AEP 10Q 2015 1Q


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 March 31, 2015
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
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 and posted on their corporate websites, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
X
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
Indicate by check mark whether 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 or smaller reporting companies.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
X
 
Smaller reporting company
 
 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
 
 
 
 
 
 
Yes
 
 
No
X
 
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
 
April 23, 2015
 
 
American Electric Power Company, Inc.
489,941,950

 
($6.50 par value)

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)





AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
INDEX OF QUARTERLY REPORTS ON FORM 10-Q
March 31, 2015
 
 
 
 
 
 
 
 
 
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
 
Index of Condensed Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
Appalachian Power Company and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries
 
 
 
 
 
Indiana Michigan Power Company and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries
 
 
 
 
 
Ohio Power Company and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries
 
 
 
 
 
Public Service Company of Oklahoma:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Financial Statements
 
Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries
 
 
 
 
 
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 Registrant Subsidiaries
 
 
 
 
 
Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries
 
 
 
 
 
Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries
 
 
 
 
 
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 4.
  Mine Safety Disclosures
 
Item 5.
  Other Information
 
Item 6.
  Exhibits:
 
 
 
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., 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 or Parent
 
American Electric Power Company, Inc., an electric utility holding company.
AEP Consolidated
 
AEP and its 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 Energy
 
AEP Energy, Inc., a wholly-owned retail electric supplier for customers in Ohio, Illinois and other deregulated electricity markets throughout the United States.
AEP System
 
American Electric Power System, an electric system, owned and operated by AEP subsidiaries.
AEP Transmission Holdco
 
AEP Transmission Holding Company, LLC, a wholly-owned subsidiary of AEP.
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 and an intermediate holding company that owns seven wholly-owned transmission companies.
AGR
 
AEP Generation Resources Inc., a nonregulated AEP subsidiary in the Generation & Marketing segment.
AFUDC
 
Allowance for Funds Used During Construction.
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.
ASU
 
Accounting Standards Update.
CAA
 
Clean Air Act.
CLECO
 
Central Louisiana Electric Company, a nonaffiliated utility company.
CO2
 
Carbon dioxide and other greenhouse gases.
Cook Plant
 
Donald C. Cook Nuclear Plant, a two-unit, 2,191 MW nuclear plant owned by I&M.
CRES provider
 
Competitive Retail Electric Service providers under Ohio law that target retail customers by offering alternative generation service.
CWIP
 
Construction Work in Progress.
DCC Fuel
 
DCC Fuel IV LLC, DCC Fuel V LLC and DCC Fuel VI LLC, consolidated variable interest entities formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.
DHLC
 
Dolet Hills Lignite Company, LLC, a wholly-owned lignite mining subsidiary of SWEPCo.
EIS
 
Energy Insurance Services, Inc., a nonaffiliated captive insurance company and consolidated variable interest entity of AEP.
ENEC
 
Expanded Net Energy Charge.
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.

i



Term
 
Meaning
 
 
 
ETT
 
Electric Transmission Texas, LLC, an equity interest joint venture between AEP and Berkshire Hathaway Energy Company formed to own and operate electric transmission facilities in ERCOT.
FAC
 
Fuel Adjustment Clause.
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.
I&M
 
Indiana Michigan Power Company, an AEP electric utility subsidiary.
IEU
 
Industrial Energy Users-Ohio.
IGCC
 
Integrated Gasification Combined Cycle, technology that turns coal into a cleaner-burning gas.
Interconnection Agreement
 
An agreement by and among APCo, I&M, KPCo and OPCo, which defined the sharing of costs and benefits associated with their respective generation plants. This agreement was terminated January 1, 2014.
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.
KWh
 
Kilowatthour.
LPSC
 
Louisiana Public Service Commission.
MISO
 
Midwest Independent Transmission System Operator.
MMBtu
 
Million British Thermal Units.
MPSC
 
Michigan Public Service Commission.
MTM
 
Mark-to-Market.
MW
 
Megawatt.
MWh
 
Megawatthour.
NOx
 
Nitrogen oxide.
Nonutility Money Pool
 
Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain nonutility subsidiaries.
NSR
 
New Source Review.
OCC
 
Corporation Commission of the State of Oklahoma.
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.
OPCo
 
Ohio Power Company, an AEP electric utility subsidiary.
OPEB
 
Other Postretirement Benefit Plans.
OTC
 
Over the counter.
OVEC
 
Ohio Valley Electric Corporation, which is 43.47% owned by AEP.
PIRR
 
Phase-In Recovery Rider.
PJM
 
Pennsylvania – New Jersey – Maryland regional transmission organization.
PM
 
Particulate Matter.
PSO
 
Public Service Company of Oklahoma, an AEP electric utility subsidiary.
PUCO
 
Public Utilities Commission of Ohio.
PUCT
 
Public Utility Commission of Texas.
Registrant Subsidiaries
 
AEP subsidiaries which are SEC registrants; 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.

ii



Term
 
Meaning
 
 
 
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.
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.
SEC
 
U.S. Securities and Exchange Commission.
SEET
 
Significantly Excessive Earnings Test.
SIA
 
System Integration Agreement, effective June 15, 2000, as amended, provides contractual basis for coordinated planning, operation and maintenance of the power supply sources of the combined AEP.
SNF
 
Spent Nuclear Fuel.
SO2
 
Sulfur dioxide.
SPP
 
Southwest Power Pool regional transmission organization.
SSO
 
Standard service offer.
Stall Unit
 
J. Lamar Stall Unit at Arsenal Hill Plant, a 534 MW natural gas unit owned by SWEPCo.
SWEPCo
 
Southwestern Electric Power Company, an AEP electric utility subsidiary.
TCC
 
AEP Texas Central Company, an AEP electric utility subsidiary.
Texas Restructuring Legislation
 
Legislation enacted in 1999 to restructure the electric utility industry in Texas.
TNC
 
AEP Texas North Company, an AEP electric utility subsidiary.
Transition Funding
 
AEP Texas Central Transition Funding I LLC, 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.
Transource Missouri
 
A 100% wholly-owned subsidiary of Transource Energy.
Turk Plant
 
John W. Turk, Jr. Plant, a 600 MW coal-fired plant in Arkansas that is 73% owned by SWEPCo.
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.
WPCo
 
Wheeling Power Company, an AEP electric utility subsidiary.
WVPSC
 
Public Service Commission of West Virginia.
 

iii



FORWARD-LOOKING INFORMATION

This report made by AEP and its Registrant Subsidiaries contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  Many forward-looking statements appear in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2014 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, we undertake 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
The economic climate, growth or contraction within and changes in market demand and demographic patterns in our service territory.
Ÿ
Inflationary or deflationary interest rate trends.
Ÿ
Volatility in the financial markets, particularly developments affecting the availability of capital on reasonable terms and developments impairing our ability to finance new capital projects and refinance existing debt at attractive rates.
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, customer growth and the impact of competition, including competition for retail customers.
Ÿ
Weather conditions, including storms and drought conditions, and our ability to recover significant storm restoration costs.
Ÿ
Available sources and costs of, and transportation for, fuels and the creditworthiness and performance of fuel suppliers and transporters.
Ÿ
Availability of necessary generation capacity and the performance of our generation plants.
Ÿ
Our ability to recover increases in fuel and other energy costs through regulated or competitive electric rates.
Ÿ
Our ability to build or acquire generation capacity and transmission lines and facilities (including our 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 or additional regulation of fly ash and similar combustion products that could impact the continued operation, cost recovery and/or profitability of our 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
A reduction in the federal statutory tax rate could result in an accelerated return of deferred federal income taxes to customers.
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 and environmental compliance.
Ÿ
Resolution of litigation.
Ÿ
Our ability to constrain operation and maintenance costs.
Ÿ
Our ability to develop and execute a strategy based on a view regarding prices of electricity and other energy-related commodities.
Ÿ
Prices and demand for power that we generate and sell at wholesale.
Ÿ
Changes in technology, particularly with respect to new, developing, alternative or distributed sources of generation.
Ÿ
Our ability to recover through rates or market prices 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 and capacity auction returns.
Ÿ
Changes in utility regulation and the allocation of costs within regional transmission organizations, including ERCOT, PJM and SPP.

iv



Ÿ
The transition to market for generation in Ohio, including the implementation of ESPs and our ability to recover investments in our Ohio generation assets.
Ÿ
Our ability to successfully and profitably manage our separate competitive generation assets.
Ÿ
Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading market.
Ÿ
Actions of rating agencies, including changes in the ratings of our debt.
Ÿ
The impact of volatility in the capital markets on the value of the investments held by our pension, other postretirement benefit plans, captive insurance entity and nuclear decommissioning trust and the impact of such volatility on future funding requirements.
Ÿ
Accounting pronouncements periodically issued by accounting standard-setting bodies.
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 AEP and its Registrant Subsidiaries speak only as of the date of this report or as of the date they are made.  AEP and its Registrant Subsidiaries 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 2014 Annual Report and in Part II of this report.



v





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


EXECUTIVE OVERVIEW

Customer Demand

Our weather-normalized retail sales volumes for the first quarter of 2015 decreased by 1.3% from the first quarter of 2014. Our first quarter 2015 industrial sales increased 1.2% compared to the first quarter of 2014 primarily due to increased sales to customers in oil and gas related sectors. Residential and commercial sales decreased 4% and 0.4% in the first quarter of 2015, respectively, from the first quarter of 2014.
Merchant Fleet Alternatives

AEP is evaluating strategic alternatives for its merchant generation fleet, which primarily includes AGR’s generation fleet and AEG's Lawrenceburg unit which operates in PJM as well as a purchased power agreement related to a 54.7% interest in the Oklaunion Plant which operates in ERCOT.  Potential alternatives may include, but are not limited to, continued ownership of the merchant generation fleet, executing a purchased power agreement with a regulated affiliate for certain merchant generation units in Ohio, a spin-off of the merchant generation fleet or a sale of the merchant generation fleet.  We have not made a decision regarding the potential alternatives, nor have we set a specific time frame for a decision.  Certain of these alternatives could result in a loss which could reduce future net income and cash flow and impact financial condition.

AEP River Operations Alternatives
AEP is evaluating strategic alternatives for its non-regulated AEP River Operations segment, which primarily includes commercial barging operations that transport liquids, coal and dry bulk commodities primarily on the Ohio, Illinois and lower Mississippi rivers.  Potential alternatives may include, but are not limited to, continued ownership or a sale of the river operations.  We have not made a decision regarding the potential alternatives, nor have we set a specific time frame for a decision.  We do not expect to incur a loss related to a potential sale transaction.
Merchant Portion of Turk Plant

SWEPCo constructed the Turk Plant, a new base load 600 MW pulverized coal ultra-supercritical generating unit in Arkansas, which was placed into service in December 2012. SWEPCo owns 73% (440 MW) 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.

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.


1



Ohio Electric Security Plan Filings

2009 - 2011 ESP

In August 2012, the PUCO issued an order in a separate proceeding which implemented a PIRR to recover OPCo’s deferred fuel costs in rates beginning September 2012. Oral arguments at the Supreme Court of Ohio were held in February 2015. OPCo presented arguments to reinstate a weighted average cost of capital carrying charge and to defend against an intervenor argument that the carrying charges should be reduced due to an accumulated deferred income tax credit.

June 2012 - May 2015 Ohio ESP Including Capacity Charge

In August 2012, the PUCO issued an order which adopted and modified a new ESP that established base generation rates through May 2015. This ruling was generally upheld in PUCO rehearing orders in January and March 2013.

In July 2012, the PUCO issued an order in a separate capacity proceeding which stated that OPCo must charge CRES providers the RPM price and authorized OPCo to defer a portion of its incurred capacity costs not recovered from CRES providers up to $188.88/MW day. The OPCo RPM price collected from CRES providers, which includes reserve margins, was approximately $34/MW day through May 2014 and is $150/MW day from June 2014 through May 2015. In December 2012, various parties filed notices of appeal of the capacity costs decision with the Supreme Court of Ohio.

As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012. The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs. In April and May 2013, OPCo and various intervenors filed appeals with the Supreme Court of Ohio challenging portions of the PUCO’s ESP order, including the RSR. In July 2014, OPCo submitted a separate application to continue the RSR to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh, until the balance of the capacity deferrals has been collected. In April 2015, the PUCO issued an order approving the application to continue the RSR, with modifications. As of March 31, 2015, OPCo’s incurred deferred capacity costs balance was $434 million, including debt carrying costs.
 
In November 2013, the PUCO issued an order approving OPCo’s competitive bid process with modifications. As ordered, in 2014, OPCo conducted multiple energy-only auctions for a total of 100% of the SSO load with delivery beginning April 2014 through May 2015. For delivery starting in June 2015, OPCo will conduct energy and capacity auctions for its entire SSO load. The PUCO also approved the unbundling of the FAC into fixed and energy-related components and an intervenor proposal to blend the $188.88/MW day capacity price in proportion to the percentage of energy planned to be auctioned. Additionally, the PUCO ordered that intervenor concerns related to the recovery of the fixed fuel costs through potentially both the FAC and the approved capacity charges be addressed in subsequent FAC proceedings. Management believes that these intervenor concerns are without merit.

In January 2014, the PUCO denied all rehearing requests and agreed to issue a supplemental request for an independent auditor in the 2012 - 2013 FAC proceeding to separately examine the recovery of the fixed fuel costs, including OVEC. In March 2014, the PUCO approved OPCo’s request to implement riders related to the unbundling of the FAC. In October 2014, the independent auditor, selected by the PUCO, filed its report for the period August 2012 through May 2015 with the PUCO. If the PUCO ultimately concludes that a portion of the fixed fuel costs are also recovered through OPCo's $188.88 capacity charge, the independent auditor recommends a methodology for calculating a refund of a portion of certain fixed fuel costs. The retail share of these fixed fuel costs is approximately $90 million annually. A hearing related to this matter has not been scheduled. Management believes that no over-recovery of costs has occurred and intends to oppose the findings in the audit report.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition.


2



June 2015 - May 2018 ESP

In December 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 effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement.

In October 2014, OPCo filed a separate application with the PUCO to propose a new extended PPA for inclusion in the PPA rider, discussed above. The new PPA would include an additional 2,671 MW to be purchased from AGR over the life of the respective generating units.

In February 2015, the PUCO issued an order approving OPCo's ESP application, subject to certain modifications, with a return on common equity of 10.2% on capital costs for certain riders. The order included (a) approval of the Distribution Investment Rider with modified rate caps established by the PUCO, (b) authorization to establish a zero rate rider for OPCo's proposed PPA, (c) the option for OPCo to reapply in a future proceeding with a more detailed PPA proposal and (d) a directive to continue to pursue the transfer of the OVEC contractual entitlement to AGR or to otherwise divest of its interest in OVEC. In April 2015, the PUCO issued an order that granted applications for rehearing for further consideration filed by OPCo and various intervenors.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition. See “Ohio Electric Security Plan Filings” section of Note 4.

2012 Texas Base Rate Case

Upon rehearing in January 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, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances.  The resulting annual base rate increase is approximately $52 million.  In May 2014, intervenors filed appeals of the order with the Texas District Court.  In June 2014, SWEPCo intervened in those appeals and filed initial responses.  If certain parts of the PUCT order are overturned it could reduce future net income and cash flows and impact financial condition. See the “2012 Texas Base Rate Case” section of Note 4.

2012 Louisiana Formula Rate Filing

In 2012, SWEPCo initiated a proceeding to establish new formula base rates in Louisiana, including recovery of the Louisiana jurisdictional share of the Turk Plant. In February 2013, a settlement was approved by the LPSC that increased SWEPCo's Louisiana total rates by approximately $2 million annually, effective March 2013. The March 2013 base rates are based upon a 10% return on common equity and cost recovery of the Louisiana jurisdictional share of the Turk Plant and Stall Unit, subject to refund. The settlement also provided that the LPSC will review base rates in 2014 and 2015 and that SWEPCo will recover non-fuel Turk Plant costs and a full weighted-average cost of capital return on the prudently incurred Turk Plant investment in jurisdictional rate base, effective January 2013. In December 2014, the LPSC approved a settlement agreement related to the staff review of the cost of service. The settlement agreement reduced the requested revenue increase by $3 million, primarily due to the timing of both the allowed recovery of certain existing regulatory assets and the establishment of a regulatory asset for certain previously expensed costs. See the “2012 Louisiana Formula Rate Filing” section of Note 4.


3



2014 Oklahoma Base Rate Case

In January 2014, PSO filed a request with the OCC to increase annual base rates by $38 million, based upon a 10.5% return on common equity. This revenue increase included a proposed increase in depreciation rates of $29 million. In addition, the filing proposed recovery of advanced metering costs through a separate rider over a three-year deployment period requesting $7 million of revenues in year one, increasing to $28 million in year three. The filing also proposed expansion of an existing transmission rider currently recovered in base rates to include additional transmission-related costs that are expected to increase over the next several years.

In June 2014, a non-unanimous stipulation agreement between PSO, the OCC staff and certain intervenors was filed with the OCC. The parties to the stipulation recommended no overall change to the transmission rider or to annual revenues, other than additional revenues through a separate rider related to advanced metering costs, and that the terms of the stipulation be effective November 2014. The advanced metering rider would provide $24 million of revenues over 14 months beginning in November 2014 and increase to $27 million in 2016. New depreciation rates are recommended for advanced metering investments and existing meters, also to be effective November 2014. Additionally, the stipulation recommends recovery of regulatory assets for 2013 storms and regulatory case expenses. In July 2014, the Attorney General joined in the stipulation agreement. In April 2015, the OCC issued an order that approved the stipulation agreement. See the “2014 Oklahoma Base Rate Case” section of Note 4.

2014 West Virginia Base Rate Case

In June 2014, APCo and WPCo filed a request with the WVPSC to increase annual base rates by $181 million, based upon a 10.62% return on common equity, to be effective in the second quarter of 2015.  The filing included a request to increase generation depreciation rates primarily due to the increase in plant investment and changes in the expected service lives of various generating units.  The filing also requested recovery of $89 million in regulatory assets over five years related to 2012 West Virginia storm costs, IGCC and other deferred costs.  The filing also included a request to implement a rider of approximately $45 million annually to recover vegetation management costs, including a return on capital investment.  In December 2014 and January 2015, intervenors filed testimony which proposed total annual revenue increases ranging from $35 million to $59 million based upon returns on common equity ranging from 9% to 10% and regulatory asset disallowances ranging from $7 million to $9 million.  Additionally, other intervenors proposed that the revenue requirement be based on a return on common equity of 8.7% and that $89 million of regulatory assets be disallowed.  Intervenors also recommended a disallowance of approximately $44 million related to the December 2013 transfer of OPCo's two-thirds interest in the Amos Plant, Unit 3 to APCo.  Hearings at the WVPSC were held in January 2015.  An order is anticipated in the second quarter of 2015. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. See the “2014 West Virginia Base Rate Case” section of Note 4.

New Virginia Legislation Affecting Biennial Reviews

In February 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 are frozen until after the Virginia SCC rules on APCo’s next biennial review, which APCo will file in March 2020 for the 2018 and 2019 test years. These amendments also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. APCo's financial statements adequately address the impact of these amendments. During the years 2014 through 2017, the new law provides that APCo will absorb incremental generation and distribution costs associated with severe weather events and/or natural disasters and costs associated with potential impairments related to new carbon emission guidelines issued by the Federal EPA.
  

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Kentucky Fuel Adjustment Clause Review

In August 2014, the KPSC issued an order initiating a review of KPCo's FAC from November 2013 through April 2014. In January 2015, the KPSC issued an order disallowing certain FAC costs during the period of January 2014 through May 2015 while KPCo owns and operates both Big Sandy Plant, Unit 2 and its one-half interest in the Mitchell Plant. As a result of this order, KPCo recorded a regulatory disallowance of $36 million in December 2014. In February 2015, KPCo filed an appeal of this order with the Franklin County Circuit Court. In April 2015, the Franklin County Circuit Court issued an order approving intervenors request to hold this case in abeyance until the KPSC issues a final order in KPCo’s two-year FAC review case for the period November 1, 2012 through October 31, 2014. See the “Kentucky Fuel Adjustment Clause Review” section of Note 4.

2014 Kentucky Base Rate Case

In December 2014, KPCo filed a request with the KPSC for a net increase in rates of $70 million, which consists of a $75 million increase in rider rates, offset by a $5 million decrease in annual base rates, to be effective July 2015 based upon a 10.62% return on common equity.  In March 2015, intervenors filed testimony which recommended net increases in rates ranging from $20 million to $26 million.  These increases consist of proposed increases in rider rates ranging from $55 million to $63 million, offset by decreases in annual base rates ranging from $35 million to $37 million and based upon returns on common equity ranging from 8.65% to 8.75%.  Hearings at the KPSC are scheduled for May 2015.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. See the “2014 Kentucky Base Rate Case” section of Note 4.

PJM Capacity Market

AGR is required to offer all of its available generation capacity in the PJM RPM auction, which is conducted three years in advance of the actual delivery year.

Through May 2015, AGR will provide generation capacity to OPCo for both switched and non-switched OPCo generation customers.  For switched customers, OPCo pays AGR $188.88/MW day for capacity.  For non-switched OPCo generation customers, OPCo pays AGR its blended tariff rate for capacity consisting of $188.88/MW day for auctioned load and the non-fuel generation portion of its base rate for non-auctioned load.  AGR’s excess capacity is subject to the PJM RPM auction. After May 2015, AGR's generation assets will be subject to PJM capacity prices.  Shown below are the current auction prices for capacity, as announced/settled by PJM:
 
 
PJM Base
PJM Auction Period
 
Auction Price
 
 
(per MW day)
June 2013 through May 2014
 
$
27.73

June 2014 through May 2015
 
125.99

June 2015 through May 2016
 
136.00

June 2016 through May 2017
 
59.37

June 2017 through May 2018
 
120.00


We expect a significant decline in AGR capacity revenues after May 2015 when the Power Supply Agreement between AGR and OPCo ends. We expect a further decline in AGR capacity revenues from June 2016 through May 2017 based upon the decrease in the PJM base auction price.

In conjunction with other utility companies, we continue to address mutual concerns related to the PJM capacity auction process. Through this advocacy effort, the FERC has accepted PJM recommendations including: (a) assuring that capacity imports have firm transmission and can be readily dispatched by PJM, (b) placing limits on the number of MWs of summer-only demand response to assure more year-round reliability, (c) modification and enforcement of the dispatch of demand response to better reflect real-time capacity requirements, and (d) redesigning the auction demand curve so that it is less steep, all which should have the impact of reducing capacity price volatility beginning in the June 2018 time period.

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In December 2014, PJM filed with FERC for approval of a new type of capacity product, the Capacity Performance Product (CP). The intent of the filing is to raise the level of capacity performance and reliability during emergency events by: (a) assessing higher penalties for non-performance during these events, (b) allowing higher price offers into the auction and (c) requiring generating units to provide fuel and operational assurances that they can perform reliably during emergency events.

In this same filing, PJM proposed with FERC supplemental capacity auctions for the June 2016 through May 2017 and June 2017 through May 2018 auction periods. These supplemental auctions would address capacity performance and reliability issues in these interim years, and if accepted, would allow AGR to re-offer at least part of the capacity already cleared for these years at a higher price.

On March 31, 2015, FERC issued a deficiency letter to PJM regarding their capacity performance filing.  FERC directed PJM to respond within 30 days.

Due to the FERC deficiency letter, PJM filed a waiver request at FERC seeking authority to delay the June 2018 through May 2019 base residual auction, scheduled for May 2015, until FERC issues an order on the merits in the CP docket. PJM requested FERC to rule on its request by April 24, 2015. Absent a ruling, PJM will withdraw its previously filed CP proposal and hold the May auction under its current tariff. If this occurs, the June 2016 through May 2017 and June 2017 through May 2018 supplemental capacity auctions will not be held.

On April 10, 2015, PJM filed a response to the FERC deficiency letter. PJM proposed certain changes to the auction bidding process developed in conjunction with the PJM Market Monitor. The impact of these revisions to the auction clearing price cannot be estimated at this time. Although PJM did not ask for a specific response date from FERC, they reiterated their arguments in the waiver filing, asking FERC for minimal delays in issuing an order.

AEP, our coalition partners and the PJM supplier group made joint filings in support of the PJM proposal to delay the June 2018 through May 2019 base residual auction as well as PJM’s request that FERC rule on the CP docket without undue delay.  Additionally, we plan to provide comments on PJM's deficiency letter response by the April 24, 2015 deadline set by FERC.

Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC. Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC. As of March 31, 2015, SWEPCo has incurred costs of $211 million and has remaining contractual construction obligations of $84 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. See "Climate Change, CO2 Regulation and Energy Policy" section of “Environmental Issues” below.  As of March 31, 2015, the net book value of Welsh Plant, Units 1 and 3 was $431 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. 

LITIGATION

In the ordinary course of business, we are involved in employment, commercial, environmental and regulatory litigation. Since it is difficult to predict the outcome of these proceedings, we cannot predict the eventual resolution, timing or amount of any loss, fine or penalty. We assess the probability of loss for each contingency and accrue a liability for cases that have a probable likelihood of loss if the loss can be estimated. For details on our regulatory proceedings and pending litigation see Note 4 - Rate Matters, Note 6 - Commitments, Guarantees and Contingencies and the “Litigation” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2014 Annual Report. Additionally, see Note 4 - Rate Matters and Note 5 - Commitments, Guarantees and Contingencies included herein. Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

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Rockport Plant Litigation

In July 2013, the Wilmington Trust Company filed a complaint in U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will 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 plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement. The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff. The New York court granted our motion to transfer this case to the U.S. District Court for the Southern District of Ohio. In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.  We will continue to defend against the remaining claims. We are unable to determine a range of potential losses that are reasonably possible of occurring.

ENVIRONMENTAL ISSUES

We are implementing a substantial capital investment program and incurring additional operational costs to comply with environmental control requirements. We will need to make additional investments and operational changes in response to existing and anticipated requirements such as CAA requirements to reduce emissions of SO2, NOx, PM and hazardous air pollutants (HAPs) from fossil fuel-fired power plants, proposals governing the beneficial use and disposal of coal combustion products, proposed clean water rules and renewal permits for certain water discharges that are currently under appeal.

We are engaged in litigation about environmental issues, have been notified of potential responsibility for the clean-up of contaminated sites and incur costs for disposal of SNF and future decommissioning of our nuclear units. We, along with various industry groups, affected states and other parties have challenged some of the Federal EPA requirements in court. We are also engaged in the development of possible future requirements including the items discussed below and reductions of CO2 emissions to address concerns about global climate change. We believe that further analysis and better coordination of these environmental requirements would facilitate planning and lower overall compliance costs while achieving the same environmental goals.

See a complete discussion of these matters in the “Environmental Issues” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2014 Annual Report. We 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 we are 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 in the next several sections will have a material impact on the generating units in the AEP System. We continue to evaluate the impact of these rules, project scope and technology available to achieve compliance. As of March 31, 2015, the AEP System had a total generating capacity of 37,600 MWs, of which 23,700 MWs are coal-fired. We continue to refine the cost estimates of complying with these rules and other impacts of the environmental proposals on our generating facilities. Based upon our estimates, investment to meet these requirements ranges from approximately $2.8 billion to $3.3 billion through 2020. These amounts include investments to convert some of our coal generation to natural gas. If natural gas conversion is not completed, the units could be retired sooner than planned.


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The cost estimates will change depending on the timing of implementation and whether the Federal EPA provides flexibility in the final rules. 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 our 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 and (g) other factors. In addition, we are continuing to evaluate the economic feasibility of environmental investments on both regulated and nonregulated plants.

Subject to the factors listed above and based upon our continuing evaluation, we intend to retire the following plants or units of plants before or during 2016:
 
 
 
 
Expected
 
Generating
Company
 
Plant Name and Unit
 
Retirement Date
 
Capacity
 
 
 
 
 
 
(in MWs) 
AGR
 
Kammer Plant
 
Second quarter of 2015
 
630

AGR
 
Muskingum River Plant
 
Second quarter of 2015
 
1,440

AGR
 
Picway Plant
 
Second quarter of 2015
 
100

APCo
 
Clinch River Plant, Unit 3
 
Second quarter of 2015
 
235

APCo
 
Glen Lyn Plant
 
Second quarter of 2015
 
335

APCo
 
Kanawha River Plant
 
Second quarter of 2015
 
400

APCo/AGR
 
Sporn Plant
 
Second quarter of 2015
 
600

I&M
 
Tanners Creek Plant
 
Second quarter of 2015
 
995

KPCo
 
Big Sandy Plant, Unit 2
 
Second quarter of 2015
 
800

PSO
 
Northeastern Station, Unit 4
 
2016
 
470

SWEPCo
 
Welsh Plant, Unit 2
 
2016
 
528

Total
 
 
 
 
 
6,533


As of March 31, 2015, the net book value of the AGR units listed above was zero. The net book value before cost of removal, including related material and supplies inventory and CWIP balances, of the regulated plants in the table above was $965 million.

In addition, we are in the process of obtaining permits following the KPSC's approval for the conversion of KPCo's 278 MW Big Sandy Plant, Unit 1 to natural gas.  As of March 31, 2015, the net book value before cost of removal, including related material and supplies inventory and CWIP balances, of Big Sandy Plant, Unit 1 was $109 million.

Volatility in fuel prices, pending environmental rules and other market factors could also have an adverse impact on the accounting evaluation of the recoverability of the net book values of coal-fired units. For regulated plants that we may close early, we are seeking regulatory recovery of remaining net book values. To the extent existing generation assets and the cost of new equipment and converted facilities are not recoverable, it could materially reduce future net income and cash flows and impact financial condition.

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.


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The Federal EPA issued the Clean Air Interstate Rule (CAIR) in 2005 requiring specific reductions in SO2 and NOx emissions from power plants.  The Federal EPA issued the Cross-State Air Pollution Rule (CSAPR) in August 2011 to replace CAIR.  The CSAPR was challenged in the courts.  In 2012, a panel of the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating and remanding CSAPR to the Federal EPA with instructions to continue implementing CAIR until a replacement rule is finalized.  That decision was appealed to the U.S. Supreme Court, which reversed the decision and remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit.  All of the states in which our power plants are located are covered by CSAPR. See "Cross-State Air Pollution Rule (CSAPR)" section below.

The Federal EPA issued the final maximum achievable control technology (MACT) standards for coal and oil-fired power plants in 2012. See “Mercury and Other Hazardous Air Pollutants (HAPs) Regulation” section below.

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) to 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 or, if SIPs are not adequate or are not developed on schedule, through FIPs.  The Federal EPA proposed disapproval of SIPs in a few states, including Arkansas.  In March 2012, the Federal EPA disapproved certain portions of the Arkansas regional haze SIP. 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 are consistent with the environmental controls currently under construction. 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.  This rule is being challenged in the U.S. Court of Appeals for the District of Columbia Circuit.

In 2009, the Federal EPA issued a final mandatory reporting rule for CO2 and other greenhouse gases covering a broad range of facilities emitting in excess of 25,000 tons of CO2 emissions per year.   The Federal EPA issued a final endangerment finding for greenhouse gas emissions from new motor vehicles in 2009.  The Federal EPA determined that greenhouse gas emissions from stationary sources will be subject to regulation under the CAA beginning January 2011 and finalized its proposed scheme to streamline and phase-in regulation of stationary source CO2 emissions through the NSR prevention of significant deterioration and Title V operating permit programs through the issuance of final federal rules, SIP calls and FIPs.  This rule was overturned by the U.S. Supreme Court. The Federal EPA has proposed to include CO2 emissions in standards that apply to new and existing electric utility units. See "Climate Change, CO2 Regulation and Energy Policy" section below.

The Federal EPA has also issued new, more stringent national ambient air quality standards (NAAQS) for PM, SO2 and is currently reviewing the NAAQS for ozone. States are in the process of evaluating the attainment status and need for additional control measures in order to attain and maintain the new NAAQS and may develop additional requirements for our facilities as a result of those evaluations. We cannot currently predict the nature, stringency or timing of those requirements.

Notable developments in significant CAA regulatory requirements affecting our operations are discussed in the following sections.


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Cross-State Air Pollution Rule (CSAPR)

In 2011, the Federal EPA issued CSAPR.  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 in 28 states.  Interstate trading of allowances is allowed on a restricted sub-regional basis.  Arkansas and Louisiana are subject only to the seasonal NOx program in the rule.  Texas is subject to the annual programs for SO2 and NOx in addition to the seasonal NOx program.  The annual SO2 allowance budgets in Indiana, Ohio and West Virginia were reduced significantly in the rule.  A supplemental rule includes Oklahoma in the seasonal NOx program.  The supplemental rule was finalized in December 2011 with an increased NOx emission budget for the 2012 compliance year.  The Federal EPA issued a final Error Corrections Rule and further CSAPR revisions in 2012 to make corrections to state budgets and unit allocations and to remove the restrictions on interstate trading in the first phase of CSAPR.

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.  In 2012, the court issued a decision vacating and remanding CSAPR to the Federal EPA with instructions to continue implementing the CAIR until a replacement rule is finalized.  The majority determined that the CAA does not allow the Federal EPA to “overcontrol” emissions in an upwind state and that the Federal EPA exceeded its statutory authority by failing to allow states an opportunity to develop their own implementation plans before issuing a FIP.  The petition for review filed by the Federal EPA and other parties in the U.S. Supreme Court was granted in June 2013. In April 2014, the U.S. Supreme Court issued a decision reversing in part the decision of the U.S. Court of Appeals for the District of Columbia Circuit and remanding the case for further proceedings consistent with the opinion. The Federal EPA filed a motion to lift the stay and allow Phase I of CSAPR to take effect on January 1, 2015 and Phase II to take effect on January 1, 2017. The court granted the Federal EPA's motion. The parties have filed briefs, presented oral arguments and the case remains pending. Separate appeals of the Error Corrections Rule and the further revisions have been filed but no briefing schedules have been established. We cannot predict the outcome of the pending litigation.

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 establishes unit-specific emission rates for mercury, PM (as a surrogate for particles of nonmercury metals) and hydrogen chloride (as a surrogate for acid gases) for units burning coal on a 30-day rolling average basis.  In addition, the rule proposes work practice standards, such as boiler tune-ups, for controlling emissions of organic HAPs and dioxin/furans.  The effective date of the final rule was April 16, 2012 and compliance is required within three years.  Petitions for administrative reconsideration and judicial review were filed.  In 2012, the Federal EPA published a notice announcing that it would accept comments on its reconsideration of certain issues related to the new source standards, including clarification of the requirements that apply during periods of start-up and shut down, measurement issues and the application of variability factors that may have an impact on the level of the standards.  The Federal EPA issued revisions to the new source standards consistent with the proposed rule, except the start-up and shut down provisions in March 2013.  A final rule on reconsideration was issued in 2014 and a proposed rule containing technical corrections was issued in early 2015, but it has not yet been published in the Federal Register. 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 and the court granted those petitions in November 2014.
 
The final rule contains a slightly less stringent PM limit for existing sources than the original proposal and the revised rule provides alternative work practice standards for operators during start-up and shut down periods.  We have obtained a one-year administrative extension at several units to facilitate the installation of controls or to avoid a serious reliability problem.  In addition, the Federal EPA issued an enforcement policy describing the circumstances under which an administrative consent order might be issued to provide a fifth year for the installation of controls or completion of reliability upgrades.  We remain concerned about the availability of compliance extensions, the inability to foreclose citizen suits being filed under the CAA for failure to achieve compliance by the required deadlines and the lack of coordination among the Mercury and Air Toxics Standards schedule and other environmental requirements.

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Climate Change, CO2 Regulation and Energy Policy

National public policy makers and regulators in the 11 states we serve have diverse views on climate change, carbon regulation and energy policy.  We are currently focused on responding to these emerging views with prudent actions across a range of plausible scenarios and outcomes.  We are active participants in both state and federal policy development to assure that any proposed new requirements are feasible and the economies of the states we serve are not placed at a competitive disadvantage.

Several states have adopted programs that directly regulate CO2 emissions from power plants.  The majority of the states where we have generating facilities have passed legislation establishing renewable energy, alternative energy and/or energy efficiency requirements that can assist in reducing carbon emissions.  We are taking steps to comply with these requirements, including increasing our wind power purchases and broadening our portfolio of energy efficiency programs.

In the absence of comprehensive federal climate change or energy policy legislation, President Obama issued a memorandum to the Administrator of the Federal EPA directing the agency to develop and issue a new proposal regulating carbon emissions from new electric generating units under the CAA.  The new proposal was issued in September 2013 and requires new large natural gas units to meet a limit of 1,000 pounds of CO2 per MWh of electricity generated and small natural gas units to meet a limit of 1,100 pounds of CO2 per MWh.  New coal-fired units are required to meet a limit of 1,100 pounds of CO2 per MWh, with the option to meet a 1,000 pound per MWh limit if they choose to average emissions over multiple years.  This proposal was published in the Federal Register in January 2014 and the comment period has closed.

The Federal EPA was also directed to develop and issue a separate proposal regulating carbon emissions from modified and reconstructed electric generating units (EGUs) and to issue guidelines for existing EGUs before June 2014, to finalize those standards by June 2015 and to require states to submit revisions to their implementation plans including such standards no later than June 2016. The Federal EPA issued guidelines for the development of standards for existing sources in June 2014. The guidelines use a “portfolio” approach to reducing emissions from existing sources that includes efficiency improvements at coal plants, displacing coal-fired generation with increased utilization of natural gas combined cycle units, expanding renewable generation resources and increasing customer energy efficiency. Comments were due in December 2014. The Federal EPA also issued proposed regulations governing emissions of CO2 from modified and reconstructed EGUs in June 2014 and comments were due in October 2014. The standards for modified and reconstructed units include several options, including use of historic baselines or energy efficiency audits to establish source-specific CO2 emission rates or to limit CO2 emission rates which could be no less than 1,900 pounds per MWh at larger coal units and 2,100 pounds per MWh at smaller coal units. The Federal EPA announced in January 2015 that the schedule for finalizing its action on all of these standards will extend into the summer of 2015 and that it will develop and propose for public comment a model FIP that will be finalized for individual states that fail to submit a timely state plan to implement the existing source standards. We cannot currently predict the impact these programs may have on future resource plans or our existing generating fleet, but the costs may be substantial.

In 2012, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision upholding, in all material respects, the Federal EPA’s endangerment finding, its regulatory program for CO2 emissions from new motor vehicles and its plan to phase in regulation of CO2 emissions from stationary sources under the Prevention of Significant Deterioration (PSD) and Title V operating permit programs. In June 2014, the U.S. Supreme Court determined that the Federal EPA was not compelled to regulate CO2 emissions from stationary sources under the Title V or PSD programs as a result of its adoption of the motor vehicle standards, but that sources otherwise required to obtain a PSD permit may be required to perform a Best Available Control Technology analysis for CO2 emissions if they exceed a reasonable level.

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 our utility subsidiaries to close some coal-fired facilities and could lead to possible impairment of assets.

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Coal Combustion Residual Rule

In 2010, the Federal EPA published a proposed 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 proposed rule contained two alternative proposals.  One proposal would impose federal hazardous waste disposal and management standards on these materials and another would allow states to retain primary authority to regulate the beneficial re-use and disposal of these materials under state solid waste management standards, including minimum federal standards for disposal and management.  Both proposals would impose stringent requirements for the construction of new coal ash landfills and existing unlined surface impoundments.

Various environmental organizations and industry groups filed a petition seeking to establish deadlines for a final rule.  To comply with a court-ordered deadline, the Federal EPA issued a prepublication copy of its final rule in December 2014. The final rule was published in the Federal Register in April 2015 and becomes effective six months after publication. We are in the process of evaluating the impact of this rule and have not yet determined an estimate of the expected increase in asset retirement obligations. Upon completion of the evaluation, we expect to record an increase in asset retirement obligations in the second quarter of 2015 due to this publication.

In the final rule, the Federal EPA elected to regulate CCR as a non-hazardous solid waste and issued new minimum federal solid waste management standards. On the effective date, 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 new and additional construction and operating obligations, including location restrictions, liner criteria, structural integrity requirements for impoundments, operating criteria and additional groundwater monitoring requirements. The rule does not apply to inactive CCR landfills and inactive surface impoundments at retired generating stations or the beneficial use of CCR. The rule is self-implementing so state action is not required. Because of this self-implementing feature, the rule contains extensive record keeping, notice and internet posting requirements. Because we currently use surface impoundments and landfills to manage CCR materials at our generating facilities, we will incur significant costs to upgrade or close and replace these existing facilities at some point in the future as the new rule is implemented. We continue to review the new rule and evaluate its costs and impacts to our operations, including ongoing monitoring requirements.

In February 2014, the Federal EPA completed a risk evaluation of the beneficial uses of coal fly ash in concrete and FGD gypsum in wallboard and concluded that the Federal EPA supports these beneficial uses.  Currently, approximately 40% of the coal ash and other residual products from our generating facilities are re-used in the production of cement and wallboard, as structural fill or soil amendments, as abrasives or road treatment materials and for other beneficial uses.  Encapsulated beneficial uses are not materially impacted by the new rule but additional demonstrations may be required to continue land applications in significant amounts except in road construction projects.

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.  Entrainment is when small fish, eggs or larvae are drawn into the cooling water system and affected by heat, chemicals or physical stress.  The final rule affects all plants withdrawing more than two million gallons of cooling water per day. The rule offers seven technology options to comply with the impingement standard and requires site-specific studies to determine appropriate entrainment compliance measures at facilities withdrawing more than 125 million gallons per day. Additional requirements may be imposed as a result of consultation with other federal agencies to protect threatened and endangered species and their habitats. Facilities with existing closed cycle recirculating cooling systems, as defined in the rule, are not expected to require any technology changes. Facilities subject to both the impingement standard and site-specific entrainment studies will typically be given at least three years to conduct and submit the results of those studies to the permit agency. Compliance timeframes will then be established by the permit agency through each facility’s National Pollutant Discharge Elimination System (NPDES) permit for installation of any required technology changes, as those permits are renewed over the next five to eight years. Petitions for review of the final rule have been filed by industry and environmental groups and are currently pending in the U.S. Court of Appeals for the Second Circuit.

12



In addition, the Federal EPA issued an information collection request and is developing revised effluent limitation guidelines for electricity generating facilities.  A proposed rule was signed in April 2013 with a final rule expected in September 2015.  The Federal EPA proposed eight options of increasing stringency and cost for fly ash and bottom ash transport water, scrubber wastewater, leachate from coal combustion byproduct landfills and impoundments and other wastewaters associated with coal-fired generating units, with four labeled preferred options.  Certain of the Federal EPA's preferred options have already been implemented or are part of our long-term plans.  We continue to review the proposal in detail to evaluate whether our plants are currently meeting the proposed limitations, what technologies have been incorporated into our long-range plans and what additional costs might be incurred if the Federal EPA's most stringent options were adopted.  We submitted detailed comments to the Federal EPA in September 2013 and participated in comments filed by various organizations of which we are members.

In April 2014, the Federal EPA and the U.S. Army Corps of Engineers jointly issued a proposed rule to clarify the scope of the regulatory definition of “waters of the United States” in light of recent U.S. Supreme Court cases and published the proposed rule in the Federal Register. The CWA provides for federal jurisdiction over “navigable waters” defined as “the waters of the United States.” This proposed jurisdictional definition will apply to all CWA programs, potentially impacting generation, transmission and distribution permitting and compliance requirements. Among those programs are: permits for wastewater and storm water discharges, permits for impacts to wetlands and water bodies and oil spill prevention planning. We agree that clarity and efficiency in the permitting process is needed. We are concerned that the proposed rule introduces new concepts and could subject more of our operations to CWA jurisdiction, thereby increasing the time and complexity of permitting. We submitted detailed comments to the Federal EPA in November 2014 and also participated in comments filed by various organizations of which we are members.

RESULTS OF OPERATIONS

SEGMENTS

Our primary business is the generation, transmission and distribution of electricity. Within our Vertically Integrated Utilities segment, we centrally dispatch generation assets and manage our 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.

Our 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 OPCo, TCC and TNC.
OPCo purchases energy to serve SSO customers and provides capacity for all connected load.

AEP Transmission Holdco

Development, construction and operation of transmission facilities through investments in our wholly-owned transmission subsidiaries and transmission only joint ventures.  These investments have PUCT-approved or FERC-approved returns on equity.


13



Generation & Marketing

Nonregulated generation in ERCOT and PJM.
Marketing, risk management and retail activities in ERCOT, PJM and MISO.

AEP River Operations

Commercial barging operations that transport liquids, coal and dry bulk commodities primarily on the Ohio, Illinois and lower Mississippi Rivers.

The table below presents Earnings Attributable to AEP Common Shareholders by segment for the three months ended March 31, 2015 and 2014.
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions)
Vertically Integrated Utilities
$
299

 
$
278

Transmission and Distribution Utilities
97

 
97

AEP Transmission Holdco
36

 
24

Generation & Marketing
187

 
163

AEP River Operations
11

 
3

Corporate and Other (a)
(1
)
 
(5
)
Earnings Attributable to AEP Common Shareholders
$
629

 
$
560

(a)
While not considered a reportable segment, 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.

AEP CONSOLIDATED

First Quarter of 2015 Compared to First Quarter of 2014

Earnings Attributable to AEP Common Shareholders increased from $560 million in 2014 to $629 million in 2015 primarily due to:

Successful rate proceedings in our various jurisdictions.
A decrease in employee related expenses.
An increase in transmission investment which resulted in higher revenues and income.
Favorable trading and marketing activity.

These increases were partially offset by:

A decrease in off-system sales margins due to lower market prices and reduced sales volumes.
A decrease in weather normalized sales.

Our results of operations by operating segment are discussed below.


14



VERTICALLY INTEGRATED UTILITIES
 
 
Three Months Ended March 31,
 Vertically Integrated Utilities
 
2015
 
2014
 
 
(in millions)
Revenues
 
$
2,505

 
$
2,586

Fuel and Purchased Electricity
 
983

 
1,094

Gross Margin
 
1,522

 
1,492

Other Operation and Maintenance
 
576

 
576

Depreciation and Amortization
 
272

 
263

Taxes Other Than Income Taxes
 
97

 
96

Operating Income
 
577

 
557

Interest and Investment Income
 
1

 
1

Carrying Costs Income (Expense)
 
2

 
(1
)
Allowance for Equity Funds Used During Construction
 
14

 
10

Interest Expense
 
(131
)
 
(131
)
Income Before Income Tax Expense and Equity Earnings
 
463

 
436

Income Tax Expense
 
164

 
157

Equity Earnings of Unconsolidated Subsidiaries
 
1

 

Net Income
 
300

 
279

Net Income Attributable to Noncontrolling Interests
 
1

 
1

Earnings Attributable to AEP Common Shareholders
 
$
299

 
$
278


Summary of KWh Energy Sales for Vertically Integrated Utilities
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of KWhs)
Retail:
 

 
 

Residential
10,379

 
10,905

Commercial
6,011

 
6,115

Industrial
8,360

 
8,332

Miscellaneous
548

 
555

Total Retail
25,298

 
25,907

 
 
 
 
Wholesale (a)
8,268

 
10,184

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



15



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 our eastern region have a larger effect on revenues than changes in our 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 March 31,
 
2015
 
2014
 
(in degree days)
Eastern Region
 

 
 

Actual  Heating (a)
2,045

 
2,128

Normal  Heating (b)
1,604

 
1,593

 
 
 
 
Actual  Cooling (c)

 

Normal  Cooling (b)
5

 
5

 
 
 
 
Western Region
 

 
 

Actual  Heating (a)
1,040

 
1,186

Normal  Heating (b)
877

 
887

 
 
 
 
Actual  Cooling (c)
14

 
6

Normal  Cooling (b)
23

 
24


(a)
Eastern Region and Western Region 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 and Western Region cooling degree days are calculated on a 65 degree temperature base.


16



First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Earnings Attributable to AEP Common Shareholders from Vertically Integrated Utilities
(in millions)
 
 
 
First Quarter of 2014
 
$
278

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
101

Off-system Sales
 
(72
)
Other Revenues
 
1

Total Change in Gross Margin
 
30

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 

Depreciation and Amortization
 
(9
)
Taxes Other Than Income Taxes
 
(1
)
Carrying Costs Income
 
3

Allowance for Equity Funds Used During Construction
 
4

Total Change in Expenses and Other
 
(3
)
 
 
 

Income Tax Expense
 
(7
)
Equity Earnings
 
1

 
 
 
First Quarter of 2015
 
$
299


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 $101 million primarily due to the following:
The effect of successful rate proceedings in our service territories which include:
A $46 million increase primarily due to rate increases in West Virginia and Virginia, including an adjustment due to the amended Virginia law affecting Biennial Reviews.
A $30 million rate increase for I&M.
An $11 million increase primarily due to revenue increases from SWEPCo rate riders in Louisiana and Texas.
A $9 million rate increase for PSO.
For the rate increases described above, $45 million relate to riders/trackers which have corresponding increases in expense items below.    
A $31 million decrease in PJM expenses net of recovery or offsets.
These increases were partially offset by:
A $27 million decrease in weather-normalized load primarily due to lower residential sales in the eastern region.
Margins from Off-system Sales decreased $72 million primarily due to lower market prices and decreased sales volumes.

17



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

Other Operation and Maintenance expenses remained unchanged but included:
A $23 million decrease in employee-related expenses.
A $23 million increase in recoverable expenses, primarily including PJM expenses currently fully recovered in rate recovery riders/trackers.
Depreciation and Amortization expenses increased $9 million primarily due to amortization related to an advanced metering rider implemented in November 2014 in Oklahoma and overall higher depreciable base.
Allowance for Equity Funds Used During Construction increased $4 million primarily due to increases in environmental construction and transmission projects.
Income Tax Expense increased $7 million primarily due to an increase in pretax book income, partially offset by other book/tax differences which are accounted for on a flow-through basis.

TRANSMISSION AND DISTRIBUTION UTILITIES
 
 
Three Months Ended March 31,
Transmission and Distribution Utilities
 
2015
 
2014
 
 
(in millions)
Revenues
 
$
1,270

 
$
1,215

Purchased Electricity
 
421

 
403

Amortization of Generation Deferrals
 
31

 
31

Gross Margin
 
818

 
781

Other Operation and Maintenance
 
319

 
293

Depreciation and Amortization
 
168

 
161

Taxes Other Than Income Taxes
 
122

 
119

Operating Income
 
209

 
208

Interest and Investment Income
 
2

 
3

Carrying Costs Income
 
6

 
7

Allowance for Equity Funds Used During Construction
 
4

 
3

Interest Expense
 
(70
)
 
(70
)
Income Before Income Tax Expense
 
151

 
151

Income Tax Expense
 
54

 
54

Net Income
 
97

 
97

Net Income Attributable to Noncontrolling Interests
 

 

Earnings Attributable to AEP Common Shareholders
 
$
97

 
$
97


Summary of KWh Energy Sales for Transmission and Distribution Utilities
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of KWhs)
Retail:
 

 
 

Residential
7,266

 
7,527

Commercial
5,915

 
5,902

Industrial
5,280

 
5,143

Miscellaneous
161

 
171

Total Retail (a)
18,622

 
18,743

 
 
 
 
Wholesale (b)
534

 
700


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


18



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 our eastern region have a larger effect on revenues than changes in our 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 March 31,
 
2015
 
2014
 
(in degree days)
Eastern Region
 

 
 

Actual  Heating (a)
2,438

 
2,409

Normal  Heating (b)
1,881

 
1,880

 
 
 
 
Actual  Cooling (c)

 

Normal  Cooling (b)
3

 
3

 
 
 
 
Western Region
 

 
 

Actual  Heating (a)
320

 
300

Normal  Heating (b)
188

 
196

 
 
 
 
Actual  Cooling (d)
41

 
70

Normal  Cooling (b)
109

 
108


(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.


19



First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Earnings Attributable to AEP Common Shareholders from Transmission and Distribution Utilities
(in millions)
 
 
 
First Quarter of 2014
 
$
97

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
31

Off-System Sales
 
1

Transmission Revenues
 
4

Other Revenues
 
1

Total Change in Gross Margin
 
37

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(26
)
Depreciation and Amortization
 
(7
)
Taxes Other Than Income Taxes
 
(3
)
Interest and Investment Income
 
(1
)
Carrying Costs Income
 
(1
)
Allowance for Equity Funds Used During Construction
 
1

Total Change in Expenses and Other
 
(37
)
 
 
 

Income Tax Expense
 

 
 
 

First Quarter of 2015
 
$
97


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 $31 million primarily due to the following:
A $17 million increase in TCC and TNC revenues primarily due to the recovery of ERCOT transmission expenses, which is offset in Other Operation and Maintenance expenses below.
A $12 million increase in Ohio base rates due to the discontinuance of seasonal rates.
Transmission Revenues increased $4 million primarily due to increased transmission investment in ERCOT.

Expenses and Other changed between years as follows:

Other Operation and Maintenance expenses increased $26 million primarily due to the following:
A $23 million increase in recoverable expenses, including ERCOT expenses and PJM expenses, currently fully recovered in rate recovery riders/trackers.
A $13 million increase due to the amortization of 2012 Ohio deferred storm expenses. This increase was offset by a corresponding increase in Retail Margins above.
A $6 million increase due to PUCO ordered contributions to the Ohio Growth Fund.
These increases were partially offset by:
A $10 million decrease in the Ohio Energy Efficiency (EE), Peak Demand Reduction Cost Recovery Rider (PDR) costs and associated deferrals. This decrease was offset by a corresponding decrease in Retail Margins above.
A $6 million decrease in remitted Ohio Universal Service Fund (USF) surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This decrease was offset by a corresponding decrease in Retail Margins above.    
Depreciation and Amortization expenses increased $7 million primarily due to the following:
A $4 million increase due to an increase in the depreciable base of transmission and distribution assets.
A $3 million increase in TCC's securitization transition asset, which is partially offset in Other Revenues.

20



AEP TRANSMISSION HOLDCO
 
 
Three Months Ended March 31,
AEP Transmission Holdco
 
2015
 
2014
 
 
(in millions)
Transmission Revenues
 
$
58

 
$
28

Gross Margin
 
58

 
28

Other Operation and Maintenance
 
8

 
5

Depreciation and Amortization
 
9

 
5

Taxes Other Than Income Taxes
 
16

 
7

Operating Income
 
25

 
11

Allowance for Equity Funds Used During Construction
 
12

 
9

Interest Expense
 
(8
)
 
(5
)
Income Before Income Tax Expense and Equity Earnings
 
29

 
15

Income Tax Expense
 
14

 
8

Equity Earnings of Unconsolidated Subsidiaries
 
22

 
17

Net Income
 
37

 
24

Net Income Attributable to Noncontrolling Interests
 
1

 

Earnings Attributable to AEP Common Shareholders
 
$
36

 
$
24


Summary of Net Plant in Service and CWIP for Transmission Holdco

 
 
As of March 31,
 
 
2015
 
2014
 
 
(in millions)
Net Plant in Service
 
$
1,832

 
$
1,024

CWIP
 
1,120

 
804


21



First Quarter of 2015 Compared to First Quarter of 2014
 
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Earnings Attributable to AEP Common Shareholders from Transmission Holdco
(in millions)
First Quarter of 2014
 
$
24

 
 
 
Changes in Transmission Revenues:
 
 
Transmission Revenues
 
30

Total Change in Transmission Revenues
 
30

 
 
 
Changes in Expenses and Other:
 
 
Other Operation and Maintenance
 
(3
)
Depreciation and Amortization
 
(4
)
Taxes Other Than Income Taxes
 
(9
)
Allowance for Equity Funds Used During Construction
 
3

Interest Expense
 
(3
)
Total Change in Expenses and Other
 
(16
)
 
 
 
Income Tax Expense
 
(6
)
Equity Earnings
 
5

Net Income Attributable to Noncontrolling Interests
 
(1
)
 
 
 
First Quarter of 2015
 
$
36


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

Transmission Revenues increased $30 million primarily due to an increase in projects placed in-service by our wholly-owned transmission subsidiaries.

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

Other Operation and Maintenance expenses increased $3 million primarily due to increased transmission investment.
Depreciation and Amortization expenses increased $4 million primarily due to higher depreciable base.
Taxes Other Than Income Taxes increased $9 million primarily due to increased property taxes.
Allowance for Equity Funds Used During Construction increased $3 million primarily due to increased transmission investment.
Interest Expense increased $3 million primarily due to higher outstanding long-term debt balances.
Income Tax Expense increased $6 million primarily due to an increase in pretax book income.
Equity Earnings increased $5 million primarily due to an increase in transmission investment by ETT.


22



GENERATION & MARKETING
 
 
Three Months Ended March 31,
Generation & Marketing
 
2015
 
2014
 
 
(in millions)
Revenues
 
$
1,170

 
$
1,251

Fuel, Purchased Electricity and Other
 
716

 
805

Gross Margin
 
454

 
446

Other Operation and Maintenance
 
100

 
116

Depreciation and Amortization
 
50

 
57

Taxes Other Than Income Taxes
 
9

 
12

Operating Income
 
295

 
261

Interest and Investment Income
 
1

 
1

Interest Expense
 
(11
)
 
(12
)
Income Before Income Tax Expense
 
285

 
250

Income Tax Expense
 
98

 
87

Net Income
 
187

 
163

Net Income Attributable to Noncontrolling Interests
 

 

Earnings Attributable to AEP Common Shareholders
 
$
187

 
$
163


Summary of MWhs Generated for Generation & Marketing
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of MWhs)
Fuel Type:
 

 
 

Coal
10

 
12

Natural Gas
4

 
2

Total MWhs
14

 
14



23



First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Earnings Attributable to AEP Common Shareholders from Generation & Marketing
(in millions)
 
 
 
First Quarter of 2014
 
$
163

 
 
 

Changes in Gross Margin:
 
 

Generation
 
(24
)
Retail, Trading and Marketing
 
34

Other
 
(2
)
Total Change in Gross Margin
 
8

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
16

Depreciation and Amortization
 
7

Taxes Other Than Income Taxes
 
3

Interest Expense
 
1

Total Change in Expenses and Other
 
27

 
 
 

Income Tax Expense
 
(11
)
 
 
 

First Quarter of 2015
 
$
187


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 $24 million primarily due to lower capacity revenue.
Retail, Trading and Marketing increased $34 million primarily due to favorable wholesale trading and marketing performance.

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

Other Operation and Maintenance expenses decreased $16 million primarily due to a decrease in plant outage and maintenance costs.
Depreciation and Amortization expenses decreased $7 million primarily due to reduced plant in service.
Income Tax Expense increased $11 million primarily due to an increase in pretax book income.

AEP RIVER OPERATIONS

First Quarter of 2015 Compared to First Quarter of 2014

Earnings Attributable to AEP Common Shareholders from our AEP River Operations segment increased from income of $3 million in 2014 to income of $11 million in 2015 primarily due to a reduction in operating expenses, including lower fuel prices and reduced consumption, lower barge and boat charter expenses and reduced purchases of towing and port services.


24



CORPORATE AND OTHER

First Quarter of 2015 Compared to First Quarter of 2014

Earnings Attributable to AEP Common Shareholders from Corporate and Other increased from a loss of $5 million in 2014 to a loss of $1 million in 2015 primarily due to other book/tax differences which are accounted for on a flow-through basis.

AEP SYSTEM INCOME TAXES

First Quarter of 2015 Compared to First Quarter of 2014

Income Tax Expense increased $26 million primarily due to an increase in pretax book income, partially offset by other book/tax differences which are accounted for on a flow-through basis.

FINANCIAL CONDITION

We measure our financial condition by the strength of our balance sheet and the liquidity provided by our cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Debt and Equity Capitalization
 
March 31, 2015
 
December 31, 2014
 
(dollars in millions)
Long-term Debt, including amounts due within one year
$
19,229

 
51.5
%
 
$
18,684

 
50.7
%
Short-term Debt
855

 
2.3

 
1,346

 
3.6

Total Debt
20,084

 
53.8

 
20,030

 
54.3

AEP Common Equity
17,241

 
46.2

 
16,820

 
45.7

Noncontrolling Interests
7

 

 
4

 

Total Debt and Equity Capitalization
$
37,332

 
100.0
%
 
$
36,854

 
100.0
%

Our ratio of debt-to-total capital improved from 54.3% as of December 31, 2014 to 53.8% as of March 31, 2015 primarily due to an increase in our common equity from earnings.

Liquidity

Liquidity, or access to cash, is an important factor in determining our financial stability.  We believe we have adequate liquidity under our existing credit facilities.  As of March 31, 2015, we had $3.5 billion in aggregate credit facility commitments to support our operations.  Additional liquidity is available from cash from operations and a receivables securitization agreement.  We are committed to maintaining adequate liquidity.  We generally use 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-and-leaseback or leasing agreements or common stock.


25



Commercial Paper Credit Facilities

We manage our liquidity by maintaining adequate external financing commitments.  As of March 31, 2015, our available liquidity was approximately $3.5 billion as illustrated in the table below:
 
 
Amount
 
Maturity
 
 
(in millions)
 
 
Commercial Paper Backup:
 

 
 
 
Revolving Credit Facility
$
1,750

 
June 2017
 
Revolving Credit Facility
1,750

 
July 2018
Total
3,500

 
 
Cash and Cash Equivalents
190

 
 
Total Liquidity Sources
3,690

 
 
Less:
AEP Commercial Paper Outstanding
115

 
 
 
Letters of Credit Issued
75

 
 
 
 
 
 
 
Net Available Liquidity
$
3,500

 
 

We have credit facilities totaling $3.5 billion to support our commercial paper program.  The credit facilities allow us to issue letters of credit in an amount up to $1.2 billion.

We use our commercial paper program to meet the short-term borrowing needs of our subsidiaries.  The program is used to fund both a Utility Money Pool, which funds the utility subsidiaries, and a Nonutility Money Pool, which funds the majority of the 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 three months of 2015 was $788 million.  The weighted-average interest rate for our commercial paper during 2015 was 0.46%.

Other Credit Facilities

We issue letters of credit under a $100 million uncommitted facility. As of March 31, 2015, the maximum future payments for letters of credit issued under the uncommitted facility were $100 million with a maturity of July 2015. An uncommitted facility gives the issuer of the facility the right to accept or decline each request we make under the facility.

Securitized Accounts Receivable

Our receivables securitization agreement provides a commitment of $750 million from bank conduits to purchase receivables. This agreement expires in June 2016.

Debt Covenants and Borrowing Limitations

Our credit agreements contain certain covenants and require us to maintain our 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 our credit agreements. Debt as defined in the revolving credit agreements excludes securitization bonds and debt of AEP Credit. As of March 31, 2015, this contractually-defined percentage was 50.8%. Nonperformance under these covenants could result in an event of default under these credit agreements. As of March 31, 2015, we complied with all of the covenants contained in these credit agreements. In addition, the acceleration of our payment obligations, or the obligations of certain of our 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 our non-exchange traded commodity contracts and would similarly allow lenders and counterparties to declare the outstanding amounts payable. However, a default under our non-exchange traded commodity contracts does not cause an event of default under our credit agreements.

The revolving credit facilities do not permit the lenders to refuse a draw on any facility if a material adverse change occurs.

26



Utility Money Pool borrowings and external borrowings may not exceed amounts authorized by regulatory orders and we manage our borrowings to stay within those authorized limits.

Dividend Policy and Restrictions

The Board of Directors declared a quarterly dividend of $0.53 per share in April 2015. Future dividends may vary depending upon our profit levels, operating cash flow levels and capital requirements, as well as financial and other business conditions existing at the time. Our income primarily derives from our common stock equity in the earnings of our utility subsidiaries. Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of our utility subsidiaries to transfer funds to us in the form of dividends.

We do not believe restrictions related to our various financing arrangements and regulatory requirements will have any significant impact on Parent’s ability to access cash to meet the payment of dividends on its common stock.

Credit Ratings

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

CASH FLOW

Managing our cash flows is a major factor in maintaining our liquidity strength.
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(in millions)
Cash and Cash Equivalents at Beginning of Period
$
163

 
$
118

Net Cash Flows from Operating Activities
1,257

 
1,133

Net Cash Flows Used for Investing Activities
(1,017
)
 
(981
)
Net Cash Flows from (Used for) Financing Activities
(213
)
 
22

Net Increase in Cash and Cash Equivalents
27

 
174

Cash and Cash Equivalents at End of Period
$
190

 
$
292


Cash from operations and short-term borrowings provides working capital and allows us to meet other short-term cash needs.
 
Operating Activities
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(in millions)
Net Income
$
631

 
$
561

Depreciation and Amortization
505

 
491

Other
121

 
81

Net Cash Flows from Operating Activities
$
1,257

 
$
1,133



27



Net Cash Flows from Operating Activities were $1.3 billion in 2015 consisting primarily of Net Income of $631 million and $505 million of noncash Depreciation and Amortization. Other changes represent items that had a current period cash flow impact, such as changes in working capital, as well as items that represent future rights or obligations to receive or pay cash, such as regulatory assets and liabilities. Deferred Income Taxes increased primarily due to provisions in the Taxpayer Relief Act of 2014 and an increase in tax/book temporary differences from operations. The reduction in Fuel, Material and Supplies balances reflects a decrease in fuel inventory due to the cold winter weather and increased generation.

Net Cash Flows from Operating Activities were $1.1 billion in 2014 consisting primarily of Net Income of $561 million and $491 million of noncash Depreciation and Amortization partially offset by $137 million of fuel cost deferrals and $56 million of Ohio capacity deferrals as a result of the PUCO's July 2012 approval of a capacity deferral mechanism. Other changes represent items that had a current period cash flow impact, such as changes in working capital, as well as items that represent future rights or obligations to receive or pay cash, such as regulatory assets and liabilities. Deferred Income Taxes increased primarily due to provisions in the Taxpayer Relief Act of 2012 and an increase in tax/book temporary differences from operations. The reduction in Fuel, Material and Supplies balances reflects a decrease in fuel inventory due to the cold winter weather and increased generation.

Investing Activities
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(in millions)
Construction Expenditures
$
(1,077
)
 
$
(907
)
Acquisitions of Nuclear Fuel
(52
)
 
(49
)
Acquisitions of Assets/Businesses
(2
)
 
(43
)
Other
114

 
18

Net Cash Flows Used for Investing Activities
$
(1,017
)
 
$
(981
)

Net Cash Flows Used for Investing Activities were $1 billion in 2015 primarily due to Construction Expenditures for environmental, distribution and transmission investments.

Net Cash Flows Used for Investing Activities were $981 million in 2014 primarily due to Construction Expenditures for environmental, distribution and transmission investments. We also purchased transmission assets for $38 million.

Financing Activities
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(in millions)
Issuance of Common Stock, Net
$
31

 
$
15

Issuance/Retirement of Debt, Net
44

 
281

Dividends Paid on Common Stock
(260
)
 
(245
)
Other
(28
)
 
(29
)
Net Cash Flows from (Used for) Financing Activities
$
(213
)
 
$
22


Net Cash Flows Used for Financing Activities in 2015 were $213 million. Our net debt issuances were $44 million. The net issuances included issuances of $700 million of senior unsecured notes, $54 million of pollution control bonds and $20 million of other debt notes offset by retirements of $153 million of securitization bonds, $54 million of pollution control bonds, $32 million of senior unsecured and other debt notes and a decrease in short-term borrowing of $491 million. We paid common stock dividends of $260 million. See Note 11 - Financing Activities for a complete discussion of long-term debt issuances and retirements.

28



Net Cash Flows from Financing Activities in 2014 were $22 million. Our net debt issuances were $281 million. The net issuances included issuances of $76 million of other debt notes and an increase in short-term borrowing of $575 million offset by retirements of $258 million of senior unsecured and other debt notes and $112 million of securitization bonds. We paid common stock dividends of $245 million. See Note 11 - Financing Activities for a complete discussion of long-term debt issuances and retirements.

In April 2015, APCo issued $86 million of 1.9% Pollution Control Bonds due in 2019.

In April 2015, OPCo retired $86 million of 3.125% Pollution Control Bonds due in 2015.

In April 2015, SWEPCo retired $100 million of 5.375% Senior Unsecured Notes due in 2015.

OFF-BALANCE SHEET ARRANGEMENTS

Our current guidelines restrict the use of off-balance sheet financing entities or structures to traditional operating lease arrangements that we enter in the normal course of business.  The following identifies significant off-balance sheet arrangements:
 
March 31,
2015
 
December 31,
2014
 
(in millions)
Rockport Plant, Unit 2 Future Minimum Lease Payments
$
1,184

 
$
1,184

Railcars Maximum Potential Loss from Lease Agreement
19

 
19


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 2014 Annual Report.

CONTRACTUAL OBLIGATION INFORMATION

A summary of our contractual obligations is included in our 2014 Annual Report and has not changed significantly from year-end other than the debt issuances and retirements discussed in the “Cash Flow” section above.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES, NEW 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 2014 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

New Accounting Pronouncements Adopted During the First Quarter of 2015

The FASB issued ASU 2014-08 “Presentation of Financial Statements and Property, Plant and Equipment” changing the presentation of discontinued operations on the statements of income and other requirements for reporting discontinued operations. Under the new standard, a disposal of a component or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component meets the criteria to be classified as held-for-sale or is disposed. The amendments in this update also require additional disclosures about discontinued operations and disposal of an individually significant component of an entity that does not qualify for discontinued operations. We adopted ASU 2014-08 effective January 1, 2015. There were no events requiring application of the new accounting guidance.

29



Pronouncements Effective in the Future

The FASB issued ASU 2014-09 "Revenue from Contracts with Customers" clarifying 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, 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. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016. We are analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on revenue or net income. We plan to adopt ASU 2014-09 effective January 1, 2017.

The FASB issued ASU 2015-01 "Income Statement – Extraordinary and Unusual Items" eliminating the concept of extraordinary items for presentation on the face of the income statement. Under the new standard, a material event or transaction that is unusual in nature, infrequent or both shall be reported as a separate component of income from continuing operations. Alternatively, it may be disclosed in the notes to financial statements. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted if applied from the beginning of a fiscal year. As applicable, this standard may change the presentation of amounts in the income statements. We plan to adopt ASU 2015-01 effective January 1, 2016.

The FASB issued ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs" to simplify the presentation of debt issuance costs on the balance sheets. Under the new standard, debt issuance costs related to a recognized debt liability will be presented on the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with discounts. We include debt issuance costs in Deferred Charges and Other Noncurrent Assets on the balance sheets. Debt issuance costs represent less than 1% of total long-term debt. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. We intend to early adopt ASU 2015-03 for the 2015 Form 10-K.

The FASB issued ASU 2015-05 "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" to provide guidance to customers about whether a cloud computing arrangement includes a software license. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. We are analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net income. We plan to adopt ASU 2015-05 effective January 1, 2016.

Future Accounting Changes

The FASB’s standard-setting process is ongoing and until new standards have been finalized and issued, we cannot determine the impact on the reporting of our operations and financial position that may result from any such future changes.  The FASB is currently working on several projects including financial instruments, leases, insurance, hedge accounting and consolidation policy.  The ultimate pronouncements resulting from these and future projects could have an impact on future net income and financial position.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

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

Our Transmission and Distribution Utilities segment is exposed to FTR price risk as it relates to RTO congestion during the June 2012 - May 2015 Ohio ESP period. Additional risks include energy procurement risk and interest rate risk.

30



Our Generation & Marketing segment conducts marketing, risk management and retail activities in ERCOT, PJM and MISO. This segment is exposed to certain market risks as a marketer of wholesale and retail electricity. These risks include commodity price risk, interest rate risk and credit risk. These risks represent the risk of loss that may impact us due to changes in the underlying market prices or rates. In addition, our Generation & Marketing segment is also exposed to certain market risks as a major power producer and through its transactions in wholesale electricity, natural gas and coal trading and marketing contracts.

We employ risk management contracts including physical forward purchase-and-sale contracts and financial forward purchase-and-sale contracts.  We engage in risk management of power, coal, natural gas and, to a lesser extent, heating oil, gasoline and other commodity contracts to manage the risk associated with our energy business.  As a result, we are subject to price risk.  The amount of risk taken is determined by the Commercial Operations, Energy Supply, and Finance groups in accordance with our established risk management policies as approved by the Finance Committee of our Board of Directors.  Our market risk oversight staff independently monitors our 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 daily and quarterly reports regarding compliance with policies, limits and procedures.  The Regulated Risk Committee consists of AEPSC’s Chief Operating Officer, 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 Operating Officer, Chief Financial Officer, and Chief Risk Officer in addition to Energy Supply’s President and Vice President.  When commercial activities exceed predetermined limits, we modify the positions 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, 2014:
MTM Risk Management Contract Net Assets (Liabilities)
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
Vertically
Integrated
Utilities
 
Transmission
and
Distribution
Utilities
 
Generation
&
Marketing
 
Total
 
(in millions)
Total MTM Risk Management Contract Net Assets as of December 31, 2014
$
36

 
$
46

 
$
140

 
$
222

(Gain) Loss from Contracts Realized/Settled During the Period and Entered in a Prior Period
(24
)
 
(6
)
 
1

 
(29
)
Fair Value of New Contracts at Inception When Entered During the Period (a)

 

 
47

 
47

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

 

 
4

 
4

Changes in Fair Value Allocated to Regulated Jurisdictions (c)
(5
)
 
4

 

 
(1
)
Total MTM Risk Management Contract Net Assets as of March 31, 2015
$
7

 
$
44

 
$
192

 
243

Commodity Cash Flow Hedge Contracts
 
 
 

 
 

 
(8
)
Interest Rate and Foreign Currency Cash Flow Hedge Contracts
 
 
 

 
 

 
(1
)
Fair Value Hedge Contracts
 
 
 

 
 

 
(2
)
Collateral Deposits
 
 
 

 
 

 
32

Total MTM Derivative Contract Net Assets as of March 31, 2015
 
 
 

 
 

 
$
264


(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 condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.

31



See Note 8 – Derivatives and Hedging and Note 9 – Fair Value Measurements for additional information related to our risk management contracts.  The following tables and discussion provide information on our credit risk and market volatility risk.

Credit Risk

We limit credit risk in our 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. We use Moody’s Investors Service, Standard & Poor’s and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

We have risk management contracts with numerous counterparties. Since open risk management contracts are valued based on changes in market prices of the related commodities, our exposures change daily. As of March 31, 2015, our credit exposure net of collateral to sub investment grade counterparties was approximately 7.9%, 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 March 31, 2015, the following table approximates our 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
 
$
641

 
$

 
$
641

 
2

 
$
261

Split Rating
 
23

 

 
23

 
1

 
23

Noninvestment Grade
 
1

 
1

 

 

 

No External Ratings:
 
 

 
 

 


 
 

 
 

Internal Investment Grade
 
106

 

 
106

 
4

 
73

Internal Noninvestment Grade
 
84

 
18

 
66

 
2

 
37

Total as of March 31, 2015
 
$
855

 
$
19

 
$
836

 
9

 
$
394

 
 
 
 
 
 
 
 
 
 
 
Total as of December 31, 2014
 
$
817

 
$
21

 
$
796

 
8

 
$
347


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

Value at Risk (VaR) Associated with Risk Management Contracts

We use a risk measurement model, which calculates VaR, to measure our 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 March 31, 2015, a near term typical change in commodity prices is not expected to materially impact net income, cash flows or financial condition.

32



The following tables show the end, high, average and low market risk as measured by VaR for the periods indicated:

VaR Model
Trading Portfolio
Three Months Ended
 
Twelve Months Ended
March 31, 2015
 
December 31, 2014
End
 
High
 
Average
 
Low
 
End
 
High
 
Average
 
Low
(in millions)
 
(in millions)
$

 
$
1

 
$

 
$

 
$

 
$
3

 
$
1

 
$


VaR Model
Non-Trading Portfolio
Three Months Ended
 
Twelve Months Ended
March 31, 2015
 
December 31, 2014
End
 
High
 
Average
 
Low
 
End
 
High
 
Average
 
Low
(in millions)
 
(in millions)
$
1

 
$
2

 
$
1

 
$

 
$
2

 
$
3

 
$
1

 
$


We back-test our 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 our VaR calculation captures recent price movements, we also perform regular stress testing of the trading portfolio to understand our exposure to extreme price movements. We employ a historical-based method 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. We then research the underlying positions, price movements and market events that created the most significant exposure and report the findings to the Risk Executive Committee, Regulated Risk Committee, or Competitive Risk Committee as appropriate.

Interest Rate Risk

We utilize an Earnings at Risk (EaR) model to measure interest rate market risk exposure. EaR statistically quantifies the extent to which our interest expense could vary over the next twelve months and gives a probabilistic estimate of different levels of interest expense. The resulting EaR is interpreted as the dollar amount by which actual interest expense for the next twelve months could exceed expected interest expense with a one-in-twenty chance of occurrence. The primary drivers of EaR are from the existing floating rate debt (including short-term debt) as well as long-term debt issuances in the next twelve months. As calculated on debt outstanding as of March 31, 2015 and December 31, 2014, the estimated EaR on our debt portfolio for the following twelve months was $36 million and $33 million, respectively.

33




AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2015 and 2014
(in millions, except per-share and share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
REVENUES
 
 
 
 
Vertically Integrated Utilities
 
$
2,487

 
$
2,549

Transmission and Distribution Utilities
 
1,206

 
1,161

Generation & Marketing
 
859

 
821

Other Revenues
 
156

 
117

TOTAL REVENUES
 
4,708

 
4,648

 
 
 
 
 
EXPENSES
 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
1,071

 
1,168

Purchased Electricity for Resale
 
718

 
638

Other Operation
 
746

 
780

Maintenance
 
294

 
292

Depreciation and Amortization
 
505

 
491

Taxes Other Than Income Taxes
 
250

 
238

TOTAL EXPENSES
 
3,584

 
3,607

 
 
 
 
 
OPERATING INCOME
 
1,124

 
1,041

 
 
 
 
 
Other Income (Expense):
 
 

 
 

Interest and Investment Income
 
1

 
1

Carrying Costs Income
 
8

 
6

Allowance for Equity Funds Used During Construction
 
30

 
22

Interest Expense
 
(223
)
 
(220
)
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY EARNINGS
 
940

 
850

 
 
 
 
 
Income Tax Expense
 
333

 
307

Equity Earnings of Unconsolidated Subsidiaries
 
24

 
18

 
 
 
 
 
NET INCOME
 
631

 
561

 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
 
2

 
1

 
 
 
 
 
EARNINGS ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS
 
$
629

 
$
560

 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF BASIC AEP COMMON SHARES OUTSTANDING
 
489,597,986

 
487,867,089

 
 
 
 
 
TOTAL BASIC EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS
 
$
1.29

 
$
1.15

 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF DILUTED AEP COMMON SHARES OUTSTANDING
 
489,936,726

 
488,271,167

 
 
 
 
 
TOTAL DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS
 
$
1.29

 
$
1.15

 
 
 
 
 
CASH DIVIDENDS DECLARED PER SHARE
 
$
0.53

 
$
0.50

See Condensed Notes to Condensed Consolidated Financial Statements beginning on page 40.


34



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2015 and 2014
(in millions)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
Net Income
 
$
631

 
$
561

 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
 
 

 
 

Cash Flow Hedges, Net of Tax of $3 and $3 in 2015 and 2014, Respectively
 
(6
)
 
5

Securities Available for Sale, Net of Tax of $0 and $0 in 2015 and 2014, Respectively
 
1

 

Amortization of Pension and OPEB Deferred Costs, Net of Tax of $0
and $0 in 2015 and 2014, Respectively
 

 
1

 
 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
 
(5
)
 
6

 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
626

 
567

 
 
 
 
 
Total Comprehensive Income Attributable to Noncontrolling Interests
 
2

 
1

 
 
 
 
 
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO AEP
COMMON SHAREHOLDERS
 
$
624

 
$
566

See Condensed Notes to Condensed Consolidated Financial Statements beginning on page 40.


35



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2015 and 2014
(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, 2013
508

 
$
3,303

 
$
6,131

 
$
6,766

 
$
(115
)
 
$
1

 
$
16,086

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of Common Stock


 
2

 
13

 
 

 
 

 
 

 
15

Common Stock Dividends
 

 
 

 
 

 
(244
)
 
 

 
(1
)
 
(245
)
Other Changes in Equity
 

 
 

 


 
(6
)
 
 

 
2

 
(4
)
Net Income
 
 
 
 
 
 
560

 
 

 
1

 
561

Other Comprehensive Income
 

 
 

 
 

 
 

 
6

 
 

 
6

TOTAL EQUITY – MARCH 31, 2014
508

 
$
3,305

 
$
6,144

 
$
7,076

 
$
(109
)
 
$
3

 
$
16,419

 
 
 
 
 
 
 
 
 
 
 
 
 
 
TOTAL EQUITY – DECEMBER 31, 2014
510

 
$
3,313

 
$
6,204

 
$
7,406

 
$
(103
)
 
$
4

 
$
16,824

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of Common Stock


 
4

 
27

 
 

 
 

 
 

 
31

Common Stock Dividends
 

 
 

 
 

 
(259
)
 
 

 
(1
)
 
(260
)
Other Changes in Equity
 
 
 
 
3

 
 
 
 
 
2

 
5

Deferred State Income Tax Rate Adjustment
 

 
 

 
17

 


 
 

 
 
 
17

Net Income
 
 
 
 
 
 
629

 
 

 
2

 
631

Other Comprehensive Loss
 

 
 

 
 

 
 

 
(5
)
 
 

 
(5
)
Pension and OPEB Adjustment Related to Mitchell Plant
 
 
 
 
 
 
 
 
5

 
 
 
5

TOTAL EQUITY – MARCH 31, 2015
510

 
$
3,317

 
$
6,251

 
$
7,776

 
$
(103
)
 
$
7

 
$
17,248

See Condensed Notes to Condensed Consolidated Financial Statements beginning on page 40.


36



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2015 and December 31, 2014
(in millions)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT ASSETS
 
 

 
 

Cash and Cash Equivalents
 
$
190

 
$
163

Other Temporary Investments
(March 31, 2015 and December 31, 2014 Amounts Include $281 and $371, Respectively, Related to Transition Funding, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and EIS)
 
293

 
386

Accounts Receivable:
 
 

 
 

Customers
 
725

 
727

Accrued Unbilled Revenues
 
107

 
146

Pledged Accounts Receivable – AEP Credit
 
1,005

 
987

Miscellaneous
 
78

 
87

Allowance for Uncollectible Accounts
 
(26
)
 
(21
)
Total Accounts Receivable
 
1,889

 
1,926

Fuel
 
452

 
587

Materials and Supplies
 
740

 
738

Risk Management Assets
 
138

 
178

Regulatory Asset for Under-Recovered Fuel Costs
 
137

 
127

Margin Deposits
 
129

 
95

Prepayments and Other Current Assets
 
148

 
278

TOTAL CURRENT ASSETS
 
4,116

 
4,478

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 

 
 

Electric:
 
 

 
 

Generation
 
25,856

 
25,727

Transmission
 
12,531

 
12,433

Distribution
 
17,375

 
17,157

Other Property, Plant and Equipment (Including Plant to be Retired, Coal Mining and Nuclear Fuel)
 
5,834

 
5,770

Construction Work in Progress
 
3,710

 
3,218

Total Property, Plant and Equipment
 
65,306

 
64,305

Accumulated Depreciation and Amortization
 
20,496

 
20,188

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
44,810

 
44,117

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 

 
 

Regulatory Assets
 
4,255

 
4,264

Securitized Assets
 
2,001

 
2,072

Spent Nuclear Fuel and Decommissioning Trusts
 
2,122

 
2,096

Goodwill
 
91

 
91

Long-term Risk Management Assets
 
365

 
294

Deferred Charges and Other Noncurrent Assets
 
2,278

 
2,221

TOTAL OTHER NONCURRENT ASSETS
 
11,112

 
11,038

 
 
 
 
 
TOTAL ASSETS
 
$
60,038

 
$
59,633

See Condensed Notes to Condensed Consolidated Financial Statements beginning on page 40.


37



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
March 31, 2015 and December 31, 2014
(dollars in millions)
(Unaudited)
 
 
 
 
 
 
 
March 31,
 
December 31,
 
 
 
 
 
 
 
2015
 
2014
CURRENT LIABILITIES
 
 
 
 
Accounts Payable
 
 
 
 
 
 
$
1,283

 
$
1,287

Short-term Debt:
 
 
 
 
 
 
 
 
 
Securitized Debt for Receivables – AEP Credit
 
 
 
 
740

 
744

Other Short-term Debt
 
 
 
 
 
 
115

 
602

Total Short-term Debt
 
 
 
 
 
 
855

 
1,346

Long-term Debt Due Within One Year
(March 31, 2015 and December 31, 2014 Amounts Include $434 and $431, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and Sabine)
 
 
2,451

 
2,503

Risk Management Liabilities
 
 
 
 
 
 
83

 
92

Customer Deposits
 
 
 
 
 
 
335

 
324

Accrued Taxes
 
 
 
 
 
 
846

 
871

Accrued Interest
 
 
 
 
 
 
227

 
239

Regulatory Liability for Over-Recovered Fuel Costs
 
 
 
 
48

 
55

Other Current Liabilities
 
 
 
 
 
 
1,000

 
1,250

TOTAL CURRENT LIABILITIES
 
 
 
 
 
 
7,128

 
7,967

 
 
 
 
 
 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt
(March 31, 2015 and December 31, 2014 Amounts Include $2,084 and $2,260, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, Transource Energy and Sabine)
 
 
16,778

 
16,181

Long-term Risk Management Liabilities
 
 
 
 
 
 
156

 
131

Deferred Income Taxes
 
 
 
 
 
 
11,188

 
10,986

Regulatory Liabilities and Deferred Investment Tax Credits
 
 
3,911

 
3,892

Asset Retirement Obligations
 
 
 
 
 
 
1,969

 
1,951

Employee Benefits and Pension Obligations
 
 
 
 
 
 
598

 
630

Deferred Credits and Other Noncurrent Liabilities
 
 
1,062

 
1,071

TOTAL NONCURRENT LIABILITIES
 
 
 
 
 
 
35,662

 
34,842

 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES
 
 
 
 
 
 
42,790

 
42,809

 
 
 
 
 
 
 
 
 
 
Rate Matters (Note 4)
 
 
 
 
 
 

 

Commitments and Contingencies (Note 5)
 
 
 
 
 
 

 

 
 
 
 
 
 
 
 
 
 
EQUITY
 
 
 
 
Common Stock – Par Value – $6.50 Per Share:
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
 
 
 
 
Shares Authorized
 
600,000,000
 
600,000,000
 
 
 
 
 
Shares Issued
 
510,266,134
 
509,739,159
 
 
 
 
 
(20,336,592 Shares were Held in Treasury as of March 31, 2015 and December 31, 2014)
 
 
3,317

 
3,313

Paid-in Capital
 
 
 
 
 
 
6,251

 
6,204

Retained Earnings
 
 
 
 
 
 
7,776

 
7,406

Accumulated Other Comprehensive Income (Loss)
 
 
(103
)
 
(103
)
TOTAL AEP COMMON SHAREHOLDERS’ EQUITY
 
 
17,241

 
16,820

 
 
 
 
 
 
 
 
 
 
Noncontrolling Interests
 
 
 
 
 
 
7

 
4

 
 
 
 
 
 
 
 
 
 
TOTAL EQUITY
 
 
 
 
 
 
17,248

 
16,824

 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
 
 
 
 
 
$
60,038

 
$
59,633

See Condensed Notes to Condensed Consolidated Financial Statements beginning on page 40.


38



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2015 and 2014
(in millions)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
631

 
$
561

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
Depreciation and Amortization
 
505

 
491

Deferred Income Taxes
 
243

 
299

Carrying Costs Income
 
(8
)
 
(6
)
Allowance for Equity Funds Used During Construction
 
(30
)
 
(22
)
Mark-to-Market of Risk Management Contracts
 
(21
)
 
6

Amortization of Nuclear Fuel
 
38

 
38

Property Taxes
 
(35
)
 
(54
)
Fuel Over/Under-Recovery, Net
 
3

 
(137
)
Deferral of Ohio Capacity Costs, Net
 
(7
)
 
(56
)
Change in Other Noncurrent Assets
 
1

 
(25
)
Change in Other Noncurrent Liabilities
 
(31
)
 
77

Changes in Certain Components of Working Capital:
 
 
 
 
Accounts Receivable, Net
 
37

 
(83
)
Fuel, Materials and Supplies
 
133

 
209

Accounts Payable
 
49

 
33

Accrued Taxes, Net
 
35

 
(16
)
Other Current Assets
 
(17
)
 
(51
)
Other Current Liabilities
 
(269
)
 
(131
)
Net Cash Flows from Operating Activities
 
1,257

 
1,133

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Construction Expenditures
 
(1,077
)
 
(907
)
Change in Other Temporary Investments, Net
 
93

 
44

Purchases of Investment Securities
 
(246
)
 
(165
)
Sales of Investment Securities
 
228

 
148

Acquisitions of Nuclear Fuel
 
(52
)
 
(49
)
Acquisitions of Assets/Businesses
 
(2
)
 
(43
)
Other Investing Activities
 
39

 
(9
)
Net Cash Flows Used for Investing Activities
 
(1,017
)
 
(981
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Issuance of Common Stock, Net
 
31

 
15

Issuance of Long-term Debt
 
774

 
76

Change in Short-term Debt, Net
 
(491
)
 
575

Retirement of Long-term Debt
 
(239
)
 
(370
)
Principal Payments for Capital Lease Obligations
 
(31
)
 
(33
)
Dividends Paid on Common Stock
 
(260
)
 
(245
)
Other Financing Activities
 
3

 
4

Net Cash Flows from (Used for) Financing Activities
 
(213
)
 
22

 
 
 
 
 
Net Increase in Cash and Cash Equivalents
 
27

 
174

Cash and Cash Equivalents at Beginning of Period
 
163

 
118

Cash and Cash Equivalents at End of Period
 
$
190

 
$
292

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 
 
 
Cash Paid for Interest, Net of Capitalized Amounts
 
$
223

 
$
234

Net Cash Paid (Received) for Income Taxes
 
2

 
(6
)
Noncash Acquisitions Under Capital Leases
 
29

 
20

Construction Expenditures Included in Current Liabilities as of March 31,
 
529

 
387

Construction Expenditures Included in Noncurrent Liabilities as of March 31,
 
43

 

See Condensed Notes to Condensed Consolidated Financial Statements beginning on page 40.


39



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
INDEX OF CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Page
Number
 
 
Significant Accounting Matters
New Accounting Pronouncements
Comprehensive Income
Rate Matters
Commitments, Guarantees and Contingencies
Benefit Plans
Business Segments
Derivatives and Hedging
Fair Value Measurements
Income Taxes
Financing Activities
Variable Interest Entities
Property, Plant and Equipment
Disposition Plant Severance


40



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  SIGNIFICANT ACCOUNTING MATTERS

General

The unaudited condensed consolidated 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 consolidated interim financial statements reflect all normal and recurring accruals and adjustments necessary for a fair presentation of our net income, financial position and cash flows for the interim periods.  Net income for the three months ended March 31, 2015 is not necessarily indicative of results that may be expected for the year ending December 31, 2015.  The condensed consolidated financial statements are unaudited and should be read in conjunction with the audited 2014 consolidated financial statements and notes thereto, which are included in our Form 10-K as filed with the SEC on February 20, 2015.

Revenue Recognition
    
Electricity Supply and Delivery Activities - Transactions with PJM

Revenues are recognized from retail and wholesale electricity sales and electricity transmission and distribution delivery services. For regulated and nonregulated operations, we recognize the revenues on the statements of income upon delivery of the energy to the customer and include unbilled as well as billed amounts.

APCo, I&M, KPCo and WPCo sell power produced at their generation plants to PJM and purchase power from PJM to supply their retail load. These power sales and purchases for each subsidiary’s retail load are netted hourly for financial reporting purposes. On an hourly net basis, each subsidiary records sales of power to PJM in excess of purchases of power from PJM as revenue on the statements of income. Also, on an hourly net basis, each subsidiary records purchases of power from PJM to serve retail load in excess of sales of power to PJM as Purchased Electricity for Resale on the statements of income. Upon termination of the Interconnection Agreement in 2014, each subsidiary manages and accounts for its purchases and sales with PJM individually based on market prices.

AEP’s nonregulated subsidiaries also purchase power from PJM and sell power to PJM. With the exception of certain dedicated load bilateral power supply contracts, these transactions are reported as gross purchases and sales.



41



Earnings Per Share (EPS)

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 our basic and diluted EPS calculations included on our condensed statements of income:
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions, except per share data)
 
 

 
$/share
 
 
 
$/share
Earnings Attributable to AEP Common Shareholders
$
629

 
 

 
$
560

 
 

 
 
 
 
 
 
 
 
Weighted Average Number of Basic Shares Outstanding
489.6

 
$
1.29

 
487.9

 
$
1.15

Weighted Average Dilutive Effect of Restricted Stock Units
0.3

 

 
0.4

 

Weighted Average Number of Diluted Shares Outstanding
489.9

 
$
1.29

 
488.3

 
$
1.15


There were no antidilutive shares outstanding as of March 31, 2015 and 2014.


42



2. NEW ACCOUNTING PRONOUNCEMENTS

Upon issuance of final pronouncements, we review the new accounting literature to determine its relevance, if any, to our business. The following final pronouncements will impact our financial statements.

ASU 2014-08 “Presentation of Financial Statements and Property, Plant and Equipment” (ASU 2014-08)

In April 2014, the FASB issued ASU 2014-08 changing the presentation of discontinued operations on the statements of income and other requirements for reporting discontinued operations. Under the new standard, a disposal of a component or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component meets the criteria to be classified as held-for-sale or is disposed. The amendments in this update also require additional disclosures about discontinued operations and disposal of an individually significant component of an entity that does not qualify for discontinued operations. This standard must be prospectively applied to all reporting periods presented in financial reports issued after the effective date.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2014. If applicable, this standard will change the presentation of our financial statements but will not affect the calculation of net income, comprehensive income or earnings per share. We adopted ASU 2014-08 effective January 1, 2015. There were no events requiring the application of this new accounting guidance.

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

In May 2014, the FASB issued ASU 2014-09 clarifying 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, 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.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is not permitted. As applicable, this standard may change the amount of revenue recognized in the income statements in each reporting period. We are analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on revenue or net income. We plan to adopt ASU 2014-09 effective January 1, 2017.

ASU 2015-01 “Income Statement Extraordinary and Unusual Items” (ASU 2015-01)

In January 2015, the FASB issued ASU 2015-01 eliminating the concept of extraordinary items for presentation on the face of the income statement. Under the new standard, a material event or transaction that is unusual in nature, infrequent or both shall be reported as a separate component of income from continuing operations. Alternatively, it may be disclosed in the notes to financial statements.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted if applied from the beginning of a fiscal year. As applicable, this standard may change the presentation of amounts in the income statements. We plan to adopt ASU 2015-01 effective January 1, 2016.

ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03)

In April 2015, the FASB issued ASU 2015-03 to simplify the presentation of debt issuance costs on the balance sheets. Under the new standard, debt issuance costs related to a recognized debt liability will be presented on the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with discounts. We include debt issuance costs in Deferred Charges and Other Noncurrent Assets on the balance sheets. Debt issuance costs represent less than 1% of total long-term debt.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. We intend to early adopt ASU 2015-03 for the 2015 Form 10-K.

43




ASU 2015-05 "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" (ASU 2015-05)

In April 2015, the FASB issued ASU 2015-05 to provide guidance to customers about whether a cloud computing arrangement includes a software license. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. We are analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net income. We plan to adopt ASU 2015-05 effective January 1, 2016.

44



3.  COMPREHENSIVE INCOME

Presentation of Comprehensive Income

The following tables provide the components of changes in AOCI for the three months ended March 31, 2015 and 2014.  All amounts in the following tables are presented net of related income taxes.

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2015
 
Cash Flow Hedges
 
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Securities
Available for Sale
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of December 31, 2014
$
1

 
$
(19
)
 
$
8

 
$
(93
)
 
$
(103
)
Change in Fair Value Recognized in AOCI
1

 

 
1

 

 
2

Amounts Reclassified from AOCI
(8
)
 
1

 

 

 
(7
)
Net Current Period Other Comprehensive Income (Loss)
(7
)
 
1

 
1

 

 
(5
)
Pension and OPEB Adjustment Related to Mitchell Plant

 

 

 
5

 
5

Balance in AOCI as of March 31, 2015
$
(6
)
 
$
(18
)
 
$
9

 
$
(88
)
 
$
(103
)

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2014
 
Cash Flow Hedges
 
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Securities
Available for Sale
 
Pension
and OPEB
 
Total
 
(in millions)
Balance in AOCI as of December 31, 2013
$

 
$
(23
)
 
$
7

 
$
(99
)
 
$
(115
)
Change in Fair Value Recognized in AOCI
(14
)
 

 

 

 
(14
)
Amounts Reclassified from AOCI
18

 
1

 

 
1

 
20

Net Current Period Other Comprehensive Income
4

 
1

 

 
1

 
6

Balance in AOCI as of March 31, 2014
$
4

 
$
(22
)
 
$
7

 
$
(98
)
 
$
(109
)


45



Reclassifications from Accumulated Other Comprehensive Income

The following table provides details of reclassifications from AOCI for the three months ended March 31, 2015 and 2014.  The amortization of pension and OPEB AOCI components are included in the computation of net periodic pension and OPEB costs.  See Note 6 for additional details.

Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2015 and 2014
 
 
Amount of (Gain) Loss
Reclassified from AOCI
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Gains and Losses on Cash Flow Hedges
 
(in millions)
Commodity:
 
 

 
 
Generation & Marketing Revenues
 
$
(13
)
 
$

Purchased Electricity for Resale
 
1

 
31

Regulatory Assets/(Liabilities), Net (a)
 

 
(3
)
Subtotal  Commodity
 
(12
)
 
28

 
 
 

 
 
Interest Rate and Foreign Currency:
 
 

 
 
Interest Expense
 
1

 
2

Subtotal  Interest Rate and Foreign Currency
 
1

 
2

 
 
 
 
 
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(11
)
 
30

Income Tax (Expense) Credit
 
(4
)
 
11

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(7
)
 
19

 
 
 
 
 
Pension and OPEB
 
 

 
 
Amortization of Prior Service Cost (Credit)
 
(5
)
 
(5
)
Amortization of Actuarial (Gains)/Losses
 
5

 
7

Reclassifications from AOCI, before Income Tax (Expense) Credit
 

 
2

Income Tax (Expense) Credit
 

 
1

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 

 
1

 
 
 

 
 
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
$
(7
)
 
$
20


(a)
Represents realized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the condensed balance sheets.


46



4.  RATE MATTERS

As discussed in the 2014 Annual Report, our subsidiaries are involved in rate and regulatory proceedings at the FERC and their state commissions. The Rate Matters note within our 2014 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 2015 and updates the 2014 Annual Report.

Regulatory Assets Pending Final Regulatory Approval
 
 
March 31,
 
December 31,
 
 
2015
 
2014
 Noncurrent Regulatory Assets
 
(in millions)
 
 
 
 
 
Regulatory Assets Currently Earning a Return
 
 
 
 
West Virginia Vegetation Management Program
 
$
26

 
$
20

Storm Related Costs
 
20

 
20

Regulatory Assets Currently Not Earning a Return
 
 

 
 

Storm Related Costs
 
100

 
100

Asset Retirement Obligation
 
17

 
9

Carbon Capture and Storage Product Validation Facility
 
13

 
13

IGCC Pre-Construction Costs
 
11

 
11

Virginia Demand Response Program Costs
 
10

 
9

Ormet Special Rate Recovery Mechanism
 
10

 
10

Other Regulatory Assets Pending Final Regulatory Approval
 
29

 
34

Total Regulatory Assets Pending Final Regulatory Approval
$
236

 
$
226


If these costs are ultimately determined not to be recoverable, it could reduce future net income and cash flows and impact financial condition.

OPCo Rate Matters

Ohio Electric Security Plan Filings

2009 – 2011 ESP

The PUCO issued an order in March 2009 that modified and approved the ESP which established rates at the start of the April 2009 billing cycle through 2011. The order also provided a phase-in FAC, which was authorized to be recovered through a non-bypassable surcharge over the period 2012 through 2018.

In August 2012, the PUCO issued an order in a separate proceeding which implemented a PIRR to recover deferred fuel costs in rates beginning September 2012. The PUCO ruled that carrying charges should be calculated without an offset for accumulated deferred income taxes and that a long-term debt rate should be applied when collections begin. In November 2012, OPCo appealed that PUCO order to the Supreme Court of Ohio claiming a long-term debt rate modified the previously adjudicated 2009 - 2011 ESP order, which granted a weighted average cost of capital (WACC) rate. In November 2012, the IEU filed an appeal of the PUCO decision that included the argument that carrying costs should be reduced due to an accumulated deferred income tax credit which, as of March 31, 2015, could reduce carrying costs by $25 million including $13 million of unrecognized equity carrying costs. Oral arguments at the Supreme Court of Ohio were held in February 2015. OPCo argued for a remand to reinstate the WACC carrying charges initially approved by the PUCO and challenged the IEU argument that the carrying charges should be reduced due to an accumulated deferred income tax credit. A decision from the Supreme Court of Ohio is pending.

Management is unable to predict the outcome of the unresolved litigation discussed above. Depending on the rulings in these proceedings, it could reduce future net income and cash flows and impact financial condition.

47



June 2012 – May 2015 ESP Including Capacity Charge

In August 2012, the PUCO issued an order which adopted and modified a new ESP that established base generation rates through May 2015. This ruling was generally upheld in rehearing orders in January and March 2013.

In July 2012, the PUCO issued an order in a separate capacity proceeding which stated that OPCo must charge CRES providers the RPM price and authorized OPCo to defer a portion of its incurred capacity costs not recovered from CRES providers up to $188.88/MW day.  The OPCo RPM price collected from CRES providers, which includes reserve margins, was approximately $34/MW day through May 2014 and is $150/MW day from June 2014 through May 2015. In December 2012, various parties filed notices of appeal of the capacity costs decision with the Supreme Court of Ohio.

As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012.  The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs. In July 2014, OPCo submitted a separate application to continue the RSR to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh, until the balance of the capacity deferrals has been collected. In April 2015, the PUCO issued an order approving the application to continue the RSR, with modifications. The order included approval to continue the collection of deferred capacity costs at a rate of $4.00/MWh beginning June 1, 2015 for approximately 32 months, with carrying costs at a long-term cost of debt rate. Additionally, the order stated that an audit will be conducted of the final capacity deferral balance as of May 31, 2015. As of March 31, 2015, OPCo's incurred deferred capacity costs balance of $434 million, including debt carrying costs, was recorded in regulatory assets on the condensed balance sheet.

In 2013, the PUCO issued its Orders on Rehearing for the ESP which generally upheld its August 2012 order, including the implementation of the RSR. The PUCO clarified that a final reconciliation of revenues and expenses would be permitted for any over- or under-recovery on several riders including fuel. In addition, the PUCO addressed certain issues around the energy auctions while other SSO issues related to the energy auctions were deferred to a separate docket related to the competitive bid process (CBP). In 2013, OPCo and various intervenors filed appeals with the Supreme Court of Ohio challenging portions of the PUCO’s ESP order, including the RSR. Oral arguments at the Supreme Court of Ohio are scheduled for May 2015.

In November 2013, the PUCO issued an order approving OPCo’s CBP with modifications. As ordered, in 2014, OPCo conducted multiple energy-only auctions for a total of 100% of the SSO load with delivery beginning April 2014 through May 2015. For delivery starting in June 2015, OPCo will conduct energy and capacity auctions for its entire SSO load. The PUCO also approved the unbundling of the FAC into fixed and energy-related components and an intervenor proposal to blend the $188.88/MW day capacity price in proportion to the percentage of energy planned to be auctioned. Additionally, the PUCO ordered that intervenor concerns related to the recovery of the fixed fuel costs through potentially both the FAC and the approved capacity charges be addressed in subsequent FAC proceedings. Management believes that these intervenor concerns are without merit.

In January 2014, the PUCO denied all rehearing requests and agreed to issue a supplemental request for an independent auditor in the 2012 - 2013 FAC proceeding to separately examine the recovery of the fixed fuel costs, including OVEC. In March 2014, the PUCO approved OPCo’s request to implement riders related to the unbundling of the FAC. In October 2014, the independent auditor, selected by the PUCO, filed its report for the period August 2012 through May 2015 with the PUCO. If the PUCO ultimately concludes that a portion of the fixed fuel costs are also recovered through OPCo's $188.88/MW day capacity charge, the independent auditor recommends a methodology for calculating a refund of a portion of certain fixed fuel costs. The retail share of these fixed fuel costs is approximately $90 million annually. A hearing related to this matter has not been scheduled. Management believes that no over-recovery of costs has occurred and intends to oppose the findings in the audit report.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition.


48



June 2015 - May 2018 ESP

In December 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 Distribution Investment Rider (DIR), effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement. The PPA would initially be based upon the OVEC contractual entitlement and could, upon further approval, be expanded to include other contracts involving other Ohio legacy generation assets.

In October 2014, OPCo filed a separate application with the PUCO to propose a new extended PPA for inclusion in the PPA rider, discussed above. The new PPA would include an additional 2,671 MW to be purchased from AGR over the life of the respective generating units.

In February 2015, the PUCO issued an order approving OPCo's ESP application, subject to certain modifications, with a return on common equity of 10.2% on capital costs for certain riders. The order included (a) approval of the DIR with modified rate caps established by the PUCO, (b) authorization to establish a zero rate rider for OPCo's proposed PPA, (c) the option for OPCo to reapply in a future proceeding with a more detailed PPA proposal and (d) a directive to continue to pursue the transfer of the OVEC contractual entitlement to AGR or to otherwise divest of its interest in OVEC. In April 2015, the PUCO issued an order that granted applications for rehearing for further consideration filed by OPCo and various intervenors.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition.

Significantly Excessive Earnings Test Filings

In January 2011, the PUCO issued an order on the 2009 SEET filing. The order gave consideration for a future commitment to invest $20 million to support the development of a large solar farm. In January 2013, the PUCO found there was not a need for the large solar farm. The PUCO noted that OPCo remains obligated to spend $20 million on this solar project or another project. In September 2013, a proposed second phase of OPCo’s gridSMART® program was filed with the PUCO which included a proposed project to satisfy this PUCO directive. A decision from the PUCO is pending.

Management believes its financial statements adequately address the impact of 2014 SEET requirements.

Corporate Separation

In October 2012, the PUCO issued an order which approved the corporate separation of OPCo’s generation assets including the transfer of OPCo’s generation assets and associated generation liabilities at net book value to AGR. In June 2013, the IEU filed an appeal with the Supreme Court of Ohio claiming the PUCO order approving the corporate separation was unlawful. A decision from the Supreme Court of Ohio is pending. In December 2013, corporate separation of OPCo’s generation assets was completed. If any part of the PUCO order is overturned, it could reduce future net income and cash flows and impact financial condition.

2009 Fuel Adjustment Clause Audit

In January 2012, the PUCO issued an order in OPCo’s 2009 FAC that the remaining $65 million in proceeds from a 2008 coal contract settlement agreement be applied against OPCo’s under-recovered fuel balance. In April 2012, on rehearing, the PUCO ordered that the settlement credit only needed to reflect the Ohio retail jurisdictional share of the gain not already flowed through the FAC with carrying charges. As a result, OPCo recorded a $30 million net favorable adjustment on the 2012 statement of income. The January 2012 PUCO order also stated that a consultant should be hired to review the coal reserve valuation and recommend whether any additional value should benefit ratepayers.

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In September 2014, the Supreme Court of Ohio upheld the PUCO order on appeal. A review of the coal reserve valuation by an outside consultant is still pending. If the PUCO ultimately determines that additional amounts should benefit ratepayers as a result of the consultant’s review of the coal reserve valuation, it could reduce future net income and cash flows and impact financial condition.

2012 and 2013 Fuel Adjustment Clause Audits

In May 2014, the PUCO-selected outside consultant provided its final report related to its 2012 and 2013 FAC audit which included certain unfavorable recommendations related to the FAC recovery for 2012 and 2013. These recommendations are opposed by OPCo. In addition, the PUCO will consider the results of the final audit of the recovery of fixed fuel costs that was issued in October 2014. See the "June 2012 - May 2015 ESP Including Capacity Charge" section above. If the PUCO orders a reduction to the FAC deferral or a refund to customers, it could reduce future net income and cash flows and impact financial condition.

Ormet

Ormet, a large aluminum company, had a contract to purchase power from OPCo through 2018. In February 2013, Ormet filed for bankruptcy and subsequently shut down operations in October 2013. In March 2014, the PUCO issued an order in OPCo’s Economic Development Rider (EDR) filing allowing OPCo to include $39 million of Ormet-related foregone revenues in the EDR effective April 2014. The order stated that if the stipulation agreement between OPCo and Ormet is subsequently adopted by the PUCO, OPCo could file an application to modify the EDR rate for the remainder of the period requesting recovery of the remaining $10 million of Ormet deferrals which, as of March 31, 2015, is recorded in regulatory assets on the condensed balance sheet. In April 2014, an intervenor filed testimony objecting to $5 million of the remaining foregone revenues. A hearing at the PUCO related to the stipulation agreement was held in May 2014.

In addition, in the 2009 - 2011 ESP proceeding, intervenors requested that OPCo be required to refund the Ormet-related revenues under a previous interim arrangement (effective from January 2009 through September 2009) and requested that the PUCO prevent OPCo from collecting Ormet-related revenues in the future. Through September 2009, the last month of the interim arrangement, OPCo had $64 million of deferred FAC costs related to the interim arrangement, excluding $2 million of unrecognized equity carrying costs. The PUCO did not take any action on this request. The intervenors raised this issue again in response to OPCo’s November 2009 filing to approve recovery of the deferral under the interim agreement.

To the extent amounts discussed above are not recoverable, it could reduce future net income and cash flows and impact financial condition.

SWEPCo Rate Matters

2012 Texas Base Rate Case

In July 2012, SWEPCo filed a request with the PUCT to increase annual base rates primarily due to the completion of the Turk Plant. In October 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. Additionally, the PUCT deferred consideration of the requested increase in depreciation expense related to the change in the 2016 retirement date of the Welsh Plant, Unit 2. As of March 31, 2015, the net book value of Welsh Plant, Unit 2 was $84 million, before cost of removal, including materials and supplies inventory and CWIP.


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Upon rehearing in January 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, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances. The resulting annual base rate increase is approximately $52 million. In March 2014, the PUCT issued an order related to the January 2014 PUCT ruling and in April 2014, this order became final. In May 2014, intervenors filed appeals of that order with the Texas District Court. In June 2014, SWEPCo intervened in those appeals and filed initial responses.

If certain parts of the PUCT order are overturned or if SWEPCo cannot ultimately recover its Texas jurisdictional share of the Turk Plant investment, including AFUDC, or its retirement-related costs and potential fuel or replacement power disallowances related to Welsh Plant, Unit 2, it could reduce future net income and cash flows and impact financial condition.

2012 Louisiana Formula Rate Filing

In 2012, SWEPCo initiated a proceeding to establish new formula base rates in Louisiana, including recovery of the Louisiana jurisdictional share (approximately 29%) of the Turk Plant. In February 2013, a settlement was filed and approved by the LPSC. The settlement increased SWEPCo's Louisiana total rates by approximately $2 million annually, effective March 2013, which consisted of an increase in base rates of approximately $85 million annually offset by a decrease in fuel and other rates of approximately $83 million annually.  The March 2013 base rates are based on a 10% return on common equity and cost recovery of the Louisiana jurisdictional share of the Turk Plant and Stall Unit. The rates are subject to refund based on the staff review of the cost of service and the prudency review of the Turk Plant. The settlement also provided that the LPSC review base rates in 2014 and 2015 and that SWEPCo recover non-fuel Turk Plant costs and a full weighted-average cost of capital return on the prudently incurred Turk Plant investment in jurisdictional rate base, effective January 2013. In December 2014, the LPSC approved a settlement agreement related to the staff review of the cost of service. The settlement agreement reduced the requested revenue increase by $3 million, primarily due to the timing of both the allowed recovery of certain existing regulatory assets and the establishment of a regulatory asset for certain previously expensed costs. If the LPSC orders refunds based upon the pending prudence review of the Turk Plant investment, it could reduce future net income and cash flows and impact financial condition.

2014 Louisiana Formula Rate Filing

In April 2014, SWEPCo filed its annual formula rate plan for test year 2013 with the LPSC.  The filing included a $5 million annual increase, which was effective August 2014.  SWEPCo also proposed to increase rates by an additional $15 million annually, effective January 2015, for a total annual increase of $20 million. This additional increase reflects the cost of incremental generation to be used to serve Louisiana customers in 2015 due to the expiration of a purchase power agreement attributable to Louisiana customers.  In December 2014, the LPSC approved a partial settlement agreement that included the implementation of the $15 million annual increase in rates effective January 2015. These increases are subject to LPSC staff review and are subject to refund.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

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 will be effective August 2015.  This increase is subject to LPSC staff review and is subject to refund.  If any of the costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.


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Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC.  Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC.  As of March 31, 2015, SWEPCo has incurred costs of $211 million and has remaining contractual construction obligations of $84 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. As of March 31, 2015, the net book value of Welsh Plant, Units 1 and 3 was $431 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. 

APCo and WPCo Rate Matters

2014 West Virginia Base Rate Case

In June 2014, APCo filed a request with the WVPSC to increase annual base rates by $181 million, based upon a 10.62% return on common equity, to be effective in the second quarter of 2015. The filing included a request to increase generation depreciation rates primarily due to the increase in plant investment and changes in the expected service lives of various generating units. The filing also requested recovery of $89 million in regulatory assets over five years related to 2012 West Virginia storm costs, IGCC and other deferred costs. In addition to the base rate request, the filing also included a request to implement a rider of approximately $45 million annually to recover vegetation management costs, including a return on capital investment.  In October 2014, the WVPSC approved APCo's motion to revise the procedural schedule which included a request to change the date of implementation of the new rates to May 2015.  In December 2014 and January 2015, intervenors filed testimony which proposed total annual revenue increases ranging from $35 million to $59 million based upon returns on common equity ranging from 9% to 10% and regulatory asset disallowances ranging from $7 million to $9 million.  Additionally, other intervenors proposed that the revenue requirement be based on a return on common equity of 8.7% and that $89 million of regulatory assets be disallowed.  Intervenors also recommended a disallowance of approximately $44 million related to the December 2013 transfer of OPCo's two-thirds interest in the Amos Plant, Unit 3 to APCo.  Hearings at the WVPSC were held in January 2015.  An order is anticipated in the second quarter of 2015. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2015 Virginia Regulatory Asset Proceeding

In January 2015, the Virginia SCC initiated a separate proceeding to address the proper treatment of APCo’s authorized regulatory assets. As of March 31, 2015, APCo’s authorized regulatory assets under review in this proceeding are estimated to be $14 million. In February and March 2015, briefs related to this proceeding were filed by various parties. If any of these costs, or any additional costs that may be subject to review, are not recoverable, it could reduce future net income and cash flows and impact financial condition.

New Virginia Legislation Affecting Biennial Reviews

In February 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 are frozen until after the Virginia SCC rules on APCo’s next biennial review, which APCo will file in March 2020 for the 2018 and 2019 test years. These amendments also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. APCo's financial statements adequately address the impact of these amendments. During the years 2014 through 2017, the new law provides that APCo will absorb incremental generation and distribution costs associated with severe weather events and/or natural disasters and costs associated with potential impairments related to new carbon emission guidelines issued by the Federal EPA.

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PSO Rate Matters

2014 Oklahoma Base Rate Case

In January 2014, PSO filed a request with the OCC to increase annual base rates by $38 million, based upon a 10.5% return on common equity. This revenue increase included a proposed increase in depreciation rates of $29 million. In addition, the filing proposed recovery of advanced metering costs through a separate rider over a three-year deployment period requesting $7 million of revenues in year one, increasing to $28 million in year three. The filing also proposed expansion of an existing transmission rider currently recovered in base rates to include additional transmission-related costs that are expected to increase over the next several years.

In June 2014, a non-unanimous stipulation agreement between PSO, the OCC staff and certain intervenors was filed with the OCC. The parties to the stipulation recommended no overall change to the transmission rider or to annual revenues, other than additional revenues through a separate rider related to advanced metering costs, and that the terms of the stipulation be effective November 2014. The advanced metering rider would provide $24 million of revenues over 14 months beginning in November 2014 and increase to $27 million in 2016. New depreciation rates are recommended for advanced metering investments and existing meters, also to be effective November 2014. Further, the stipulation recommends a return on common equity of 9.85% to be used only in the formula to calculate AFUDC, factoring of customer receivables and for riders with an equity component. Additionally, the stipulation recommends recovery of regulatory assets for 2013 storms and regulatory case expenses. In July 2014, the Attorney General joined in the stipulation agreement. In October 2014, the Administrative Law Judge recommended approval of the stipulation agreement and interim rates were implemented in November 2014, subject to refund. In April 2015, the OCC issued an order that approved the stipulation agreement.

I&M Rate Matters

Tanners Creek Plant

I&M announced that it would retire Tanners Creek Plant by June 2015 to comply with proposed environmental regulations. I&M is currently recovering depreciation and a return on the net book value of the Tanners Creek Plant in base rates.

In October 2014, I&M filed an application with the IURC seeking approval of revised depreciation rates for Rockport Plant, Unit 1 and the Tanners Creek Plant. Upon retirement of the Tanners Creek Plant, I&M proposed that, for purposes of determining its depreciation rates, the net book value of the Tanners Creek Plant be recovered over the remaining life of the Rockport Plant. The new depreciation rates would result in a decrease in I&M's Indiana jurisdictional electric depreciation expense which I&M proposed to reduce customer rates through a credit rider. In February 2015, the OUCC filed testimony that recommended approval of I&M's application. A hearing at the IURC was held in March 2015. A decision from the IURC is pending.

As of March 31, 2015, the net book value of the Tanners Creek Plant was $333 million, before cost of removal, including materials and supplies inventory and CWIP.  If I&M is ultimately not permitted to fully recover its net book value of the Tanners Creek Plant and its retirement-related costs, it could reduce future net income and cash flows and impact financial condition.

Transmission, Distribution and Storage System Improvement Charge (TDSIC)

In October 2014, I&M filed petitions with the IURC for approval of a TDSIC Rider and approval of I&M’s seven-year TDSIC Plan, from 2015 through 2021, for eligible transmission, distribution and storage system improvements. The initial estimated cost of the capital improvements and associated operation and maintenance expenses included in the TDSIC Plan of $787 million, excluding AFUDC, will be updated annually. The TDSIC Plan included distribution investments specific to the Indiana jurisdiction. The TDSIC Rider will allow the periodic adjustment of I&M's rates to provide for timely recovery of 80% of approved TDSIC Plan costs. I&M will defer the remaining 20% of approved

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TDSIC Plan costs to be recovered in I&M's next general rate case. I&M is not seeking a rate adjustment in this proceeding but is seeking approval of a TDSIC Rider rate adjustment mechanism for subsequent proceedings. In January 2015, intervenors filed testimony that recommended denial of certain portions of the TDSIC Plan including recommended changes to the capital structure, recovery of requested operation and maintenance cost allocations and the rate design within the TDSIC Rider mechanism. A hearing at the IURC was held in February 2015. In April 2015, I&M filed a notice with the IURC to seek approval of the proposed TDSIC Plan excluding $117 million of certain projects that were challenged in this proceeding. A decision from the IURC is pending. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

KPCo Rate Matters

Plant Transfer

In October 2013, the KPSC issued an order that approved a modified settlement agreement which included the approval to transfer to KPCo a one-half interest in the Mitchell Plant, comprising 780 MW of average annual generating capacity. In December 2013, the transfer of a one-half interest in the Mitchell Plant to KPCo was completed.

In December 2013, the Attorney General filed an appeal of the order with the Franklin County Circuit Court. In May 2014, KPCo's motion to dismiss the appeal was denied. In May 2014, KPCo filed motions for reconsideration and clarification with the Franklin County Circuit Court. In June 2014, the motion for reconsideration was denied but the motion to clarify was granted, thereby limiting the appeal to the issues of law presented in the Attorney General's appeal. In April 2015, the Franklin County Circuit Court issued an order that affirmed the KPSC's October 2013 order.

Kentucky Fuel Adjustment Clause Review

In August 2014, the KPSC issued an order initiating a review of KPCo's FAC from November 2013 through April 2014. In January 2015, the KPSC issued an order disallowing certain FAC costs during the period of January 2014 through May 2015 while KPCo owns and operates both Big Sandy Plant, Unit 2 and its one-half interest in the Mitchell Plant. As a result of this order, KPCo recorded a regulatory disallowance of $36 million in December 2014. In February 2015, KPCo filed an appeal of this order with the Franklin County Circuit Court. In April 2015, the Franklin County Circuit Court issued an order approving intervenors request to hold this case in abeyance until the KPSC issues a final order in KPCo’s two-year FAC review case for the period November 1, 2012 through October 31, 2014.

2014 Kentucky Base Rate Case

In December 2014, KPCo filed a request with the KPSC for a net increase in rates of $70 million, which consists of a $75 million increase in rider rates, offset by a $5 million decrease in annual base rates, to be effective July 2015 based upon a 10.62% return on common equity.  The net increase reflects KPCo's ownership interest in the Mitchell Plant, riders to recover the Big Sandy Plant retirement and operational costs and the inclusion of an environmental compliance plan related to the Mitchell Plant FGD.  Additionally, the filing included a request to recover deferred storm costs.  In March 2015, intervenors filed testimony which recommended net increases in rates ranging from $20 million to $26 million.  These increases consist of proposed increases in rider rates ranging from $55 million to $63 million, offset by decreases in annual base rates ranging from $35 million to $37 million and based upon returns on common equity ranging from 8.65% to 8.75%.  Intervenor recommendations include the recovery of deferred storm costs.  Hearings at the KPSC are scheduled for May 2015.  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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5.  COMMITMENTS, GUARANTEES AND CONTINGENCIES

We are subject to certain claims and legal actions arising in our ordinary course of business.  In addition, our 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 us cannot be predicted.  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 our financial statements.  The Commitments, Guarantees and Contingencies note within our 2014 Annual Report should be read in conjunction with this report.

GUARANTEES

We record liabilities for guarantees 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

We enter into standby letters of credit with third parties.  As Parent, we issue all of these letters of credit in our ordinary course of business on behalf of our subsidiaries.  These letters of credit cover items such as gas and electricity risk management contracts, construction contracts, insurance programs, security deposits and debt service reserves.

We have two revolving credit facilities totaling $3.5 billion, under which we may issue up to $1.2 billion as letters of credit.  As of March 31, 2015, the maximum future payments for letters of credit issued under the revolving credit facilities were $75 million with maturities ranging from April 2015 to May 2016.

We issue letters of credit under a $100 million uncommitted facility. As of March 31, 2015, the maximum future payments for letters of credit issued under the uncommitted facility were $100 million with a maturity of July 2015. An uncommitted facility gives the issuer of the facility the right to accept or decline each request we make under the facility.

We have $477 million of variable rate Pollution Control Bonds supported by bilateral letters of credit for $483 million.  The letters of credit have maturities ranging from March 2016 to July 2017.

Guarantees of Third-Party Obligations

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 $115 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.  Based on the latest study completed in 2010, we estimate the reserves will be depleted in 2036 with final reclamation completed by 2046 at an estimated cost of $58 million.  Actual reclamation costs could vary due to period inflation and any changes to actual mine reclamation.  As of March 31, 2015, SWEPCo has collected $64 million through a rider for final mine closure and reclamation costs, of which $16 million is recorded in Deferred Credits and Other Noncurrent Liabilities and $48 million is recorded in Asset Retirement Obligations on our condensed balance sheets.

Sabine charges SWEPCo, its only customer, all of its costs.  SWEPCo passes these costs to customers through its fuel clauses.


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Indemnifications and Other Guarantees

Contracts

We 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, our exposure generally does not exceed the sale price.  As of March 31, 2015, there were no material liabilities recorded for any indemnifications.

Master Lease Agreements

We 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, we 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 March 31, 2015, the maximum potential loss for these lease agreements was $26 million assuming the fair value of the equipment is zero at the end of the lease term.

Railcar Lease

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 intend to renew these leases for the full lease term of twenty years via the renewal options.  The future minimum lease obligations are $11 million and $13 million for I&M and SWEPCo, respectively, for the remaining railcars as of March 31, 2015.

Under the 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 declines from 83% of the projected fair value of the equipment under the current five year lease term to 77% at the end of the 20-year term.  I&M and SWEPCo have assumed the guarantee under the return-and-sale option.  The maximum potential losses related to the guarantee are $9 million and $10 million for I&M and SWEPCo, respectively, assuming the fair value of the equipment is zero at the end of the current five-year lease term.  However, we believe that the fair value would produce a sufficient sales price to avoid any loss.

ENVIRONMENTAL CONTINGENCIES

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, our generation plants and transmission and distribution facilities have used asbestos, polychlorinated biphenyls and other hazardous and nonhazardous materials.  We currently incur costs to dispose of these substances safely.


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In 2008, I&M received a letter from the Michigan Department of Environmental Quality (MDEQ) concerning conditions at a site under state law and requesting I&M take voluntary action necessary to prevent and/or mitigate public harm.  I&M started remediation work in accordance with a plan approved by MDEQ.  In 2014, I&M recorded an accrual for remediation at certain additional sites in Michigan. As a result of receiving approval of completed remediation work from the MDEQ in March 2015, I&M's accrual for all of these sites was reduced to approximately $9 million.  As the remediation work is completed, I&M’s cost may change as new information becomes available concerning either the level of contamination at the site or changes in the scope of remediation.  We cannot predict the amount of additional cost, if any.

NUCLEAR CONTINGENCIES

I&M owns and operates the two-unit 2,191 MW Cook Plant under licenses granted by the Nuclear Regulatory Commission.  We have 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.

OPERATIONAL CONTINGENCIES

Rockport Plant Litigation

In July 2013, the Wilmington Trust Company filed a complaint in U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will 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 plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement.  The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff.  The New York court granted our motion to transfer this case to the U.S. District Court for the Southern District of Ohio.  In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.  We will continue to defend against the remaining claims.  We are unable to determine a range of potential losses that are reasonably possible of occurring.

Natural Gas Markets Lawsuits

In 2002, the Lieutenant Governor of California filed a lawsuit in Los Angeles County California Superior Court against numerous energy companies, including AEP, alleging violations of California law through alleged fraudulent reporting of false natural gas price and volume information with an intent to affect the market price of natural gas and electricity.  AEP was dismissed from the case.  A number of similar cases were also filed in California and in state and federal courts in several states making essentially the same allegations under federal or state laws against the same companies.  AEP (or a subsidiary) is among the companies named as defendants in some of these cases.  We settled, received summary judgment or were dismissed from all of these cases.  The plaintiffs appealed the Nevada federal district court's dismissal of several cases involving AEP companies to the U.S. Court of Appeals for the Ninth Circuit.  In April 2013, the appellate court reversed in part, and affirmed in part, the district court's orders in these cases.  The appellate court reversed the district court's holding that the state antitrust claims were preempted by the Natural Gas Act and the order dismissing AEP from two of the cases on personal jurisdiction grounds and affirmed the decision denying leave to the plaintiffs to amend their complaints in two of the cases.  Defendants in these cases, including AEP, filed a petition seeking further review with the U.S. Supreme Court on the preemption issue. AEP also subsequently filed a separate petition with the U.S. Supreme Court seeking review of the personal jurisdiction issue. In July 2014,

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the U.S. Supreme Court granted the defendants' previously filed petition for further review with the U.S. Supreme Court on the preemption issue. Oral argument occurred in January 2015. In April 2015, the U.S. Supreme Court affirmed the judgment of the U.S. Court of Appeals for the Ninth Circuit on the preemption issue, holding that the plaintiffs' state antitrust claims were not preempted by the Natural Gas Act. AEP's petition for review on the personal jurisdiction issue remains pending. We will continue to defend the cases.  We believe the provision we have is adequate. We are unable to determine the amount of potential additional losses that are reasonably possible of occurring.

Wage and Hours Lawsuit

In August 2013, PSO received an amended complaint filed in the U.S. District Court for the Northern District of Oklahoma by 36 current and former line and warehouse employees alleging that they have been denied overtime pay in violation of the Fair Labor Standards Act.  Plaintiffs claim that they are entitled to overtime pay for “on call” time. They allege that restrictions placed on them during on call hours are burdensome enough that they are entitled to compensation for these hours as hours worked.  Plaintiffs also filed a motion to conditionally certify this action as a class action, claiming there are an additional 70 individuals similarly situated to plaintiffs.  Plaintiffs seek damages in the amount of unpaid overtime over a three-year period and liquidated damages in the same amount.

In March 2014, the federal court granted plaintiffs’ motion to conditionally certify the action as a class action.  Notice was given to all potential class members and an additional 44 individuals opted in to the class, bringing the plaintiff class to 80 current and former employees. We will continue to defend the case. We are unable to determine a range of potential losses that are reasonably possible of occurring.

National Do Not Call Registry Lawsuit

In May 2014, AEP Energy was served with a complaint filed in the U.S. District Court for the Northern District of Illinois, alleging violations of the Telephone Consumer Protection Act (TCPA). The plaintiff alleges that he received telemarketing calls on behalf of AEP Energy despite having registered his telephone number on the National Do Not Call Registry. Plaintiff seeks to represent a class of persons who allegedly received such calls. Plaintiff seeks statutory damages under the TCPA on behalf of himself and the alleged class as well as injunctive relief. As a result of a mediation held in October 2014, the parties reached an agreement in principle, subject to final documentation and preliminary and final court approval. In April 2015, we filed a motion with the court for preliminary approval of the settlement. We will continue to defend the case. We believe the provision we have is adequate. We are unable to determine the amount of potential additional losses that are reasonably possible of occurring.

Gavin Landfill Litigation
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.  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.  Eleven of the family members are pursuing personal injury/illness claims and the remainder are pursuing loss of consortium claims.  The plaintiffs seek compensatory and punitive damages, as well as medical monitoring.  In September 2014, we filed a motion to dismiss the complaint, contending the case should be filed in Ohio.  That motion is pending.  We will continue to defend against the claims.  We are unable to determine a range of potential losses that are reasonably possible of occurring.

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6.  BENEFIT PLANS

We sponsor a qualified pension plan and two unfunded nonqualified pension plans.  Substantially all of our employees are covered by the qualified plan or both the qualified and a nonqualified pension plan.  We sponsor OPEB plans to provide health and life insurance benefits for retired employees.

Components of Net Periodic Benefit Cost

The following table provides the components of our net periodic benefit cost (credit) for the plans for the three months ended March 31, 2015 and 2014:
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Service Cost
$
23

 
$
18

 
$
3

 
$
4

Interest Cost
51

 
55

 
14

 
17

Expected Return on Plan Assets
(69
)
 
(66
)
 
(28
)
 
(28
)
Amortization of Prior Service Cost (Credit)
1

 
1

 
(17
)
 
(17
)
Amortization of Net Actuarial Loss
27

 
31

 
5

 
5

Net Periodic Benefit Cost (Credit)
$
33

 
$
39

 
$
(23
)
 
$
(19
)


59



7.  BUSINESS SEGMENTS

Our primary business is the generation, transmission and distribution of electricity. Within our Vertically Integrated Utilities segment, we centrally dispatch generation assets and manage our 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.

Our 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 OPCo, TCC and TNC.
OPCo purchases energy to serve standard service offer customers, and provides capacity for all connected load.

AEP Transmission Holdco

Development, construction and operation of transmission facilities through investments in our wholly-owned transmission only subsidiaries and transmission only joint ventures.  These investments have PUCT-approved or FERC-approved returns on equity.

Generation & Marketing

Nonregulated generation in ERCOT and PJM.
Marketing, risk management and retail activities in ERCOT, PJM and MISO.

AEP River Operations

Commercial barging operations that transports liquids, coal and dry bulk commodities primarily on the Ohio, Illinois and lower Mississippi Rivers.

The remainder of our 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. This segment also includes Parent's guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.


60



The tables below present our reportable segment income statement information for the three months ended March 31, 2015 and 2014 and reportable segment balance sheet information as of March 31, 2015 and December 31, 2014.  These amounts include certain estimates and allocations where necessary.
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities

AEP Transmission Holdco

Generation
&
Marketing
 
AEP River Operations

Corporate and Other (a)

Reconciling Adjustments
 
Consolidated
 
(in millions)
Three Months Ended 
 March 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Revenues from:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

External Customers
$
2,487

 
$
1,206

 
$
22

 
$
859

 
$
128

 
$
6

 
$

 
$
4,708

Other Operating Segments
18

 
64

 
36

 
311

 
11

 
20

 
(460
)
 

Total Revenues
$
2,505

 
$
1,270

 
$
58

 
$
1,170

 
$
139

 
$
26

 
$
(460
)
 
$
4,708


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
300

 
$
97

 
$
37

 
$
187

 
$
11

 
$
(1
)
 
$

 
$
631

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
AEP River Operations
 
Corporate and Other (a)
 
Reconciling Adjustments
 
Consolidated
 
(in millions)
Three Months Ended 
 March 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Revenues from:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

External Customers
$
2,549

(b)
$
1,161

 
$
12

 
$
821

(b)
$
146

 
$
10

 
$
(51
)
(c)
$
4,648

Other Operating Segments
37

(b)
54

 
16

 
430

(b)
19

 
16

 
(572
)
 

Total Revenues
$
2,586

 
$
1,215

 
$
28

 
$
1,251

 
$
165

 
$
26

 
$
(623
)
 
$
4,648

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
$
279

 
$
97

 
$
24

 
$
163

 
$
3

 
$
(5
)
 
$

 
$
561


61



 
 
Vertically Integrated Utilities

Transmission and Distribution Utilities

AEP Transmission Holdco

Generation
&
Marketing

AEP River Operations

Corporate and Other (a)

Reconciling
Adjustments

Consolidated
 
 
(in millions)
March 31, 2015
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

Total Property, Plant and Equipment
 
$
40,890

 
$
13,251

 
$
2,980

 
$
7,414

 
$
701

 
$
350

 
$
(280
)
(d)
$
65,306

Accumulated Depreciation and Amortization
 
13,335

 
3,520

 
28

 
3,309

 
223

 
183

 
(102
)
(d)
20,496

Total Property Plant and Equipment - Net
 
$
27,555

 
$
9,731

 
$
2,952

 
$
4,105

 
$
478

 
$
167

 
$
(178
)
(d)
$
44,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
35,075

 
$
14,403

 
$
3,736

 
$
5,706

 
$
743

 
$
21,402

 
$
(21,027
)
(d) (e)
$
60,038

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt Due Within One Year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated
 
$
111

 
$

 
$

 
$
86

 
$

 
$

 
$
(197
)
 
$

Non-Affiliated
 
1,291

 
414

 

 
740

 
3

 
3

 

 
2,451

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated
 
20

 

 

 
32

 

 

 
(52
)
 

Non-Affiliated
 
9,393

 
5,105

 
1,207

 
148

 
80

 
845

 

 
16,778

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Long-term Debt
 
$
10,815

 
$
5,519

 
$
1,207

 
$
1,006

 
$
83

 
$
848

 
$
(249
)
 
$
19,229

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vertically Integrated Utilities
 
Transmission and Distribution Utilities
 
AEP Transmission Holdco
 
Generation
&
Marketing
 
AEP River Operations
 
Corporate and Other (a)
 
Reconciling
Adjustments
 
Consolidated
 
 
(in millions)
December 31, 2014
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

Total Property, Plant and Equipment
 
$
39,402

 
$
13,024

 
$
2,714

 
$
8,394

 
$
700

 
$
343

 
$
(272
)
(d)
$
64,305

Accumulated Depreciation and Amortization
 
12,773

 
3,481

 
25

 
3,603

 
217

 
188

 
(99
)
(d)
20,188

Total Property Plant and Equipment - Net
 
$
26,629

 
$
9,543

 
$
2,689

 
$
4,791

 
$
483

 
$
155

 
$
(173
)
(d)
$
44,117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
33,750

 
$
14,495

 
$
3,575

 
$
6,329

 
$
749

 
$
21,081

 
$
(20,346
)
(d) (e)
$
59,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt Due Within One Year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated
 
$
111

 
$

 
$

 
$
86

 
$

 
$

 
$
(197
)
 
$

Non-Affiliated
 
1,352

 
405

 

 
740

 
3

 
3

 

 
2,503

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliated
 
20

 

 

 
32

 

 

 
(52
)
 

Non-Affiliated
 
8,634

 
5,256

 
1,153

 
217

 
80

 
841

 

 
16,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Long-term Debt
 
$
10,117

 
$
5,661

 
$
1,153

 
$
1,075

 
$
83

 
$
844

 
$
(249
)
 
$
18,684


(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 the impact of corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013, as well as the impact of the termination of the Interconnection Agreement effective January 1, 2014.
(c)
Reconciling Adjustments for External Customers primarily include eliminations as a result of corporate separation in Ohio.
(d)
Includes eliminations due to an intercompany capital lease.
(e)
Reconciling Adjustments for Total Assets primarily include the elimination of intercompany advances to affiliates and intercompany accounts receivable along with the elimination of AEP's investments in subsidiary companies.


62



8.  DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

We are exposed to certain market risks as a major power producer and marketer of wholesale electricity, natural gas, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact us due to changes in the underlying market prices or rates. We manage these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

Our strategy surrounding the use of derivative instruments primarily focuses on managing our risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. Our risk management strategies also include the use of derivative instruments for trading purposes, focusing on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which we transact. To accomplish our objectives, we 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.

We enter into power, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other commodity contracts to manage the risk associated with our energy business. We enter into interest rate derivative contracts in order to manage the interest rate exposure associated with our commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as they are related to energy risk management activities. We also engage in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with our established risk management policies as approved by the Finance Committee of our Board of Directors.

The following table represents the gross notional volume of our outstanding derivative contracts as of March 31, 2015 and December 31, 2014:

Notional Volume of Derivative Instruments
 
 
Volume
 
 
 
 
March 31,
2015
 
December 31,
2014
 
Unit of
Measure
Primary Risk Exposure
 
(in millions)
 
 
Commodity:
 
 
 
 

 
 
Power
 
271

 
334

 
MWhs
Coal
 
2

 
3

 
Tons
Natural Gas
 
75

 
106

 
MMBtus
Heating Oil and Gasoline
 
4

 
6

 
Gallons
Interest Rate
 
$
140

 
$
152

 
USD
 
 
 
 
 
 
 
Interest Rate and Foreign Currency
 
$
814

 
$
815

 
USD


63



Fair Value Hedging Strategies

We enter 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 our exposure to interest rate risk by converting a portion of our fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

We enter into and designate as cash flow hedges certain derivative transactions for the purchase and sale of power and natural gas (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. We monitor the potential impacts of commodity price changes and, where appropriate, enter into derivative transactions to protect profit margins for a portion of future electricity sales and energy purchases. We do not hedge all commodity price risk.

Our vehicle fleet and barge operations are exposed to gasoline and diesel fuel price volatility. We enter into financial heating oil and gasoline derivative contracts in order to mitigate price risk of our future fuel purchases. We discontinued cash flow hedge accounting for these derivative contracts effective March 31, 2014. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. We do not hedge all fuel price risk.

We enter into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify our exposure to interest rate risk by converting a portion of our floating-rate debt to a fixed rate. We also enter into interest rate derivative contracts to manage interest rate exposure related to future borrowings of fixed-rate debt. Our forecasted fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. We do not hedge all interest rate exposure.

At times, we are exposed to foreign currency exchange rate risks primarily when we purchase certain fixed assets from foreign suppliers. In accordance with our risk management policy, we may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. We do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON OUR FINANCIAL STATEMENTS

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the condensed 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 our derivative instruments, we also 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 our 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 our risk management contracts.

64



According to the accounting guidance for “Derivatives and Hedging,” we reflect the fair values of our derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, we are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the March 31, 2015 and December 31, 2014 condensed balance sheets, we netted $4 million and $4 million, respectively, of cash collateral received from third parties against short-term and long-term risk management assets and $37 million and $35 million, respectively, of cash collateral paid to third parties against short-term and long-term risk management liabilities.

The following tables represent the gross fair value impact of our derivative activity on our condensed balance sheets as of March 31, 2015 and December 31, 2014:

Fair Value of Derivative Instruments
March 31, 2015
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in millions)
Current Risk Management Assets
 
$
342

 
$
10

 
$
3

 
$
355

 
$
(217
)
 
$
138

Long-term Risk Management Assets
 
453

 
4

 

 
457

 
(92
)
 
365

Total Assets
 
795

 
14

 
3

 
812

 
(309
)
 
503

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
302

 
12

 
1

 
315

 
(232
)
 
83

Long-term Risk Management Liabilities
 
250

 
10

 
5

 
265

 
(109
)
 
156

Total Liabilities
 
552

 
22

 
6

 
580

 
(341
)
 
239

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
243

 
$
(8
)
 
$
(3
)
 
$
232

 
$
32

 
$
264

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Derivative Instruments
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in millions)
Current Risk Management Assets
 
$
392

 
$
30

 
$
3

 
$
425

 
$
(247
)
 
$
178

Long-term Risk Management Assets
 
367

 
3

 

 
370

 
(76
)
 
294

Total Assets
 
759

 
33

 
3

 
795

 
(323
)
 
472

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
329

 
23

 
1

 
353

 
(261
)
 
92

Long-term Risk Management Liabilities
 
208

 
8

 
9

 
225

 
(94
)
 
131

Total Liabilities
 
537

 
31

 
10

 
578

 
(355
)
 
223

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
222

 
$
2

 
$
(7
)
 
$
217

 
$
32

 
$
249


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts primarily include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."  Amounts also include de-designated risk management contracts.
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.


65



The table below presents our activity of derivative risk management contracts for the three months ended March 31, 2015 and 2014:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended March 31, 2015 and 2014
Location of Gain (Loss)
 
2015
 
2014
 
 
(in millions)
Vertically Integrated Utilities Revenues
 
$
5

 
$
18

Generation & Marketing Revenues
 
49

 
32

Other Operation Expense
 
(1
)
 

Maintenance Expense
 
(1
)
 

Purchased Electricity for Resale
 
3

 

Regulatory Assets (a)
 
(4
)
 

Regulatory Liabilities (a)
 
4

 
89

Total Gain on Risk Management Contracts
 
$
55

 
$
139


(a)
Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the condensed 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 condensed statements of income on an accrual basis.

Our 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, we designate 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 condensed 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 condensed 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 condensed 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.”

Accounting for Fair Value Hedging Strategies

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.


66



We record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on our condensed statements of income. The following table shows the results of our hedging gains (losses) during the three months ended March 31, 2015 and 2014:  
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(in millions)
Gain on Fair Value Hedging Instruments
$
5

 
$
2

Loss on Fair Value Portion of Long-term Debt
(5
)
 
(2
)

During the three months ended March 31, 2015 and 2014, hedge ineffectiveness was immaterial.

Accounting for Cash Flow Hedging Strategies

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows attributable to a particular risk), we initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets until the period the hedged item affects Net Income. We recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

Realized gains and losses on derivative contracts for the purchase and sale of power and natural gas designated as cash flow hedges are included in Revenues or Purchased Electricity for Resale on our condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on our condensed balance sheets, depending on the specific nature of the risk being hedged. During the three months ended March 31, 2015 and 2014, we designated power and natural gas derivatives as cash flow hedges.

We reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on our condensed statements of income. The impact of cash flow hedge accounting for these derivative contracts was immaterial and was discontinued effective March 31, 2014.

We reclassify gains and losses on interest rate derivative hedges related to our debt financings from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Interest Expense on our condensed statements of income in those periods in which hedged interest payments occur. During the three months ended March 31, 2015 and 2014, we designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to our foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Depreciation and Amortization expense on our condensed 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 months ended March 31, 2015 and 2014, we did not designate any foreign currency derivatives as cash flow hedges. 

During the three months ended March 31, 2015 and 2014, hedge ineffectiveness was immaterial or nonexistent for all cash flow hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets and the reasons for changes in cash flow hedges for the three months ended March 31, 2015 and 2014, see Note 3.


67



Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of March 31, 2015 and December 31, 2014 were:
Impact of Cash Flow Hedges on the Condensed Balance Sheet
March 31, 2015
 
 
 
 
 
 
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Total
 
(in millions)
Hedging Assets (a)
$
4

 
$

 
$
4

Hedging Liabilities (a)
12

 
1

 
13

AOCI Gain (Loss) Net of Tax
(6
)
 
(18
)
 
(24
)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months
(6
)
 
(2
)
 
(8
)
 
 
 
 
 
 
Impact of Cash Flow Hedges on the Condensed Balance Sheet
December 31, 2014
 
 
 
 
 
 
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Total
 
(in millions)
Hedging Assets (a)
$
16

 
$

 
$
16

Hedging Liabilities (a)
14

 
1

 
15

AOCI Gain (Loss) Net of Tax
1

 
(19
)
 
(18
)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months
4

 
(2
)
 
2


(a)
Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the condensed balance sheets.

The actual amounts that we reclassify from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.  As of March 31, 2015, the maximum length of time that we are hedging (with contracts subject to the accounting guidance for “Derivatives and Hedging”) our exposure to variability in future cash flows related to forecasted transactions was 69 months.

Credit Risk

We limit credit risk in our 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. We use Moody’s, Standard and Poor’s and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

When we use standardized master agreements, these agreements may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds our established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with our credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.


68



Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs), a limited number of derivative and non-derivative contracts primarily related to our competitive retail auction loads, and guaranties for contractual obligations, we are obligated to post an additional amount of collateral if our credit ratings decline below a specified rating threshold. The amount of collateral required fluctuates based on market prices and our total exposure. On an ongoing basis, our risk management organization assesses the appropriateness of these collateral triggering items in contracts. AEP and its subsidiaries have not experienced a downgrade below a specified rating threshold that would require the posting of additional collateral. The following table represents our exposure if our credit ratings were to decline below a specified rating threshold as of March 31, 2015 and December 31, 2014:
 
 
March 31,
 
December 31,
 
 
2015
 
2014
 
 
(in millions)
Fair Value of Contracts with Credit Downgrade Triggers
 
$

 
$

Amount of Collateral AEP Subsidiaries Would Have been Required to Post for Derivative Contracts as well as Derivative and Non-Derivative Contracts Subject to the Same Master Netting Arrangement
 

 

Amount of Collateral AEP Subsidiaries Would Have Been Required to Post Attributable to RTOs and ISOs
 
29

 
36

Amount of Collateral Attributable to Other Contracts (a)
 
300

 
281


(a)
Represents the amount of collateral AEP subsidiaries would have been required to post for other significant non-derivative contracts including AGR jointly owned plant contracts and various other commodity related contacts.

In addition, a majority of our 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 in excess of $50 million.  On an ongoing basis, our risk management organization assesses the appropriateness of these cross-default provisions in our contracts. The following table represents: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral we have posted and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering our contractual netting arrangements as of March 31, 2015 and December 31, 2014:
 
March 31,
2015
 
December 31,
2014
 
(in millions)
Liabilities for Contracts with Cross Default Provisions Prior to Contractual Netting Arrangements
$
271

 
$
235

Amount of Cash Collateral Posted
8

 
9

Additional Settlement Liability if Cross Default Provision is Triggered
203

 
178



69



9.  FAIR VALUE MEASUREMENTS

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. The amount of risk taken is determined by the Commercial Operations, Energy Supply and Finance groups in accordance with our established risk management policies as approved by the Finance Committee of our Board of Directors. Our market risk oversight staff independently monitors our 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 daily and quarterly reports regarding compliance with policies, limits and procedures. The Regulated Risk Committee consists of AEPSC’s Chief Operating Officer, 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 Operating Officer, Chief Financial Officer and Chief Risk Officer in addition to Energy Supply’s President and Vice President.

For our 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.  We verify our price curves using these broker quotes and classify these fair values within Level 2 when substantially all of the fair value can be corroborated.  We typically obtain multiple broker quotes, which are nonbinding in nature, but are based on recent trades in the marketplace.  When multiple broker quotes are obtained, we average the quoted bid and ask prices.  In certain circumstances, we may discard a broker quote if it is a clear outlier.  We use a historical correlation analysis between the broker quoted location and the illiquid locations.  If the points are highly correlated, we include these locations 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 our contracts being classified as Level 3 is the inability to substantiate our energy price curves in the market.  A significant portion of our Level 3 instruments have been economically hedged which greatly limits potential earnings volatility.

We utilize our trustee’s external pricing service in our estimate of the fair value of the underlying investments held in the nuclear trusts.  Our investment managers review and validate the prices utilized by the trustee to determine fair value.  We perform our own valuation testing to verify the fair values of the securities.  We receive audit reports of our 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 and Other Temporary Investments 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 and cash equivalents funds.  Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation

70



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.

Fair Value Measurements of Long-term Debt

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 we could realize in a current market exchange.

The book values and fair values of Long-term Debt as of March 31, 2015 and December 31, 2014 are summarized in the following table:
 
March 31, 2015
 
December 31, 2014
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
 
(in millions)
Long-term Debt
$
19,229

 
$
22,015

 
$
18,684

 
$
21,075


Fair Value Measurements of Other Temporary Investments

Other Temporary Investments include funds held by trustees primarily for the payment of securitization bonds and securities available for sale, including marketable securities that we intend to hold for less than one year and investments by our protected cell of EIS.

The following is a summary of Other Temporary Investments:
 
 
March 31, 2015
Other Temporary Investments
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
 
(in millions)
Restricted Cash (a)
 
$
186

 
$

 
$

 
$
186

Fixed Income Securities  Mutual Funds
 
81

 

 

 
81

Equity Securities  Mutual Funds
 
13

 
13

 

 
26

Total Other Temporary Investments
 
$
280

 
$
13

 
$

 
$
293

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Other Temporary Investments
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
 
(in millions)
Restricted Cash (a)
 
$
280

 
$

 
$

 
$
280

Fixed Income Securities  Mutual Funds
 
81

 

 

 
81

Equity Securities  Mutual Funds
 
13

 
12

 

 
25

Total Other Temporary Investments
 
$
374

 
$
12

 
$

 
$
386


(a)
Primarily represents amounts held for the repayment of debt.


71



The following table provides the activity for our fixed income and equity securities within Other Temporary Investments for the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions)
Proceeds from Investment Sales
$

 
$

Purchases of Investments

 
1

Gross Realized Gains on Investment Sales

 

Gross Realized Losses on Investment Sales

 


As of March 31, 2015 and December 31, 2014, we had no Other Temporary Investments with an unrealized loss position.  As of March 31, 2015, fixed income securities were primarily debt based mutual funds with short and intermediate maturities.  Mutual funds may be sold and do not contain maturity dates.

For details of the reasons for changes in Securities Available for Sale included in Accumulated Other Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2014, see Note 3.

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

Nuclear decommissioning and spent nuclear fuel trust funds represent funds that regulatory commissions allow us to collect through rates to fund future decommissioning and spent nuclear fuel 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 or its affiliates.
Withdrawals permitted only for payment of decommissioning costs and trust expenses.

We maintain trust records for each regulatory jurisdiction.  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 trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity 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 equity and fixed income investments held in these trusts and generally intends to sell fixed income 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 and other-than-temporary impairments from securities in the 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.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.


72



The following is a summary of nuclear trust fund investments as of March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
December 31, 2014
 
Estimated
Fair
Value
 
Gross
Unrealized
Gains
 
Other-Than-
Temporary
Impairments
 
Estimated
Fair
Value
 
Gross
Unrealized
Gains
 
Other-Than-
Temporary
Impairments
 
(in millions)
Cash and Cash Equivalents
$
31

 
$

 
$

 
$
20

 
$

 
$

Fixed Income Securities:
 

 
 

 
 

 
 
 
 

 
 

United States Government
695

 
51

 
(3
)
 
697

 
45

 
(5
)
Corporate Debt
60

 
5

 
(1
)
 
48

 
4

 
(1
)
State and Local Government
201

 
1

 
(1
)
 
208

 
1

 

Subtotal Fixed Income Securities
956

 
57

 
(5
)
 
953

 
50

 
(6
)
Equity Securities  Domestic
1,135

 
601

 
(78
)
 
1,123

 
599

 
(79
)
Spent Nuclear Fuel and Decommissioning Trusts
$
2,122

 
$
658

 
$
(83
)
 
$
2,096

 
$
649

 
$
(85
)

The following table provides the securities activity within the decommissioning and SNF trusts for the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions)
Proceeds from Investment Sales
$
228

 
$
148

Purchases of Investments
246

 
164

Gross Realized Gains on Investment Sales
11

 
8

Gross Realized Losses on Investment Sales
4

 
1


The adjusted cost of fixed income securities was $899 million and $903 million as of March 31, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $534 million and $524 million as of March 31, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of March 31, 2015 was as follows:
 
Fair Value of
Fixed Income
Securities
 
(in millions)
Within 1 year
$
148

1 year – 5 years
407

5 years – 10 years
174

After 10 years
227

Total
$
956



73



Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014.  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.  Our 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 our valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents (a)
 
$
21

 
$
6

 
$

 
$
163

 
$
190

 
 
 
 
 
 
 
 
 
 
 
Other Temporary Investments
 
 
 
 
 
 
 
 
 
 
Restricted Cash (a)
 
171

 
2

 

 
13

 
186

Fixed Income Securities  Mutual Funds
 
81

 

 

 

 
81

Equity Securities  Mutual Funds (b)
 
26

 

 

 

 
26

Total Other Temporary Investments
 
278

 
2

 

 
13

 
293

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (d)
 
35

 
555

 
165

 
(259
)
 
496

Cash Flow Hedges:
 
 

 
 

 
 

 
 

 
 

Commodity Hedges (c)
 

 
10

 
1

 
(7
)
 
4

Fair Value Hedges
 

 

 

 
3

 
3

Total Risk Management Assets
 
35

 
565

 
166

 
(263
)
 
503

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (e)
 
23

 

 

 
8

 
31

Fixed Income Securities:
 
 

 
 

 
 

 
 

 
 

United States Government
 

 
695

 

 

 
695

Corporate Debt
 

 
60

 

 

 
60

State and Local Government
 

 
201

 

 

 
201

Subtotal Fixed Income Securities
 

 
956

 

 

 
956

Equity Securities  Domestic (b)
 
1,135

 

 

 

 
1,135

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,158

 
956

 

 
8

 
2,122

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,492

 
$
1,529

 
$
166

 
$
(79
)
 
$
3,108

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (d)
 
$
54

 
$
428

 
$
30

 
$
(291
)
 
$
221

Cash Flow Hedges:
 
 

 
 

 
 

 
 

 
 

Commodity Hedges (c)
 

 
14

 
5

 
(7
)
 
12

Interest Rate/Foreign Currency Hedges
 

 
1

 

 

 
1

Fair Value Hedges
 

 
2

 

 
3

 
5

Total Risk Management Liabilities
 
$
54

 
$
445

 
$
35

 
$
(295
)
 
$
239



74



Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents (a)
 
$
17

 
$
1

 
$

 
$
145

 
$
163

 
 
 
 
 
 
 
 
 
 
 
Other Temporary Investments
 
 
 
 
 
 
 
 
 
 
Restricted Cash (a)
 
234

 
9

 

 
37

 
280

Fixed Income Securities  Mutual Funds
 
81

 

 

 

 
81

Equity Securities  Mutual Funds (b)
 
25

 

 

 

 
25

Total Other Temporary Investments
 
340

 
9

 

 
37

 
386

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (f)
 
37

 
528

 
190

 
(302
)
 
453

Cash Flow Hedges:
 
 

 
 

 
 

 
 

 
 

Commodity Hedges (c)
 

 
32

 

 
(16
)
 
16

Fair Value Hedges
 

 
1

 

 
2

 
3

Total Risk Management Assets
 
37

 
561

 
190

 
(316
)
 
472

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (e)
 
9

 

 

 
11

 
20

Fixed Income Securities:
 
 

 
 

 
 

 
 

 
 

United States Government
 

 
697

 

 

 
697

Corporate Debt
 

 
48

 

 

 
48

State and Local Government
 

 
208

 

 

 
208

Subtotal Fixed Income Securities
 

 
953

 

 

 
953

Equity Securities  Domestic (b)
 
1,123

 

 

 

 
1,123

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,132

 
953

 

 
11

 
2,096

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,526

 
$
1,524

 
$
190

 
$
(123
)
 
$
3,117

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (c) (f)
 
$
65

 
$
432

 
$
36

 
$
(334
)
 
$
199

Cash Flow Hedges:
 
 

 
 

 
 

 
 

 
 

Commodity Hedges (c)
 

 
27

 
3

 
(16
)
 
14

Interest Rate/Foreign Currency Hedges
 

 
1

 

 

 
1

Fair Value Hedges
 

 
7

 

 
2

 
9

Total Risk Management Liabilities
 
$
65

 
$
467

 
$
39

 
$
(348
)
 
$
223


(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 March 31, 2015 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows:  Level 1 matures $(8) million in 2015 and ($11) million in periods 2016-2018;  Level 2 matures $19 million in 2015, $60 million in periods 2016-2018, $21 million in periods 2019-2020 and $27 million in periods 2021-2030;  Level 3 matures $23 million in 2015, $31 million in periods 2016-2018, $9 million in periods 2019-2020 and $72 million in periods 2021-2030.  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, 2014 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows:  Level 1 matures $(18) million in 2015 and ($10) million in periods 2016-2018;  Level 2 matures $31 million in 2015, $52 million in periods 2016-2018, $12 million in periods 2019-2020 and $1 million in periods 2021-2030;  Level 3 matures $50 million in 2015, $29 million in periods 2016-2018, $9 million in periods 2019-2020 and $66 million in periods 2021-2030.  Risk management commodity contracts are substantially comprised of power contracts.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2015 and 2014.


75



The following tables set forth a reconciliation of changes in the fair value of net trading derivatives and other investments classified as Level 3 in the fair value hierarchy:
Three Months Ended March 31, 2015
 
Net Risk Management
Assets (Liabilities)
 
 
(in millions)
Balance as of December 31, 2014
 
$
151

Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
9

Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)
 
5

Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income
 
(2
)
Purchases, Issuances and Settlements (c)
 
(39
)
Transfers into Level 3 (d) (e)
 
15

Transfers out of Level 3 (e) (f)
 
(12
)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)
 
4

Balance as of March 31, 2015
 
$
131

Three Months Ended March 31, 2014
 
Net Risk Management
Assets (Liabilities)
 
 
(in millions)
Balance as of December 31, 2013
 
$
117

Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
84

Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)
 
(10
)
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income
 
9

Purchases, Issuances and Settlements (c)
 
(100
)
Transfers into Level 3 (d) (e)
 
(4
)
Transfers out of Level 3 (e) (f)
 
(2
)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)
 
11

Balance as of March 31, 2014
 
$
105


(a)
Included in revenues on the condensed 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 the settlement of risk management commodity contracts for the reporting period.
(d)
Represents existing assets or liabilities that were previously categorized as Level 2.
(e)
Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.
(f)
Represents existing assets or liabilities that were previously categorized as Level 3.
(g)
Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.


76



The following tables quantify the significant unobservable inputs used in developing the fair value of our Level 3 positions as of March 31, 2015 and December 31, 2014:

Significant Unobservable Inputs
March 31, 2015
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
160

 
$
32

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
$
0.53

 
$
163.52

 
$
37.67

 
 
 
 
 
 
 
Counterparty Credit Risk (b) 
 
373
FTRs
6

 
3

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
(10.12
)
 
10.85

 
0.57

Total
$
166

 
$
35

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
December 31, 2014
 
 
 
 
 
Significant
 
Input/Range
 
Fair Value
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
Technique
 
Input
 
Low
 
High
 
Average
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
157

 
$
37

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
$
11.37

 
$
159.92

 
$
57.18

 
 
 
 
 
 
 
Counterparty Credit Risk (b) 
 
303
FTRs
33

 
2

 
Discounted Cash Flow 
 
Forward Market Price (a) 
 
(14.63
)
 
20.02

 
0.96

Total
$
190

 
$
39

 
 
 
 
 
 

 
 

 
 

(a)
Represents market prices in dollars per MWh.
(b)
Represents average price of credit default swaps used to calculate counterparty credit risk, reported in basis points.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs as of March 31, 2015:

Sensitivity of Fair Value Measurements
March 31, 2015
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)



77



10.  INCOME TAXES

AEP System Tax Allocation Agreement

We, along with our subsidiaries, file a consolidated federal income tax return.  The allocation of the AEP System’s current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense.  The tax benefit of the Parent is allocated to our subsidiaries with taxable income.  With the exception of the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

We are no longer subject to U.S. federal examinations for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. Although the outcome of tax audits is uncertain, in our opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters.  In addition, we accrue interest on these uncertain tax positions.  We are not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

We, along with our subsidiaries, file income tax returns in various state, local and foreign jurisdictions.  These taxing authorities routinely examine our tax returns. We are currently under examination in several state and local jurisdictions.  However, it is possible that we have filed tax returns with positions that may be challenged by these tax authorities.  We believe 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.  We are no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2009.



78



11.  FINANCING ACTIVITIES

Long-term Debt

The following table details long-term debt outstanding as of March 31, 2015 and December 31, 2014:
Type of Debt
 
March 31, 2015
 
December 31, 2014
 
 
(in millions)
Senior Unsecured Notes
 
$
13,344

 
$
12,647

Pollution Control Bonds
 
1,963

 
1,963

Notes Payable
 
331

 
357

Securitization Bonds
 
2,227

 
2,380

Spent Nuclear Fuel Obligation (a)
 
266

 
266

Other Long-term Debt
 
1,127

 
1,101

Fair Value of Interest Rate Hedges
 
(2
)
 
(6
)
Unamortized Discount, Net
 
(27
)
 
(24
)
Total Long-term Debt Outstanding
 
19,229

 
18,684

Long-term Debt Due Within One Year
 
2,451

 
2,503

Long-term Debt
 
$
16,778

 
$
16,181


(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 $309 million and $309 million as of March 31, 2015 and December 31, 2014, respectively, and are included in Spent Nuclear Fuel and Decommissioning Trusts on our condensed balance sheets.

Long-term debt and other securities issued, retired and principal payments made during the first three months of 2015 are shown in the tables below:
Company
 
Type of Debt
 
Principal
Amount
 
Interest
Rate
 
Due Date
Issuances:
 
 
 
(in millions)
 
(%)
 
 
PSO
 
Senior Unsecured Notes
 
$
125

 
3.17
 
2025
PSO
 
Senior Unsecured Notes
 
125

 
4.09
 
2045
SWEPCo
 
Pollution Control Bonds
 
54

 
1.60
 
2019
SWEPCo
 
Senior Unsecured Notes
 
400

 
3.90
 
2045
 
 
 
 
 
 
 
 
 
Non-Registrant:
 
 
 
 

 
 
 
 
AEPTCo
 
Senior Unsecured Notes
 
50

 
3.66
 
2025
KPCo
 
Other Long-term Debt
 
25

 
Variable
 
2018
Transource Missouri
 
Other Long-term Debt
 
5

 
Variable
 
2018
Total Issuances
 
 
 
$
784

(a)
 
 
 

(a)
Amount indicated on the statement of cash flows is net of issuance costs and premium or discount and will not tie to the issuance amount.

79



Company
 
Type of Debt
 
Principal
Amount Paid
 
Interest
Rate
 
Due Date
Total Retirements and Principal Payments:
 
 
 
(in millions)
 
(%)
 
 
APCo
 
Securitization Bonds
 
$
11

 
2.008
 
2024
I&M
 
Other Long-term Debt
 
3

 
Variable
 
2015
I&M
 
Notes Payable
 
9

 
Variable
 
2016
I&M
 
Notes Payable
 
7

 
Variable
 
2017
I&M
 
Notes Payable
 
6

 
Variable
 
2019
OPCo
 
Securitization Bonds
 
22

 
0.958
 
2018
SWEPCo
 
Notes Payable
 
2

 
4.58
 
2032
SWEPCo
 
Pollution Control Bonds
 
54

 
3.25
 
2015
 
 
 
 
 
 
 
 
 
Non-Registrant:
 
 
 
 

 
 
 
 
AEGCo
 
Senior Unsecured Notes
 
4

 
6.33
 
2037
AEP Subsidiaries
 
Notes Payable
 
1

 
Variable
 
2017
TCC
 
Securitization Bonds
 
78

 
5.09
 
2015
TCC
 
Securitization Bonds
 
42

 
6.25
 
2016
Total Retirements and Principal Payments
 
 
 
$
239

 
 
 
 

In April 2015, APCo issued $86 million of 1.9% Pollution Control Bonds due in 2019.

In April 2015, OPCo retired $86 million of 3.125% Pollution Control Bonds due in 2015.

In April 2015, SWEPCo retired $100 million of 5.375% Senior Unsecured Notes due in 2015.

As of March 31, 2015, trustees held on our behalf, $385 million of our reacquired Pollution Control Bonds.

Dividend Restrictions

Parent Restrictions

The holders of our common stock are entitled to receive the dividends declared by our Board of Directors provided funds are legally available for such dividends.  Our income primarily derives from our common stock equity in the earnings of our utility subsidiaries.

Pursuant to the leverage restrictions in our credit agreements, we must maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%.  The payment of cash dividends indirectly results in an increase in the percentage of debt to total capitalization of the company distributing the dividend.  The method for calculating outstanding debt and capitalization is contractually defined in the credit agreements.  None of AEP’s retained earnings were restricted for the purpose of the payment of dividends.

Utility Subsidiaries’ Restrictions

Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of our utility subsidiaries to transfer funds to us in the form of dividends.  Specifically, several of our public utility subsidiaries have credit agreements that contain a covenant that limits their debt to capitalization ratio to 67.5%.

The Federal Power Act prohibits the utility subsidiaries from participating “in the making or paying of any dividends of such public utility from any funds properly included in capital account.”  The term “capital account” is not defined in the Federal Power Act or its regulations.  Management understands “capital account” to mean the book value of the common stock.  This restriction does not limit the ability of the utility subsidiaries to pay dividends out of retained earnings.

80




Short-term Debt

Our outstanding short-term debt was as follows:
 
 
March 31, 2015
 
December 31, 2014
Type of Debt
 
Outstanding
Amount
 
Interest
Rate (a)
 
Outstanding
Amount
 
Interest
Rate (a)
 
 
(in millions)
 
 

 
(in millions)
 
 

Securitized Debt for Receivables (b)
 
$
740

 
0.26
%
 
$
744

 
0.22
%
Commercial Paper
 
115

 
0.51
%
 
602

 
0.59
%
Total Short-term Debt
 
$
855

 
 

 
$
1,346

 
 


(a)
Weighted average rate.
(b)
Amount of securitized debt for receivables as accounted for under the ''Transfers and Servicing'' accounting guidance.

Credit Facilities

For an additional discussion of credit facilities, see “Letters of Credit” section of Note 5.

Securitized Accounts Receivable – AEP Credit

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.  AEP Credit continues to service the receivables.  These securitized transactions allow AEP Credit to repay its outstanding debt obligations, continue to purchase our operating companies’ receivables and accelerate AEP Credit’s cash collections.

Our receivables securitization agreement provides a commitment of $750 million from bank conduits to purchase receivables. The agreement was increased in June 2014 from $700 million and expires in June 2016.

Accounts receivable information for AEP Credit is as follows:
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(dollars in millions)
 
 

 
 

Effective Interest Rates on Securitization of Accounts Receivable
0.26
%
 
0.24
%
Net Uncollectible Accounts Receivable Written Off
$
7

 
$
8

 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Accounts Receivable Retained Interest and Pledged as Collateral Less Uncollectible Accounts
$
988

 
$
975

Total Principal Outstanding
740

 
744

Delinquent Securitized Accounts Receivable
52

 
44

Bad Debt Reserves Related to Securitization/Sale of Accounts Receivable
17

 
13

Unbilled Receivables Related to Securitization/Sale of Accounts Receivable
265

 
335


Customer accounts receivable retained and securitized for our operating companies are managed by AEP Credit.  AEP Credit’s delinquent customer accounts receivable represents accounts greater than 30 days past due.


81



12.  VARIABLE INTEREST ENTITIES

The accounting guidance for “Variable Interest Entities” is a consolidation model that considers if a company has a controlling financial interest in a VIE.  A controlling financial interest will have both (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  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 we are the primary beneficiary of a VIE, we consider factors such as equity at risk, the amount of the VIE’s variability we absorb, guarantees of indebtedness, voting rights including kick-out rights, the power to direct the VIE, variable interests held by related parties and other factors.  We believe that significant assumptions and judgments were applied consistently.

We are the primary beneficiary of Sabine, DCC Fuel, AEP Credit, Transition Funding, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, a protected cell of EIS and Transource Energy.  In addition, we have not provided material financial or other support to any of these entities that was not previously contractually required.  We hold a significant variable interest in DHLC and Potomac-Appalachian Transmission Highline, LLC West Virginia Series (West Virginia Series).

Sabine is a mining operator providing mining services to SWEPCo.  SWEPCo has no equity investment in Sabine but is Sabine’s only customer.  SWEPCo guarantees the debt obligations and lease obligations of Sabine.  Under the terms of the note agreements, substantially all assets are pledged and all rights under the lignite mining agreement are assigned to SWEPCo.  The creditors of Sabine have no recourse to any AEP entity other than SWEPCo.  Under the provisions of the mining agreement, SWEPCo is required to pay, as a part of the cost of lignite delivered, an amount equal to mining costs plus a management fee.  In addition, SWEPCo determines how much coal will be mined each year.  Based on these facts, management concluded that SWEPCo is the primary beneficiary and is required to consolidate Sabine.  SWEPCo’s total billings from Sabine for the three months ended March 31, 2015 and 2014 were $42 million and $39 million, respectively.  See the tables below for the classification of Sabine’s assets and liabilities on the condensed balance sheets.

I&M has nuclear fuel lease agreements with DCC Fuel IV LLC, DCC Fuel V LLC, DCC Fuel VI LLC and DCC Fuel VII (collectively DCC Fuel).  DCC Fuel was formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.  DCC Fuel purchased the nuclear fuel from I&M with funds received from the issuance of notes to financial institutions.  Each entity is a single-lessee leasing arrangement with only one asset and is capitalized with all debt.  Each is a separate legal entity from I&M, the assets of which are not available to satisfy the debts of I&M.  Payments on the leases for the three months ended March 31, 2015 and 2014 were $23 million and $25 million, respectively. The leases were recorded as capital leases on I&M’s balance sheet as title to the nuclear fuel transfers to I&M at the end of the respective lease terms, which do not exceed 54 months.  Based on our control of DCC Fuel, management concluded that I&M is the primary beneficiary and is required to consolidate DCC Fuel.  The capital leases are eliminated upon consolidation.  The lease agreement ended for DCC Fuel II LLC in October 2014.  See the tables below for the classification of DCC Fuel’s assets and liabilities on the condensed balance sheets.

AEP Credit is a wholly-owned subsidiary of AEP.  AEP Credit purchases, without recourse, accounts receivable from certain utility subsidiaries of AEP to reduce working capital requirements.  AEP provides a minimum of 5% equity and up to 20% of AEP Credit’s short-term borrowing needs in excess of third party financings.  Any third party financing of AEP Credit only has recourse to the receivables securitized for such financing.  Based on our control of AEP Credit, management concluded that we are the primary beneficiary and are required to consolidate AEP Credit.  See the tables below for the classification of AEP Credit’s assets and liabilities on the condensed balance sheets.  See “Securitized Accounts Receivable – AEP Credit” section of Note 11.


82



Transition Funding was formed for the sole purpose of issuing and servicing securitization bonds related to Texas Restructuring Legislation.  Management has concluded that TCC is the primary beneficiary of Transition Funding because TCC has the power to direct the most significant activities of the VIE and TCC’s equity interest could potentially be significant.  Therefore, TCC is required to consolidate Transition Funding.  The securitized bonds totaled $1.7 billion and $1.8 billion as of March 31, 2015 and December 31, 2014, respectively.  Transition Funding has securitized transition assets of $1.6 billion and $1.6 billion as of March 31, 2015 and December 31, 2014, respectively.  The securitized transition assets represent the right to impose and collect Texas true-up costs from customers receiving electric transmission or distribution service from TCC under recovery mechanisms approved by the PUCT.  The securitization bonds are payable only from and secured by the securitized transition assets.  The bondholders have no recourse to TCC or any other AEP entity.  TCC acts as the servicer for Transition Funding’s securitized transition assets and remits all related amounts collected from customers to Transition Funding for interest and principal payments on the securitization bonds and related costs.  See the tables below for the classification of Transition Funding’s assets and liabilities on the condensed balance sheets.

Ohio Phase-in-Recovery Funding was formed for the sole purpose of issuing and servicing securitization bonds related to phase-in recovery property.  Management has concluded that OPCo is the primary beneficiary of Ohio Phase-in-Recovery Funding because OPCo has the power to direct the most significant activities of the VIE and OPCo's equity interest could potentially be significant.  Therefore, OPCo is required to consolidate Ohio Phase-in-Recovery Funding.  The securitized bonds totaled $210 million and $232 million as of March 31, 2015 and December 31, 2014, respectively.  Ohio Phase-in-Recovery Funding has securitized assets of $104 million and $110 million as of March 31, 2015 and December 31, 2014, respectively.  The phase-in recovery property represents the right to impose and collect Ohio deferred distribution charges from customers receiving electric transmission and distribution service from OPCo under a recovery mechanism approved by the PUCO.  In August 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to OPCo or any other AEP entity.  OPCo acts as the servicer for Ohio Phase-in-Recovery Funding's securitized assets and remits all related amounts collected from customers to Ohio Phase-in-Recovery Funding for interest and principal payments on the securitization bonds and related costs.  See the table below for the classification of Ohio Phase-in-Recovery Funding's assets and liabilities on the condensed balance sheets.

Appalachian Consumer Rate Relief Funding was formed for the sole purpose of issuing and servicing securitization bonds related to APCo's under-recovered ENEC deferral balance.  Management has concluded that APCo is the primary beneficiary of Appalachian Consumer Rate Relief Funding because APCo has the power to direct the most significant activities of the VIE and APCo's equity interest could potentially be significant.  Therefore, APCo is required to consolidate Appalachian Consumer Rate Relief Funding.  The securitized bonds totaled $357 million and $368 million as of March 31, 2015 and December 31, 2014, respectively.  Appalachian Consumer Rate Relief Funding has securitized assets of $345 million and $350 million as of March 31, 2015 and December 31, 2014, respectively.  The phase-in recovery property represents the right to impose and collect West Virginia deferred generation charges from customers receiving electric transmission, distribution and generation service from APCo under a recovery mechanism approved by the WVPSC.  In November 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to APCo or any other AEP entity.  APCo acts as the servicer for Appalachian Consumer Rate Relief Funding's securitized assets and remits all related amounts collected from customers to Appalachian Consumer Rate Relief Funding for interest and principal payments on the securitization bonds and related costs.  See the tables below for the classification of Appalachian Consumer Rate Relief Funding's assets and liabilities on the condensed balance sheets.

The securitized bonds of Transition Funding, Ohio Phase-in-Recovery Funding and Appalachian Consumer Rate Relief Funding are included in current and long-term debt on the condensed balance sheets. The securitized assets of Transition Funding, Ohio Phase-in-Recovery Funding and Appalachian Consumer Rate Relief Funding are included in securitized assets on the condensed balance sheets.


83



Our subsidiaries participate in one protected cell of EIS for approximately ten lines of insurance.  EIS has multiple protected cells.  Neither AEP nor its subsidiaries have an equity investment in EIS.  The AEP System is essentially this EIS cell’s only participant, but allows certain third parties access to this insurance.  Our subsidiaries and any allowed third parties share in the insurance coverage, premiums and risk of loss from claims.  Based on our control and the structure of the protected cell of EIS, management concluded that we are the primary beneficiary of the protected cell and are required to consolidate the protected cell of EIS.  Our insurance premium expense to the protected cell for the three months ended March 31, 2015 and 2014 were $14 million and $16 million, respectively. See the tables below for the classification of the protected cell’s assets and liabilities on the condensed balance sheets.

Transource Energy was formed for the purpose of investing in utilities which develop, acquire, construct, own and operate transmission facilities in accordance with FERC-approved rates. AEP has equity and voting ownership of 86.5% with the other owner having 13.5% interest. Management has concluded that Transource Energy is a VIE and that AEP is the primary beneficiary because AEP has the power to direct the most significant activities of the entity. Therefore, AEP is required to consolidate Transource Energy. AEP’s equity interest could potentially be significant. In January 2014, Transource Missouri (a wholly-owned subsidiary of Transource Energy) acquired transmission assets from the non-controlling owner and issued debt and received a capital contribution to fund the acquisition. The majority of Transource Energy’s activity resulted from the asset acquisition, construction projects, debt issuance and capital contribution. AEP provided capital contributions to Transource Energy of $12 million and $23 million as of March 31, 2015 and December 31, 2014, respectively. AEP and the other owner of Transource Energy are required to ensure a specific equity level in Transource Missouri upon completion of projects or if a project is abandoned by the RTO. See the tables below for the classification of Transource Energy’s assets and liabilities on the condensed balance sheets.

The balances below represent the assets and liabilities of the VIEs that are consolidated.  These balances include intercompany transactions that are eliminated upon consolidation.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
VARIABLE INTEREST ENTITIES
March 31, 2015
(in millions)
 
 
SWEPCo
Sabine
 
I&M
DCC Fuel
 
AEP
Credit
 
TCC
Transition
Funding
 
OPCo
Ohio
Phase-in-
Recovery
Funding
 
 
APCo
Appalachian
Consumer
Rate Relief
Funding
 
Protected
Cell
of EIS
 
Transource
Energy
ASSETS
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 

 
 
Current Assets
 
$
59

 
$
89

 
$
995

 
$
169

 
$
22

 
 
$
11

 
$
158

 
$
16

Net Property, Plant and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equipment
 
144

 
129

 

 

 

 
 

 

 
116

Other Noncurrent Assets
 
59

 
65

 

 
1,594

(a) 
198

(b) 
 
352

(c)
2

 
6

Total Assets
 
$
262

 
$
283

 
$
995

 
$
1,763

 
$
220

 
 
$
363

 
$
160

 
$
138

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 

 
 
Current Liabilities
 
$
29

 
$
81

 
$
895

 
$
316

 
$
47

 
 
$
24

 
$
50

 
$
31

Noncurrent Liabilities
 
233

 
202

 

 
1,429

 
172

 
 
337

 
64

 
60

Equity
 

 

 
100

 
18

 
1

 
 
2

 
46

 
47

Total Liabilities and Equity
 
$
262

 
$
283

 
$
995

 
$
1,763

 
$
220

 
 
$
363

 
$
160

 
$
138


(a)
Includes an intercompany item eliminated in consolidation of $74 million.
(b)
Includes an intercompany item eliminated in consolidation of $92 million.
(c)
Includes an intercompany item eliminated in consolidation of $4 million.

84




AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
VARIABLE INTEREST ENTITIES
December 31, 2014
(in millions)
 
 
 
SWEPCo
Sabine
 
I&M
DCC
Fuel
 
AEP
Credit
 
TCC
Transition
Funding
 
 
OPCo
Ohio
Phase-in-
Recovery
Funding
 
 
APCo
Appalachian
Consumer
Rate Relief
Funding
 
 
Protected
Cell
of EIS
 
Transource
Energy
ASSETS
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 

 
 
Current Assets
 
$
68

 
$
97

 
$
980

 
$
239

 
 
$
33

 
 
$
18

 
 
$
149

 
$
2

Net Property, Plant and
Equipment
 
145

 
158

 

 

 
 

 
 

 
 

 
98

Other Noncurrent Assets
 
52

 
80

 

 
1,654

(a) 
 
210

(b)
 
358

(c)
 
2

 
4

Total Assets
 
$
265

 
$
335

 
$
980

 
$
1,893

 
 
$
243

 
 
$
376

 
 
$
151

 
$
104

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

 
 

 
 

 
 
 

 
 
 

 
 
 

 
 
Current Liabilities
 
$
36

 
$
86

 
$
894

 
$
322

 
 
$
47

 
 
$
27

 
 
$
44

 
$
21

Noncurrent Liabilities
 
228

 
249

 

 
1,553

 
 
195

 
 
347

 
 
62

 
55

Equity
 
1

 

 
86

 
18

 
 
1

 
 
2

 
 
45

 
28

Total Liabilities and Equity
 
$
265

 
$
335

 
$
980

 
$
1,893

 
 
$
243

 
 
$
376

 
 
$
151

 
$
104


(a)
Includes an intercompany item eliminated in consolidation of $75 million.
(b)
Includes an intercompany item eliminated in consolidation of $97 million.
(c)
Includes an intercompany item eliminated in consolidation of $4 million.

DHLC is a mining operator that sells 50% of the lignite produced to SWEPCo and 50% to CLECO.  SWEPCo and CLECO share the executive board seats and voting rights equally.  Each entity guarantees 50% of DHLC’s debt.  SWEPCo and CLECO equally approve DHLC’s annual budget.  The creditors of DHLC have no recourse to any AEP entity other than SWEPCo.  As SWEPCo is the sole equity owner of DHLC, it receives 100% of the management fee.  SWEPCo’s total billings from DHLC for the three months ended March 31, 2015 and 2014 were $15 million and $2 million, respectively. We are not required to consolidate DHLC as we are not the primary beneficiary, although we hold a significant variable interest in DHLC.  Our equity investment in DHLC is included in Deferred Charges and Other Noncurrent Assets on the condensed balance sheets.

Our investment in DHLC was:
 
March 31, 2015
 
December 31, 2014
 
As Reported on
the Balance Sheet
 
Maximum
Exposure
 
As Reported on
the Balance Sheet
 
Maximum
Exposure
 
(in millions)
Capital Contribution from SWEPCo
$
8

 
$
8

 
$
8

 
$
8

Retained Earnings
4

 
4

 
4

 
4

Advance Due to Parent
48

 
48

 
56

 
56

Guarantee of Debt

 
51

 

 
48

 
 
 
 
 
 
 
 
Total Investment in DHLC
$
60

 
$
111

 
$
68

 
$
116


We and FirstEnergy Corp. (FirstEnergy) have a joint venture in Potomac-Appalachian Transmission Highline, LLC (PATH).  PATH is a series limited liability company and was created to construct, through its operating companies, a high-voltage transmission line project in the PJM region.  PATH consists of the “West Virginia Series (PATH-WV),” owned equally by subsidiaries of FirstEnergy and AEP, and the “Allegheny Series” which is 100% owned by a subsidiary of FirstEnergy.  Provisions exist within the PATH-WV agreement that make it a VIE.  The “Allegheny Series” is not considered a VIE.  We are not required to consolidate PATH-WV as we are not the primary beneficiary, although we hold a significant variable interest in PATH-WV.  Our equity investment in PATH-WV is included in Deferred Charges and Other Noncurrent Assets on our condensed balance sheets.  We and FirstEnergy share the returns and losses equally in PATH-WV.  Our subsidiaries and FirstEnergy’s subsidiaries provide services to the PATH companies through service agreements.  The entities recover costs through regulated rates.

85



In August 2012, the PJM board cancelled the PATH Project, the transmission project that PATH was intended to develop, and removed it from the 2012 Regional Transmission Expansion Plan.  In September 2012, the PATH Project companies submitted an application to the FERC requesting authority to recover prudently-incurred costs associated with the PATH Project. In November 2012, the FERC issued an order accepting the PATH Project's abandonment cost recovery application, subject to settlement procedures and hearing. The parties to the case have been unable to reach a settlement agreement and, in March 2014, settlement judge procedures were terminated. Hearings at FERC were held in March and April 2015.

Our investment in PATH-WV was:
 
March 31, 2015
 
December 31, 2014
 
As Reported on
the Balance Sheet
 
Maximum
Exposure
 
As Reported on
the Balance Sheet
 
Maximum
Exposure
 
(in millions)
Capital Contribution from AEP
$
19

 
$
19

 
$
19

 
$
19

Retained Earnings
2

 
2

 
2

 
2

 
 
 
 
 
 
 
 
Total Investment in PATH-WV
$
21

 
$
21

 
$
21

 
$
21


As of March 31, 2015, our $21 million investment in PATH-WV is included in Deferred Charges and Other Noncurrent Assets on the condensed balance sheet. If we cannot ultimately recover our investment related to PATH-WV, it could reduce future net income and cash flows.

86



13. PROPERTY, PLANT AND EQUIPMENT

Coal Combustion Residual Rule

In 2010, the Federal EPA published a proposed rule to regulate the disposal and beneficial re-use of coal combustion residuals, including fly ash and bottom ash generated at coal-fired electric generating units and also flue gas desulfurization gypsum generated at some coal-fired plants. The final rule was published in the Federal Register in April 2015 and becomes effective six months after publication. We are in the process of evaluating the impact of this rule and have not yet determined an estimate of the expected increase in asset retirement obligations. Upon completion of the evaluation, we expect to record an increase in asset retirement obligations in the second quarter of 2015 due to this publication.


87



14.  DISPOSITION PLANT SEVERANCE

AEP intends to retire several generation plants or units of plants during 2015. The plant closures will result in involuntary severances. The severance program provides two weeks of base pay for every year of service along with other severance benefits.

The disposition plant severance activity for the three months ended March 31, 2015 is described in the following table:
 
 
Disposition Plant
Severance Activity
 
 
(in millions)
Balance as of December 31, 2014
 
$
29

Incurred
 

Settled
 
(1
)
Adjustments
 

Balance as of March 31, 2015
 
$
28


We recorded a charge of $29 million to Other Operation expense in 2014 primarily related to employees at the disposition plants. These expenses, net of adjustments, relate primarily to severance benefits and are included primarily in Other Operation expense on the condensed statements of income.  Of the cumulative expense, approximately 32% was within the Generation & Marketing segment and 68% was within the Vertically Integrated Utilities segment.  The remaining liability is included in Other Current Liabilities on the condensed balance sheets. We do not expect additional severance costs to be incurred related to this initiative.


88



APPALACHIAN POWER COMPANY
AND SUBSIDIARIES

89



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

EXECUTIVE OVERVIEW

Regulatory Activity

2014 West Virginia Base Rate Case

In June 2014, APCo and WPCo filed a request with the WVPSC to increase annual base rates by $156 million, based upon a 10.62% return on common equity, to be effective in the second quarter of 2015.  The filing included a request to increase generation depreciation rates primarily due to the increase in plant investment and changes in the expected service lives of various generating units.  The filing also requested recovery of $77 million in regulatory assets over five years related to 2012 West Virginia storm costs, IGCC and other deferred costs. The filing also included a request to implement a rider of approximately $38 million annually to recover vegetation management costs, including a return on capital investment.  In December 2014 and January 2015, intervenors filed testimony which proposed total annual revenue increases ranging from $30 million to $51 million based upon returns on common equity ranging from 9% to 10% and regulatory asset disallowances ranging from $6 million to $8 million.  Additionally, other intervenors proposed that the revenue requirement be based on a return on common equity of 8.7% and that $77 million of regulatory assets be disallowed.  Intervenors also recommended a disallowance of approximately $38 million related to the December 2013 transfer of OPCo's two-thirds interest in the Amos Plant, Unit 3 to APCo.  Hearings at the WVPSC were held in January 2015.  An order is anticipated in the second quarter of 2015. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. See the “2014 West Virginia Base Rate Case” section of APCo Rate Matters in Note 4.

2015 Virginia Regulatory Asset Proceeding

In January 2015, the Virginia SCC initiated a separate proceeding to address the proper treatment of APCo’s authorized regulatory assets. As of March 31, 2015, APCo’s authorized regulatory assets under review in this proceeding are estimated to be $14 million. In February and March 2015, briefs related to this proceeding were filed by various parties. If any of these costs, or any additional costs that may be subject to review, are not recoverable, it could reduce future net income and cash flows and impact financial condition.

New Virginia Legislation Affecting Biennial Reviews

In February 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 are frozen until after the Virginia SCC rules on APCo’s next biennial review, which APCo will file in March 2020 for the 2018 and 2019 test years. These amendments also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. APCo's financial statements adequately address the impact of these amendments. During the years 2014 through 2017, the new law provides that APCo will absorb incremental generation and distribution costs associated with severe weather events and/or natural disasters and costs associated with potential impairments related to new carbon emission guidelines issued by the Federal EPA.

Litigation and Environmental Issues

In the ordinary course of business, APCo 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 which have a probable likelihood of loss if the loss can be estimated. For details on regulatory proceedings and pending litigation, see Note 4 – Rate Matters and Note 6 – Commitments, Guarantees and Contingencies in the 2014 Annual Report. Also, see Note 4 – Rate Matters and Note 5 – Commitments, Guarantees and Contingencies within the Condensed Notes to Condensed Financial Statements beginning on page 149. Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 214 for additional discussion of relevant factors.

90



RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of KWhs)
Retail:
 

 
 

Residential
4,202

 
4,362

Commercial
1,727

 
1,780

Industrial
2,460

 
2,492

Miscellaneous
216

 
222

Total Retail
8,605

 
8,856

 
 
 
 
Wholesale
866

 
1,071

 
 
 
 
Total KWhs
9,471

 
9,927


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 March 31,
 
2015
 
2014
 
(in degree days)
Actual – Heating (a)
1,680

 
1,715

Normal – Heating (b)
1,321

 
1,311

 
 
 
 
Actual – Cooling (c)

 

Normal – Cooling (b)
6

 
7


(a) Eastern Region 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.


91



First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Net Income
(in millions)
 
First Quarter of 2014
 
$
102

 
 
 

Changes in Gross Margin:
 
 
Retail Margins
 
57

Off-system Sales
 
(2
)
Total Change in Gross Margin
 
55

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(5
)
Depreciation and Amortization
 
4

Carrying Costs Income
 
2

Other Income
 
2

Interest Expense
 
1

Total Change in Expenses and Other
 
4

 
 
 

Income Tax Expense
 
(19
)
 
 
 

First Quarter of 2015
 
$
142


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 $57 million primarily due to the following:
A $46 million increase primarily due to increases in rates in West Virginia and Virginia, including an adjustment resulting from amendments to Virginia law that impacts biennial reviews. Of these increases, $10 million relate to riders/trackers which have corresponding increases in other expense items below.
A $10 million decrease in PJM expenses due to the polar vortex in 2014.
A $7 million decrease in expense due to the timing of fuel recovery in 2014.
These increases were partially offset by:
A $12 million decrease primarily due to lower residential usage.
A $7 million increase in other variable electric generation expenses.

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

Other Operation and Maintenance expenses increased $5 million primarily due to the following:
A $12 million increase in PJM transmission expenses.
A $4 million increase associated with the over-recovery of transmission costs in accordance with the Virginia Transmission Rate Adjustment Clause effective May 2014. This increase in expense is offset within Retail Margins above.
These increases were partially offset by:
A $6 million decrease in steam and electric plant maintenance expenses primarily at the Amos Plant due to a prior year outage.
A $5 million decrease in employee-related expenses.
Depreciation and Amortization expenses decreased $4 million primarily due to the following:
A $2 million decrease due to decreased recovery of West Virginia consumer rate relief.
A $2 million decrease due to prior year amortization of West Virginia ENEC deferrals.
Income Tax Expense increased $19 million primarily due to an increase in pretax book income.

92



CRITICAL ACCOUNTING POLICIES AND ESTIMATES, NEW ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” in the 2014 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 214 for a discussion of accounting pronouncements.


93




APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
REVENUES
 
 
 
 
Electric Generation, Transmission and Distribution
 
$
854,179

 
$
866,457

Sales to AEP Affiliates
 
42,515

 
44,914

Other Revenues
 
2,321

 
2,020

TOTAL REVENUES
 
899,015

 
913,391

 
 
 
 
 
EXPENSES
 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
223,247

 
230,737

Purchased Electricity for Resale
 
112,669

 
168,991

Purchased Electricity from AEP Affiliates
 

 
4,662

Other Operation
 
106,070

 
93,538

Maintenance
 
52,297

 
60,090

Depreciation and Amortization
 
100,143

 
104,586

Taxes Other Than Income Taxes
 
31,047

 
30,777

TOTAL EXPENSES
 
625,473

 
693,381

 
 
 
 
 
OPERATING INCOME
 
273,542

 
220,010

 
 
 
 
 
Other Income (Expense):
 
 

 
 

Interest Income
 
389

 
401

Carrying Costs Income (Expense)
 
293

 
(1,875
)
Allowance for Equity Funds Used During Construction
 
3,008

 
1,235

Interest Expense
 
(50,291
)
 
(51,672
)
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
226,941

 
168,099

 
 
 
 
 
Income Tax Expense
 
85,148

 
66,248

 
 
 
 
 
NET INCOME
 
$
141,793

 
$
101,851

The common stock of APCo is wholly-owned by AEP.
 
 
 
 
 
 
See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.



94



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
  Three Months Ended March 31,
 
2015
 
2014
Net Income
$
141,793

 
$
101,851

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
 

 
 

Cash Flow Hedges, Net of Tax of $70 and $132 in 2015 and 2014, Respectively
129

 
246

Amortization of Pension and OPEB Deferred Costs, Net of Tax of $247 and $179 in 2015 and 2014, Respectively
(458
)
 
(333
)
 
 
 
 
TOTAL OTHER COMPREHENSIVE LOSS
(329
)
 
(87
)
 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
141,464

 
$
101,764

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.



95



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER'S EQUITY
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013
 
$
260,458

 
$
1,809,562

 
$
1,156,461

 
$
2,951

 
$
3,229,432

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(20,000
)
 
 

 
(20,000
)
Net Income
 
 

 
 

 
101,851

 
 

 
101,851

Other Comprehensive Loss
 
 

 
 

 
 

 
(87
)
 
(87
)
TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2014
 
$
260,458

 
$
1,809,562

 
$
1,238,312

 
$
2,864

 
$
3,311,196

 
 
 
 
 
 
 
 
 
 
 
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014
 
$
260,458

 
$
1,809,562

 
$
1,291,876

 
$
5,032

 
$
3,366,928

 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 

 
 

 
(56,250
)
 
 

 
(56,250
)
Net Income
 
 

 
 

 
141,793

 
 

 
141,793

Other Comprehensive Loss
 
 

 
 

 
 

 
(329
)
 
(329
)
TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2015
 
$
260,458

 
$
1,809,562

 
$
1,377,419

 
$
4,703

 
$
3,452,142

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.




96



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2015 and December 31, 2014
(in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
3,902

 
$
2,613

Restricted Cash for Securitized Funding
 
7,884

 
15,599

Advances to Affiliates
 
152,148

 
48,519

Accounts Receivable:
 
 
 
 
Customers
 
130,929

 
114,711

Affiliated Companies
 
60,106

 
67,294

Accrued Unbilled Revenues
 
42,753

 
58,022

Miscellaneous
 
2,016

 
1,956

Allowance for Uncollectible Accounts
 
(3,445
)
 
(2,364
)
Total Accounts Receivable
 
232,359

 
239,619

Fuel
 
71,131

 
113,386

Materials and Supplies
 
133,917

 
131,285

Risk Management Assets
 
12,384

 
23,792

Deferred Income Tax Benefits
 
600

 
23,955

Regulatory Asset for Under-Recovered Fuel Costs
 
95,994

 
66,076

Prepayments and Other Current Assets
 
16,870

 
13,660

TOTAL CURRENT ASSETS
 
727,189

 
678,504

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
6,849,458

 
6,824,029

Transmission
 
2,238,121

 
2,228,029

Distribution
 
3,283,917

 
3,258,306

Other Property, Plant and Equipment
 
380,512

 
373,520

Construction Work in Progress
 
381,475

 
321,495

Total Property, Plant and Equipment
 
13,133,483

 
13,005,379

Accumulated Depreciation and Amortization
 
3,897,327

 
3,823,664

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
9,236,156

 
9,181,715

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
842,030

 
857,872

Securitized Assets
 
344,631

 
350,170

Long-term Risk Management Assets
 
4,157

 
4,891

Deferred Charges and Other Noncurrent Assets
 
162,878

 
159,230

TOTAL OTHER NONCURRENT ASSETS
 
1,353,696

 
1,372,163

 
 
 
 
 
TOTAL ASSETS
 
$
11,317,041

 
$
11,232,382

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.



97



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
March 31, 2015 and December 31, 2014
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
 
 
(in thousands)
CURRENT LIABILITIES
 
 
 
 
Accounts Payable:
 
 

 
 

General
 
$
186,116

 
$
166,821

Affiliated Companies
 
59,718

 
80,602

Long-term Debt Due Within One Year – Nonaffiliated
 
552,409

 
552,212

Long-term Debt Due Within One Year – Affiliated
 
86,000

 
86,000

Risk Management Liabilities
 
8,661

 
11,017

Customer Deposits
 
73,978

 
71,766

Accrued Taxes
 
140,980

 
109,482

Accrued Interest
 
62,966

 
52,141

Other Current Liabilities
 
113,427

 
145,017

TOTAL CURRENT LIABILITIES
 
1,284,255

 
1,275,058

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
3,330,996

 
3,342,062

Long-term Risk Management Liabilities
 
2,033

 
2,057

Deferred Income Taxes
 
2,315,890

 
2,288,842

Regulatory Liabilities and Deferred Investment Tax Credits
 
651,625

 
652,867

Asset Retirement Obligations
 
120,310

 
122,300

Employee Benefits and Pension Obligations
 
127,626

 
127,980

Deferred Credits and Other Noncurrent Liabilities
 
32,164

 
54,288

TOTAL NONCURRENT LIABILITIES
 
6,580,644

 
6,590,396

 
 
 
 
 
TOTAL LIABILITIES
 
7,864,899

 
7,865,454

 
 
 
 
 
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
 
260,458

 
260,458

Paid-in Capital
 
1,809,562

 
1,809,562

Retained Earnings
 
1,377,419

 
1,291,876

Accumulated Other Comprehensive Income (Loss)
 
4,703

 
5,032

TOTAL COMMON SHAREHOLDER’S EQUITY
 
3,452,142

 
3,366,928

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
 
$
11,317,041

 
$
11,232,382

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.


98



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
141,793

 
$
101,851

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

 
 

Depreciation and Amortization
 
100,143

 
104,586

Deferred Income Taxes
 
49,834

 
65,690

Carrying Costs Income
 
(293
)
 
1,875

Allowance for Equity Funds Used During Construction
 
(3,008
)
 
(1,235
)
Mark-to-Market of Risk Management Contracts
 
9,760

 
1,625

Fuel Over/Under-Recovery, Net
 
(26,209
)
 
(102,051
)
Change in Other Noncurrent Assets
 
3,886

 
4,959

Change in Other Noncurrent Liabilities
 
(32,562
)
 
7,799

Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
7,260

 
41,382

Fuel, Materials and Supplies
 
39,623

 
88,057

Accounts Payable
 
(2,199
)
 
(4,314
)
Accrued Taxes, Net
 
31,805

 
929

Other Current Assets
 
(2,980
)
 
(7,276
)
Other Current Liabilities
 
(15,801
)
 
(6,707
)
Net Cash Flows from Operating Activities
 
301,052

 
297,170

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(140,964
)
 
(112,824
)
Change in Advances to Affiliates, Net
 
(103,629
)
 
(153,031
)
Other Investing Activities
 
13,047

 
(8,677
)
Net Cash Flows Used for Investing Activities
 
(231,546
)
 
(274,532
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Retirement of Long-term Debt – Nonaffiliated
 
(11,046
)
 
(8
)
Principal Payments for Capital Lease Obligations
 
(1,313
)
 
(1,559
)
Dividends Paid on Common Stock
 
(56,250
)
 
(20,000
)
Other Financing Activities
 
392

 
942

Net Cash Flows Used for Financing Activities
 
(68,217
)
 
(20,625
)
 
 
 
 
 
Net Increase in Cash and Cash Equivalents
 
1,289

 
2,013

Cash and Cash Equivalents at Beginning of Period
 
2,613

 
2,745

Cash and Cash Equivalents at End of Period
 
$
3,902

 
$
4,758

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
37,335

 
$
39,431

Net Cash Paid for Income Taxes
 
61

 

Noncash Acquisitions Under Capital Leases
 
1,540

 
2,657

Construction Expenditures Included in Current Liabilities as of March 31,
 
69,980

 
38,972

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.



99



APPALACHIAN POWER COMPANY AND SUBSIDIARIES
INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF
REGISTRANT SUBSIDIARIES

The condensed notes to APCo’s condensed financial statements are combined with the condensed notes to condensed financial statements for other registrant subsidiaries.  Listed below are the notes that apply to APCo.
 
Page
Number
 
 
Significant Accounting Matters
New Accounting Pronouncements
Comprehensive Income
Rate Matters
Commitments, Guarantees and Contingencies
Benefit Plans
Business Segments
Derivatives and Hedging
Fair Value Measurements
Income Taxes
Financing Activities
Variable Interest Entities
Property, Plant and Equipment
Disposition Plant Severance

100



INDIANA MICHIGAN POWER COMPANY
AND SUBSIDIARIES

101



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

EXECUTIVE OVERVIEW

Regulatory Activity

Transmission, Distribution and Storage System Improvement Charge (TDSIC)

In October 2014, I&M filed petitions with the IURC for approval of a TDSIC Rider and TDSIC Plan for eligible transmission, distribution and storage system improvements. The initial estimated cost of the capital improvements and associated operation and maintenance expenses included in the TDSIC Plan of $787 million, excluding AFUDC, will be updated annually. The TDSIC Rider will allow the periodic adjustment of I&M's rates to provide for timely recovery of 80% of approved TDSIC Plan costs. I&M will defer the remaining 20% of approved TDSIC Plan costs to be recovered in I&M's next general rate case. In January 2015, intervenors filed testimony that recommended denial of certain portions of the TDSIC Plan including recommended changes to the capital structure, recovery of requested operation and maintenance cost allocations and the rate design within the TDSIC Rider mechanism. A hearing at the IURC was held in February 2015. In April 2015, I&M filed a notice with the IURC to seek approval of the proposed TDSIC Plan excluding $117 million of certain projects that were challenged in this proceeding. A decision from the IURC is pending. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. See the “Transmission, Distribution and Storage System Improvement Charge (TDSIC)” section of I&M Rate Matters in Note 4.

Litigation and Environmental Issues

In the ordinary course of business, I&M 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 which have a probable likelihood of loss if the loss can be estimated. For details on regulatory proceedings and pending litigation, see Note 4 - Rate Matters and Note 6 - Commitments, Guarantees and Contingencies in the 2014 Annual Report. Also, see Note 4 - Rate Matters and Note 5 - Commitments, Guarantees and Contingencies within the Condensed Notes to Condensed Financial Statements beginning on page 149. 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 U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will 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 plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement.  The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff.  The New York court granted a motion to transfer this case to the U.S. District Court for the Southern District of Ohio.  In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.   Management will continue to defend against the remaining claims.  Management is unable to determine a range of potential losses that are reasonably possible of occurring.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 214 for additional discussion of relevant factors.

102



RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of KWhs)
Retail:
 

 
 

Residential
1,745

 
1,905

Commercial
1,209

 
1,221

Industrial
1,794

 
1,805

Miscellaneous
20

 
20

Total Retail
4,768

 
4,951

 
 
 
 
Wholesale
3,406

 
5,296

 
 
 
 
Total KWhs
8,174

 
10,247


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 March 31,
 
2015
 
2014
 
(in degree days)
Actual – Heating (a)
2,759

 
2,972

Normal – Heating (b)
2,171

 
2,149

 
 
 
 
Actual – Cooling (c)

 

Normal – Cooling (b)
2

 
2


(a) Eastern Region 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.


103



First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Net Income
(in millions)
 
 
 
First Quarter of 2014
 
$
87

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
15

FERC Municipals and Cooperatives
 
(1
)
Off-system Sales
 
(43
)
Transmission Revenues
 
1

Other Revenues
 
(4
)
Total Change in Gross Margin
 
(32
)
 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
14

Depreciation and Amortization
 
(1
)
Taxes Other Than Income Taxes
 
(2
)
Interest Expense
 
3

Total Change in Expenses and Other
 
14

 
 
 

Income Tax Expense
 
4

 
 
 

First Quarter of 2015
 
$
73


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 $15 million primarily due to the following:
A $13 million increase due to an Indiana Capacity Tracker Rider effective August 2014.
An $8 million increase due to an Indiana PJM Rider.
A $4 million increase due to an Indiana Federal Mandate Rider effective January 2015.
These increases were partially offset by:
A $10 million decrease due to weather normalized usage.
Margins from Off-system Sales decreased $43 million due to lower market prices and decreased sales volumes.
Other Revenues decreased $4 million primarily due to a decrease in barging due to reduced deliveries to Rockport. The decrease in River Transportation Division (RTD) revenue was offset by a corresponding decrease in Other Operation and Maintenance expenses for barging discussed below.

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

Other Operation and Maintenance expenses decreased $14 million primarily due to the following:
A $6 million decrease due to the reduction of an environmental liability.
A $5 million decrease in RTD expenses for barging activities. The decrease in RTD expenses was offset by a corresponding decrease in Other Revenues from barging activities discussed above.
Interest Expense decreased $3 million due to a lower interest rate on a remarketed pollution control bond and lower amortized losses due to the early redemption of a senior unsecured note.
Income Tax Expense decreased $4 million primarily due to a decrease in pretax book income and the regulatory accounting treatment of state income taxes, partially offset by other book/tax differences which are accounted for on a flow-through basis.

104



CRITICAL ACCOUNTING POLICIES AND ESTIMATES, NEW ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” in the 2014 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 214 for a discussion of accounting pronouncements.

105




INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
REVENUES
 
 
 
 

Electric Generation, Transmission and Distribution
 
$
566,250

 
$
614,843

Sales to AEP Affiliates
 
453

 
2,284

Other Revenues – Affiliated
 
18,580

 
24,727

Other Revenues – Nonaffiliated
 
1,028

 

TOTAL REVENUES
 
586,311

 
641,854

 
 
 
 
 
EXPENSES
 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
99,884

 
156,643

Purchased Electricity for Resale
 
55,907

 
5,362

Purchased Electricity from AEP Affiliates
 
54,965

 
72,056

Other Operation
 
128,960

 
141,350

Maintenance
 
47,351

 
48,565

Depreciation and Amortization
 
51,407

 
50,031

Taxes Other Than Income Taxes
 
23,407

 
21,823

TOTAL EXPENSES
 
461,881

 
495,830

 
 
 
 
 
OPERATING INCOME
 
124,430

 
146,024

 
 
 
 
 
Other Income (Expense):
 
 

 
 

Interest Income
 
1,748

 
1,049

Allowance for Equity Funds Used During Construction
 
4,043

 
3,964

Interest Expense
 
(22,777
)
 
(25,633
)
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
107,444

 
125,404

 
 
 
 
 
Income Tax Expense
 
34,770

 
38,315

 
 
 
 
 
NET INCOME
 
$
72,674

 
$
87,089

The common stock of I&M is wholly-owned by AEP.
 
See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.


106



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Net Income
$
72,674

 
$
87,089

 
 
 
 
OTHER COMPREHENSIVE INCOME, NET OF TAXES
 

 
 

Cash Flow Hedges, Net of Tax of $144 and $229 in 2015 and 2014, Respectively
267

 
425

Amortization of Pension and OPEB Deferred Costs, Net of Tax of $6 and $23 in 2015 and 2014, Respectively
12

 
43

 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME
279

 
468

 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
72,953

 
$
87,557

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

107



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER'S EQUITY
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013
$
56,584

 
$
980,896

 
$
900,182

 
$
(15,509
)
 
$
1,922,153

 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 

 
 

 
(25,000
)
 
 

 
(25,000
)
Net Income
 

 
 

 
87,089

 
 

 
87,089

Other Comprehensive Income
 

 
 

 
 

 
468

 
468

TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2014
$
56,584

 
$
980,896

 
$
962,271

 
$
(15,041
)
 
$
1,984,710

 
 

 
 

 
 

 
 

 
 

TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014
$
56,584

 
$
980,896

 
$
930,829

 
$
(14,360
)
 
$
1,953,949

 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 

 
 

 
(30,000
)
 
 

 
(30,000
)
Net Income
 

 
 

 
72,674

 
 

 
72,674

Other Comprehensive Income
 

 
 

 
 

 
279

 
279

TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2015
$
56,584

 
$
980,896

 
$
973,503

 
$
(14,081
)
 
$
1,996,902

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

108



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2015 and December 31, 2014
(in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
1,771

 
$
1,020

Advances to Affiliates
 
13,497

 
13,481

Accounts Receivable:
 
 
 
 
Customers
 
38,919

 
56,978

Affiliated Companies
 
57,523

 
72,582

Accrued Unbilled Revenues
 
1,551

 
503

Miscellaneous
 
1,663

 
1,625

Allowance for Uncollectible Accounts
 
(377
)
 
(494
)
Total Accounts Receivable
 
99,279

 
131,194

Fuel
 
47,969

 
54,623

Materials and Supplies
 
198,985

 
201,089

Risk Management Assets
 
9,954

 
22,328

Accrued Tax Benefits
 
6,358

 
24,788

Prepayments and Other Current Assets
 
17,963

 
27,968

TOTAL CURRENT ASSETS
 
395,776

 
476,491

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
3,780,570

 
3,741,831

Transmission
 
1,361,626

 
1,358,419

Distribution
 
1,712,898

 
1,698,409

Other Property, Plant and Equipment (Including Plant to be Retired, Coal Mining and Nuclear Fuel)
 
1,474,324

 
1,490,820

Construction Work in Progress
 
563,975

 
537,237

Total Property, Plant and Equipment
 
8,893,393

 
8,826,716

Accumulated Depreciation, Depletion and Amortization
 
3,440,400

 
3,410,341

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
5,452,993

 
5,416,375

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
534,898

 
536,152

Spent Nuclear Fuel and Decommissioning Trusts
 
2,122,387

 
2,095,732

Long-term Risk Management Assets
 
2,820

 
3,317

Deferred Charges and Other Noncurrent Assets
 
137,647

 
137,209

TOTAL OTHER NONCURRENT ASSETS
 
2,797,752

 
2,772,410

 
 
 
 
 
TOTAL ASSETS
 
$
8,646,521

 
$
8,665,276

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

109



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
March 31, 2015 and December 31, 2014
(dollars in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$
168,150

 
$
142,501

Accounts Payable:
 
 
 
 
General
 
143,030

 
168,294

Affiliated Companies
 
57,727

 
76,010

Long-term Debt Due Within One Year – Nonaffiliated
(March 31, 2015 and December 31, 2014 Amounts Include $80,535 and $85,657, Respectively, Related to DCC Fuel)
 
374,347

 
382,187

Risk Management Liabilities
 
4,808

 
5,223

Customer Deposits
 
35,803

 
35,206

Accrued Taxes
 
82,787

 
72,742

Accrued Interest
 
13,135

 
26,677

Obligations Under Capital Leases
 
41,178

 
42,050

Other Current Liabilities
 
122,673

 
150,566

TOTAL CURRENT LIABILITIES
 
1,043,638

 
1,101,456

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
1,627,262

 
1,645,210

Long-term Risk Management Liabilities
 
1,378

 
1,395

Deferred Income Taxes
 
1,292,309

 
1,264,167

Regulatory Liabilities and Deferred Investment Tax Credits
 
1,186,521

 
1,199,694

Asset Retirement Obligations
 
1,352,747

 
1,337,179

Deferred Credits and Other Noncurrent Liabilities
 
145,764

 
162,226

TOTAL NONCURRENT LIABILITIES
 
5,605,981

 
5,609,871

 
 
 
 
 
TOTAL LIABILITIES
 
6,649,619

 
6,711,327

 
 
 
 
 
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
 
56,584

 
56,584

Paid-in Capital
 
980,896

 
980,896

Retained Earnings
 
973,503

 
930,829

Accumulated Other Comprehensive Income (Loss)
 
(14,081
)
 
(14,360
)
TOTAL COMMON SHAREHOLDER’S EQUITY
 
1,996,902

 
1,953,949

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
 
$
8,646,521

 
$
8,665,276

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

110



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
72,674

 
$
87,089

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

 
 

Depreciation and Amortization
 
51,407

 
50,031

Deferred Income Taxes
 
15,568

 
21,017

Amortization (Deferral) of Incremental Nuclear Refueling Outage Expenses, Net
 
(9,316
)
 
14,821

Allowance for Equity Funds Used During Construction
 
(4,043
)
 
(3,964
)
Mark-to-Market of Risk Management Contracts
 
12,440

 
426

Amortization of Nuclear Fuel
 
38,327

 
38,049

Fuel Over/Under-Recovery, Net
 
(2,996
)
 
11,683

Change in Other Noncurrent Assets
 
6,201

 
(16,211
)
Change in Other Noncurrent Liabilities
 
(7,820
)
 
11,505

Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
31,915

 
24,411

Fuel, Materials and Supplies
 
8,758

 
7,340

Accounts Payable
 
(181
)
 
(20,902
)
Accrued Taxes, Net
 
28,475

 
29,583

Other Current Assets
 
7,632

 
5,933

Other Current Liabilities
 
(30,640
)
 
(18,862
)
Net Cash Flows from Operating Activities
 
218,401

 
241,949

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(111,802
)
 
(117,807
)
Change in Advances to Affiliates, Net
 
(16
)
 
(3,299
)
Purchases of Investment Securities
 
(245,841
)
 
(164,511
)
Sales of Investment Securities
 
228,164

 
147,700

Acquisitions of Nuclear Fuel
 
(51,834
)
 
(49,420
)
Other Investing Activities
 
5,631

 
8,860

Net Cash Flows Used for Investing Activities
 
(175,698
)
 
(178,477
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Change in Advances from Affiliates, Net
 
25,649

 

Retirement of Long-term Debt – Nonaffiliated
 
(25,937
)
 
(26,337
)
Principal Payments for Capital Lease Obligations
 
(12,154
)
 
(11,569
)
Dividends Paid on Common Stock
 
(30,000
)
 
(25,000
)
Other Financing Activities
 
490

 
405

Net Cash Flows Used for Financing Activities
 
(41,952
)
 
(62,501
)
 
 
 
 
 
Net Increase in Cash and Cash Equivalents
 
751

 
971

Cash and Cash Equivalents at Beginning of Period
 
1,020

 
1,317

Cash and Cash Equivalents at End of Period
 
$
1,771

 
$
2,288

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
34,980

 
$
34,592

Net Cash Paid for Income Taxes
 
1,959

 

Noncash Acquisitions Under Capital Leases
 
827

 
2,406

Construction Expenditures Included in Current Liabilities as of March 31,
 
66,324

 
56,668

Acquisition of Nuclear Fuel Included in Current Liabilities as of March 31,
 

 
116

Expected Reimbursement for Capital Cost of Spent Nuclear Fuel Dry Cask Storage
 
143

 
854

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

111



INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF
REGISTRANT SUBSIDIARIES

The condensed notes to I&M’s condensed financial statements are combined with the condensed notes to condensed financial statements for other registrant subsidiaries.  Listed below are the notes that apply to I&M.
 
Page
Number
 
 
Significant Accounting Matters
New Accounting Pronouncements
Comprehensive Income
Rate Matters
Commitments, Guarantees and Contingencies
Benefit Plans
Business Segments
Derivatives and Hedging
Fair Value Measurements
Income Taxes
Financing Activities
Variable Interest Entities
Property, Plant and Equipment
Disposition Plant Severance

112



OHIO POWER COMPANY AND SUBSIDIARIES


113



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

EXECUTIVE OVERVIEW

Regulatory Activity

Ohio Electric Security Plan Filings

2009 - 2011 ESP

In August 2012, the PUCO issued an order in a separate proceeding which implemented a PIRR to recover OPCo’s deferred fuel costs in rates beginning September 2012. Oral arguments at the Supreme Court of Ohio were held in February 2015. OPCo presented arguments to reinstate a weighted average cost of capital carrying charge and to defend against an intervenor argument that the carrying charges should be reduced due to an accumulated deferred income tax credit.
 
June 2012 - May 2015 Ohio ESP Including Capacity Charge

In August 2012, the PUCO issued an order which adopted and modified a new ESP that established base generation rates through May 2015. This ruling was generally upheld in PUCO rehearing orders in January and March 2013.

In July 2012, the PUCO issued an order in a separate capacity proceeding which stated that OPCo must charge CRES providers the RPM price and authorized OPCo to defer a portion of its incurred capacity costs not recovered from CRES providers up to $188.88/MW day. The OPCo RPM price collected from CRES providers, which includes reserve margins, was approximately $34/MW day through May 2014 and is $150/MW day from June 2014 through May 2015. In December 2012, various parties filed notices of appeal of the capacity costs decision with the Supreme Court of Ohio.

As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012. The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs. In April and May 2013, OPCo and various intervenors filed appeals with the Supreme Court of Ohio challenging portions of the PUCO’s ESP order, including the RSR. In July 2014, OPCo submitted a separate application to continue the RSR to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh, until the balance of the capacity deferrals has been collected. In April 2015, the PUCO issued an order approving the application to continue the RSR, with modifications. As of March 31, 2015, OPCo’s incurred deferred capacity costs balance was $434 million, including debt carrying costs.

In November 2013, the PUCO issued an order approving OPCo’s competitive bid process with modifications. As ordered, in 2014, OPCo conducted multiple energy-only auctions for a total of 100% of the SSO load with delivery beginning April 2014 through May 2015. For delivery starting in June 2015, OPCo will conduct energy and capacity auctions for its entire SSO load. The PUCO also approved the unbundling of the FAC into fixed and energy-related components and an intervenor proposal to blend the $188.88/MW day capacity price in proportion to the percentage of energy planned to be auctioned. Additionally, the PUCO ordered that intervenor concerns related to the recovery of the fixed fuel costs through potentially both the FAC and the approved capacity charges be addressed in subsequent FAC proceedings. Management believes that these intervenor concerns are without merit.

In January 2014, the PUCO denied all rehearing requests and agreed to issue a supplemental request for an independent auditor in the 2012 - 2013 FAC proceeding to separately examine the recovery of the fixed fuel costs, including OVEC. In March 2014, the PUCO approved OPCo’s request to implement riders related to the unbundling of the FAC. In October 2014, the independent auditor, selected by the PUCO, filed its report for the period August 2012 through May 2015 with the PUCO. If the PUCO ultimately concludes that a portion of the fixed fuel costs are also recovered through

114



OPCo's $188.88 capacity charge, the independent auditor recommends a methodology for calculating a refund of a portion of certain fixed fuel costs. The retail share of these fixed fuel costs is approximately $90 million annually. A hearing related to this matter has not been scheduled. Management believes that no over-recovery of costs has occurred and intends to oppose the findings in the audit report.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition.

June 2015 - May 2018 ESP

In December 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 effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement.

In October 2014, OPCo filed a separate application with the PUCO to propose a new extended PPA for inclusion in the PPA rider, discussed above. The new PPA would include an additional 2,671 MW to be purchased from AGR over the life of the respective generating units.

In February 2015, the PUCO issued an order approving OPCo's ESP application, subject to certain modifications, with a return on common equity of 10.2% on capital costs for certain riders. The order included (a) approval of the Distribution Investment Rider with modified rate caps established by the PUCO, (b) authorization to establish a zero rate rider for OPCo's proposed PPA, (c) the option for OPCo to reapply in a future proceeding with a more detailed PPA proposal and (d) a directive to continue to pursue the transfer of the OVEC contractual entitlement to AGR or to otherwise divest of its interest in OVEC. In April 2015, the PUCO issued an order that granted applications for rehearing for further consideration filed by OPCo and various intervenors.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition. See “Ohio Electric Security Plan Filings” section of OPCo Rate Matters in Note 4.

Litigation and Environmental Issues

In the ordinary course of business, OPCo 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 which have a probable likelihood of loss if the loss can be estimated. For details on regulatory proceedings and pending litigation, see Note 4 - Rate Matters and Note 6 - Commitments, Guarantees and Contingencies in the 2014 Annual Report. Also, see Note 4 - Rate Matters and Note 5 - Commitments, Guarantees and Contingencies within the Condensed Notes to Condensed Financial Statements beginning on page 149. Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 214 for additional discussion of relevant factors.


115



RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of KWhs)
Retail:
 

 
 

Residential
4,491

 
4,731

Commercial
3,595

 
3,579

Industrial
3,544

 
3,473

Miscellaneous
32

 
34

Total Retail (a)
11,662

 
11,817

 
 
 
 
Wholesale (b)
534


700

 
 
 
 
Total KWhs
12,196

 
12,517


(a) Represents energy delivered to distribution customers.
(b) 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 March 31,
 
2015
 
2014
 
(in degree days)
Actual – Heating (a)
2,438

 
2,409

Normal – Heating (b)
1,881

 
1,880

 
 
 
 
Actual – Cooling (c)

 

Normal – Cooling (b)
3

 
3


(a) Eastern Region 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.


116



First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Net Income
(in millions)
 
 
 
First Quarter of 2014
 
$
61

 
 
 

Changes in Gross Margin:
 
 

Retail Margins
 
20

Off-system Sales
 
(1
)
Transmission Revenues
 
(2
)
Other Revenues
 
1

Total Change in Gross Margin
 
18

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
(8
)
Depreciation and Amortization
 
(1
)
Taxes Other Than Income Taxes
 
(3
)
Carrying Costs Income
 
(1
)
Interest Expense
 
1

Total Change in Expenses and Other
 
(12
)
 
 
 

Income Tax Expense
 
(2
)
 
 
 

First Quarter of 2015
 
$
65


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 amortization of generation deferrals were as follows:

Retail Margins increased $20 million primarily due to the following:
A $12 million increase in base rates due to the discontinuance of seasonal rates.
A $14 million increase in revenues associated with the Storm Damage Recovery Rider. This increase in Retail Margins is primarily offset by an increase in Other Operation and Maintenance expenses below.
An $8 million increase in revenues associated with the Distribution Investment Rider.
These increases were partially offset by:
A $10 million decrease in the Energy Efficiency (EE), Peak Demand Reduction Cost Recovery Rider (PDR) revenues and associated deferrals. This decrease was offset by a corresponding decrease in Other Operation and Maintenance expenses below.
A $6 million decrease in revenues associated with the Universal Service Fund (USF) surcharge. This decrease was offset by a corresponding decrease in Other Operation and Maintenance expenses below.

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

Other Operation and Maintenance expenses increased $8 million primarily due to the following:
A $13 million increase due to the amortization of 2012 deferred storm expenses. This increase was offset by a corresponding increase in Retail Margins above.
An $8 million increase in recoverable PJM expenses.
A $6 million increase due to PUCO ordered contributions to the Ohio Growth Fund.
These increases were partially offset by:
A $10 million decrease in EE and PDR costs and associated deferrals. This decrease was offset by a corresponding decrease in Retail Margins above.

117



A $6 million decrease in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This decrease was offset by a corresponding decrease in Retail Margins above.
A $3 million decrease in employee-related expenses.
Taxes Other Than Income Taxes increased $3 million primarily due to an increase in property taxes due to additional investment in transmission and distribution assets and higher tax rates.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES, NEW ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” in the 2014 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 214 for a discussion of accounting pronouncements.


118




OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
REVENUES
 
 
 
 
Electric Transmission and Distribution
 
$
874,217

 
$
846,906

Sales to AEP Affiliates
 
42,106

 
31,978

Other Revenues
 
2,117

 
1,308

TOTAL REVENUES
 
918,440

 
880,192

 
 
 
 
 
EXPENSES
 
 

 
 

Purchased Electricity for Resale
 
142,080

 
79,130

Purchased Electricity from AEP Affiliates
 
270,604

 
314,124

Amortization of Generation Deferrals
 
31,454

 
31,186

Other Operation
 
146,844

 
151,426

Maintenance
 
47,573

 
34,651

Depreciation and Amortization
 
59,212

 
58,699

Taxes Other Than Income Taxes
 
97,787

 
95,257

TOTAL EXPENSES
 
795,554

 
764,473

 
 
 
 
 
OPERATING INCOME
 
122,886

 
115,719

 
 
 
 
 
Other Income (Expense):
 
 

 
 

Interest Income
 
1,913

 
3,274

Carrying Costs Income
 
6,460

 
7,114

Allowance for Equity Funds Used During Construction
 
2,444

 
1,726

Interest Expense
 
(32,449
)
 
(33,007
)
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
101,254

 
94,826

 
 
 
 
 
Income Tax Expense
 
35,887

 
34,052

 
 
 
 
 
NET INCOME
 
$
65,367

 
$
60,774

The common stock of OPCo is wholly-owned by AEP.
 
See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.




119



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Net Income
$
65,367

 
$
60,774

 
 
 
 
OTHER COMPREHENSIVE LOSS, NET OF TAXES
 
 
 
Cash Flow Hedges, Net of Tax of $185 and $241 in 2015 and 2014, Respectively
(343
)
 
(448
)
 
 

 
 

TOTAL COMPREHENSIVE INCOME
$
65,024

 
$
60,326

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.


120



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER'S EQUITY
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013
$
321,201

 
$
663,782

 
$
633,203

 
$
7,079

 
$
1,625,265

 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 

 
 

 
(25,000
)
 
 

 
(25,000
)
Net Income
 

 
 

 
60,774

 
 

 
60,774

Other Comprehensive Loss
 

 
 

 
 

 
(448
)
 
(448
)
TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2014
$
321,201

 
$
663,782

 
$
668,977

 
$
6,631

 
$
1,660,591

 
 

 
 

 
 

 
 

 
 

TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014
$
321,201

 
$
838,782

 
$
814,625

 
$
5,602

 
$
1,980,210

 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 

 
 

 
(37,500
)
 
 

 
(37,500
)
Net Income
 

 
 

 
65,367

 
 

 
65,367

Other Comprehensive Loss
 

 
 

 
 

 
(343
)
 
(343
)
TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2015
$
321,201

 
$
838,782

 
$
842,492

 
$
5,259

 
$
2,007,734

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.
 


121



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2015 and December 31, 2014
(in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
4,366

 
$
2,870

Restricted Cash for Securitized Funding
 
17,125

 
28,687

Advances to Affiliates
 
291,256

 
312,473

Accounts Receivable:
 
 
 
 
Customers
 
59,645

 
57,906

Affiliated Companies
 
75,151

 
79,822

Accrued Unbilled Revenues
 
34,247

 
35,755

Miscellaneous
 
590

 
927

Allowance for Uncollectible Accounts
 
(113
)
 
(171
)
Total Accounts Receivable
 
169,520

 
174,239

Notes Receivable Due Within One Year – Affiliated
 
86,000

 
86,000

Materials and Supplies
 
68,180

 
60,909

Risk Management Assets
 
1,272

 
7,242

Deferred Income Tax Benefits
 
48,724

 
49,306

Accrued Tax Benefits
 
5,497

 
6,100

Prepayments and Other Current Assets
 
9,142

 
8,997

TOTAL CURRENT ASSETS
 
701,082

 
736,823

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Transmission
 
2,124,497

 
2,104,613

Distribution
 
4,129,839

 
4,087,601

Other Property, Plant and Equipment
 
417,682

 
390,848

Construction Work in Progress
 
227,764

 
218,667

Total Property, Plant and Equipment
 
6,899,782

 
6,801,729

Accumulated Depreciation and Amortization
 
2,053,450

 
2,038,120

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
4,846,332

 
4,763,609

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Notes Receivable – Affiliated
 
32,245

 
32,245

Regulatory Assets
 
1,261,382

 
1,318,939

Securitized Assets
 
103,924

 
109,999

Long-term Risk Management Assets
 
50,422

 
45,102

Deferred Charges and Other Noncurrent Assets
 
215,448

 
264,150

TOTAL OTHER NONCURRENT ASSETS
 
1,663,421

 
1,770,435

 
 
 
 
 
TOTAL ASSETS
 
$
7,210,835

 
$
7,270,867

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.


122



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
March 31, 2015 and December 31, 2014
(dollars in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT LIABILITIES
 
 
 
 
Accounts Payable:
 
 

 
 

General
 
$
156,577

 
$
145,328

Affiliated Companies
 
139,114

 
172,741

Long-term Debt Due Within One Year – Nonaffiliated
(March 31, 2015 and December 31, 2014 Amounts Include $45,973 and $45,427, Respectively, Related to Ohio Phase-in-Recovery Funding)
 
132,044

 
131,497

Risk Management Liabilities
 
1,491

 
1,943

Customer Deposits
 
54,854

 
53,922

Accrued Taxes
 
360,641

 
420,772

Accrued Interest
 
45,854

 
34,279

Other Current Liabilities
 
157,120

 
179,093

TOTAL CURRENT LIABILITIES
 
1,047,695

 
1,139,575

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
(March 31, 2015 and December 31, 2014 Amounts Include $164,295 and $187,041, Respectively, Related to Ohio Phase-in-Recovery Funding)
 
2,142,997

 
2,165,626

Long-term Risk Management Liabilities
 
4,292

 
3,013

Deferred Income Taxes
 
1,406,172

 
1,405,620

Regulatory Liabilities and Deferred Investment Tax Credits
 
534,000

 
514,691

Employee Benefits and Pension Obligations
 
36,378

 
36,662

Deferred Credits and Other Noncurrent Liabilities
 
31,567

 
25,470

TOTAL NONCURRENT LIABILITIES
 
4,155,406

 
4,151,082

 
 
 
 
 
TOTAL LIABILITIES
 
5,203,101

 
5,290,657

 
 
 
 
 
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
 
321,201

 
321,201

Paid-in Capital
 
838,782

 
838,782

Retained Earnings
 
842,492

 
814,625

Accumulated Other Comprehensive Income (Loss)
 
5,259

 
5,602

TOTAL COMMON SHAREHOLDER’S EQUITY
 
2,007,734

 
1,980,210

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
 
$
7,210,835

 
$
7,270,867

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.


123



OHIO POWER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
65,367

 
$
60,774

Adjustments to Reconcile Net Income to Net Cash Flows from (Used for) Operating Activities:
 
 

 
 

Depreciation and Amortization
 
59,212

 
58,699

Amortization of Generation Deferrals
 
31,454

 
31,186

Deferred Income Taxes
 
1,749

 
24,917

Carrying Costs Income
 
(6,460
)
 
(7,114
)
Allowance for Equity Funds Used During Construction
 
(2,444
)
 
(1,726
)
Mark-to-Market of Risk Management Contracts
 
1,478

 
(1,060
)
Property Taxes
 
49,760

 
48,743

Fuel Over/Under-Recovery, Net
 
(2,965
)
 
12,265

Deferral of Ohio Capacity Costs, Net
 
(18,172
)
 
(56,167
)
Change in Other Noncurrent Assets
 
33,029

 
(21,285
)
Change in Other Noncurrent Liabilities
 
24,903

 
29,277

Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
4,719

 
(34,984
)
Materials and Supplies
 
(7,271
)
 
(1,600
)
Accounts Payable
 
(25,168
)
 
(30,911
)
Accrued Taxes, Net
 
(59,528
)
 
(98,147
)
Other Current Assets
 
(1,237
)
 
(1,415
)
Other Current Liabilities
 
(3,334
)
 
(13,633
)
Net Cash Flows from (Used for) Operating Activities
 
145,092

 
(2,181
)
 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(119,723
)
 
(100,220
)
Change in Restricted Cash for Securitized Funding
 
11,562

 
(12,668
)
Change in Advances to Affiliates, Net
 
21,217

 
339,070

Other Investing Activities
 
2,873

 
1,162

Net Cash Flows from (Used for) Investing Activities
 
(84,071
)
 
227,344

 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Change in Advances from Affiliates, Net
 

 
27,108

Retirement of Long-term Debt – Nonaffiliated
 
(22,219
)
 
(225,029
)
Principal Payments for Capital Lease Obligations
 
(947
)
 
(1,396
)
Dividends Paid on Common Stock
 
(37,500
)
 
(25,000
)
Other Financing Activities
 
1,141

 
930

Net Cash Flows Used for Financing Activities
 
(59,525
)
 
(223,387
)
 
 
 
 
 
Net Increase in Cash and Cash Equivalents
 
1,496

 
1,776

Cash and Cash Equivalents at Beginning of Period
 
2,870

 
3,004

Cash and Cash Equivalents at End of Period
 
$
4,366

 
$
4,780

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
18,813

 
$
23,425

Net Cash Paid (Received) for Income Taxes
 
(46
)
 

Noncash Acquisitions Under Capital Leases
 
1,619

 
3,324

Construction Expenditures Included in Current Liabilities as of March 31,
 
42,947

 
46,910

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.


124



OHIO POWER COMPANY AND SUBSIDIARIES
INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF
REGISTRANT SUBSIDIARIES

The condensed notes to OPCo’s condensed financial statements are combined with the condensed notes to condensed financial statements for other registrant subsidiaries.  Listed below are the notes that apply to OPCo.
 
Page
Number
 
 
Significant Accounting Matters
New Accounting Pronouncements
Comprehensive Income
Rate Matters
Commitments, Guarantees and Contingencies
Benefit Plans
Business Segments
Derivatives and Hedging
Fair Value Measurements
Income Taxes
Financing Activities
Variable Interest Entities
Property, Plant and Equipment
Disposition Plant Severance




125



PUBLIC SERVICE COMPANY OF OKLAHOMA

126



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

EXECUTIVE OVERVIEW

Regulatory Activity

2014 Oklahoma Base Rate Case

In January 2014, PSO filed a request with the OCC to increase annual base rates by $38 million, based upon a 10.5% return on common equity. This revenue increase included a proposed increase in depreciation rates of $29 million. In addition, the filing proposed recovery of advanced metering costs through a separate rider over a three-year deployment period requesting $7 million of revenues in year one, increasing to $28 million in year three. The filing also proposed expansion of an existing transmission rider currently recovered in base rates to include additional transmission-related costs that are expected to increase over the next several years.

In June 2014, a non-unanimous stipulation agreement between PSO, the OCC staff and certain intervenors was filed with the OCC. The parties to the stipulation recommended no overall change to the transmission rider or to annual revenues, other than additional revenues through a separate rider related to advanced metering costs, and that the terms of the stipulation be effective November 2014. The advanced metering rider would provide $24 million of revenues over 14 months beginning in November 2014 and increase to $27 million in 2016. New depreciation rates are recommended for advanced metering investments and existing meters, also to be effective November 2014. Additionally, the stipulation recommends recovery of regulatory assets for 2013 storms and regulatory case expenses. In July 2014, the Attorney General joined in the stipulation agreement. In April 2015, the OCC issued an order that approved the stipulation agreement. See the “2014 Oklahoma Base Rate Case” section of PSO Rate Matters in Note 4.

Litigation and Environmental Issues

In the ordinary course of business, PSO 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 which have a probable likelihood of loss if the loss can be estimated. For details on regulatory proceedings and pending litigation, see Note 4 - Rate Matters and Note 6 - Commitments, Guarantees and Contingencies in the 2014 Annual Report. Also, see Note 4 - Rate Matters and Note 5 - Commitments, Guarantees and Contingencies within the Condensed Notes to Condensed Financial Statements beginning on page 149. Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 214 for additional discussion of relevant factors.


127



RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of KWhs)
Retail:
 

 
 

Residential
1,516

 
1,634

Commercial
1,131

 
1,139

Industrial
1,254

 
1,193

Miscellaneous
276

 
278

Total Retail
4,177

 
4,244

 
 
 
 
Wholesale
91

 
227

 
 
 
 
Total KWhs
4,268

 
4,471


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 March 31,
 
2015
 
2014
 
(in degree days)
Actual – Heating (a)
1,166

 
1,369

Normal – Heating (b)
1,047

 
1,045

 
 
 
 
Actual – Cooling (c)
13

 
3

Normal – Cooling (b)
14

 
15


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


128




First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Net Income
(in millions)
 
 
 
First Quarter of 2014
 
$
8

 
 
 
Changes in Gross Margin:
 
 
Retail Margins (a)
 
9

Transmission Revenues
 
1

Other Revenues
 
1

Total Change in Gross Margin
 
11

 
 
 
Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
2

Depreciation and Amortization
 
(6
)
Taxes Other Than Income Taxes
 
3

Interest Expense
 
(1
)
Total Change in Expenses and Other
 
(2
)
 
 
 

Income Tax Expense
 
(3
)
 
 
 

First Quarter of 2015
 
$
14


(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 $9 million primarily due to revenue increases from rate riders. This increase in retail margins has corresponding increases to riders/trackers recognized in other expense items below.
    
Expenses and Other and Income Tax Expense changed between years as follows:

Depreciation and Amortization expenses increased $6 million primarily due to amortization related to an advanced metering rider implemented in November 2014.
Taxes Other Than Income Taxes decreased $3 million primarily due to a June 2014 property tax reduction resulting from a change in Oklahoma tax law.
Income Tax Expense increased $3 million primarily due to an increase in pretax book income.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES, NEW ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” in the 2014 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 214 for a discussion of accounting pronouncements.


129




PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
REVENUES
 
 
 
 
Electric Generation, Transmission and Distribution
 
$
304,673

 
$
296,710

Sales to AEP Affiliates
 
1,279

 
4,597

Other Revenues
 
820

 
78

TOTAL REVENUES
 
306,772

 
301,385

 
 
 
 
 
EXPENSES
 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
85,599

 
65,937

Purchased Electricity for Resale
 
65,523

 
79,691

Purchased Electricity from AEP Affiliates
 

 
11,024

Other Operation
 
60,765

 
58,711

Maintenance
 
21,140

 
24,745

Depreciation and Amortization
 
29,534

 
23,982

Taxes Other Than Income Taxes
 
9,278

 
11,969

TOTAL EXPENSES
 
271,839

 
276,059

 
 
 
 
 
OPERATING INCOME
 
34,933

 
25,326

 
 
 
 
 
Other Income (Expense):
 
 

 
 

Other Income
 
1,363

 
1,428

Interest Expense
 
(14,570
)
 
(13,317
)
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
21,726

 
13,437

 
 
 
 
 
Income Tax Expense
 
8,041

 
4,989

 
 
 
 
 
NET INCOME
 
$
13,685

 
$
8,448

The common stock of PSO is wholly-owned by AEP.
 
 
 
 
 
See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

130



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Net Income
$
13,685

 
$
8,448

 
 
 
 
OTHER COMPREHENSIVE LOSS, NET OF TAXES
 

 
 

Cash Flow Hedges, Net of Tax of $102 and $132 in 2015 and 2014, Respectively
(190
)
 
(246
)
 
 

 
 

TOTAL COMPREHENSIVE INCOME
$
13,495

 
$
8,202

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

131



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER'S EQUITY
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013
$
157,230

 
$
364,037

 
$
415,076

 
$
5,758

 
$
942,101

 
 
 
 
 
 
 
 
 
 
Net Income
 

 
 

 
8,448

 
 

 
8,448

Other Comprehensive Loss
 

 
 

 
 

 
(246
)
 
(246
)
TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2014
$
157,230

 
$
364,037

 
$
423,524

 
$
5,512

 
$
950,303

 
 

 
 

 
 

 
 

 
 

TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014
$
157,230

 
$
364,037

 
$
502,005

 
$
4,943

 
$
1,028,215

 
 
 
 
 
 
 
 
 
 
Net Income
 

 
 

 
13,685

 
 

 
13,685

Other Comprehensive Loss
 

 
 

 
 

 
(190
)
 
(190
)
TOTAL COMMON SHAREHOLDER'S EQUITY – MARCH 31, 2015
$
157,230

 
$
364,037

 
$
515,690

 
$
4,753

 
$
1,041,710

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.


132



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED BALANCE SHEETS
ASSETS
March 31, 2015 and December 31, 2014
(in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
 
$
1,424

 
$
1,352

Advances to Affiliates
 
62,255

 

Accounts Receivable:
 
 
 
 
Customers
 
29,156

 
28,448

Affiliated Companies
 
19,075

 
22,114

Miscellaneous
 
3,793

 
6,026

Allowance for Uncollectible Accounts
 
(64
)
 
(147
)
Total Accounts Receivable
 
51,960

 
56,441

Fuel
 
16,639

 
16,436

Materials and Supplies
 
52,640

 
50,880

Risk Management Assets
 
9

 

Accrued Tax Benefits
 
24,986

 
24,369

Regulatory Asset for Under-Recovered Fuel Costs
 
10,704

 
35,699

Prepayments and Other Current Assets
 
15,428

 
6,524

TOTAL CURRENT ASSETS
 
236,045

 
191,701

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
1,279,389

 
1,264,724

Transmission
 
793,850

 
788,911

Distribution
 
2,124,964

 
2,080,221

Other Property, Plant and Equipment (Including Plant to be Retired)
 
428,190

 
421,568

Construction Work in Progress
 
218,241

 
204,753

Total Property, Plant and Equipment
 
4,844,634

 
4,760,177

Accumulated Depreciation and Amortization
 
1,342,464

 
1,319,554

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
3,502,170

 
3,440,623

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
154,239

 
154,327

Employee Benefits and Pension Assets
 
19,934

 
19,335

Deferred Charges and Other Noncurrent Assets
 
32,763

 
7,557

TOTAL OTHER NONCURRENT ASSETS
 
206,936

 
181,219

 
 
 
 
 
TOTAL ASSETS
 
$
3,945,151

 
$
3,813,543

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

133



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
March 31, 2015 and December 31, 2014
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
 
 
(in thousands)
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$

 
$
154,249

Accounts Payable:
 
 

 
 

General
 
84,206

 
92,672

Affiliated Companies
 
47,906

 
51,744

Long-term Debt Due Within One Year – Nonaffiliated
 
430

 
427

Risk Management Liabilities
 
702

 
918

Customer Deposits
 
49,952

 
48,700

Accrued Taxes
 
36,280

 
20,887

Accrued Interest
 
16,029

 
12,699

Other Current Liabilities
 
37,311

 
58,878

TOTAL CURRENT LIABILITIES
 
272,816

 
441,174

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
1,290,585

 
1,040,609

Deferred Income Taxes
 
916,258

 
898,352

Regulatory Liabilities and Deferred Investment Tax Credits
 
346,265

 
334,479

Asset Retirement Obligations
 
37,619

 
37,030

Employee Benefits and Pension Obligations
 
20,514

 
20,095

Deferred Credits and Other Noncurrent Liabilities
 
19,384

 
13,589

TOTAL NONCURRENT LIABILITIES
 
2,630,625

 
2,344,154

 
 
 
 
 
TOTAL LIABILITIES
 
2,903,441

 
2,785,328

 
 
 
 
 
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
 
157,230

 
157,230

Paid-in Capital
 
364,037

 
364,037

Retained Earnings
 
515,690

 
502,005

Accumulated Other Comprehensive Income (Loss)
 
4,753

 
4,943

TOTAL COMMON SHAREHOLDER’S EQUITY
 
1,041,710

 
1,028,215

 
 
 
 
 
TOTAL LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
 
$
3,945,151

 
$
3,813,543

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

134



PUBLIC SERVICE COMPANY OF OKLAHOMA
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
13,685

 
$
8,448

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

 
 

Depreciation and Amortization
 
29,534

 
23,982

Deferred Income Taxes
 
8,870

 
19,178

Allowance for Equity Funds Used During Construction
 
(1,327
)
 
(1,431
)
Mark-to-Market of Risk Management Contracts
 
(225
)
 
(267
)
Property Taxes
 
(24,148
)
 
(31,260
)
Fuel Over/Under-Recovery, Net
 
24,995

 
(23,394
)
Change in Regulatory Assets
 
132

 
(8,468
)
Change in Regulatory Liabilities
 
8,111

 
254

Change in Other Noncurrent Assets
 
(4,922
)
 
(1,045
)
Change in Other Noncurrent Liabilities
 
8,313

 
(2,458
)
Changes in Certain Components of Working Capital:
 
 

 
 

Accounts Receivable, Net
 
4,481

 
14,193

Fuel, Materials and Supplies
 
(1,963
)
 
149

Accounts Payable
 
(6,805
)
 
(16,891
)
Accrued Taxes, Net
 
14,776

 
7,362

Other Current Assets
 
(8,998
)
 
(395
)
Other Current Liabilities
 
(7,297
)
 
22,401

Net Cash Flows from Operating Activities
 
57,212

 
10,358

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Construction Expenditures
 
(90,205
)
 
(93,500
)
Change in Advances to Affiliates, Net
 
(62,255
)
 

Other Investing Activities
 
1,149

 
776

Net Cash Flows Used for Investing Activities
 
(151,311
)
 
(92,724
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Issuance of Long-term Debt – Nonaffiliated
 
248,792

 
49,975

Change in Advances from Affiliates, Net
 
(154,249
)
 
33,347

Retirement of Long-term Debt – Nonaffiliated
 
(106
)
 
(102
)
Principal Payments for Capital Lease Obligations
 
(995
)
 
(941
)
Other Financing Activities
 
729

 
566

Net Cash Flows from Financing Activities
 
94,171

 
82,845

 
 
 
 
 
Net Increase in Cash and Cash Equivalents
 
72

 
479

Cash and Cash Equivalents at Beginning of Period
 
1,352

 
1,277

Cash and Cash Equivalents at End of Period
 
$
1,424

 
$
1,756

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 

 
 

Cash Paid for Interest, Net of Capitalized Amounts
 
$
10,995

 
$
10,487

Net Cash Paid for Income Taxes
 

 
67

Noncash Acquisitions Under Capital Leases
 
908

 
904

Construction Expenditures Included in Current Liabilities as of March 31,
 
30,787

 
34,199

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

135



PUBLIC SERVICE COMPANY OF OKLAHOMA
INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF
REGISTRANT SUBSIDIARIES

The condensed notes to PSO’s condensed financial statements are combined with the condensed notes to condensed financial statements for other registrant subsidiaries.  Listed below are the notes that apply to PSO.
 
Page
Number
 
 
Significant Accounting Matters
New Accounting Pronouncements
Comprehensive Income
Rate Matters
Commitments, Guarantees and Contingencies
Benefit Plans
Business Segments
Derivatives and Hedging
Fair Value Measurements
Income Taxes
Financing Activities
Variable Interest Entities
Property, Plant and Equipment
Disposition Plant Severance

136



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED


137



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

EXECUTIVE OVERVIEW

Regulatory Activity

2012 Texas Base Rate Case

Upon rehearing in January 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, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances.  The resulting annual base rate increase is approximately $52 million.  In May 2014, intervenors filed appeals of the order with the Texas District Court.  In June 2014, SWEPCo intervened in those appeals and filed initial responses.  If certain parts of the PUCT order are overturned it could reduce future net income and cash flows and impact financial condition. See the “2012 Texas Base Rate Case” section of SWEPCo Rate Matters in Note 4.

2012 Louisiana Formula Rate Filing

In 2012, SWEPCo initiated a proceeding to establish new formula base rates in Louisiana, including recovery of the Louisiana jurisdictional share of the Turk Plant. In February 2013, a settlement was approved by the LPSC that increased SWEPCo's Louisiana total rates by approximately $2 million annually, effective March 2013. The March 2013 base rates are based upon a 10% return on common equity and cost recovery of the Louisiana jurisdictional share of the Turk Plant and Stall Unit, subject to refund. The settlement also provided that the LPSC will review base rates in 2014 and 2015 and that SWEPCo will recover non-fuel Turk Plant costs and a full weighted-average cost of capital return on the prudently incurred Turk Plant investment in jurisdictional rate base, effective January 2013. In December 2014, the LPSC approved a settlement agreement related to the staff review of the cost of service. The settlement agreement reduced the requested revenue increase by $3 million, primarily due to the timing of both the allowed recovery of certain existing regulatory assets and the establishment of a regulatory asset for certain previously expensed costs. See the “2012 Louisiana Formula Rate Filing” section of SWEPCo Rate Matters in Note 4.

2014 Louisiana Formula Rate Filing

In April 2014, SWEPCo filed its annual formula rate plan for test year 2013 with the LPSC.  The filing included a $5 million annual increase, which was effective August 2014.  SWEPCo also proposed to increase rates by an additional $15 million annually, effective January 2015, for a total annual increase of $20 million. This additional increase reflects the cost of incremental generation to be used to serve Louisiana customers in 2015 due to the expiration of a purchase power agreement attributable to Louisiana customers.  In December 2014, the LPSC approved a partial settlement agreement that included the implementation of the $15 million annual increase in rates effective January 2015. These increases are subject to LPSC staff review and are subject to refund.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

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 will be effective August 2015.  This increase is subject to LPSC staff review and is subject to refund.  If any of the costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.


138



Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC.  Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC.  As of March 31, 2015, SWEPCo has incurred costs of $211 million and has remaining contractual construction obligations of $84 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. See "Climate Change, CO2 Regulation and Energy Policy" section of “Environmental Issues” within “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries”. As of March 31, 2015, the net book value of Welsh Plant, Units 1 and 3 was $431 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. 

Merchant Portion of Turk Plant

SWEPCo constructed the Turk Plant, a new base load 600 MW pulverized coal ultra-supercritical generating unit in Arkansas, which was placed into service in December 2012. SWEPCo owns 73% (440 MW) 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.

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.

Litigation and Environmental Issues

In the ordinary course of business, SWEPCo 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 which have a probable likelihood of loss if the loss can be estimated. For details on regulatory proceedings and pending litigation, see Note 4 - Rate Matters and Note 6 - Commitments, Guarantees and Contingencies in the 2014 Annual Report. Also, see Note 4 - Rate Matters and Note 5 - Commitments, Guarantees and Contingencies within the Condensed Notes to Condensed Financial Statements beginning on page 149. Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 214 for additional discussion of relevant factors.


139



RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions of KWhs)
Retail:
 

 
 

Residential
1,706

 
1,747

Commercial
1,366

 
1,393

Industrial
1,246

 
1,377

Miscellaneous
19

 
20

Total Retail
4,337

 
4,537

 
 
 
 
Wholesale
2,782

 
2,279

 
 
 
 
Total KWhs
7,119

 
6,816


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 March 31,
 
2015
 
2014
 
(in degree days)
Actual – Heating (a)
912

 
994

Normal – Heating (b)
706

 
721

 
 
 
 
Actual – Cooling (c)
16

 
10

Normal – Cooling (b)
33

 
33


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



140



First Quarter of 2015 Compared to First Quarter of 2014
Reconciliation of First Quarter of 2014 to First Quarter of 2015
Earnings Attributable to SWEPCo Common Shareholder
(in millions)
 
 
 
First Quarter of 2014
 
$
22

 
 
 

Changes in Gross Margin:
 
 

Retail Margins (a)
 
27

Off-system Sales
 
(2
)
Transmission Revenues
 
(1
)
Total Change in Gross Margin
 
24

 
 
 

Changes in Expenses and Other:
 
 

Other Operation and Maintenance
 
6

Depreciation and Amortization
 
(1
)
Taxes Other Than Income Taxes
 
(1
)
Other Income
 
3

Interest Expense
 
2

Total Change in Expenses and Other
 
9

 
 
 

Income Tax Expense
 
(9
)
 
 
 

First Quarter of 2015
 
$
46


(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 $27 million primarily due to the following:
A $16 million increase primarily due to fuel cost recovery adjustments.
An $11 million increase primarily due to revenue increases from rate riders in Louisiana and Texas.
A $5 million increase in municipal and cooperative revenues due to formula rate adjustments.
These increases were partially offset by:
A $6 million decrease due to lower weather-normalized retail sales.

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

Other Operation and Maintenance expenses decreased $6 million primarily due to the following:
A $5 million decrease in generation plant expenses.
A $3 million decrease in general and administrative expenses.
These decreases were partially offset by:
A $2 million increase in transmission expenses primarily due to increased SPP transmission services.
Other Income increased $3 million primarily due to an increase in AFUDC as a result of environmental and transmission projects.
Income Tax Expense increased $9 million primarily due to an increase in pretax book income partially offset by other book/tax differences which are accounted for on a flow-through basis.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES, NEW ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” in the 2014 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 214 for a discussion of accounting pronouncements.

141




SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
REVENUES
 
 
 
 
Electric Generation, Transmission and Distribution
 
$
428,535

 
$
426,627

Sales to AEP Affiliates
 
2,670

 
13,598

Other Revenues
 
504

 
365

TOTAL REVENUES
 
431,709

 
440,590

 
 
 
 
 
EXPENSES
 
 

 
 

Fuel and Other Consumables Used for Electric Generation
 
157,732

 
145,587

Purchased Electricity for Resale
 
20,014

 
61,165

Purchased Electricity from AEP Affiliates
 

 
3,766

Other Operation
 
65,545

 
68,537

Maintenance
 
27,414

 
30,411

Depreciation and Amortization
 
46,954

 
45,661

Taxes Other Than Income Taxes
 
21,732

 
20,737

TOTAL EXPENSES
 
339,391

 
375,864

 
 
 
 
 
OPERATING INCOME
 
92,318

 
64,726

 
 
 
 
 
Other Income (Expense):
 
 

 
 

Other Income
 
5,209

 
1,967

Interest Expense
 
(30,215
)
 
(31,876
)
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY EARNINGS
 
67,312

 
34,817

 
 
 
 
 
Income Tax Expense
 
21,172

 
12,165

Equity Earnings of Unconsolidated Subsidiary
 
597

 
310

 
 
 
 
 
NET INCOME
 
46,737

 
22,962

 
 
 
 
 
Net Income Attributable to Noncontrolling Interest
 
1,033

 
1,102

 
 
 
 
 
EARNINGS ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER
 
$
45,704

 
$
21,860

The common stock of SWEPCo is wholly-owned by AEP.
 
 
 
 
 
See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

142



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Net Income
$
46,737

 
$
22,962

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
 

 
 

Cash Flow Hedges, Net of Tax of $305 and $270 in 2015 and 2014, Respectively
567

 
502

Amortization of Pension and OPEB Deferred Costs, Net of Tax of $129 and $126 in 2015 and 2014, Respectively
(240
)
 
(234
)
 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME
327

 
268

 
 
 
 
TOTAL COMPREHENSIVE INCOME
47,064

 
23,230

 
 
 
 
Total Comprehensive Income Attributable to Noncontrolling Interest
1,033

 
1,102

 
 

 
 

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER
$
46,031

 
$
22,128

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

143



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
  SWEPCo Common Shareholder
 
 
 
 
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
TOTAL EQUITY – DECEMBER 31, 2013
$
135,660

 
$
674,606

 
$
1,253,617

 
$
(8,444
)
 
$
478

 
$
2,055,917

 
 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 
 
 
 
(25,000
)
 
 
 
 
 
(25,000
)
Common Stock Dividends – Nonaffiliated
 

 
 

 
 

 
 

 
(1,236
)
 
(1,236
)
Net Income
 

 
 

 
21,860

 
 

 
1,102

 
22,962

Other Comprehensive Income
 

 
 

 
 

 
268

 
 

 
268

TOTAL EQUITY – MARCH 31, 2014
$
135,660

 
$
674,606

 
$
1,250,477

 
$
(8,176
)
 
$
344

 
$
2,052,911

 
 
 
 
 
 
 
 
 
 
 
 
TOTAL EQUITY – DECEMBER 31, 2014
$
135,660

 
$
674,606

 
$
1,293,986

 
$
(7,466
)
 
$
415

 
$
2,097,201

 
 
 
 
 
 
 
 
 
 
 
 
Common Stock Dividends
 

 
 

 
(30,000
)
 
 

 
 

 
(30,000
)
Common Stock Dividends – Nonaffiliated
 

 
 

 
 

 
 

 
(1,062
)
 
(1,062
)
Net Income
 

 
 

 
45,704

 
 

 
1,033

 
46,737

Other Comprehensive Income
 

 
 

 
 

 
327

 
 

 
327

TOTAL EQUITY – MARCH 31, 2015
$
135,660

 
$
674,606

 
$
1,309,690

 
$
(7,139
)
 
$
386

 
$
2,113,203

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

144



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2015 and December 31, 2014
(in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
CURRENT ASSETS
 
 
 
 
Cash and Cash Equivalents
(March 31, 2015 and December 31, 2014 Amounts Include $6,201 and $12,695, Respectively, Related to Sabine)
 
$
7,975

 
$
14,356

Advances to Affiliates
 
293,378

 
41,033

Accounts Receivable:
 
 
 
 
Customers
 
39,995

 
46,738

Affiliated Companies
 
20,234

 
37,114

Miscellaneous
 
22,807

 
25,625

Allowance for Uncollectible Accounts
 
(76
)
 
(516
)
Total Accounts Receivable
 
82,960

 
108,961

Fuel
(March 31, 2015 and December 31, 2014 Amounts Include $34,131 and $38,920, Respectively, Related to Sabine)
 
117,097

 
116,955

Materials and Supplies
 
73,982

 
73,666

Risk Management Assets
 
11

 
31

Deferred Income Tax Benefits
 
8,764

 
9,041

Accrued Tax Benefits
 
13,499

 
15,408

Regulatory Asset for Under-Recovered Fuel Costs
 
21,188

 
24,024

Prepayments and Other Current Assets
 
37,996

 
25,779

TOTAL CURRENT ASSETS
 
656,850

 
429,254

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Electric:
 
 
 
 
Generation
 
3,907,999

 
3,864,543

Transmission
 
1,310,952

 
1,300,729

Distribution
 
1,906,290

 
1,894,572

Other Property, Plant and Equipment (Including Plant to be Retired)
(March 31, 2015 and December 31, 2014 Amounts Include $290,242 and $288,183, Respectively, Related to Sabine)
 
887,719

 
878,753

Construction Work in Progress
 
519,678

 
471,980

Total Property, Plant and Equipment
 
8,532,638

 
8,410,577

Accumulated Depreciation and Amortization
(March 31, 2015 and December 31, 2014 Amounts Include $146,704 and $142,983, Respectively, Related to Sabine)
 
2,541,492

 
2,503,290

TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
 
5,991,146

 
5,907,287

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
410,925

 
393,602

Deferred Charges and Other Noncurrent Assets
 
130,685

 
86,750

TOTAL OTHER NONCURRENT ASSETS
 
541,610

 
480,352

 
 
 
 
 
TOTAL ASSETS
 
$
7,189,606

 
$
6,816,893

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

145



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
March 31, 2015 and December 31, 2014
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2015
 
2014
 
 
(in thousands)
CURRENT LIABILITIES
 
 
 
 
Accounts Payable:
 
 
 
 
General
 
$
143,229

 
$
175,109

Affiliated Companies
 
60,373

 
67,410

Long-term Debt Due Within One Year – Nonaffiliated
 
253,250

 
306,750

Risk Management Liabilities
 
4,197

 
1,082

Customer Deposits
 
60,861

 
59,903

Accrued Taxes
 
85,192

 
43,965

Accrued Interest
 
18,841

 
44,328

Obligations Under Capital Leases
 
17,572

 
17,557

Other Current Liabilities
 
55,579

 
104,553

TOTAL CURRENT LIABILITIES
 
699,094

 
820,657

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
2,282,111

 
1,833,687

Deferred Income Taxes
 
1,379,089

 
1,351,111

Regulatory Liabilities and Deferred Investment Tax Credits
 
457,238

 
458,530

Asset Retirement Obligations
 
92,635

 
92,015

Employee Benefits and Pension Obligations
 
31,147

 
25,374

Obligations Under Capital Leases
 
87,434

 
91,044

Deferred Credits and Other Noncurrent Liabilities
 
47,655

 
47,274

TOTAL NONCURRENT LIABILITIES
 
4,377,309

 
3,899,035

 
 
 
 
 
TOTAL LIABILITIES
 
5,076,403

 
4,719,692

 
 
 
 
 
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
 
135,660

 
135,660

Paid-in Capital
 
674,606

 
674,606

Retained Earnings
 
1,309,690

 
1,293,986

Accumulated Other Comprehensive Income (Loss)
 
(7,139
)
 
(7,466
)
TOTAL COMMON SHAREHOLDER’S EQUITY
 
2,112,817

 
2,096,786

 
 
 
 
 
Noncontrolling Interest
 
386

 
415

 
 
 
 
 
TOTAL EQUITY
 
2,113,203

 
2,097,201

 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
7,189,606

 
$
6,816,893

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

146



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2015 and 2014
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
46,737

 
$
22,962

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
Depreciation and Amortization
 
46,954

 
45,661

Deferred Income Taxes
 
18,745

 
11,351

Allowance for Equity Funds Used During Construction
 
(5,229
)
 
(2,081
)
Mark-to-Market of Risk Management Contracts
 
3,135

 
(825
)
Property Taxes
 
(39,393
)
 
(37,511
)
Fuel Over/Under-Recovery, Net
 
2,836

 
(21,651
)
Change in Other Noncurrent Assets
 
(549
)
 
3,963

Change in Other Noncurrent Liabilities
 
(3,323
)
 
2,914

Changes in Certain Components of Working Capital:
 
 
 
 
Accounts Receivable, Net
 
26,001

 
13,614

Fuel, Materials and Supplies
 
(458
)
 
5,102

Accounts Payable
 
(28,300
)
 
(9,410
)
Accrued Taxes, Net
 
43,136

 
42,596

Accrued Interest
 
(25,487
)
 
(25,431
)
Other Current Assets
 
(11,384
)
 
(4,663
)
Other Current Liabilities
 
(44,068
)
 
(18,123
)
Net Cash Flows from Operating Activities
 
29,353

 
28,468

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Construction Expenditures
 
(138,110
)
 
(105,165
)
Change in Advances to Affiliates, Net
 
(252,345
)
 

Other Investing Activities
 
(1,394
)
 
1,046

Net Cash Flows Used for Investing Activities
 
(391,849
)
 
(104,119
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Issuance of Long-term Debt – Nonaffiliated
 
446,057

 

Change in Advances from Affiliates, Net
 

 
108,162

Retirement of Long-term Debt – Nonaffiliated
 
(55,125
)
 
(1,625
)
Principal Payments for Capital Lease Obligations
 
(4,510
)
 
(4,470
)
Dividends Paid on Common Stock
 
(30,000
)
 
(25,000
)
Dividends Paid on Common Stock – Nonaffiliated
 
(1,062
)
 
(1,236
)
Other Financing Activities
 
755

 
574

Net Cash Flows from Financing Activities
 
356,115

 
76,405

 
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
 
(6,381
)
 
754

Cash and Cash Equivalents at Beginning of Period
 
14,356

 
17,241

Cash and Cash Equivalents at End of Period
 
$
7,975

 
$
17,995

 
 
 
 
 
SUPPLEMENTARY INFORMATION
 
 
 
 
Cash Paid for Interest, Net of Capitalized Amounts
 
$
53,390

 
$
55,123

Net Cash Paid (Received) for Income Taxes
 
(938
)
 
734

Noncash Acquisitions Under Capital Leases
 
926

 
2,824

Construction Expenditures Included in Current Liabilities as of March 31,
 
80,185

 
53,628

See Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries beginning on page 149.

147



SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF
REGISTRANT SUBSIDIARIES

The condensed notes to SWEPCo’s condensed financial statements are combined with the condensed notes to condensed financial statements for other registrant subsidiaries.  Listed below are the notes that apply to SWEPCo.
 
Page
Number
 
 
Significant Accounting Matters
New Accounting Pronouncements
Comprehensive Income
Rate Matters
Commitments, Guarantees and Contingencies
Benefit Plans
Business Segments
Derivatives and Hedging
Fair Value Measurements
Income Taxes
Financing Activities
Variable Interest Entities
Property, Plant and Equipment
Disposition Plant Severance


148



INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF
REGISTRANT SUBSIDIARIES

The condensed notes to condensed financial statements that follow are a combined presentation for the Registrant Subsidiaries.  The following list indicates the registrants to which the footnotes apply:
 
 
Page
Number
 
 
 
Significant Accounting Matters
APCo, I&M, OPCo, PSO, SWEPCo
New Accounting Pronouncements
APCo, I&M, OPCo, PSO, SWEPCo
Comprehensive Income
APCo, I&M, OPCo, PSO, SWEPCo
Rate Matters
APCo, I&M, OPCo, PSO, SWEPCo
Commitments, Guarantees and Contingencies
APCo, I&M, OPCo, PSO, SWEPCo
Benefit Plans
APCo, I&M, OPCo, PSO, SWEPCo
Business Segments
APCo, I&M, OPCo, PSO, SWEPCo
Derivatives and Hedging
APCo, I&M, OPCo, PSO, SWEPCo
Fair Value Measurements
APCo, I&M, OPCo, PSO, SWEPCo
Income Taxes
APCo, I&M, OPCo, PSO, SWEPCo
Financing Activities
APCo, I&M, OPCo, PSO, SWEPCo
Variable Interest Entities
APCo, I&M, OPCo, PSO, SWEPCo
Property, Plant and Equipment
APCo, I&M, OPCo, PSO, SWEPCo
Disposition Plant Severance
APCo, I&M, OPCo, PSO, SWEPCo


149



1.  SIGNIFICANT ACCOUNTING MATTERS

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 Subsidiary.  Net income for the three months ended March 31, 2015 is not necessarily indicative of results that may be expected for the year ending December 31, 2015.  The condensed financial statements are unaudited and should be read in conjunction with the audited 2014 financial statements and notes thereto, which are included in the Registrant Subsidiaries’ Annual Reports on Form 10-K as filed with the SEC on February 20, 2015.



150



2. NEW ACCOUNTING PRONOUNCEMENTS

Upon issuance of final pronouncements, management reviews the new accounting literature to determine its relevance, if any, to the Registrant Subsidiaries’ business. The following final pronouncements will impact the financial statements.

ASU 2014-08 “Presentation of Financial Statements and Property, Plant and Equipment” (ASU 2014-08)

In April 2014, the FASB issued ASU 2014-08 changing the presentation of discontinued operations on the statements of income and other requirements for reporting discontinued operations. Under the new standard, a disposal of a component or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component meets the criteria to be classified as held-for-sale or is disposed. The amendments in this update also require additional disclosures about discontinued operations and disposal of an individually significant component of an entity that does not qualify for discontinued operations. This standard must be prospectively applied to all reporting periods presented in financial reports issued after the effective date.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2014. If applicable, this standard will change the presentation of financial statements but will not affect the calculation of net income, comprehensive income or earnings per share. Management adopted ASU 2014-08 effective January 1, 2015. There were no events requiring the application of this new accounting guidance.

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

In May 2014, the FASB issued ASU 2014-09 clarifying 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, 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.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is not permitted. As applicable, this standard may change the amount of revenue recognized in the income statements in each reporting period. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on revenue or net income. Management plans to adopt ASU 2014-09 effective January 1, 2017.

ASU 2015-01 “Income Statement Extraordinary and Unusual Items” (ASU 2015-01)

In January 2015, the FASB issued ASU 2015-01 eliminating the concept of extraordinary items for presentation on the face of the income statement. Under the new standard, a material event or transaction that is unusual in nature, infrequent or both shall be reported as a separate component of income from continuing operations. Alternatively, it may be disclosed in the notes to financial statements.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted if applied from the beginning of a fiscal year. As applicable, this standard may change the presentation of amounts in the income statements. Management plans to adopt ASU 2015-01 effective January 1, 2016.

ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03)

In April 2015, the FASB issued ASU 2015-03 to simplify the presentation of debt issuance costs on the balance sheets. Under the new standard, debt issuance costs related to a recognized debt liability will be presented on the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with discounts. The Registrant Subsidiaries include debt issuance costs in Deferred Charges and Other Noncurrent Assets on the balance sheets. Debt issuance costs represent less than 1% of total long-term debt.


151



The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. Management intends to early adopt ASU 2015-03 for the 2015 Form 10-K.

ASU 2015-05 "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" (ASU 2015-05)

In April 2015, the FASB issued ASU 2015-05 to provide guidance to customers about whether a cloud computing arrangement includes a software license. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. 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 2015-05 effective January 1, 2016.

152



3.  COMPREHENSIVE INCOME

Presentation of Comprehensive Income

The following tables provide the components of changes in AOCI for the three months ended March 31, 2015 and 2014.  All amounts in the following tables are presented net of related income taxes.

APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2015
 
 
Cash Flow Hedges
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Pension
and OPEB
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2014
 
$

 
$
3,896

 
$
1,136

 
$
5,032

Change in Fair Value Recognized in AOCI
 

 

 

 

Amounts Reclassified from AOCI
 

 
129

 
(458
)
 
(329
)
Net Current Period Other
Comprehensive Income (Loss)
 

 
129

 
(458
)
 
(329
)
Balance in AOCI as of March 31, 2015
 
$

 
$
4,025

 
$
678

 
$
4,703


APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2014
 
 
Cash Flow Hedges
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Pension
and OPEB
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2013
 
$
94

 
$
3,090

 
$
(233
)
 
$
2,951

Change in Fair Value Recognized in AOCI
 
1,583

 

 

 
1,583

Amounts Reclassified from AOCI
 
(1,590
)
 
253

 
(333
)
 
(1,670
)
Net Current Period Other
Comprehensive Income (Loss)
 
(7
)
 
253

 
(333
)
 
(87
)
Balance in AOCI as of March 31, 2014
 
$
87

 
$
3,343

 
$
(566
)
 
$
2,864





153



I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2015
 
 
Cash Flow Hedges
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Pension
and OPEB
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2014
 
$

 
$
(14,406
)
 
$
46

 
$
(14,360
)
Change in Fair Value Recognized in AOCI
 

 

 

 

Amounts Reclassified from AOCI
 

 
267

 
12

 
279

Net Current Period Other
Comprehensive Income
 

 
267

 
12

 
279

Balance in AOCI as of March 31, 2015
 
$

 
$
(14,139
)
 
$
58

 
$
(14,081
)

I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2014
 
 
Cash Flow Hedges
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Pension
and OPEB
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2013
 
$
46

 
$
(15,976
)
 
$
421

 
$
(15,509
)
Change in Fair Value Recognized in AOCI
 
1,062

 

 

 
1,062

Amounts Reclassified from AOCI
 
(1,047
)
 
410

 
43

 
(594
)
Net Current Period Other
Comprehensive Income
 
15

 
410

 
43

 
468

Balance in AOCI as of March 31, 2014
 
$
61

 
$
(15,566
)
 
$
464

 
$
(15,041
)



154



OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2015
 
 
Cash Flow Hedges
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2014
 
$

 
$
5,602

 
$
5,602

Change in Fair Value Recognized in AOCI
 

 

 

Amounts Reclassified from AOCI
 

 
(343
)
 
(343
)
Net Current Period Other Comprehensive Loss
 

 
(343
)
 
(343
)
Balance in AOCI as of March 31, 2015
 
$

 
$
5,259

 
$
5,259

 
OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2014
 
 
Cash Flow Hedges
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2013
 
$
105

 
$
6,974

 
$
7,079

Change in Fair Value Recognized in AOCI
 

 

 

Amounts Reclassified from AOCI
 
(105
)
 
(343
)
 
(448
)
Net Current Period Other Comprehensive Loss
 
(105
)
 
(343
)
 
(448
)
Balance in AOCI as of March 31, 2014
 
$

 
$
6,631

 
$
6,631




155



PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2015
 
 
Cash Flow Hedges
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2014
 
$

 
$
4,943

 
$
4,943

Change in Fair Value Recognized in AOCI
 

 

 

Amounts Reclassified from AOCI
 

 
(190
)
 
(190
)
Net Current Period Other Comprehensive Loss
 

 
(190
)
 
(190
)
Balance in AOCI as of March 31, 2015
 
$

 
$
4,753

 
$
4,753

 
PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2014
 
 
Cash Flow Hedges
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2013
 
$
57

 
$
5,701

 
$
5,758

Change in Fair Value Recognized in AOCI
 

 

 

Amounts Reclassified from AOCI
 
(57
)
 
(189
)
 
(246
)
Net Current Period Other Comprehensive Loss
 
(57
)
 
(189
)
 
(246
)
Balance in AOCI as of March 31, 2014
 
$

 
$
5,512

 
$
5,512




156



SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2015
 
 
Cash Flow Hedges
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Pension
and OPEB
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2014
 
$

 
$
(11,036
)
 
$
3,570

 
$
(7,466
)
Change in Fair Value Recognized in AOCI
 

 

 

 

Amounts Reclassified from AOCI
 

 
567

 
(240
)
 
327

Net Current Period Other
Comprehensive Income (Loss)
 

 
567

 
(240
)
 
327

Balance in AOCI as of March 31, 2015
 
$

 
$
(10,469
)
 
$
3,330

 
$
(7,139
)

SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended March 31, 2014
 
 
Cash Flow Hedges
 
 
 
 
 
 
Commodity
 
Interest Rate and
Foreign Currency
 
Pension
and OPEB
 
Total
 
 
(in thousands)
Balance in AOCI as of December 31, 2013
 
$
66

 
$
(13,304
)
 
$
4,794

 
$
(8,444
)
Change in Fair Value Recognized in AOCI
 

 

 

 

Amounts Reclassified from AOCI
 
(66
)
 
568

 
(234
)
 
268

Net Current Period Other
Comprehensive Income (Loss)
 
(66
)
 
568

 
(234
)
 
268

Balance in AOCI as of March 31, 2014
 
$

 
$
(12,736
)
 
$
4,560

 
$
(8,176
)



157



Reclassifications from Accumulated Other Comprehensive Income

The following tables provide details of reclassifications from AOCI for the three months ended March 31, 2015 and 2014.  The amortization of pension and OPEB AOCI components are included in the computation of net periodic pension and OPEB costs.  See Note 6 for additional details.

APCo

Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2015 and 2014
 
 
Amount of (Gain) Loss
Reclassified from AOCI
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Gains and Losses on Cash Flow Hedges
 
(in thousands)
Commodity:
 
 

 
 
Purchased Electricity for Resale
 
$

 
$
(462
)
Other Operation Expense
 

 
(10
)
Maintenance Expense
 

 
(20
)
Property, Plant and Equipment
 

 
(17
)
Regulatory Assets/(Liabilities), Net (a)
 

 
(1,937
)
Subtotal  Commodity
 

 
(2,446
)
 
 
 

 
 
Interest Rate and Foreign Currency:
 
 

 
 
Interest Expense
 
199

 
390

Subtotal  Interest Rate and Foreign Currency
 
199

 
390

 
 
 
 
 
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
199

 
(2,056
)
Income Tax (Expense) Credit
 
70

 
(719
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
129

 
(1,337
)
 
 
 
 
 
Pension and OPEB
 
 

 
 
Amortization of Prior Service Cost (Credit)
 
(1,282
)
 
(1,282
)
Amortization of Actuarial (Gains)/Losses
 
578

 
770

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(704
)
 
(512
)
Income Tax (Expense) Credit
 
(246
)
 
(179
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(458
)
 
(333
)
 
 
 

 
 
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
$
(329
)
 
$
(1,670
)



158



I&M

Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2015 and 2014
 
 
Amount of (Gain) Loss
Reclassified from AOCI
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Gains and Losses on Cash Flow Hedges
 
(in thousands)
Commodity:
 
 

 
 
Purchased Electricity for Resale
 
$

 
$
(717
)
Other Operation Expense
 

 
(7
)
Maintenance Expense
 

 
(7
)
Property, Plant and Equipment
 

 
(10
)
Regulatory Assets/(Liabilities), Net (a)
 

 
(870
)
Subtotal  Commodity
 

 
(1,611
)
 
 
 

 
 
Interest Rate and Foreign Currency:
 
 

 
 
Interest Expense
 
411

 
631

Subtotal  Interest Rate and Foreign Currency
 
411

 
631

 
 
 
 
 
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
411

 
(980
)
Income Tax (Expense) Credit
 
144

 
(343
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
267

 
(637
)
 
 
 
 
 
Pension and OPEB
 
 

 
 
Amortization of Prior Service Cost (Credit)
 
(199
)
 
(199
)
Amortization of Actuarial (Gains)/Losses
 
217

 
265

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
18

 
66

Income Tax (Expense) Credit
 
6

 
23

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
12

 
43

 
 
 

 
 
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
$
279

 
$
(594
)




159



OPCo

Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2015 and 2014
 
 
Amount of (Gain) Loss
Reclassified from AOCI
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Gains and Losses on Cash Flow Hedges
 
(in thousands)
Commodity:
 
 

 
 
Other Operation Expense
 
$

 
$
(11
)
Maintenance Expense
 

 
(11
)
Property, Plant and Equipment
 

 
(18
)
Regulatory Assets/(Liabilities), Net (a)
 

 
(122
)
Subtotal  Commodity
 

 
(162
)
 
 
 

 
 
Interest Rate and Foreign Currency:
 
 

 
 
Depreciation and Amortization Expense
 
(3
)
 
(3
)
Interest Expense
 
(524
)
 
(524
)
Subtotal  Interest Rate and Foreign Currency
 
(527
)
 
(527
)
 
 
 
 
 
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(527
)
 
(689
)
Income Tax (Expense) Credit
 
(184
)
 
(241
)
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
$
(343
)
 
$
(448
)

PSO

Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2015 and 2014
 
 
Amount of (Gain) Loss
Reclassified from AOCI
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Gains and Losses on Cash Flow Hedges
 
(in thousands)
Commodity:
 
 

 
 
Other Operation Expense
 
$

 
$
(8
)
Maintenance Expense
 

 
(9
)
Property, Plant and Equipment
 

 
(13
)
Regulatory Assets/(Liabilities), Net (a)
 

 
(58
)
Subtotal  Commodity
 

 
(88
)
 
 
 

 
 
Interest Rate and Foreign Currency:
 
 

 
 
Interest Expense
 
(292
)
 
(292
)
Subtotal  Interest Rate and Foreign Currency
 
(292
)
 
(292
)
 
 
 
 
 
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(292
)
 
(380
)
Income Tax (Expense) Credit
 
(102
)
 
(134
)
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
$
(190
)
 
$
(246
)
 

160



SWEPCo

Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2015 and 2014
 
 
Amount of (Gain) Loss
Reclassified from AOCI
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Gains and Losses on Cash Flow Hedges
 
(in thousands)
Commodity:
 
 

 
 
Other Operation Expense
 
$

 
$
(13
)
Maintenance Expense
 

 
(10
)
Property, Plant and Equipment
 

 
(11
)
Regulatory Assets/(Liabilities), Net (a)
 

 
(67
)
Subtotal  Commodity
 

 
(101
)
 
 
 

 
 
Interest Rate and Foreign Currency:
 
 

 
 
Interest Expense
 
872

 
872

Subtotal  Interest Rate and Foreign Currency
 
872

 
872

 
 
 
 
 
Reclassifications from AOCI, before Income Tax (Expense) Credit
 
872

 
771

Income Tax (Expense) Credit
 
305

 
269

Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
567

 
502

 
 
 
 
 
Pension and OPEB
 
 

 
 
Amortization of Prior Service Cost (Credit)
 
(467
)
 
(478
)
Amortization of Actuarial (Gains)/Losses
 
98

 
118

Reclassifications from AOCI, before Income Tax (Expense) Credit
 
(369
)
 
(360
)
Income Tax (Expense) Credit
 
(129
)
 
(126
)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
(240
)
 
(234
)
 
 
 

 
 
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit
 
$
327

 
$
268


(a)
Represents realized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the condensed balance sheets.


161



4.  RATE MATTERS

As discussed in the 2014 Annual Report, the Registrant Subsidiaries are involved in rate and regulatory proceedings at the FERC and their state commissions. The Rate Matters note within the 2014 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 2015 and updates the 2014 Annual Report.

Regulatory Assets Pending Final Regulatory Approval
 
 
APCo
 
 
March 31,
 
December 31,
 
 
2015
 
2014
Noncurrent Regulatory Assets
 
(in thousands)
 
 
 
 
 
Regulatory Assets Currently Earning a Return
 
 
 
 
Vegetation Management Program - West Virginia
 
$
23,983

 
$
19,089

Regulatory Assets Currently Not Earning a Return
 
 
 
 
Storm Related Costs  West Virginia
 
65,206

 
65,206

Carbon Capture and Storage Product Validation Facility  West Virginia, FERC
 
13,264

 
13,264

IGCC Pre-Construction Costs  West Virginia, FERC
 
10,838

 
10,838

Demand Response Program Costs  Virginia
 
9,803

 
8,791

Amos Plant Transfer Costs  West Virginia
 
1,721

 
1,377

Carbon Capture and Storage Commercial Scale Facility – West Virginia, FERC
 
1,287

 
1,287

Expanded Net Energy Charge  Coal Inventory
 

 
3,421

Expanded Net Energy Charge  Construction Surcharge
 

 
2,307

Other Regulatory Assets Pending Final Regulatory Approval
 
168

 
168

Total Regulatory Assets Pending Final Regulatory Approval
 
$
126,270

 
$
125,748

 
 
I&M
 
 
March 31,
 
December 31,
 
 
2015
 
2014
Noncurrent Regulatory Assets
 
(in thousands)
 
 
 
 
 
Regulatory Assets Currently Not Earning a Return
 
 
 
 
Cook Plant Turbine
 
$
7,382

 
$
6,596

Stranded Costs on Abandoned Plants
 
3,897

 
3,897

Deferred Cook Plant Life Cycle Management Project Costs Michigan
 
2,030

 
1,222

Storm Related Costs – Indiana
 
72

 
1,074

Other Regulatory Assets Pending Final Regulatory Approval
 
337

 
860

Total Regulatory Assets Pending Final Regulatory Approval
 
$
13,718

 
$
13,649

 
 
OPCo
 
 
March 31,
 
December 31,
 
 
2015
 
2014
Noncurrent Regulatory Assets
 
(in thousands)
 
 
 
 
 
Regulatory Assets Currently Not Earning a Return
 
 

 
 

Ormet Special Rate Recovery Mechanism
 
$
10,483

 
$
10,483

Total Regulatory Assets Pending Final Regulatory Approval
 
$
10,483

 
$
10,483


162



 
 
PSO
 
 
March 31,
 
December 31,
 
 
2015
 
2014
Noncurrent Regulatory Assets
 
(in thousands)
 
 
 
 
 
Regulatory Assets Currently Not Earning a Return
 
 

 
 

Storm Related Costs
 
$
17,375

 
$
16,614

Other Regulatory Assets Pending Final Regulatory Approval
 
1,079

 
1,079

Total Regulatory Assets Pending Final Regulatory Approval
 
$
18,454

 
$
17,693

 
 
SWEPCo
 
 
March 31,
 
December 31,
 
 
2015
 
2014
Noncurrent Regulatory Assets
 
(in thousands)
 
 
 
 
 
Regulatory Assets Currently Not Earning a Return
 
 
 
 
Rate Case Expenses
 
$
8,188

 
$
8,126

Shipe Road Transmission Project
 
2,343

 
2,287

Asset Retirement Obligation
 
1,233

 
1,144

Other Regulatory Assets Pending Final Regulatory Approval
 
558

 
558

Total Regulatory Assets Pending Final Regulatory Approval
 
$
12,322

 
$
12,115


If these costs are ultimately determined not to be recoverable, it could reduce future net income and cash flows and impact financial condition.

OPCo Rate Matters

Ohio Electric Security Plan Filings

2009 – 2011 ESP

The PUCO issued an order in March 2009 that modified and approved the ESP which established rates at the start of the April 2009 billing cycle through 2011. The order also provided a phase-in FAC, which was authorized to be recovered through a non-bypassable surcharge over the period 2012 through 2018.

In August 2012, the PUCO issued an order in a separate proceeding which implemented a PIRR to recover deferred fuel costs in rates beginning September 2012. The PUCO ruled that carrying charges should be calculated without an offset for accumulated deferred income taxes and that a long-term debt rate should be applied when collections begin. In November 2012, OPCo appealed that PUCO order to the Supreme Court of Ohio claiming a long-term debt rate modified the previously adjudicated 2009 - 2011 ESP order, which granted a weighted average cost of capital (WACC) rate. In November 2012, the IEU filed an appeal of the PUCO decision that included the argument that carrying costs should be reduced due to an accumulated deferred income tax credit which, as of March 31, 2015, could reduce carrying costs by $25 million including $13 million of unrecognized equity carrying costs. Oral arguments at the Supreme Court of Ohio were held in February 2015. OPCo argued for a remand to reinstate the WACC carrying charges initially approved by the PUCO and challenged the IEU argument that the carrying charges should be reduced due to an accumulated deferred income tax credit. A decision from the Supreme Court of Ohio is pending.

Management is unable to predict the outcome of the unresolved litigation discussed above. Depending on the rulings in these proceedings, it could reduce future net income and cash flows and impact financial condition.

June 2012 – May 2015 ESP Including Capacity Charge

In August 2012, the PUCO issued an order which adopted and modified a new ESP that established base generation rates through May 2015. This ruling was generally upheld in rehearing orders in January and March 2013.

163



In July 2012, the PUCO issued an order in a separate capacity proceeding which stated that OPCo must charge CRES providers the RPM price and authorized OPCo to defer a portion of its incurred capacity costs not recovered from CRES providers up to $188.88/MW day.  The OPCo RPM price collected from CRES providers, which includes reserve margins, was approximately $34/MW day through May 2014 and is $150/MW day from June 2014 through May 2015.  In December 2012, various parties filed notices of appeal of the capacity costs decision with the Supreme Court of Ohio.

As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012.  The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs. In July 2014, OPCo submitted a separate application to continue the RSR to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh until the balance of the capacity deferrals has been collected. In April 2015, the PUCO issued an order approving the application to continue the RSR, with modifications. The order included approval to continue the collection of deferred capacity costs at a rate of $4.00/MWh beginning June 1, 2015 for approximately 32 months, with carrying costs at a long-term cost of debt rate. Additionally, the order stated that an audit will be conducted of the final capacity deferral balance as of May 31, 2015. As of March 31, 2015, OPCo's incurred deferred capacity costs balance of $434 million, including debt carrying costs, was recorded in regulatory assets on the condensed balance sheet.

In 2013, the PUCO issued its Orders on Rehearing for the ESP which generally upheld its August 2012 order, including the implementation of the RSR. The PUCO clarified that a final reconciliation of revenues and expenses would be permitted for any over- or under-recovery on several riders including fuel. In addition, the PUCO addressed certain issues around the energy auctions while other SSO issues related to the energy auctions were deferred to a separate docket related to the competitive bid process (CBP). In 2013, OPCo and various intervenors filed appeals with the Supreme Court of Ohio challenging portions of the PUCO’s ESP order, including the RSR. Oral arguments at the Supreme Court of Ohio are scheduled for May 2015.

In November 2013, the PUCO issued an order approving OPCo’s CBP with modifications. As ordered, in 2014, OPCo conducted multiple energy-only auctions for a total of 100% of the SSO load with delivery beginning April 2014 through May 2015. For delivery starting in June 2015, OPCo will conduct energy and capacity auctions for its entire SSO load. The PUCO also approved the unbundling of the FAC into fixed and energy-related components and an intervenor proposal to blend the $188.88/MW day capacity price in proportion to the percentage of energy planned to be auctioned. Additionally, the PUCO ordered that intervenor concerns related to the recovery of the fixed fuel costs through potentially both the FAC and the approved capacity charges be addressed in subsequent FAC proceedings. Management believes that these intervenor concerns are without merit.

In January 2014, the PUCO denied all rehearing requests and agreed to issue a supplemental request for an independent auditor in the 2012 - 2013 FAC proceeding to separately examine the recovery of the fixed fuel costs, including OVEC. In March 2014, the PUCO approved OPCo’s request to implement riders related to the unbundling of the FAC. In October 2014, the independent auditor, selected by the PUCO, filed its report for the period August 2012 through May 2015 with the PUCO. If the PUCO ultimately concludes that a portion of the fixed fuel costs are also recovered through OPCo's $188.88/MW day capacity charge, the independent auditor recommends a methodology for calculating a refund of a portion of certain fixed fuel costs. The retail share of these fixed fuel costs is approximately $90 million annually. A hearing related to this matter has not been scheduled. Management believes that no over-recovery of costs has occurred and intends to oppose the findings in the audit report.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition.


164



June 2015 - May 2018 ESP

In December 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 Distribution Investment Rider (DIR), effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement. The PPA would initially be based upon the OVEC contractual entitlement and could, upon further approval, be expanded to include other contracts involving other Ohio legacy generation assets.

In October 2014, OPCo filed a separate application with the PUCO to propose a new extended PPA for inclusion in the PPA rider, discussed above. The new PPA would include an additional 2,671 MW to be purchased from AGR over the life of the respective generating units.

In February 2015, the PUCO issued an order approving OPCo's ESP application, subject to certain modifications, with a return on common equity of 10.2% on capital costs for certain riders. The order included (a) approval of the DIR with modified rate caps established by the PUCO, (b) authorization to establish a zero rate rider for OPCo's proposed PPA, (c) the option for OPCo to reapply in a future proceeding with a more detailed PPA proposal and (d) a directive to continue to pursue the transfer of the OVEC contractual entitlement to AGR or to otherwise divest of its interest in OVEC. In April 2015, the PUCO issued an order that granted applications for rehearing for further consideration filed by OPCo and various intervenors.

If OPCo is ultimately not permitted to fully collect all components of its ESP rates, it could reduce future net income and cash flows and impact financial condition.

Significantly Excessive Earnings Test Filings

In January 2011, the PUCO issued an order on the 2009 SEET filing. The order gave consideration for a future commitment to invest $20 million to support the development of a large solar farm. In January 2013, the PUCO found there was not a need for the large solar farm. The PUCO noted that OPCo remains obligated to spend $20 million on this solar project or another project. In September 2013, a proposed second phase of OPCo’s gridSMART® program was filed with the PUCO which included a proposed project to satisfy this PUCO directive. A decision from the PUCO is pending.

Management believes its financial statements adequately address the impact of 2014 SEET requirements.

Corporate Separation

In October 2012, the PUCO issued an order which approved the corporate separation of OPCo’s generation assets including the transfer of OPCo’s generation assets and associated generation liabilities at net book value to AGR. In June 2013, the IEU filed an appeal with the Supreme Court of Ohio claiming the PUCO order approving the corporate separation was unlawful. A decision from the Supreme Court of Ohio is pending. In December 2013, corporate separation of OPCo’s generation assets was completed. If any part of the PUCO order is overturned, it could reduce future net income and cash flows and impact financial condition.

2009 Fuel Adjustment Clause Audit

In January 2012, the PUCO issued an order in OPCo’s 2009 FAC that the remaining $65 million in proceeds from a 2008 coal contract settlement agreement be applied against OPCo’s under-recovered fuel balance. In April 2012, on rehearing, the PUCO ordered that the settlement credit only needed to reflect the Ohio retail jurisdictional share of the gain not already flowed through the FAC with carrying charges. As a result, OPCo recorded a $30 million net favorable adjustment on the 2012 statement of income. The January 2012 PUCO order also stated that a consultant should be hired to review the coal reserve valuation and recommend whether any additional value should benefit ratepayers.


165



In September 2014, the Supreme Court of Ohio upheld the PUCO order on appeal. A review of the coal reserve valuation by an outside consultant is still pending. If the PUCO ultimately determines that additional amounts should benefit ratepayers as a result of the consultant’s review of the coal reserve valuation, it could reduce future net income and cash flows and impact financial condition.

2012 and 2013 Fuel Adjustment Clause Audits

In May 2014, the PUCO-selected outside consultant provided its final report related to its 2012 and 2013 FAC audit which included certain unfavorable recommendations related to the FAC recovery for 2012 and 2013. These recommendations are opposed by OPCo. In addition, the PUCO will consider the results of the final audit of the recovery of fixed fuel costs that was issued in October 2014. See the "June 2012 - May 2015 ESP Including Capacity Charge" section above. If the PUCO orders a reduction to the FAC deferral or a refund to customers, it could reduce future net income and cash flows and impact financial condition.

Ormet

Ormet, a large aluminum company, had a contract to purchase power from OPCo through 2018. In February 2013, Ormet filed for bankruptcy and subsequently shut down operations in October 2013. In March 2014, the PUCO issued an order in OPCo’s Economic Development Rider (EDR) filing allowing OPCo to include $39 million of Ormet-related foregone revenues in the EDR effective April 2014. The order stated that if the stipulation agreement between OPCo and Ormet is subsequently adopted by the PUCO, OPCo could file an application to modify the EDR rate for the remainder of the period requesting recovery of the remaining $10 million of Ormet deferrals which, as of March 31, 2015, is recorded in regulatory assets on the condensed balance sheet. In April 2014, an intervenor filed testimony objecting to $5 million of the remaining foregone revenues. A hearing at the PUCO related to the stipulation agreement was held in May 2014.

In addition, in the 2009 - 2011 ESP proceeding, intervenors requested that OPCo be required to refund the Ormet-related revenues under a previous interim arrangement (effective from January 2009 through September 2009) and requested that the PUCO prevent OPCo from collecting Ormet-related revenues in the future. Through September 2009, the last month of the interim arrangement, OPCo had $64 million of deferred FAC costs related to the interim arrangement, excluding $2 million of unrecognized equity carrying costs. The PUCO did not take any action on this request. The intervenors raised this issue again in response to OPCo’s November 2009 filing to approve recovery of the deferral under the interim agreement.

To the extent amounts discussed above are not recoverable, it could reduce future net income and cash flows and impact financial condition.

SWEPCo Rate Matters

2012 Texas Base Rate Case

In July 2012, SWEPCo filed a request with the PUCT to increase annual base rates primarily due to the completion of the Turk Plant. In October 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. Additionally, the PUCT deferred consideration of the requested increase in depreciation expense related to the change in the 2016 retirement date of the Welsh Plant, Unit 2. As of March 31, 2015, the net book value of Welsh Plant, Unit 2 was $84 million, before cost of removal, including materials and supplies inventory and CWIP.

Upon rehearing in January 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, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances. The resulting annual base rate increase is approximately $52 million. In March 2014, the PUCT issued an order related to the January 2014 PUCT ruling and in April 2014, this order became final. In May 2014, intervenors filed appeals of that order with the Texas District Court. In June 2014, SWEPCo intervened in those appeals and filed initial responses.


166



If certain parts of the PUCT order are overturned or if SWEPCo cannot ultimately recover its Texas jurisdictional share of the Turk Plant investment, including AFUDC, or its retirement-related costs and potential fuel or replacement power disallowances related to Welsh Plant, Unit 2, it could reduce future net income and cash flows and impact financial condition.

2012 Louisiana Formula Rate Filing

In 2012, SWEPCo initiated a proceeding to establish new formula base rates in Louisiana, including recovery of the Louisiana jurisdictional share (approximately 29%) of the Turk Plant.  In February 2013, a settlement was filed and approved by the LPSC.  The settlement increased SWEPCo's Louisiana total rates by approximately $2 million annually, effective March 2013, which consisted of an increase in base rates of approximately $85 million annually offset by a decrease in fuel and other rates of approximately $83 million annually.  The March 2013 base rates are based on a 10% return on common equity and cost recovery of the Louisiana jurisdictional share of the Turk Plant and Stall Unit. The rates are subject to refund based on the staff review of the cost of service and the prudency review of the Turk Plant. The settlement also provided that the LPSC review base rates in 2014 and 2015 and that SWEPCo recover non-fuel Turk Plant costs and a full weighted-average cost of capital return on the prudently incurred Turk Plant investment in jurisdictional rate base, effective January 2013. In December 2014, the LPSC approved a settlement agreement related to the staff review of the cost of service. The settlement agreement reduced the requested revenue increase by $3 million, primarily due to the timing of both the allowed recovery of certain existing regulatory assets and the establishment of a regulatory asset for certain previously expensed costs. If the LPSC orders refunds based upon the pending prudence review of the Turk Plant investment, it could reduce future net income and cash flows and impact financial condition.

2014 Louisiana Formula Rate Filing

In April 2014, SWEPCo filed its annual formula rate plan for test year 2013 with the LPSC.  The filing included a $5 million annual increase, which was effective August 2014.  SWEPCo also proposed to increase rates by an additional $15 million annually, effective January 2015, for a total annual increase of $20 million. This additional increase reflects the cost of incremental generation to be used to serve Louisiana customers in 2015 due to the expiration of a purchase power agreement attributable to Louisiana customers.  In December 2014, the LPSC approved a partial settlement agreement that included the implementation of the $15 million annual increase in rates effective January 2015. These increases are subject to LPSC staff review and are subject to refund.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

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 will be effective August 2015.  This increase is subject to LPSC staff review and is subject to refund.  If any of the costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC.  Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC.  As of March 31, 2015, SWEPCo has incurred costs of $211 million and has remaining contractual construction obligations of $84 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. As of March 31, 2015, the net book value of Welsh Plant, Units 1 and 3 was $431 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. 


167



APCo Rate Matters

2014 West Virginia Base Rate Case

In June 2014, APCo filed a request with the WVPSC to increase annual base rates by $156 million, based upon a 10.62% return on common equity, to be effective in the second quarter of 2015. The filing included a request to increase generation depreciation rates primarily due to the increase in plant investment and changes in the expected service lives of various generating units.  The filing also requested recovery of $77 million in regulatory assets over five years related to 2012 West Virginia storm costs, IGCC and other deferred costs.  In addition to the base rate request, the filing also included a request to implement a rider of approximately $38 million annually to recover vegetation management costs, including a return on capital investment.  In October 2014, the WVPSC approved APCo's motion to revise the procedural schedule which included a request to change the date of implementation of the new rates to May 2015.  In December 2014 and January 2015, intervenors filed testimony which proposed total annual revenue increases ranging from $30 million to $51 million based upon returns on common equity ranging from 9% to 10% and regulatory asset disallowances ranging from $6 million to $8 million.  Additionally, other intervenors proposed that the revenue requirement be based on a return on common equity of 8.7% and that $77 million of regulatory assets be disallowed.  Intervenors also recommended a disallowance of approximately $38 million related to the December 2013 transfer of OPCo's two-thirds interest in the Amos Plant, Unit 3 to APCo.  Hearings at the WVPSC were held in January 2015.  An order is anticipated in the second quarter of 2015. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2015 Virginia Regulatory Asset Proceeding

In January 2015, the Virginia SCC initiated a separate proceeding to address the proper treatment of APCo’s authorized regulatory assets. As of March 31, 2015, APCo’s authorized regulatory assets under review in this proceeding are estimated to be $14 million. In February and March 2015, briefs related to this proceeding were filed by various parties. If any of these costs, or any additional costs that may be subject to review, are not recoverable, it could reduce future net income and cash flows and impact financial condition.

New Virginia Legislation Affecting Biennial Reviews

In February 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 are frozen until after the Virginia SCC rules on APCo’s next biennial review, which APCo will file in March 2020 for the 2018 and 2019 test years. These amendments also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. APCo's financial statements adequately address the impact of these amendments. During the years 2014 through 2017, the new law provides that APCo will absorb incremental generation and distribution costs associated with severe weather events and/or natural disasters and costs associated with potential impairments related to new carbon emission guidelines issued by the Federal EPA.

PSO Rate Matters

2014 Oklahoma Base Rate Case

In January 2014, PSO filed a request with the OCC to increase annual base rates by $38 million, based upon a 10.5% return on common equity. This revenue increase included a proposed increase in depreciation rates of $29 million. In addition, the filing proposed recovery of advanced metering costs through a separate rider over a three-year deployment period requesting $7 million of revenues in year one, increasing to $28 million in year three. The filing also proposed expansion of an existing transmission rider currently recovered in base rates to include additional transmission-related costs that are expected to increase over the next several years.


168



In June 2014, a non-unanimous stipulation agreement between PSO, the OCC staff and certain intervenors was filed with the OCC. The parties to the stipulation recommended no overall change to the transmission rider or to annual revenues, other than additional revenues through a separate rider related to advanced metering costs, and that the terms of the stipulation be effective November 2014. The advanced metering rider would provide $24 million of revenues over 14 months beginning in November 2014 and increase to $27 million in 2016. New depreciation rates are recommended for advanced metering investments and existing meters, also to be effective November 2014. Further, the stipulation recommends a return on common equity of 9.85% to be used only in the formula to calculate AFUDC, factoring of customer receivables and for riders with an equity component. Additionally, the stipulation recommends recovery of regulatory assets for 2013 storms and regulatory case expenses. In July 2014, the Attorney General joined in the stipulation agreement. In October 2014, the Administrative Law Judge recommended approval of the stipulation agreement and interim rates were implemented in November 2014, subject to refund. In April 2015, the OCC issued an order that approved the stipulation agreement.

I&M Rate Matters

Tanners Creek Plant

I&M announced that it would retire Tanners Creek Plant by June 2015 to comply with proposed environmental regulations. I&M is currently recovering depreciation and a return on the net book value of the Tanners Creek Plant in base rates.

In October 2014, I&M filed an application with the IURC seeking approval of revised depreciation rates for Rockport Plant, Unit 1 and the Tanners Creek Plant. Upon retirement of the Tanners Creek Plant, I&M proposed that, for purposes of determining its depreciation rates, the net book value of the Tanners Creek Plant be recovered over the remaining life of the Rockport Plant. The new depreciation rates would result in a decrease in I&M's Indiana jurisdictional electric depreciation expense which I&M proposed to reduce customer rates through a credit rider. In February 2015, the OUCC filed testimony that recommended approval of I&M's application. A hearing at the IURC was held in March 2015. A decision from the IURC is pending.

As of March 31, 2015, the net book value of the Tanners Creek Plant was $333 million, before cost of removal, including materials and supplies inventory and CWIP.  If I&M is ultimately not permitted to fully recover its net book value of the Tanners Creek Plant and its retirement-related costs, it could reduce future net income and cash flows and impact financial condition.

Transmission, Distribution and Storage System Improvement Charge (TDSIC)

In October 2014, I&M filed petitions with the IURC for approval of a TDSIC Rider and approval of I&M’s seven-year TDSIC Plan, from 2015 through 2021, for eligible transmission, distribution and storage system improvements. The initial estimated cost of the capital improvements and associated operation and maintenance expenses included in the TDSIC Plan of $787 million, excluding AFUDC, will be updated annually. The TDSIC Plan included distribution investments specific to the Indiana jurisdiction. The TDSIC Rider will allow the periodic adjustment of I&M's rates to provide for timely recovery of 80% of approved TDSIC Plan costs. I&M will defer the remaining 20% of approved TDSIC Plan costs to be recovered in I&M's next general rate case. I&M is not seeking a rate adjustment in this proceeding but is seeking approval of a TDSIC Rider rate adjustment mechanism for subsequent proceedings. In January 2015, intervenors filed testimony that recommended denial of certain portions of the TDSIC Plan including recommended changes to the capital structure, recovery of requested operation and maintenance cost allocations and the rate design within the TDSIC Rider mechanism. A hearing at the IURC was held in February 2015. In April 2015, I&M filed a notice with the IURC to seek approval of the proposed TDSIC Plan excluding $117 million of certain projects that were challenged in this proceeding. A decision from the IURC is pending. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

169



5.  COMMITMENTS, GUARANTEES AND CONTINGENCIES

The Registrant Subsidiaries are subject to certain claims and legal actions arising in their ordinary course of business.  In addition, their business activities are subject to extensive governmental regulation related to public health and the environment.  The ultimate outcome of such pending or potential litigation cannot be predicted.  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 2014 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 – Affecting APCo, I&M and OPCo

Certain Registrant Subsidiaries enter into standby letters of credit with third parties.  These letters of credit are issued in the ordinary course of business and cover items such as insurance programs, security deposits and debt service reserves.

AEP has two revolving credit facilities totaling $3.5 billion, under which up to $1.2 billion may be issued as letters of credit.  As of March 31, 2015, the maximum future payments for letters of credit issued under the revolving credit facilities were as follows:
Company
 
Amount
 
Maturity
 
 
(in thousands)
 
 
I&M
 
$
35

 
March 2016
OPCo
 
4,200

 
June 2015

The Registrant Subsidiaries have $307 million of variable rate Pollution Control Bonds supported by bilateral letters of credit for $310 million as follows:
Company
 
Pollution
Control Bonds
 
Bilateral Letters
of Credit
 
Maturity of Bilateral
Letters of Credit
 
 
(in thousands)
 
 
APCo
 
$
229,650

 
$
232,293

 
March 2016 to March 2017 
I&M
 
77,000

 
77,886

 
March 2017

Guarantees of Third-Party Obligations – Affecting 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 $115 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.  Based on the latest study completed in 2010, it is estimated the reserves will be depleted in 2036 with final reclamation completed by 2046 at an estimated cost of $58 million.  Actual reclamation costs could vary due to period inflation and any changes to actual mine reclamation.  As of March 31, 2015, SWEPCo has collected $64 million through a rider for final mine closure and reclamation costs, of which $16 million is recorded in Deferred Credits and Other Noncurrent Liabilities and $48 million is recorded in Asset Retirement Obligations on SWEPCo’s condensed balance sheets.

Sabine charges SWEPCo, its only customer, all of its costs.  SWEPCo passes these costs to customers through its fuel clauses.

170



Indemnifications and Other Guarantees – Affecting APCo, I&M, OPCo, PSO and SWEPCo

Contracts

The Registrant Subsidiaries 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 March 31, 2015, there were no material liabilities recorded for any indemnifications.

APCo, I&M and OPCo are jointly and severally liable for activity conducted by AEPSC on behalf of AEP companies related to power purchase and sale activity pursuant to the SIA.  PSO and SWEPCo are jointly and severally liable for activity conducted by AEPSC on behalf of PSO and SWEPCo related to power purchase and sale activity pursuant to the SIA.

Master Lease Agreements

The Registrant Subsidiaries 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 Registrant Subsidiaries 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 March 31, 2015, the maximum potential loss by Registrant Subsidiary 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 thousands)
APCo
 
$
4,053

I&M
 
2,914

OPCo
 
4,886

PSO
 
2,263

SWEPCo
 
2,588


Railcar Lease

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 intend to renew these leases for the full lease term of twenty years via the renewal options.  The future minimum lease obligations are $11 million and $13 million for I&M and SWEPCo, respectively, for the remaining railcars as of March 31, 2015.

Under the 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 declines from 83% of the projected fair value of the equipment under the current five year lease term to 77% at the end of the 20-year term.  I&M and SWEPCo have assumed the guarantee under the return-and-sale option.  The maximum potential losses related to the guarantee are $9 million and $10 million for I&M and SWEPCo, respectively, 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.


171



ENVIRONMENTAL CONTINGENCIES

The Comprehensive Environmental Response Compensation and Liability Act (Superfund) and State Remediation – Affecting I&M

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 Registrant Subsidiaries currently incur costs to dispose of these substances safely.

In 2008, I&M received a letter from the Michigan Department of Environmental Quality (MDEQ) concerning conditions at a site under state law and requesting I&M take voluntary action necessary to prevent and/or mitigate public harm.  I&M started remediation work in accordance with a plan approved by MDEQ.  In 2014, I&M recorded an accrual for remediation at certain additional sites in Michigan. As a result of receiving approval of completed remediation work from the MDEQ in March 2015, I&M's accrual for all of these sites was reduced to approximately $9 million.  As the remediation work is completed, I&M’s cost may change as new information becomes available concerning either the level of contamination at the sites or changes in the scope of remediation.  Management cannot predict the amount of additional cost, if any.

NUCLEAR CONTINGENCIES – AFFECTING I&M

I&M owns and operates the two-unit 2,191 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.

OPERATIONAL CONTINGENCIES

Rockport Plant Litigation – Affecting I&M

In July 2013, the Wilmington Trust Company filed a complaint in U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will 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 plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement.  The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff.  The New York court granted the motion to transfer this case to the U.S. District Court for the Southern District of Ohio.  In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.  Management will continue to defend against the remaining claims.  Management is unable to determine a range of potential losses that are reasonably possible of occurring.


172



Wage and Hours Lawsuit – Affecting PSO

In August 2013, PSO received an amended complaint filed in the U.S. District Court for the Northern District of Oklahoma by 36 current and former line and warehouse employees alleging that they have been denied overtime pay in violation of the Fair Labor Standards Act.  Plaintiffs claim that they are entitled to overtime pay for “on call” time. They allege that restrictions placed on them during on call hours are burdensome enough that they are entitled to compensation for these hours as hours worked.  Plaintiffs also filed a motion to conditionally certify this action as a class action, claiming there are an additional 70 individuals similarly situated to plaintiffs.  Plaintiffs seek damages in the amount of unpaid overtime over a three-year period and liquidated damages in the same amount.

In March 2014, the federal court granted plaintiffs’ motion to conditionally certify the action as a class action.  Notice was given to all potential class members and an additional 43 individuals opted in to the class, bringing the plaintiff class to 79 current and former employees. Management will continue to defend the case. Management is unable to determine a range of potential losses that are reasonably possible of occurring.

Gavin Landfill Litigation – Affecting 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.  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.  Eleven of the family members are pursuing personal injury/illness claims and the remainder are pursuing loss of consortium claims.  The plaintiffs seek compensatory and punitive damages, as well as medical monitoring.  In September 2014, management filed a motion to dismiss the complaint, contending the case should be filed in Ohio.  That motion is pending.  Management will continue to defend against the claims.  Management is unable to determine a range of potential losses that are reasonably possible of occurring.


173



6.  BENEFIT PLANS

The Registrant Subsidiaries participate in an AEP sponsored qualified pension plan and two unfunded nonqualified pension plans.  Substantially all employees are covered by the qualified plan or both the qualified and a nonqualified pension plan.  The Registrant Subsidiaries also participate in OPEB plans sponsored by AEP 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 Subsidiary for the plans for the three months ended March 31, 2015 and 2014:

APCo
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2015

2014
 
2015
 
2014
 
(in thousands)
Service Cost
$
2,175

 
$
1,759

 
$
286

 
$
362

Interest Cost
6,679

 
7,406

 
2,584

 
3,197

Expected Return on Plan Assets
(8,745
)
 
(8,482
)
 
(4,529
)
 
(4,633
)
Amortization of Prior Service Cost (Credit)
45

 
50

 
(2,513
)
 
(2,513
)
Amortization of Net Actuarial Loss
3,473

 
4,148

 
900

 
1,146

Net Periodic Benefit Cost (Credit)
$
3,627

 
$
4,881

 
$
(3,272
)
 
$
(2,441
)

I&M
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Service Cost
$
3,217

 
$
2,517

 
$
406

 
$
487

Interest Cost
6,115

 
6,573

 
1,592

 
1,909

Expected Return on Plan Assets
(8,116
)
 
(7,748
)
 
(3,304
)
 
(3,364
)
Amortization of Prior Service Cost (Credit)
45

 
49

 
(2,355
)
 
(2,355
)
Amortization of Net Actuarial Loss
3,145

 
3,646

 
506

 
592

Net Periodic Benefit Cost (Credit)
$
4,406

 
$
5,037

 
$
(3,155
)
 
$
(2,731
)

OPCo
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Service Cost
$
1,672

 
$
1,285

 
$
216

 
$
256

Interest Cost
5,070

 
5,526

 
1,615

 
1,901

Expected Return on Plan Assets
(6,878
)
 
(6,607
)
 
(3,376
)
 
(3,380
)
Amortization of Prior Service Cost (Credit)
35

 
39

 
(1,731
)
 
(1,731
)
Amortization of Net Actuarial Loss
2,644

 
3,106

 
517

 
595

Net Periodic Benefit Cost (Credit)
$
2,543

 
$
3,349

 
$
(2,759
)
 
$
(2,359
)


174



PSO
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Service Cost
$
1,599

 
$
1,302

 
$
170

 
$
210

Interest Cost
2,731

 
3,014

 
759

 
893

Expected Return on Plan Assets
(3,786
)
 
(3,651
)
 
(1,577
)
 
(1,575
)
Amortization of Prior Service Cost (Credit)
63

 
74

 
(1,073
)
 
(1,072
)
Amortization of Net Actuarial Loss
1,417

 
1,688

 
242

 
277

Net Periodic Benefit Cost (Credit)
$
2,024

 
$
2,427

 
$
(1,479
)
 
$
(1,267
)

SWEPCo
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Service Cost
$
2,081

 
$
1,655

 
$
211

 
$
253

Interest Cost
2,932

 
3,163

 
837

 
998

Expected Return on Plan Assets
(4,008
)
 
(3,857
)
 
(1,735
)
 
(1,754
)
Amortization of Prior Service Cost (Credit)
77

 
87

 
(1,289
)
 
(1,289
)
Amortization of Net Actuarial Loss
1,507

 
1,761

 
266

 
309

Net Periodic Benefit Cost (Credit)
$
2,589

 
$
2,809

 
$
(1,710
)
 
$
(1,483
)


175



7.  BUSINESS SEGMENTS

The Registrant Subsidiaries each have one reportable segment, an integrated electricity generation, transmission and distribution business, except OPCo, an electricity transmission and distribution business that started in 2014.  The Registrant Subsidiaries’ 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.


176



8.  DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, natural gas, coal and emission allowances.  These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates.  AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

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, focusing on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs 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.

AEPSC, on behalf of the Registrant Subsidiaries, enters into power, 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. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts in order to manage the interest rate exposure associated with the Registrant Subsidiaries’ commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. AEPSC, on behalf of the Registrant Subsidiaries, also engages in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP’s Board of Directors.


177



The following tables represent the gross notional volume of the Registrant Subsidiaries’ outstanding derivative contracts as of March 31, 2015 and December 31, 2014:

Notional Volume of Derivative Instruments
March 31, 2015
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
18,442

 
12,984

 
11,459

 
7,283

 
9,187

Coal
 
Tons
 
209

 
375

 

 

 
1,125

Natural Gas
 
MMBtus
 
366

 
248

 

 

 

Heating Oil and Gasoline
 
Gallons
 
792

 
379

 
806

 
446

 
508

Interest Rate
 
USD
 
$
4,353

 
$
2,952

 
$

 
$

 
$


Notional Volume of Derivative Instruments
December 31, 2014
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
32,479

 
23,774

 
20,334

 
16,765

 
20,469

Coal
 
Tons
 
279

 
500

 

 

 
1,500

Natural Gas
 
MMBtus
 
421

 
286

 

 

 

Heating Oil and Gasoline
 
Gallons
 
1,089

 
521

 
1,108

 
614

 
699

Interest Rate
 
USD
 
$
5,094

 
$
3,455

 
$

 
$

 
$


Cash Flow Hedging Strategies

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges 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 Registrant Subsidiaries do not hedge all commodity price risk.

The Registrant Subsidiaries’ vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. The Registrant Subsidiaries do not hedge all fuel price risk.

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts to manage interest rate exposure related to future borrowings of fixed-rate debt. The Registrant Subsidiaries do not hedge all interest rate exposure.

At times, the Registrant Subsidiaries 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, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.

178



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 condensed balance sheet 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 Registrant Subsidiaries also 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 Registrant Subsidiaries 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 Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the March 31, 2015 and December 31, 2014 condensed balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:
 
 
March 31, 2015
 
December 31, 2014
Company
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
 
(in thousands)
APCo
 
$
153

 
$
830

 
$
68

 
$
98

I&M
 
89

 
404

 
163

 
47

OPCo
 

 
804

 

 
102

PSO
 
6

 
435

 

 
54

SWEPCo
 
8

 
499

 

 
62


179



The following tables represent the gross fair value of the Registrant Subsidiaries’ derivative activity on the condensed balance sheets as of March 31, 2015 and December 31, 2014:

APCo

Fair Value of Derivative Instruments
March 31, 2015
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
19,733

 
$

 
$

 
$
19,733

 
$
(7,349
)
 
$
12,384

Long-term Risk Management Assets
 
4,747

 

 

 
4,747

 
(590
)
 
4,157

Total Assets
 
24,480

 

 

 
24,480

 
(7,939
)
 
16,541

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
16,627

 

 

 
16,627

 
(7,966
)
 
8,661

Long-term Risk Management Liabilities
 
2,683

 

 

 
2,683

 
(650
)
 
2,033

Total Liabilities
 
19,310

 

 

 
19,310

 
(8,616
)
 
10,694

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
5,170

 
$

 
$

 
$
5,170

 
$
677

 
$
5,847


APCo

Fair Value of Derivative Instruments
December 31, 2014
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
32,903

 
$

 
$

 
$
32,903

 
$
(9,111
)
 
$
23,792

Long-term Risk Management Assets
 
5,159

 

 

 
5,159

 
(268
)
 
4,891

Total Assets
 
38,062

 

 

 
38,062

 
(9,379
)
 
28,683

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
20,161

 

 

 
20,161

 
(9,144
)
 
11,017

Long-term Risk Management Liabilities
 
2,322

 

 

 
2,322

 
(265
)
 
2,057

Total Liabilities
 
22,483

 

 

 
22,483

 
(9,409
)
 
13,074

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
15,579

 
$

 
$

 
$
15,579

 
$
30

 
$
15,609


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed 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)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.


180



I&M

Fair Value of Derivative Instruments
March 31, 2015
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
14,701

 
$

 
$

 
$
14,701

 
$
(4,747
)
 
$
9,954

Long-term Risk Management Assets
 
3,210

 

 

 
3,210

 
(390
)
 
2,820

Total Assets
 
17,911

 

 

 
17,911

 
(5,137
)
 
12,774

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
9,835

 

 

 
9,835

 
(5,027
)
 
4,808

Long-term Risk Management Liabilities
 
1,803

 

 

 
1,803

 
(425
)
 
1,378

Total Liabilities
 
11,638

 

 

 
11,638

 
(5,452
)
 
6,186

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
6,273

 
$

 
$

 
$
6,273

 
$
315

 
$
6,588


I&M

Fair Value of Derivative Instruments
December 31, 2014
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
28,545

 
$

 
$

 
$
28,545

 
$
(6,217
)
 
$
22,328

Long-term Risk Management Assets
 
3,499

 

 

 
3,499

 
(182
)
 
3,317

Total Assets
 
32,044

 

 

 
32,044

 
(6,399
)
 
25,645

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
11,326

 

 

 
11,326

 
(6,103
)
 
5,223

Long-term Risk Management Liabilities
 
1,575

 

 

 
1,575

 
(180
)
 
1,395

Total Liabilities
 
12,901

 

 

 
12,901

 
(6,283
)
 
6,618

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
19,143

 
$

 
$

 
$
19,143

 
$
(116
)
 
$
19,027


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed 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)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.


181



OPCo

Fair Value of Derivative Instruments
March 31, 2015
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,303

 
$

 
$

 
$
1,303

 
$
(31
)
 
$
1,272

Long-term Risk Management Assets
 
50,422

 

 

 
50,422

 

 
50,422

Total Assets
 
51,725

 

 

 
51,725

 
(31
)
 
51,694

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
2,326

 

 

 
2,326

 
(835
)
 
1,491

Long-term Risk Management Liabilities
 
4,292

 

 

 
4,292

 

 
4,292

Total Liabilities
 
6,618

 

 

 
6,618

 
(835
)
 
5,783

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
45,107

 
$

 
$

 
$
45,107

 
$
804

 
$
45,911


OPCo

Fair Value of Derivative Instruments
December 31, 2014
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
7,242

 
$

 
$

 
$
7,242

 
$

 
$
7,242

Long-term Risk Management Assets
 
45,102

 

 

 
45,102

 

 
45,102

Total Assets
 
52,344

 

 

 
52,344

 

 
52,344

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
2,045

 

 

 
2,045

 
(102
)
 
1,943

Long-term Risk Management Liabilities
 
3,013

 

 

 
3,013

 

 
3,013

Total Liabilities
 
5,058

 

 

 
5,058

 
(102
)
 
4,956

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
47,286

 
$

 
$

 
$
47,286

 
$
102

 
$
47,388


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed 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)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.


182



PSO

Fair Value of Derivative Instruments
March 31, 2015
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
150

 
$

 
$

 
$
150

 
$
(141
)
 
$
9

Long-term Risk Management Assets
 

 

 

 

 

 

Total Assets
 
150

 

 

 
150

 
(141
)
 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
1,272

 

 

 
1,272

 
(570
)
 
702

Long-term Risk Management Liabilities
 

 

 

 

 

 

Total Liabilities
 
1,272

 

 

 
1,272

 
(570
)
 
702

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
(1,122
)
 
$

 
$

 
$
(1,122
)
 
$
429

 
$
(693
)

PSO

Fair Value of Derivative Instruments
December 31, 2014
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
360

 
$

 
$

 
$
360

 
$
(360
)
 
$

Long-term Risk Management Assets
 

 

 

 

 

 

Total Assets
 
360

 

 

 
360

 
(360
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
1,332

 

 

 
1,332

 
(414
)
 
918

Long-term Risk Management Liabilities
 

 

 

 

 

 

Total Liabilities
 
1,332

 

 

 
1,332

 
(414
)
 
918

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
(972
)
 
$

 
$

 
$
(972
)
 
$
54

 
$
(918
)

(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed 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)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.


183



SWEPCo

Fair Value of Derivative Instruments
March 31, 2015
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
185

 
$

 
$

 
$
185

 
$
(174
)
 
$
11

Long-term Risk Management Assets
 

 

 

 

 

 

Total Assets
 
185

 

 

 
185

 
(174
)
 
11

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
4,862

 

 

 
4,862

 
(665
)
 
4,197

Long-term Risk Management Liabilities
 

 

 

 

 

 

Total Liabilities
 
4,862

 

 

 
4,862

 
(665
)
 
4,197

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
(4,677
)
 
$

 
$

 
$
(4,677
)
 
$
491

 
$
(4,186
)

SWEPCo

Fair Value of Derivative Instruments
December 31, 2014
 
 
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
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
471

 
$

 
$

 
$
471

 
$
(440
)
 
$
31

Long-term Risk Management Assets
 

 

 

 

 

 

Total Assets
 
471

 

 

 
471

 
(440
)
 
31

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
1,584

 

 

 
1,584

 
(502
)
 
1,082

Long-term Risk Management Liabilities
 

 

 

 

 

 

Total Liabilities
 
1,584

 

 

 
1,584

 
(502
)
 
1,082

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
(1,113
)
 
$

 
$

 
$
(1,113
)
 
$
62

 
$
(1,051
)

(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed 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)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.


184



The tables below present the Registrant Subsidiaries’ activity of derivative risk management contracts for the three months ended March 31, 2015 and 2014:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended March 31, 2015
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
644

 
$
2,239

 
$

 
$
(11
)
 
$
(17
)
Other Operation Expense
 
(118
)
 
(100
)
 
(150
)
 
(122
)
 
(147
)
Maintenance Expense
 
(205
)
 
(80
)
 
(143
)
 
(81
)
 
(93
)
Purchased Electricity for Resale
 
729

 
294

 

 

 

Regulatory Assets (a)
 
717

 
(560
)
 

 
(816
)
 
(3,533
)
Regulatory Liabilities (a)
 
1,666

 
(2,991
)
 
4,673

 

 
3,959

Total Gain (Loss) on Risk Management Contracts
 
$
3,433

 
$
(1,198
)
 
$
4,380

 
$
(1,030
)
 
$
169


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended March 31, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
4,847

 
$
6,156

 
$

 
$
64

 
$
23

Sales to AEP Affiliates
 

 
(221
)
 

 
221

 

Regulatory Assets (a)
 
4

 

 

 
2

 
3

Regulatory Liabilities (a)
 
32,332

 
18,317

 
35,099

 
480

 
1,330

Total Gain on Risk Management Contracts
 
$
37,183

 
$
24,252

 
$
35,099

 
$
767

 
$
1,356

(a)
Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the condensed 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 condensed 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 condensed 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 condensed 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 condensed 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.”

185



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 Registrant Subsidiaries initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets until the period the hedged item affects Net Income. The Registrant Subsidiaries recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

Realized gains and losses on derivative contracts for the purchase and sale of power designated as cash flow hedges are included in Revenues or Purchased Electricity for Resale on the condensed statements of income or in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets, depending on the specific nature of the risk being hedged. During the three months ended March 31, 2015, Registrant Subsidiaries did not designate power derivatives as cash flow hedges. During the three months ended March 31, 2014, APCo and I&M designated power derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the condensed statements of income. The impact of cash flow hedge accounting for these derivative contracts was immaterial and was discontinued effective March 31, 2014.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Interest Expense on the condensed statements of income in those periods in which hedged interest payments occur. During the three months ended March 31, 2015, the Registrant Subsidiaries did not designate interest rate derivatives as cash flow hedges. During the three months ended March 31, 2014, I&M designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Depreciation and Amortization expense on the condensed 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 months ended March 31, 2015 and 2014, the Registrant Subsidiaries did not designate any foreign currency derivatives as cash flow hedges.

During the three months ended March 31, 2015 and 2014, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets and the reasons for changes in cash flow hedges for the three months ended March 31, 2015 and 2014, see Note 3.


186



Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of March 31, 2015 and December 31, 2014 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
March 31, 2015
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$

 
$

 
$

 
$

 
$

 
$
4,025

I&M
 

 

 

 

 

 
(14,139
)
OPCo
 

 

 

 

 

 
5,259

PSO
 

 

 

 

 

 
4,753

SWEPCo
 

 

 

 

 

 
(10,469
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
 
 
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Maximum Term for
Exposure to
Variability of Future
Cash Flows
 
 
(in thousands)
 
(in months)
APCo
 
$

 
$
587

 
0
I&M
 

 
(1,152
)
 
0
OPCo
 

 
1,372

 
0
PSO
 

 
759

 
0
SWEPCo
 

 
(1,863
)
 
0

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
December 31, 2014
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$

 
$

 
$

 
$

 
$

 
$
3,896

I&M
 

 

 

 

 

 
(14,406
)
OPCo
 

 

 

 

 

 
5,602

PSO
 

 

 

 

 

 
4,943

SWEPCo
 

 

 

 

 

 
(11,036
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$

 
$
275

I&M
 

 
(1,090
)
OPCo
 

 
1,372

PSO
 

 
759

SWEPCo
 

 
(1,998
)

(a)
Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the condensed balance sheets.

187



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

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their 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. AEPSC, on behalf of the Registrant Subsidiaries, uses Moody’s, Standard and Poor’s and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

When AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements, these agreements may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an 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, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade.  The amount of collateral required fluctuates based on market prices and total exposure.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering items in contracts.  The Registrant Subsidiaries have not experienced a downgrade below investment grade.  The following tables represent the Registrant Subsidiaries exposure if credit ratings were to decline below a specified rating threshold as of March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
Company
 
Fair Value
 of Contracts
with Credit Downgrade
Triggers
 
Amount of Collateral
the Registrant Subsidiaries
Would Have Been Required
to Post for Derivative
Contracts as well as Non-
Derivative Contracts Subject
to the Same Master Netting
Arrangement
 
Amount of Collateral
the Registrant Subsidiaries
Would Have Been Required to Post Attributable to
RTOs and ISOs
 
Amount of
Collateral Attributable to
Other
Contracts
 
 
(in thousands)
APCo
 
$

 
$

 
$
4,547

 
$
83

I&M
 

 

 
3,084

 
53

OPCo
 

 

 

 

PSO
 

 

 

 
4,108

SWEPCo
 

 

 

 
162


188



 
 
December 31, 2014
Company
 
Fair Value
of Contracts
with Credit Downgrade
Triggers
 
Amount of Collateral
the Registrant Subsidiaries
Would Have Been Required
to Post for Derivative
Contracts as well as Non-
Derivative Contracts Subject
to the Same Master Netting
Arrangement
 
Amount of Collateral
the Registrant Subsidiaries
Would Have Been Required to Post Attributable to
RTOs and ISOs
 
Amount of
Collateral Attributable to
Other
Contracts
 
 
(in thousands)
APCo
 
$

 
$

 
$
6,339

 
$
74

I&M
 

 

 
4,299

 
47

OPCo
 

 

 

 

PSO
 

 

 
693

 
4,111

SWEPCo
 

 

 
877

 
166


In addition, a majority of the Registrant Subsidiaries’ 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 in excess of $50 million.  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 this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries’ contractual netting arrangements as of March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
8,051

 
$

 
$
7,921

I&M
 
5,461

 

 
5,373

OPCo
 

 

 

PSO
 

 

 

SWEPCo
 

 

 

 
 
December 31, 2014
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
9,043

 
$

 
$
9,012

I&M
 
6,134

 

 
6,113

OPCo
 

 

 

PSO
 

 

 

SWEPCo
 

 

 



189



9.  FAIR VALUE MEASUREMENTS

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.  The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP’s Board of Directors. The AEP System’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) various daily and quarterly reports regarding compliance with policies, limits and procedures. The Regulated Risk Committee consists of AEPSC’s Chief Operating Officer, Chief Financial Officer, Executive Vice President of Generation, Senior Vice President of Commercial Operations and Chief Risk Officer.

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 the contracts being classified as Level 3 is the inability to substantiate energy price curves in the market.  A significant portion of the Level 3 instruments have been economically hedged which greatly limits potential earnings volatility.

AEP utilizes its trustee’s external pricing service in its estimate of the fair value of the underlying investments held in the 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, Restricted Cash for Securitized Funding and Cash and Cash Equivalents 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 and cash equivalents funds.  Fixed income securities do not trade on an exchange 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

190



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.

Fair Value Measurements of Long-term Debt

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 for the Registrant Subsidiaries as of March 31, 2015 and December 31, 2014 are summarized in the following table:
 
 
March 31, 2015
 
December 31, 2014
Company
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
 
 
(in thousands)
APCo
 
$
3,969,405

 
$
4,815,530

 
$
3,980,274

 
$
4,711,210

I&M
 
2,001,609

 
2,260,547

 
2,027,397

 
2,255,124

OPCo
 
2,275,041

 
2,735,382

 
2,297,123

 
2,709,452

PSO
 
1,291,015

 
1,501,358

 
1,041,036

 
1,216,205

SWEPCo
 
2,535,361

 
2,827,604

 
2,140,437

 
2,402,639


Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

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 spent nuclear fuel 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 or its affiliates.
Withdrawals permitted only for payment of decommissioning costs and trust expenses.

I&M maintains trust records for each regulatory jurisdiction.  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 trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity 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 equity and fixed income investments held in these trusts and generally intends to sell fixed income 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 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.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.

191



The following is a summary of nuclear trust fund investments as of March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
December 31, 2014
 
Estimated Fair
Value
 
Gross Unrealized
Gains
 
Other-Than-Temporary
Impairments
 
Estimated Fair
Value
 
Gross Unrealized
Gains
 
Other-Than-Temporary Impairments
 
(in thousands)
Cash and Cash Equivalents
$
30,731

 
$

 
$

 
$
19,966

 
$

 
$

Fixed Income Securities:
 
 
 

 
 

 
 

 
 

 
 

United States Government
695,576

 
51,093

 
(2,616
)
 
697,042

 
44,615

 
(5,016
)
Corporate Debt
59,764

 
5,208

 
(908
)
 
47,792

 
4,523

 
(1,018
)
State and Local Government
200,707

 
982

 
(736
)
 
208,553

 
1,206

 
(319
)
Subtotal Fixed Income Securities
956,047

 
57,283

 
(4,260
)
 
953,387

 
50,344

 
(6,353
)
Equity Securities - Domestic
1,135,609

 
601,023

 
(78,643
)
 
1,122,379

 
598,788

 
(79,142
)
Spent Nuclear Fuel and Decommissioning Trusts
$
2,122,387

 
$
658,306

 
$
(82,903
)
 
$
2,095,732

 
$
649,132

 
$
(85,495
)

The following table provides the securities activity within the decommissioning and SNF trusts for the three months ended March 31, 2015 and 2014:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
(in thousands)
Proceeds from Investment Sales
 
$
228,164

 
$
147,700

Purchases of Investments
 
245,841

 
164,511

Gross Realized Gains on Investment Sales
 
11,153

 
8,141

Gross Realized Losses on Investment Sales
 
3,771

 
874


The adjusted cost of fixed income securities was $899 million and $903 million as of March 31, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $534 million and $524 million as of March 31, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of March 31, 2015 was as follows:
 
Fair Value of Fixed Income Securities
 
(in thousands)
Within 1 year
$
148,126

1 year – 5 years
406,568

5 years – 10 years
173,946

After 10 years
227,407

Total
$
956,047



192



Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014.  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.

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding (a)
 
$
7,884

 
$

 
$

 
$
33

 
$
7,917

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
226

 
16,014

 
7,864

 
(7,563
)
 
16,541

 
 
 
 
 
 
 
 
 
 
 
Total Assets:
 
$
8,110

 
$
16,014

 
$
7,864

 
$
(7,530
)
 
$
24,458

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$
244

 
$
16,813

 
$
1,877

 
$
(8,240
)
 
$
10,694


APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding (a)
 
$
15,599

 
$

 
$

 
$
33

 
$
15,632

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
206

 
20,197

 
17,654

 
(9,374
)
 
28,683

 
 
 
 
 
 
 
 
 
 
 
Total Assets:
 
$
15,805

 
$
20,197

 
$
17,654

 
$
(9,341
)
 
$
44,315

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$
227

 
$
20,339

 
$
1,912

 
$
(9,404
)
 
$
13,074


193



I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$
153

 
$
10,671

 
$
6,832

 
$
(4,882
)
 
$
12,774

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (d)
 
22,727

 

 

 
8,004

 
30,731

Fixed Income Securities:
 
 

 
 

 
 

 
 

 
 

United States Government
 

 
695,576

 

 

 
695,576

Corporate Debt
 

 
59,764

 

 

 
59,764

State and Local Government
 

 
200,707

 

 

 
200,707

Subtotal Fixed Income Securities
 

 
956,047

 

 

 
956,047

Equity Securities - Domestic (e)
 
1,135,609

 

 

 

 
1,135,609

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,158,336

 
956,047

 

 
8,004

 
2,122,387

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,158,489

 
$
966,718

 
$
6,832

 
$
3,122

 
$
2,135,161

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$
166

 
$
9,958

 
$
1,259

 
$
(5,197
)
 
$
6,186


I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$
140

 
$
15,893

 
$
16,008

 
$
(6,396
)
 
$
25,645

 
 
 
 
 
 
 
 
 
 
 
Spent Nuclear Fuel and Decommissioning Trusts
 
 

 
 

 
 

 
 

 
 

Cash and Cash Equivalents (d)
 
9,418

 

 

 
10,548

 
19,966

Fixed Income Securities:
 
 

 
 

 
 

 
 

 


United States Government
 

 
697,042

 

 

 
697,042

Corporate Debt
 

 
47,792

 

 

 
47,792

State and Local Government
 

 
208,553

 

 

 
208,553

Subtotal Fixed Income Securities
 

 
953,387

 

 

 
953,387

Equity Securities - Domestic (e)
 
1,122,379

 

 

 

 
1,122,379

Total Spent Nuclear Fuel and Decommissioning Trusts
 
1,131,797

 
953,387

 

 
10,548

 
2,095,732

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,131,937

 
$
969,280

 
$
16,008

 
$
4,152

 
$
2,121,377

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$
154

 
$
11,440

 
$
1,304

 
$
(6,280
)
 
$
6,618


194



OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding (a)
 
$
17,125

 
$

 
$

 
$
9

 
$
17,134

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 

 

 
50,536

 
1,158

 
51,694

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
17,125

 
$

 
$
50,536

 
$
1,167

 
$
68,828

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 
 
 
 
 
 
 
 
 
Risk Management Commodity Contracts (b) (c)
 
$

 
$
835

 
$
4,594

 
$
354

 
$
5,783


OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Restricted Cash for Securitized Funding (a)
 
$
408

 
$

 
$

 
$
28,288

 
$
28,696

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 

 

 
52,343

 
1

 
52,344

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
408

 
$

 
$
52,343

 
$
28,289

 
$
81,040

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$

 
$
1,116

 
$
3,941

 
$
(101
)
 
$
4,956



195



PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$

 
$
18

 
$
130

 
$
(139
)
 
$
9

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$

 
$
455

 
$
815

 
$
(568
)
 
$
702


PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$

 
$

 
$
360

 
$
(360
)
 
$

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$

 
$
595

 
$
737

 
$
(414
)
 
$
918



196



SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents (a)
 
$
6,199

 
$

 
$

 
$
1,776

 
$
7,975

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 

 
23

 
161

 
(173
)
 
11

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
6,199

 
$
23

 
$
161

 
$
1,603

 
$
7,986

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$

 
$
3,478

 
$
1,383

 
$
(664
)
 
$
4,197


SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
Assets:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents (a)
 
$
12,660

 
$

 
$

 
$
1,696

 
$
14,356

 
 
 
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 

 
31

 
439

 
(439
)
 
31

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
12,660

 
$
31

 
$
439

 
$
1,257

 
$
14,387

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

 
 

Risk Management Commodity Contracts (b) (c)
 
$

 
$
684

 
$
899

 
$
(501
)
 
$
1,082


(a)
Amounts in "Other" column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 amounts primarily represent investment in money market funds.
(b)
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.”
(c)
Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.
(d)
Amounts in “Other” column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.
(e)
Amounts represent publicly traded equity securities and equity-based mutual funds.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2015 and 2014.


197



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 for the Registrant Subsidiaries:
Three Months Ended March 31, 2015
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Balance as of December 31, 2014
 
$
15,742

 
$
14,704

 
$
48,402

 
$
(377
)
 
$
(460
)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
2,163

 
117

 
215

 
(259
)
 
5,809

Purchases, Issuances and Settlements (c)
 
(13,355
)
 
(9,053
)
 
(6,745
)
 
635

 
(5,351
)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)
 
1,437

 
(195
)
 
4,070

 
(684
)
 
(1,220
)
Balance as of March 31, 2015
 
$
5,987

 
$
5,573

 
$
45,942

 
$
(685
)
 
$
(1,222
)
Three Months Ended March 31, 2014
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Balance as of December 31, 2013
 
$
10,562

 
$
7,164

 
$
2,920

 
$

 
$

Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)
 
29,162

 
18,219

 
30,963

 

 

Purchases, Issuances and Settlements (c)
 
(31,781
)
 
(19,995
)
 
(34,036
)
 

 

Transfers into Level 3 (d) (e)
 
(3,825
)
 
(2,594
)
 

 

 

Transfers out of Level 3 (e) (f)
 
(6
)
 
(4
)
 

 

 

Changes in Fair Value Allocated to Regulated Jurisdictions (g)
 
3,289

 
2,052

 
4,065

 
349

 
442

Balance as of March 31, 2014
 
$
7,401

 
$
4,842

 
$
3,912

 
$
349

 
$
442


(a)
Included in revenues on the condensed 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 the settlement of risk management commodity contracts for the reporting period.
(d)
Represents existing assets or liabilities that were previously categorized as Level 2.
(e)
Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.
(f)
Represents existing assets or liabilities that were previously categorized as Level 3.
(g)
Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.


198



The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for the Registrant Subsidiaries as of March 31, 2015 and December 31, 2014:

Significant Unobservable Inputs
March 31, 2015
APCo
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
5,805

 
$
1,646

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
10.55

 
$
51.25

 
$
36.89

FTRs
2,059

 
231

 
Discounted Cash Flow 
 
Forward Market Price 
 
(9.62
)
 
6.77

 
0.62

Total
$
7,864

 
$
1,877

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
December 31, 2014
APCo
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
5,801

 
$
1,799

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
13.43

 
$
123.02

 
$
52.47

FTRs
11,853

 
113

 
Discounted Cash Flow 
 
Forward Market Price 
 
(14.63
)
 
20.02

 
1.01

Total
$
17,654

 
$
1,912

 
 
 
 
 
 

 
 

 
 


199



Significant Unobservable Inputs
March 31, 2015
I&M
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
5,189

 
$
1,117

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
10.55

 
$
51.25

 
$
36.89

FTRs
1,643

 
142

 
Discounted Cash Flow 
 
Forward Market Price 
 
(9.62
)
 
6.77

 
0.62

Total
$
6,832

 
$
1,259

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
December 31, 2014
I&M
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
6,375

 
$
1,219

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
13.43

 
$
123.02

 
$
52.47

FTRs
9,633

 
85

 
Discounted Cash Flow 
 
Forward Market Price 
 
(14.63
)
 
20.02

 
1.01

Total
$
16,008

 
$
1,304

 
 
 
 
 
 

 
 

 
 

Significant Unobservable Inputs
March 31, 2015
OPCo
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
49,233

 
$
4,564

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
44.41

 
$
163.52

 
$
91.73

FTRs
1,303

 
30

 
Discounted Cash Flow 
 
Forward Market Price 
 
(9.62
)
 
6.77

 
0.62

Total
$
50,536

 
$
4,594

 
 
 
 
 
 
 
 
 
 

Significant Unobservable Inputs
December 31, 2014
OPCo
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Energy Contracts
$
45,101

 
$
3,941

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
48.25

 
$
159.92

 
$
84.04

FTRs
7,242

 

 
Discounted Cash Flow 
 
Forward Market Price 
 
(14.63
)
 
20.02

 
1.01

Total
$
52,343

 
$
3,941

 
 
 
 
 
 

 
 

 
 


200



Significant Unobservable Inputs
March 31, 2015
PSO
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
FTRs
$
130

 
$
815

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
(9.62
)
 
$
6.77

 
$
0.62


Significant Unobservable Inputs
December 31, 2014
PSO
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
FTRs
$
360

 
$
737

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
(14.63
)
 
$
20.02

 
$
1.01


Significant Unobservable Inputs
March 31, 2015
SWEPCo
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
FTRs
$
161

 
$
1,383

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
(9.62
)
 
$
6.77

 
$
0.62


Significant Unobservable Inputs
December 31, 2014
SWEPCo
 
 
 
 
 
 
 
Significant
 
Forward Price Range
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
 
Assets
 
Liabilities
 
Technique
 
Input (a)
 
Low
 
High
 
Average
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
FTRs
$
439

 
$
899

 
Discounted Cash Flow 
 
Forward Market Price 
 
$
(14.63
)
 
$
20.02

 
$
1.01


(a)
Represents market prices in dollars per MWh.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs for the Registrant Subsidiaries as of March 31, 2015:

Sensitivity of Fair Value Measurements
March 31, 2015
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)

201



10.  INCOME TAXES

AEP System Tax Allocation Agreement

The Registrant Subsidiaries join in the filing of a consolidated federal income tax return with their affiliates in the AEP System.  The allocation of the AEP System’s current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense.  The tax benefit of the Parent is allocated to its subsidiaries with taxable income.  With the exception of the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

The Registrant Subsidiaries are no longer subject to U.S federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. Although the outcome of tax audits is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters.  In addition, the Registrant Subsidiaries accrue interest on these uncertain tax positions.  Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

The Registrant Subsidiaries file income tax returns in various state and local jurisdictions.  These taxing authorities routinely examine the tax returns and the Registrant 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 Registrant Subsidiaries are no longer subject to state or local income tax examinations by tax authorities for years before 2009.



202



11.  FINANCING ACTIVITIES

Long-term Debt

Long-term debt and other securities issued, retired and principal payments made during the first three months of 2015 are shown in the tables below:
Company
 
Type of Debt
 
Principal Amount (a)
 
Interest Rate
 
Due Date
Issuances:
 
 
 
(in thousands)
 
(%)
 
 
PSO
 
Senior Unsecured Notes
 
$
125,000

 
3.17
 
2025
PSO
 
Senior Unsecured Notes
 
125,000

 
4.09
 
2045
SWEPCo
 
Pollution Control Bonds
 
53,500

 
1.60
 
2019
SWEPCo
 
Senior Unsecured Notes
 
400,000

 
3.90
 
2045

(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.
Company
 
Type of Debt
 
 Principal Amount Paid
 
Interest Rate
 
Due Date
Retirements and Principal Payments:
 
 
 
(in thousands)
 
(%)
 
 
APCo
 
Land Note
 
$
9

 
13.718
 
2026
APCo
 
Securitization Bonds
 
11,037

 
2.008
 
2024
I&M
 
Notes Payable
 
8,643

 
Variable
 
2016
I&M
 
Notes Payable
 
6,943

 
Variable
 
2017
I&M
 
Notes Payable
 
6,600

 
Variable
 
2019
I&M
 
Notes Payable
 
429

 
Variable
 
2016
I&M
 
Notes Payable
 
297

 
2.12
 
2016
I&M
 
Other Long-term Debt
 
2,750

 
Variable
 
2015
I&M
 
Other Long-term Debt
 
275

 
6.00
 
2025
OPCo
 
Other Long-term Debt
 
19

 
1.149
 
2028
OPCo
 
Securitization Bonds
 
22,200

 
0.958
 
2018
PSO
 
Other Long-term Debt
 
106

 
3.00
 
2027
SWEPCo
 
Notes Payable
 
1,625

 
4.58
 
2032
SWEPCo
 
Pollution Control Bonds
 
53,500

 
3.25
 
2015

In April 2015, APCo issued $86 million of 1.9% Pollution Control Bonds due in 2019 and retired $86 million of 3.125% Notes Payable – Affiliated due in 2015.

In April 2015, OPCo retired $86 million of 3.125% Pollution Control Bonds due in 2015.

In April 2015, SWEPCo retired $100 million of 5.375% Senior Unsecured Notes due in 2015.

As of March 31, 2015, trustees held on behalf of I&M and OPCo, $40 million and $345 million, respectively, of their reacquired Pollution Control Bonds.


203



Dividend Restrictions

The Registrant 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 Registrant Subsidiaries to transfer funds to Parent in the form of dividends.

Federal Power Act

The Federal Power Act prohibits each of the Registrant Subsidiaries from participating “in the making or paying of any dividends of such public utility from any funds properly included in capital account.”  The term “capital account” is not defined in the Federal Power Act or its regulations.  Management understands “capital account” to mean the book value of the common stock. This restriction does not limit the ability of the Registrant Subsidiaries to pay dividends out of retained earnings.

Additionally, the Federal Power Act creates a reserve on earnings attributable to hydroelectric generation plants.  Because of their respective ownership of such plants, this reserve applies to APCo and I&M.

Leverage Restrictions

Pursuant to the credit agreement leverage restrictions, APCo, I&M, PSO and SWEPCo must maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%.

Utility Money Pool – AEP System

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.  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 March 31, 2015 and December 31, 2014 are included in Advances to Affiliates and Advances from Affiliates, respectively, on each of the Registrant Subsidiaries’ condensed balance sheets.  The Utility Money Pool participants’ money pool activity and their corresponding authorized borrowing limits for the three months ended March 31, 2015 are described in the following table:
Company
 
Maximum
Borrowings
from the
Utility
Money Pool
 
Maximum
Loans to the
Utility
Money Pool
 
Average
Borrowings
from the
Utility
Money Pool
 
Average
Loans to the
Utility
Money Pool
 
Net Loans to
(Borrowings from)
the Utility Money
Pool as of
March 31, 2015
 
Authorized
Short-term
Borrowing
Limit
 
 
(in thousands)
APCo
 
$

 
$
185,121

 
$

 
$
115,109

 
$
152,148

 
$
600,000

I&M
 
200,032

 
13,514

 
149,526

 
13,496

 
(154,653
)
 
500,000

OPCo
 

 
367,472

 

 
301,505

 
291,256

 
400,000

PSO
 
165,947

 
62,255

 
113,117

 
16,812

 
62,255

 
300,000

SWEPCo
 
112,481

 
293,378

 
52,596

 
96,548

 
293,378

 
350,000



204



The maximum and minimum interest rates for funds either borrowed from or loaned to the Utility Money Pool were as follows:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Maximum Interest Rate
 
0.59
%
 
0.33
%
Minimum Interest Rate
 
0.39
%
 
0.28
%

The average interest rates for funds borrowed from and loaned to the Utility Money Pool for the three months ended March 31, 2015 and 2014 are summarized for all Registrant Subsidiaries in the following table:
 
 
Average Interest Rate
for Funds Borrowed
from the Utility Money Pool for
 
Average Interest Rate
for Funds Loaned
to the Utility Money Pool for
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
Company
 
2015
 
2014
 
2015
 
2014
APCo
 
%
 
%
 
0.45
%
 
0.31
%
I&M
 
0.46
%
 
%
 
0.46
%
 
0.31
%
OPCo
 
%
 
0.31
%
 
0.46
%
 
0.29
%
PSO
 
0.49
%
 
0.31
%
 
0.44
%
 
%
SWEPCo
 
0.46
%
 
0.31
%
 
0.52
%
 
%

Credit Facilities

For a discussion of credit facilities, see “Letters of Credit” section of Note 5.

Sale of Receivables – AEP Credit

Under a 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 Subsidiary’s 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’ condensed statements of income.  The Registrant Subsidiaries manage and service their customer accounts receivable sold.

AEP Credit's receivables securitization agreement provides a commitment of $750 million from bank conduits to purchase receivables.  The agreement was increased in June 2014 from $700 million and expires in June 2016.

The amount of accounts receivable and accrued unbilled revenues under the sale of receivables agreement for each Registrant Subsidiary as of March 31, 2015 and December 31, 2014 was as follows:
 
 
March 31,
 
December 31,
Company
 
2015
 
2014
 
 
(in thousands)
APCo
 
$
164,414

 
$
159,823

I&M
 
152,843

 
137,459

OPCo
 
383,572

 
365,834

PSO
 
110,513

 
112,905

SWEPCo
 
132,161

 
148,668



205



The fees paid by the Registrant Subsidiaries to AEP Credit for customer accounts receivable sold were:
 
 
Three Months Ended March 31,
Company
 
2015
 
2014
 
 
(in thousands)
APCo
 
$
2,454

 
$
2,423

I&M
 
2,357

 
2,040

OPCo
 
8,015

 
7,498

PSO
 
1,422

 
1,323

SWEPCo
 
1,722

 
1,566


The Registrant Subsidiaries’ proceeds on the sale of receivables to AEP Credit were:
 
 
Three Months Ended March 31,
Company
 
2015
 
2014
 
 
(in thousands)
APCo
 
$
429,624

 
$
437,196

I&M
 
419,560

 
407,150

OPCo
 
714,985

 
686,627

PSO
 
302,501

 
290,217

SWEPCo
 
373,167

 
390,588



206



12.  VARIABLE INTEREST ENTITIES

The accounting guidance for “Variable Interest Entities” is a consolidation model that considers if a company has a controlling financial interest in a VIE.  A controlling financial interest will have both (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  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 they are the primary beneficiary of a VIE, management considers for each Registrant Subsidiary factors such as equity at risk, the amount of the VIE’s variability the Registrant Subsidiary absorbs, guarantees of indebtedness, voting rights including kick-out rights, the power to direct the VIE, variable interests held by related parties and other factors.  Management believes that significant assumptions and judgments were applied consistently.  In addition, the Registrant Subsidiaries have not provided financial or other support to any VIE that was not previously contractually required.

SWEPCo is the primary beneficiary of Sabine.  I&M is the primary beneficiary of DCC Fuel.  OPCo is the primary beneficiary of Ohio Phase-in-Recovery Funding.  APCo is the primary beneficiary of Appalachian Consumer Rate Relief Funding.  In addition, the Registrant Subsidiaries have not provided material financial or other support to any of these entities that was not previously contractually required. SWEPCo holds a significant variable interest in DHLC.  Each of the Registrant Subsidiaries hold a significant variable interest in AEPSC.  I&M holds a significant variable interest in AEGCo.

Sabine is a mining operator providing mining services to SWEPCo.  SWEPCo has no equity investment in Sabine but is Sabine’s only customer.  SWEPCo guarantees the debt obligations and lease obligations of Sabine.  Under the terms of the note agreements, substantially all assets are pledged and all rights under the lignite mining agreement are assigned to SWEPCo.  The creditors of Sabine have no recourse to any AEP entity other than SWEPCo.  Under the provisions of the mining agreement, SWEPCo is required to pay, as a part of the cost of lignite delivered, an amount equal to mining costs plus a management fee.  In addition, SWEPCo determines how much coal will be mined each year.  Based on these facts, management concluded that SWEPCo is the primary beneficiary and is required to consolidate Sabine.  SWEPCo’s total billings from Sabine for the three months ended March 31, 2015 and 2014 were $42 million and $39 million, respectively. See the table below for the classification of Sabine’s assets and liabilities on SWEPCo’s condensed balance sheets.

The balances below represent the assets and liabilities of Sabine that are consolidated.  These balances include intercompany transactions that are eliminated upon consolidation.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
VARIABLE INTEREST ENTITIES
March 31, 2015 and December 31, 2014
(in thousands)
 
 
Sabine
ASSETS
 
2015
 
2014
Current Assets
 
$
58,946

 
$
67,981

Net Property, Plant and Equipment
 
143,910

 
145,491

Other Noncurrent Assets
 
59,272

 
51,578

Total Assets
 
$
262,128

 
$
265,050

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Current Liabilities
 
$
28,620

 
$
36,286

Noncurrent Liabilities
 
233,122

 
228,349

Equity
 
386

 
415

Total Liabilities and Equity
 
$
262,128

 
$
265,050



207



I&M has nuclear fuel lease agreements with DCC Fuel IV LLC, DCC Fuel V LLC, DCC Fuel VI LLC and DCC Fuel VII (collectively DCC Fuel).  DCC Fuel was formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.  DCC Fuel purchased the nuclear fuel from I&M with funds received from the issuance of notes to financial institutions.  Each entity is a single-lessee leasing arrangement with only one asset and is capitalized with all debt.  Each is a separate legal entity from I&M, the assets of which are not available to satisfy the debts of I&M.  Payments on the leases for the three months ended March 31, 2015 and 2014 were $23 million and $25 million, respectively. The leases were recorded as capital leases on I&M’s balance sheet as title to the nuclear fuel transfers to I&M at the end of the respective lease terms, which do not exceed 54 months.  Based on I&M’s control of DCC Fuel, management concluded that I&M is the primary beneficiary and is required to consolidate DCC Fuel.  The capital leases are eliminated upon consolidation.  The lease agreement ended for DCC Fuel II LLC in October 2014.  See the table below for the classification of DCC Fuel’s assets and liabilities on I&M’s condensed balance sheets.

The balances below represent the assets and liabilities of DCC Fuel that are consolidated.  These balances include intercompany transactions that are eliminated upon consolidation.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
VARIABLE INTEREST ENTITIES
March 31, 2015 and December 31, 2014
(in thousands)
 
 
DCC Fuel
ASSETS
 
2015
 
2014
Current Assets
 
$
89,509

 
$
97,361

Net Property, Plant and Equipment
 
128,919

 
158,121

Other Noncurrent Assets
 
64,576

 
79,705

Total Assets
 
$
283,004

 
$
335,187

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Current Liabilities
 
$
80,834

 
$
86,026

Noncurrent Liabilities
 
202,170

 
249,161

Total Liabilities and Equity
 
$
283,004

 
$
335,187


Ohio Phase-in-Recovery Funding was formed for the sole purpose of issuing and servicing securitization bonds related to phase-in recovery property.  Management has concluded that OPCo is the primary beneficiary of Ohio Phase-in-Recovery Funding because OPCo has the power to direct the most significant activities of the VIE and OPCo's equity interest could potentially be significant.  Therefore, OPCo is required to consolidate Ohio Phase-in-Recovery Funding.  The securitized bonds totaled $210 million and $232 million as of March 31, 2015 and December 31, 2014, respectively, and are included in current and long-term debt on the condensed balance sheets.  Ohio Phase-in-Recovery Funding has securitized assets of $104 million and $110 million as of March 31, 2015 and December 31, 2014, respectively, which are presented separately on the face of the condensed balance sheets.  The phase-in recovery property represents the right to impose and collect Ohio deferred distribution charges from customers receiving electric transmission and distribution service from OPCo under a recovery mechanism approved by the PUCO.  In August 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to OPCo or any other AEP entity.  OPCo acts as the servicer for Ohio Phase-in-Recovery Funding's securitized assets and remits all related amounts collected from customers to Ohio Phase-in-Recovery Funding for interest and principal payments on the securitization bonds and related costs. See the table below for the classification of Ohio Phase-in-Recovery Funding’s assets and liabilities on OPCo’s condensed balance sheets.


208



The balances below represent the assets and liabilities of Ohio Phase-in-Recovery Funding that are consolidated.  These balances include intercompany transactions that are eliminated upon consolidation.

OHIO POWER COMPANY AND SUBSIDIARIES
VARIABLE INTEREST ENTITIES
March 31, 2015 and December 31, 2014
(in thousands)
 

Ohio
Phase-In Recovery
Funding
ASSETS

2015

2014
Current Assets

$
21,606


$
32,676

Other Noncurrent Assets (a)

198,266


209,922

Total Assets

$
219,872


$
242,598

 

 




LIABILITIES AND EQUITY

 




Current Liabilities

$
46,756


$
47,099

Noncurrent Liabilities

171,779


194,162

Equity

1,337


1,337

Total Liabilities and Equity

$
219,872


$
242,598

(a)
Includes an intercompany item eliminated in consolidation as of March 31, 2015 and December 31, 2014 of $92 million and $97 million, respectively.

Appalachian Consumer Rate Relief Funding was formed for the sole purpose of issuing and servicing securitization bonds related to APCo's under-recovered ENEC deferral balance.  Management has concluded that APCo is the primary beneficiary of Appalachian Consumer Rate Relief Funding because APCo has the power to direct the most significant activities of the VIE and APCo's equity interest could potentially be significant.  Therefore, APCo is required to consolidate Appalachian Consumer Rate Relief Funding.  The securitized bonds totaled $357 million and $368 million as of March 31, 2015 and December 31, 2014, respectively, and are included in current and long term debt on the condensed balance sheets.  Appalachian Consumer Rate Relief Funding has securitized assets of $345 million and $350 million as of March 31, 2015 and December 31, 2014, respectively, which are presented separately on the face of the condensed balance sheets.  The phase-in recovery property represents the right to impose and collect West Virginia deferred generation charges from customers receiving electric transmission, distribution and generation service from APCo under a recovery mechanism approved by the WVPSC.  In November 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to APCo or any other AEP entity.  APCo acts as the servicer for Appalachian Consumer Rate Relief Funding's securitized assets and remits all related amounts collected from customers to Appalachian Consumer Rate Relief Funding for interest and principal payments on the securitization bonds and related costs. See the table below for the classification of Appalachian Consumer Rate Relief Funding’s assets and liabilities on APCo’s condensed balance sheets.


209



The balances below represent the assets and liabilities of Appalachian Consumer Rate Relief Funding that are consolidated.  These balances include intercompany transactions that are eliminated upon consolidation.

APPALACHIAN POWER COMPANY AND SUBSIDIARIES
VARIABLE INTEREST ENTITIES
March 31, 2015 and December 31, 2014
(in thousands)
 
 
Appalachian Consumer Rate
Relief Funding
ASSETS
 
2015
 
2014
Current Assets
 
$
10,886

 
$
18,099

Other Noncurrent Assets (a)
 
352,573

 
358,264

Total Assets
 
$
363,459

 
$
376,363

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 
Current Liabilities
 
$
24,397

 
$
26,809

Noncurrent Liabilities
 
337,336

 
347,652

Equity
 
1,726

 
1,902

Total Liabilities and Equity
 
$
363,459

 
$
376,363


(a)
Includes an intercompany item eliminated in consolidation as of March 31, 2015 and December 31, 2014 of $4 million and $4 million, respectively.

DHLC is a mining operator which sells 50% of the lignite produced to SWEPCo and 50% to CLECO.  SWEPCo and CLECO share the executive board seats and voting rights equally.  Each entity guarantees 50% of DHLC’s debt.  SWEPCo and CLECO equally approve DHLC’s annual budget.  The creditors of DHLC have no recourse to any AEP entity other than SWEPCo.  As SWEPCo is the sole equity owner of DHLC, it receives 100% of the management fee.  SWEPCo’s total billings from DHLC for the three months ended March 31, 2015 and 2014 were $15 million and $2 million. SWEPCo is not required to consolidate DHLC as it is not the primary beneficiary, although SWEPCo holds a significant variable interest in DHLC.  SWEPCo’s equity investment in DHLC is included in Deferred Charges and Other Noncurrent Assets on SWEPCo’s condensed balance sheets.

SWEPCo’s investment in DHLC was:
 
 
March 31, 2015
 
December 31, 2014
 
 
 
As Reported on
the Balance Sheet
 
Maximum
Exposure
 
As Reported on
the Balance Sheet
 
Maximum
Exposure
 
 
 
(in thousands)
 
Capital Contribution from SWEPCo
 
$
7,643

 
$
7,643

 
$
7,643

 
$
7,643

 
Retained Earnings
 
4,415

 
4,415

 
3,819

 
3,819

 
SWEPCo's Guarantee of Debt
 

 
99,397

(a)

 
104,334

(a)
 
 
 
 
 
 
 
 
 
 
Total Investment in DHLC
 
$
12,058

 
$
111,455

 
$
11,462

 
$
115,796

 

(a)
Includes affiliate advances due to Parent related to participation in the Utility Money Pool of $48 million and $56 million in 2015 and 2014, respectively.

AEPSC provides certain managerial and professional services to AEP’s subsidiaries.  AEP is the sole equity owner of AEPSC.  AEP management controls the activities of AEPSC.  The costs of the services are based on a direct charge or on a prorated basis and billed to the AEP subsidiary companies at AEPSC’s cost.  AEP subsidiaries have not provided financial or other support outside of the reimbursement of costs for services rendered.  AEPSC finances its operations through cost reimbursement from other AEP subsidiaries.  There are no other terms or arrangements between AEPSC and any of the AEP subsidiaries that could require additional financial support from an AEP subsidiary or expose them

210



to losses outside of the normal course of business.  AEPSC and its billings are subject to regulation by the FERC.  AEP subsidiaries are exposed to losses to the extent they cannot recover the costs of AEPSC through their normal business operations.  AEP subsidiaries are considered to have a significant interest in AEPSC due to their activity in AEPSC’s cost reimbursement structure.  However, AEP subsidiaries do not have control over AEPSC.  AEPSC is consolidated by AEP.  In the event AEPSC would require financing or other support outside the cost reimbursement billings, this financing would be provided by AEP.

Total AEPSC billings to the Registrant Subsidiaries were as follows:
 
 
Three Months Ended March 31,
Company
 
2015
 
2014
 
 
(in thousands)
APCo
 
$
48,248

 
$
50,136

I&M
 
33,502

 
31,969

OPCo
 
39,230

 
39,049

PSO
 
23,524

 
24,439

SWEPCo
 
31,514

 
33,023


The carrying amount and classification of variable interest in AEPSC’s accounts payable are as follows:
 
 
March 31, 2015
 
December 31, 2014
Company
 
As Reported on the
Balance Sheet
 
Maximum
Exposure
 
As Reported on the
Balance Sheet
 
Maximum
Exposure
 
 
(in thousands)
APCo
 
$
16,935

 
$
16,935

 
$
30,692

 
$
30,692

I&M
 
12,795

 
12,795

 
22,480

 
22,480

OPCo
 
13,376

 
13,376

 
24,695

 
24,695

PSO
 
8,005

 
8,005

 
15,338

 
15,338

SWEPCo
 
10,778

 
10,778

 
20,772

 
20,772


AEGCo, a wholly-owned subsidiary of AEP, is consolidated by AEP.  AEGCo owns a 50% ownership interest in Rockport Plant, Unit 1, leases a 50% interest in Rockport Plant, Unit 2 and owns 100% of the Lawrenceburg Generating Station.  AEGCo sells all the output from the Rockport Plant to I&M and KPCo.  AEGCo has a Unit Power Agreement associated with the Lawrenceburg Generating Station which was assigned by OPCo to AGR effective January 1, 2014.  AEP has agreed to provide AEGCo with the funds necessary to satisfy all of the debt obligations of AEGCo.  I&M is considered to have a significant interest in AEGCo due to these transactions.  I&M is exposed to losses to the extent it cannot recover the costs of AEGCo through its normal business operations.  In the event AEGCo would require financing or other support outside the billings to I&M and KPCo, this financing would be provided by AEP.  For additional information regarding AEGCo’s lease, see “Rockport Lease” section of Note 13 in the 2014 Annual Report.

Total billings from AEGCo were as follows:
 
 
Three Months Ended March 31,
Company
 
2015
 
2014
 
 
(in thousands)
I&M
 
$
54,965

 
$
70,422


The carrying amount and classification of variable interest in AEGCo’s accounts payable are as follows:
 
 
March 31, 2015
 
December 31, 2014
Company
 
As Reported on the
Balance Sheet
 
Maximum
Exposure
 
As Reported on the
Balance Sheet
 
Maximum
Exposure
 
 
(in thousands)
I&M
 
$
14,982

 
$
14,982

 
$
20,031

 
$
20,031



211



13. PROPERTY, PLANT AND EQUIPMENT

Coal Combustion Residual Rule

In 2010, the Federal EPA published a proposed rule to regulate the disposal and beneficial re-use of coal combustion residuals, including fly ash and bottom ash generated at coal-fired electric generating units and also flue gas desulfurization gypsum generated at some coal-fired plants. The final rule was published in the Federal Register in April 2015 and becomes effective six months after publication. Management is in the process of evaluating the impact of this rule and has not yet determined an estimate of the expected increase in asset retirement obligations. Upon completion of the evaluation, management expects to record an increase in asset retirement obligations in the second quarter of 2015 due to this publication.


212



14.  DISPOSITION PLANT SEVERANCE

Management intends to retire several generation plants or units of plants during 2015. The plant closures will result in involuntary severances. The severance program provides two weeks of base pay for every year of service along with other severance benefits.

The Registrant Subsidiaries' disposition plant severance activity for the three months ended March 31, 2015 is described in the following table:
 
 
Balance as of
 
Expense
Allocation from
 
Incurred by
Registrant
 
 
 
 
 
Remaining
Balance as of
Company
 
December 31, 2014
 
AEPSC
 
Subsidiaries
 
Settled
 
Adjustments
 
March 31, 2015
 
 
(in thousands)
APCo
 
$
9,304

 
$
(4
)
 
$
(187
)
 
$
(98
)
(a)
$

 
$
9,015

I&M
 
8,023

 
(2
)
 
90

 
(5
)
 

 
8,106

PSO
 
134

 
(2
)
 

 
(111
)
 

 
21

SWEPCo
 
84

 
(3
)
 

 
(80
)
 

 
1


(a) Settled includes amounts received from affiliates for expenses related to joint plant.

The Registrant Subsidiaries recorded charges to Other Operation expense in 2014 primarily related to employees at the disposition plants. The total amount incurred in 2014 by Registrant Subsidiary was as follows:
Company
 
Total Cost Incurred
 
 
(in thousands)
APCo
 
$
7,112

I&M
 
8,185

OPCo
 
80

PSO
 
288

SWEPCo
 
289


These expenses, net of adjustments, relate primarily to severance benefits and are included primarily in Other Operation expense on the condensed statements of income.  The remaining liability is included in Other Current Liabilities on the condensed balance sheets.  Management does not expect additional severance costs to be incurred related to this initiative.


213



COMBINED MANAGEMENT’S NARRATIVE DISCUSSION
AND ANALYSIS OF REGISTRANT SUBSIDIARIES

The following is a combined presentation of certain components of the Registrant Subsidiaries’ management’s discussion and analysis.  The information in this section completes the information necessary for management’s discussion and analysis of financial condition and net income and is meant to be read with (a) Management’s Narrative Discussion and Analysis of Results of Operations, (b) financial statements, (c) footnotes and (d) the schedules of each individual registrant.  The Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries section of the 2014 Annual Report should also be read in conjunction with this report.

EXECUTIVE OVERVIEW

Customer Demand

AEP's weather-normalized retail sales volumes for the first quarter of 2015 decreased by 1.3% from the first quarter of 2014. First quarter 2015 industrial sales increased 1.2% compared to the first quarter of 2014 primarily due to increased sales to customers in oil and gas related sectors. Residential and commercial sales decreased 4% and 0.4% in the first quarter of 2015, respectively, from the first quarter of 2014.
ENVIRONMENTAL ISSUES

The Registrant Subsidiaries are implementing a substantial capital investment program and incurring additional operational costs to comply with environmental control requirements.  The Registrant Subsidiaries will need to make additional investments and operational changes in response to existing and anticipated requirements such as CAA requirements to reduce emissions of SO2, NOx, PM and hazardous air pollutants (HAPs) from fossil fuel-fired power plants, proposals governing the beneficial use and disposal of coal combustion products, proposed clean water rules and renewal permits for certain water discharges that are currently under appeal.

The Registrant Subsidiaries are engaged in litigation about environmental issues, have been notified of potential responsibility for the clean-up of contaminated sites and incur costs for disposal of SNF and future decommissioning of I&M’s nuclear units.  AEP, along with various industry groups, affected states and other parties have 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 and reductions of CO2 emissions to address concerns about global climate change.  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.

See a complete discussion of these matters in the “Environmental Issues” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” in the 2014 Annual Report.  Management 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 the costs of environmental compliance are not recovered, it would reduce future net income and cash flows and impact financial condition.


214



Environmental Controls Impact on the Generating Fleet

The rules and proposed environmental controls discussed in the next several sections 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 March 31, 2015, the AEP System had a total generating capacity of 37,600 MWs, of which 23,700 MWs are coal-fired.  Management continues to refine the cost estimates of complying with these rules and other impacts of the environmental proposals on the generating facilities.  For the Registrant Subsidiaries, management’s current ranges of estimates of environmental investments to comply with these requirements are listed below:
 
 
Through 2020
Estimated Environmental Investment
Company
 
Low
 
High
 
 
(in millions) 
APCo
 
$
310

 
$
360

I&M
 
370

 
430

PSO
 
270

 
310

SWEPCo
 
880

 
950

Total
 
$
1,830

 
$
2,050


For APCo, the projected environmental investment above includes the conversion of 470 MWs of coal generation to natural gas capacity.  If natural gas conversion is not completed, the units could be closed sooner than planned.

The cost estimates will change depending on the timing of implementation and whether the Federal EPA provides flexibility in the final rules.  The cost estimates for each Registrant Subsidiary 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 and (g) other factors.

Subject to the factors listed above and based upon continuing evaluation, management intends to retire the following plants or units of plants before or during 2016:
 
 
 
 
Expected
 
Generating
Company
 
Plant Name and Unit
 
Retirement Date
 
Capacity
 
 
 
 
 
 
(in MWs) 
APCo
 
Clinch River Plant, Unit 3
 
Second quarter of 2015
 
235

APCo
 
Glen Lyn Plant
 
Second quarter of 2015
 
335

APCo
 
Kanawha River Plant
 
Second quarter of 2015
 
400

APCo/AGR
 
Sporn Plant
 
Second quarter of 2015
 
600

I&M
 
Tanners Creek Plant
 
Second quarter of 2015
 
995

PSO
 
Northeastern Station, Unit 4
 
2016
 
470

SWEPCo
 
Welsh Plant, Unit 2
 
2016
 
528

Total
 
 
 
 
 
3,563


As of March 31, 2015, the net book value before cost of removal, including related material and supplies inventory and CWIP balances, of the plants in the table above was $715 million.

Volatility in fuel prices, pending environmental rules and other market factors could also have an adverse impact on the accounting evaluation of the recoverability of the net book values of coal-fired units. For regulated plants that may close early, management is seeking regulatory recovery of remaining net book values. To the extent existing generation assets and the cost of new equipment and converted facilities are not recoverable, it could materially reduce future net income and cash flows and impact financial condition.

215



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 Federal EPA issued the Clean Air Interstate Rule (CAIR) in 2005 requiring specific reductions in SO2 and NOx emissions from power plants.  The Federal EPA issued the Cross-State Air Pollution Rule (CSAPR) in August 2011 to replace CAIR.  The CSAPR was challenged in the courts.  In 2012, a panel of the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating and remanding CSAPR to the Federal EPA with instructions to continue implementing CAIR until a replacement rule is finalized.  That decision was appealed to the U.S. Supreme Court, which reversed the decision and remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit.  All of the states in which the Registrant Subsidiaries' power plants are located are covered by CSAPR. See "Cross-State Air Pollution Rule (CSAPR)" section below.

The Federal EPA issued the final maximum achievable control technology (MACT) standards for coal and oil-fired power plants in 2012. See “Mercury and Other Hazardous Air Pollutants (HAPs) Regulation” section below.

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) to 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 or, if SIPs are not adequate or are not developed on schedule, through FIPs.  The Federal EPA proposed disapproval of SIPs in a few states, including Arkansas.  In March 2012, the Federal EPA disapproved certain portions of the Arkansas regional haze SIP. 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 are consistent with the environmental controls currently under construction. 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.  This rule is being challenged in the U.S. Court of Appeals for the District of Columbia Circuit.

In 2009, the Federal EPA issued a final mandatory reporting rule for CO2 and other greenhouse gases covering a broad range of facilities emitting in excess of 25,000 tons of CO2 emissions per year.   The Federal EPA issued a final endangerment finding for greenhouse gas emissions from new motor vehicles in 2009.  The Federal EPA determined that greenhouse gas emissions from stationary sources will be subject to regulation under the CAA beginning January 2011 and finalized its proposed scheme to streamline and phase-in regulation of stationary source CO2 emissions through the NSR prevention of significant deterioration and Title V operating permit programs through the issuance of final federal rules, SIP calls and FIPs.  This rule was overturned by the U.S. Supreme Court. The Federal EPA has proposed to include CO2 emissions in standards that apply to new and existing electric utility units. See "Climate Change, CO2 Regulation and Energy Policy" section below.

The Federal EPA has also issued new, more stringent national ambient air quality standards (NAAQS) for PM, SO2, and is currently reviewing the NAAQS for ozone. States are in the process of evaluating the attainment status and need for additional control measures in order to attain and maintain the new NAAQS and may develop additional requirements for facilities as a result of those evaluations. Management cannot currently predict the nature, stringency or timing of those requirements.

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


216



Cross-State Air Pollution Rule (CSAPR)

In 2011, the Federal EPA issued CSAPR.  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 in 28 states.  Interstate trading of allowances is allowed on a restricted sub-regional basis.  Arkansas and Louisiana are subject only to the seasonal NOx program in the rule.  Texas is subject to the annual programs for SO2 and NOx in addition to the seasonal NOx program.  The annual SO2 allowance budgets in Indiana, Ohio and West Virginia were reduced significantly in the rule.  A supplemental rule includes Oklahoma in the seasonal NOx program.  The supplemental rule was finalized in December 2011 with an increased NOx emission budget for the 2012 compliance year.  The Federal EPA issued a final Error Corrections Rule and further CSAPR revisions in 2012 to make corrections to state budgets and unit allocations and to remove the restrictions on interstate trading in the first phase of CSAPR.

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.  In 2012, the court issued a decision vacating and remanding CSAPR to the Federal EPA with instructions to continue implementing the CAIR until a replacement rule is finalized.  The majority determined that the CAA does not allow the Federal EPA to “overcontrol” emissions in an upwind state and that the Federal EPA exceeded its statutory authority by failing to allow states an opportunity to develop their own implementation plans before issuing a FIP.  The petition for review filed by the Federal EPA and other parties in the U.S. Supreme Court was granted in June 2013. In April 2014, the U.S. Supreme Court issued a decision reversing in part the decision of the U.S. Court of Appeals for the District of Columbia Circuit and remanding the case for further proceedings consistent with the opinion. The Federal EPA filed a motion to lift the stay and allow Phase I of CSAPR to take effect on January 1, 2015 and Phase II to take effect on January 1, 2017. The court granted the Federal EPA's motion. The parties have filed briefs, presented oral arguments and the case remains pending. Separate appeals of the Error Corrections Rule and the further revisions have been filed but no briefing schedules have been established. Management cannot predict the outcome of the pending litigation.

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 establishes unit-specific emission rates for mercury, PM (as a surrogate for particles of nonmercury metals) and hydrogen chloride (as a surrogate for acid gases) for units burning coal on a 30-day rolling average basis.  In addition, the rule proposes work practice standards, such as boiler tune-ups, for controlling emissions of organic HAPs and dioxin/furans.  The effective date of the final rule was April 16, 2012 and compliance is required within three years.  Petitions for administrative reconsideration and judicial review were filed.  In 2012, the Federal EPA published a notice announcing that it would accept comments on its reconsideration of certain issues related to the new source standards, including clarification of the requirements that apply during periods of start-up and shut down, measurement issues and the application of variability factors that may have an impact on the level of the standards.  The Federal EPA issued revisions to the new source standards consistent with the proposed rule, except the start-up and shut down provisions in March 2013.  A final rule on reconsideration was issued in 2014 and a proposed rule containing technical corrections was issued in early 2015, but it has not yet been published in the Federal Register. 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 and the court granted those petitions in November 2014.

The final rule contains a slightly less stringent PM limit for existing sources than the original proposal and the revised rule provides alternative work practice standards for operators during start-up and shut down periods.  The AEP System has obtained a one-year administrative extension at several units to facilitate the installation of controls or to avoid a serious reliability problem.  In addition, the Federal EPA issued an enforcement policy describing the circumstances under which an administrative consent order might be issued to provide a fifth year for the installation of controls or completion of reliability upgrades.  Management remains concerned about the availability of compliance extensions, the inability to foreclose citizen suits being filed under the CAA for failure to achieve compliance by the required deadlines and the lack of coordination among the Mercury and Air Toxics Standards schedule and other environmental requirements.

217



Climate Change, CO2 Regulation and Energy Policy

National public policy makers and regulators in the 10 states the Registrant Subsidiaries serve have diverse views on climate change, carbon regulation and energy policy.  Management is currently focused on responding to these emerging views with prudent actions across a range of plausible scenarios and outcomes.  Management is an active participant in both state and federal policy development to assure that any proposed new requirements are feasible and the economies of the states served are not placed at a competitive disadvantage.

Several states have adopted programs that directly regulate CO2 emissions from power plants.  The majority of the states where the Registrant Subsidiaries have generating facilities have passed legislation establishing renewable energy, alternative energy and/or energy efficiency requirements that can assist in reducing carbon emissions.  The Registrant Subsidiaries are taking steps to comply with these requirements, including increasing wind power purchases and broadening the AEP System's portfolio of energy efficiency programs.

In the absence of comprehensive federal climate change or energy policy legislation, President Obama issued a memorandum to the Administrator of the Federal EPA directing the agency to develop and issue a new proposal regulating carbon emissions from new electric generating units under the CAA.  The new proposal was issued in September 2013 and requires new large natural gas units to meet a limit of 1,000 pounds of CO2 per MWh of electricity generated and small natural gas units to meet a limit of 1,100 pounds of CO2 per MWh.  New coal-fired units are required to meet a limit of 1,100 pounds of CO2 per MWh, with the option to meet a 1,000 pound per MWh limit if they choose to average emissions over multiple years.  This proposal was published in the Federal Register in January 2014 and the comment period has closed.

The Federal EPA was also directed to develop and issue a separate proposal regulating carbon emissions from modified and reconstructed electric generating units (EGUs) and to issue guidelines for existing EGUs before June 2014, to finalize those standards by June 2015 and to require states to submit revisions to their implementation plans including such standards no later than June 2016. The Federal EPA issued guidelines for the development of standards for existing sources in June 2014. The guidelines use a “portfolio” approach to reducing emissions from existing sources that includes efficiency improvements at coal plants, displacing coal-fired generation with increased utilization of natural gas combined cycle units, expanding renewable generation resources and increasing customer energy efficiency. Comments were due in December 2014. The Federal EPA also issued proposed regulations governing emissions of CO2 from modified and reconstructed EGUs in June 2014 and comments were due in October 2014. The standards for modified and reconstructed units include several options, including use of historic baselines or energy efficiency audits to establish source-specific CO2 emission rates or to limit CO2 emission rates which could be no less than 1,900 pounds per MWh at larger coal units and 2,100 pounds per MWh at smaller coal units. The Federal EPA announced in January 2015 that the schedule for finalizing its action on all of these standards will extend into the summer of 2015 and that it will develop and propose for public comment a model FIP that will be finalized for individual states that fail to submit a timely state plan to implement the existing source standards. Management cannot currently predict the impact these programs may have on future resource plans or the existing generating fleet, but the costs may be substantial.

In 2012, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision upholding, in all material respects, the Federal EPA’s endangerment finding, its regulatory program for CO2 emissions from new motor vehicles and its plan to phase in regulation of CO2 emissions from stationary sources under the Prevention of Significant Deterioration (PSD) and Title V operating permit programs. In June 2014, the U.S. Supreme Court determined that the Federal EPA was not compelled to regulate CO2 emissions from stationary sources under the Title V or PSD programs as a result of its adoption of the motor vehicle standards, but that sources otherwise required to obtain a PSD permit may be required to perform a Best Available Control Technology analysis for CO2 emissions if they exceed a reasonable level.

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 the Registrant Subsidiaries to close some coal-fired facilities and could lead to possible impairment of assets.

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Coal Combustion Residual Rule

In 2010, the Federal EPA published a proposed 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 proposed rule contained two alternative proposals.  One proposal would impose federal hazardous waste disposal and management standards on these materials and another would allow states to retain primary authority to regulate the beneficial re-use and disposal of these materials under state solid waste management standards, including minimum federal standards for disposal and management.  Both proposals would impose stringent requirements for the construction of new coal ash landfills and existing unlined surface impoundments.

Various environmental organizations and industry groups filed a petition seeking to establish deadlines for a final rule.  To comply with a court-ordered deadline, the Federal EPA issued a prepublication copy of its final rule in December 2014. The final rule was published in the Federal Register in April 2015 and becomes effective six months after publication. Management is in the process of evaluating the impact of this rule and has not yet determined an estimate of the expected increase in asset retirement obligations. Upon completion of the evaluation, management expects to record an increase in asset retirement obligations in the second quarter of 2015 due to this publication.

In the final rule, the Federal EPA elected to regulate CCR as a non-hazardous solid waste and issued new minimum federal solid waste management standards. On the effective date, 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 new and additional construction and operating obligations, including location restrictions, liner criteria, structural integrity requirements for impoundments, operating criteria and additional groundwater monitoring requirements. The rule does not apply to inactive CCR landfills and inactive surface impoundments at retired generating stations or the beneficial use of CCR. The rule is self-implementing so state action is not required. Because of this self-implementing feature, the rule contains extensive record keeping, notice and internet posting requirements. Because the Registrant Subsidiaries currently use surface impoundments and landfills to manage CCR materials at the generating facilities, they will incur significant costs to upgrade or close and replace these existing facilities at some point in the future as the new rule is implemented. Management continues to review the new rule and evaluate its costs and impacts on operations, including ongoing monitoring requirements.

In February 2014, the Federal EPA completed a risk evaluation of the beneficial uses of coal fly ash in concrete and FGD gypsum in wallboard and concluded that the Federal EPA supports these beneficial uses.  Currently, approximately 40% of the coal ash and other residual products from the AEP System's generating facilities are re-used in the production of cement and wallboard, as structural fill or soil amendments, as abrasives or road treatment materials and for other beneficial uses.  Encapsulated beneficial uses are not materially impacted by the new rule but additional demonstrations may be required to continue land applications in significant amounts except in road construction projects.

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.  Entrainment is when small fish, eggs or larvae are drawn into the cooling water system and affected by heat, chemicals or physical stress.  The final rule affects all plants withdrawing more than two million gallons of cooling water per day. The rule offers seven technology options to comply with the impingement standard and requires site-specific studies to determine appropriate entrainment compliance measures at facilities withdrawing more than 125 million gallons per day. Additional requirements may be imposed as a result of consultation with other federal agencies to protect threatened and endangered species and their habitats. Facilities with existing closed cycle recirculating cooling systems, as defined in the rule, are not expected to require any technology changes. Facilities subject to both the impingement standard and site-specific entrainment studies will typically be given at least three years to conduct and submit the results of those studies to the permit agency. Compliance timeframes will then be established by the permit agency through each facility’s National Pollutant Discharge Elimination System (NPDES) permit for installation of any required technology changes, as those permits are renewed over the next five to eight years. Petitions for review of the final rule have been filed by industry and environmental groups and are currently pending in the U.S. Court of Appeals for the Second Circuit.

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In addition, the Federal EPA issued an information collection request and is developing revised effluent limitation guidelines for electricity generating facilities.  A proposed rule was signed in April 2013 with a final rule expected in September 2015.  The Federal EPA proposed eight options of increasing stringency and cost for fly ash and bottom ash transport water, scrubber wastewater, leachate from coal combustion byproduct landfills and impoundments and other wastewaters associated with coal-fired generating units, with four labeled preferred options.  Certain of the Federal EPA's preferred options have already been implemented or are part of long-term plans.  Management continues to review the proposal in detail to evaluate whether the plants are currently meeting the proposed limitations, what technologies have been incorporated into long-range plans and what additional costs might be incurred if the Federal EPA's most stringent options were adopted.  Management submitted detailed comments to the Federal EPA in September 2013 and participated in comments filed by various organizations of which the AEP System is a member.

In April 2014, the Federal EPA and the U.S. Army Corps of Engineers jointly issued a proposed rule to clarify the scope of the regulatory definition of “waters of the United States” in light of recent U.S. Supreme Court cases and published the proposed rule in the Federal Register. The CWA provides for federal jurisdiction over “navigable waters” defined as “the waters of the United States.” This proposed jurisdictional definition will apply to all CWA programs, potentially impacting generation, transmission and distribution permitting and compliance requirements. Among those programs are: permits for wastewater and storm water discharges, permits for impacts to wetlands and water bodies and oil spill prevention planning. Management agrees that clarity and efficiency in the permitting process is needed. Management is concerned that the proposed rule introduces new concepts and could subject more operations to CWA jurisdiction, thereby increasing the time and complexity of permitting. Management submitted detailed comments to the Federal EPA in November 2014 and also participated in comments filed by various organizations of which the AEP System is a member.

ACCOUNTING PRONOUNCEMENTS

New Accounting Pronouncements Adopted During the First Quarter of 2015

The FASB issued ASU 2014-08 “Presentation of Financial Statements and Property, Plant and Equipment” changing the presentation of discontinued operations on the statements of income and other requirements for reporting discontinued operations. Under the new standard, a disposal of a component or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component meets the criteria to be classified as held-for-sale or is disposed. The amendments in this update also require additional disclosures about discontinued operations and disposal of an individually significant component of an entity that does not qualify for discontinued operations. Management adopted ASU 2014-08 effective January 1, 2015. There were no events requiring application of the new accounting guidance.

Pronouncements Effective in the Future

The FASB issued ASU 2014-09 "Revenue from Contracts with Customers" clarifying 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, 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. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on revenue or net income. Management plans to adopt ASU 2014-09 effective January 1, 2017.


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The FASB issued ASU 2015-01 "Income Statement – Extraordinary and Unusual Items" eliminating the concept of extraordinary items for presentation on the face of the income statement. Under the new standard, a material event or transaction that is unusual in nature, infrequent or both shall be reported as a separate component of income from continuing operations. Alternatively, it may be disclosed in the notes to financial statements. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted if applied from the beginning of a fiscal year. As applicable, this standard may change the presentation of amounts in the income statements. Management plans to adopt ASU 2015-01 effective January 1, 2016.

The FASB issued ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs" to simplify the presentation of debt issuance costs on the balance sheets. Under the new standard, debt issuance costs related to a recognized debt liability will be presented on the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with discounts. The Registrant Subsidiaries include debt issuance costs in Deferred Charges and Other Noncurrent Assets on the balance sheets. Debt issuance costs represent less than 1% of total long-term debt. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. Management intends to early adopt ASU 2015-03 for the 2015 Form 10-K.

The FASB issued ASU 2015-05 "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" to provide guidance to customers about whether a cloud computing arrangement includes a software license. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. 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 2015-05 effective January 1, 2016.

Future Accounting Changes

The FASB’s standard-setting process is ongoing and until new standards have been finalized and issued, management cannot determine the impact on the reporting of the Registrant Subsidiaries’ operations and financial position that may result from any such future changes.  The FASB is currently working on several projects including financial instruments, leases, insurance, hedge accounting and consolidation policy.  The ultimate pronouncements resulting from these and future projects could have an impact on future net income and financial position.

CONTROLS AND PROCEDURES

During the first quarter of 2015, management, including the principal executive officer and principal financial officer of each of AEP, APCo, I&M, OPCo, PSO and SWEPCo (collectively, 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 March 31, 2015, 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. The Registrants continually strive to improve their disclosure controls and procedures to enhance the quality of their financial reporting and to maintain dynamic systems that change as events warrant.

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 first quarter of 2015 that materially affected, or is reasonably likely to materially affect, the Registrants’ internal control over financial reporting.


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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, 2014 includes a detailed discussion of risk factors.  As of March 31, 2015, there have been no material changes to the risk factors previously disclosed in the 2014 Annual Report on Form 10-K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

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, and AGR and KPCo, through their use of the Conner Run fly ash impoundment, are subject to the provisions of the Mine Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act and its related regulations require 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 contains the notices of violation and proposed assessments received by DHLC and Conner Run under the Mine Act for the quarter ended March 31, 2015.

Item 5.  Other Information

None

Item 6.  Exhibits

10 – American Electric Power System 2015 Long-Term Incentive Plan

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
101.SCH – XBRL Taxonomy Extension Schema
101.CAL – XBRL Taxonomy Extension Calculation Linkbase
101.DEF – XBRL Taxonomy Extension Definition Linkbase
101.LAB – XBRL Taxonomy Extension Label Linkbase
101.PRE – XBRL Taxonomy Extension Presentation Linkbase

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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



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:  April 23, 2015


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