)
 

 
(0.5
)
 
(0.5
)
Amortization of Actuarial (Gains)/Losses
 

 
0.1

 
0.1

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
0.5

 
(0.4
)
 
0.1

Income Tax (Expense) Credit
 
0.1

 
(0.1
)
 

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.4

 
(0.3
)
 
0.1

Net Current Period Other Comprehensive Income (Loss)
 
2.7

 
(0.3
)
 
2.4

Balance in AOCI as of September 30, 2018
 
$
(3.7
)
 
$
1.4

 
$
(2.3
)

SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of June 30, 2017
 
$
(6.7
)
 
$
(2.3
)
 
$
(9.0
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
0.6

 

 
0.6

Amortization of Prior Service Cost (Credit)
 

 
(0.5
)
 
(0.5
)
Amortization of Actuarial (Gains)/Losses
 

 
0.2

 
0.2

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
0.6

 
(0.3
)
 
0.3

Income Tax (Expense) Credit
 
0.2

 
(0.1
)
 
0.1

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
0.4

 
(0.2
)
 
0.2

Net Current Period Other Comprehensive Income (Loss)
 
0.4

 
(0.2
)
 
0.2

Balance in AOCI as of September 30, 2017
 
$
(6.3
)
 
$
(2.5
)
 
$
(8.8
)


163



SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2018
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of December 31, 2017
 
$
(6.0
)
 
$
2.0

 
$
(4.0
)
Change in Fair Value Recognized in AOCI
 
2.3

 

 
2.3

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
1.6

 

 
1.6

Amortization of Prior Service Cost (Credit)
 

 
(1.5
)
 
(1.5
)
Amortization of Actuarial (Gains)/Losses
 

 
0.2

 
0.2

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
1.6

 
(1.3
)
 
0.3

Income Tax (Expense) Credit
 
0.3

 
(0.3
)
 

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
1.3

 
(1.0
)
 
0.3

Net Current Period Other Comprehensive Income (Loss)
 
3.6

 
(1.0
)
 
2.6

ASU 2018-02 Adoption (b)
 
(1.3
)
 
0.4

 
(0.9
)
Balance in AOCI as of September 30, 2018
 
$
(3.7
)
 
$
1.4

 
$
(2.3
)

SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2017
 
 
Cash Flow Hedge – Interest Rate
 
Pension
and OPEB
 
Total
 
 
(in millions)
Balance in AOCI as of December 31, 2016
 
$
(7.4
)
 
$
(2.0
)
 
$
(9.4
)
Change in Fair Value Recognized in AOCI
 

 

 

Amount of (Gain) Loss Reclassified from AOCI
 
 
 
 
 
 
Interest Expense (a)
 
1.7

 

 
1.7

Amortization of Prior Service Cost (Credit)
 

 
(1.5
)
 
(1.5
)
Amortization of Actuarial (Gains)/Losses
 

 
0.7

 
0.7

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
1.7

 
(0.8
)
 
0.9

Income Tax (Expense) Credit
 
0.6

 
(0.3
)
 
0.3

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
1.1

 
(0.5
)
 
0.6

Net Current Period Other Comprehensive Income (Loss)
 
1.1

 
(0.5
)
 
0.6

Balance in AOCI as of September 30, 2017
 
$
(6.3
)
 
$
(2.5
)
 
$
(8.8
)

(a) Amounts reclassified to the referenced line item on the statements of income.
(b) See Note 2 - New Accounting Pronouncements for additional information.

164



4.  RATE MATTERS

The disclosures in this note apply to all Registrants unless indicated otherwise.

As discussed in the 2017 Annual Report, the Registrants are involved in rate and regulatory proceedings at the FERC and their state commissions. The Rate Matters note within the 2017 Annual Report should be read in conjunction with this report to gain a complete understanding of material rate matters still pending that could impact net income, cash flows and possibly financial condition. The following discusses ratemaking developments in 2018 and updates the 2017 Annual Report.

Regulated Generating Unit to be Retired by 2020 (Applies to AEP and PSO)

In September 2018, management announced that the Oklaunion Power Station is probable of abandonment and is to be retired by October 2020.  The table below summarizes the plant investment and cost of removal, currently being recovered, for the generating unit as of September 30, 2018. See “2018 Oklahoma Base Rate Case” below for additional information.
Gross
Investment
 
Accumulated
Depreciation
 
Net
Investment
 
Materials and Supplies
 
Cost of
Removal
Regulatory
Liability
 
Expected
Retirement
Date
 
Remaining
Recovery
Period
(dollars in millions)
$
106.5

 
$
56.8

 
$
49.7

 
$
3.1

 
$
5.0

 
2020
 
28 years

Regulatory Assets Pending Final Regulatory Approval (Applies to all Registrants except AEPTCo and OPCo)
 
 
AEP
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 Noncurrent Regulatory Assets
 
(in millions)
 
 
 
 
 
Regulatory Assets Currently Earning a Return
 
 
 
 
Plant Retirement Costs - Unrecovered Plant
 
$
50.3

 
$
50.3

Other Regulatory Assets Pending Final Regulatory Approval
 
20.1

 
9.6

Regulatory Assets Currently Not Earning a Return
 
 

 
 

Storm-Related Costs (a)
 
151.7

 
128.0

Plant Retirement Costs - Asset Retirement Obligation Costs
 
39.7

 
39.7

Cook Plant Uprate Project
 

 
36.3

Cook Plant Turbine
 

 
15.9

Other Regulatory Assets Pending Final Regulatory Approval
 
18.8

 
42.2

Total Regulatory Assets Pending Final Regulatory Approval (b)
$
280.6

 
$
322.0


(a)
As of September 30, 2018, AEP Texas has deferred $127 million related to Hurricane Harvey and is in the process of requesting securitization of the distribution portion of the regulatory asset.
(b)
In 2015, APCo recorded a $91 million reduction to accumulated depreciation related to the remaining net book value of plants retired in 2015, primarily in its Virginia jurisdiction. These plants were normal retirements at the end of their depreciable lives under the group composite method of depreciation. APCo’s recovery of the remaining Virginia net book value for the retired plants will be considered in the Virginia SCC’s 2020 triennial review of APCo’s generation and distribution base rates. In 2017, the Virginia SCC staff requested that APCo prepare a depreciation study as of December 31, 2017 and submit that study to the Virginia SCC staff in 2018. In June 2018, APCo submitted the new depreciation study, based on December 31, 2017 property balances, to the Virginia SCC staff.


165



 
 
AEP Texas
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Noncurrent Regulatory Assets
 
(in millions)
 
 
 
 
 
Regulatory Assets Currently Not Earning a Return
 
 
 
 
Storm-Related Costs (a)
 
$
150.2

 
$
123.3

Rate Case Expense
 
0.2

 
0.1

Total Regulatory Assets Pending Final Regulatory Approval
 
$
150.4

 
$
123.4


(a)
As of September 30, 2018, AEP Texas has deferred $127 million related to Hurricane Harvey and is in the process of requesting securitization of the distribution portion of the regulatory asset.
 
 
APCo
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Noncurrent Regulatory Assets
 
(in millions)
 
 
 
 
 
Regulatory Assets Currently Earning a Return
 
 
 
 
Plant Retirement Costs - Materials and Supplies
 
$
9.0

 
$
9.1

Regulatory Assets Currently Not Earning a Return
 
 
 
 
Plant Retirement Costs - Asset Retirement Obligation Costs
 
39.7

 
39.7

Other Regulatory Assets Pending Final Regulatory Approval
 
0.6

 
0.6

Total Regulatory Assets Pending Final Regulatory Approval (a)
 
$
49.3

 
$
49.4


(a)
In 2015, APCo recorded a $91 million reduction to accumulated depreciation related to the remaining net book value of plants retired in 2015, primarily in its Virginia jurisdiction. These plants were normal retirements at the end of their depreciable lives under the group composite method of depreciation. APCo’s recovery of the remaining Virginia net book value for the retired plants will be considered in the Virginia SCC’s 2020 triennial review of APCo’s generation and distribution base rates. In 2017, the Virginia SCC staff requested that APCo prepare a depreciation study as of December 31, 2017 and submit that study to the Virginia SCC staff in 2018. In June 2018, APCo submitted the new depreciation study, based on December 31, 2017 property balances, to the Virginia SCC staff.
 
 
I&M
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Noncurrent Regulatory Assets
 
(in millions)
 
 
 
 
 
Regulatory Assets Currently Not Earning a Return
 
 
 
 
Cook Plant Uprate Project
 
$

 
$
36.3

Deferred Cook Plant Life Cycle Management Project Costs - Michigan
 

 
14.7

Cook Plant Turbine
 

 
15.9

Rockport Dry Sorbent Injection System - Indiana
 

 
10.4

Other Regulatory Assets Pending Final Regulatory Approval
 
3.4

 
2.0

Total Regulatory Assets Pending Final Regulatory Approval
 
$
3.4

 
$
79.3

 
 
PSO
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Noncurrent Regulatory Assets
 
(in millions)
 
 
 
 
 
Regulatory Assets Currently Not Earning a Return
 
 

 
 

Storm-Related Costs
 
$

 
$
3.2

Other Regulatory Assets Pending Final Regulatory Approval
 
0.5

 
0.1

Total Regulatory Assets Pending Final Regulatory Approval
 
$
0.5

 
$
3.3


166



 
 
SWEPCo
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Noncurrent Regulatory Assets
 
(in millions)
 
 
 
 
 
Regulatory Assets Currently Earning a Return
 
 
 
 
Plant Retirement Costs - Unrecovered Plant
 
$
50.3

 
$
50.3

Other Regulatory Assets Pending Final Regulatory Approval
 
0.5

 
0.5

Regulatory Assets Currently Not Earning a Return
 
 

 
 

Asset Retirement Obligation - Arkansas, Louisiana
 
5.0

 
4.0

Rate Case Expense - Texas
 
4.6

 
4.3

Shipe Road Transmission Project - FERC
 

 
3.3

Other Regulatory Assets Pending Final Regulatory Approval
 
3.3

 
2.5

Total Regulatory Assets Pending Final Regulatory Approval
 
$
63.7

 
$
64.9


If these costs are ultimately determined not to be recoverable, it could reduce future net income and cash flows and impact financial condition.

Impact of Tax Reform

Rate and regulatory matters are impacted by federal income tax implications. In December 2017, Tax Reform was enacted, which impacts outstanding rate and regulatory matters. For additional details on the impact of Tax Reform, see Note 11 - Income Taxes.

AEP Texas Rate Matters (Applies to AEP and AEP Texas)

AEP Texas Interim Transmission and Distribution Rates

As of September 30, 2018, AEP Texas’ cumulative revenues from interim base rate increases from 2008 through 2018, subject to review, are estimated to be $959 million. A base rate review could produce a refund to customers if AEP Texas incurs a disallowance of the transmission or distribution investment on which an interim increase was based. Management is unable to determine a range of potential losses, if any, that are reasonably possible of occurring. A revenue decrease, including a refund of interim transmission and distribution rates, could reduce future net income and cash flows and impact financial condition.

In April 2018, the PUCT adopted a rule requiring investor-owned utilities operating solely within ERCOT to make periodic filings for rate proceedings. The rule requires AEP Texas to file for a comprehensive rate review no later than May 1, 2019.

In 2018, the PUCT issued approvals to increase AEP Texas’ transmission rates by $22 million annually. The approvals included an increase in annual revenues to recover transmission capital additions of $46 million offset by a reduction in annual revenues of $24 million due to the reduction in the federal income tax rate due to Tax Reform. The approvals did not address the return of Excess ADIT benefits to customers.

In August 2018, the PUCT approved a Stipulation and Settlement agreement to amend AEP Texas’ Distribution Cost Recovery Factor to reduce annual distribution rates by approximately $24 million annually, beginning September 1, 2018. The settlement included an increase in annual revenues to recover 2017 distribution capital additions of $19 million offset by reductions in annual revenues of: (a) $21 million due to the reduction in the federal income tax rate due to Tax Reform, (b) $10 million due to Excess ADIT associated with certain depreciable property to be amortized using ARAM and (c) $12 million due to Excess ADIT that is not subject to rate normalization requirements to be refunded over 5 years.


167



Hurricane Harvey

In August 2017, Hurricane Harvey hit the coast of Texas, causing power outages in the AEP Texas service territory. AEP Texas has a PUCT approved catastrophe reserve in base rates and can defer incremental storm expenses. AEP Texas currently recovers approximately $1 million of storm costs annually through base rates. As of September 30, 2018, the total balance of AEP Texas’ regulatory asset for deferred storm costs is approximately $150 million, inclusive of approximately $127 million of incremental storm expenses related to Hurricane Harvey. As of September 30, 2018, AEP Texas has recorded approximately $205 million of capital expenditures related to Hurricane Harvey. Also, as of September 30, 2018, AEP Texas has received $10 million in insurance proceeds, and has recorded a receivable for an additional $4 million that will be received in the fourth quarter of 2018, which were applied to the Hurricane Harvey related regulatory asset and property, plant and equipment balances. Management, in conjunction with the insurance adjusters, is reviewing all damages to determine the extent of coverage for additional insurance reimbursement. Any future insurance recoveries received will be applied to and will offset the regulatory asset and property, plant and equipment, as applicable.

Management believes the amount recorded as a regulatory asset is probable of recovery and is in the process of requesting securitization of the distribution portion of the regulatory asset. The standard process for securitization of storm cost recovery in Texas requires two filings with the PUCT. In August 2018, AEP Texas filed a Determination of System Restoration Costs with the PUCT for total estimated storm costs in the amount of $425 million, which includes estimated carrying costs. The estimated value of the total storm costs net of insurance proceeds, tax credits and Excess ADIT is $370 million. AEP Texas intends to request securitization for distribution related assets of $253 million while the remaining $117 million of transmission related assets will be recovered through interim transmission filings or an upcoming base rate case. The request for securitization is expected to occur by the first quarter of 2019.

In October 2018, intervenors filed testimony requesting a $24 million reduction in AEP Texas’ Determination of System Restoration Costs. Also in October 2018, the PUCT staff filed testimony requesting a $4 million reduction AEP Texas’ Determination of System Restoration Costs. Settlement negotiations are ongoing. If the ultimate costs of the incident are not recovered by insurance or through the regulatory process, it could have an adverse effect on future net income, cash flows and financial condition.

APCo and WPCo Rate Matters (Applies to AEP and APCo)

Virginia Legislation Affecting Earnings Reviews

In 2015, amendments to Virginia law governing the regulation of investor-owned electric utilities were enacted. Under the amended Virginia law, APCo’s existing generation and distribution base rates were frozen until after the Virginia SCC ruled on APCo’s next biennial review. These amendments also precluded the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017.

In March 2018, new Virginia legislation impacting investor-owned utilities was enacted, effective July 1, 2018, that: (a) on a one-time basis, required APCo to exclude $10 million of incurred fuel expenses from the July 2018 over/under recovery calculation, (b) reduced APCo’s base rates by $50 million annually effective July 30, 2018, on an interim basis and subject to true-up, to reflect the reduction in the federal income tax rate due to Tax Reform, (c) will require APCo to file its next generation and distribution base rate case by March 31, 2020 using 2017, 2018 and 2019 test years (“triennial review”), (d) will require an adjustment in APCo’s base rates on April 1, 2019 to reflect actual annual reductions in corporate income taxes due to Tax Reform, (e) will require APCo to seek approval from the Virginia SCC for energy efficiency programs with projected costs in the aggregate of at least $140 million over the 10-year period ending July 1, 2028 and (f) will require APCo to construct and/or acquire solar generation facilities in Virginia, as approved by the Virginia SCC, of at least 200 MW of aggregate capacity by July 1, 2028. Triennial reviews are subject to an earnings test which provides that 70% of any over earnings would be refunded or may be reinvested in approved energy distribution grid transformation projects and/or new utility-owned solar and wind generation facilities. The Virginia SCC’s triennial review of 2017-2019 APCo earnings could reduce future net income and cash flows and impact financial condition.

168



Virginia Tax Reform

In October 2018, the Virginia SCC issued an order approving APCo’s request to refund $55 million of Excess ADIT that is not subject to rate normalization requirements to customers through a rider. The rider will be paid over twelve months effective November 1, 2018 and will offset APCo’s recent increase in interim fuel rates, subject to refund, that was filed with the Virginia SCC.

In October 2018, APCo submitted a filing with the Virginia SCC to resolve outstanding issues related to Tax Reform. The filing incorporated amounts already refunded to customers as disclosed in “Virginia Legislation Affecting Earnings Reviews” above and, if approved, will reduce APCo’s base rates by an additional $7 million annually. The combined reduction in APCo’s base rates due to Tax Reform will refund: (a) $39 million annually of excess federal income taxes collected since January 1, 2018 until new base rates are implemented, (b) $7 million annually of Excess ADIT associated with certain depreciable property using ARAM and (c) $11 million annually of Excess ADIT that is not subject to rate normalization requirements over 10 years. APCo anticipates a final order from the Virginia SCC in the first quarter of 2019 and expects to implement additional customer rate credits in a tax-related rider starting in April 2019. The Virginia SCC’s review of APCo’s October 2018 Tax Reform filing could reduce future net income and cash flows and impact financial condition.

2018 West Virginia Base Rate Case

In May 2018, APCo and WPCo filed a joint request with the WVPSC to increase their combined West Virginia base rates by $115 million ($98 million related to APCo) annually based on a 10.22% return on common equity. The proposed annual increase includes $32 million ($28 million related to APCo) due to increased annual depreciation rates and also reflects the impact of the reduction in the federal income tax rate due to Tax Reform. In October 2018, APCo and WPCo filed updated schedules supporting a $95 million ($80 million related to APCo) annual increase in West Virginia base rates primarily due to the impact of West Virginia Tax Reform discussed below.

In October 2018, WVPSC staff and intervenors filed testimony. WVPSC staff recommended a $2 million annual net revenue increase based on a 9.25% return on common equity while intervenors recommended a $14 million annual net revenue decrease based on an 8.75% return on common equity. The difference between APCo and WPCo’s requested annual base rate increase and the WVPSC staff and intervenors recommendations are primarily due to: (a) a reduction in the requested return on common equity, (b) the rejection of updates to the rate base calculation methodology, (c) the rejection of updates to rate base for certain known plant in service increases in 2018 and (d) a reduction in annual depreciation rates primarily related to continuing with a 2040 retirement date for Clinch River Plant rather than APCo’s proposed retirement date of 2025. A hearing at the WVPSC is scheduled for November 2018. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

West Virginia Tax Reform

In August 2018, the WVPSC approved a settlement agreement between APCo, WPCo and various intervenors that addresses the reduction in the federal income tax rate due to Tax Reform. The agreement will provide refunds to customers, through a rider, of approximately $63 million ($51 million related to APCo) through June 2020. In addition, APCo and WPCo utilized $139 million ($125 million related to APCo) of current tax savings and Excess ADIT to offset regulatory asset balances related to carbon capture, storm damage, ENEC and vegetation management. The remaining balance of $87 million ($77 million related to APCo) of Excess ADIT that is not subject to rate normalization requirements will be addressed by the WVPSC at a later date.


169



ETT Rate Matters (Applies to AEP)

ETT Interim Transmission Rates

AEP has a 50% equity ownership interest in ETT. Predominantly all of ETT’s revenues are based on interim rate changes that can be filed twice annually and are subject to review and possible true-up in the next filed base rate proceeding. Through September 30, 2018, AEP’s share of ETT’s cumulative revenues that are subject to review is estimated to be $849 million. A base rate review could produce a refund if ETT incurs a disallowance of the transmission investment on which an interim increase was based. A revenue decrease, including a refund of interim transmission rates, could reduce future net income and cash flows and impact financial condition. Management is unable to determine a range of potential losses, if any, that are reasonably possible of occurring.

In April 2018, the PUCT adopted a rule requiring investor-owned utilities operating solely inside ERCOT to make periodic filings for rate proceedings. The rule requires ETT to file for a comprehensive rate review no later than February 1, 2021.

In June 2018, the PUCT approved ETT’s application to reduce its transmission rates by $28 million annually, beginning June 21, 2018, to reflect the reduction in the federal income tax rate due to Tax Reform. The filing did not address the return of Excess ADIT benefits to customers.

In September 2018, ETT filed a request with the PUCT to refund $11 million of excess federal income taxes collected in 2018 prior to the reduction in transmission rates that were implemented on June 21, 2018.

I&M Rate Matters (Applies to AEP and I&M)

2017 Indiana Base Rate Case

In July 2017, I&M filed a request with the IURC for a $263 million annual increase in Indiana rates based upon a proposed 10.6% return on common equity with the annual increase to be implemented after June 2018. Upon implementation, this proposed annual increase would be subject to a temporary offsetting $23 million annual reduction to customer bills through December 2018 for a credit adjustment rider related to the timing of estimated in-service dates of certain capital expenditures.  The proposed annual increase includes $78 million related to increased annual depreciation rates and an $11 million increase related to the amortization of certain Cook Plant and Rockport Plant regulatory assets. The increase in depreciation rates includes a change in the expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028 combined with increased investment at the Cook Plant, including the Cook Plant Life Cycle Management Project.

In February 2018, I&M filed a Stipulation and Settlement Agreement for a $97 million annual increase in Indiana rates effective July 1, 2018 subject to a temporary offsetting reduction to customer bills through December 2018 for a credit rider related to the timing of estimated in-service dates of certain capital expenditures.  The difference between I&M’s requested $263 million annual increase and the $97 million annual increase in the Stipulation and Settlement Agreement is primarily a result of: (a) the reduction in the federal income tax rate due to Tax Reform, (b) the feedback of credits for Excess ADIT, (c) a 9.95% return on equity, (d) longer recovery periods of regulatory assets, (e) lower depreciation expense primarily for meters, (f) an increase in the sharing of off-system sales margins with customers from 50% to 95% and (g) a refund of $4 million from July 2018 through December 2018 for the impact of Tax Reform for the period January 2018 through June 2018.
In May 2018, the IURC issued an order approving the Stipulation and Settlement Agreement in its entirety.

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2017 Michigan Base Rate Case

In May 2017, I&M filed a request with the MPSC for a $52 million annual increase in Michigan base rates based upon a proposed 10.6% return on common equity with the increase to be implemented no later than April 2018. The proposed annual increase included $23 million related to increased annual depreciation rates and a $4 million increase related to the amortization of certain Cook Plant regulatory assets. The increase in depreciation rates is primarily due to the proposed change in the expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028 combined with increased investment at the Cook Plant related to the Life Cycle Management Project.

In February 2018, an MPSC ALJ issued a Proposal for Decision and recommended an annual revenue increase of $49 million, including an intervenor’s proposal for up to 10% of I&M’s Michigan retail customers to choose an alternate supplier for generation and a proposed capacity rate based on PJM’s net cost of new entry value of $289/MW-day, as well as the MPSC staff’s recommended calculation of depreciation expense for both units of Rockport Plant through 2028 and a return on common equity of 9.8%.  If the maximum 10% of customers choose an alternate supplier starting in February 2019, the estimated annual pretax loss due to the reduced capacity rate would be approximately $9 million. In October 2018, I&M filed a request with the MPSC seeking authority to defer costs related to customers choosing an alternate supplier starting in February 2019.

In April 2018, the MPSC issued an order that generally approved the ALJ proposal resulting in an annual revenue increase of $50 million, effective April 2018 based on a 9.9% return on common equity.  The MPSC also approved the ALJ’s recommendation related to the capacity rate.
 
In May 2018, I&M filed a Petition for Rehearing on the capacity rate issue. In June 2018, the MPSC denied I&M’s request.

Michigan Tax Reform

In August 2018, the MPSC approved I&M’s application to refund, through a rider, approximately $9 million annually for the impact of Tax Reform on I&M’s Michigan jurisdictional earnings effective September 1, 2018.  In October 2018, I&M also made two filings with the MPSC recommending to: (a) refund $3 million over eight months for the impact of Tax Reform on Michigan jurisdictional earnings for the period April 26, 2018 through August 31, 2018, (b) refund approximately $68 million of Excess ADIT associated with certain depreciable property using ARAM and (c) refund approximately $37 million of Excess ADIT that is not subject to rate normalization requirements over 10 years. An order from the MPSC is expected by the end of the first quarter of 2019.

Rockport Plant, Unit 2 SCR

In October 2016, I&M filed an application with the IURC for approval of a Certificate of Public Convenience and Necessity (CPCN) to install SCR technology at Rockport Plant, Unit 2. The equipment will allow I&M to reduce emissions of NOx from Rockport Plant, Unit 2 in order for I&M to continue to operate that unit under current environmental requirements and is expected to be placed in service in May 2020. The estimated cost of the SCR project is $274 million, excluding AFUDC, to be shared equally between I&M and AEGCo.  The filing included a request for authorization for I&M to defer its Indiana jurisdictional ownership share of costs including investment carrying costs at a weighted average cost of capital (WACC), depreciation over a 10-year period as provided by statute and other related expenses. I&M proposed recovery of these costs using the existing Clean Coal Technology Rider in a future filing subsequent to approval of the SCR project.

In March 2018, the IURC issued an order approving: (a) the CPCN, (b) the $274 million estimated cost of the SCR, excluding AFUDC, (c) deferral of the Indiana jurisdictional ownership share of costs, including investment carrying costs, (d) depreciation of the SCR asset over 10 years and (e) recovery of these costs using an I&M Indiana rider.

In April 2018, a group of intervenors filed a Petition for Reconsideration and Rehearing of the March 2018 IURC order.  In June 2018, the IURC denied the Petition for Reconsideration and Rehearing.

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Management intends to request recovery of the Michigan jurisdictional share of the SCR project in a future base rate case. The AEGCo ownership share of the SCR project will be billable under the Rockport UPA to I&M and KPCo and will be subject to future regulatory approval for recovery.

KPCo Rate Matters (Applies to AEP)

2017 Kentucky Base Rate Case

In January 2018, the KPSC issued an order approving a non-unanimous settlement agreement with certain modifications resulting in an annual revenue increase of $12 million, effective January 2018, based on a 9.7% return on equity. The KPSC’s primary revenue requirement modification to the settlement agreement was a $14 million annual revenue reduction for the decrease in the corporate federal income tax rate due to Tax Reform. The KPSC approved: (a) the deferral of a total of $50 million of Rockport Plant UPA expenses for the years 2018 through 2022, with the manner and timing of recovery of the deferral to be addressed in KPCo’s next base rate case, (b) the recovery/return of 80% of certain annual PJM OATT expenses above/below the corresponding level recovered in base rates, (c) KPCo’s commitment to not file a base rate case for three years with rates effective no earlier than 2021 and (d) increased depreciation expense based upon updated Big Sandy Plant, Unit 1 depreciation rates using a 20-year depreciable life.

In February 2018, KPCo filed with the KPSC for rehearing of the January 2018 base case order and requested an additional $2.3 million of annual revenue increases related to: (a) the calculation of federal income tax expense, (b) recovery of purchased power costs associated with forced outages and (c) capital structure adjustments.  Also in February 2018, an intervenor filed for rehearing recommending that the reduced corporate federal income tax rate be reflected in lower purchased power expense related to the Rockport UPA.

In April 2018, KPCo and the intervenor filed a settlement agreement with the KPSC in which KPCo withdrew its requested increase related to the recovery of purchased power costs associated with forced outages and the intervenor withdrew its claim regarding the impact of the reduced corporate federal income tax rates on purchased power costs related to the Rockport UPA.

In June 2018, the KPSC issued an order approving the settlement agreement including KPCo’s requested additional revenue increase of $765 thousand related to the calculation of federal income tax expense. This rate increase was effective June 28, 2018.

Kentucky Tax Reform

In June 2018, the KPSC issued an order approving a settlement agreement between KPCo and an intervenor that stipulates that KPCo will refund an estimated $82 million of Excess ADIT associated with certain depreciable property using ARAM and an estimated $93 million of Excess ADIT that is not subject to rate normalization requirements over 18 years. The refund was effective July 1, 2018.

OPCo Rate Matters (Applies to AEP and OPCo)

Ohio Electric Security Plan Filings

June 2015 - May 2018 ESP Including PPA Application and Proposed ESP Extension through 2024

In 2013, OPCo filed an application with the PUCO to approve an ESP that included proposed rate adjustments and the continuation and modification of certain existing riders, including the DIR, effective June 2015 through May 2018. The proposal also involved a PPA rider that would include OPCo’s OVEC contractual entitlement (OVEC PPA) and would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based PPA.

In 2015 and 2016, the PUCO issued orders in this proceeding. As part of the issued orders, the PUCO approved: (a) the DIR with modified revenue caps, (b) recovery of OVEC-related net margin incurred beginning June 2016, (c)

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potential additional contingent customer credits of up to $15 million to be included in the PPA rider over the final four years of the PPA rider and (d) the limitation that OPCo will not flow through any capacity performance penalties or bonuses through the PPA rider. Additionally, subject to cost recovery and PUCO approval, OPCo agreed to develop and implement, by 2021, a solar energy project(s) of at least 400 MWs and a wind energy project(s) of at least 500 MWs, with 100% of all output to be received by OPCo. AEP affiliates could own up to 50% of these solar and wind projects.

In April 2017, the PUCO rejected all pending rehearing requests related to the OVEC PPA. In June 2017, intervenors filed appeals to the Supreme Court of Ohio stating that the PUCO’s approval of the OVEC PPA was unlawful and does not provide customers with rate stability. In June 2018, oral arguments were held before the Supreme Court of Ohio.

In November 2016, OPCo refiled its amended ESP extension application and supporting testimony, consistent with the terms of the modified and approved stipulation agreement and based upon a 2016 PUCO order. The amended filing proposed to extend the ESP through May 2024.

In August 2017, OPCo and various intervenors filed a stipulation agreement with the PUCO. The stipulation extends the term of the ESP through May 2024 and includes: (a) an extension of the OVEC PPA rider, (b) a proposed 10% return on common equity on capital costs for certain riders, (c) the continuation of riders previously approved in the June 2015 - May 2018 ESP, (d) rate caps related to OPCo’s DIR ranging from $215 million to $290 million for the periods 2018 through 2021 and (e) the addition of various new riders, including a Smart City Rider and a Renewable Generation Rider. DIR rate caps will be reset in OPCo’s next distribution base rate case which must be filed by June 2020.

In April 2018, the PUCO issued an order approving the ESP extension stipulation agreement, with no significant changes. In May 2018, OPCo and various intervenors filed requests for rehearing with the PUCO. In June 2018, these requests for rehearing were approved to allow further consideration of the requests. In August 2018, the PUCO denied all requests for rehearing. In October 2018, an intervenor filed an appeal with the Ohio Supreme Court challenging various approved riders.

2016 SEET Filing

Ohio law provides for the return of significantly excessive earnings to ratepayers upon PUCO review. Significantly excessive earnings are measured by whether the earned return on common equity of the electric utility is significantly in excess of the return on common equity that was earned during the same period by publicly traded companies, including utilities, that face comparable business and financial risk.

In December 2016, OPCo recorded a 2016 SEET provision of $58 million based upon projected earnings data for companies in the comparable utilities risk group. In determining OPCo’s return on equity in relation to the comparable utilities risk group, management excluded the following items resolved in OPCo’s Global Settlement that was filed at the PUCO in December 2016 and subsequently approved in February 2017: (a) gain on the deferral of RSR costs, (b) refunds to customers related to the SEET remands and (c) refunds to customers related to fuel adjustment clause proceedings.

In May 2017, OPCo submitted its 2016 SEET filing with the PUCO in which management indicated that OPCo did not have significantly excessive earnings in 2016 based upon actual earnings data for the comparable utilities risk group.

In January 2018, PUCO staff filed testimony that OPCo did not have significantly excessive earnings. Also in January 2018, an intervenor filed testimony recommending a $53 million refund to customers. In February 2018, OPCo and PUCO staff filed a stipulation agreement in which both parties agreed that OPCo did not have significantly excessive earnings in 2016.


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A 2016 SEET hearing was held in April 2018 and management expects to receive an order in the first half of 2019. While management believes that OPCo’s adjusted 2016 earnings were not excessive, management did not adjust OPCo’s 2016 SEET provision due to risks that the PUCO could rule against OPCo’s proposed SEET adjustments, including treatment of the Global Settlement issues described above, adjust the comparable risk group or adopt a different 2016 SEET threshold. If the PUCO orders a refund of 2016 OPCo earnings, it could negatively affect future SEET filings, reduce future net income and cash flows and impact financial condition.

Ohio Tax Reform

In October 2018, the PUCO issued an order approving a September 2018 settlement agreement between OPCo and various intervenors that addresses the reduction in the federal income tax rate due to Tax Reform. The settlement will: (a) refund excess federal income tax of $20 million annually, through a rider, effective January 1, 2018 until new base rates are implemented, (b) refund an estimated $278 million of Excess ADIT associated with depreciable property through OPCo’s DIR, (c) utilize $48 million of Excess ADIT that is not subject to rate normalization to offset regulatory asset balances related to OPCo’s distribution decoupling program and (d) refund the remaining estimated $129 million of Excess ADIT that is not subject to rate normalization by December 31, 2024 through a rider.

PSO Rate Matters (Applies to AEP and PSO)

2018 Oklahoma Base Rate Case

In October 2018, PSO filed a request with the OCC for an $88 million annual increase in Oklahoma retail rates based upon a 10.3% return on common equity. PSO also proposed to implement a performance based rate plan that combines a formula rate with a set of customer-focused performance incentive measures related to reliability, public safety, customer satisfaction and economic development. The proposed annual increase includes $13 million related to increased annual depreciation rates and $7 million related to increased storm expense amortization. The requested increase in annual depreciation rates includes the recovery of Oklaunion Power Station through 2028 (currently being recovered in rates through 2046).  Management has announced plans to retire Oklaunion Power Station by October 2020. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Oklahoma Tax Reform

In August 2018, the OCC issued an order that approved PSO’s compliance filing that addresses the reduction in the federal income tax rate due to Tax Reform. As a result of the order PSO will establish a rider to: (a) refund $3 million of excess federal income taxes collected from January 9, 2018 through February 28, 2018 by the end of 2018, (b) refund an estimated $353 million of Excess ADIT associated with certain depreciable property using ARAM and (c) refund an estimated $72 million of Excess ADIT that is not subject to rate normalization requirements over 10 years.

SWEPCo Rate Matters (Applies to AEP and SWEPCo)

2012 Texas Base Rate Case

In 2012, SWEPCo filed a request with the PUCT to increase annual base rates primarily due to the completion of the Turk Plant. In 2013, the PUCT issued an order affirming the prudence of the Turk Plant but determined that the Turk Plant’s Texas jurisdictional capital cost cap established in a previous Certificate of Convenience and Necessity case also limited SWEPCo’s recovery of AFUDC in addition to limits on its recovery of cash construction costs.

Upon rehearing in 2014, the PUCT reversed its initial ruling and determined that AFUDC was excluded from the Turk Plant’s Texas jurisdictional capital cost cap. As a result, SWEPCo reversed $114 million of previously recorded regulatory disallowances in 2013. The resulting annual base rate increase was approximately $52 million. In June 2017, the Texas District Court upheld the PUCT’s 2014 order. In July 2017, intervenors filed appeals with the Texas Third Court of Appeals.

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In July 2018, the Texas Third Court of Appeals reversed the PUCT’s judgment affirming the prudence of the Turk Plant and remanded the issue back to the PUCT. In August 2018, SWEPCo filed a Motion for Reconsideration at the Court of Appeals. In October 2018, the Court of Appeals denied SWEPCo’s request. SWEPCo intends to file an appeal with the Texas Supreme Court in the fourth quarter of 2018.

If certain parts of the PUCT order are overturned and if SWEPCo cannot ultimately recover its Texas jurisdictional share of the Turk Plant investment, including AFUDC, it could reduce future net income and cash flows and impact financial condition.

2016 Texas Base Rate Case

In December 2016, SWEPCo filed a request with the PUCT for a net increase in Texas annual revenues of $69 million based upon a 10% return on common equity. In January 2018, the PUCT issued a final order approving a net increase in Texas annual revenues of $50 million based upon a return on common equity of 9.6%, effective May 2017. The final order also included: (a) approval to recover the Texas jurisdictional share of environmental investments placed in service, as of June 30, 2016, at various plants, including Welsh Plant, Units 1 and 3, (b) approval of recovery of, but no return on, the Texas jurisdictional share of the net book value of Welsh Plant, Unit 2, (c) approval of $2 million in additional vegetation management expenses and (d) the rejection of SWEPCo’s proposed transmission cost recovery mechanism.

As a result of the final order, in 2017 SWEPCo: (a) recorded an impairment charge of $19 million, which included $7 million associated with the lack of return on Welsh Plant, Unit 2 and $12 million related to other disallowed plant investments, (b) recognized $32 million of additional revenues, for the period of May 2017 through December 2017, that will be surcharged to customers and (c) recognized an additional $7 million of expenses consisting primarily of depreciation expense and vegetation management expense, offset by the deferral of rate case expense. SWEPCo implemented new rates in February 2018 billings. The $32 million of additional 2017 revenues will be collected by the end of 2018. In March 2018, the PUCT clarified and corrected portions of the final order, without changing the overall decision or amounts of the rate change. The order has been appealed by various intervenors.

In April 2018, SWEPCo made an income tax rate refund tariff filing which includes an annual revenue reduction of approximately $18 million to reflect the difference between rates collected under the final order and the rates that would be collected under Tax Reform. The filing did not address the return of Excess ADIT benefits to customers. In June 2018, the ALJ issued an order approving interim rates that provided for a reduction of residential rates of $8 million. In September 2018, the ALJ issued an order approving interim rates for the remaining customers. The matter has been sent to the PUCT for final approval.

Texas Tax Reform

In October 2018, SWEPCo filed a Stipulation and Settlement Agreement with the PUCT to refund $10 million of excess federal income taxes collected, as a result of Tax Reform, from January 1, 2018 through June 14, 2018 for residential customers and January 1, 2018 through September 19, 2018 for all other customer classes. An interim order was issued by an ALJ and the refunds will be made to customers through a rider in the fourth quarter of 2018.

2015 Louisiana Formula Rate Filing

In April 2015, SWEPCo filed its formula rate plan for test year 2014 with the LPSC.  The filing included a $14 million annual increase, which was effective August 2015.  In February 2018, LPSC staff filed a report approving the increase as filed. This increase is subject to refund pending commission approval.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.


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2017 Louisiana Formula Rate Filing

In April 2017, the LPSC approved an uncontested stipulation agreement that SWEPCo filed for its formula rate plan for test year 2015.  The filing included a net annual increase not to exceed $31 million, which was effective May 2017 and includes SWEPCo’s Louisiana jurisdictional share of Welsh Plant and Flint Creek Plant environmental controls which were placed in service in 2016. In October 2017, SWEPCo filed testimony in Louisiana supporting the prudence of its environmental control investment for Welsh Plant, Units 1 and 3 and Flint Creek power plants. These environmental costs are subject to prudence review by the LPSC. In May 2018, LPSC staff filed testimony that the environmental control investment for Welsh Plant, Units 1 and 3 and Flint Creek power plants is prudent. In August 2018, the LPSC issued an order affirming prudence and approved the settlement agreement for the environmental control investment. In October 2018, the LPSC staff filed a report approving the $31 million increase as filed. The net annual increase is subject to refund pending commission approval. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2018 Louisiana Formula Rate Filing

In April 2018, SWEPCo filed its formula rate plan for test year 2017 with the LPSC.  The filing included a net $28 million annual increase, which was effective August 2018 and includes SWEPCo’s Louisiana jurisdictional share of Welsh Plant and Flint Creek Plant environmental controls. The filing also included a reduction in the federal income tax rate due to Tax Reform but did not address the return of Excess ADIT benefits to customers.

In July 2018, SWEPCo made a supplemental filing to its formula rate plan with the LPSC to reduce the requested annual increase to $18 million. The difference between SWEPCo’s requested $28 million annual increase and the $18 million annual increase in the supplemental filing is primarily the result of the return of Excess ADIT benefits to customers.
In October 2018, the LPSC staff issued a recommendation that SWEPCo refund $11 million of excess federal income taxes collected, as a result of Tax Reform, from January 1, 2018 through July 31, 2018. A decision by the LPSC is expected in the fourth quarter of 2018.

If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Welsh Plant - Environmental Impact

Management currently estimates that the investment necessary to meet proposed environmental regulations through 2025 for Welsh Plant, Units 1 and 3 could total approximately $550 million, excluding AFUDC. As of September 30, 2018, SWEPCo had incurred costs of $399 million, including AFUDC, related to these projects.  Management continues to evaluate the impact of environmental rules and related project cost estimates. As of September 30, 2018, the total net book value of Welsh Plant, Units 1 and 3 was $621 million, before cost of removal, including materials and supplies inventory and CWIP. 

In 2016, as approved by the APSC, SWEPCo began recovering $79 million related to the Arkansas jurisdictional share of these environmental costs, subject to prudence review in the next Arkansas filed base rate proceeding. In April 2017, the LPSC approved recovery of $131 million in investments related to its Louisiana jurisdictional share of environmental controls installed at Welsh Plant, effective May 2017. SWEPCo’s approved Louisiana jurisdictional share of Welsh Plant deferrals: (a) are $10 million, excluding $6 million of unrecognized equity as of September 30, 2018, (b) is subject to review by the LPSC and (c) includes a WACC return on environmental investments and the related depreciation expense and taxes. See “2017 Louisiana Formula Rate Filing” and “2018 Louisiana Formula Rate Filing” disclosures above.

If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.


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Arkansas Tax Reform

In September 2018, the APSC issued an order that approved SWEPCo’s application to implement a rider for SWEPCo’s Arkansas jurisdiction to address the reduction in the federal income tax rate due to Tax Reform. The rider was implemented in the first billing cycle of October 2018 and will: (a) refund $7 million over 15 months of excess federal income taxes collected from January 1, 2018 through September 30, 2018, (b) refund an ongoing estimated $655 thousand monthly from October 1, 2018 until new base rates go into effect as a result of a subsequent APSC order, (c) refund an estimated $66 million of Excess ADIT associated with certain depreciable property using ARAM and (d) refund an estimated $11 million of Excess ADIT that is not subject to rate normalization requirements over 15 months.

FERC Rate Matters

PJM Transmission Rates (Applies to AEP, APCo, I&M and OPCo)

In June 2016, PJM transmission owners, including AEP’s transmission owning subsidiaries within PJM, and various state commissions filed a settlement agreement at the FERC to resolve outstanding issues related to cost responsibility for charges to transmission customers for certain transmission facilities that operate at or above 500 kV. In July 2016, certain parties filed comments at the FERC contesting the settlement agreement. In May 2018, the FERC approved the contested settlement agreement. PJM implemented a transmission enhancement charge adjustment through the PJM OATT, which will be billable through 2025. Management expects that any refunds received would generally be returned to retail customers through existing state rider mechanisms and has recorded $134 million to Customer Accounts Receivable and $75 million to Deferred Charges and Other Noncurrent Assets, with offsets to Regulatory Liabilities and Deferred Investment Tax Credits as of September 30, 2018.

FERC Transmission Complaint - AEP’s PJM Participants (Applies to AEP, AEPTCo, APCo, I&M and OPCo)

In October 2016, seven parties filed a complaint at the FERC that alleged the base return on common equity used by AEP’s transmission owning subsidiaries within PJM in calculating formula transmission rates under the PJM OATT is excessive and should be reduced from 10.99% to 8.32%, effective upon the date of the complaint.  In November 2017, a FERC order set the matter for hearing and settlement procedures.  In March 2018, AEP’s transmission owning subsidiaries within PJM and six of the complainants filed a settlement agreement with the FERC (the seventh complainant abstained).  If approved by the FERC the settlement agreement: (a) establishes a base ROE for AEP’s transmission owning subsidiaries within PJM of 9.85% (10.35% inclusive of the RTO incentive adder of 0.5%), effective January 1, 2018, (b) requires AEP’s transmission owning subsidiaries within PJM to provide a one-time refund of $50 million, attributable from the date of the complaint through December 31, 2017, which was credited to customer bills in the second quarter of 2018 and (c) increases the cap on the equity portion of the capital structure to 55% from 50%.  As part of the settlement agreement, AEP’s transmission owning subsidiaries within PJM also filed updated transmission formula rates incorporating the reduction in the corporate federal income tax rate due to Tax Reform, effective January 1, 2018 and providing for the amortization of the portion of the Excess ADIT that is not subject to the normalization method of accounting, ratably over a ten-year period through credits to the federal income tax expense component of the revenue requirement. In April 2018, an ALJ accepted the interim settlement rates, which included the $50 million one-time refund that occurred in the second quarter of 2018. These interim rates are subject to refund or surcharge, with interest.

In April 2018, certain intervenors filed comments at the FERC recommending a base ROE of 8.48% and a one-time refund of $184 million. The FERC trial staff filed comments recommending a base ROE of 8.41% and one-time refund of $175 million. Another intervenor recommended the refund be calculated in accordance with the base ROE that will ultimately be approved by the FERC. In May 2018, management filed reply comments providing further support for the 9.85% base ROE agreed to in the settlement agreement.

If the FERC orders revenue reductions in excess of the terms of the settlement agreement, it could reduce future net income and cash flows and impact financial condition.  A decision from the FERC is pending.


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Modifications to AEP’s PJM Transmission Rates (Applies to AEP, AEPTCo, APCo, I&M and OPCo)

In November 2016, AEP’s transmission owning subsidiaries within PJM filed an application at the FERC to modify the PJM OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to projected expenses. In March 2017, the FERC accepted the proposed modifications effective January 1, 2017, subject to refund, and set this matter for hearing and settlement procedures. The modified PJM OATT formula rates are based on projected calendar year financial activity and projected plant balances. In December 2017, AEP’s transmission owning subsidiaries within PJM filed an uncontested settlement agreement with the FERC resolving all outstanding issues. In April 2018, the FERC approved the uncontested settlement agreement and rates were implemented effective January 1, 2018.

FERC Transmission Complaint - AEP’s SPP Participants (Applies to AEP, AEPTCo, PSO and SWEPCo)

In June 2017, several parties filed a complaint at the FERC that states the base return on common equity used by AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.36%, effective upon the date of the complaint through September 5, 2018. In November 2017, a FERC order set the matter for hearing and settlement procedures. The parties were unable to settle and the proceeding is currently in the hearing phase.

In September 2018, the same parties filed another complaint at the FERC that states the base return on common equity used by AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.71%, effective upon the date of the second complaint.

Management believes its financial statements adequately address the impact of these complaints. If the FERC orders revenue reductions as a result of these complaints, including refunds from the date of the complaint filings, it could reduce future net income and cash flows and impact financial condition.

Modifications to AEP’s SPP Transmission Rates (Applies to AEP, AEPTCo, PSO and SWEPCo)

In October 2017, AEP’s transmission owning subsidiaries within SPP filed an application at the FERC to modify the SPP OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to projected expenses.  The modified SPP OATT formula rates are based on projected calendar year financial activity and projected plant balances. In December 2017, the FERC accepted the proposed modifications effective January 1, 2018, subject to refund, and set this matter for hearing and settlement procedures. If the FERC determines that any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

FERC SWEPCo Power Supply Agreements Complaint - East Texas Electric Cooperative, Inc. (ETEC) and Northeast Texas Electric Cooperative, Inc. (NTEC) (Applies to AEP and SWEPCo)

In September 2017, ETEC and NTEC filed a complaint at the FERC that states the base return on common equity used by SWEPCo in calculating its power supply formula rates is excessive and should be reduced from 11.1% to 8.41%, effective upon the date of the complaint. In November 2017, a FERC order set the matter for hearing and settlement procedures.

In May 2018, SWEPCo filed a settlement agreement with ETEC and NTEC at the FERC that resolves the issues of the complaint. If approved by the FERC, the settlement agreement: (a) reduces the base return on common equity from 11.1% to 10.1% effective September 1, 2017, (b) requires SWEPCo to provide a one-time billing credit of $287 thousand to reflect the decrease in return on common equity from September 1, 2017 through December 31, 2017 and (c) implements the lower return on common equity on contracts starting January 1, 2018. In July 2018, the FERC issued an order approving the settlement.


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5.  COMMITMENTS, GUARANTEES AND CONTINGENCIES

The disclosures in this note apply to all Registrants unless indicated otherwise.

The Registrants are subject to certain claims and legal actions arising in the ordinary course of business.  In addition, the Registrants business activities are subject to extensive governmental regulation related to public health and the environment.  The ultimate outcome of such pending or potential litigation against the Registrants cannot be predicted.  Management accrues contingent liabilities only when management concludes that it is both probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. When management determines that it is not probable, but rather reasonably possible that a liability has been incurred at the date of the financial statements, management discloses such contingencies and the possible loss or range of loss if such estimate can be made. Any estimated range is based on currently available information and involves elements of judgment and significant uncertainties. Any estimated range of possible loss may not represent the maximum possible loss exposure. Circumstances change over time and actual results may vary significantly from estimates.

For current proceedings not specifically discussed below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on the financial statements. The Commitments, Guarantees and Contingencies note within the 2017 Annual Report should be read in conjunction with this report.

GUARANTEES

Liabilities for guarantees are recorded in accordance with the accounting guidance for “Guarantees.”  There is no collateral held in relation to any guarantees.  In the event any guarantee is drawn, there is no recourse to third parties unless specified below.

Letters of Credit (Applies to AEP, AEP Texas and OPCo)

Standby letters of credit are entered into with third parties.  These letters of credit are issued in the ordinary course of business and cover items such as natural gas and electricity risk management contracts, construction contracts, insurance programs, security deposits and debt service reserves.

AEP has a $3 billion revolving credit facility due in June 2021, under which up to $1.2 billion may be issued as letters of credit on behalf of subsidiaries. As of September 30, 2018, no letters of credit were issued under the $3 billion revolving credit facility. In October 2018, the revolving credit facility was increased to $4 billion and extended until June 2022.

An uncommitted facility gives the issuer of the facility the right to accept or decline each request made under the facility.  AEP issues letters of credit on behalf of subsidiaries under four uncommitted facilities totaling $305 million. The Registrants’ maximum future payments for letters of credit issued under the uncommitted facilities as of September 30, 2018 were as follows:
Company
 
Amount
 
Maturity
 
 
(in millions)
 
 
AEP
 
$
71.8

 
October 2018 to September 2019
AEP Texas
 
2.8

 
January 2019
OPCo
 
0.6

 
September 2019

AEP has $45 million of variable rate Pollution Control Bonds supported by $46 million of bilateral letters of credit maturing in July 2019.

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Guarantees of Third-Party Obligations (Applies to AEP and SWEPCo)

As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining, SWEPCo provides guarantees of mine reclamation of $140 million.  Since SWEPCo uses self-bonding, the guarantee provides for SWEPCo to commit to use its resources to complete the reclamation in the event the work is not completed by Sabine.  This guarantee ends upon depletion of reserves and completion of final reclamation.  It is estimated the reserves will be depleted in 2036 with final reclamation completed by 2046 at an estimated cost of $79 million.  Actual reclamation costs could vary due to period inflation and any changes to actual mine reclamation.  As of September 30, 2018, SWEPCo has collected $74 million through a rider for final mine closure and reclamation costs, of which $79 million is recorded in Asset Retirement Obligations, offset by $5 million that is recorded in Deferred Charges and Other Noncurrent Assets on SWEPCo’s balance sheet.

Sabine charges SWEPCo, its only customer, all of its costs.  SWEPCo passes these costs to customers through its fuel clause.

Guarantees of Equity Method Investees (Applies to AEP)

In December 2016, AEP issued a performance guarantee for a 50% owned joint venture which is accounted for as an equity method investment. If the joint venture were to default on payments or performance, AEP would be required to make payments on behalf of the joint venture. As of September 30, 2018, the maximum potential amount of future payments associated with this guarantee was $75 million, which expires in December 2019.

Indemnifications and Other Guarantees

Contracts

The Registrants enter into certain types of contracts which require indemnifications.  Typically these contracts include, but are not limited to, sale agreements, lease agreements, purchase agreements and financing agreements.  Generally, these agreements may include, but are not limited to, indemnifications around certain tax, contractual and environmental matters.  With respect to sale agreements, exposure generally does not exceed the sale price.  As of September 30, 2018, there were no material liabilities recorded for any indemnifications.

AEPSC conducts power purchase and sale activity on behalf of APCo, I&M, KPCo and WPCo, who are jointly and severally liable for activity conducted on their behalf.  AEPSC also conducts power purchase and sale activity on behalf of PSO and SWEPCo, who are jointly and severally liable for activity conducted on their behalf.

Master Lease Agreements (Applies to all Registrants except AEPTCo)

The Registrants lease certain equipment under master lease agreements.  Under the lease agreements, the lessor is guaranteed a residual value up to a stated percentage of either the unamortized balance or the equipment cost at the end of the lease term.  If the actual fair value of the leased equipment is below the guaranteed residual value at the end of the lease term, the Registrants are committed to pay the difference between the actual fair value and the residual value guarantee.  Historically, at the end of the lease term the fair value has been in excess of the unamortized balance.  As of September 30, 2018, the maximum potential loss by Registrants for these lease agreements assuming the fair value of the equipment is zero at the end of the lease term is as follows:
Company
 
Maximum
Potential Loss
 
 
(in millions)
AEP
 
$
47.7

AEP Texas
 
11.4

APCo
 
8.8

I&M
 
3.5

OPCo
 
7.6

PSO
 
4.1

SWEPCo
 
4.2


180



Railcar Lease (Applies to AEP, I&M and SWEPCo)

In June 2003, AEP Transportation LLC (AEP Transportation), a subsidiary of AEP, entered into an agreement with BTM Capital Corporation, as lessor, to lease 875 coal-transporting aluminum railcars.  The lease is accounted for as an operating lease.  In January 2008, AEP Transportation assigned the remaining 848 railcars under the original lease agreement to I&M (390 railcars) and SWEPCo (458 railcars).  The assignments are accounted for as operating leases for I&M and SWEPCo.  The initial lease term was five years with three consecutive five-year renewal periods for a maximum lease term of twenty years.  I&M and SWEPCo have exercised all renewal options for the maximum lease term.  The future minimum lease obligations were $7 million and $7 million for I&M and SWEPCo, respectively, for the remaining railcars as of September 30, 2018.

Under the remaining five-year lease agreement, the lessor is guaranteed that the sale proceeds under a return-and-sale option will equal at least a lessee obligation amount specified in the lease, which is equal to 77% of the projected fair value of the equipment.  I&M and SWEPCo have assumed the guarantee under the return-and-sale option.  The maximum potential losses related to the guarantee were $5 million and $5 million for I&M and SWEPCo, respectively, as of September 30, 2018, assuming the fair value of the equipment is zero at the end of the current five-year lease term.  However, management believes that the fair value would produce a sufficient sales price to avoid any loss.

AEPRO Boat and Barge Leases (Applies to AEP)

In October 2015, AEP signed a Purchase and Sale Agreement to sell its commercial barge transportation subsidiary, AEPRO, to a nonaffiliated party. The sale closed in November 2015. Certain of the boat and barge leases acquired by the nonaffiliated party are subject to an AEP guarantee in favor of the lessor, ensuring future payments under such leases with maturities up to 2027. As of September 30, 2018, the maximum potential amount of future payments required under the guaranteed leases was $46 million. In certain instances, AEP has no recourse against the nonaffiliated party if required to pay a lessor under a guarantee, but AEP would have access to sell the leased assets in order to recover payments made by AEP under the guarantee. As of September 30, 2018, AEP’s boat and barge lease guarantee liability was $6 million, of which $1 million was recorded in Other Current Liabilities and $5 million was recorded in Deferred Credits and Other Noncurrent Liabilities on AEP’s balance sheet.

In January 2018, S&P Global Inc. downgraded the ratings of the nonaffiliated party and set their outlook to negative. In April 2018, Moody’s Investors Service Inc. also downgraded their ratings and set their outlook to negative. It is reasonably possible that enforcement of AEP’s liability for future payments under these leases could be exercised, which could reduce future net income and cash flows and impact financial condition.

ENVIRONMENTAL CONTINGENCIES (Applies to all Registrants except AEPTCo)

The Comprehensive Environmental Response Compensation and Liability Act (Superfund) and State Remediation

By-products from the generation of electricity include materials such as ash, slag, sludge, low-level radioactive waste and SNF.  Coal combustion by-products, which constitute the overwhelming percentage of these materials, are typically treated and deposited in captive disposal facilities or are beneficially utilized.  In addition, the generation plants and transmission and distribution facilities have used asbestos, polychlorinated biphenyls and other hazardous and nonhazardous materials.  The Registrants currently incur costs to dispose of these substances safely. For remediation processes not specifically discussed, management does not anticipate that the liabilities, if any, arising from such remediation processes would have a material effect on the financial statements.


181



NUCLEAR CONTINGENCIES (Applies to AEP and I&M)

I&M owns and operates the two-unit 2,278 MW Cook Plant under licenses granted by the Nuclear Regulatory Commission.  I&M has a significant future financial commitment to dispose of SNF and to safely decommission and decontaminate the plant.  The licenses to operate the two nuclear units at the Cook Plant expire in 2034 and 2037.  The operation of a nuclear facility also involves special risks, potential liabilities and specific regulatory and safety requirements.  By agreement, I&M is partially liable, together with all other electric utility companies that own nuclear generation units, for a nuclear power plant incident at any nuclear plant in the U.S.  Should a nuclear incident occur at any nuclear power plant in the U.S., the resultant liability could be substantial.

Westinghouse Electric Company Bankruptcy Filing

In March 2017, Westinghouse filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Westinghouse and I&M have a number of significant ongoing contracts relating to reactor services, nuclear fuel fabrication and ongoing engineering projects.  The most significant of these relate to Cook Plant fuel fabrication.  As part of the reorganization, the bankruptcy court approved Westinghouse’s sale of its nuclear business to Brookfield WEC Holdings (Brookfield), a nonaffiliated third party. Pursuant to the sale, Brookfield will assume all of I&M’s contracts with Westinghouse. In August 2018, the sale closed.

OPERATIONAL CONTINGENCIES

Rockport Plant Litigation (Applies to AEP and I&M)

In July 2013, the Wilmington Trust Company filed a complaint in the U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it would be unlawfully burdened by the terms of the modified NSR consent decree after the Rockport Plant, Unit 2 lease expiration in December 2022.  The terms of the consent decree allow the installation of environmental emission control equipment, repowering or retirement of the unit.  The plaintiffs seek a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiffs.  The New York court granted a motion to transfer this case to the U.S. District Court for the Southern District of Ohio.

AEGCo and I&M sought and were granted dismissal of certain of the plaintiffs’ claims, including claims for compensatory damages, breach of contract, breach of the implied covenant of good faith and fair dealing and indemnification of costs. The court permitted plaintiffs to move forward with their claim that AEGCo and I&M failed to exercise prudent utility practices in the maintenance and operation of Rockport Plant, Unit 2. Plaintiffs voluntarily dismissed the surviving claims with prejudice, and the court issued a final judgment. The plaintiffs subsequently filed an appeal in the U.S. Court of Appeals for the Sixth Circuit on whether the trial court erred in dismissing plaintiffs’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing.

In April 2017, the U.S. Court of Appeals for the Sixth Circuit issued an opinion reversing the district court’s decisions in part. In June 2017, on rehearing, the court of appeals issued an amended opinion reversing the district court’s dismissal of certain of plaintiffs’ claims for breach of contract, vacating the denial of the plaintiffs’ motion for partial summary judgment and remanding the case to the district court for further proceedings.  The amended opinion and judgment affirmed the district court’s dismissal of the owners’ breach of good faith and fair dealing claim as duplicative of the breach of contract claims and removed the instruction to the district court in the original opinion to enter summary judgment in favor of the owners.

In July 2017, AEP filed a motion with the U.S. District Court for the Southern District of Ohio in the original NSR litigation, seeking to modify the consent decree to eliminate the obligation to install certain future controls at Rockport Plant, Unit 2 if AEP does not acquire ownership of that Unit, and to modify the consent decree in other respects to preserve the environmental benefits of the consent decree. Responsive and supplemental filings have been made by all parties. In November 2017, the district court granted the owners’ unopposed motion to stay the lease litigation to afford time for resolution of AEP’s motion to modify the consent decree. In September 2018, the district court granted AEP’s unopposed motion to stay further proceedings regarding the consent decree to facilitate settlement discussions among the parties to the consent decree.

182



Management will continue to defend against the claims. Given that the district court dismissed plaintiffs’ claims seeking compensatory relief as premature, and that plaintiffs have yet to present a methodology for determining or any analysis supporting any alleged damages, management is unable to determine a range of potential losses that are reasonably possible of occurring.

Gavin Landfill Litigation (Applies to AEP and OPCo)

In August 2014, a complaint was filed in the Mason County, West Virginia Circuit Court against AEP, AEPSC, OPCo and an individual supervisor alleging wrongful death and personal injury/illness claims arising out of purported exposure to coal combustion by-product waste at the Gavin Plant landfill.  As a result of OPCo transferring its generation assets to AGR, the outcome of this complaint became the responsibility of AGR. The lawsuit was filed on behalf of 77 plaintiffs, consisting of 39 current and former contractors of the landfill and 38 family members of those contractors.  Twelve of the family members pursued personal injury/illness claims (non-working direct claims) and the remainder pursued loss of consortium claims.  The plaintiffs sought compensatory and punitive damages, as well as medical monitoring.  In September 2014, defendants filed a motion to dismiss the complaint, contending the case should be filed in Ohio. In August 2015, the court denied the motion. Defendants appealed that decision to the West Virginia Supreme Court. In February 2016, a decision was issued by the court denying the appeal and remanding the case to the West Virginia Mass Litigation Panel (WVMLP), rather than back to the Mason County, West Virginia Circuit Court. Defendants subsequently filed a motion to dismiss the twelve non-working direct claims under Ohio law. The WVMLP denied the motion and defendants again appealed to the West Virginia Supreme Court. In June 2017, the West Virginia Supreme Court reversed the WVMLP decision and dismissed the claims of the twelve non-working direct claim plaintiffs. A settlement was reached with all of the plaintiffs and was approved by the WVMLP in June 2018. The settlement did not have a material impact on net income, cash flows or financial condition.

183



6DISPOSITIONS AND IMPAIRMENTS
 
The disclosures in this note apply to AEP only unless indicated otherwise.
 
DISPOSITIONS
 
Zimmer Plant (Generation & Marketing Segment)
 
In February 2017, AEP signed an agreement to sell its 25.4% ownership share of Zimmer Plant to a nonaffiliated party.  The transaction closed in the second quarter of 2017 and did not have a material impact on net income, cash flows or financial condition.  The Income before Income Tax Expense and Equity Earnings of Zimmer Plant was immaterial for the three and nine months ended September 30, 2017.
 
Gavin, Waterford, Darby and Lawrenceburg Plants (Generation & Marketing Segment)
 
In September 2016, AEP signed a Purchase and Sale Agreement to sell AGR’s Gavin, Waterford and Darby Plants as well as AEGCo’s Lawrenceburg Plant totaling 5,329 MWs of competitive generation assets to a nonaffiliated party. The sale closed in January 2017 for $2.2 billion, which was recorded in Investing Activities on the statement of cash flows. The net proceeds from the transaction were $1.2 billion in cash after taxes, repayment of debt associated with these assets including a make whole payment related to the debt, payment of a coal contract associated with one of the plants and transaction fees. The sale resulted in a pretax gain of $226 million that was recorded in Gain on Sale of Merchant Generation Assets on AEP’s statement of income.
 
IMPAIRMENTS

Other Assets (Corporate and Other) (Vertically Integrated Utilities Segment) (Applies to AEP and APCo)
 
In the first quarter of 2018, AEP was notified by an equity investee that it had ceased operations. AEP recorded a pretax impairment of $21 million in Other Operation on the statement of income related to the equity investment and related assets. The impairment also had an immaterial impact to APCo.
 
Merchant Generating Assets (Generation & Marketing Segment)
 
A project to reconstruct a defective dam structure at Racine began in the first quarter of 2017. In December 2017, and in accordance with the accounting guidance for impairments of long-lived assets, an impairment analysis was triggered by the expected costs of the dam reconstruction activities, resulting in the conclusion that the fair value of Racine, in its present condition, was $0 as of December 31, 2017. A pretax impairment charge equal to Racine’s net book value of $43 million was recognized in AEP’s 2017 statement of income.
 
Construction activities at Racine continued throughout 2018, accumulating new capital expenditures of $35 million as of September 30, 2018. However, due to a significant increase in estimated costs to complete the reconstruction project, in the third quarter of 2018, an impairment analysis was performed. AEP performed step one of the impairment analysis using undiscounted cash flows for the estimated useful life of Racine based upon energy and capacity price curves, which were developed internally with observable Level 2 third party quotations and unobservable Level 3 inputs, as well as management’s forecasts of operating expenses and capital expenditures. AEP performed step two of the impairment analysis on Racine using a ten-year discounted cash flow model based upon similar forecasted information used in the step one test. The step two analysis resulted in a determination that the fair value of Racine, in its present condition, was $0 as of September 30, 2018. As a result, AEP recorded a pretax impairment of $35 million in Other Operation on the statement of income in the third quarter of 2018. In October 2018, AEP received authorization from the FERC to restart generation at Racine.  Management plans to resume generation at Racine during the fourth quarter of 2018.
 
In the first quarter of 2017, AEP recorded a pretax impairment of $4 million in Other Operation on the statement of income related to the Merchant Coal-fired Generation Assets. In addition, AEP recorded a $7 million pretax impairment in Other Operation on the statement of income related to the sale of Zimmer Plant.

184



7.  BENEFIT PLANS

The disclosures in this note apply to all Registrants except AEPTCo unless indicated otherwise.

AEP sponsors a qualified pension plan and two unfunded nonqualified pension plans.  Substantially all AEP employees are covered by the qualified plan or both the qualified and a nonqualified pension plan.  AEP also sponsors OPEB plans to provide health and life insurance benefits for retired employees.

Components of Net Periodic Benefit Cost

The following tables provide the components of net periodic benefit cost (credit) by Registrant for the plans:

AEP
 
Pension Plans
 
OPEB
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
24.4

 
$
24.1

 
$
2.9

 
$
2.8

Interest Cost
46.9

 
50.7

 
11.8

 
14.8

Expected Return on Plan Assets
(72.6
)
 
(71.1
)
 
(25.6
)
 
(25.3
)
Amortization of Prior Service Cost (Credit)

 
0.3

 
(17.3
)
 
(17.3
)
Amortization of Net Actuarial Loss
21.3

 
20.7

 
2.7

 
9.2

Net Periodic Benefit Cost (Credit)
$
20.0

 
$
24.7

 
$
(25.5
)
 
$
(15.8
)
 
Pension Plans
 
OPEB
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
73.2

 
$
72.3

 
$
8.7

 
$
8.4

Interest Cost
140.8

 
152.3

 
35.5

 
44.5

Expected Return on Plan Assets
(217.7
)
 
(213.5
)
 
(76.7
)
 
(76.0
)
Amortization of Prior Service Cost (Credit)

 
0.8

 
(51.8
)
 
(51.8
)
Amortization of Net Actuarial Loss
63.9

 
62.1

 
7.9

 
27.5

Net Periodic Benefit Cost (Credit)
$
60.2

 
$
74.0

 
$
(76.4
)
 
$
(47.4
)


185



AEP Texas
 
Pension Plans
 
OPEB
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
2.3

 
$
2.1

 
$
0.3

 
$
0.3

Interest Cost
4.0

 
4.3

 
0.9

 
1.2

Expected Return on Plan Assets
(6.4
)
 
(6.2
)
 
(2.1
)
 
(2.2
)
Amortization of Prior Service Credit

 

 
(1.5
)
 
(1.5
)
Amortization of Net Actuarial Loss
1.8

 
1.7

 
0.2

 
0.8

Net Periodic Benefit Cost (Credit)
$
1.7

 
$
1.9

 
$
(2.2
)
 
$
(1.4
)
 
Pension Plans
 
OPEB
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
6.9

 
$
6.4

 
$
0.7

 
$
0.7

Interest Cost
12.0

 
12.9

 
2.8

 
3.7

Expected Return on Plan Assets
(19.2
)
 
(18.8
)
 
(6.4
)
 
(6.6
)
Amortization of Prior Service Credit

 

 
(4.4
)
 
(4.4
)
Amortization of Net Actuarial Loss
5.4

 
5.2

 
0.6

 
2.4

Net Periodic Benefit Cost (Credit)
$
5.1

 
$
5.7

 
$
(6.7
)
 
$
(4.2
)

APCo
 
Pension Plans
 
OPEB
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018

2017
 
2018
 
2017
 
(in millions)
Service Cost
$
2.4

 
$
2.3

 
$
0.3

 
$
0.3

Interest Cost
5.8

 
6.5

 
2.1

 
2.6

Expected Return on Plan Assets
(9.1
)
 
(8.9
)
 
(4.0
)
 
(4.1
)
Amortization of Prior Service Credit

 

 
(2.5
)
 
(2.5
)
Amortization of Net Actuarial Loss
2.6

 
2.6

 
0.4

 
1.6

Net Periodic Benefit Cost (Credit)
$
1.7

 
$
2.5

 
$
(3.7
)
 
$
(2.1
)
 
Pension Plans
 
OPEB
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
7.0

 
$
7.0

 
$
0.8

 
$
0.8

Interest Cost
17.6

 
19.3

 
6.2

 
7.9

Expected Return on Plan Assets
(27.4
)
 
(26.8
)
 
(12.0
)
 
(12.3
)
Amortization of Prior Service Cost (Credit)

 
0.1

 
(7.5
)
 
(7.5
)
Amortization of Net Actuarial Loss
7.9

 
7.8

 
1.4

 
4.7

Net Periodic Benefit Cost (Credit)
$
5.1

 
$
7.4

 
$
(11.1
)
 
$
(6.4
)

186



I&M
 
Pension Plans
 
OPEB
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
3.4

 
$
3.5

 
$
0.4

 
$
0.4

Interest Cost
5.6

 
6.1

 
1.4

 
1.7

Expected Return on Plan Assets
(9.0
)
 
(8.6
)
 
(3.1
)
 
(3.1
)
Amortization of Prior Service Credit

 

 
(2.4
)
 
(2.3
)
Amortization of Net Actuarial Loss
2.5

 
2.4

 
0.3

 
1.1

Net Periodic Benefit Cost (Credit)
$
2.5

 
$
3.4

 
$
(3.4
)
 
$
(2.2
)
 
Pension Plans
 
OPEB
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
10.2

 
$
10.5

 
$
1.2

 
$
1.2

Interest Cost
16.6

 
18.2

 
4.1

 
5.2

Expected Return on Plan Assets
(26.8
)
 
(25.9
)
 
(9.3
)
 
(9.2
)
Amortization of Prior Service Cost (Credit)

 
0.1

 
(7.1
)
 
(7.0
)
Amortization of Net Actuarial Loss
7.4

 
7.3

 
0.9

 
3.3

Net Periodic Benefit Cost (Credit)
$
7.4

 
$
10.2

 
$
(10.2
)
 
$
(6.5
)

OPCo
 
Pension Plans
 
OPEB
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
2.0

 
$
1.8

 
$
0.2

 
$
0.3

Interest Cost
4.4

 
4.8

 
1.3

 
1.6

Expected Return on Plan Assets
(7.2
)
 
(6.9
)
 
(2.9
)
 
(3.0
)
Amortization of Prior Service Credit

 

 
(1.7
)
 
(1.7
)
Amortization of Net Actuarial Loss
2.0

 
2.0

 
0.3

 
1.1

Net Periodic Benefit Cost (Credit)
$
1.2

 
$
1.7

 
$
(2.8
)
 
$
(1.7
)
 
Pension Plans
 
OPEB
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
5.8

 
$
5.6

 
$
0.7

 
$
0.7

Interest Cost
13.3

 
14.5

 
3.9

 
5.0

Expected Return on Plan Assets
(21.6
)
 
(20.9
)
 
(8.8
)
 
(9.0
)
Amortization of Prior Service Cost (Credit)

 
0.1

 
(5.2
)
 
(5.2
)
Amortization of Net Actuarial Loss
6.0

 
5.9

 
0.8

 
3.3

Net Periodic Benefit Cost (Credit)
$
3.5

 
$
5.2

 
$
(8.6
)
 
$
(5.2
)


187



PSO
 
Pension Plans
 
OPEB
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
1.7

 
$
1.7

 
$
0.1

 
$
0.2

Interest Cost
2.5

 
2.6

 
0.6

 
0.8

Expected Return on Plan Assets
(4.0
)
 
(3.9
)
 
(1.3
)
 
(1.4
)
Amortization of Prior Service Credit

 

 
(1.1
)
 
(1.1
)
Amortization of Net Actuarial Loss
1.1

 
1.1

 
0.1

 
0.5

Net Periodic Benefit Cost (Credit)
$
1.3

 
$
1.5

 
$
(1.6
)
 
$
(1.0
)
 
Pension Plans
 
OPEB
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
5.3

 
$
4.9

 
$
0.5

 
$
0.5

Interest Cost
7.4

 
8.0

 
1.8

 
2.4

Expected Return on Plan Assets
(12.1
)
 
(11.8
)
 
(4.1
)
 
(4.2
)
Amortization of Prior Service Credit

 

 
(3.2
)
 
(3.2
)
Amortization of Net Actuarial Loss
3.3

 
3.3

 
0.4

 
1.5

Net Periodic Benefit Cost (Credit)
$
3.9

 
$
4.4

 
$
(4.6
)
 
$
(3.0
)

SWEPCo
 
Pension Plans
 
OPEB
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
2.4

 
$
2.1

 
$
0.2

 
$
0.2

Interest Cost
2.8

 
3.1

 
0.7

 
0.9

Expected Return on Plan Assets
(4.4
)
 
(4.2
)
 
(1.6
)
 
(1.5
)
Amortization of Prior Service Credit

 

 
(1.3
)
 
(1.3
)
Amortization of Net Actuarial Loss
1.3

 
1.3

 
0.2

 
0.5

Net Periodic Benefit Cost (Credit)
$
2.1

 
$
2.3

 
$
(1.8
)
 
$
(1.2
)
 
Pension Plans
 
OPEB
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service Cost
$
7.0

 
$
6.5

 
$
0.7

 
$
0.6

Interest Cost
8.5

 
9.2

 
2.1

 
2.7

Expected Return on Plan Assets
(13.1
)
 
(12.6
)
 
(4.8
)
 
(4.7
)
Amortization of Prior Service Credit

 

 
(3.9
)
 
(3.9
)
Amortization of Net Actuarial Loss
3.8

 
3.7

 
0.5

 
1.7

Net Periodic Benefit Cost (Credit)
$
6.2

 
$
6.8

 
$
(5.4
)
 
$
(3.6
)

188



8.  BUSINESS SEGMENTS

The disclosures in this note apply to all Registrants unless indicated otherwise.

AEP’s Reportable Segments

AEP’s primary business is the generation, transmission and distribution of electricity.  Within its Vertically Integrated Utilities segment, AEP centrally dispatches generation assets and manages its overall utility operations on an integrated basis because of the substantial impact of cost-based rates and regulatory oversight.  Intersegment sales and transfers are generally based on underlying contractual arrangements and agreements.

AEP’s reportable segments and their related business activities are outlined below:

Vertically Integrated Utilities

Generation, transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by AEGCo, APCo, I&M, KGPCo, KPCo, PSO, SWEPCo and WPCo.

Transmission and Distribution Utilities

Transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by AEP Texas and OPCo.
OPCo purchases energy and capacity to serve SSO customers and provides transmission and distribution services for all connected load.

AEP Transmission Holdco

Development, construction and operation of transmission facilities through investments in AEPTCo. These investments have FERC-approved returns on equity.
Development, construction and operation of transmission facilities through investments in AEP’s transmission-only joint ventures. These investments have PUCT-approved or FERC-approved returns on equity.

Generation & Marketing

Competitive generation in ERCOT and PJM.
Marketing, risk management and retail activities in ERCOT, PJM, SPP and MISO.
Contracted renewable energy investments and management services.

The remainder of AEP’s activities is presented as Corporate and Other. While not considered a reportable segment, Corporate and Other primarily includes the purchasing of receivables from certain AEP utility subsidiaries, Parent’s guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.


189



The tables below present AEP’s reportable segment income statement information for the three and nine months ended September 30, 2018 and 2017 and reportable segment balance sheet information as of September 30, 2018 and December 31, 2017.
 
Three Months Ended September 30, 2018
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
Corporate and Other (a)
 
Reconciling Adjustments
 
Consolidated
 
(in millions)
Revenues from:
 

 
 

 
 

 
 

 
 

 
 
 
 

External Customers
$
2,610.2

 
$
1,180.9

 
$
51.9

 
$
486.5

 
$
3.6

 
$

 
$
4,333.1

Other Operating Segments
26.5

 
30.6

 
135.3

 
35.1

 
20.1

 
(247.6
)
 

Total Revenues
$
2,636.7

 
$
1,211.5

 
$
187.2

 
$
521.6

 
$
23.7

 
$
(247.6
)
 
$
4,333.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
345.6

 
$
145.2

 
$
74.2

 
$
5.1

 
$
9.6

 
$

 
$
579.7

 
Three Months Ended September 30, 2017
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
Corporate and Other (a)
 
Reconciling Adjustments
 
Consolidated
 
(in millions)
Revenues from:
 

 
 

 
 

 
 

 
 

 
 
 
 

External Customers
$
2,453.8

 
$
1,149.7

 
$
45.1

 
$
441.5

 
$
14.6

 
$

 
$
4,104.7

Other Operating Segments
28.4

 
23.6

 
133.4

 
24.0

 
16.7

 
(226.1
)
 

Total Revenues
$
2,482.2

 
$
1,173.3

 
$
178.5

 
$
465.5

 
$
31.3

 
$
(226.1
)
 
$
4,104.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
297.3

 
$
144.0

 
$
76.5

 
$
33.7

 
$
5.2

 
$

 
$
556.7

 
Nine Months Ended September 30, 2018
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
Corporate and Other (a)
 
Reconciling Adjustments
 
Consolidated
 
(in millions)
Revenues from:
 

 
 

 
 

 
 

 
 

 
 
 
 

External Customers
$
7,332.4

 
$
3,450.0

 
$
196.5

 
$
1,399.3

 
$
16.4

 
$

 
$
12,394.6

Other Operating Segments
61.3

 
60.9

 
408.7

 
88.1

 
55.1

 
(674.1
)
 

Total Revenues
$
7,393.7

 
$
3,510.9

 
$
605.2

 
$
1,487.4

 
$
71.5

 
$
(674.1
)
 
$
12,394.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
856.3

 
$
384.6

 
$
280.9

 
$
61.8

 
$
(17.1
)
 
$

 
$
1,566.5

 
Nine Months Ended September 30, 2017
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
Corporate and Other (a)
 
Reconciling Adjustments
 
Consolidated
 
(in millions)
Revenues from:
 

 
 

 
 

 
 

 
 

 
 
 
 

External Customers
$
6,819.3

 
$
3,242.7

 
$
125.8

 
$
1,386.8

 
$
39.9

 
$

 
$
11,614.5

Other Operating Segments
73.8

 
70.5

 
456.1

 
80.7

 
46.8

 
(727.9
)
 

Total Revenues
$
6,893.1

 
$
3,313.2

 
$
581.9

 
$
1,467.5

 
$
86.7

 
$
(727.9
)
 
$
11,614.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
639.2

 
$
374.3

 
$
278.3

 
$
246.3

 
$
(11.0
)
 
$

 
$
1,527.1



190



 
 
September 30, 2018
 
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
Corporate and Other (a)
 
Reconciling
Adjustments
 
Consolidated
 
 
(in millions)
Total Property, Plant and Equipment
 
$
44,553.4

 
$
17,619.1

 
$
8,130.3

 
$
864.1

 
$
384.8

 
$
(354.4
)
(b)
$
71,197.3

Accumulated Depreciation and Amortization
 
13,703.3

 
3,856.7

 
244.3

 
40.1

 
183.6

 
(186.4
)
(b)
17,841.6

Total Property Plant and Equipment - Net
 
$
30,850.1

 
$
13,762.4

 
$
7,886.0

 
$
824.0

 
$
201.2

 
$
(168.0
)
(b)
$
53,355.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
38,813.2

 
$
16,399.1

 
$
9,127.7

 
$
2,369.3

 
$
4,306.1

(c)
$
(3,398.0
)
(b) (d)
$
67,617.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt Due Within One Year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaffiliated
 
$
1,306.1

 
$
548.5

 
$
50.0

 
$
0.1

 
$
(0.5
)
 
$

 
$
1,904.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated
 
50.0

 

 

 
32.2

 

 
(82.2
)
 

Nonaffiliated
 
11,563.5

 
5,082.2

 
2,966.2

 
(0.3
)
 
1,258.2

 

 
20,869.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Long-term Debt
 
$
12,919.6

 
$
5,630.7

 
$
3,016.2

 
$
32.0

 
$
1,257.7

 
$
(82.2
)
 
$
22,774.0

 
 
December 31, 2017
 
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
Corporate and Other (a)
 
Reconciling
Adjustments
 
Consolidated
 
 
(in millions)
Total Property, Plant and Equipment
 
$
43,294.4

 
$
16,371.2

 
$
7,110.2

 
$
644.6

 
$
374.5

 
$
(366.4
)
(b)
$
67,428.5

Accumulated Depreciation and Amortization
 
13,153.4

 
3,768.3

 
176.6

 
75.0

 
180.6

 
(186.9
)
(b)
17,167.0

Total Property Plant and Equipment - Net
 
$
30,141.0

 
$
12,602.9

 
$
6,933.6

 
$
569.6

 
$
193.9

 
$
(179.5
)
(b)
$
50,261.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
37,579.7

 
$
16,060.7

 
$
8,141.8

 
$
2,009.8

 
$
3,959.1

(c)
$
(3,022.0
)
(b) (d)
$
64,729.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt Due Within One Year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaffiliated
 
$
1,038.1

 
$
663.1

 
$
50.0

 
$

 
$
2.5

 
$

 
$
1,753.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated
 
50.0

 

 

 
32.2

 

 
(82.2
)
 

Nonaffiliated
 
10,801.4

 
4,705.4

 
2,631.3

 
(0.3
)
 
1,281.8

 

 
19,419.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Long-term Debt
 
$
11,889.5

 
$
5,368.5

 
$
2,681.3

 
$
31.9

 
$
1,284.3

 
$
(82.2
)
 
$
21,173.3


(a)
Corporate and Other primarily includes the purchasing of receivables from certain AEP utility subsidiaries. This segment also includes Parent’s guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.
(b)
Includes eliminations due to an intercompany capital lease.
(c)
Includes elimination of AEP Parent’s investments in wholly-owned subsidiary companies.
(d)
Reconciling Adjustments for Total Assets primarily include elimination of intercompany advances to affiliates and intercompany accounts receivable.

Registrant Subsidiaries’ Reportable Segments (Applies to all Registrant Subsidiaries except AEPTCo)

The Registrant Subsidiaries each have one reportable segment, an integrated electricity generation, transmission and distribution business for APCo, I&M, PSO and SWEPCo, and an integrated electricity transmission and distribution business for AEP Texas and OPCo.  Other activities are insignificant.  The Registrant Subsidiaries’ operations are managed on an integrated basis because of the substantial impact of cost-based rates and regulatory oversight on the business process, cost structures and operating results.


191



AEPTCo’s Reportable Segments

AEPTCo Parent is the holding company of seven FERC-regulated transmission-only electric utilities (State Transcos). The seven State Transcos have been identified as operating segments of AEPTCo under the accounting guidance for “Segment Reporting.” The State Transcos business consists of developing, constructing and operating transmission facilities at the request of the RTOs in which they operate and in replacing and upgrading facilities, assets and components of the existing AEP transmission system as needed to maintain reliability standards and provide service to AEP’s wholesale and retail customers. The State Transcos are regulated for rate-making purposes exclusively by the FERC and earn revenues through tariff rates charged for the use of their electric transmission systems.

AEPTCo’s Chief Operating Decision Maker makes operating decisions, allocates resources to and assesses performance based on these operating segments. The seven State Transcos operating segments all have similar economic characteristics and meet all of the criteria under the accounting guidance for “Segment Reporting” to be aggregated into one operating segment. As a result, AEPTCo has one reportable segment. The remainder of AEPTCo’s activity is presented in AEPTCo Parent. While not considered a reportable segment, AEPTCo Parent represents the activity of the holding company which primarily relates to debt financing activity and general corporate activities.

The tables below present AEPTCo’s reportable segment income statement information for the three and nine months ended September 30, 2018 and 2017 and reportable segment balance sheet information as of September 30, 2018 and December 31, 2017.
 
Three Months Ended September 30, 2018
 
State Transcos
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated
 
(in millions)
Revenues from:
 
 
 
 
 
 
 
External Customers
$
46.0

 
$

 
$

 
$
46.0

Sales to AEP Affiliates
148.4

 

 

 
148.4

Other Revenues

 

 

 

Total Revenues
$
194.4

 
$

 
$

 
$
194.4

 
 
 
 
 
 
 
 
Interest Income
$
0.2

 
$
26.0

 
$
(25.7
)
(b)
$
0.5

Interest Expense
19.8

 
25.7

 
(25.7
)
(b)
19.8

Income Tax Expense
18.4

 
(0.8
)
 

 
17.6

 
 
 
 
 
 
 
 
Net Income
$
77.1

 
$
1.0

(c)
$

 
$
78.1

 
Three Months Ended September 30, 2017
 
State Transcos (a)
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated (a)
 
(in millions)
Revenues from:
 
 
 
 
 
 
 
External Customers
$
35.6

 
$

 
$

 
$
35.6

Sales to AEP Affiliates
130.1

 

 

 
130.1

Other Revenues
(0.1
)
 

 

 
(0.1
)
Total Revenues
$
165.6

 
$

 
$

 
$
165.6

 
 
 
 
 
 
 
 
Interest Income
$

 
$
19.5

 
$
(19.3
)
(b)
$
0.2

Interest Expense
17.1

 
19.3

 
(19.3
)
(b)
17.1

Income Tax Expense
29.5

 

 

 
29.5

 
 
 
 
 
 
 
 
Net Income
$
58.5

 
$
0.1

(c)
$

 
$
58.6


192



 
Nine Months Ended September 30, 2018
 
State Transcos (a)
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated (a)
 
(in millions)
Revenues from:
 
 
 
 
 
 
 
External Customers
$
132.3

 
$

 
$

 
$
132.3

Sales to AEP Affiliates
453.8

 

 

 
453.8

Other Revenues
0.1

 
$

 
$

 
0.1

Total Revenues
$
586.2

 
$

 
$

 
$
586.2

 
 
 
 
 
 
 
 
Interest Income
$
0.4

 
$
76.2

 
$
(75.3
)
(b)
$
1.3

Interest Expense
60.7

 
75.3

 
(75.3
)
(b)
60.7

Income Tax Expense
63.7

 

 

 
63.7

 
 
 
 
 
 
 
 
Net Income
$
243.6

 
$
0.6

(c)
$

 
$
244.2

 
Nine Months Ended September 30, 2017
 
State Transcos (a)
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated (a)
 
(in millions)
Revenues from:
 
 
 
 
 
 
 
External Customers
$
95.7

 
$

 
$

 
$
95.7

Sales to AEP Affiliates
439.1

 

 

 
439.1

Other Revenues

 

 

 

Total Revenues
$
534.8

 
$

 
$

 
$
534.8

 
 
 
 
 
 
 
 
Interest Income
$
0.1

 
$
58.0

 
$
(57.6
)
(b)
$
0.5

Interest Expense
50.4

 
57.6

 
(57.6
)
(b)
50.4

Income Tax Expense
108.0

 
0.2

 

 
108.2

 
 
 
 
 
 
 
 
Net Income
$
212.1

 
$
0.3

(c)
$

 
$
212.4

 
September 30, 2018
 
State Transcos
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated
 
 
(in millions)
 
Total Transmission Property
$
7,761.6

(a)
$

 
$

 
$
7,761.6

(a)
Accumulated Depreciation and Amortization
234.6

(a)

 

 
234.6

(a)
Total Transmission Property – Net
$
7,527.0

(a)
$

 
$

 
$
7,527.0

(a)
 
 
 
 
 
 
 
 
 
Notes Receivable - Affiliated
$

 
$
2,900.0

 
$
(2,900.0
)
(d)
$

 
 
 
 
 
 
 
 
 
 
Total Assets
$
7,983.6

(a)
$
2,988.4

(e)
$
(2,973.6
)
(f)
$
7,998.4

(a)
 
 
 
 
 
 
 
 
 
Total Long-term Debt
$
2,900.0

 
$
2,872.6

 
$
(2,900.0
)
(d)
$
2,872.6

 
 
December 31, 2017
 
 
State Transcos
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated
 
 
(in millions)
 
Total Transmission Property
$
6,770.5

(a)
$

 
$

 
$
6,770.5

(a)
Accumulated Depreciation and Amortization
152.6

(a)

 

 
152.6

(a)
Total Transmission Property – Net
$
6,617.9

(a)
$

 
$

 
$
6,617.9

(a)
 
 
 
 
 
 
 
 
 
Notes Receivable - Affiliated
$

 
$
2,550.4

 
$
(2,550.4
)
(d)
$

 
 
 
 
 
 
 
 
 
 
Total Assets
$
7,086.9

(a)
$
2,590.1

(e)
$
(2,594.9
)
(f)
$
7,082.1

(a)
 
 
 
 
 
 
 
 
 
Total Long-term Debt
$
2,575.0

 
$
2,550.4

 
$
(2,575.0
)
(d)
$
2,550.4

 

(a)
The amounts presented reflect the revisions made to AEPTCo’s previously issued financial statements. For additional details on revisions made to AEPTCo’s financial statements, see Note 1- Significant Accounting Matters.
(b)
Elimination of intercompany interest income/interest expense on affiliated debt arrangement.
(c)
Includes the elimination of AEPTCo Parent’s equity earnings in the State Transcos.
(d)
Elimination of intercompany debt.
(e)
Includes the elimination of AEPTCo Parent’s investments in State Transcos.
(f)
Primarily relates to the elimination of Notes Receivable from the State Transcos.


193



9.  DERIVATIVES AND HEDGING

The disclosures in this note apply to all Registrants unless indicated otherwise. For the periods presented, AEPTCo did not have any derivative and hedging activity.

The Registrants adopted ASU 2017-12 in the second quarter of 2018, effective January 1, 2018. See Note 2 - New Accounting Pronouncements for additional information.

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

AEPSC is agent for and transacts on behalf of AEP subsidiaries, including the Registrant Subsidiaries. AEPEP is agent for and transacts on behalf of other AEP subsidiaries.

The Registrants are exposed to certain market risks as major power producers and participants in the electricity, capacity, natural gas, coal and emission allowance markets.  These risks include commodity price risks which may be subject to capacity risk, interest rate risk, credit risk and foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrants due to changes in the underlying market prices or rates.  Management utilizes derivative instruments to manage these risks.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

The strategy surrounding the use of derivative instruments primarily focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. The risk management strategies also include the use of derivative instruments for trading purposes which focus on seizing market opportunities to create value driven by expected changes in the market prices of the commodities. To accomplish these objectives, the Registrants primarily employ risk management contracts including physical and financial forward purchase-and-sale contracts and, to a lesser extent, OTC swaps and options. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

The Registrants utilize power, capacity, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other commodity contracts to manage the risk associated with the energy business. The Registrants utilize interest rate derivative contracts in order to manage the interest rate exposure associated with the commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. The Registrants also utilize derivative contracts to manage interest rate risk associated with debt financing. For disclosure purposes, these risks are grouped as “Interest Rate.” The amount of risk taken is determined by the Commercial Operations, Energy Supply and Finance groups in accordance with established risk management policies as approved by the Finance Committee of the Board of Directors.


194



The following tables represent the gross notional volume of the Registrants’ outstanding derivative contracts:

Notional Volume of Derivative Instruments
September 30, 2018
Primary Risk
Exposure
 
Unit of
Measure
 
AEP
 
AEP Texas
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in millions)
Commodity:
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
415.7

 

 
88.7

 
52.8

 
8.0

 
19.0

 
13.0

Coal
 
Tons
 
0.2

 

 

 
0.2

 

 

 

Natural Gas
 
MMBtus
 
84.4

 

 
8.4

 
4.9

 

 

 
16.1

Heating Oil and Gasoline
 
Gallons
 
8.3

 
1.7

 
1.6

 
0.8

 
2.0

 
0.8

 
0.9

Interest Rate
 
USD
 
$
37.7

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
USD
 
$
500.0

 
$

 
$

 
$

 
$

 
$

 
$


Notional Volume of Derivative Instruments
December 31, 2017
Primary Risk
Exposure
 
Unit of
Measure
 
AEP
 
AEP Texas
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in millions)
Commodity:
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
358.7

 

 
57.4

 
38.5

 
10.4

 
10.3

 
22.7

Coal
 
Tons
 
2.0

 

 

 
2.0

 

 

 

Natural Gas
 
MMBtus
 
53.7

 

 
1.1

 
0.7

 

 

 
18.3

Heating Oil and Gasoline
 
Gallons
 
6.9

 
1.4

 
1.3

 
0.7

 
1.6

 
0.7

 
0.8

Interest Rate
 
USD
 
$
50.7

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
USD
 
$
500.0

 
$

 
$

 
$

 
$

 
$

 
$


Fair Value Hedging Strategies (Applies to AEP)

Parent enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives may be designated as fair value hedges.

Cash Flow Hedging Strategies

The Registrants utilize cash flow hedges on certain derivative transactions for the purchase and sale of power (“Commodity”) in order to manage the variable price risk related to forecasted purchases and sales. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and purchases. The Registrants do not hedge all commodity price risk.

The Registrants utilize a variety of interest rate derivative transactions in order to manage interest rate risk exposure. The Registrants also utilize interest rate derivative contracts to manage interest rate exposure related to future borrowings of fixed-rate debt. The Registrants do not hedge all interest rate exposure.

At times, the Registrants are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP’s risk management policy, the Registrants may utilize foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrants do not hedge all foreign currency exposure.

195



ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheets at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrants apply valuation adjustments for discounting, liquidity and credit quality.

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract’s term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management’s estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

According to the accounting guidance for “Derivatives and Hedging,” the Registrants reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrants are required to post or receive cash collateral based on third party contractual agreements and risk profiles. AEP netted cash collateral received from third parties against short-term and long-term risk management assets in the amounts of $15 million and $9.4 million as of September 30, 2018 and December 31, 2017, respectively. AEP netted cash collateral paid to third parties against short-term and long-term risk management liabilities in the amounts of $1 million and $9 million as of September 30, 2018 and December 31, 2017, respectively. The netted cash collateral from third parties against short-term and long-term risk management assets and netted cash collateral paid to third parties against short-term and long-term risk management liabilities were immaterial for the other Registrants as of September 30, 2018 and December 31, 2017.

196



The following tables represent the gross fair value of the Registrants’ derivative activity on the balance sheets:

AEP

Fair Value of Derivative Instruments
September 30, 2018
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate (a)
 
 
 
 
 
(in millions)
Current Risk Management Assets
 
$
359.9

 
$
29.1

 
$

 
$
389.0

 
$
(197.1
)
 
$
191.9

Long-term Risk Management Assets
 
295.3

 
10.6

 

 
305.9

 
(41.0
)
 
264.9

Total Assets
 
655.2

 
39.7

 

 
694.9

 
(238.1
)
 
456.8

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
232.4

 
7.5

 
0.5

 
240.4

 
(183.1
)
 
57.3

Long-term Risk Management Liabilities
 
240.0

 
55.4

 
33.7

 
329.1

 
(41.9
)
 
287.2

Total Liabilities
 
472.4

 
62.9

 
34.2

 
569.5

 
(225.0
)
 
344.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
182.8

 
$
(23.2
)
 
$
(34.2
)
 
$
125.4

 
$
(13.1
)
 
$
112.3


Fair Value of Derivative Instruments
December 31, 2017
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate (a)
 
 
 
 
 
(in millions)
Current Risk Management Assets
 
$
389.0

 
$
17.5

 
$
2.5

 
$
409.0

 
$
(282.8
)
 
$
126.2

Long-term Risk Management Assets
 
300.9

 
6.3

 

 
307.2

 
(25.1
)
 
282.1

Total Assets
 
689.9

 
23.8

 
2.5

 
716.2

 
(307.9
)
 
408.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
334.6

 
9.0

 

 
343.6

 
(282.0
)
 
61.6

Long-term Risk Management Liabilities
 
280.6

 
58.3

 
8.6

 
347.5

 
(25.5
)
 
322.0

Total Liabilities
 
615.2

 
67.3

 
8.6

 
691.1

 
(307.5
)
 
383.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
74.7

 
$
(43.5
)
 
$
(6.1
)
 
$
25.1

 
$
(0.4
)
 
$
24.7




197



AEP Texas
Fair Value of Derivative Instruments
September 30, 2018
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
0.5

 
$

 
$
0.5

Long-term Risk Management Assets
 

 

 

Total Assets
 
0.5

 

 
0.5

 
 
 
 
 
 
 
Current Risk Management Liabilities
 

 

 

Long-term Risk Management Liabilities
 

 

 

Total Liabilities
 

 

 

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
0.5

 
$

 
$
0.5


Fair Value of Derivative Instruments
December 31, 2017
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
0.5

 
$

 
$
0.5

Long-term Risk Management Assets
 

 

 

Total Assets
 
0.5

 

 
0.5

 
 
 
 
 
 
 
Current Risk Management Liabilities
 

 

 

Long-term Risk Management Liabilities
 

 

 

Total Liabilities
 

 

 

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
0.5

 
$

 
$
0.5


APCo
Fair Value of Derivative Instruments
September 30, 2018
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
106.6

 
$
(38.2
)
 
$
68.4

Long-term Risk Management Assets
 
6.0

 
(4.6
)
 
1.4

Total Assets
 
112.6

 
(42.8
)
 
69.8

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
39.1

 
(38.2
)
 
0.9

Long-term Risk Management Liabilities
 
5.5

 
(4.8
)
 
0.7

Total Liabilities
 
44.6

 
(43.0
)
 
1.6

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
68.0

 
$
0.2

 
$
68.2


Fair Value of Derivative Instruments
December 31, 2017
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
75.6

 
$
(50.7
)
 
$
24.9

Long-term Risk Management Assets
 
2.4

 
(1.3
)
 
1.1

Total Assets
 
78.0

 
(52.0
)
 
26.0

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
50.6

 
(49.3
)
 
1.3

Long-term Risk Management Liabilities
 
1.4

 
(1.2
)
 
0.2

Total Liabilities
 
52.0

 
(50.5
)
 
1.5

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
26.0

 
$
(1.5
)
 
$
24.5


198



I&M
Fair Value of Derivative Instruments
September 30, 2018
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
39.4

 
$
(28.5
)
 
$
10.9

Long-term Risk Management Assets
 
3.7

 
(2.8
)
 
0.9

Total Assets
 
43.1

 
(31.3
)
 
11.8

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
35.2

 
(28.8
)
 
6.4

Long-term Risk Management Liabilities
 
3.2

 
(2.8
)
 
0.4

Total Liabilities
 
38.4

 
(31.6
)
 
6.8

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
4.7

 
$
0.3

 
$
5.0


Fair Value of Derivative Instruments
December 31, 2017
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
47.2

 
$
(39.6
)
 
$
7.6

Long-term Risk Management Assets
 
1.6

 
(0.9
)
 
0.7

Total Assets
 
48.8

 
(40.5
)
 
8.3

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
48.5

 
(45.0
)
 
3.5

Long-term Risk Management Liabilities
 
0.9

 
(0.8
)
 
0.1

Total Liabilities
 
49.4

 
(45.8
)
 
3.6

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
(0.6
)
 
$
5.3

 
$
4.7


OPCo
Fair Value of Derivative Instruments
September 30, 2018
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
0.6

 
$

 
$
0.6

Long-term Risk Management Assets
 
0.1

 

 
0.1

Total Assets
 
0.7

 

 
0.7

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
5.4

 

 
5.4

Long-term Risk Management Liabilities
 
89.8

 

 
89.8

Total Liabilities
 
95.2

 

 
95.2

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Liabilities
 
$
(94.5
)
 
$

 
$
(94.5
)

Fair Value of Derivative Instruments
December 31, 2017
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
0.6

 
$

 
$
0.6

Long-term Risk Management Assets
 

 

 

Total Assets
 
0.6

 

 
0.6

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
6.4

 

 
6.4

Long-term Risk Management Liabilities
 
126.0

 

 
126.0

Total Liabilities
 
132.4

 

 
132.4

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Liabilities
 
$
(131.8
)
 
$

 
$
(131.8
)

199



PSO
Fair Value of Derivative Instruments
September 30, 2018
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
18.8

 
$
(0.3
)
 
$
18.5

Long-term Risk Management Assets
 

 

 

Total Assets
 
18.8

 
(0.3
)
 
18.5

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
0.9

 
(0.3
)
 
0.6

Long-term Risk Management Liabilities
 

 

 

Total Liabilities
 
0.9

 
(0.3
)
 
0.6

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
17.9

 
$

 
$
17.9


Fair Value of Derivative Instruments
December 31, 2017
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
6.6

 
$
(0.2
)
 
$
6.4

Long-term Risk Management Assets
 

 

 

Total Assets
 
6.6

 
(0.2
)
 
6.4

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
0.2

 
(0.2
)
 

Long-term Risk Management Liabilities
 

 

 

Total Liabilities
 
0.2

 
(0.2
)
 

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
6.4

 
$

 
$
6.4


SWEPCo
Fair Value of Derivative Instruments
September 30, 2018
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
8.1

 
$
(1.6
)
 
$
6.5

Long-term Risk Management Assets
 

 

 

Total Assets
 
8.1

 
(1.6
)
 
6.5

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
1.8

 
(1.6
)
 
0.2

Long-term Risk Management Liabilities
 
2.6

 

 
2.6

Total Liabilities
 
4.4

 
(1.6
)
 
2.8

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
3.7

 
$

 
$
3.7


Fair Value of Derivative Instruments
December 31, 2017
Balance Sheet Location
 
Risk Management Contracts – Commodity (a)
 
Gross Amounts Offset in the Statement of Financial Position (b)
 
Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
 
 
(in millions)
Current Risk Management Assets
 
$
7.0

 
$
(0.6
)
 
$
6.4

Long-term Risk Management Assets
 

 

 

Total Assets
 
7.0

 
(0.6
)
 
6.4

 
 
 
 
 
 
 
Current Risk Management Liabilities
 
0.8

 
(0.6
)
 
0.2

Long-term Risk Management Liabilities
 

 

 

Total Liabilities
 
0.8

 
(0.6
)
 
0.2

 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets
 
$
6.2

 
$

 
$
6.2


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the balance sheets on a net basis in accordance with the accounting guidance for “Derivatives and Hedging.”
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for “Derivatives and Hedging.”
(c)
All derivative contracts subject to a master netting arrangement or similar agreement are offset in the statement of financial position.

200



The tables below present the Registrants’ activity of derivative risk management contracts:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended September 30, 2018
Location of Gain (Loss)
 
AEP
 
AEP Texas
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Vertically Integrated Utilities Revenues
 
$
(0.7
)
 
$

 
$

 
$

 
$

 
$

 
$

Generation & Marketing Revenues
 
19.3

 

 

 

 

 

 

Electric Generation, Transmission and Distribution Revenues
 

 

 
(0.5
)
 
(0.1
)
 

 

 

Purchased Electricity for Resale
 
0.3

 

 
0.3

 

 

 

 

Other Operation
 
0.5

 
0.1

 
0.1

 
0.1

 
0.1

 
0.1

 
0.1

Maintenance
 
0.6

 
0.1

 
0.1

 
0.1

 
0.1

 
0.1

 
0.1

Regulatory Assets (a)
 
(14.0
)
 

 

 
(3.5
)
 
(9.3
)
 
(0.6
)
 
(0.6
)
Regulatory Liabilities (a)
 
33.8

 

 
24.0

 

 

 
3.9

 
1.5

Total Gain (Loss) on Risk Management Contracts
 
$
39.8

 
$
0.2

 
$
24.0

 
$
(3.4
)
 
$
(9.1
)
 
$
3.5

 
$
1.1


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended September 30, 2017
Location of Gain (Loss)
 
AEP
 
AEP Texas
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Vertically Integrated Utilities Revenues
 
$
0.9

 
$

 
$

 
$

 
$

 
$

 
$

Generation & Marketing Revenues
 
17.7

 

 

 

 

 

 

Electric Generation, Transmission and Distribution Revenues
 

 

 
0.3

 
0.6

 

 

 
(0.1
)
Purchased Electricity for Resale
 
1.0

 

 
0.3

 
0.2

 

 

 

Other Operation
 
0.1

 
0.1

 

 

 
0.1

 

 

Maintenance
 
0.1

 
0.1

 
0.1

 

 
0.1

 

 

Regulatory Assets (a)
 
(8.8
)
 
0.1

 
0.1

 
(0.8
)
 
(8.7
)
 

 
0.3

Regulatory Liabilities (a)
 
15.6

 
0.1

 
3.7

 
2.1

 

 
2.6

 
7.0

Total Gain (Loss) on Risk Management Contracts
 
$
26.6

 
$
0.4

 
$
4.5

 
$
2.1

 
$
(8.5
)
 
$
2.6

 
$
7.2



201



Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Nine Months Ended September 30, 2018
Location of Gain (Loss)
 
AEP
 
AEP Texas
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Vertically Integrated Utilities Revenues
 
$
(9.4
)
 
$

 
$

 
$

 
$

 
$

 
$

Generation & Marketing Revenues
 
31.7

 

 

 

 

 

 

Electric Generation, Transmission and Distribution Revenues
 

 

 
(1.3
)
 
(7.8
)
 

 

 
0.1

Purchased Electricity for Resale
 
8.3

 

 
7.3

 
0.8

 

 

 

Other Operation
 
1.3

 
0.3

 
0.2

 
0.2

 
0.3

 
0.2

 
0.2

Maintenance
 
1.5

 
0.3

 
0.3

 
0.2

 
0.3

 
0.2

 
0.2

Regulatory Assets (a)
 
29.2

 

 

 
(0.3
)
 
31.8

 
(0.6
)
 
(1.7
)
Regulatory Liabilities (a)
 
206.2

 

 
127.3

 
11.7

 
0.6

 
34.8

 
7.6

Total Gain on Risk Management Contracts
 
$
268.8

 
$
0.6

 
$
133.8

 
$
4.8

 
$
33.0

 
$
34.6

 
$
6.4


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Nine Months Ended September 30, 2017
Location of Gain (Loss)
 
AEP
 
AEP Texas
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Vertically Integrated Utilities Revenues
 
$
7.0

 
$

 
$

 
$

 
$

 
$

 
$

Generation & Marketing Revenues
 
38.5

 

 

 

 

 

 

Electric Generation, Transmission and Distribution Revenues
 

 

 
0.6

 
6.3

 

 

 

Purchased Electricity for Resale
 
4.9

 

 
1.6

 
0.5

 

 

 

Other Operation
 
0.5

 
0.1

 

 

 
0.1

 

 

Maintenance
 
0.4

 
0.1

 
0.1

 

 
0.1

 

 

Regulatory Assets (a)
 
(26.8
)
 

 

 
(1.0
)
 
(25.9
)
 

 
0.1

Regulatory Liabilities (a)
 
81.8

 
(0.2
)
 
28.2

 
15.3

 

 
13.7

 
22.0

Total Gain (Loss) on Risk Management Contracts
 
$
106.3

 
$

 
$
30.5

 
$
21.1

 
$
(25.7
)
 
$
13.7

 
$
22.1


(a)
Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the balance sheets.

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the statements of income on an accrual basis.

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the statements of income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the statements of income depending on the relevant facts and circumstances. Certain derivatives that economically hedge future commodity risk are recorded in the same expense line item on the statements of income as that of the associated risk. However, unrealized and some realized gains and losses in regulated jurisdictions for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

202



Accounting for Fair Value Hedging Strategies (Applies to AEP)

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

AEP records realized and unrealized gains or losses on interest rate swaps that are designated and qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the statements of income.

The following table shows the impacts recognized on the balance sheets related to the hedged items in fair value hedging relationships:
 
 
Carrying Amount of the Hedged
 Assets/(Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
 
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
 
 
(in millions)
Long-Term Debt (a)
 
$
(461.4
)
 
$
(489.3
)
 
$
34.2

 
$
6.1


(a)
Amounts included on the balance sheets within Long-term Debt Due within One Year and Long-term Debt, respectively.

The pretax effects of fair value hedge accounting on income were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Gain (Loss) on Interest Rate Contracts:
 
 
 
 
 
 
 
Gain (Loss) on Fair Value Hedging Instruments (a)
$
(6.3
)
 
$
0.1

 
$
(28.1
)
 
$
(0.1
)
Gain (Loss) on Fair Value Portion of Long-term Debt (a)
6.3

 
(0.1
)
 
28.1

 
0.1


(a)
Gain (Loss) is included in Interest Expense on the statements of income.

Accounting for Cash Flow Hedging Strategies

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrants initially report the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the balance sheets until the period the hedged item affects Net Income.

Realized gains and losses on derivative contracts for the purchase and sale of power designated as cash flow hedges are included in Total Revenues or Purchased Electricity for Resale on the statements of income or in Regulatory Assets or Regulatory Liabilities on the balance sheets, depending on the specific nature of the risk being hedged. During the three and nine months ended September 30, 2018 and 2017, AEP applied cash flow hedging to outstanding power derivatives. During the three and nine months ended September 30, 2018 and 2017, the Registrant Subsidiaries did not apply cash flow hedging to outstanding power derivatives.

The Registrants reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Interest Expense on the statements of income in those periods in which hedged interest payments occur. During the three and nine months ended September 30, 2018 and 2017, AEP applied cash flow hedging to outstanding interest rate derivatives. During the three and nine months ended September 30, 2017, the Registrant Subsidiaries did not apply cash flow hedging to outstanding interest rate derivatives. During the three and nine months ended September 30, 2018 SWEPCo applied cash flow hedging to outstanding interest rate derivatives and the other Registrant Subsidiaries did not.


203



The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Depreciation and Amortization expense on the statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and nine months ended September 30, 2018 and 2017, the Registrants did not apply cash flow hedging to any outstanding foreign currency derivatives.

For details on effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets and the reasons for changes in cash flow hedges, see Note 3 - Comprehensive Income.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets were:

Impact of Cash Flow Hedges on AEP’s Balance Sheets
 
 
September 30, 2018
 
December 31, 2017
 
 
Commodity
 
Interest Rate
 
Commodity
 
Interest Rate
 
 
(in millions)
AOCI Loss Net of Tax
 
$
(22.8
)
 
$
(12.7
)
 
$
(28.4
)
 
$
(13.0
)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months
 
14.4

 
(0.8
)
 
5.5

 
(0.8
)

As of September 30, 2018 the maximum length of time that AEP is hedging its exposure to variability in future cash flows related to forecasted transactions is 183 months.

Impact of Cash Flow Hedges on the Registrant Subsidiaries’ Balance Sheets
 
 
September 30, 2018
 
December 31, 2017
 
 
Interest Rate
 
 
 
 
Expected to be
 
 
 
Expected to be
 
 
 
 
Reclassified to
 
 
 
Reclassified to
 
 
 
 
Net Income During
 
 
 
Net Income During
 
 
AOCI Gain (Loss)
 
the Next
 
AOCI Gain (Loss)
 
the Next
Company
 
Net of Tax
 
Twelve Months
 
Net of Tax
 
Twelve Months
 
 
(in millions)
AEP Texas
 
$
(4.6
)
 
$
(1.1
)
 
$
(4.5
)
 
$
(0.9
)
APCo
 
2.0

 
0.9

 
2.2

 
0.7

I&M
 
(11.9
)
 
(1.6
)
 
(10.7
)
 
(1.3
)
OPCo
 
1.3

 
1.3

 
1.9

 
1.1

PSO
 
2.4

 
1.0

 
2.6

 
0.8

SWEPCo
 
(3.7
)
 
(1.5
)
 
(6.0
)
 
(1.4
)

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

Management mitigates credit risk in wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. Management uses credit agency ratings and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

Master agreements are typically used to facilitate the netting of cash flows associated with a single counterparty and may include collateral requirements. Collateral requirements in the form of cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. Some master agreements include margining, which requires a counterparty to post cash or letters of credit in the event exposure exceeds the established threshold. A counterparty is required to post cash or letters of credit in the event exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP’s credit policy. In addition, master agreements allow for termination and liquidation of all positions in the event of a default including a failure or inability to post collateral when required.

204




Collateral Triggering Events

Credit Downgrade Triggers (Applies to AEP, APCo, I&M, PSO and SWEPCo)

A limited number of derivative contracts include collateral triggering events, which include a requirement to maintain certain credit ratings.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering events in contracts.  The Registrants have not experienced a downgrade below a specified credit rating threshold that would require the posting of additional collateral.  The Registrants had immaterial derivative contracts with collateral triggering events in a net liability position as of September 30, 2018 and December 31, 2017, respectively.

Cross-Default Triggers (Applies to AEP, APCo, I&M and SWEPCo)

In addition, a majority of non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation that is $50 million or greater.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount that the exposure has been reduced by cash collateral posted and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering contractual netting arrangements:
 
 
September 30, 2018
 
 
Liabilities for
 
 
 
Additional
 
 
Contracts with Cross
 
 
 
Settlement
 
 
Default Provisions
 
 
 
Liability if Cross
 
 
Prior to Contractual
 
Amount of Cash
 
Default Provision
Company
 
Netting Arrangements
 
Collateral Posted
 
is Triggered
 
 
(in millions)
AEP
 
$
253.1

 
$
0.8

 
$
211.2

APCo
 
0.1

 

 
0.1

I&M
 

 

 

SWEPCo
 
2.8

 

 
2.8

 
 
December 31, 2017
 
 
Liabilities for
 
 
 
Additional
 
 
Contracts with Cross
 
 
 
Settlement
 
 
Default Provisions
 
 
 
Liability if Cross
 
 
Prior to Contractual
 
Amount of Cash
 
Default Provision
Company
 
Netting Arrangements
 
Collateral Posted
 
is Triggered
 
 
(in millions)
AEP
 
$
243.6

 
$
1.3

 
$
223.1

APCo
 
0.6

 

 
0.5

I&M
 
0.4

 

 
0.4

SWEPCo
 
0.2

 

 
0.1



205



10.  FAIR VALUE MEASUREMENTS

The disclosures in this note apply to all Registrants except AEPTCo unless indicated otherwise.

Fair Value Hierarchy and Valuation Techniques

The accounting guidance for “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  When quoted market prices are not available, pricing may be completed using comparable securities, dealer values, operating data and general market conditions to determine fair value.  Valuation models utilize various inputs such as commodity, interest rate and, to a lesser degree, volatility and credit that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, market corroborated inputs (i.e. inputs derived principally from, or correlated to, observable market data) and other observable inputs for the asset or liability.

For commercial activities, exchange traded derivatives, namely futures contracts, are generally fair valued based on unadjusted quoted prices in active markets and are classified as Level 1.  Level 2 inputs primarily consist of OTC broker quotes in moderately active or less active markets, as well as exchange traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1.  Management verifies price curves using these broker quotes and classifies these fair values within Level 2 when substantially all of the fair value can be corroborated.  Management typically obtains multiple broker quotes, which are nonbinding in nature but are based on recent trades in the marketplace.  When multiple broker quotes are obtained, the quoted bid and ask prices are averaged.  In certain circumstances, a broker quote may be discarded if it is a clear outlier.  Management uses a historical correlation analysis between the broker quoted location and the illiquid locations.  If the points are highly correlated, these locations are included within Level 2 as well.  Certain OTC and bilaterally executed derivative instruments are executed in less active markets with a lower availability of pricing information.  Illiquid transactions, complex structured transactions, FTRs and counterparty credit risk may require nonmarket based inputs.  Some of these inputs may be internally developed or extrapolated and utilized to estimate fair value.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3.  The main driver of contracts being classified as Level 3 is the inability to substantiate energy price curves in the market.  A portion of the Level 3 instruments have been economically hedged which limits potential earnings volatility.

AEP utilizes its trustee’s external pricing service to estimate the fair value of the underlying investments held in the benefit plan and nuclear trusts.  AEP’s investment managers review and validate the prices utilized by the trustee to determine fair value.  AEP’s management performs its own valuation testing to verify the fair values of the securities.  AEP receives audit reports of the trustee’s operating controls and valuation processes.  The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, cash and cash equivalents, other temporary investments and restricted cash for securitized funding are classified using the following methods. Equities are classified as Level 1 holdings if they are actively traded on exchanges. Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities. They are valued based on observable inputs, primarily unadjusted quoted prices in active markets for identical assets. Items classified as Level 2 are primarily investments in individual fixed income securities. Fixed income securities generally do not trade on exchanges and do not have an official closing price but their valuation inputs are based on observable market data. Pricing vendors calculate bond valuations using financial models and matrices. The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation. Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments. Investments with unobservable valuation inputs are classified as Level 3 investments.

206



Fair Value Measurements of Long-term Debt (Applies to all Registrants)

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs.  These instruments are not marked-to-market.  The estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange.

The book values and fair values of Long-term Debt are summarized in the following table:
 
 
September 30, 2018
 
December 31, 2017
Company
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
 
 
(in millions)
AEP
 
$
22,774.0

 
$
23,869.1

 
$
21,173.3

 
$
23,649.6

AEP Texas
 
3,914.4

 
4,019.2

 
3,649.3

 
3,964.8

AEPTCo
 
2,872.6

 
2,861.1

 
2,550.4

 
2,782.9

APCo
 
4,061.7

 
4,629.8

 
3,980.1

 
4,782.6

I&M
 
3,062.4

 
3,161.9

 
2,745.1

 
3,014.7

OPCo
 
1,716.3

 
1,941.9

 
1,719.3

 
2,064.3

PSO
 
1,286.9

 
1,373.4

 
1,286.5

 
1,457.1

SWEPCo
 
3,072.7

 
3,068.4

 
2,441.9

 
2,645.9


Fair Value Measurements of Other Temporary Investments (Applies to AEP)

Other Temporary Investments include marketable securities that management intends to hold for less than one year and investments by AEP’s protected cell of EIS.

The following is a summary of Other Temporary Investments:
 
 
September 30, 2018
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
Unrealized
 
Unrealized
 
Fair
Other Temporary Investments
 
Cost
 
Gains
 
Losses
 
Value
 
 
(in millions)
Restricted Cash and Other Cash Deposits (a)
 
$
170.4

 
$

 
$

 
$
170.4

Fixed Income Securities – Mutual Funds (b)
 
105.9

 

 
(2.8
)
 
103.1

Equity Securities  Mutual Funds
 
17.6

 
22.2

 

 
39.8

Total Other Temporary Investments
 
$
293.9

 
$
22.2

 
$
(2.8
)
 
$
313.3

 
 
December 31, 2017
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
Unrealized
 
Unrealized
 
Fair
Other Temporary Investments
 
Cost
 
Gains
 
Losses
 
Value
 
 
(in millions)
Restricted Cash and Other Cash Deposits (a)
 
$
220.1

 
$

 
$

 
$
220.1

Fixed Income Securities  Mutual Funds (b)
 
104.3

 

 
(1.4
)
 
102.9

Equity Securities  Mutual Funds
 
17.0

 
19.7

 

 
36.7

Total Other Temporary Investments
 
$
341.4

 
$
19.7

 
$
(1.4
)
 
$
359.7


(a)
Primarily represents amounts held for the repayment of debt.
(b)
Primarily short and intermediate maturities which may be sold and do not contain maturity dates.

207



The following table provides the activity for fixed income and equity securities within Other Temporary Investments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Proceeds from Investment Sales
$

 
$

 
$

 
$

Purchases of Investments
0.8

 
12.6

 
2.2

 
13.6

Gross Realized Gains on Investment Sales

 

 

 

Gross Realized Losses on Investment Sales

 

 

 


For details of the reasons for changes in Securities Available for Sale included in Accumulated Other Comprehensive Income (Loss) for the three and nine months ended September 30, 2017, see Note 3 - Comprehensive Income.

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal (Applies to AEP and I&M)

Nuclear decommissioning and spent nuclear fuel trust funds represent funds that regulatory commissions allow I&M to collect through rates to fund future decommissioning and SNF disposal liabilities.  By rules or orders, the IURC, the MPSC and the FERC established investment limitations and general risk management guidelines.  In general, limitations include:

Acceptable investments (rated investment grade or above when purchased).
Maximum percentage invested in a specific type of investment.
Prohibition of investment in obligations of AEP, I&M or their affiliates.
Withdrawals permitted only for payment of decommissioning costs and trust expenses.

I&M maintains trust funds for each regulatory jurisdiction.  Regulatory approval is required to withdraw decommissioning funds. These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities.  The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in these trust funds in Spent Nuclear Fuel and Decommissioning Trusts on its balance sheets. I&M records these securities at fair value. I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose. Upon adoption of ASU 2016-01 in first quarter 2018, equity securities are now recorded with changes in fair value recognized in earnings. Effective January 2018 available for sale classification only applies to investment in debt securities. Other-than-temporary impairments for investments in debt securities are considered realized losses as a result of securities being managed by an external investment management firm. The external investment management firm makes specific investment decisions regarding the debt and equity investments held in these trusts and generally intends to sell debt securities in an unrealized loss position as part of a tax optimization strategy. Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment. I&M records unrealized gains, unrealized losses and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates. Consequently, changes in fair value of trust assets do not affect earnings or AOCI.


208



The following is a summary of nuclear trust fund investments:
 
September 30, 2018
 
December 31, 2017
 
 
 
Gross
 
Other-Than-
 
 
 
Gross
 
Other-Than-
 
Fair
 
Unrealized
 
Temporary
 
Fair
 
Unrealized
 
Temporary
 
Value
 
Gains
 
Impairments
 
Value
 
Gains
 
Impairments
 
(in millions)
Cash and Cash Equivalents
$
41.6

 
$

 
$

 
$
17.2

 
$

 
$

Fixed Income Securities:
 

 
 

 
 

 
 

 
 

 
 

United States Government
951.9

 
12.2

 
(6.2
)
 
981.2

 
29.7

 
(3.6
)
Corporate Debt
54.4

 
1.1

 
(1.6
)
 
58.7

 
3.8

 
(1.2
)
State and Local Government
8.5

 
0.5

 
(0.2
)
 
8.8

 
0.8

 
(0.2
)
Subtotal Fixed Income Securities
1,014.8

 
13.8

 
(8.0
)
 
1,048.7

 
34.3

 
(5.0
)
Equity Securities - Domestic (a)
1,609.6

 
990.5

 

 
1,461.7

 
868.2

 
(75.5
)
Spent Nuclear Fuel and Decommissioning Trusts
$
2,666.0

 
$
1,004.3

 
$
(8.0
)
 
$
2,527.6

 
$
902.5

 
$
(80.5
)

(a)
Amount reported as Gross Unrealized Gains includes unrealized gains of $995.8 million and unrealized losses of $5.3 million. AEP adopted ASU 2016-01 during the first quarter of 2018 by means of a modified retrospective approach. Due to the adoption of the ASU, Other-Than-Temporary Impairments are no longer applicable to Equity Securities with readily determinable fair values.

The following table provides the securities activity within the decommissioning and SNF trusts:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Proceeds from Investment Sales
 
$
513.1

 
$
519.5

 
$
1,550.9

 
$
1,808.6

Purchases of Investments
 
521.2

 
525.0

 
1,589.0

 
1,842.2

Gross Realized Gains on Investment Sales
 
3.9

 
9.8

 
27.7

 
198.1

Gross Realized Losses on Investment Sales
 
3.5

 
5.2

 
22.2

 
145.4


The base cost of fixed income securities was $1 billion and $1 billion as of September 30, 2018 and December 31, 2017, respectively.  The base cost of equity securities was $619 million and $594 million as of September 30, 2018 and December 31, 2017, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, 2018 was as follows:
 
Fair Value of Fixed Income Securities
 
(in millions)
Within 1 year
$
348.7

After 1 year through 5 years
331.4

After 5 years through 10 years
177.0

After 10 years
157.7

Total
$
1,014.8


209



Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrants’ financial assets and liabilities that were accounted for at fair value on a recurring basis.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in management’s valuation techniques.

AEP

Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Other Temporary Investments
 
 
 
 
 
 
 
 
 
 
Restricted Cash and Other Cash Deposits (a)
 
$
160.8

 
$

 
$

 
$
9.6

 
$
170.4

Fixed Income Securities  Mutual Funds
 
103.1

 

 

 

 
103.1

Equity Securities  Mutual Funds (b)
 
39.8

 

 

 

 
39.8

Total Other Temporary Investments
 
303.7

 

 

 
9.6

 
313.3

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (d)
 
1.7

 
270.9

 
361.7

 
(213.2
)
 
421.1

Cash Flow Hedges:
 
 

 
 

 
 

 
 

 
 

Commodity Hedges (c)
 

 
20.9

 
11.7

 
3.1

 
35.7

Total Risk Management Assets
 
1.7

 
291.8

 
373.4

 
(210.1
)
 
456.8

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (e)
 
27.2

 

 

 
14.4

 
41.6

Fixed Income Securities:
 
 

 
 

 
 

 
 

 
 

United States Government
 

 
951.9

 

 

 
951.9

Corporate Debt
 

 
54.4

 

 

 
54.4

State and Local Government
 

 
8.5

 

 

 
8.5

Subtotal Fixed Income Securities
 

 
1,014.8

 

 

 
1,014.8

Equity Securities  Domestic (b)
 
1,609.6

 

 

 

 
1,609.6

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,636.8

 
1,014.8

 

 
14.4

 
2,666.0

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,942.2

 
$
1,306.6

 
$
373.4

 
$
(186.1
)
 
$
3,436.1

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (d)
 
$
1.9

 
$
271.4

 
$
178.2

 
$
(200.1
)
 
$
251.4

Cash Flow Hedges:
 
 

 
 
 
 

 
 

 
 

Commodity Hedges (c)
 

 
21.8

 
34.0

 
3.1

 
58.9

Fair Value Hedges
 

 
34.2

 

 

 
34.2

Total Risk Management Liabilities
 
$
1.9

 
$
327.4

 
$
212.2

 
$
(197.0
)
 
$
344.5


210



AEP

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Other Temporary Investments
 
 
 
 
 
 
 
 
 
 
Restricted Cash and Other Cash Deposits (a)
 
$
183.2

 
$

 
$

 
$
36.9

 
$
220.1

Fixed Income Securities  Mutual Funds
 
102.9

 

 

 

 
102.9

Equity Securities  Mutual Funds (b)
 
36.7

 

 

 

 
36.7

Total Other Temporary Investments
 
322.8

 

 

 
36.9

 
359.7

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (f)
 
3.9

 
391.2

 
274.1

 
(285.4
)
 
383.8

Cash Flow Hedges:
 
 

 
 

 
 

 
 

 
 

Commodity Hedges (c)
 

 
17.3

 
4.7

 

 
22.0

Fair Value Hedges
 

 
2.5

 

 

 
2.5

Total Risk Management Assets
 
3.9

 
411.0

 
278.8

 
(285.4
)
 
408.3

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (e)
 
7.5

 

 

 
9.7

 
17.2

Fixed Income Securities:
 
 

 
 

 
 

 
 

 
 

United States Government
 

 
981.2

 

 

 
981.2

Corporate Debt
 

 
58.7

 

 

 
58.7

State and Local Government
 

 
8.8

 

 

 
8.8

Subtotal Fixed Income Securities
 

 
1,048.7

 

 

 
1,048.7

Equity Securities  Domestic (b)
 
1,461.7

 

 

 

 
1,461.7

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,469.2

 
1,048.7

 

 
9.7

 
2,527.6

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,795.9

 
$
1,459.7

 
$
278.8

 
$
(238.8
)
 
$
3,295.6

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (f)
 
$
5.1

 
$
392.5

 
$
196.9

 
$
(285.0
)
 
$
309.5

Cash Flow Hedges:
 
 

 
 

 
 

 
 

 
 

Commodity Hedges (c)
 

 
23.9

 
41.6

 

 
65.5

Fair Value Hedges
 

 
8.6

 

 

 
8.6

Total Risk Management Liabilities
 
$
5.1

 
$
425.0

 
$
238.5

 
$
(285.0
)
 
$
383.6




211



AEP Texas

Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding
 
$
124.2

 
$

 
$

 
$

 
$
124.2

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c)
 

 
0.5

 

 

 
0.5

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
124.2

 
$
0.5

 
$

 
$

 
$
124.7


AEP Texas

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding
 
$
155.2

 
$

 
$

 
$

 
$
155.2

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c)
 

 
0.5

 

 

 
0.5

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
155.2

 
$
0.5

 
$

 
$

 
$
155.7






212



APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding
 
$
9.9

 
$

 
$

 
$

 
$
9.9

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
0.2

 
41.8

 
66.7

 
(38.9
)
 
69.8

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
10.1

 
$
41.8

 
$
66.7

 
$
(38.9
)
 
$
79.7

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$
0.3

 
$
40.2

 
$
0.2

 
$
(39.1
)
 
$
1.6


APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding
 
$
16.3

 
$

 
$

 
$

 
$
16.3

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 

 
52.5

 
25.1

 
(51.6
)
 
26.0

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
16.3

 
$
52.5

 
$
25.1

 
$
(51.6
)
 
$
42.3

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
51.2

 
$
0.4

 
$
(50.1
)
 
$
1.5


213



I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$
0.1

 
$
28.5

 
$
12.3

 
$
(29.1
)
 
$
11.8

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (e)
 
27.2

 

 

 
14.4

 
41.6

Fixed Income Securities:
 
 

 
 

 
 

 
 

 
 

United States Government
 

 
951.9

 

 

 
951.9

Corporate Debt
 

 
54.4

 

 

 
54.4

State and Local Government
 

 
8.5

 

 

 
8.5

Subtotal Fixed Income Securities
 

 
1,014.8

 

 

 
1,014.8

Equity Securities - Domestic (b)
 
1,609.6

 

 

 

 
1,609.6

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,636.8

 
1,014.8

 

 
14.4

 
2,666.0

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,636.9

 
$
1,043.3

 
$
12.3

 
$
(14.7
)
 
$
2,677.8

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$
0.1

 
$
33.2

 
$
2.9

 
$
(29.4
)
 
$
6.8


I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
39.4

 
$
9.1

 
$
(40.2
)
 
$
8.3

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (e)
 
7.5

 

 

 
9.7

 
17.2

Fixed Income Securities:
 
 

 
 

 
 

 
 

 


United States Government
 

 
981.2

 

 

 
981.2

Corporate Debt
 

 
58.7

 

 

 
58.7

State and Local Government
 

 
8.8

 

 

 
8.8

Subtotal Fixed Income Securities
 

 
1,048.7

 

 

 
1,048.7

Equity Securities - Domestic (b)
 
1,461.7

 

 

 

 
1,461.7

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,469.2

 
1,048.7

 

 
9.7

 
2,527.6

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,469.2

 
$
1,088.1

 
$
9.1

 
$
(30.5
)
 
$
2,535.9

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
47.6

 
$
1.5

 
$
(45.5
)
 
$
3.6


214



OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding
 
$
15.2

 
$

 
$

 
$

 
$
15.2

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 

 
0.7

 

 

 
0.7

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
15.2

 
$
0.7

 
$

 
$

 
$
15.9

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 
 
 
 
 
 
 
 
 
Risk Management Commodity Contracts (c) (g)
 
$

 
$

 
$
95.2

 
$

 
$
95.2


OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
0.6

 
$

 
$

 
$
0.6

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$

 
$
132.4

 
$

 
$
132.4



215



PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
0.3

 
$
18.5

 
$
(0.3
)
 
$
18.5

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$

 
$
0.9

 
$
(0.3
)
 
$
0.6


PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
0.2

 
$
6.4

 
$
(0.2
)
 
$
6.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$

 
$
0.2

 
$
(0.2
)
 
$



216



SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
0.2

 
$
7.9

 
$
(1.6
)
 
$
6.5

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$

 
$
4.4

 
$
(1.6
)
 
$
2.8


SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$
0.3

 
$
6.7

 
$
(0.6
)
 
$
6.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (g)
 
$

 
$

 
$
0.8

 
$
(0.6
)
 
$
0.2


(a)
Amounts in “Other’’ column primarily represent cash deposits in bank accounts with financial institutions or with third parties.  Level 1 and Level 2 amounts primarily represent investments in money market funds.
(b)
Amounts represent publicly traded equity securities and equity-based mutual funds.
(c)
Amounts in “Other’’ column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.’’
(d)
The September 30, 2018 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 2 matures $(2) million in 2018 and $(2) million in periods 2019-2021 and $3 million in periods 2022-2023; Level 3 matures $40 million in 2018, $122 million in periods 2019-2021, $21 million in periods 2022-2023 and $1 million in periods 2024-2032.  Risk management commodity contracts are substantially comprised of power contracts.
(e)
Amounts in “Other’’ column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.
(f)
The December 31, 2017 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 1 matures $(1) million in 2018; Level 2 matures $(3) million in 2018 and $2 million in periods 2022-2023; Level 3 matures $59 million in 2018, $33 million in periods 2019-2021, $14 million in periods 2022-2023 and $(29) million in periods 2024-2032.  Risk management commodity contracts are substantially comprised of power contracts.
(g)
Substantially comprised of power contracts for the Registrant Subsidiaries.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2018 and 2017.

217



The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy:
Three Months Ended September 30, 2018
 
AEP
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Balance as of June 30, 2018
 
$
172.3

 
$
60.0

 
$
13.2

 
$
(86.9
)
 
$
24.3

 
$
4.9

Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
19.9

 
9.0

 
1.9

 

 
3.7

 
1.7

Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)
 
1.5

 

 

 

 

 

Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income
 
10.4

 

 

 

 

 

Settlements
 
(56.0
)
 
(19.8
)
 
(5.5
)
 
0.6

 
(10.8
)
 
(2.7
)
Transfers into Level 3 (c) (d)
 
2.3

 

 

 

 

 

Transfers out of Level 3 (d)
 
(1.2
)
 

 

 

 

 

Changes in Fair Value Allocated to Regulated Jurisdictions (e)
 
12.0

 
17.3

 
(0.2
)
 
(8.9
)
 
0.4

 
(0.4
)
Balance as of September 30, 2018
 
$
161.2

 
$
66.5

 
$
9.4

 
$
(95.2
)
 
$
17.6

 
$
3.5

Three Months Ended September 30, 2017
 
AEP
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Balance as of June 30, 2017
 
$
87.3

 
$
41.3

 
$
15.5

 
$
(130.5
)
 
$
9.5

 
$
12.4

Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
19.8

 
6.2

 
3.8

 
(0.1
)
 
4.0

 
3.8

Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)
 
14.8

 

 

 

 

 

Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income
 
(24.3
)
 

 

 

 

 

Settlements
 
(49.2
)
 
(16.2
)
 
(8.4
)
 
1.2

 
(6.9
)
 
(7.6
)
Transfers into Level 3 (c) (d)
 
5.7

 

 

 

 

 

Transfers out of Level 3 (d)
 
0.2

 

 

 

 

 

Changes in Fair Value Allocated to Regulated Jurisdictions (e)
 
(9.3
)
 
(1.9
)
 
(0.7
)
 
(9.1
)
 
(1.9
)
 
4.5

Balance as of September 30, 2017
 
$
45.0

 
$
29.4

 
$
10.2

 
$
(138.5
)
 
$
4.7

 
$
13.1

Nine Months Ended September 30, 2018
 
AEP
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Balance as of December 31, 2017
 
$
40.3

 
$
24.7

 
$
7.6

 
$
(132.4
)
 
$
6.2

 
$
5.9

Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
150.9

 
104.4

 
14.7

 
1.3

 
18.1

 
(4.8
)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)
 
9.5

 

 

 

 

 

Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income
 
16.4

 

 

 

 

 

Settlements
 
(212.3
)
 
(128.3
)
 
(21.9
)
 
3.0

 
(24.3
)
 
(1.3
)
Transfers into Level 3 (c) (d)
 
16.5

 

 

 

 

 

Transfers out of Level 3 (d)
 
(2.5
)
 

 
(0.3
)
 

 

 

Changes in Fair Value Allocated to Regulated Jurisdictions (e)
 
142.4

 
65.7

 
9.3

 
32.9

 
17.6

 
3.7

Balance as of September 30, 2018
 
$
161.2

 
$
66.5

 
$
9.4

 
$
(95.2
)
 
$
17.6

 
$
3.5


218



Nine Months Ended September 30, 2017
 
AEP
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Balance as of December 31, 2016
 
$
2.5

 
$
1.4

 
$
2.8

 
$
(119.0
)
 
$
0.7

 
$
0.7

Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
37.4

 
17.2

 
4.0

 
(1.0
)
 
3.1

 
6.0

Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)
 
37.2

 

 

 

 

 

Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income
 
(29.5
)
 

 

 

 

 

Settlements
 
(49.7
)
 
(18.9
)
 
(7.1
)
 
5.1

 
(3.8
)
 
(6.8
)
Transfers into Level 3 (c) (d)
 
16.1

 

 

 

 

 

Transfers out of Level 3 (d)
 
(9.1
)
 

 

 

 

 

Changes in Fair Value Allocated to Regulated Jurisdictions (e)
 
40.1

 
29.7

 
10.5

 
(23.6
)
 
4.7

 
13.2

Balance as of September 30, 2017
 
$
45.0

 
$
29.4

 
$
10.2

 
$
(138.5
)
 
$
4.7

 
$
13.1


(a)
Included in revenues on the statements of income.
(b)
Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.
(c)
Represents existing assets or liabilities that were previously categorized as Level 2.
(d)
Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.
(e)
Relates to the net gains (losses) of those contracts that are not reflected on the statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets or accounts payable.

219



The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions:

Significant Unobservable Inputs
September 30, 2018
AEP
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
251.5

 
$
202.4

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
$
(0.05
)
 
$
161.90

 
$
33.54

 
 
 
 
 
 
 
Counterparty Credit Risk (b) 
 
10

 
418

 
158

Natural Gas Contracts

 
2.8

 
Discounted Cash Flow 
 
Forward Market Price (c) 
 
2.19

 
2.97

 
2.45

FTRs
121.9

 
7.0

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
(9.40
)
 
16.17

 
0.83

Total
$
373.4

 
$
212.2

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
December 31, 2017
AEP
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
225.1

 
$
233.7

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
$
(0.05
)
 
$
263.00

 
$
36.32

 
 
 
 
 
 
 
Counterparty Credit Risk (b) 
 
8

 
456

 
180

Natural Gas Contracts

 
0.2

 
Discounted Cash Flow 
 
Forward Market Price (c) 
 
2.37

 
2.96

 
2.62

FTRs
53.7

 
4.6

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
(55.62
)
 
54.88

 
0.41

Total
$
278.8

 
$
238.5

 
 
 
 
 
 

 
 

 
 


220



Significant Unobservable Inputs
September 30, 2018
APCo
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
1.8

 
$
0.1

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
14.98

 
$
59.45

 
$
36.30

FTRs
64.9

 
0.1

 
Discounted Cash Flow 
 
Forward Market Price 
 
0.06

 
12.73

 
2.37

Total
$
66.7

 
$
0.2

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
December 31, 2017
APCo
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
0.8

 
$
0.4

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
20.52

 
$
195.00

 
$
33.80

FTRs
24.3

 

 
Discounted Cash Flow 
 
Forward Market Price 
 
(0.36
)
 
7.15

 
1.62

Total
$
25.1

 
$
0.4

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
September 30, 2018
I&M
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
1.1

 
$
0.9

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
14.98

 
$
59.45

 
$
36.30

FTRs
11.2

 
2.0

 
Discounted Cash Flow 
 
Forward Market Price 
 
(2.58
)
 
6.21

 
0.73

Total
$
12.3

 
$
2.9

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
December 31, 2017
I&M
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
0.5

 
$
0.3

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
20.52

 
$
195.00

 
$
33.80

FTRs
8.6

 
1.2

 
Discounted Cash Flow 
 
Forward Market Price 
 
(0.36
)
 
5.75

 
0.86

Total
$
9.1

 
$
1.5

 
 
 
 
 
 

 
 

 
 

221



Significant Unobservable Inputs
September 30, 2018
OPCo
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$

 
$
95.2

 
Discounted Cash Flow 
 
Forward Market Price (a)
 
$
27.23

 
$
64.61

 
$
43.26

 
 
 
 
 
 
 
Counterparty Credit Risk (b)
 
10

 
188

 
141

Total
$

 
$
95.2

 
 
 
 
 
 
 
 
 
 

Significant Unobservable Inputs
December 31, 2017
OPCo
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$

 
$
132.4

 
Discounted Cash Flow 
 
Forward Market Price (a)
 
$
30.52

 
$
170.43

 
$
44.62

 


 


 
 
 
Counterparty Credit Risk (b)
 
8

 
190

 
136

Total
$

 
$
132.4

 
 
 
 
 
 
 
 
 
 

Significant Unobservable Inputs
September 30, 2018
PSO
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
FTRs
$
18.5

 
$
0.9

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
(9.40
)
 
$
10.30

 
$
(1.49
)

Significant Unobservable Inputs
December 31, 2017
PSO
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
FTRs
$
6.4

 
$
0.2

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
(6.62
)
 
$
1.41

 
$
(0.76
)

222



Significant Unobservable Inputs
September 30, 2018
SWEPCo
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Natural Gas Contracts
$

 
$
2.8

 
Discounted Cash Flow 
 
Forward Market Price (c)
 
$
2.19

 
$
2.97

 
$
2.45

FTRs
7.9

 
1.6

 
Discounted Cash Flow 
 
Forward Market Price (a)
 
(9.40
)
 
10.30

 
(1.49
)
Total
$
7.9

 
$
4.4

 
 
 
 
 
 
 
 
 
 

Significant Unobservable Inputs
December 31, 2017
SWEPCo
 
 
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Natural Gas Contracts
$

 
$
0.2

 
Discounted Cash Flow 
 
Forward Market Price (c)
 
$
2.37

 
$
2.96

 
$
2.62

FTRs
6.7

 
0.6

 
Discounted Cash Flow 
 
Forward Market Price (a)
 
(6.62
)
 
1.41

 
(0.76
)
Total
$
6.7

 
$
0.8

 
 
 
 
 
 
 
 
 
 

(a)
Represents market prices in dollars per MWh.
(b)
Represents prices of credit default swaps used to calculate counterparty credit risk, reported in basis points.
(c)
Represents market prices in dollars per MMBtu.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts, Natural Gas Contracts and FTRs for the Registrants as of September 30, 2018 and December 31, 2017:

Sensitivity of Fair Value Measurements
Significant Unobservable Input
 
Position
 
Change in Input
 
Impact on Fair Value
Measurement
Forward Market Price
 
Buy
 
Increase (Decrease)
 
Higher (Lower)
Forward Market Price
 
Sell
 
Increase (Decrease)
 
Lower (Higher)
Counterparty Credit Risk
 
Loss
 
Increase (Decrease)
 
Higher (Lower)
Counterparty Credit Risk
 
Gain
 
Increase (Decrease)
 
Lower (Higher)

223



11.  INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Federal Tax Reform

In December 2017, Tax Reform legislation was signed into law. Tax Reform includes significant changes to the Internal Revenue Code of 1986, as amended, and had a material impact on the Registrants’ financial statements in the reporting period of its enactment. Tax Reform lowered the corporate federal income tax rate from 35% to 21%. Tax Reform provisions related to regulated public utilities generally allow for the continued deductibility of interest expense, impact bonus depreciation for certain property acquired and placed in service after September 27, 2017 and continue certain rate normalization requirements for accelerated depreciation benefits.

Provisional Amounts

The Registrants applied Staff Accounting Bulletin 118 (SAB 118), issued by the SEC staff in December 2017, and made reasonable estimates for the measurement and accounting of the effects of Tax Reform which are reflected in the financial statements as provisional amounts based on the best information available. SAB 118 provides for up to a one-year period to complete the required analysis and accounting for Tax Reform referred to as the measurement period. While the Registrants were able to make reasonable estimates of the impact of Tax Reform in 2017, the final impact may differ from the recorded provisional amounts to the extent refinements are made to the estimated cumulative differences or as a result of additional guidance or technical corrections that may be issued by the IRS that may impact management’s interpretation and assumptions utilized. The measurement period adjustments recorded during the third quarter of 2018 to the provisional amounts were immaterial.

During the third quarter of 2018, the IRS proposed new regulations that reflect changes made by Tax Reform and affect taxpayers with qualified depreciable property acquired and placed in service after September 27, 2017. The Registrants expect to complete the analysis of the provisional items, including analysis of the new regulations proposed by the IRS, during the fourth quarter of 2018.


224



Status of Tax Reform Regulatory Proceedings

The table below summarizes the current status of Tax Reform in AEP’s various regulatory jurisdictions. See Note 4 - Rate Matters for additional information related to regulatory filings in these jurisdictions.
Registrant (Jurisdiction)
 
Change in Tax Rate
 
Excess ADIT Subject to Normalization Requirements
 
Excess ADIT Not Subject to Normalization Requirements
AEP Texas (Texas-Distribution)
 
Order Issued
 
Order Issued
 
Order Issued – Partial (a)
AEP Texas (Texas-Transmission)
 
Order Issued
 
To be addressed in a later filing
 
To be addressed in a later filing
APCo (Virginia)
 
Legislation Enacted – Case Pending (b)
 
Legislation Enacted – Case Pending (b)
 
Order Issued – Partial; Separate Case Pending (c)
APCo (West Virginia)
 
Order Issued
 
Order Issued
 
Order Issued
I&M (Indiana)
 
Order Issued
 
Order Issued
 
Order Issued
I&M (Michigan)
 
Order Issued; Separate Case Pending (d)
 
Case Pending
 
Case Pending
AEP (Tennessee)
 
Case Pending
 
Case Pending
 
Case Pending
AEP (Kentucky)
 
Order Issued
 
Order Issued
 
Order Issued
OPCo (Ohio)
 
Order Issued
 
Order Issued
 
Order Issued
PSO (Oklahoma)
 
Order Issued
 
Order Issued
 
Order Issued
SWEPCo (Arkansas)
 
Order Issued
 
Order Issued
 
Order Issued
SWEPCo (Louisiana)
 
Case Pending – Rates Implemented (e)
 
Case Pending – Rates Implemented (e)
 
Case Pending – Rates Implemented (e)
SWEPCo (Texas)
 
Order Issued (f)
 
To be addressed in a later filing
 
To be addressed in a later filing
PJM FERC Transmission
 
Settlement Approved (g)
 
Settlement Approved (g)
 
Settlement Approved (g)
SPP FERC Transmission
 
To be addressed in a later filing
 
To be addressed in a later filing
 
To be addressed in a later filing

(a)
A portion of the Excess ADIT that is not subject to rate normalization requirements is to be addressed in a later filing.
(b)
Legislation has been issued for a blanket amount that is subject to true-up and final commission approval.
(c)
In October 2018, the Virginia SCC issued an order approving APCo’s request to refund a portion of the Excess ADIT that is not subject to rate normalization requirements to customers. The remainder is to be addressed in a separate pending case.
(d)
A rider was implemented to refund the impact of Tax Reform prospectively and effective September 1, 2018. A separate filing was submitted in October 2018 for the Tax Reform impact from January 1, 2018 through August 31, 2018.
(e)
Rates have been implemented through a filed formula rate plan that is subject to true-up and final commission approval.
(f)
An interim order has been issued to lower rates. Parties continue to finalize settlement.
(g)
An administrative law judge has approved a settlement. The settlement is subject to final FERC ruling.

Reduction in the Corporate Federal Income Tax Rate - Pending Rate Reductions

State utility commissions have issued orders or instructions requiring public utilities, including the Registrants, to record liabilities to reflect the impact of the reduction in the corporate federal income tax rate in excess of the enacted corporate federal income tax rate of 21% beginning in 2018. As described in Note 4 - Rate Matters, certain Registrants have received state utility commission orders and have reflected the lower corporate federal income tax rate in current customer rates. The table below provides a summary of the estimated provisions for revenue refund recorded by the Registrants related to the reduction in the corporate federal tax rate as of September 30, 2018:
 
 
AEP
 
AEP Texas
 
AEPTCo
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Included in Current Liabilities
 
$
51.1

 
$

 
$

 
$
40.5

 
$
2.0

 
$

 
$
2.4

 
$
5.3

Included in Deferred Credits and Other Noncurrent Liabilities
 
98.4

 
21.9

 
8.6

 
3.7

 
12.8

 
20.8

 
2.3

 
27.6


Excess ADIT - Pending Rate Reductions

As of September 30, 2018, the Registrants have approximately $4.3 billion of Excess ADIT, as well as an incremental liability of $1.1 billion to reflect the $4.3 billion Excess ADIT on a pretax basis, presented in Regulatory Liabilities and Deferred Investment Tax Credits on the balance sheets.  The Excess ADIT is reflected on a pretax basis to appropriately contemplate future tax consequences in the periods when the regulatory liability is settled.  As of September 30, 2018, approximately $3.4 billion of the Excess ADIT relates to temporary differences associated with certain depreciable property subject to rate normalization requirements.


225



As reflected in the Registrants’ respective estimated annual ETR for 2018, AEP’s regulated public utilities began amortizing the Excess ADIT associated with certain depreciable property subject to rate normalization requirements using the ARAM during the first quarter of 2018. The amortization resulted in a reduction in the Excess ADIT balance recorded in Regulatory Liabilities and Deferred Investment Tax Credits and a reduction in Income Tax Expense. As a result of state utility commission orders or instructions, the Registrants have recorded estimated provisions for revenue refund offsetting the amortization of the Excess ADIT to the extent not yet reflected in current customer rates. The table below provides a summary of the estimated provisions for revenue refund recorded by the Registrants as of September 30, 2018:
 
 
AEP
 
AEP Texas
 
AEPTCo
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Included in Current Liabilities
 
$
15.3

 
$

 
$

 
$
9.5

 
$

 
$

 
$
4.7

 
$
1.2

Included in Deferred Credits and Other Noncurrent Liabilities
 
20.6

 
6.9

 
0.1

 
0.7

 
1.4

 
3.3

 

 
7.8


In addition, with respect to the remaining $0.9 billion of Excess ADIT recorded in Regulatory Liabilities and Deferred Investment Tax Credits that are not subject to rate normalization requirements, the Registrants have received state utility commission orders or instructions and a filed FERC settlement agreement to begin amortization.

Effective Tax Rates (ETR)

The Registrants’ interim ETR reflect the estimated annual ETR for 2018 and 2017, adjusted for tax expense associated with certain discrete items. As previously mentioned, effective January 1, 2018, Tax Reform lowered the corporate tax rate from 35% to 21%. The interim ETR differ from the federal statutory tax rate of 21% and 35% in 2018 and 2017, respectively, primarily due to state income taxes, the amortization of the Excess ADIT, tax credits and other book/tax differences which are accounted for on a flow-through basis.

The ETR for each of the Registrants is included in the following table. Significant variances in the ETR are described below.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Company
 
2018
 
2017
 
2018
 
2017
AEP
 
(16.2
)%
 
33.0
%
 
5.6
 %
 
35.3
%
AEP Texas
 
12.6
 %
 
32.2
%
 
14.9
 %
 
33.6
%
AEPTCo (a)
 
18.4
 %
 
33.5
%
 
20.7
 %
 
33.8
%
APCo
 
(962.2
)%
 
33.4
%
 
(13.8
)%
 
35.5
%
I&M
 
15.9
 %
 
30.6
%
 
10.4
 %
 
30.1
%
OPCo
 
(46.4
)%
 
36.9
%
 
4.6
 %
 
35.6
%
PSO
 
5.6
 %
 
37.2
%
 
8.7
 %
 
37.4
%
SWEPCo
 
9.8
 %
 
21.2
%
 
11.4
 %
 
25.7
%

(a)
The 2017 ETRs presented above reflect the revisions made to AEPTCo's previously issued financial statements.  See Note 1 - Significant Accounting Matters for additional information.


226



AEP

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The decrease in the ETR was primarily due to the discrete impact of the West Virginia and Ohio Tax Reform orders which enabled APCo, OPCo and WPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances.  The West Virginia and Ohio Tax Reform orders impacted the ETR by (17.9)% and (7.8)%, respectively.  See “West Virginia Tax Reform” and “Ohio Tax Reform” sections of Note 4 for additional information.  Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (7.4)% due to increased 2018 amortization of Excess ADIT.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the discrete impact of the West Virginia and Ohio Tax Reform orders which enabled APCo, OPCo and WPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances.  The West Virginia and Ohio Tax Reform orders impacted the ETR by (5.4)% and (2.3)%, respectively. See “West Virginia Tax Reform” and “Ohio Tax Reform” sections of Note 4 for additional information. Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, state tax legislation enacted in Kentucky in April 2018 impacted the ETR by (1.1)% and increased 2018 amortization of Excess ADIT impacted the ETR by (4.7)%.

AEP Texas

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT.

AEPTCo

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform.


227



APCo
 
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
 
The decrease in the ETR was primarily due to the discrete impact of the West Virginia Tax Reform orders which enabled APCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances.  The West Virginia Tax Reform order impacted the ETR by (887.8)%.  See “West Virginia Tax Reform” section of Note 4 for additional information.  Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (31.7)% due to increased 2018 amortization of Excess ADIT.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the discrete impact of the West Virginia Tax Reform orders which enabled APCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances.  The West Virginia Tax Reform order impacted the ETR by (28.6)%.  See “West Virginia Tax Reform” section of Note 4 for additional information.  Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (4.9)% due to increased 2018 amortization of Excess ADIT.

I&M

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, increased 2018 amortization of Excess ADIT and decreased state income taxes.  These decreases were partially offset by an increase in book/tax differences which are accounted for on a flow-through basis resulting from a change in the expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, increased 2018 amortization of Excess ADIT and decreased state income taxes.  These decreases were partially offset by an increase in book/tax differences which are accounted for on a flow-through basis resulting from a change in the expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028.

OPCo

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The decrease in the ETR was primarily due to the discrete impact of the Ohio Tax Reform orders which enabled OPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances.  The Ohio Tax Reform order impacted the ETR by (62.0)%.  See “Ohio Tax Reform” section of Note 4 for additional information. Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (4.1)% due to increased 2018 amortization of Excess ADIT.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the discrete impact of the Ohio Tax Reform orders which enabled OPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances.  The Ohio Tax Reform order impacted the ETR by (15.1)%.  See “Ohio Tax Reform” section of Note 4 for additional information.  Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (2.5)% due to increased 2018 amortization of Excess ADIT.

228




PSO

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT. The amortization of Excess ADIT impacted the ETR by (17.3)%.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT. The amortization of Excess ADIT impacted the ETR by (13.9)%.

SWEPCo

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT. The amortization of Excess ADIT impacted the ETR by (9.0)%. These decreases are partially offset by a prior year income tax benefit attributable to SWEPCo’s noncontrolling interest in Sabine.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT. The amortization of Excess ADIT impacted the ETR by (7.9)%.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011 through 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. To resolve the issue under consideration, AEP and subsidiaries and the IRS exam team agreed to utilize the Fast Track Settlement Program in December 2017. The program was completed in March 2018 and tax years 2014 and 2015 were added to the IRS examination to reflect the impact of the Fast Track changes that were carried forward to 2014 and 2015. In June 2018, AEP settled all outstanding issues under audit for tax years 2011-2013, and the audit was again submitted to the Joint Committee for approval in the third quarter of 2018. As a result, the related $72 million unrecognized tax benefit was reversed in the second quarter of 2018. The settlement did not materially impact the Registrants net income, cash flows or financial condition. In the third quarter of 2018, AEP was notified that the IRS would commence an audit of the 2016 tax year in October 2018.

AEP and subsidiaries file income tax returns in various state, local or foreign jurisdictions.  These taxing authorities routinely examine the tax returns. AEP and subsidiaries are currently under examination in several state and local jurisdictions.  However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities.  Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income.  The Registrants are no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2009.


229



State Tax Legislation (Applies to AEP, AEPTCo, I&M and OPCo)

In April 2018, the Kentucky legislature enacted House Bill (H.B.) 487. H.B. 487 adopts mandatory unitary combined reporting for state corporate income tax purposes applicable for taxable years beginning on or after January 1, 2019. H.B. 487 also adopts the 80% federal net operating loss (NOL) limitation under Internal Revenue Code Sec. 172(a) for NOLs generated after January 1, 2018 and the federal unlimited carryforward period for unused NOLs generated after January 1, 2018. In addition, H.B. 366 was also enacted in April 2018, which among other things, replaces the graduated corporate tax rate structure with a flat 5% tax rate for business income and adopts a single-sales factor apportionment formula for apportioning a corporation’s business income to Kentucky. In the second quarter of 2018, AEP recorded an $18 million benefit to Income Tax Expense as a result of remeasuring Kentucky deferred taxes under a unitary filing group. The enacted legislation did not materially impact AEPTCo’s, I&M’s or OPCo’s net income.

230



12.  FINANCING ACTIVITIES

The disclosures in this note apply to all Registrants, unless indicated otherwise.

Long-term Debt Outstanding (Applies to AEP)

The following table details long-term debt outstanding:
Type of Debt
 
September 30, 2018
 
December 31, 2017
 
 
(in millions)
Senior Unsecured Notes
 
$
18,342.1

 
$
16,478.3

Pollution Control Bonds
 
1,643.2

 
1,621.7

Notes Payable
 
233.2

 
260.8

Securitization Bonds
 
1,145.2

 
1,416.5

Spent Nuclear Fuel Obligation (a)
 
272.1

 
268.6

Other Long-term Debt
 
1,138.2

 
1,127.4

Total Long-term Debt Outstanding
 
22,774.0

 
21,173.3

Long-term Debt Due Within One Year
 
1,904.2

 
1,753.7

Long-term Debt
 
$
20,869.8

 
$
19,419.6


(a)
Pursuant to the Nuclear Waste Policy Act of 1982, I&M, a nuclear licensee, has an obligation to the United States Department of Energy for spent nuclear fuel disposal.  The obligation includes a one-time fee for nuclear fuel consumed prior to April 7, 1983.  Trust fund assets related to this obligation were $316 million and $312 million as of September 30, 2018 and December 31, 2017, respectively, and are included in Spent Nuclear Fuel and Decommissioning Trusts on the balance sheets.

Long-term Debt Activity

Long-term debt and other securities issued, retired and principal payments made during the first nine months of 2018 are shown in the tables below:
Company
 
Type of Debt
 
Principal Amount (a)
 
Interest Rate
 
Due Date
Issuances:
 
 
 
(in millions)
 
(%)
 
 
AEP Texas
 
Senior Unsecured Notes
 
$
500.0

 
3.95
 
2028
AEPTCo
 
Senior Unsecured Notes
 
325.0

 
4.25
 
2048
APCo
 
Pollution Control Bonds
 
104.4

 
2.625
 
2022
I&M
 
Other Long-term Debt
 
200.0

 
Variable
 
2021
I&M
 
Notes Payable
 
55.5

 
Variable
 
2022
I&M
 
Pollution Control Bonds
 
100.0

 
3.05
 
2025
I&M
 
Senior Unsecured Notes
 
350.0

 
3.85
 
2028
I&M
 
Senior Unsecured Notes
 
475.0

 
4.25
 
2048
OPCo
 
Senior Unsecured Notes
 
400.0

 
4.15
 
2048
SWEPCo
 
Senior Unsecured Notes
 
575.0

 
4.10
 
2028
SWEPCo
 
Senior Unsecured Notes
 
450.0

 
3.85
 
2048
 
 
 
 


 

 

Non-Registrant:
 
 
 


 

 

Transource Energy
 
Other Long-term Debt
 
12.7

 
Variable
 
2020
WPCo
 
Pollution Control Bonds
 
65.0

 
3.00
 
2022
Total Issuances
 
 
 
$
3,612.6

 

 


(a)
Amounts indicated on the statements of cash flows are net of issuance costs and premium or discount and will not tie to the issuance amounts.

231



Company
 
Type of Debt
 
 Principal Amount Paid
 
Interest Rate
 
Due Date
Retirements and Principal Payments:
 
 
 
(in millions)
 
(%)
 
 
AEP Texas
 
Securitization Bonds
 
$
70.0

 
5.17
 
2018
AEP Texas
 
Senior Unsecured Notes
 
30.0

 
5.89
 
2018
AEP Texas
 
Securitization Bonds
 
27.6

 
1.976
 
2020
AEP Texas
 
Securitization Bonds
 
104.1

 
5.306
 
2020
APCo
 
Securitization Bonds
 
24.0

 
2.008
 
2023
I&M
 
Other Long-term Debt
 
200.0

 
Variable
 
2018
I&M
 
Pollution Control Bonds
 
100.0

 
1.75
 
2018
I&M
 
Senior Unsecured Notes
 
475.0

 
7.00
 
2019
I&M
 
Notes Payable
 
3.5

 
Variable
 
2019
I&M
 
Notes Payable
 
10.1

 
Variable
 
2019
I&M
 
Notes Payable
 
18.8

 
Variable
 
2020
I&M
 
Notes Payable
 
19.5

 
Variable
 
2021
I&M
 
Notes Payable
 
21.3

 
Variable
 
2022
I&M
 
Notes Payable
 
6.7

 
Variable
 
2022
I&M
 
Other Long-term Debt
 
1.2

 
6.00
 
2025
OPCo
 
Senior Unsecured Notes
 
350.0

 
6.05
 
2018
OPCo
 
Securitization Bonds
 
46.9

 
2.049
 
2019
OPCo
 
Other Long-term Debt
 
0.1

 
1.149
 
2028
PSO
 
Other Long-term Debt
 
0.3

 
3.00
 
2027
SWEPCo
 
Pollution Control Bonds
 
81.7

 
4.95
 
2018
SWEPCo
 
Senior Unsecured Notes
 
300.0

 
5.875
 
2018
SWEPCo
 
Other Long-term Debt
 
0.2

 
3.50
 
2023
SWEPCo
 
Other Long-term Debt
 
0.2

 
4.28
 
2023
SWEPCo
 
Notes Payable
 
3.2

 
4.58
 
2032
 
 
 
 
 
 
 
 
 
Non-Registrant:
 
 
 
 
 
 
 
 
AEP Energy
 
Notes Payable
 
0.1

 
5.75
 
2019
WPCo
 
Pollution Control Bonds
 
65.0

 
Variable
 
2018
Total Retirements and Principal Payments
 
 
 
$
1,959.5

 
 
 
 

As of September 30, 2018, trustees held, on behalf of AEP, $574 million of their reacquired Pollution Control Bonds. Of this total, $345 million relates to OPCo.

Long-term Debt Subsequent Events

In October 2018, I&M retired $4 million of Notes Payable related to DCC Fuel.


232



Debt Covenants (Applies to AEP and AEPTCo)

Covenants in AEPTCo’s note purchase agreements and indenture limit the amount of contractually-defined priority debt (which includes a further sub-limit of $50 million of secured debt) to 10% of consolidated tangible net assets. AEPTCo’s contractually-defined priority debt was immaterial as of September 30, 2018. The method for calculating the consolidated tangible net assets is contractually defined in the note purchase agreements.

Dividend Restrictions

Utility Subsidiaries’ Restrictions

Parent depends on its utility subsidiaries to pay dividends to shareholders. AEP utility subsidiaries pay dividends to Parent provided funds are legally available. Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of the subsidiaries to transfer funds to Parent in the form of dividends.

All of the dividends declared by AEP’s utility subsidiaries that provide transmission or local distribution services are subject to a Federal Power Act restriction that prohibits the payment of dividends out of capital accounts without regulatory approval; payment of dividends is allowed out of retained earnings only. Additionally, the Federal Power Act creates a reserve on earnings attributable to hydroelectric generation plants. Because of their ownership of such plants, this reserve applies to AGR, APCo and I&M.

Certain AEP subsidiaries have credit agreements that contain covenants that limit their debt to capitalization ratio to 67.5%. The method for calculating outstanding debt and capitalization is contractually defined in the credit agreements.

The Federal Power Act restriction does not limit the ability of the AEP subsidiaries to pay dividends out of retained earnings.

Parent Restrictions (Applies to AEP)

The holders of AEP’s common stock are entitled to receive the dividends declared by the Board of Directors provided funds are legally available for such dividends.  Parent’s income primarily derives from common stock equity in the earnings of its utility subsidiaries.

Pursuant to the leverage restrictions in credit agreements, AEP must maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%.  The method for calculating outstanding debt and capitalization is contractually defined in the credit agreements.

233



Corporate Borrowing Program - AEP System (Applies to Registrant Subsidiaries)

The AEP System uses a corporate borrowing program to meet the short-term borrowing needs of AEP’s subsidiaries.  The corporate borrowing program includes a Utility Money Pool, which funds AEP’s utility subsidiaries; a Nonutility Money Pool, which funds certain AEP nonutility subsidiaries; and direct borrowing from AEP.  The AEP System Utility Money Pool operates in accordance with the terms and conditions of the AEP System Utility Money Pool agreement filed with the FERC.  The amounts of outstanding loans to (borrowings from) the Utility Money Pool as of September 30, 2018 and December 31, 2017 are included in Advances to Affiliates and Advances from Affiliates, respectively, on each of the Registrant Subsidiaries’ balance sheets.  The Utility Money Pool participants’ money pool activity and corresponding authorized borrowing limits for the nine months ended September 30, 2018 are described in the following table:
 
 
Maximum
 
 
 
Average
 
 
 
Net Loans to
 
 
 
 
 
Borrowings
 
Maximum
 
Borrowings
 
Average
 
(Borrowings from)
 
Authorized
 
 
 
from the
 
Loans to the
 
from the
 
Loans to the
 
the Utility Money
 
Short-term
 
 
 
Utility
 
Utility
 
Utility
 
Utility
 
Pool as of
 
Borrowing
 
Company
 
Money Pool
 
Money Pool
 
Money Pool
 
Money Pool
 
September 30, 2018
 
Limit
 
 
 
(in millions)
AEP Texas
 
$
390.6

 
$
106.9

 
$
189.9

 
$
47.1

 
$
(77.8
)
 
$
500.0

 
AEPTCo
 
371.3

 
232.7

 
237.9

 
28.1

 
232.7

 
795.0

(a)
APCo
 
295.5

 
23.7

 
185.3

 
23.4

 
(75.4
)
 
600.0

 
I&M
 
322.1

 
657.8

 
257.6

 
116.4

 
72.5

 
500.0

 
OPCo
 
270.8

 
225.0

 
169.0

 
189.4

 
(242.9
)
 
500.0

 
PSO
 
193.7

 
30.9

 
119.8

 
10.1

 
(22.0
)
 
300.0

 
SWEPCo
 
200.1

 
525.5

 
143.2

 
343.3

 
516.6

 
350.0

 

(a)
Amount represents the combined authorized short-term borrowing limit the State Transcos have from FERC or state regulatory commissions.

The activity in the above table does not include short-term lending activity of certain AEP nonutility subsidiaries. AEP Texas’ wholly-owned subsidiary, AEP Texas North Generation Company LLC and SWEPCo’s wholly-owned subsidiary, Mutual Energy SWEPCo, LP are participants in the Nonutility Money Pool. The amounts of outstanding loans to the Nonutility Money Pool as of September 30, 2018 and December 31, 2017 are included in Advances to Affiliates on each subsidiaries’ balance sheets. The Nonutility Money Pool participants’ money pool activity for the nine months ended September 30, 2018 is described in the following table:
 
 
Maximum
 
Average
 
Loans to the
 
 
Loans to the
 
Loans to the
 
Nonutility
 
 
Nonutility
 
Nonutility
 
Money Pool as of
Company
 
Money Pool
 
Money Pool
 
September 30, 2018
 
(in millions)
AEP Texas
 
$
8.4

 
$
8.1

 
$
8.0

SWEPCo
 
2.0

 
2.0

 
2.0


AEP has a direct financing relationship with AEPTCo to meet its short-term borrowing needs. The amounts of outstanding loans to (borrowings from) AEP as of September 30, 2018 and December 31, 2017 are included in Advances to Affiliates and Advances from Affiliates, respectively, on AEPTCo’s balance sheets. AEPTCo’s direct borrowing and lending activity with AEP for the nine months ended September 30, 2018 is described in the following table:
Maximum
 
Maximum
 
Average
 
Average
 
Borrowings from
 
Loans to
 
Authorized
 
Borrowings
 
Loans
 
Borrowings
 
Loans
 
AEP as of
 
AEP as of
 
Short-term
 
from AEP
 
to AEP
 
from AEP
 
to AEP
 
September 30, 2018
 
September 30, 2018
 
Borrowing Limit
 
(in millions)
$
1.1

 
$
104.7

 
$
1.1

 
$
50.0

 
$
1.1

 
$
45.3

 
$
75.0

(a)

(a)
Amount represents the combined authorized short-term borrowing limit the State Transcos have from FERC or state regulatory commissions.

234



The maximum and minimum interest rates for funds either borrowed from or loaned to the Utility Money Pool were as follows:
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Maximum Interest Rate
 
2.52
%
 
1.49
%
Minimum Interest Rate
 
1.81
%
 
0.92
%

The average interest rates for funds borrowed from and loaned to the Utility Money Pool are summarized for all Registrant Subsidiaries in the following table:
 
 
Average Interest Rate
 
Average Interest Rate
 
 
for Funds Borrowed from
 
for Funds Loaned to
 
 
the Utility Money Pool for the
 
the Utility Money Pool for the
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
Company
 
2018
 
2017
 
2018
 
2017
AEP Texas
 
2.25
%
 
1.29
%
 
2.29
%
 
1.35
%
AEPTCo
 
2.26
%
 
1.36
%
 
2.04
%
 
1.04
%
APCo
 
2.22
%
 
1.24
%
 
2.19
%
 
1.28
%
I&M
 
2.16
%
 
1.24
%
 
2.06
%
 
1.27
%
OPCo
 
2.18
%
 
1.40
%
 
2.47
%
 
0.98
%
PSO
 
2.25
%
 
1.30
%
 
1.86
%
 
%
SWEPCo
 
2.31
%
 
1.26
%
 
1.87
%
 
0.98
%

Maximum, minimum and average interest rates for funds loaned to the Nonutility Money Pool are summarized in the following table:
 
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
 
Maximum
 
Minimum
 
Average
 
Maximum
 
Minimum
 
Average
 
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
 
Loaned to
 
Loaned to
 
Loaned to
 
Loaned to
 
Loaned to
 
Loaned to
 
 
the Nonutility
 
the Nonutility
 
the Nonutility
 
the Nonutility
 
the Nonutility
 
the Nonutility
Company
 
Money Pool
 
Money Pool
 
Money Pool
 
Money Pool
 
Money Pool
 
Money Pool
AEP Texas
 
2.52
%
 
1.83
%
 
2.26
%
 
1.49
%
 
%
 
1.27
%
SWEPCo
 
2.52
%
 
1.83
%
 
2.26
%
 
1.49
%
 
%
 
1.27
%

AEPTCo’s maximum, minimum and average interest rates for funds either borrowed from or loaned to AEP are summarized in the following table:
 
 
Maximum
 
Minimum
 
Maximum
 
Minimum
 
Average
 
Average
 
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
Nine Months
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
Ended
 
Borrowed
 
Borrowed
 
Loaned
 
Loaned
 
Borrowed
 
Loaned
September 30,
 
from AEP
 
from AEP
to AEP
 
to AEP
 
from AEP
 
to AEP
2018
 
2.52
%
 
1.76
%
 
2.52
%
 
1.76
%
 
2.26
%
 
2.27
%
2017
 
1.49
%
 
0.92
%
 
1.49
%
 
0.92
%
 
1.27
%
 
1.31
%

235



Short-term Debt (Applies to AEP and SWEPCo)

Outstanding short-term debt was as follows:
 
 
 
 
September 30, 2018
 
December 31, 2017
Company
 
Type of Debt
 
Outstanding
Amount
 
Interest
Rate (a)
 
Outstanding
Amount
 
Interest
Rate (a)
 
 
 
 
(dollars in millions)
AEP
 
Securitized Debt for Receivables (b)
 
$
750.0

 
2.06
%
 
$
718.0

 
1.22
%
AEP
 
Commercial Paper
 
1,473.2

 
2.40
%
 
898.6

 
1.85
%
SWEPCo
 
Notes Payable
 
19.4

 
3.45
%
 
22.0

 
2.92
%
 
 
Total Short-term Debt
 
$
2,242.6

 
 

 
$
1,638.6

 
 


(a)
Weighted average rate.
(b)
Amount of securitized debt for receivables as accounted for under the “Transfers and Servicing” accounting guidance.

Credit Facilities

For a discussion of credit facilities, see “Letters of Credit” section of Note 5.

Securitized Accounts Receivables – AEP Credit (Applies to AEP)

AEP Credit has a receivables securitization agreement with bank conduits.  Under the securitization agreement, AEP Credit receives financing from the bank conduits for the interest in the receivables AEP Credit acquires from affiliated utility subsidiaries.  These securitized transactions allow AEP Credit to repay its outstanding debt obligations, continue to purchase the operating companies’ receivables and accelerate AEP Credit’s cash collections.

AEP Credit’s receivables securitization agreement provides a commitment of $750 million from bank conduits to purchase receivables and was amended in July 2018 to include a $125 million and a $625 million facility which expire in July 2020 and 2021, respectively.

Accounts receivable information for AEP Credit is as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(dollars in millions)
Effective Interest Rates on Securitization of Accounts Receivable
 
2.27
%
 
1.33
%
 
2.06
%
 
1.17
%
Net Uncollectible Accounts Receivable Written Off
 
$
9.6

 
$
7.0

 
$
19.0

 
$
18.2

 
 
September 30, 2018
 
December 31, 2017
 
 
(in millions)
Accounts Receivable Retained Interest and Pledged as Collateral Less Uncollectible Accounts
 
$
1,082.9

 
$
925.5

Short-term – Securitized Debt of Receivables
 
750.0

 
718.0

Delinquent Securitized Accounts Receivable
 
58.2

 
41.1

Bad Debt Reserves Related to Securitization
 
29.3

 
28.7

Unbilled Receivables Related to Securitization
 
242.1

 
303.2


AEP Credit’s delinquent customer accounts receivable represent accounts greater than 30 days past due.


236



Securitized Accounts Receivables – AEP Credit (Applies to Registrant Subsidiaries, except AEP Texas and AEPTCo)

Under this sale of receivables arrangement, the Registrant Subsidiaries sell, without recourse, certain of their customer accounts receivable and accrued unbilled revenue balances to AEP Credit and are charged a fee based on AEP Credit’s financing costs, administrative costs and uncollectible accounts experience for each Registrant Subsidiaries’ receivables.  APCo does not have regulatory authority to sell its West Virginia accounts receivable.  The costs of customer accounts receivable sold are reported in Other Operation expense on the Registrant Subsidiaries’ statements of income.  The Registrant Subsidiaries manage and service their customer accounts receivable, which are sold to AEP Credit. AEP Credit securitizes the eligible receivables for the operating companies and retains the remainder.

The amount of accounts receivable and accrued unbilled revenues under the sale of receivables agreements were:
Company
 
September 30, 2018
 
December 31, 2017
 
 
(in millions)
APCo
 
$
122.9

 
$
136.2

I&M
 
169.5

 
136.5

OPCo
 
413.7

 
367.4

PSO
 
163.0

 
115.1

SWEPCo
 
190.5

 
138.2


The fees paid to AEP Credit for customer accounts receivable sold were:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Company
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
APCo
 
$
1.8

 
$
1.5

 
$
5.1

 
$
4.2

I&M
 
2.5

 
1.8

 
6.8

 
4.9

OPCo
 
7.2

 
6.1

 
18.8

 
16.5

PSO
 
2.3

 
2.0

 
6.0

 
5.2

SWEPCo
 
2.6

 
2.0

 
6.6

 
5.4


The proceeds on the sale of receivables to AEP Credit were:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Company
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
APCo
 
$
334.1

 
$
335.5

 
$
1,079.2

 
$
1,029.4

I&M
 
498.4

 
409.9

 
1,401.7

 
1,218.9

OPCo
 
695.2

 
616.3

 
2,046.9

 
1,741.7

PSO
 
454.9

 
407.0

 
1,171.2

 
1,022.6

SWEPCo
 
512.6

 
455.0

 
1,364.6

 
1,200.8


237



13. VARIABLE INTEREST ENTITIES

The disclosures in this note apply to AEP only.

The accounting guidance for “Variable Interest Entities” is a consolidation model that considers if a company has a variable interest in a VIE.  A VIE is a legal entity that possesses any of the following conditions: the entity’s equity at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, equity owners are unable to direct the activities that most significantly impact the legal entity’s economic performance (or they possess disproportionate voting rights in relation to the economic interest in the legal entity), or the equity owners lack the obligation to absorb the legal entity’s expected losses or the right to receive the legal entity’s expected residual returns. Entities are required to consolidate a VIE when it is determined that they have a controlling financial interest in a VIE and therefore, are the primary beneficiary of that VIE, as defined by the accounting guidance for “Variable Interest Entities.” In determining whether AEP is the primary beneficiary of a VIE, management considers whether AEP has the power to direct the most significant activities of the VIE and is obligated to absorb losses or receive the expected residual returns that are significant to the VIE. Management believes that significant assumptions and judgments were applied consistently.

Desert Sky Wind Farm LLC (Desert Sky) and Trent Wind Farm LLC (Trent) (collectively “the LLCs”) were established for the purpose of repowering, owning and operating wind-powered electric energy generation facilities in Texas. In January 2018, AEP admitted a nonaffiliate as a member of the LLCs to own and repower Desert Sky and Trent. The nonaffiliate contributed full turbine sets to each project in exchange for a 20.1% interest in the LLCs. The nonaffiliates’ contribution of $84 million was recorded as Net Property, Plant and Equipment on the balance sheets, which was the fair value as of the contribution date determined based on key input assumptions of the original cost of the full turbine sets and the discounted cash flow benefit associated with the production tax credits available from repowering Desert Sky and Trent based on their expected net capacity, capacity factor and the operational availability. AEP owns 79.9% of the LLCs. As a result, management has concluded that Desert Sky and Trent, collectively, are VIE’s and that AEP is the primary beneficiary based on its power to direct the activities that most significantly impact Desert Sky and Trent’s economic performance. Also in January 2018, Desert Sky and Trent entered into a forward PPA for the sale of power to AEPEP related to deliveries of electricity beginning January 1, 2021 for a 12 year period. Prior to the effective date of the PPA, Desert Sky and Trent will sell power at market rates into ERCOT. AEP and the nonaffiliate will share tax attributes including production tax credits and cash distributions from the operation of the LLCs generally consistent with the ownership percentages. See the table below for the classification of Desert Sky and Trent’s assets and liabilities on the balance sheet:
American Electric Power Company, Inc.
Variable Interest Entities
September 30, 2018
 
 
 
Desert Sky and Trent
 
(in millions)
ASSETS
 
Current Assets
$
89.2

Net Property, Plant and Equipment
350.8

Other Noncurrent Assets
0.4

Total Assets
$
440.4

 
 
LIABILITIES AND EQUITY
 
Current Liabilities
$
93.4

Noncurrent Liabilities
6.1

Equity
340.9

Total Liabilities and Equity
$
440.4



238



AEP has a call right, which if exercised, would require the nonaffiliate to sell its noncontrolling interest in the LLCs to AEP. The call exercise period is for ninety days, beginning July 2020 for Trent and August 2020 for Desert Sky. The nonaffiliates’ interest in the LLCs is presented as Redeemable Noncontrolling Interest on the balance sheets.  The nonaffiliate holds redemption rights, which if exercised, would require AEP to purchase the nonaffiliates’ noncontrolling interest in the LLCs.  The redemption right exercise period is for ninety days, beginning July 2021 for Trent and August 2021 for Desert Sky. The exercise price for both the call and redemption right are determined using a discounted cash flow model with agreed input assumptions as well as potential updates to certain assumptions reasonably expected based on the actual results of the LLCs.  As of September 30, 2018, AEP recorded $70 million of Redeemable Noncontrolling Interest in Mezzanine Equity on the balance sheets.

239



14. REVENUE FROM CONTRACTS WITH CUSTOMERS

The disclosures in this note apply to all Registrants, unless indicated otherwise.

Disaggregated Revenues from Contracts with Customers
The tables below represent AEP’s reportable segment revenues from contracts with customers, net of respective provisions for refund, by type of revenue:
 
 
Three Months Ended September 30, 2018
 
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation & Marketing
 
Corporate and Other
 
Reconciling Adjustments
 
AEP Consolidated
 
 
(in millions)
Retail Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Revenues
 
$
1,048.7

 
$
612.2

 
$

 
$

 
$

 
$

 
$
1,660.9

Commercial Revenues
 
618.5

 
336.7

 

 

 

 

 
955.2

Industrial Revenues
 
573.2

 
123.9

 

 

 

 

 
697.1

Other Retail Revenues
 
49.0

 
9.8

 

 

 

 

 
58.8

Total Retail Revenues
 
2,289.4

 
1,082.6

 

 

 

 

 
3,372.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale and Competitive Retail Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Generation Revenues (a)
 
224.2

 

 

 
115.1

 

 
(98.5
)
 
240.8

Transmission Revenues (b)
 
72.8

 
88.0

 
201.4

 

 

 
(241.6
)
 
120.6

Marketing, Competitive Retail and Renewable Revenues
 

 

 

 
399.1

 

 

 
399.1

Total Wholesale and Competitive Retail Revenues
 
297.0

 
88.0

 
201.4

 
514.2

 

 
(340.1
)
 
760.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues from Contracts with Customers (c)
 
40.3

 
69.9

 
0.7

 
12.7

 
21.5

 
49.5

 
194.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues from Contracts with Customers
 
2,626.7

 
1,240.5

 
202.1

 
526.9

 
21.5

 
(290.6
)
 
4,327.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alternative Revenues (d)
 
0.2

 
(37.9
)
 
(14.9
)
 

 

 

 
(52.6
)
Other Revenues (c)
 
9.8

 
8.9

 

 
(5.3
)
 
2.2

 
43.0

 
58.6

Total Other Revenues
 
10.0

 
(29.0
)
 
(14.9
)
 
(5.3
)
 
2.2

 
43.0

 
6.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues
 
$
2,636.7

 
$
1,211.5

 
$
187.2

 
$
521.6

 
$
23.7

 
$
(247.6
)
 
$
4,333.1


(a)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for Generation & Marketing is $35 million. The remaining affiliated amounts are immaterial.
(b)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEP Transmission Holdco is $147 million. The remaining affiliated amounts are immaterial.
(c)
Amounts include affiliated and nonaffiliated revenues.
(d)
The alternative revenue for Transmission and Distribution Utilities is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.




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Nine Months Ended September 30, 2018
 
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation & Marketing
 
Corporate and Other
 
Reconciling Adjustments
 
AEP Consolidated
 
 
(in millions)
Retail Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Revenues
 
$
2,906.9

 
$
1,711.0

 
$

 
$

 
$

 
$

 
$
4,617.9

Commercial Revenues
 
1,693.9

 
962.6

 

 

 

 

 
2,656.5

Industrial Revenues
 
1,655.2

 
366.8

 

 

 

 

 
2,022.0

Other Retail Revenues
 
139.1

 
29.2

 

 

 

 

 
168.3

Total Retail Revenues
 
6,395.1

 
3,069.6

 

 

 

 

 
9,464.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale and Competitive Retail Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Generation Revenues (a)
 
686.5

 

 

 
413.4

 

 
(155.2
)
 
944.7

Transmission Revenues (b)
 
208.4

 
272.6

 
633.9

 

 

 
(520.7
)
 
594.2

Marketing, Competitive Retail and Renewable Revenues
 

 

 

 
1,040.2

 

 

 
1,040.2

Total Wholesale and Competitive Retail Revenues
 
894.9

 
272.6

 
633.9

 
1,453.6

 

 
(675.9
)
 
2,579.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues from Contracts with Customers (c)
 
121.8

 
165.1

 
11.1

 
15.0

 
64.8

 
1.8

 
379.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues from Contracts with Customers
 
7,411.8

 
3,507.3

 
645.0

 
1,468.6

 
64.8

 
(674.1
)
 
12,423.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alternative Revenues (d)
 
(19.2
)
 
(48.3
)
 
(39.8
)
 

 

 

 
(107.3
)
Other Revenues (c)
 
1.1

 
51.9

 

 
18.8

 
6.7

 

 
78.5

Total Other Revenues
 
(18.1
)
 
3.6

 
(39.8
)
 
18.8

 
6.7

 

 
(28.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues
 
$
7,393.7

 
$
3,510.9

 
$
605.2

 
$
1,487.4

 
$
71.5

 
$
(674.1
)
 
$
12,394.6


(a)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for Generation & Marketing is $87 million. The remaining affiliated amounts are immaterial.
(b)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEP Transmission Holdco is $444 million. The remaining affiliated amounts are immaterial.
(c)
Amounts include affiliated and nonaffiliated revenues.
(d)
The alternative revenue for Transmission and Distribution Utilities is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.




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The tables below represent revenues from contracts with customers, net of respective provisions for refund, by type of revenue for the Registrant Subsidiaries:
 
 
Three Months Ended September 30, 2018
 
 
AEP Texas
 
AEPTCo (a)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Retail Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Revenues
 
$
178.8

 
$

 
$
320.9

 
$
207.4

 
$
433.5

 
$
220.8

 
$
214.0

Commercial Revenues
 
113.7

 

 
155.6

 
139.5

 
222.9

 
122.2

 
142.6

Industrial Revenues
 
27.2

 

 
157.1

 
148.7

 
96.3

 
80.2

 
87.5

Other Retail Revenues
 
6.5

 

 
19.2

 
1.7

 
3.3

 
24.4

 
2.2

Total Retail Revenues
 
326.2

 

 
652.8

 
497.3

 
756.0

 
447.6

 
446.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Generation Revenues (b)
 

 

 
74.5

 
93.6

 

 
12.5

 
53.2

Transmission Revenues (c)
 
73.6

 
206.6

 
20.9

 
6.2

 
14.8

 
13.5

 
29.5

Total Wholesale Revenues
 
73.6

 
206.6

 
95.4

 
99.8

 
14.8

 
26.0

 
82.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues from Contracts with Customers (d)
 
7.5

 
0.2

 
15.9

 
22.4

 
(29.9
)
 
5.5

 
6.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues from Contracts with Customers
 
407.3

 
206.8

 
764.1

 
619.5

 
740.9

 
479.1

 
535.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alternative Revenues (e)
 
(1.0
)
 
(12.4
)
 
(1.2
)
 
1.5

 
(36.9
)
 
2.3

 
(0.3
)
Other Revenues (f)
 
27.1

 

 
(0.9
)
 
8.7

 
74.3

 

 

Total Other Revenues
 
26.1

 
(12.4
)
 
(2.1
)
 
10.2

 
37.4

 
2.3

 
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues
 
$
433.4

 
$
194.4

 
$
762.0

 
$
629.7

 
$
778.3

 
$
481.4

 
$
535.3


(a)
The amounts presented reflect the revisions made to AEPTCo’s previously issued financial statements. For additional details on revisions made to AEPTCo’s financial statements, see Note 1- Significant Accounting Matters.
(b)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for APCo is $30 million primarily relating to the PPA with Kingsport. The remaining affiliated amounts are immaterial.
(c)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEPTCo is $146 million. The remaining affiliated amounts are immaterial.
(d)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for I&M is $17 million primarily relating to the barging, urea transloading and other transportation services. The remaining affiliated amounts are immaterial.
(e)
The alternative revenue for OPCo is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.
(f)
Amounts include affiliated and nonaffiliated revenues.




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Nine Months Ended September 30, 2018
 
 
AEP Texas
 
AEPTCo (a)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in millions)
Retail Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Revenues
 
$
453.6

 
$

 
$
1,017.2

 
$
559.4

 
$
1,258.4

 
$
531.4

 
$
512.3

Commercial Revenues
 
328.5

 

 
443.8

 
373.7

 
632.8

 
317.9

 
378.6

Industrial Revenues
 
79.7

 

 
455.9

 
424.1

 
287.8

 
220.4

 
248.1

Other Retail Revenues
 
19.1

 

 
57.6

 
5.4

 
9.8

 
64.9

 
6.4

Total Retail Revenues
 
880.9

 

 
1,974.5

 
1,362.6

 
2,188.8

 
1,134.6

 
1,145.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Generation Revenues (b)
 

 

 
194.1

 
349.7

 

 
26.7

 
168.8

Transmission Revenues (c)
 
229.6

 
612.9

 
60.2

 
16.9

 
42.8

 
29.4

 
77.3

Total Wholesale Revenues
 
229.6

 
612.9

 
254.3

 
366.6

 
42.8

 
56.1

 
246.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues from Contracts with Customers (d)
 
21.8

 
8.7

 
42.2

 
71.0

 
51.3

 
14.6

 
18.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues from Contracts with Customers
 
1,132.3

 
621.6

 
2,271.0

 
1,800.2

 
2,282.9

 
1,205.3

 
1,409.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alternative Revenues (e)
 
(1.1
)
 
(35.4
)
 
(20.7
)
 
(4.0
)
 
(47.2
)
 
11.2

 
2.3

Other Revenues (f)
 
62.1

 

 
(0.9
)
 

 
82.3

 

 

Total Other Revenues
 
61.0

 
(35.4
)
 
(21.6
)
 
(4.0
)
 
35.1

 
11.2

 
2.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenues
 
$
1,193.3

 
$
586.2

 
$
2,249.4

 
$
1,796.2

 
$
2,318.0

 
$
1,216.5

 
$
1,411.8


(a)
The amounts presented reflect the revisions made to AEPTCo’s previously issued financial statements. For additional details on revisions made to AEPTCo’s financial statements, see Note 1- Significant Accounting Matters.
(b)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for APCo is $100 million primarily relating to the PPA with Kingsport. The remaining affiliated amounts are immaterial.
(c)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEPTCo is $448 million. The remaining affiliated amounts are immaterial.
(d)
Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for I&M is $57 million primarily relating to barging, urea transloading and other transportation services. The remaining affiliated amounts are immaterial.
(e)
The alternative revenue for OPCo is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.
(f)
Amounts include affiliated and nonaffiliated revenues.

Performance Obligations

AEP has performance obligations as part of its normal course of business. A performance obligation is a promise to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to a customer. The invoice practical expedient within the accounting guidance for “Revenue from Contracts with Customers” allows for the recognition of revenue from performance obligations in the amount of consideration to which there is a right to invoice the customer and when the amount for which there is a right to invoice corresponds directly to the value transferred to the customer.

The purpose of the invoice practical expedient is to depict an entity’s measure of progress toward completion of the performance obligation within a contract and can only be applied to performance obligations that are satisfied over time and when the invoice is representative of services provided to date. AEP subsidiaries elected to apply the invoice practical expedient to recognize revenue for performance obligations satisfied over time as the invoices from the respective revenue streams are representative of services or goods provided to date to the customer. Performance obligations for AEP’s subsidiaries are summarized as follows:


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Retail Revenues

AEP’s subsidiaries within the Vertically Integrated Utilities and Transmission and Distribution Utilities segments have performance obligations to generate, transmit and distribute electricity for sale to rate-regulated retail customers. The performance obligation to deliver electricity is satisfied over time as the customer simultaneously receives and consumes the benefits provided. Revenues are variable as they are subject to the customer’s usage requirements.

Rate-regulated retail customers typically have the right to discontinue receiving service at will, therefore these contracts between AEP’s subsidiaries and their customers for rate-regulated services are generally limited to the services requested and received to date for such arrangements. Retail customers are generally billed on a monthly basis, and payment is typically due within 15 to 20 days after the issuance of the invoice. Payments from Retail Electric Providers are due to AEP Texas within 35 days.

Wholesale Revenues - Generation

AEP’s subsidiaries within the Vertically Integrated Utilities and Generation & Marketing segments have performance obligations to sell electricity to wholesale customers from generation assets in PJM, SPP and ERCOT. The performance obligation to deliver electricity from generation assets is satisfied over time as the customer simultaneously receives and consumes the benefits provided. Wholesale generation revenues are variable as they are subject to the customer’s usage requirements.

AEP’s subsidiaries within the Vertically Integrated Utilities and Generation & Marketing segments also have performance obligations to stand ready in order to promote grid reliability. Stand ready services are sold into PJM’s RPM capacity market. RPM entails a base auction and at least three incremental auctions for a specific PJM delivery year, with the incremental auctions spanning three years. The performance obligation to stand ready is satisfied over time and the consideration for which is variable until the occurrence of the final incremental auction, at which point the performance obligation becomes fixed.

Payments from the RTO for stand ready services are typically received within one week from the issuance of the invoice, which is typically issued weekly. Gross margin resulting from generation sales within the Vertically Integrated Utilities segment are primarily subject to margin sharing agreements with customers and vary by state, where the revenues are reflected gross in the disaggregated revenue tables above.

APCo has a performance obligation to supply wholesale electricity to KGPCo through a purchased power agreement. The FERC regulates the cost-based wholesale power transactions between APCo and KGPCo. The purchased power agreement includes a component for the recovery of transmission costs under the FERC OATT. The transmission cost component of purchased power is cost-based and regulated by the Tennessee Regulatory Authority. APCo’s performance obligation under the purchased power agreement is satisfied over time as KGPCo simultaneously receives and consumes the wholesale electricity. APCo’s revenues from the purchased power agreement are presented within the Generation Revenues line in the disaggregated revenue tables above.

Wholesale Revenues - Transmission

AEP’s subsidiaries within the Vertically Integrated Utilities, Transmission and Distribution Utilities and AEP Transmission Holdco segments have performance obligations to transmit electricity to wholesale customers through assets owned and operated by AEP subsidiaries. The performance obligation to provide transmission services in PJM, SPP and ERCOT encompass a time frame greater than a year, where the performance obligation within each RTO is partially fixed for a period of one year or less. Payments from the RTO for transmission services are typically received within one week from the issuance of the invoice, which is issued monthly for SPP and ERCOT and weekly for PJM.

AEP subsidiaries within the PJM and SPP regions collect revenues through transmission formula rates. The FERC-approved rates establish the annual transmission revenue requirement (ATRR) and transmission service rates for transmission owners. The formula rates establish rates for a one year period and also include a true-up calculation for

244



the prior year’s billings, allowing for over/under-recovery of the transmission owner’s ATRR. The annual true-ups meet the definition of alternative revenues in accordance with the accounting guidance for “Regulated Operations,” and are therefore presented as such in the disaggregated revenue tables above. AEP subsidiaries within the ERCOT region collect revenues through a combination of base rates and interim Transmission Costs of Services filings that are approved by the PUCT.

APCo, I&M, KGPCo, KPCo, OPCo and WPCo (AEP East Companies) are parties to the Transmission Agreement (TA), which defines how transmission costs are allocated among the AEP East Companies on a 12-month average coincident peak basis. PSO, SWEPCo and AEPSC are parties to the Transmission Coordination Agreement (TCA) by and among PSO, SWEPCo and AEPSC, in connection with the operation of the transmission assets of the two AEP utility subsidiaries. AEPTCo is a load serving entity within the PJM and SPP regions providing transmission services to affiliates in accordance with the OATT, TA and TCA. Affiliate revenues as a result of the respective TA and the TCA are reflected as Transmission Revenues in the disaggregated revenue tables above.

Marketing, Competitive Retail and Renewable Revenues

AEP’s subsidiaries within the Generation & Marketing segment have performance obligations to deliver electricity to competitive retail and wholesale customers. Performance obligations for marketing, competitive retail and renewable offtake sales are satisfied over time as the customer simultaneously receives and consumes the benefits provided. Revenues are primarily variable as they are subject to customer’s usage requirements; however, certain contracts mandate a delivery of a set quantity of electricity at a predetermined price, resulting in a fixed performance obligation.

Payment terms under marketing arrangements typically follow standard Edison Electric Institute and International Swaps and Derivatives Association terms, which call for payment in 20 days. Payments for competitive retail and offtake arrangements for renewable assets range from 15 to 60 days and are dependent on the product sold, location and the creditworthiness of customer. Invoices for marketing arrangements, competitive retail and offtake arrangements for renewable assets are issued monthly.

Fixed Performance Obligations

The following table represents the Registrants’ remaining fixed performance obligations satisfied over time as of September 30, 2018. Fixed performance obligations primarily include wholesale transmission services, electricity sales for fixed amounts of energy and stand ready services into PJM’s RPM market. The Registrant Subsidiaries amounts shown in the table below include affiliated and nonaffiliated revenues.
Company
 
2018
 
2019-2020
 
2021-2022
 
After 2022
 
Total
 
 
(in millions)
AEP
 
$
246.1

 
$
258.7

 
$
164.8

 
$
349.0

 
$
1,018.6

AEP Texas
 
74.2

 

 

 

 
74.2

AEPTCo
 
166.8

 

 

 

 
166.8

APCo
 
30.7

 
32.9

 
25.5

 
11.6

 
100.7

I&M
 
6.3

 
3.0

 
2.9

 
1.4

 
13.6

OPCo
 
21.5

 
12.4

 

 

 
33.9

PSO
 
4.5

 

 

 

 
4.5

SWEPCo
 
9.1

 

 

 

 
9.1


Contract Assets and Liabilities

Contract assets are recognized when the Registrants have a right to consideration that is conditional upon the occurrence of an event other than the passage of time, such as future performance under a contract. The Registrants did not have any material contract assets as of September 30, 2018.

When the Registrants receive consideration, or such consideration is unconditionally due from a customer prior to transferring goods or services to the customer under the terms of a sales contract, they recognize a contract liability on the balance sheet in the amount of that consideration. Revenue for such consideration is subsequently recognized

245



in the period or periods in which the remaining performance obligations in the contract are satisfied. The Registrants’ contract liabilities typically arise from services provided under joint use agreements for utility poles. The Registrants did not have any material contract liabilities as of September 30, 2018.

Accounts Receivable from Contracts with Customers

Accounts receivable from contracts with customers are presented on the Registrants’ balance sheets within the Accounts Receivable - Customers line item. The Registrants’ balances for receivables from contracts that are not recognized in accordance with the accounting guidance for “Revenue from Contracts with Customers” included in Accounts Receivable - Customers were not material as of September 30, 2018. See “Securitized Accounts Receivable - AEP Credit” section of Note 12 for additional information related to AEP Credit’s securitized accounts receivable.

The following table represents the amount of affiliated accounts receivable from contracts with customers included in Accounts Receivable - Affiliated Companies on the Registrant Subsidiaries’ balance sheets:
Company
 
September 30, 2018
 
January 1, 2018
 
 
(in millions)
AEPTCo
 
$
71.9

 
$
47.1

APCo
 
54.1

 
35.6

I&M
 
24.7

 
15.1

OPCo
 
42.5

 
26.1

PSO
 
17.1

 
6.1

SWEPCo
 
20.3

 
11.0


Contract Costs

Contract costs to obtain or fulfill a contract for AEP subsidiaries within the Generation & Marketing segment are accounted for under the guidance for “Other Assets and Deferred Costs” and presented as a single asset and are neither bifurcated nor reclassified between current and noncurrent assets on the Registrants’ balance sheets. Contract costs to acquire a contract are amortized in a manner consistent with the transfer of goods or services to the customer in Other Operation on the Registrants’ income statements. The Registrants did not have material contract costs as of September 30, 2018.

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CONTROLS AND PROCEDURES

During the third quarter of 2018, management, including the principal executive officer and principal financial officer of each of the Registrants, evaluated the Registrants’ disclosure controls and procedures. Disclosure controls and procedures are defined as controls and other procedures of the Registrants that are designed to ensure that information required to be disclosed by the Registrants in the reports that they file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Registrants in the reports that they file or submit under the Exchange Act is accumulated and communicated to the Registrants’ management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of September 30, 2018, these officers concluded that the disclosure controls and procedures in place are effective and provide reasonable assurance that the disclosure controls and procedures accomplished their objectives.

There was no change in the Registrants’ internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2018 that materially affected, or is reasonably likely to materially affect, the Registrants’ internal control over financial reporting.



247



PART II.  OTHER INFORMATION

Item 1.     Legal Proceedings

For a discussion of material legal proceedings, see “Commitments, Guarantees and Contingencies,” of Note 5 incorporated herein by reference.

Item 1A.  Risk Factors

The Annual Report on Form 10-K for the year ended December 31, 2017 includes a detailed discussion of risk factors.  As of September 30, 2018, the risk factor appearing in the 2017 Annual Report on Form 10-K under the heading set forth below is supplemented and updated as follows:

Certain elements of AEP’s transmission formula rates have been challenged, which could result in lowered rates and/or refunds of amounts previously collected and thus have an adverse effect on AEP’s business, financial condition, results of operations and cash flows. (Applies to all Registrants other than AEP Texas)

AEP provides transmission service under rates regulated by the FERC. The FERC has approved the cost-based formula rate templates used by AEP to calculate its respective annual revenue requirements, but it has not expressly approved the amount of actual capital and operating expenditures to be used in the formula rates. All aspects of AEP’s rates accepted or approved by the FERC, including the formula rate templates, the rates of return on the actual equity portion of its respective capital structures and the approved targeted capital structures, are subject to challenge by interested parties at the FERC, or by the FERC on its own initiative. In addition, interested parties may challenge the annual implementation and calculation by AEP of its projected rates and formula rate true up pursuant to its approved formula rate templates under AEP’s formula rate implementation protocols. If a challenger can establish that any of these aspects are unjust, unreasonable, unduly discriminatory or preferential, then the FERC will make appropriate prospective adjustments to them and/or disallow any of AEP’s inclusion of those aspects in the rate setting formula.

In October 2016, seven parties filed a complaint at the FERC that alleged the base return on common equity used by AEP’s transmission owning subsidiaries within PJM in calculating formula transmission rates under the PJM OATT is excessive and should be reduced from 10.99% to 8.32%, effective upon the date of the complaint.  In November 2017, a FERC order set the matter for hearing and settlement procedures.  In March 2018, AEP’s transmission owning subsidiaries within PJM and six of the complainants filed a settlement agreement with the FERC (the seventh complainant abstained). 

In April 2018, certain intervenors filed comments at the FERC recommending a base ROE of 8.48% and a one-time refund of $184 million. The FERC trial staff filed comments recommending a base ROE of 8.41% and one-time refund of $175 million. Another intervenor recommended the refund be calculated in accordance with the base ROE that will ultimately be approved by the FERC. In May 2018, management filed reply comments providing further support for the 9.85% base ROE agreed to in the settlement agreement. Management believes its financial statements adequately address the impact of the settlement agreement.  If the FERC orders revenue reductions in excess of the terms of the settlement agreement, it could reduce future net income and cash flows and impact financial condition.  A decision from the FERC is pending.

In June 2017, a similar complaint was filed with the FERC claiming that the base ROE used by AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.36%, effective upon the date of the complaint through September 5, 2018. In September 2018, the same parties filed another complaint at the FERC that states the base return on common equity used by AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.71%, effective upon the date of the second complaint. If the FERC orders revenue reductions as a result of the complaint, including refunds from the date of the complaint filing, it could reduce future net income and cash flows and impact financial condition.


248



End-use consumers and entities supplying electricity to end-use consumers may also attempt to influence government and/or regulators to change the rate setting methodologies that apply to AEP, particularly if rates for delivered electricity increase substantially.

OVEC may require additional liquidity and other capital support.  (Applies to AEP, APCo, I&M and OPCo)

AEP and several nonaffiliated utility companies own OVEC. The Inter-Company Power Agreement (ICPA) defines the rights and obligations and sets the power participation ratio of the parties to it.  Under the ICPA, parties are entitled to receive and are obligated to pay for all OVEC capacity (approximately 2,400 MWs) in proportion to their respective power participation ratios. The aggregate power participation ratio of APCo, I&M and OPCo is 43.47%. If a party fails to make payments owed by it under the ICPA, OVEC may not have sufficient funds to honor its payment obligations, including its ongoing operating expenses as well as its indebtedness. As of September 30, 2018, OVEC has outstanding indebtedness of approximately $1.4 billion, of which APCo, I&M, and OPCo are collectively responsible for $611 million through the ICPA. Although they are not an obligor or guarantor, APCo, I&M, and OPCo are responsible for their respective ratio of OVEC’s outstanding debt through the ICPA.

FirstEnergy Solutions, a nonaffiliated party, whose aggregate power participation ratio is 4.85% under the ICPA, has filed a petition seeking protection under bankruptcy law.  Bankruptcy filings typically trigger review of the petitioner’s contractual obligations, including, in this instance, the ICPA.  Because the ICPA is subject to FERC approval and jurisdiction, prior to the bankruptcy petition OVEC made a filing at FERC seeking, among other objectives, to confirm FERC’s jurisdiction.  Litigation related to these filings continues.  In addition, as a result of these and prior related developments, OVEC’s credit ratings have been impacted.

If OVEC does not have sufficient funds to honor its payment obligations, there is risk that APCo, I&M and/or OPCo may need to make payments in addition to their power participation ratio payments.  Further, if OVEC’s indebtedness is accelerated for any reason, there is risk that APCo, I&M and/or OPCo may be required to pay some or all of such accelerated indebtedness in amounts equal to their aggregate power participation ratio of 43.47%.  Also, as a result of the credit rating agencies’ actions, OVEC’s ability to access capital markets on terms as favorable as previously may diminish and its financing costs will increase.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Mine Safety Disclosures

The Federal Mine Safety and Health Act of 1977 (Mine Act) imposes stringent health and safety standards on various mining operations. The Mine Act and its related regulations affect numerous aspects of mining operations, including training of mine personnel, mining procedures, equipment used in mine emergency procedures, mine plans and other matters. SWEPCo, through its ownership of DHLC, a wholly-owned lignite mining subsidiary of SWEPCo, is subject to the provisions of the Mine Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires companies that operate mines to include in their periodic reports filed with the SEC, certain mine safety information covered by the Mine Act. Exhibit 95 “Mine Safety Disclosure Exhibit” contains the notices of violation and proposed assessments received by DHLC under the Mine Act for the quarter ended September 30, 2018.


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Item 5.  Other Information

None

Item 6.  Exhibits

The exhibits designated with an (X) in the table below are being filed on behalf of the Registrants.
Exhibit
 
Description
 
AEP
 
AEP
Texas
 
AEPTCo
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
4
 
First Amendment to Fourth Amended and Restated Credit Agreement dated June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
 
Aircraft Time Sharing Agreement dated September 17, 2018 between American Electric Power Service Corporation and Mr. Akins
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
 
Computation of Consolidated Ratio of Earnings to Fixed Charges
 
 
 
 
 
 
 
 
31(a)
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
31(b)
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
32(a)
 
Certification of Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
 
 
 
 
 
 
 
 
32(b)
 
Certification of Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
 
 
 
 
 
 
 
 
95
 
Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
X
 
X
 
X
 
X
 
X
 
X
 
X
 
X
101.SCH
 
XBRL Taxonomy Extension Schema
 
X
 
X
 
X
 
X
 
X
 
X
 
X
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
X
 
X
 
X
 
X
 
X
 
X
 
X
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
X
 
X
 
X
 
X
 
X
 
X
 
X
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
X
 
X
 
X
 
X
 
X
 
X
 
X
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
X
 
X
 
X
 
X
 
X
 
X
 
X
 
X


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SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  The signature for each undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.


AMERICAN ELECTRIC POWER COMPANY, INC.



By: /s/ Joseph M. Buonaiuto
Joseph M. Buonaiuto
Controller and Chief Accounting Officer



AEP TEXAS INC.
AEP TRANSMISSION COMPANY, LLC
APPALACHIAN POWER COMPANY
INDIANA MICHIGAN POWER COMPANY
OHIO POWER COMPANY
PUBLIC SERVICE COMPANY OF OKLAHOMA
SOUTHWESTERN ELECTRIC POWER COMPANY



By: /s/ Joseph M. Buonaiuto
Joseph M. Buonaiuto
Controller and Chief Accounting Officer



Date:  October 25, 2018

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