UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, ~~2017~~2018

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period from ____ to ____



Commission	Registrants; States of Incorporation;	I.R.S. Employer
File Number	Address and Telephone Number	Identification Nos.

1-3525	AMERICAN ELECTRIC POWER COMPANY, INC. (A New York Corporation)	13-4922640
333-221643	AEP TEXAS INC. (A Delaware Corporation)	51-0007707
333-217143	AEP TRANSMISSION COMPANY, LLC (A Delaware Limited Liability Company)	46-1125168
1-3457	APPALACHIAN POWER COMPANY (A Virginia Corporation)	54-0124790
1-3570	INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation)	35-0410455
1-6543	OHIO POWER COMPANY (An Ohio Corporation)	31-4271000
0-343	PUBLIC SERVICE COMPANY OF OKLAHOMA (An Oklahoma Corporation)	73-0410895
1-3146	SOUTHWESTERN ELECTRIC POWER COMPANY (A Delaware Corporation)	72-0323455
	1 Riverside Plaza, Columbus, Ohio 43215-2373
	Telephone (614) 716-1000



Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x No ¨



Indicate by check mark whether the registrants have submitted electronically ~~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 ~~the~~ American Electric Power Company, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ ~~(Do not check if a smaller reporting company)~~

Smaller reporting company ¨			Emerging growth company ¨



Indicate by check mark whether AEP Texas Inc., AEP Transmission Company, LLC, Appalachian Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company are large accelerated filers, accelerated filers, non-accelerated filers, smaller reporting companies, or emerging growth companies. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x ~~(Do not check if a smaller reporting company)~~

Smaller reporting company ¨			Emerging growth company ¨



	If an emerging growth company, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨



Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

AEP Texas Inc., AEP Transmission Company, LLC, Appalachian Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.



	Number of shares of common stock outstanding of the Registrants as of
	October ~~26, 2017~~25, 2018

American Electric Power Company, Inc.	~~491,883,887~~493,108,827
	($6.50 par value)
AEP Texas Inc.	100
	($0.01 par value)
AEP Transmission Company, LLC (a)	NA

Appalachian Power Company	13,499,500
	(no par value)
Indiana Michigan Power Company	1,400,000
	(no par value)
Ohio Power Company	27,952,473
	(no par value)
Public Service Company of Oklahoma	9,013,000
	($15 par value)
Southwestern Electric Power Company	7,536,640
	($18 par value)


(a)	100% interest is held by AEP Transmission Holding Company, LLC, a wholly-owned subsidiary of American Electric Power Company, Inc.


NA	Not applicable.



AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
INDEX OF QUARTERLY REPORTS ON FORM 10-Q
September 30, ~~2017~~2018

		Page
		Number
Glossary of Terms		i

Forward-Looking Information		ivv

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	1
	Condensed Consolidated Financial Statements	4854

AEP Texas Inc. and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	61
	Condensed Consolidated Financial Statements	66

AEP Transmission Company, LLC and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	5573
	Condensed Consolidated Financial Statements	5776

Appalachian Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	6382
	Condensed Consolidated Financial Statements	6687

Indiana Michigan Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	7394
	Condensed Consolidated Financial Statements	7899

Ohio Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	85106
	Condensed Consolidated Financial Statements	90111

Public Service Company of Oklahoma:
	Management’s Narrative Discussion and Analysis of Results of Operations	97118
	Condensed Financial Statements	~~101~~123

Southwestern Electric Power Company Consolidated:
	Management’s Narrative Discussion and Analysis of Results of Operations	~~108~~130
	Condensed Consolidated Financial Statements	~~112~~135

Index of Condensed Notes to Condensed Financial Statements of Registrants		~~118~~141

Controls and Procedures		~~203~~247



Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings		~~204~~248
	Item 1A.	Risk Factors		~~204~~248
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		~~205~~249
	Item 3.	Defaults Upon Senior Securities		~~205~~249
	Item 4.	Mine Safety Disclosures		~~205~~249
	Item 5.	Other Information		~~206~~250
	Item 6.	Exhibits:		~~206~~250
			Exhibit 4
			Exhibit 10
			Exhibit 12
			Exhibit 31(a)
			Exhibit 31(b)
			Exhibit 32(a)
			Exhibit 32(b)
			Exhibit 95
			Exhibit 101.INS
			Exhibit 101.SCH
			Exhibit 101.CAL
			Exhibit 101.DEF
			Exhibit 101.LAB
			Exhibit 101.PRE

SIGNATURE				~~207~~251


This combined Form 10-Q is separately filed by American Electric Power Company, Inc., AEP Texas Inc., AEP Transmission Company, LLC, Appalachian Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

GLOSSARY OF TERMS

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.



Term		Meaning

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



Term		Meaning

DHLC		Dolet Hills Lignite Company, LLC, a wholly-owned lignite mining subsidiary of SWEPCo.
DIR		Distribution Investment Rider.
EIS		Energy Insurance Services, Inc., a nonaffiliated captive insurance company and consolidated variable interest entity of AEP.
ENEC		Expanded Net Energy Cost.
Energy Supply		AEP Energy Supply LLC, a nonregulated holding company for AEP’s competitive generation, wholesale and retail businesses, and a wholly-owned subsidiary of AEP.
ERCOT		Electric Reliability Council of Texas regional transmission organization.



~~Term~~		~~Meaning~~

ESP		Electric Security Plans, a PUCO requirement for electric utilities to adjust their rates by filing with the PUCO.
ETR		Effective tax rates.
ETT		Electric Transmission Texas, LLC, an equity interest joint venture between ~~Parent~~AEP Transmission Holdco and Berkshire Hathaway Energy Company formed to own and operate electric transmission facilities in ERCOT.
Excess ADIT		Excess accumulated deferred income taxes.
FASB		Financial Accounting Standards Board.
Federal EPA		United States Environmental Protection Agency.
FERC		Federal Energy Regulatory Commission.
FGD		Flue Gas Desulfurization or scrubbers.
FTR		Financial Transmission Right, a financial instrument that entitles the holder to receive compensation for certain congestion-related transmission charges that arise when the power grid is congested resulting in differences in locational prices.
GAAP		Accounting Principles Generally Accepted in the United States of America.
Global Settlement		In February 2017, the PUCO approved a settlement agreement filed by OPCo in December 2016 which resolved all remaining open issues on remand from the Supreme Court of Ohio in OPCo’s 2009 - 2011 and June 2012 - May 2015 ESP filings. It also resolved all open issues in OPCo’s 2009, 2014 and 2015 SEET filings and 2009, 2012 and 2013 Fuel Adjustment Clause Audits.
I&M		Indiana Michigan Power Company, an AEP electric utility subsidiary.
IRS		Internal Revenue Service.
IURC		Indiana Utility Regulatory Commission.
KGPCo		Kingsport Power Company, an AEP electric utility subsidiary.
KPCo		Kentucky Power Company, an AEP electric utility subsidiary.
KPSC		Kentucky Public Service Commission.
kV		Kilovolt.
KWh		Kilowatthour.
LPSC		Louisiana Public Service Commission.
~~Market Based Mechanism~~		An order from the LPSC established to evaluate proposals to construct or acquire generating capacity. The LPSC directs that the market based mechanism shall be a request for proposal competitive solicitation process.
MISO		~~Midwest~~Midcontinent Independent ~~Transmission~~ System Operator.
MMBtu		Million British Thermal Units.
MPSC		Michigan Public Service Commission.
MTM		Mark-to-Market.
MW		Megawatt.
MWh		Megawatthour.
NO_x		~~Nitrogen oxide.~~
Nonutility Money Pool		Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain nonutility subsidiaries.
NO₂		Nitrogen dioxide.
NO_x		Nitrogen oxide.
NSR		New Source Review.
OATT		Open Access Transmission Tariff.
OCC		Corporation Commission of the State of Oklahoma.



Term		Meaning

Ohio Phase-in-Recovery Funding		Ohio Phase-in-Recovery Funding LLC, a wholly-owned subsidiary of OPCo and a consolidated variable interest entity formed for the purpose of issuing and servicing securitization bonds related to phase-in recovery property.
Oklaunion Power Station		A single unit coal-fired generation plant totaling 650 MW located in Vernon, Texas. The plant is jointly owned by AEP Texas, PSO and certain non-affiliated entities.
OPCo		Ohio Power Company, an AEP electric utility subsidiary.
OPEB		Other Postretirement Benefit Plans.
OSS		Off-System Sales.
OTC		Over the counter.
OVEC		Ohio Valley Electric Corporation, which is 43.47% owned by AEP.
Parent		American Electric Power Company, Inc., the equity owner of AEP subsidiaries within the AEP consolidation.
PJM		Pennsylvania – New Jersey – Maryland regional transmission organization.
PM		Particulate Matter.
PPA		Purchase Power and Sale Agreement.
PSO		Public Service Company of Oklahoma, an AEP electric utility subsidiary.
PUCO		Public Utilities Commission of Ohio.
PUCT		Public Utility Commission of Texas.



~~Term~~Racine		~~Meaning~~
		A generation plant consisting of two hydroelectric generating units totaling 47.5 MW located in Racine, Ohio and owned by AGR.
Registrant Subsidiaries		AEP subsidiaries which are SEC registrants: AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO and SWEPCo.
Registrants		SEC registrants: AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO and SWEPCo.
Risk Management Contracts		Trading and nontrading derivatives, including those derivatives designated as cash flow and fair value hedges.
Rockport Plant		A generation plant, consisting of two 1,310 MW coal-fired generating units near Rockport, Indiana. AEGCo and I&M jointly-own Unit 1. In 1989, AEGCo and I&M entered into a sale-and-leaseback transaction with Wilmington Trust Company, an unrelated, unconsolidated trustee for Rockport Plant, Unit 2.
ROE		Return on Equity.
RPM		Reliability Pricing Model.
RSR		Retail Stability Rider.
RTO		Regional Transmission Organization, responsible for moving electricity over large interstate areas.
Sabine		Sabine Mining Company, a lignite mining company that is a consolidated variable interest entity for AEP and SWEPCo.
SCR		Selective Catalytic Reduction, NO_xreduction technology at Rockport Plant.
SEC		U.S. Securities and Exchange Commission.
SEET		Significantly Excessive Earnings Test.
SNF		Spent Nuclear Fuel.
SO₂		Sulfur dioxide.
SPP		Southwest Power Pool regional transmission organization.
SSO		Standard service offer.
State Transcos		AEPTCo’s seven wholly-owned, ~~FERC-regulated, transmission-only~~FERC regulated, transmission only electric utilities, each of which is geographically aligned with ~~AEP~~AEP’s existing utility operating companies.
SWEPCo		Southwestern Electric Power Company, an AEP electric utility subsidiary.
Tax Reform		On December 22, 2017, President Trump signed into law legislation referred to as the “Tax Cuts and Jobs Act” (the TCJA). The TCJA includes significant changes to the Internal Revenue Code of 1986, including a reduction in the corporate federal income tax rate from 35% to 21% effective January 1, 2018.
TCC		Formerly AEP Texas Central Company, now a division of AEP Texas.
Texas Restructuring Legislation		Legislation enacted in 1999 to restructure the electric utility industry in Texas.

iii

~~TNC~~

Term		~~Formerly AEP Texas North Company, now a division of AEP Texas.~~Meaning

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~~Trent		~~A 100% wholly-owned subsidiary of Transource Energy.~~Trent Wind Farm, a 154 MW wind electricity generation facility located between Abilene and Sweetwater in West Texas.
Turk Plant		John W. Turk, Jr. Plant, a 600 MW coal-fired plant in Arkansas that is 73% owned by SWEPCo.
UMWA		United Mine Workers of America.
UPA		Unit Power Agreement.
Utility Money Pool		Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain utility subsidiaries.
VIE		Variable Interest Entity.
Virginia SCC		Virginia State Corporation Commission.
Wind Catcher Project		Wind Catcher Energy Connection Project, a joint PSO and SWEPCo project ~~which includes~~that was cancelled in July 2018. The project included the acquisition of a wind generation facility, totaling approximately 2,000 MW of wind generation, and the construction of a generation interconnection tie-line totaling approximately 350 miles.
WPCo		Wheeling Power Company, an AEP electric utility subsidiary.
WVPSC		Public Service Commission of West Virginia.

~~iii~~iv

FORWARD-LOOKING INFORMATION

This report made by the Registrants contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Many forward-looking statements appear in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the ~~2016~~2017 Annual Report, ~~and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in AEPTCo’s 2016 Annual Report included within AEPTCo’s Registration Statement,~~ but there are others throughout this document which may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “project,” “continue” and similar expressions, and include statements reflecting future results or guidance and statements of outlook. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements in this document are presented as of the date of this document. Except to the extent required by applicable law, management undertakes no obligation to update or revise any forward-looking statement. Among the factors that could cause actual results to differ materially from those in the forward-looking statements are:



Ÿ	Economic growth or contraction within and changes in market demand and demographic patterns in AEP service territories.
Ÿ	Inflationary or deflationary interest rate trends.
Ÿ	Volatility in the financial markets, particularly developments affecting the availability or cost of capital to finance new capital projects and refinance existing debt.
Ÿ	The availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material.
Ÿ	Electric load and customer growth.
Ÿ	Weather conditions, including storms and drought conditions, and the ability to recover significant storm restoration costs.
Ÿ	The cost of fuel and its transportation, the creditworthiness and performance of fuel suppliers and transporters and the cost of storing and disposing of used fuel, including coal ash and spent nuclear fuel.
Ÿ	Availability of necessary generation capacity, the performance of generation plants and the availability of fuel, including processed nuclear fuel, parts and service from reliable vendors.
Ÿ	The ability to recover fuel and other energy costs through regulated or competitive electric rates.
Ÿ	The ability to build renewable generation, transmission lines and facilities (including the ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms and to recover those costs.
Ÿ	New legislation, litigation and government regulation, including oversight of nuclear generation, energy commodity trading and new or heightened requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances that could impact the continued operation, cost recovery and/or profitability of generation plants and related assets.
Ÿ	Evolving public perception of the risks associated with fuels used before, during and after the generation of electricity, including nuclear fuel.
Ÿ	~~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, environmental compliance and ~~environmental compliance.~~Excess ADIT.
Ÿ	Resolution of litigation.
Ÿ	The ability to constrain operation and maintenance costs.
Ÿ	~~The ability to develop and execute a strategy based on a view regarding prices of electricity and gas.~~
Ÿ	Prices and demand for power generated and sold at wholesale.
Ÿ	Changes in technology, particularly with respect to energy storage and new, developing, alternative or distributed sources of generation.
Ÿ	The ability to recover through rates any remaining unrecovered investment in generation units that may be retired before the end of their previously projected useful lives.
Ÿ	Volatility and changes in markets for capacity and electricity, coal and other energy-related commodities, particularly changes in the price of natural gas.
Ÿ	Changes in utility regulation and the allocation of costs within regional transmission organizations, including ERCOT, PJM and SPP.
Ÿ	The ability to successfully and profitably manage competitive generation assets, including the evaluation and execution of strategic alternatives for these assets as some of the alternatives could result in a loss.



Ÿ	Changes in the creditworthiness of the counterparties with contractual arrangements, including participants in the energy trading market.
Ÿ	Actions of rating agencies, including changes in the ratings of debt.
Ÿ	The impact of volatility in the capital markets on the value of the investments held by the pension, other postretirement benefit plans, captive insurance entity and nuclear decommissioning trust and the impact of such volatility on future funding requirements.



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

The forward-looking statements of the Registrants speak only as of the date of this report or as of the date they are made. The Registrants expressly disclaim any obligation to update any forward-looking information. For a more detailed discussion of these factors, see “Risk Factors” in Part I of the ~~2016~~2017 Annual Report and in Part II of this report. ~~Additionally, see “Risk Factors” in the AEPTCo 2016 Annual Report included within AEPTCo’s Registration Statement.~~

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

vvi

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Customer Demand

AEP’s weather-normalized retail sales volumes for the third quarter of ~~2017 decreased~~2018 increased by ~~0.7%~~0.3% compared to the third quarter of ~~2016.~~2017. AEP’s third quarter ~~2017~~2018 industrial sales increased by ~~1.7%~~2.4% compared to the third quarter of ~~2016.~~2017. The growth in industrial sales was spread across ~~many industries and~~ most operating ~~companies.~~companies and driven by growth in the oil and gas sector. Weather-normalized residential sales decreased ~~2.4%~~0.8% in the third quarter of ~~2017~~2018 compared to the third quarter of ~~2016.~~2017. Weather-normalized commercial sales decreased by ~~1.3%~~0.5% in the third quarter of ~~2017~~2018 compared to the third quarter of ~~2016.~~2017.

AEP’s weather-normalized retail sales volumes for the nine months ended September 30, ~~2017 decreased~~2018 increased by ~~0.4%~~1.2% compared to the nine months ended September 30, ~~2016.~~2017. AEP’s industrial sales volumes for the nine months ended September 30, ~~2017~~2018 increased ~~1.6%~~2.6% compared to the nine months ended September 30, ~~2016.~~2017. The growth in industrial sales was spread across many industries and most operating companies. Weather-normalized residential and commercial sales ~~decreased 1.5%~~increased 0.7% and ~~1.4%~~0.2%, respectively, for the nine months ended September 30, ~~2017~~2018 compared to the nine months ended September 30, ~~2016.~~2017.

~~Merchant Generation Assets~~Wind Catcher Project

In ~~September 2016, AEP signed an agreement~~July 2017, PSO and SWEPCo submitted filings with the OCC, LPSC, APSC and PUCT requesting various regulatory approvals needed for the companies to ~~sell Darby, Gavin, Lawrenceburg and Waterford Plants (“Disposition Plants”)~~proceed with the Wind Catcher Project. The Wind Catcher Project included the acquisition of a wind generation facility, totaling ~~5,329~~approximately 2,000 MWs of ~~competitive~~wind generation, and the construction of a generation interconnection tie-line totaling approximately 350 miles. Total investment for the project was estimated to ~~a nonaffiliated party. The sale closed~~be $4.5 billion and would serve both retail and FERC wholesale load. PSO and SWEPCo would have had 30% and 70% ownership shares, respectively, in ~~January 2017 for approximately $2.2 billion. The net proceeds from the transaction were approximately $1.2 billion in cash after taxes, repayment of debt associated with~~ these assets and transaction fees, which resulted in an after tax gain of approximately $129 million. AEP primarily used these proceeds to reduce outstanding debt and invest in its regulated businesses including transmission, and contracted renewable projects.

The assets and liabilities included in the sale transaction have been recorded as Assets Held for Sale and Liabilities Held for Sale, respectively, on the balance sheet as of December 31, 2016. See “Assets and Liabilities Held for Sale” section of Note 6 for additional information.assets.

In ~~February 2017, AEP signed an agreement~~July 2018, the PUCT denied SWEPCo’s request for a Certificate of Public Convenience and Necessity to sell its 25.4% ownership share of Zimmer Plant to Dynegy Corporation. Simultaneously, AEP signed an agreement to purchase Dynegy Corporation’s 40% ownership share of Conesville Plant, Unit 4. The transactions closed inproceed with the ~~second quarter of 2017~~Wind Catcher Project. PSO and ~~did not have a material impact on net income, cash flows or financial condition.~~SWEPCo subsequently cancelled the Wind Catcher Project.

Management continues to evaluate potential alternatives for the remaining merchant generation assets. These potential alternatives may include, but are not limited to, transfer or sale of AEP’s ownership interests, or a wind down of merchant coal-fired generation fleet operations. Management has not set a specific time frame for a decision on these assets. These alternatives could result in additional losses which could reduce future net income and cash flows and impact financial condition.

Other Renewable Generation ~~Portfolio~~

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

Contracted Renewable Generation Facilities

AEP ~~utilizes two subsidiaries~~continues to develop its renewable portfolio within the Generation & Marketing ~~segment to further develop its renewable portfolio. AEP OnSite Partners, LLC works~~segment. Activities include working directly with wholesale and large retail customers to provide tailored solutions based upon market knowledge, technology innovations and deal structuring which may include distributed solar, wind, combined heat and power, energy storage, waste heat recovery, energy efficiency, peaking generation and other forms

of cost reducing energy technologies. ~~AEP OnSite Partners, LLC pursues projects where a suitable termed agreement is entered into with a creditworthy counterparty. AEP Renewables, LLC~~Generation & Marketing also develops and/or acquires large scale renewable generation projects that are backed with long-term ~~contracts with creditworthy counterparties.~~contracts. As of September 30, ~~2017, these~~2018, subsidiaries within AEP’s Generation & Marketing segment have approximately ~~148~~400 MWs of contracted renewable generation projects in ~~operation and $292 million of capital costs have been incurred related to these projects.~~operation. In addition, as of September 30, ~~2017,~~2018, these subsidiaries have approximately 4210 MWs of new renewable generation projects under construction ~~and~~with total estimated capital costs of ~~$54~~$27 million related to these projects. As

In January 2018, AEP admitted a nonaffiliate as a member of Desert Sky Wind Farm LLC and Trent Wind Farm LLC (collectively “the LLCs”) to own and repower Desert Sky and Trent. The nonaffiliated member contributed full turbine sets to each project in exchange for a 20.1% interest in the LLCs. AEP has contributed substantially all of its cash equity capital commitment of $235 million related to its 79.9% share of the LLCs, or 257 MW. The wind farms are fully repowered and in-service as of September 30, ~~2017, total estimated capital costs related~~2018. AEP is subject to ~~these renewable generation projects were approximately $346 million.~~a put and a call option after certain conditions are met, either of which would liquidate the nonaffiliated member’s interest. See Note 13 - Variable Interest Entities for additional information.

Regulated Renewable Generation Facilities

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

In September 2018, OPCo, consistent with its commitment in the previously approved PPA application, submitted a filing with the PUCO demonstrating a need for up to 900 MWs of economically beneficial renewable resources in Ohio. This filing was followed by a separate filing for two solar Renewable Energy Purchase Agreements totaling 400 MWs. The ~~wind generating~~solar generation facilities, ~~are located in West Virginia and Ohio and,~~ if approved, are anticipated to be in-service in the second half of 2019. APCo will assume ownership of the facilities at or near the anticipated in-service date. APCo currently plans to sell the Renewable Energy Certificates associated with the generation from these facilities.

~~In July 2017, PSO and SWEPCo submitted filings~~with the OCC, LPSC, APSC and PUCT requesting various regulatory approvals needed to fully proceed with the Wind Catcher Project. The Wind Catcher Project includes the acquisition of a wind generation facility, totaling approximately 2,000 MW of wind generation, and the construction of a generation interconnection tie-line totaling approximately 350 miles. Total investment for the project is estimated to be $4.5 billion and will serve both retail and FERC wholesale load. PSO and SWEPCo will have a 30% and 70% ownership share, respectively, in these assets. The wind generating facility is located in Oklahoma and, if approved by all state commissions, is anticipatedexpected to be in-service by the end of 2021.

Federal Tax Reform

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

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

Provisional Amounts

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

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

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

Excess ADIT - Pending Rate Reductions

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

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

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

Merchant Coal Generation Assets

In September 2018, management announced plans to close Oklaunion Power Station by October 2020. In ~~July 2017, the LPSC approved SWEPCo’s request for an exemption~~October 2018, management announced plans to ~~the Market Based Mechanism. In August 2017, the Oklahoma Attorney General filed~~close Conesville Plant in May 2020. The closures are not expected to have a ~~motion~~material impact on net income, cash flows or financial condition.

Racine

A project to ~~dismiss with the OCC. In August 2017, the motion to dismiss was denied by the OCC. Hearings~~reconstruct a defective dam structure at ~~the APSC, LPSC, OCC and PUCT are scheduled~~Racine began in the first quarter of 2017. In December 2017, an impairment analysis was triggered by the expected costs of the dam reconstruction activities, resulting in a pretax impairment charge equal to Racine’s net book value of $43 million as of December 31, 2017.

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

Hurricane Harvey

In August 2017, Hurricane Harvey hit the coast of Texas, causing power outages in the AEP Texas service territory. ~~As restoration~~Rebuilding efforts are ~~ongoing,~~expected to continue through the end of 2018 and AEP Texas’ total costs related to this storm are not yet known. AEP Texas’ current estimated cost is approximately $250 million to $300 million, including capitalized expenditures. AEP Texas currently estimates that it will incur approximately $90 million of operation and maintenance costs related to service restoration efforts.final. AEP Texas has a PUCT approved catastrophe reserve ~~in base rates and can defer~~which allows for the deferral of incremental storm ~~expenses. AEP Texas~~expenses as a regulatory asset, and currently recovers approximately $1 million of storm costs annually through base rates. As of September 30, ~~2017,~~2018, the total balance of AEP Texas’ regulatory asset for deferred storm costs is approximately ~~$97~~$150 million, ~~including~~inclusive of approximately ~~$73~~$127 million of incremental storm expenses ~~as a regulatory asset~~ related to Hurricane Harvey. ~~Management is currently~~As of September 30, 2018, AEP Texas has recorded approximately $205 million of capital expenditures related to Hurricane Harvey. Also, as of September 30, 2018, AEP Texas has received $10 million in

insurance proceeds, and has recorded a receivable for an additional $4 million that will be received in the ~~early stages~~fourth quarter of ~~analyzing~~2018, which were applied to the ~~impact~~Hurricane Harvey related regulatory asset and property, plant and equipment balances. Management, in conjunction with the insurance adjusters, is reviewing all damages to determine the extent of ~~potential~~coverage for additional insurance ~~claims and recoveries and, at this time, cannot estimate this amount.~~reimbursement. Any future insurance recoveries received will be applied to, and will offset, the regulatory asset and property, plant and equipment, as applicable. ~~AEP Texas is currently evaluating recovery options for~~

Management believes the amount recorded as a regulatory ~~asset; however, management believes the~~ asset is probable of ~~recovery. The other named hurricanes did not have a material impact on AEP’s operations~~recovery and is in the ~~third~~process of requesting securitization of the distribution portion of the regulatory asset. The standard process for securitization of storm cost recovery in Texas requires two filings with the PUCT. In August 2018, AEP Texas filed a Determination of System Restoration Costs with the PUCT for total estimated storm costs in the amount of $425 million, which includes estimated carrying costs. The estimated value of the total storm costs net of insurance proceeds, tax credits and Excess ADIT is $370 million. AEP Texas intends to request securitization for distribution related assets of $253 million while the remaining $117 million of transmission related assets will be recovered through interim transmission filings or an upcoming base rate case. The request for securitization is expected to occur by the first quarter of ~~2017.~~2019.

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

~~Merchant Portion of Turk Plant~~

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

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 (subject to prudence review) and through SWEPCo’s wholesale customers under FERC-based rates. As of September 30, 2017, the net book value of Turk Plant was $1.5 billion, before cost of removal, including materials and supplies inventory and CWIP. In October 2017, the LPSC staff filed a prudence review of the Turk Plant. See “Louisiana Turk Plant Prudence Review” section of Note 4.

~~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.~~

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

In ~~March 2016, a contested stipulation agreement related to~~April 2018, the ~~PPA rider application was modified and approved by~~PUCO issued an order approving the PUCO. The approved PPA rider is subject to audit and review by the PUCO. Consistent with the terms of a modified and approved stipulation agreement, and based upon a September 2016 PUCO order, in November 2016, OPCo refiled its amended ESP extension ~~application and supporting testimony. The amended filing proposed to extend the ESP~~ through May 2024 and included (a) an extension of the OVEC PPA rider, (b) a proposed 10.41% return on common equity on capital costs for certain riders, (c) the continuation of riders previously approved in the June 2015 - May 2018 ESP, (d) proposed increases in rate caps related to OPCo’s DIR and (e) the addition of various new riders, including a Renewable Resource Rider.

~~In August 2017, OPCo and various intervenors filed a stipulation agreement with the PUCO. The stipulation extends the term of the ESP through May 2024 and~~which includes: (a) an extension of the OVEC PPA rider, (b) a ~~proposed~~ 10% return on common equity on capital costs for certain riders, (c) the continuation of riders previously approved in the June 2015 - May 2018 ESP, (d) ~~rate~~revenue caps related to OPCo’s DIR ranging from $215 million to $290 million for the periods 2018 through 2021, (e) the addition of various new riders, including a Smart City Rider and a Renewable Generation Rider, (f) a decrease in annual depreciation rates, effective June 1, 2018, based on a depreciation study using data through December 2015 and (g) amortization of approximately $24 million annually beginning ~~January~~June 2018 of OPCo’s excess distribution accumulated depreciation reserve, which was $239 million as of December 31, 2015. Upon ~~PUCO approval~~the issuance of the ~~stipulation, effective January 2018,~~PUCO order, OPCo ~~will cease~~stopped recording $39 million in annual amortization of excess distribution accumulated depreciation reserve in June 2018, which was previously approved to end in December 2018 in accordance with PUCO’s December 2011 OPCo distribution base rate case order. ~~In the stipulation,~~ OPCo and intervenors ~~agree~~agreed that OPCo can request in future proceedings a change in meter depreciation rates due to retired meters pursuant to the smart grid Phase 2 project. DIR rate caps will be reset in OPCo’s next distribution base rate case which must be filed by June 2020.

In ~~October 2017, intervenor testimony opposing the stipulation agreement was~~May 2018, OPCo and various intervenors filed ~~recommending: (a) a return on common equity to not exceed 9.3%~~requests for ~~riders earning a return on capital investments, (b) that OPCo should file a base distribution case concurrent~~rehearing with the ~~conclusion~~PUCO. In June 2018, these requests for rehearing were approved to allow further consideration of the ~~current ESP in May~~requests. In August 2018, ~~and (c) denial of certain new riders proposed in OPCo’s ESP extension. The stipulation is subject to review by the PUCO. A hearing at~~ the PUCO ~~is scheduled~~denied all requests for ~~November 2017.~~

~~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.~~rehearing. In October 2018, an intervenor filed an appeal with the Ohio Supreme Court challenging various approved riders. See “Ohio Electric Security Plan Filings” section of Note 4.4 for additional information.

2016 SEET Filing

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

In May 2017, OPCo submitted its 2016 SEET filing with the PUCO in which

management indicated that OPCo did not have significantly excessive earnings in 2016 based upon actual earnings data for the comparable utilities risk group. ~~Although~~

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

A 2016 SEET hearing was held in April 2018 and management expects to receive an order in the first half of 2019. While management believes that OPCo’s adjusted 2016 earnings were not excessive, management did not adjust OPCo’s 2016 SEET provision due to risks that the PUCO could rule against OPCo’s proposed SEET adjustments, including treatment of the Global Settlement issues described above, adjust the comparable risk group or adopt a different 2016 SEET threshold. If the PUCO orders a refund of 2016 OPCo earnings, it could negatively affect future SEET filings, reduce future net income and cash flows and impact financial condition. See “2016 SEET Filing” section of Note 4.4 for additional information.

Rockport Plant, Unit 2 ~~Selective Catalytic Reduction (SCR)~~SCR

In October 2016, I&M filed an application with the IURC for approval of a Certificate of Public Convenience and Necessity (CPCN) to install SCR technology at Rockport Plant, Unit ~~2 by December 2019.~~2. The equipment will allow I&M to reduce emissions of NO_x from Rockport Plant, Unit 2 in order for I&M to continue to operate that unit under current environmental ~~requirements.~~requirements and is expected to be placed in service in May 2020. The estimated cost of the SCR project is $274 million, excluding AFUDC, to be shared equally between I&M and AEGCo. ~~As of September 30, 2017, total costs incurred related to this project, including AFUDC, were approximately $17 million.~~ The filing included a request for authorization for I&M to defer its Indiana jurisdictional ownership share of costs including investment carrying costs at a weighted average cost of capital (WACC), depreciation over a 10-year period as provided by statute and other related expenses. I&M proposed recovery of these costs using the existing Clean Coal Technology Rider in a future filing subsequent to approval of the SCR project.

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

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

Management intends to request recovery of the Michigan jurisdictional share of the SCR project in a future base rate case. The AEGCo ownership share of the ~~proposed~~ SCR project will be billable under the Rockport ~~Unit Power Agreement~~UPA to I&M and KPCo and will be subject to future regulatory approval for recovery. In February 2017, the Indiana Office of Utility Consumer Counselor (OUCC) and other parties filed testimony with the IURC. The OUCC recommended approval of the CPCN but also stated that any decision regarding recovery of any under-depreciated plant due to retirement should be fully investigated in a base rate case, not in a tracker or other abbreviated proceeding. The other parties recommended either denial of the CPCN or approval of the CPCN with conditions including a cap on the amount of SCR costs allowed to be recovered in the rider and limitations on other costs related to legal issues involving the Rockport Plant, Unit 2 lease. A hearing at the IURC was held in March 2017. An order from the IURC is pending. In July 2017, I&M filed a motion with the U.S. District Court for the Southern District of Ohio to remove the requirement to install SCR technology at Rockport Plant, Unit 2. In August 2017, the district court delayed the deadline for installation of the SCR technology until March 2020.

2017 Indiana Base Rate Case

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

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

In May 2018, the IURC ~~is scheduled for January 2018. If any of these costs are not recoverable, it could reduce future net income~~issued an order approving the Stipulation and ~~cash flows and impact financial condition.~~

Settlement Agreement in its entirety.

2017 Michigan Base Rate Case

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

In February 2018, an MPSC ALJ issued a Proposal for Decision and ~~increased vegetation management expenses. In October 2017, the MPSC staff and intervenors filed testimony. The MPSC staff~~ recommended an annual ~~net~~ revenue increase of $49 million, including an intervenor’s proposal for up to 10% of I&M’s Michigan retail customers to choose an alternate supplier for generation and a proposed ~~retirement dates~~capacity rate based on PJM’s net cost of ~~2028~~new entry value of $289/MW-day, as well as the MPSC staff’s recommended calculation of depreciation expense for both units of Rockport Plant ~~Units 1 (from 2044) and 2 (from 2022)~~through 2028 and a return on common equity of 9.8%. If the maximum 10% of customers choose an alternate supplier starting in February 2019, the estimated annual pretax loss due to the reduced capacity rate would be approximately $9 million. In October 2018, I&M filed a request with the MPSC seeking authority to defer costs related to customers choosing an alternate supplier starting in February 2019.

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

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

Merchant Portion of Turk Plant

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

~~proposed certain adjustments to I&M’s request including no change~~

2012 Texas Base Rate Case

In July 2018, the Texas Third Court of Appeals reversed the PUCT’s judgment affirming the prudence of the Turk Plant and remanded the issue back to the ~~current 2044 retirement date~~PUCT. In August 2018, SWEPCo filed a Motion for Reconsideration at the Court of ~~Rockport~~Appeals. In October 2018, the Court of Appeals denied SWEPCo’s request. SWEPCo intends to file an appeal with the Texas Supreme Court in the fourth quarter of 2018. If SWEPCo cannot ultimately recover its investment and expenses related to the Turk Plant, ~~Unit 1, but did not propose an~~it could reduce future net income and cash flows and impact financial condition. See “2012 Texas Base Rate Case” section of Note 4.

2016 Texas Base Rate Case

In December 2016, SWEPCo filed a request with the PUCT for a net increase in Texas annual revenues of $69 million based upon a 10% return on common equity. In January 2018, the PUCT issued a final order approving a net ~~revenue increase. Their recommended~~increase in Texas annual revenues of $50 million based upon a return on common equity ~~ranged from 9.3%~~of 9.6%, effective May 2017. The final order also included: (a) approval to ~~9.5%. A hearing~~recover the Texas jurisdictional share of environmental investments placed in service, as of June 30, 2016, at various plants, including Welsh Plant, Units 1 and 3, (b) approval of recovery of, but no return on, the ~~MPSC~~Texas jurisdictional share of the net book value of Welsh Plant, Unit 2, (c) approval of $2 million in additional vegetation management expenses and (d) the rejection of SWEPCo’s proposed transmission cost recovery mechanism.

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

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

2017 Louisiana Formula Rate Filing

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

~~Louisiana Turk Plant Prudence Review~~

~~Beginning January 2013,~~2018 Louisiana Formula Rate Filing

In April 2018, SWEPCo filed its formula rate plan for test year 2017 with the LPSC. The filing included a net $28 million annual increase, which was effective August 2018 and includes SWEPCo’s ~~formula rates, including the~~ Louisiana jurisdictional share ~~(approximately 33%)~~of Welsh Plant and Flint Creek Plant environmental controls. The filing also included a reduction in the federal income tax rate due to Tax Reform but did not address the return of Excess ADIT benefits to customers.

In July 2018, SWEPCo made a supplemental filing to its formula rate plan with the LPSC to reduce the requested annual increase to $18 million. The difference between SWEPCo’s requested $28 million annual increase and the $18 million annual increase in the supplemental filing is primarily the result of the ~~Turk Plant, have been collected subject~~return of Excess ADIT benefits to ~~refund pending the outcome of a prudence review of the Turk Plant investment, which was placed into service in December 2012.~~ customers.

In October ~~2017,~~2018, the LPSC staff ~~filed testimony contending~~issued a recommendation that SWEPCo ~~failed to continue to evaluate the suspension or cancellation~~refund $11 million of the Turk Plant during its construction period. The testimony also identified five individual items totaling approximately $51 million for potential disallowance relating to Louisiana’s jurisdictional share of Turk Plant. Asexcess federal income taxes collected, as a result of ~~SWEPCo’s alleged failure to meet its continuing prudence obligations,~~Tax Reform, from January 1, 2018 through July 31, 2018. A decision by the LPSC ~~staff recommends one~~is expected in the fourth quarter of the following potential unfavorable scenarios: (a) 50/50 sharing of construction cost overruns between SWEPCo and ratepayers, (b) an imposition of a cost cap similar to Texas or (c) approximately a 1% reduction of the rate on common equity for the Turk Plant. As SWEPCo has included the full value of the Turk Plant in rate base since its in-service date, SWEPCo may be required to refund potential over-collections from January 2013 through the date new rates are implemented. As of September 30, 2017, if the LPSC adopts one2018.

If any of these potential scenarios, and disallows the five individual items, pretax write-offs could range from $50 million to $80 million and refund provisions, including interest, could range from $15 million to $27 million. Future annual revenue reductions could range from $3 million to $4 million. Management will continue to vigorously defend against these claims. If the LPSC orders in favor of one of these scenarios,costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. ~~A hearing at the LPSC is scheduled for December 2017.~~

~~2017~~2018 Oklahoma Base Rate Case

In ~~June 2017,~~October 2018, PSO filed ~~an application for~~ a ~~base rate review~~request with the OCC ~~that requested a net~~for an $88 million annual increase in ~~annual revenues of $156 million~~Oklahoma retail rates based upon a ~~proposed 10%~~10.3% return on common equity. PSO also proposed to implement a performance based rate plan that combines a formula rate with a set of customer-focused performance incentive measures related to reliability, public safety, customer satisfaction and economic development. The proposed ~~base rate~~annual increase includes (a) environmental compliance investments, including recovery of previously deferred environmental compliance related costs currently recorded as regulatory assets, (b) Advanced Metering Infrastructure investments, (c) additional capital investments and costs to serve PSO’s customers, and (d) an annual $42 million depreciation rate increase due primarily to shorter service lives and lower net salvage estimates. As part of this filing, consistent with the OCC’s final order in its previous base rate case, PSO requested recovery through 2040 of Northeastern Plant, Unit 3, including the environmental control investment, and the net book value of Northeastern Plant, Unit 4 that was retired in 2016. As of September 30, 2017, the net book value of Northeastern Plant, Unit 4 was $82 million.

In September 2017, various intervenors and the OCC staff filed testimony that included annual net revenue increase recommendations ranging from $28 million to $108 million. The recommended returns on common equity ranged from 8% to 9%. In addition, certain parties recommended investment disallowances that ranged from $27 million to $82$13 million related to ~~Northeastern Plant, Unit 4~~increased annual depreciation rates and ~~$38 million associated with capitalized incentives. Also, a party recommended a potential refund of $43~~$7 million related to ~~an SPP rider claiming that PSO did not adequately support~~increased storm expense amortization. The requested increase in annual depreciation rates includes the ~~related SPP costs. The combined total impact could result~~recovery of Oklaunion Power Station through 2028 (currently being recovered in ~~a write-off and refund of up~~rates through 2046). Management has announced plans to approximately $163 million. In addition, if similar plant recovery issues would apply to Northeastern Plant, Unit 3, the net book value of plant, including regulatory assets, materials and supplies inventory and CWIP of $346 million as of September 30, 2017, could be adversely impacted. A hearing at the OCC is scheduled to begin inretire Oklaunion Power Station by October ~~2017.~~

2020. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2017 Kentucky Base Rate Case

In ~~June 2017, KPCo filed~~January 2018, the KPSC issued an order approving a ~~request~~non-unanimous settlement agreement with certain modifications resulting in an annual revenue increase of $12 million, effective January 2018, based on a 9.7% return on equity. The KPSC’s primary revenue requirement modification to the settlement agreement was a $14 million annual revenue reduction for the decrease in the corporate federal income tax rate due to Tax Reform. The KPSC approved: (a) the deferral of a total of $50 million of Rockport Plant UPA expenses for the years 2018 through 2022, with the ~~KPSC for a $66 million~~manner and timing of recovery of the deferral to be addressed in KPCo’s next base rate case, (b) the recovery/return of 80% of certain annual ~~increase~~PJM OATT expenses above/below the corresponding level recovered in ~~Kentucky~~ base rates, ~~based upon~~(c) KPCo’s commitment to not file a ~~proposed 10.31% return on common equity~~base rate case for three years with ~~the increase to be implemented~~rates effective no ~~later~~earlier than ~~January 2018. The proposed increase includes: (a) lost load since KPCo last changed base rates in July 2015, (b) incremental costs~~

~~related to OATT charges from PJM not currently recovered from retail ratepayers, (c)~~2021 and (d) increased depreciation expense ~~including~~based upon updated Big Sandy Plant, Unit 1 depreciation rates using a 20-year depreciable life.

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

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

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

Virginia Legislation Affecting Earnings Reviews

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

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

2018 West Virginia Base Rate Case

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

In October 2018, WVPSC staff and intervenors filed testimony. WVPSC staff recommended a $2 million annual net revenue increase based on a 9.25% return on common equity while intervenors recommended a $14 million annual net revenue decrease based on an 8.75% return on common equity. The difference between APCo and WPCo’s requested annual base rate increase and the WVPSC staff and intervenors recommendations are primarily due to: (a) a reduction in the requested return on common equity, (b) the rejection of updates to the rate base calculation methodology, (c) the rejection of updates to rate base for certain known plant in service increases in 2018 and (d) a reduction in annual depreciation rates primarily related to continuing with a 2040 retirement date for Clinch River Plant rather than APCo’s proposed retirement date of 2031, (d) recovery of other Big Sandy Plant, Unit 1 generation costs currently recovered through a retail rider and (e) incremental purchased power costs. Additionally, KPCo requested a $4 million annual increase in environmental surcharge revenues.

In August 2017, KPCo submitted a supplemental filing with the KPSC that decreased the proposed annual base rate revenue request to $60 million. The modification was due to a lower interest expense related to June 2017 debt refinancings. In October 2017, various intervenors filed testimony that included annual net revenue increase recommendations ranging from $13 million to $40 million. Intervenors recommended returns on common equity ranging from 8.6% to 8.85%. Intervenors also recommended significant delays in KPCo’s proposed recoveries of: (a) depreciation expense related to Big Sandy Plant, Unit 1 (gas unit), proposing a 30-year depreciable life instead of KPCo’s proposed 15-year life and (b) lease expense on Rockport Plant, Unit 2 billed from AEGCo, proposing that the approximate $100 million of lease expense for the period 2018 through 2022 be deferred with a WACC carrying charge for recovery over 10 years beginning 2023. Testimony on behalf of the Attorney General also discussed that the KPSC could consider disallowing all or a portion of the costs currently being recovered over 25 years through the Big Sandy Plant, Unit 2 retirement rider. As of September 30, 2017, KPCo’s regulatory asset related to the retired Big Sandy Plant, Unit 2 was $289 million.2025. A hearing at the ~~KPSC~~WVPSC is scheduled for ~~December 2017.~~

November 2018. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

~~2016 Texas Base Rate Case~~

In December 2016, SWEPCo filed a request with the PUCT for a net increase in Texas annual revenues of $69 million based upon a 10% return on common equity. In September 2017, the Administrative Law Judges (ALJs) issued their proposal for decision including an annual net revenue increase of $50 million including recovery of Welsh Plant, Unit 2 environmental investments as of June 30, 2016. The ALJs proposed a return on common equity of 9.6% and recovery of but no return on Welsh Plant, Unit 2. The ALJs rejected SWEPCo’s proposed transmission cost recovery mechanism. The estimated potential write-off associated with the ALJs proposal is approximately $22 million which includes $9 million~~associated with the lack of a return on Welsh Plant, Unit 2.~~

If any of these costs are not recoverable, including environmental investments and retirement-related costs for Welsh Plant, Unit 2, it could reduce future net income and cash flows and impact financial condition. See “2016 Texas Base Rate Case” section of Note 4.

FERC Transmission Complaint - AEP’s PJM Participants

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

If the FERC orders revenue reductions ~~as a result~~in excess of the ~~complaint, including refunds from the date~~terms of the ~~complaint filing,~~settlement agreement, it could reduce future net income and cash flows and impact financial condition. A decision from the FERC is pending.

Modifications to AEP’s PJM Transmission Rates

In November 2016, AEP’s ~~eastern~~ transmission owning subsidiaries within PJM filed an application at the FERC to modify the PJM OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to projected expenses. In March 2017, the FERC accepted the proposed modifications effective January 1, 2017, subject to refund, and set this matter for hearing and settlement procedures. ~~Effective January 1, 2017, the~~The modified PJM OATT formula rates ~~were implemented, subject to refund,~~are based on projected ~~2017~~ calendar year financial activity and projected plant balances. IfIn December 2017, AEP’s transmission owning subsidiaries within PJM filed an uncontested settlement agreement with the FERC ~~determines that any of these costs are not recoverable, it could reduce future net income~~resolving all outstanding issues. In April 2018, the FERC approved the uncontested settlement agreement and ~~cash flows and impact financial condition.~~

rates were implemented effective January 1, 2018.

FERC Transmission Complaint - AEP’s SPP Participants

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

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

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

~~FERC SWEPCo Power Supply Agreements Complaint - East Texas Electric Cooperative, Inc. (ETEC) and Northeast Texas Electric Cooperative, Inc. (NTEC)~~

Modifications to AEP’s SPP Transmission Rates

In ~~September~~October 2017, ~~ETEC and NTEC~~AEP’s transmission owning subsidiaries within SPP filed ~~a complaint~~an application at the FERC ~~that states~~to modify the ~~base return on common equity used by SWEPCo in calculating their power supply~~SPP OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to projected expenses. The modified SPP OATT formula rates ~~is excessive~~are based on projected calendar year financial activity and ~~should be reduced from 11.1%~~projected plant balances. In December 2017, the FERC accepted the proposed modifications effective January 1, 2018, subject to ~~8.41%, effective upon the date of the complaint. Management believes its financial statements adequately address the impact of the complaint.~~refund, and set this matter for hearing and settlement procedures. If the FERC ~~orders revenue reductions as a result~~determines that any of ~~the complaint, including refunds from the date of the complaint filing,~~these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Welsh Plant - Environmental Impact

Management currently estimates that the investment necessary to meet proposed environmental regulations through 2025 for Welsh Plant, Units 1 and 3 could total approximately ~~$850~~$550 million, excluding AFUDC. As of September 30, ~~2017,~~2018, SWEPCo had incurred costs of ~~$398~~$399 million, including AFUDC, related to these projects. Management continues to evaluate the impact of environmental rules and related project cost estimates. As of September 30, ~~2017,~~2018, the total net book value of Welsh Plant, Units 1 and 3 was ~~$626~~$621 million, before cost of removal, including materials and supplies inventory and CWIP.

In 2016, as approved by the APSC, SWEPCo began recovering $79 million related to the Arkansas jurisdictional share of these environmental costs, subject to prudence review in the next Arkansas filed base rate proceeding. In ~~December 2016,~~April 2017, the LPSC approved ~~deferral~~recovery of ~~certain expenses~~$131 million in investments related to ~~the~~its Louisiana jurisdictional share of environmental controls installed at Welsh ~~Plant. In April 2017, the LPSC approved SWEPCo’s recovery of these deferred costs~~Plant, effective May 2017. SWEPCo’s approved Louisiana jurisdictional share of Welsh Plant deferrals: (a) are ~~$11~~$10 million, excluding $6 million of unrecognized equity as of September 30, ~~2017,~~2018, (b) is subject to review by the LPSC and (c) includes a WACC return on environmental investments and the related depreciation expense and taxes. ~~Effective May 2017, SWEPCo began recovering $131 million in investments related to its~~See “2017 Louisiana ~~jurisdictional share of environmental costs. SWEPCo has sought recovery of its project costs from retail customers in its current Texas base rate case at the PUCT~~Formula Rate Filing” and ~~is recovering these costs from wholesale customers through SWEPCo’s FERC-approved agreements.~~“2018 Louisiana Formula Rate Filing” disclosures above.

If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. See “Welsh Plant - Environmental Impact” section of Note 4.4 for additional information.

Westinghouse Electric Company Bankruptcy Filing

In March 2017, Westinghouse filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. ~~It intends to reorganize, not cease business operations. However, it is in the early stages of the bankruptcy process and it is unclear whether the company can successfully reorganize.~~ Westinghouse and I&M have a number of significant ongoing contracts relating to reactor services, nuclear fuel fabrication and ongoing engineering projects. The most significant of these relate to Cook Plant fuel fabrication. ~~I&M is evaluating how this~~As part of the reorganization, ~~affects these contracts. Westinghouse has stated that it intends~~the bankruptcy court approved Westinghouse’s sale of its nuclear business to ~~continue performance on~~Brookfield WEC Holdings (Brookfield), a nonaffiliated third party. Pursuant to the sale, Brookfield will assume all of I&M’s contracts ~~but given~~with Westinghouse. In August 2018, the importance of upcoming dates in the fuel fabrication process for Cook Plant, and their vital part in Cook Plant’s ongoing operations, I&M continues to work with Westinghouse in the bankruptcy proceedings to avoid any interruptions to that service. In the unlikely event Westinghouse rejects I&M’s contracts, or is unable to reorganize or sell its profitable businesses in the bankruptcy, Cook Plant’s operations would be significantly impacted and potentially shut down temporarily as I&M seeks other vendors for these services.sale closed.

LITIGATION

In the ordinary course of business, AEP is involved in employment, commercial, environmental and regulatory litigation. Since it is difficult to predict the outcome of these proceedings, management cannot predict the eventual resolution, timing or amount of any loss, fine or penalty. Management assesses the probability of loss for each contingency and accrues a liability for cases that have a probable likelihood of loss if the loss can be estimated. For details on the regulatory proceedings and pending litigation see Note 4 - Rate Matters, 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 2016 Annual Report. Additionally, see Note 4 -– Rate Matters and Note 5 -– Commitments, Guarantees and ~~Contingencies included herein.~~Contingencies. Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

Rockport Plant Litigation

In July 2013, the Wilmington Trust Company filed a complaint in the U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it ~~will~~would be unlawfully burdened by the terms of the modified NSR consent decree after the Rockport Plant, Unit 2 lease expiration in December 2022. The terms of the consent decree allow the installation of environmental emission control equipment, repowering or retirement of the unit. ~~The plaintiffs further allege that the defendants’ actions constitute breach of the lease and participation agreement.~~ The plaintiffs seek a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiffs. The New York court granted a motion to transfer this case to the U.S. District Court for the Southern District of Ohio. ~~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~~&M sought and ~~order granting the motion in part and denying the motion in part. The court dismissed~~were granted dismissal of certain of the plaintiffs’ claims, including the dismissal without prejudice of plaintiffs’ claims seeking compensatory damages. Several claims remained, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing. In June 2015, AEGCo and I&M filed a motion for partial judgment on the claims seeking dismissal of the breach of participation agreement claim as well as any claim for indemnification of costs associated with this case. The plaintiffs subsequently filed an amended complaint to add another claim under the lease and also filed a motion for partial summary judgment. In November 2015, AEGCo and I&M filed a motion to strike the plaintiffs’ motion for partial judgment and filed a motion to dismiss the case for failure to state a claim.

~~In March 2016, the court entered an opinion and order in favor of AEGCo and I&M, dismissing certain of the plaintiffs’~~ claims for compensatory damages, breach of contract, ~~and dismissing claims for~~ breach of the implied covenant of good faith and fair dealing and ~~further dismissing plaintiffs’ claim for~~ indemnification of costs. ~~By the same order, the~~The court permitted plaintiffs to move forward with their claim that AEGCo and I&M failed to exercise prudent utility practices in the maintenance and operation of Rockport Plant, Unit 2. ~~In April 2016,~~Plaintiffs voluntarily dismissed the ~~plaintiffs filed a notice of voluntary dismissal of all remaining~~surviving claims with prejudice, and the court ~~subsequently entered~~issued a final judgment. ~~In May 2016,~~The plaintiffs subsequently filed an appeal in the U.S. Court of Appeals for the Sixth Circuit on whether ~~AEGCo and I&M are in breach of certain contract provisions that plaintiffs allege operate to protect the plaintiffs’ residual interests in the unit and whether~~ the trial court erred in dismissing plaintiffs’ claims ~~that AEGCo~~for breach of contract and ~~I&M breached~~breach of the implied covenant of good faith and fair dealing.

In April 2017, the U.S. Court of Appeals for the Sixth Circuit issued an opinion reversing the district court’s decisions ~~which had dismissed~~in part. In June 2017, on rehearing, the court of appeals issued an amended opinion reversing the district court’s dismissal of certain of plaintiffs’ claims for breach of contract, and remanding the case to the district court to enter summary judgment in plaintiffs’ favor consistent with that ruling. In April 2017, AEGCo and I&M filed a petition for rehearing with the U.S. Court of Appeals for the Sixth Circuit, which was granted. In June 2017, the U.S. Court of Appeals for the Sixth Circuit issued an amended opinion and judgment which reverses the district court’s dismissal of certain of the owners’ claims under the lease agreements, vacatesvacating the denial of the ~~owners’~~plaintiffs’ motion for partial summary judgment and ~~remands~~remanding the case to the district court for further proceedings. The amended opinion and judgment ~~also affirms~~affirmed the district court’s dismissal of the owners’ breach of good faith and fair dealing claim as duplicative of the breach of contract claims and ~~removes~~removed the instruction to the district court in the original opinion to enter summary judgment in favor of the owners.

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

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

ENVIRONMENTAL ISSUES

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

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

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 2016 Annual Report. AEP will seek recovery of expenditures for pollution control technologies and associated costs from customers through rates in regulated jurisdictions. Environmental rules could result in accelerated depreciation, impairment of assets or regulatory disallowances. If AEP is unable to recover the costs of environmental compliance, it would reduce future net income and cash flows and impact financial condition.

Environmental Controls Impact on the Generating Fleet

The rules and proposed environmental controls discussed ~~in the next several sections~~below will have a material impact on the generating units in the AEP System. Management continues to evaluate the impact of these rules, project scope and technology available to achieve compliance. As of September 30, ~~2017,~~2018, the AEP System had a total generating capacity of approximately 25,600 MWs, of which approximately 13,500 MWs ~~are~~were coal-fired. Management continues to refine the cost estimates of complying with these rules and other impacts of the environmental proposals on the fossil generating facilities. Based upon management estimates, AEP’s investment to meet these existing and proposed requirements ranges from approximately ~~$2.2~~$650 million to $1.5 billion ~~to $2.8 billion between 2017 and~~through 2025.

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

The table below represents the plants or units of plants previously retired ~~in 2016 and 2015 with~~that have a remaining net book value. As of September 30, ~~2017,~~2018, the net book value before cost of removal, including related materials and supplies inventory, ~~and CWIP balances,~~ of the plants/units listed below was ~~approved for recovery, except for $338~~$190 million. Management is seeking or will seek recovery of the remaining net book value ~~associated with these plants~~of $190 million in future rate proceedings.


		Generating	Amounts Pending			Generating	Amounts Pending
Company	Plant Name and Unit	Capacity	Regulatory Approval		Plant Name and Unit	Capacity	Regulatory Approval
		(in MWs)	(in millions)			(in MWs)	(in millions)
APCo	Kanawha River Plant	400	$	42.3	Kanawha River Plant	400	$	44.8
APCo	Clinch River Plant, Unit 3	235	32.7		Clinch River Plant, Unit 3	235	32.6
APCo (a)	Clinch River Plant, Units 1 and 2	470	31.8		Clinch River Plant, Units 1 and 2	470	31.8
APCo	Sporn Plant	600	17.2		Sporn Plant, Units 1 and 3	300	17.2
APCo	Glen Lyn Plant	335	13.4		Glen Lyn Plant	335	13.4
I&M (b)	Tanners Creek Plant	995	42.6
PSO (c)	Northeastern Plant, Unit 4	470	82.4
SWEPCo (d)	Welsh Plant, Unit 2	528	75.9
SWEPCo					Welsh Plant, Unit 2	528	50.6
Total		4,033	$	338.3		2,268	$	190.4


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


~~(b)~~	I&M requested recovery of the Indiana (approximately 65%) and Michigan (approximately 14%) jurisdictional shares of the remaining retirement costs of Tanners Creek Plant in the 2017 Indiana and Michigan base rate cases.

~~(c)~~

For Northeastern Plant, Unit 4, in November and December 2016, the OCC issued orders that provided no determination related to the return of and return on the post-retirement remaining net book value. In June 2017, PSO filed an application for a base rate review with the OCC. As part of this filing, PSO requested recovery of approximately $82 million~~through 2040 related tothe net book value of Northeastern Plant, Unit 4 that was retired in 2016. This regulatory asset is pending regulatory approval.~~


~~(d)~~	SWEPCo requested recovery of the Texas jurisdictional share (approximately 33%) of the net book value of Welsh Plant, Unit 2 in the 2016 Texas Base Rate Case. This regulatory asset is pending regulatory approval.

In January 2017, Dayton Power and Light Company announced the future retirement of the 2,308 MW Stuart Plant, Units 1-4. The retirement is scheduled for June 2018. Stuart Plant, Units 1-4 are operated by Dayton Power and Light Company and are jointly owned by AGR and nonaffiliated entities. AGR owns 600 MWs of the Stuart Plant, Units 1-4. As of September 30, 2017, AGR’s net book value of the Stuart Plant, Units 1-4 was zero.

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.

Proposed Modification of the ~~New Source Review (NSR)~~NSR Litigation Consent Decree

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

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

In January 2018, AEP filed a supplemental motion proposing to install the SCR at Rockport Plant, Unit 2 and achieve the final SO₂emission cap applicable to the plant under the consent decree by the end of 2020, ~~pending resolution~~before the expiration of the ~~motion.~~initial lease term. Since all required emission reductions would be achieved, no unit retirements or other compensating measures were offered to maintain the benefits of the current consent decree. Responsive filings were filed in February 2018 by parties opposing AEP’s proposed modifications to the consent decree. AEP ~~also proposes~~filed a detailed statement of the specific relief requested to ~~retire Conesville Plant, Units 5 and 6 by December 31, 2022 and to retire one~~address the changed circumstances at Rockport Plant, ~~unit by December 31, 2028.~~

Unit 2, and the opposing parties responded thereto. In September 2018, the district court granted AEP’s unopposed motion to stay further proceedings on the pending motion to modify the consent decree to facilitate settlement discussions among the parties.

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

Clean Air Act Requirements

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

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

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

~~National Ambient Air Quality Standards (NAAQS)~~NAAQS

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

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

Most areas of the country were designated attainment or unclassifiable for the 2015 ozone standard in November 2017. The Federal EPA finalized nonattainment designations for the remaining areas in April and July 2018. The Federal EPA has also issued information to assist the states in developing plans that address their obligations under the interstate transport provisions of the CAA for the 2008 and 2015 ozone standards. The Federal EPA has confirmed that for states included in the CSAPR program, there are no additional interstate transport obligations, as all areas of the country are expected to attain the 2008 ozone standard before 2023. State implementation plans for the 2015 ozone standard are due in October 2018. The Federal EPA had requested a stay of proceedings in the U.S. Court of Appeals for the District of Columbia Circuit where challenges to the 2015 ozone standard are pending, to allow reconsideration of that standard by the new administration. ~~The Federal EPA initially announced a one-year delay in~~In June 2018, the ~~designation of ozone non-attainment areas, but withdrew that decision. Final designations were due October 1, 2017, but have not yet been announced.~~court lifted the stay, allowing those challenges to proceed. Management cannot currently predict the nature, stringency or timing of additional requirements for AEP’s facilities based on the outcome of these activities.

Regional Haze

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

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

~~The Federal EPA proposed disapproval of regional haze SIPs in a few states, including Arkansas and Texas.~~ In March 2012, the Federal EPA ~~disapproved certain portions~~proposed disapproval of a portion of the ~~Arkansas~~ regional haze ~~SIP.~~SIP in Arkansas. In April 2015, the Federal EPA published a proposed FIP to replace the disapproved portions, including revised BART determinations for the Flint Creek Plant that were consistent with the planned environmental controls ~~currently under construction.~~to address other CAA requirements. In September 2016, the Federal EPA published a final FIP, ~~that retains~~retaining its BART determinations, but ~~accelerates~~accelerating the schedule for

implementation of certain required controls. The final rule is being challenged in the ~~courts. In March 2017, the Federal EPA filed a motion that was granted by the~~ U.S. Court of Appeals for the Eighth Circuit, ~~Court to hold the case~~but has been held in abeyance ~~for 90 days~~ to allow the parties to engage in settlement negotiations. Arkansas and other affected parties filed motions to stay the compliance deadlines pending further action from the Federal EPA and the motion was granted. Arkansas issued a proposed SIP revision to allow sources to participate in the CSAPR ozone season program in lieu of the source-specific NO_x BART requirements in the FIP, and the Federal EPA ~~has proposed to approve that SIP~~approved the revision. Arkansas finalized a separate action to revise the SO₂ BART determinations which has been challenged before the Arkansas Pollution Control and ~~the Federal EPA have asked the Eighth Circuit to continue to hold litigation in abeyance until October 31, 2017 to facilitate settlement discussions.~~Ecology Commission. Management cannot predict the outcome of these proceedings.

~~In January 2016, the~~The Federal EPA also disapproved portions of the Texas regional haze SIP and promulgated a final FIP that did not include any BART ~~determinations.~~determinations in January 2016. That rule was challenged ~~and stayed by~~in the U.S. Court of Appeals for the Fifth Circuit ~~Court. The parties engaged~~and in ~~a settlement discussion but were unable to reach an agreement. In~~ March 2017, the ~~U.S. Court of Appeals for the Fifth Circuit~~court granted partial remand of the final rule. In January 2017, the Federal EPA proposed source-specific BART requirements for SO₂ from sources in Texas, including Welsh Plant, Unit 1. ~~Management submitted comments on the proposal and is engaged in discussions with the Texas Commission on Environmental Quality (TCEQ) regarding the development~~The proposed source-specific approach for Welsh Plant, Unit 1 called for installation of ~~an alternative to source-specific BART.~~a wet FGD system. In ~~September~~October 2017, the Federal EPA issued a final rule withdrawing Texas from the annual CSAPR budget programs. The Federal EPA then issued a separate rule finalizing the regional haze requirements for electric generating units in Texas and confirmed TCEQ’s determination that no new PM limitations are required for regional haze. The Federal EPA also finalized a FIP that allows participation in the CSAPR ozone season program to satisfy the NO_xregional haze obligations for electric generating ~~units.~~units in Texas. Additionally, the Federal EPA finalized an intrastate SO₂ emissions trading program based on CSAPR allowance allocations as an alternative to source-specific SO₂ requirements. ~~The proposed source-specific approach called for a wet FGD system to be installed on Welsh Plant, Unit 1.~~ The opportunity to use emissions trading to satisfy the regional haze requirements for NO_x and SO₂ at AEP’s affected generating units provides greater flexibility and lower cost compliance options than the original proposal. A challenge to the FIP has been filed in the U.S. Court of Appeals for the Fifth Circuit by various intervenors. The Federal EPA and petitioners filed a joint motion to hold the case in abeyance pending the Federal EPA’s review of challengers’ petition for reconsideration. In March 2018, that motion was granted. In August 2018, the Federal EPA proposed to affirm its October 2017 FIP approval and requested comment on certain aspects of the FIP promulgation and specifically on the intrastate SO₂ trading program. Management supports the intrastate trading program contained in the FIP as a compliance alternative to source-specific controls.

In June 2012, the Federal EPA published revisions to the regional haze rules to allow states participating in the CSAPR trading programs to use those programs in place of source-specific BART for SO₂ and NO_x emissions based on its determination that CSAPR results in greater visibility improvements than source-specific BART in the CSAPR states. ~~This~~The rule ~~is being~~was challenged in the U.S. Court of Appeals for the District of Columbia Circuit. ~~Management supports compliance with~~The Federal EPA confirmed in 2017 that changes to the CSAPR ~~programs as satisfaction~~program, including the removal of Texas sources, did not alter that conclusion. In March 2018, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the Federal EPA rule that found that CSAPR provides greater visibility improvements than BART. Challenges to the changes made to the scope of the program in 2016 are being held in abeyance while the Federal EPA reconsiders the Texas SO₂BART ~~requirements.~~FIP.

~~Cross-State Air Pollution Rule (CSAPR)~~CSAPR

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

Numerous affected entities, states and other parties filed petitions to review the CSAPR in the U.S. Court of Appeals for the District of Columbia Circuit. The ~~court stayed implementation of~~rule was vacated, but that decision was reversed on appeal to the ~~rule. Following extended proceedings in~~U.S. Supreme Court. On remand, the U.S. Court of Appeals for the District of Columbia Circuit ~~and the U.S. Supreme Court, but while the litigation was still pending, the U.S. Court of Appeals for the District of Columbia Circuit granted the Federal EPA’s motion to lift the stay and allow~~allowed Phase I of CSAPR to take effect on January 1, 2015 and Phase II to take effect on January 1, 2017. In July 2015, the ~~U.S. Court of Appeals for the District of Columbia Circuit~~court found that the Federal EPA over-controlled the SO₂and/or NO_xbudgets of 14 states. The ~~U.S. Court of Appeals for the District of Columbia Circuit~~court remanded the rule to the Federal EPA ~~to timely revise the rule~~for revision consistent with the court’s opinion while CSAPR ~~remains~~remained in place.

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

were pending.

Mercury and Other Hazardous Air Pollutants (HAPs) Regulation

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

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

In June 2015, the U.S. Supreme Court reversed the decision of the U.S. Court of Appeals for the District of Columbia Circuit. The ~~U.S. Court of Appeals for the District of Columbia Circuit~~court remanded the MATS rule ~~for further proceedings consistent with the U.S. Supreme Court’s decision that~~to the Federal EPA ~~was unreasonable in refusing~~ to consider costs in ~~its determination~~determining whether to regulate emissions of HAPs from power plants. The Federal EPA issued ~~notice of~~ a supplemental finding concluding that, after considering the costs of compliance, it iswas appropriate and necessary to regulate HAP emissions from coal-fired and oil-fired units. ~~Management submitted comments on the proposal. In April 2016, the Federal EPA affirmed its determination that regulation of HAPs from electric generating units is necessary and appropriate.~~ Petitions for review of the Federal EPA’s ~~April 2016~~ determination have been filed in the U.S. Court of Appeals for the District of Columbia Circuit. Oral argument was scheduled for May 2017, but in April 2017, the Federal EPA requested that oral argument be postponed to facilitate its review of the ~~rule. The~~ rule, which remains in effect.

Climate Change, CO₂ Regulation and Energy Policy

The majority of the states where AEP has generating facilities passed legislation establishing renewable energy, alternative energy and/or energy efficiency requirements that can assist in reducing carbon emissions. Management is taking steps to comply with these requirements, including increasing wind and solar installations and power purchases and broadening the AEP System’s portfolio of energy efficiency programs.

In October 2015, the Federal EPA published the final CO₂emissions standards for new, modified and reconstructed fossil fuel fired steam generating units and combustion turbines, and final guidelines for the development of state plans to regulate CO₂ emissions from existing ~~sources. The final standard for new combustion turbines is 1,000 pounds of CO~~₂ ~~per MWh and the final standard for new fossil steam units is 1,400 pounds of CO~~₂ per MWh. Reconstructed turbines are subject to the same standard as new units and no standard for modified combustion turbines was issued. Reconstructed fossil steam units are subject to a standard of 1,800 pounds of CO₂ ~~per MWh for larger units and 2,000 pounds of CO~~₂ ~~per MWh for smaller units. Modified fossil steam units will be subject to a site specific standard no lower than the standards that would be applied if the units were reconstructed.~~

~~The final emissions guidelines for existing~~ sources, known as the Clean Power Plan (CPP)~~, are based on a series of declining emission rates that are implemented beginning in 2022 through 2029. The final emission rate is 771 pounds of CO~~.₂ ~~per MWh for existing natural gas combined cycle units and 1,305 pounds of CO~~₂ ~~per MWh for existing fossil steam units in 2030 and thereafter. The Federal EPA also developed a set of rate-based and mass-based state goals.~~

The Federal EPA also published proposed “model” rules that can be adopted by the states that would allow sources within “trading ready” state programs to trade, bank or sell allowances or credits issued by the states. These rules would also be the basis for any federal plan issued by the Federal EPA in a state that fails to submit or receive approval for a state plan. In June 2016, the Federal EPA issued a separate proposal for the Clean Energy Incentive Program (CEIP) that was included in the model rules.

The final rules are being challenged in the courts. In February 2016, the U.S. Supreme Court issued a stay on the final CPP, including all of the deadlines for submission of initial or final state plans. The stay will remain in effect until a final decision is issued by the U.S. Court of Appeals for the District of Columbia Circuit and the U.S. Supreme Court considers any petition for review. ~~In April 2017, the Federal EPA withdrew its previously issued proposals for model trading rules and a CEIP.~~

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

of Columbia Circuit granted the Federal EPA’s motion in part and has requested periodic status reports. In October 2017, the Federal EPA issued a proposed rule repealing the ~~CPP and withdrawing~~CPP. In December 2017, the ~~legal memoranda issued in connection with the rule. The~~ Federal EPA issued an advanced notice of proposed rulemaking seeking information that should be considered by the Federal EPA in developing revised guidelines for state programs. In August 2018, the Federal EPA proposed the Affordable Clean Energy (ACE) rule to replace the CPP with new emission guidelines for regulating CO₂from existing sources. ACE would establish a framework for states to adopt standards of performance for utility boilers based on heat rate improvements for such boilers. Comments on the proposed ACE rule will be accepted until the end of October 2018. Management is actively monitoring these rulemakings and participating in the development of any new guidelines.

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

In February 2018, AEP announced new intermediate and long-term CO₂emission ~~reduction” and found that~~reduction goals, based on the ~~statutory text, legislative history, use of similar terms elsewhere in the CAA and its own historic implementation of Section 111 that a narrower interpretation~~output of the ~~term limits it to those designs, processes, control technologies~~company’s integrated resource plans, which take into account economics, customer demand, grid reliability and ~~other systems that can be applied directly to or at~~resiliency, regulations and the ~~source. Since~~company’s current business strategy. The intermediate goal is a 60% reduction from 2000 CO₂ emission levels from AEP generating facilities by 2030; the ~~primary systems relied on~~long-term goal is an 80% reduction of CO₂ emissions from AEP generating facilities from 2000 levels by 2050. AEP’s total projected CO₂ emissions in ~~the CPP~~2018 are ~~not consistent with that interpretation, the Federal EPA proposes that the rule be withdrawn. Management does not expect~~approximately 90 million metric tons, a ~~change in~~46% reduction from AEP’s ~~overall strategy as a result~~2000 CO₂ emissions of ~~the proposed repeal.~~approximately 167 million metric tons.

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

Coal Combustion Residual Rule

In April 2015, the Federal EPA published a final rule to regulate the disposal and beneficial re-use of coal combustion residuals (CCR), including fly ash and bottom ash generated at coal-fired electric generating units and also FGD gypsum generated at some coal-fired plants. The ~~final rule has been challenged in the courts.~~

~~The final rule became effective in October 2015. The Federal EPA regulates CCR as a non-hazardous solid waste by its issuance of new minimum federal solid waste management standards. 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 to be implemented on a schedule spanning an approximate four year implementation period. Certain records must be posted to a publicly available internet site. Initial groundwater monitoring reports were posted in the first quarter of 2018, and some of AEP’s existing facilities were required to begin assessment monitoring programs to determine if unacceptable groundwater impacts will trigger future remedial actions.

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

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

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

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

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

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

Clean Water Act (CWA) Regulations

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

In ~~addition,~~November 2015, the Federal EPA ~~developed revised~~issued a final rule revising effluent limitation guidelines for electricity generating facilities. ~~A final rule was issued in November 2015.~~ The ~~final~~ rule establishes limits on FGD wastewater, fly ash and bottom ash transport water and flue gas mercury control wastewater to be imposed as soon as possible after November 2018 and no later than December 2023. These ~~new~~ requirements will be implemented through each facility’s wastewater discharge permit. The rule has been challenged in the U.S. Court of Appeals for the Fifth Circuit. In March 2017, industry associations filed a petition for reconsideration of the rule with the Federal EPA. In April 2017, the Federal EPA granted reconsideration of the rule and issued a stay of the rule’s future compliance deadlines, which has now expired. In April 2017, the U.S. Court of Appeals for the Fifth Circuit granted a stay of the litigation for 120 days. In June 2017, the Federal EPA also issued a proposal to temporarily postpone certain compliance deadlines in the rule. A final rule revising the compliance deadlines for FGD wastewater and bottom ash transport water to be no earlier than 2020 was issued in September ~~2017. Management submitted comments supporting~~2017, but has been challenged in the ~~proposed postponement.~~courts. Management continues to assess technology additions and retrofits to comply with the rule and the impacts of the Federal EPA’s recent actions on facilities’ wastewater discharge permitting. Management is actively participating in the reconsideration proceedings.

In June 2015, the Federal EPA and the U.S. Army Corps of Engineers jointly issued a final rule to clarify the scope of the regulatory definition of “waters of the United States” in light of recent U.S. Supreme Court cases. The CWA provides for federal jurisdiction over “navigable waters” defined as “the waters of the United States.” This jurisdictional definition applies 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. The final definition continues to recognize traditional navigable waters of the U.S. as jurisdictional as well as certain exclusions. The rule also contains a number of new specific definitions and criteria for determining whether certain other waters are jurisdictional because of a “significant nexus.” Management believes that clarity and efficiency in the permitting process is needed. Management remains concerned that the rule introduces new concepts and could subject more of AEP’s operations to CWA jurisdiction, thereby increasing the time and complexity of permitting. The final rule ~~is being~~was challenged in both courts of appeal and district courts. ~~Challengers include industry associations of which AEP is a member. The U.S. Court of Appeals for the Sixth Circuit granted a nationwide stay of the rule pending jurisdictional determinations.~~ In ~~February 2016,~~January 2018, the U.S. Supreme Court ~~of Appeals for the Sixth Circuit issued a decision holding~~ruled that ~~it has exclusive jurisdiction to decide the~~ challenges to the definition of “waters of the United States” ~~rule. Industry, state and related associations have~~must be filed ~~petitions for a rehearing of the jurisdictional decision. In April 2016, the U.S. Court of Appeals for the Sixth Circuit denied the petitions. In January 2017, the decision was appealed~~in federal district courts. Challenges to the U.S. Supreme Court, which granted certiorari to review the jurisdictional issue. The U.S. Supreme Court denied the Federal EPA’s motion to hold briefing in abeyance pending further Federal EPA actions on the rule ~~and the appeal on the jurisdictional issue continues.~~will proceed.

In March 2017, the Federal EPA published a notice of intent to review the rule and provide an advanced notice of a proposed rulemaking consistent with the Executive Order of the President of the United States directing the Federal EPA and U.S. Army Corps of Engineers to review and rescind or revise the rule. In June 2017, the agencies signed a notice of proposed rule to rescind the definition of “waters of the United States” that was adopted in June 2015, and to re-codify the definition of that phrase as it existed immediately prior to that action. This action would effectively retain the status quo until a new rule is adopted by the agencies.

A supplemental proposal was signed by the Administrator in June 2018 to provide further clarification of the impact of and support for repeal of the 2015 rule. The Federal EPA and U.S. Army Corps of Engineers also finalized a new rule to extend the applicability date of the 2015 rule to 2020. Challenges to the applicability date rule were filed by third parties in several federal district courts. In August 2018, the Federal District Court for the District of South Carolina vacated the postponement of the applicability date, allowing the 2015 rule to go into effect in 26 states. Management will participate in further rulemaking activities.

RESULTS OF OPERATIONS

SEGMENTS

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

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

Vertically Integrated Utilities

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

Transmission and Distribution Utilities

Transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by ~~OPCo~~AEP Texas and ~~AEP Texas.~~OPCo.

OPCo purchases energy and capacity at auction to serve SSO customers and provides transmission and distribution services for all connected load.

With the merger of TCC and TNC into AEP Utilities, Inc. to form AEP Texas, the Transmission and Distribution segment now includes certain activities related to the former AEP Utilities, Inc. that had been included in Corporate and Other.

AEP Transmission Holdco

Development, construction and operation of transmission facilities through investments in AEPTCo. These investments have FERC-approved returns on equity.

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

Generation & Marketing

Competitive generation in ERCOT and PJM.

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

Contracted renewable energy investments and management services.

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

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

The following table presents Earnings (Loss) Attributable to AEP Common Shareholders by segment:


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016			2017			2016			2018		2017		2018			2017
	(in millions)											(in millions)
Vertically Integrated Utilities	$	286.3	$	342.3		$	626.6		$	829.3		$	344.2	$	286.3	$	852.2		$	626.6
Transmission and Distribution Utilities	144.0		155.7			374.3			387.8			145.2		144.0		384.6			374.3
AEP Transmission Holdco	75.5		69.0			275.7			207.5			73.3		75.5		278.4			275.7
Generation & Marketing	33.7		(1,369.2		)	246.3			(1,248.8		)	5.3		33.7		62.3			246.3
Corporate and Other	5.2		36.4			(11.0		)	61.7			9.6		5.2		(17.1		)	(11.0		)
Earnings (Loss) Attributable to AEP Common Shareholders	$	544.7	$	(765.8	)	$	1,511.9		$	237.5
Earnings Attributable to AEP Common Shareholders												$	577.6	$	544.7	$	1,560.4		$	1,511.9

AEP CONSOLIDATED

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~

~~Earnings (Loss) Attributable to AEP Common Shareholders increased from a loss of $766 million in 2016 to income of $545 million in~~ 2017 ~~primarily due to:~~

~~An increase due to the impairment of certain merchant generation assets in 2016.~~

~~An increase in transmission investment primarily at AEP Transmission Holdco which resulted in higher revenues and income.~~

~~These increases were partially offset by:~~

~~A decrease in generation revenues associated with the sale of certain merchant generation assets.~~

~~A decrease in weather-related usage.~~

The prior year reversal of income tax expense for an unrealized capital loss valuation allowance. AEP effectively settled a 2011 audit issue with the IRS resulting in a change in the valuation allowance.

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

Earnings Attributable to AEP Common Shareholders increased from ~~income of $238~~$545 million in ~~2016~~2017 to ~~income of $1.5 billion~~$578 million in ~~2017~~2018 primarily due to:

An increase in weather-related usage.

Favorable rate proceedings in AEP’s various jurisdictions.

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

Earnings Attributable to AEP Common Shareholders increased from $1,512 million in 2017 to $1,560 million in 2018 primarily due ~~to the impairment of certain merchant generation assets in 2016.~~to:

~~An increase due to the current year gain on the sale of certain merchant generation assets.~~

An increase in ~~transmission investment primarily at AEP Transmission Holdco which resulted in higher revenues and income.~~weather-related usage.

Favorable rate proceedings in AEP’s various jurisdictions.

These increases were partially offset by:

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

~~A decrease in weather-related usage.~~

~~A decrease in weather-normalized sales.~~

~~A decrease in FERC wholesale municipal and cooperative revenues.~~

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

VERTICALLY INTEGRATED UTILITIES


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
Vertically Integrated Utilities	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Revenues	$	2,482.2		$	2,556.3		$	6,893.1		$	6,927.8		$	2,636.7		$	2,482.2		$	7,393.7		$	6,893.1
Fuel and Purchased Electricity	868.6			858.3			2,368.9			2,299.8			1,034.6			868.6			2,700.4			2,368.9
Gross Margin	1,613.6			1,698.0			4,524.2			4,628.0			1,602.1			1,613.6			4,693.3			4,524.2
Other Operation and Maintenance	659.1			673.0			2,024.5			1,926.9			753.7			665.0			2,197.5			2,042.2
Asset Impairments and Other Related Charges	—			10.5			—			10.5
Depreciation and Amortization	288.8			277.7			845.1			815.5			340.1			288.8			966.1			845.1
Taxes Other Than Income Taxes	105.7			99.0			306.2			295.0			108.8			105.7			326.4			306.2
Operating Income	560.0			637.8			1,348.4			1,580.1			399.5			554.1			1,203.3			1,330.7
Interest and Investment Income	1.3			0.8			5.4			2.4			3.3			1.3			8.3			5.4
Carrying Costs Income	2.1			0.8			11.3			8.1			0.8			2.1			5.9			11.3
Allowance for Equity Funds Used During Construction	7.5			10.0			20.0			35.4			9.3			7.5			24.0			20.0
Non-Service Cost Components of Net Periodic Benefit Cost													18.0			5.9			53.7			17.7
Interest Expense	(134.9		)	(136.7		)	(406.5		)	(399.9		)	(149.2		)	(134.9		)	(428.0		)	(406.5		)
Income Before Income Tax Expense and Equity Earnings (Loss)	436.0			512.7			978.6			1,226.1
Income Tax Expense	139.1			172.0			334.9			398.4
Income Before Income Tax Expense (Credit) and Equity Earnings (Loss)													281.7			436.0			867.2			978.6
Income Tax Expense (Credit)													(63.1		)	139.1			12.9			334.9
Equity Earnings (Loss) of Unconsolidated Subsidiaries	0.4			2.7			(4.5		)	4.9			0.8			0.4			2.0			(4.5		)
Net Income	297.3			343.4			639.2			832.6			345.6			297.3			856.3			639.2
Net Income Attributable to Noncontrolling Interests	11.0			1.1			12.6			3.3			1.4			11.0			4.1			12.6
Earnings Attributable to AEP Common Shareholders	$	286.3		$	342.3		$	626.6		$	829.3		$	344.2		$	286.3		$	852.2		$	626.6

Summary of KWh Energy Sales for Vertically Integrated Utilities


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of KWhs)				(in millions of KWhs)
Retail:
Residential	8,488	9,575	23,226	25,373	8,988	8,488	26,105	23,226
Commercial	6,701	7,137	18,386	19,207	6,799	6,701	18,988	18,386
Industrial	8,839	8,655	25,792	25,576	9,032	8,839	26,471	25,792
Miscellaneous	603	634	1,701	1,740	620	603	1,759	1,701
Total Retail	24,631	26,001	69,105	71,896	25,439	24,631	73,323	69,105

Wholesale (a)	6,837	6,765	19,262	17,253	6,432	6,837	17,156	19,262

Total KWhs	31,468	32,766	88,367	89,149	31,871	31,468	90,479	88,367


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

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

Summary of Heating and Cooling Degree Days for Vertically Integrated Utilities


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in degree days)				(in degree days)
Eastern Region
Actual – Heating (a)	—	—	1,266	1,684	—	—	1,844	1,266
Normal – Heating (b)	4	5	1,757	1,775	5	4	1,745	1,757

Actual – Cooling (c)	698	954	1,034	1,306	878	698	1,364	1,034
Normal – Cooling (b)	731	726	1,060	1,058	730	731	1,063	1,060

Western Region
Actual – Heating (a)	—	—	539	685	—	—	974	539
Normal – Heating (b)	1	1	926	927	1	1	908	926

Actual – Cooling (c)	1,281	1,519	2,000	2,262	1,443	1,281	2,380	2,000
Normal – Cooling (b)	1,404	1,400	2,124	2,116	1,402	1,404	2,121	2,124


(a)	Heating degree days are calculated on a 55 degree temperature base.


(b)	Normal Heating/Cooling represents the thirty-year average of degree days.


(c)	Cooling degree days are calculated on a 65 degree temperature base.

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to AEP Common Shareholders from Vertically Integrated Utilities								(in millions)

Third Quarter of 2016	$	342.3
Third Quarter of 2017					$	286.3

Changes in Gross Margin:
Retail Margins	(74.1		)		4.8
Off-system Sales	(0.8		)		(3.8		)
Transmission Revenues	(7.6		)		(6.5		)
Other Revenues	(1.9		)		(6.0		)
Total Change in Gross Margin	(84.4		)		(11.5		)

Changes in Expenses and Other:
Other Operation and Maintenance	13.9				(88.7		)
Asset Impairments and Other Related Charges	10.5
Depreciation and Amortization	(11.1		)		(51.3		)
Taxes Other Than Income Taxes	(6.7		)		(3.1		)
Interest and Investment Income	0.5				2.0
Carrying Costs Income	1.3				(1.3		)
Allowance for Equity Funds Used During Construction	(2.5		)		1.8
Non-Service Cost Components of Net Periodic Pension Cost					12.1
Interest Expense	1.8				(14.3		)
Total Change in Expenses and Other	7.7				(142.8		)

Income Tax Expense	32.9
Equity Earnings (Loss) of Unconsolidated Subsidiary	(2.3		)
Income Tax Expense (Credit)					202.2
Equity Earnings (Loss) of Unconsolidated Subsidiaries					0.4
Net Income Attributable to Noncontrolling Interest	(9.9		)		9.6

Third Quarter of 2017	$	286.3
Third Quarter of 2018					$	344.2

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

Retail Margins ~~decreased $74~~increased $5 million primarily due to the following:

~~An $80 million decrease in weather-related usage in the eastern and western regions.~~

The effect of rate proceedings in AEP’s service territories which included:

A ~~$17 million decrease for PSO primarily due to higher rates implemented in 2016 associated with interim rates.~~

~~A $6 million decrease primarily due to a decrease in rates in West Virginia and Virginia.~~

~~For the rate decreases described above, $4 million relate to riders/trackers which have corresponding decreases in expense items below.~~

~~These decreases were partially offset by:~~

•~~The effect of rate proceedings in AEP’s service territories which included:~~

~~An $11~~$47 million increase from rate proceedings for I&M, inclusive of a $22 million decrease due to the impact of Tax Reform in the Indiana ~~service territory.~~jurisdiction.

A $20 million increase for PSO due to new rates implemented in March 2018, inclusive of a $9 million decrease due to the change in the corporate federal tax rate.

An ~~$11~~$18 million increase for SWEPCo primarily due to rider and base rate revenue increases in ~~Louisiana, partially offset in expense items below.~~Texas and Louisiana.

For the rate increases described above, $8$17 million~~relate~~ related to riders/trackers, which ~~have~~had corresponding increases in expense items below.

A $61 million increase in weather-related usage across all regions.

These increases were partially offset by:

A $91 million reduction at APCo and WPCo in deferred fuel under-recovery related to the West Virginia Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.

A $13 million decrease due to lower weather-normalized wholesale margins, primarily due to SWEPCo and I&M wholesale customer load loss from contracts that expired at the end of 2017.

A $12 million decrease in weather-normalized retail margins primarily in the industrial and commercial classes.

An $11 million increase at APCo in ~~weather-normalized margins.~~deferred fuel related to recoverable PJM expenses that were offset below.

A $10 million increase at APCo in non-recoverable fuel expense related to Virginia legislation.

A $4 million ~~increase~~decrease at PSO related to the System Reliability Rider (SRR) that ended in August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.

Margins from Off-system Sales decreased $4 million primarily due to ~~reduced fuel and other variable production costs not recovered through fuel clauses or other trackers.~~mid-year changes in the OSS sharing mechanism at I&M.

Transmission Revenues decreased $8$7 million primarily due to the following:

A $6 million decrease primarily due to I&M’s annual formula rate true-up and reduced net PJM Network Integration Transmission Service revenues resulting from increased affiliated transmission-related charges.

~~A $5~~$16 million decrease due to ~~a net favorable accrual~~current year provisions for ~~SPP sponsor-funded~~rate refunds.

These decreases were partially offset by:

A $6 million increase primarily due to an increase in transmission ~~upgrades~~investments in ~~third quarter 2016.~~SPP.

A $4 million increase primarily due to an increase in transmission investments in PJM.

Other Revenues decreased $6 million primarily due to reduced rates for KPCo Demand Side Management programs beginning in 2018. This decrease was partially offset in Other Operation and Maintenance expenses below.

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

Other Operation and Maintenance expenses increased $89 million primarily due to the following:

A $40 million increase in expenses at APCo and WPCo due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.

A $25 million increase in employee-related expenses.

A $10 million increase in vegetation management expenses primarily in the east region.

A $7 million increase in plant outage and maintenance expenses primarily for APCo and KPCo.

A $4 million increase in customer-related expenses.

A $3 million increase in SPP transmission services.

A $3 million increase due to the Wind Catcher Project for SWEPCo and PSO.

This increase was partially offset by:

A $23 million decrease in PJM transmission services.

Depreciation and Amortization expenses increased $51 millionprimarily due to a higher depreciable base and increased depreciation rates approved at I&M, PSO and SWEPCo.

Non-Service Cost Components of Net Periodic Benefit Costdecreased $12 millionprimarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

Interest Expense increased $14 million primarily due to the following:

A ~~$15~~$7 million ~~decrease in employee-related expenses.~~increase at I&M primarily due to increased long-term debt balances.

A ~~$10~~$3 million ~~decrease in PJM and SPP transmission services expense not recovered through riders/trackers.~~

~~A $6 million decrease in storm expenses, primarily in the APCo region.~~

~~These decreases were partially offset by:~~

~~A $5 million~~ increase at PSO due to the ~~Wind Catcher Project~~2017 deferral of the debt component of carrying charges on environmental control costs for ~~PSO~~projects at Northeastern Plant, Unit 3 and ~~SWEPCo.~~

~~A $5 million increase in nuclear expenses at Cook~~Comanche Plant.

A $3 million increase in ~~vegetation management expenses, primarily~~other interest expense at ~~PSO and SWEPCo.~~

~~Asset Impairments and Other Related Charges~~ ~~decreased $11 million~~APCo due to the ~~impairment of I&M’s Price River Coal reserves in 2016.~~

~~Depreciation and Amortization~~ ~~expenses increased $11 millionprimarily due to the following:~~

~~A $15 million increase primarily due to higher depreciable base.~~

~~A $6 million increase due to amortization of capitalized software costs.~~

~~These increases were partially offset by:~~

~~A $9 million decrease primarily related to prior year higher estimated depreciation expense associated with interim rates at PSO.~~

~~Taxes Other Than Income Taxes~~ ~~increased $7 million primarily due to higher property taxes.~~

West Virginia Tax Reform settlement.

Income Tax Expense (Credit) decreased ~~$33~~$202 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT, other book/tax differences which are accounted for on a flow-through basis and a decrease in pretax book ~~income and income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.~~income.

Net Income Attributable to Noncontrolling Interest ~~increased~~decreased $10 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This ~~increase is~~decrease was offset by ~~a decrease~~an increase in Income Tax ~~Expense.~~Expense (Credit) above.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to AEP Common Shareholders from Vertically Integrated Utilities								(in millions)

Nine Months Ended September 30, 2016	$	829.3
Nine Months Ended September 30, 2017					$	626.6

Changes in Gross Margin:
Retail Margins	(123.9		)		167.3
Off-system Sales	7.4				(6.9		)
Transmission Revenues	11.0				24.8
Other Revenues	1.7				(16.1		)
Total Change in Gross Margin	(103.8		)		169.1

Changes in Expenses and Other:
Other Operation and Maintenance	(97.6		)		(155.3		)
Asset Impairments and Other Related Charges	10.5
Depreciation and Amortization	(29.6		)		(121.0		)
Taxes Other Than Income Taxes	(11.2		)		(20.2		)
Interest and Investment Income	3.0				2.9
Carrying Costs Income	3.2				(5.4		)
Allowance for Equity Funds Used During Construction	(15.4		)		4.0
Non-Service Cost Components of Net Periodic Pension Cost					36.0
Interest Expense	(6.6		)		(21.5		)
Total Change in Expenses and Other	(143.7		)		(280.5		)

Income Tax Expense	63.5
Equity Earnings (Loss) of Unconsolidated Subsidiary	(9.4		)
Income Tax Expense (Credit)					322.0
Equity Earnings (Loss) of Unconsolidated Subsidiaries					6.5
Net Income Attributable to Noncontrolling Interest	(9.3		)		8.5

Nine Months Ended September 30, 2017	$	626.6
Nine Months Ended September 30, 2018					$	852.2

The major components of the ~~decrease~~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 ~~decreased $124~~increased $167 million primarily due to the following:

A ~~$164~~$240 million ~~decrease~~increase in weather-related usage across all regions primarily in the ~~eastern~~residential and ~~western regions.~~

~~A $42 million decrease in FERC generation wholesale municipal and cooperative revenues primarily due to an annual formula rate true-up and adjustments at I&M and SWEPCo.~~commercial classes.

The effect of rate proceedings in AEP’s service territories which included:

~~A $14 million decrease primarily due to prior year recognition of deferred billing in West Virginia as approved by the WVPSC.~~

~~A $9 million net decrease for PSO primarily due to revenue decreases associated with interim base rates implemented in 2016.~~

~~For the rate decreases described above, $1 million relate to riders/trackers which have corresponding decreases in expense items below.~~

~~A $5 million decrease in weather-normalized margins.~~

~~These decreases were partially offset by:~~

~~The effect of rate proceedings in AEP’s service territories which included:~~

~~A $42~~An $89 million increase from rate proceedings for I&M, inclusive of a $26 million decrease due to the impact of Tax Reform in the Indiana ~~service territory.~~jurisdiction.

A ~~$33~~$57 million increase for SWEPCo due to rider and base rate revenue increases in Texas, Louisiana ~~Texas~~ and ~~Arkansas, partially offset in expense items below.~~Arkansas.

A $6$37 million increase for ~~KGPCo~~PSO due to ~~revenue increases from rate riders/trackers.~~new rates implemented in March 2018, inclusive of a $19 million decrease due to the change in the corporate federal tax rate.

For the rate increases described above, ~~$37~~$4 million ~~relate~~related to riders/trackers, which ~~have~~had corresponding increases in expense items below.

A $32 million increase for I&M in FERC generation wholesale municipal and cooperative revenues primarily due to changes to the annual formula rate.

A $16 million increase in weather-normalized retail margins primarily in the residential class.

These increases were partially offset by:

A $111 million decrease due to customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.

A $91 million reduction at APCo and WPCo in deferred fuel under-recovery related to the West Virginia Tax Reform settlements. This decrease was offset in Income Tax Expense (Credit) below.

A ~~$19~~$39 million ~~increase~~decrease due to lower weather-normalized wholesale margins, primarily due to ~~reduced~~SWEPCo and I&M wholesale customer load loss from contracts that expired at the end of 2017.

A $28 million increase at APCo in deferred fuel related to recoverable PJM expenses that were offset below.

A $16 million decrease primarily due to increased fuel and other variable production costs not recovered through fuel clauses or other trackers.

A $16 million decrease at PSO related to the SRR that ended in August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.

A $10 million increase at APCo in non-recoverable fuel expense related to Virginia legislation.

Margins from Off-system Sales ~~increased~~decreased $7 million primarily due to ~~higher market prices.~~mid-year changes in the OSS sharing mechanism at I&M.

Transmission Revenues increased ~~$11~~$25 million primarily due to the following:

A ~~$35~~$23 million increase due to the annual formula rate true-up and decreased RTO provisions at I&M.

A $19 million increase primarily due to ~~increases in formula rates driven by continued investment~~an increase in transmission ~~assets.~~investments in SPP.

These increases were partially offset by:

A $16 million decrease due to current year provisions for rate refunds.

Other Revenues decreased $16 million primarily due to reduced rates for KPCo Demand Side Management programs beginning in 2018. This ~~increase is~~decrease was partially offset in Other Operation and Maintenance expenses below.

~~These increases were partially offset by:~~

A $23 million decrease primarily due to I&M’s annual formula rate true-up and reduced net PJM Network Integration Transmission Service revenues resulting from increased affiliated transmission-related charges.

~~A $5 million net decrease due to a net favorable accrual for SPP sponsor-funded transmission upgrades in third quarter 2016.~~

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

Other Operation and Maintenance expenses increased ~~$98~~$155 million primarily due to the following:

A ~~$103~~$40 million increase in ~~recoverable~~expenses at APCo and WPCo due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.

A $39 million increase in SPP transmission services.

A $35 million increase due to the Wind Catcher Project for SWEPCo and PSO.

A $25 million increase in employee-related expenses.

A $19 million increase in plant outage and maintenance expenses primarily ~~PJM expenses~~for KPCo and ~~energy efficiency expenses fully recovered in rate recovery riders/trackers within Gross Margin above.~~I&M.

A ~~$22~~$13 million increase in vegetation ~~management expenses,~~management.

A $9 million increase due to an increase in estimated expense for claims related to asbestos exposure.

A $7 million increase in storms primarily ~~at PSO and I&M.~~for APCo.

A $6 million increase ~~due to a favorable land sale~~ in ~~2016~~customer-related expenses.

A $5 million increase in ~~the APCo region.~~factoring expense.

These increases were partially offset by:

A ~~$27~~$55 million decrease in ~~employee-related expenses.~~

~~Asset Impairments and Other Related Charges~~ ~~decreased $11 million~~PJM transmission expenses primarily due to the ~~impairment of I&M’s Price River Coal reserves in 2016.~~

annual formula rate true-up.

Depreciation and Amortization expenses increased ~~$30~~$121 million primarily due to ~~the following:~~

~~A $46 million increase primarily due to~~a higher depreciable ~~base.~~

~~A $15 million increase due to amortization of capitalized software costs.~~

~~These increases were partially offset by:~~

~~A $24 million decrease primarily related to prior year higher estimated~~base and increased depreciation ~~expense associated with interim~~ rates approved at ~~PSO.~~I&M, PSO and SWEPCo.

Taxes Other Than Income Taxes increased ~~$11~~$20 million primarily due to:

An $8 million increase in property taxes driven by an increase in utility plant.

An $8 million increase in state and local taxes due to higher reported taxable KWh and taxable revenues and a prior period refund.

Carrying Costs Income decreased $5 million primarily due to ~~higher property taxes.~~a decrease in carrying charges for certain riders at I&M.

Allowance for Equity Funds Used During Construction ~~decreased $15~~increased $4 millionprimarily due to ~~completed environmental projects.~~an increase in construction activity at APCo and SWEPCo.

Non-Service Cost Components of Net Periodic Benefit Cost decreased $36 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

Interest Expense increased $7$22 million primarily due to the following:

A $7$13 million increase due to ~~lower AFUDC borrowed funds resulting from completed environmental projects.~~

~~A $7 million increase primarily due to higher~~increased long-term debt balances at I&M.

~~These increases were partially offset by:~~

A $4$7 million ~~decrease~~increase at PSO primarily due to the 2017 deferral of the debt component of carrying charges on environmental control costs for projects at ~~PSO.~~Northeastern Plant, Unit 3 and Comanche Plant.

A $3 million increase at SWEPCo primarily due to other interest expense accruals for refunds and true-ups in 2018 and interest expense credits in 2017 on Welsh Plant and Flint Creek Plant environmental project deferrals.

Income Tax Expense (Credit) decreased ~~$64~~$322 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT, other book/tax differences which are accounted for on a flow-through basis and a decrease in pretax book ~~income and income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine, partially offset by the recording of favorable state and federal income tax adjustments in 2016.~~income.

Equity Earnings (Loss) of Unconsolidated ~~Subsidiary~~Subsidiaries ~~decreased $9~~increased $7 million primarily due to a prior period income tax adjustment ~~for DHLC, a SWEPCo unconsolidated subsidiary.~~recognized in 2017.

Net Income Attributable to Noncontrolling Interest ~~increased~~decreased $9 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This ~~increase is~~decrease was offset by ~~a decrease~~an increase in Income Tax ~~Expense.~~Expense (Credit) above.

TRANSMISSION AND DISTRIBUTION UTILITIES


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
Transmission and Distribution Utilities	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Revenues	$	1,173.3		$	1,275.6		$	3,313.2		$	3,468.5		$	1,211.5		$	1,173.3		$	3,510.9		$	3,313.2
Purchased Electricity	215.7			253.6			626.0			662.2			218.7			215.7			660.0			626.0
Amortization of Generation Deferrals	58.7			66.1			172.9			173.0			56.9			58.7			171.9			172.9
Gross Margin	898.9			955.9			2,514.3			2,633.3			935.9			898.9			2,679.0			2,514.3
Other Operation and Maintenance	303.2			358.2			882.5			1,009.5			420.4			305.4			1,152.1			889.2
Depreciation and Amortization	182.3			181.4			502.4			505.0			201.4			182.3			558.4			502.4
Taxes Other Than Income Taxes	133.6			132.0			387.1			373.0			143.2			133.6			413.2			387.1
Operating Income	279.8			284.3			742.3			745.8			170.9			277.6			555.3			735.6
Interest and Investment Income	1.2			1.5			5.6			5.5			1.3			1.2			2.6			5.6
Carrying Costs Income	0.5			0.9			3.0			4.0			0.2			0.5			1.5			3.0
Allowance for Equity Funds Used During Construction	0.9			2.2			6.3			10.6			7.8			0.9			23.0			6.3
Non-Service Cost Components of Net Periodic Benefit Cost													8.3			2.2			24.6			6.7
Interest Expense	(61.0		)	(63.2		)	(182.5		)	(196.0		)	(63.5		)	(61.0		)	(185.6		)	(182.5		)
Income Before Income Tax Expense	221.4			225.7			574.7			569.9
Income Tax Expense	77.4			70.0			200.4			182.1
Income Before Income Tax Expense (Credit)													125.0			221.4			421.4			574.7
Income Tax Expense (Credit)													(20.2		)	77.4			36.8			200.4
Net Income	144.0			155.7			374.3			387.8			145.2			144.0			384.6			374.3
Net Income Attributable to Noncontrolling Interests	—			—			—			—			—			—			—			—
Earnings Attributable to AEP Common Shareholders	$	144.0		$	155.7		$	374.3		$	387.8		$	145.2		$	144.0		$	384.6		$	374.3

Summary of KWh Energy Sales for Transmission and Distribution Utilities


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of KWhs)				(in millions of KWhs)
Retail:
Residential	7,511	8,325	19,361	20,575	7,948	7,511	21,154	19,361
Commercial	6,941	7,287	19,184	19,676	7,165	6,941	19,634	19,184
Industrial	5,575	5,518	16,992	16,522	5,720	5,575	17,259	16,992
Miscellaneous	185	187	516	528	186	185	514	516
Total Retail (a)	20,212	21,317	56,053	57,301	21,019	20,212	58,561	56,053

Wholesale (b)	585	654	1,749	1,389	634	585	1,835	1,749

Total KWhs	20,797	21,971	57,802	58,690	21,653	20,797	60,396	57,802


(a)	Represents energy delivered to distribution customers.


(b)	Primarily ~~Ohio’s~~OPCo’s contractually obligated purchases of OVEC power sold into PJM.

Summary of Heating and Cooling Degree Days for Transmission and Distribution Utilities


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in degree days)				(in degree days)
Eastern Region
Actual – Heating (a)	—	—	1,500	1,929	—	—	2,158	1,500
Normal – Heating (b)	6	7	2,091	2,110	6	6	2,076	2,091

Actual – Cooling (c)	642	900	957	1,209	864	642	1,322	957
Normal – Cooling (b)	670	664	960	956	670	670	964	960

Western Region
Actual – Heating (a)	—	—	103	123	—	—	234	103
Normal – Heating (b)	—	—	199	198	—	—	194	199

Actual – Cooling (d)	1,393	1,534	2,640	2,619	1,424	1,393	2,612	2,640
Normal – Cooling (b)	1,364	1,358	2,396	2,384	1,367	1,364	2,413	2,396


(a)	Heating degree days are calculated on a 55 degree temperature base.


(b)	Normal Heating/Cooling represents the thirty-year average of degree days.


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


(d)	Western Region cooling degree days are calculated on a 70 degree temperature base.

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to AEP Common Shareholders from Transmission and Distribution Utilities								(in millions)

Third Quarter of 2016	$	155.7
Third Quarter of 2017					$	144.0

Changes in Gross Margin:
Retail Margins	(58.7		)		21.2
Off-system Sales	(11.6		)		16.0
Transmission Revenues	7.6				(0.8		)
Other Revenues	5.7				0.6
Total Change in Gross Margin	(57.0		)		37.0

Changes in Expenses and Other:
Other Operation and Maintenance	55.0				(115.0		)
Depreciation and Amortization	(0.9		)		(19.1		)
Taxes Other Than Income Taxes	(1.6		)		(9.6		)
Interest and Investment Income	(0.3		)		0.1
Carrying Costs Income	(0.4		)		(0.3		)
Allowance for Equity Funds Used During Construction	(1.3		)		6.9
Non-Service Cost Components of Net Periodic Benefit Cost					6.1
Interest Expense	2.2				(2.5		)
Total Change in Expenses and Other	52.7				(133.4		)

Income Tax Expense	(7.4		)
Income Tax Expense (Credit)					97.6

Third Quarter of 2017	$	144.0
Third Quarter of 2018					$	145.2

The major components of the ~~decrease~~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 ~~decreased $59~~increased $21 million primarily due to the following:

A ~~$52~~$46 million ~~decrease~~net increase in Ohio Basic Transmission Cost Rider revenues and recoverable PJM expenses. This increase was partially offset by an increase in Other Operation and Maintenance below.

A $21 million increase in Ohio revenues associated with the Universal Service Fund (USF) ~~surcharge rate decrease.~~. This ~~decrease~~increase was offset by a corresponding ~~decrease~~increase in Other ~~Operating~~Operation and Maintenance expenses below.

~~An $18~~A $7 million ~~net decrease in recovery of equity carrying charges related to the Ohio Phase-In Recovery Rider (PIRR), net of associated amortizations.~~

~~An $8 million decrease~~increase in revenues associated with smart grid riders in Ohio. This ~~decrease~~increase was partially offset by an increase in various expenses below.

A $4 million increase in Ohio rider revenues associated with the DIR. This increase was partially offset in ~~expense items~~various expenses below.

A $7$3 million ~~decrease~~increase in ~~weather-related usage in Texas.~~

~~A $5 million decrease in~~rider revenues recovering state excise taxes due to ~~a decrease~~an increase in metered KWh in Ohio. This ~~decrease~~increase was offset by a corresponding ~~decrease~~increase in Taxes Other Than Income Taxes below.

~~These decreases were partially offset by:~~

A ~~$14~~$3 million increase in ~~AEP~~ Texas revenues associated with the Distribution Cost Recovery Factor revenue rider.

A $2 million increase in Texas revenues associated with the Transmission Cost Recovery Factor revenue rider. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.

These increases were partially offset by:

A $46 million decrease due to adjustments to the distribution decoupling under-recovery balance as a result of the 2018 Ohio Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.

A $12 million ~~favorable impact~~decrease in Ohio due to the recovery of lower current year losses from a power contract with OVEC. ~~The PUCO approved a PPA rider beginning in January 2017 to recover any net margin related to the deferral of OVEC losses starting in June 2016.~~ This ~~increase~~decrease was offset by a corresponding ~~decrease~~increase in Margins from ~~Off-System~~Off-system Sales below.

An $11 million decrease in weather-normalized margins.

Margins from Off-system Sales ~~decreased $12~~increased $16 million primarily due to lower current year losses from a power contract with OVEC in Ohio which ~~is deferred~~was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.

Transmission Revenues ~~increased $8~~decreased $1 million primarily due to the following:

A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers in Texas. This decrease was offset in Income Tax Expense (Credit) below.

This decrease was offset by:

A $6 million increase due to recovery of increased transmission investment in ERCOT.

~~Other Revenues~~ ~~increased $6 million primarily due to an increase in Texas securitization revenue, offset in other expense items below.~~

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

Other Operation and Maintenance expenses ~~decreased $55~~increased $115 million primarily due to the following:

A ~~$52~~$51 million ~~decrease~~increase in recoverable transmission expenses that were fully recovered in rate recovery riders/trackers within Gross Margins above.

A $21 million increase in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This ~~decrease~~increase was offset by a corresponding ~~decrease~~increase in Retail Margins above.

A $5$10 million ~~decrease~~increase in employee-related expenses.

A ~~$3 million decrease in recoverable smart grid expenses in Ohio. This decrease was offset in Retail Margins above.~~

~~These decreases were partially offset by:~~

~~A $6~~$4 million increase in ~~storm expenses, primarily in the Texas region.~~customer-related expenses.

Depreciation and Amortization expenses increased $1$19 million primarily due to the following:

~~An $11~~A $10 million increase ~~primarily~~in depreciation expense due to ~~securitization amortizations related to transition funding,~~an increase in the depreciable base of transmission and distribution assets.

A $4 million increase in recoverable smart grid depreciation expenses in Ohio. This increase was offset in ~~Other Revenues~~Retail Margins above.

A $2 million increase in amortization due to ~~amortization of~~ capitalized ~~software costs.~~

~~These increases were partially offset by:~~

~~A $5 million decrease in recoverable DIR depreciation expense in Ohio.~~

~~A $4 million decrease in amortization expenses for the collection of carrying costs on Ohio deferred capacity charges beginning June 2015.~~

~~A $4 million decrease in recoverable smart grid rider depreciation expenses in Ohio. This decrease was offset in Retail Margins above.~~software.

Taxes Other Than Income Taxes increased $2$10 million primarily due to the following:

A $7$5 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.

~~This~~A $4 million increase ~~was partially offset by:~~

~~A $5 million decrease~~ in rider revenues recovering state excise taxes due to ~~a decrease~~an increase in metered ~~KWh~~KWhs. This increase was offset in ~~Ohio.~~Retail Margins above.

~~Interest Expense~~ decreased $2 million primarily due to a decrease in the Texas securitization transition assets as a result of the final maturity of the first Texas securitization bond. This decrease was offset by a corresponding decrease in Other Revenues above.

~~Income TaxExpense~~Allowance for Equity Funds Used During Construction increased $7 million primarily due to increased transmission projects in Texas.

Non-Service Cost Components of Net Periodic Benefit Cost decreased $6 million primarily due to favorable asset returns for the ~~recording~~funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ~~favorable~~ASU 2017-07.

Income Tax Expense (Credit) decreased $98 million primarily due to the change in the corporate federal income tax ~~adjustments~~rate from 35% in ~~2016~~2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and ~~other book/tax differences which are accounted for on~~ a ~~flow-through basis.~~decrease in pretax book income.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to AEP Common Shareholders from Transmission and Distribution Utilities								(in millions)

Nine Months Ended September 30, 2016	$	387.8
Nine Months Ended September 30, 2017					$	374.3

Changes in Gross Margin:
Retail Margins	(123.0		)		140.4
Off-system Sales	(26.8		)		32.6
Transmission Revenues	24.2				(7.6		)
Other Revenues	6.6				(0.7		)
Total Change in Gross Margin	(119.0		)		164.7

Changes in Expenses and Other:
Other Operation and Maintenance	127.0				(262.9		)
Depreciation and Amortization	2.6				(56.0		)
Taxes Other Than Income Taxes	(14.1		)		(26.1		)
Interest and Investment Income	0.1				(3.0		)
Carrying Costs Income	(1.0		)		(1.5		)
Allowance for Equity Funds Used During Construction	(4.3		)		16.7
Non-Service Cost Components of Net Periodic Benefit Cost					17.9
Interest Expense	13.5				(3.1		)
Total Change in Expenses and Other	123.8				(318.0		)

Income Tax Expense	(18.3		)
Income Tax Expense (Credit)					163.6

Nine Months Ended September 30, 2017	$	374.3
Nine Months Ended September 30, 2018					$	384.6

The major components of the ~~decrease~~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 ~~decreased $123~~increased $140 million primarily due to the following:

A ~~$140~~$155 million ~~decrease~~net increase in Ohio Basic Transmission Cost Rider revenues and recoverable PJM expenses. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.

A $61 million increase in Ohio revenues associated with the ~~USF surcharge rate decrease. This decrease was offset by a corresponding decrease in Other Operating and Maintenance expenses below.~~

~~A $14 million decrease in weather-normalized margins, primarily in the residential class.~~

~~A $21 million decrease due to a prior year reversal of a regulatory provision resulting from a favorable court decision in Ohio.~~

~~A $13 million decrease in revenues associated with smart grid riders in Ohio. This decrease was offset in expense items below.~~

~~A $9 million net decrease in recovery of equity carrying charges related to the PIRR, net of associated amortizations.~~

~~A $7 million decrease in state excise taxes due to a decrease in metered KWh in Ohio. This decrease was offset by a corresponding decrease in Taxes Other Than Income Taxes.~~

~~These decreases were partially offset by:~~

A $46 million favorable impact in Ohio due to the recovery of losses from a power contract with OVEC. The PUCO approved a PPA rider beginning in January 2017 to recover any net margin related to the deferral of OVEC losses starting in June 2016.USF. This increase was offset by a corresponding ~~decrease~~increase in ~~Margins from Off-System Sales~~Other Operation and Maintenance expenses below.

An $18 million increase in Ohio rider revenues associated with the DIR. This increase was partially offset in various expenses below.

A ~~$40~~$16 million increase in ~~AEP~~ Texas revenues associated with the Distribution Cost Recovery Factor revenue rider.

A $6$13 million increase in ~~rider~~Texas revenues associated with the ~~DIR.~~Transmission Cost Recovery Factor revenue rider. This increase iswas partially offset by an increase in ~~other expense items~~Other Operation and Maintenance expenses below.

A $13 million increase in Texas weather-related usage primarily driven by a 127% increase in heating degree days partially offset by a 1% decrease in cooling degree days.

These increases were partially offset by:

A $42 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.

A $30 million decrease in Ohio due to the recovery of lower current year losses from a power contract with OVEC. This decrease was offset by a corresponding increase in Margins from Off-system Sales below.

Margins from Off-system Sales ~~decreased $27~~increased $33 million primarily due to ~~the following:~~

~~A $46 million decrease in Ohio due to~~lower current year losses from a power contract with OVEC in Ohio which ~~is deferred~~was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.

~~This decrease was partially offset by:~~

~~An $18 million increase in Ohio primarily due to the impact of prior year losses from a power contract with OVEC which was not included in the OVEC PPA rider.~~

Transmission Revenues ~~increased $24~~decreased $8 million primarily due to the following:

A $20 million decrease due to the 2018 provisions for customer refunds due to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.

A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers in Texas. This decrease was offset in Income Tax Expense (Credit) below.

These decreases were partially offset by:

A $19 million increase due to recovery of increased transmission investment in ERCOT.

~~Other Revenues~~ ~~increased $7 million primarily due to an increase in Texas securitization revenue, offset in other expense items below.~~

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

Other Operation and Maintenance expenses ~~decreased $127~~increased $263 million primarily due to the following:

A ~~$140~~$195 million ~~decrease~~increase in recoverable transmission expenses that were fully recovered in rate recovery riders/trackers within Gross Margins above.

A $61 million increase in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This ~~decrease~~increase was offset by a corresponding ~~decrease~~increase in Retail Margins above.

A ~~$10~~$7 million ~~decrease~~increase in distribution expenses.

A $7 million increase in employee-related expenses.

These ~~decreases~~increases were partially offset by:

A ~~$12~~$55 million ~~increase~~decrease in Ohio PJM expenses primarily related to the annual formula rate true-up that will be ~~recovered~~refunded in future periods.

~~A $6 million increase in storm expenses, primarily in the Texas region.~~

~~A $5 million increase in vegetation management expenses.~~

Depreciation and Amortization expenses ~~decreased $3~~increased $56 million primarily due to the following:

~~An $11 million decrease in amortization expenses for the collection of carrying costs on Ohio deferred capacity charges beginning June 2015.~~

~~An $8 million decrease due to recoveries of transmission cost rider carrying costs in Ohio. This decrease was partially offset in Retail Margins above.~~

A ~~$7 million decrease in recoverable DIR depreciation expense in Ohio.~~

~~A $5 million decrease in recoverable smart grid rider depreciation expenses in Ohio. This decrease was offset in Retail Margins above.~~

~~These decreases were partially offset by:~~

~~A $16 million increase due to securitization amortizations related to transition funding, offset in Other Revenues above.~~

~~A $9~~$28 million increase in depreciation expense ~~primarily~~ due to an increase in the depreciable base of transmission and distribution assets.

A $13 million increase in recoverable DIR depreciation expense in Ohio. This increase was offset in Retail Margins above.

A $6 million increase in amortization due to capitalized software.

A $5 million increase due to ~~amortization of capitalized software costs.~~securitization amortizations related to Texas securitized transition funding. This increase was offset in Other Revenues and in Interest Expense.

Taxes Other Than Income Taxes increased ~~$14~~$26 million primarily due to the following:

A ~~$20~~$14 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.

~~This~~An $11 million increase ~~were partially offset by:~~

~~A $7 million decrease~~ in rider revenues recovering state excise taxes due to ~~a decrease~~an increase in metered ~~KWh~~KWhs. This increase was offset in ~~Ohio.~~Retail Margins above.

Allowance for Equity Funds Used During Construction ~~decreased $4 millionprimarily due to larger short-term debt balances.~~

~~Interest Expense~~ ~~decreased $14~~increased $17 million primarily due to ~~the following:~~increased transmission projects in Texas.

~~A $9~~

Non-Service Cost Components of Net Periodic Benefit Cost decreased $18 million ~~decrease~~primarily due to favorable asset returns for the ~~maturity~~funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ~~a senior unsecured note in June 2016 in Ohio.~~ASU 2017-07.

A $7 million decrease in the Texas securitization transition assets due to the final maturity of the first Texas securitization bond. This decrease was offset by a corresponding decrease in Other Revenues above.

Income Tax Expense(Credit) ~~increased $18~~decreased $164 million primarily due to the ~~recording of favorable state and~~change in the corporate federal income tax ~~adjustments~~rate from 35% in ~~2016~~2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and ~~other book/tax differences which are accounted for on~~ a ~~flow-through basis.~~decrease in pretax book income.

AEP TRANSMISSION HOLDCO


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
AEP Transmission Holdco	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Transmission Revenues	$	178.5		$	132.4		$	581.9		$	382.7		$	187.2		$	178.5		$	605.2		$	581.9
Other Operation and Maintenance	23.1			12.2			54.5			32.7			30.9			23.2			76.2			54.7
Depreciation and Amortization	26.1			17.1			74.7			48.4			34.4			26.1			100.0			74.7
Taxes Other Than Income Taxes	28.6			22.7			85.0			65.7			36.3			28.6			106.5			85.0
Operating Income	100.7			80.4			367.7			235.9			85.6			100.6			322.5			367.5
Interest and Investment Income	0.1			—			0.5			—			0.4			0.1			1.1			0.4
Carrying Costs Expense	—			—			(0.1		)	(0.2		)
Allowance for Equity Funds Used During Construction	11.6			13.5			35.9			39.8			13.8			11.6			45.4			35.9
Non-Service Cost Components of Net Periodic Benefit Cost													0.7			0.1			2.1			0.2
Interest Expense	(17.9		)	(12.2		)	(52.3		)	(35.4		)	(24.2		)	(17.9		)	(66.8		)	(52.3		)
Income Before Income Tax Expense and Equity Earnings	94.5			81.7			351.7			240.1			76.3			94.5			304.3			351.7
Income Tax Expense	38.6			35.2			142.1			103.2			19.2			38.6			75.0			142.1
Equity Earnings of Unconsolidated Subsidiaries	20.6			23.0			68.7			72.6			17.1			20.6			51.6			68.7
Net Income	76.5			69.5			278.3			209.5			74.2			76.5			280.9			278.3
Net Income Attributable to Noncontrolling Interests	1.0			0.5			2.6			2.0			0.9			1.0			2.5			2.6
Earnings Attributable to AEP Common Shareholders	$	75.5		$	69.0		$	275.7		$	207.5		$	73.3		$	75.5		$	278.4		$	275.7

Summary of Investment in Transmission Assets for AEP Transmission Holdco


	September 30,				September 30,
	2017		2016		2018		2017
	(in millions)				(in millions)
Plant in Service	$	5,001.4	$	3,330.5	$	6,307.3	$	5,001.4
CWIP	1,392.8		1,565.8
Accumulated Depreciation	156.6		88.1
Construction Work in Progress					1,823.0		1,392.8
Accumulated Depreciation and Amortization					244.3		156.6
Total Transmission Property, Net	$	6,237.6	$	4,808.2	$	7,886.0	$	6,237.6

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017

Reconciliation of Third Quarter of ~~2016~~2017 to Third Quarter of ~~2017~~2018

Earnings Attributable to AEP Common Shareholders from AEP Transmission Holdco

(in millions)


Third Quarter of 2016	$	69.0
Third Quarter of 2017				$	75.5

Changes in Transmission Revenues:
Transmission Revenues	46.1			8.7
Total Change in Transmission Revenues	46.1			8.7

Changes in Expenses and Other:
Other Operation and Maintenance	(10.9		)	(7.7		)
Depreciation and Amortization	(9.0		)	(8.3		)
Taxes Other Than Income Taxes	(5.9		)	(7.7		)
Interest and Investment Income	0.1			0.3
Allowance for Equity Funds Used During Construction	(1.9		)	2.2
Non-Service Cost Components of Net Periodic Pension Cost				0.6
Interest Expense	(5.7		)	(6.3		)
Total Change in Expenses and Other	(33.3		)	(26.9		)

Income Tax Expense	(3.4		)	19.4
Equity Earnings	(2.4		)
Equity Earnings of Unconsolidated Subsidiaries				(3.5		)
Net Income Attributable to Noncontrolling Interests	(0.5		)	0.1

Third Quarter of 2017	$	75.5
Third Quarter of 2018				$	73.3

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

Transmission Revenues increased ~~$46~~$9 million primarily due to an increase in the formula ~~rates~~rate revenue requirement primarily driven by continued investment in transmission assets. This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.

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

Other Operation and Maintenance expenses increased ~~$11~~$8 million primarily due to increased transmission investment.

Depreciation and Amortization expenses increased $9$8 million primarily due to a higher depreciable base.

Taxes Other Than Income Taxes increased $6$8 million primarily due to ~~increased~~higher property taxes as a result of ~~additional~~increased transmission investment.

Interest Expense increased $6 million primarily due to higher ~~outstanding~~ long-term debt balances.

Income Tax Expense ~~increased $3~~decreased $19 million primarily due to ~~an increase~~the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

Equity Earnings of Unconsolidated Subsidiaries decreased $4 million due to lower pretax equity earnings at ETT primarily due to decreased revenues driven by Tax Reform.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017

Reconciliation of Nine Months Ended September 30, ~~2016~~2017 to Nine Months Ended September 30, ~~2017~~2018

Earnings Attributable to AEP Common Shareholders from AEP Transmission Holdco

(in millions)


Nine Months Ended September 30, 2016	$	207.5
Nine Months Ended September 30, 2017				$	275.7

Changes in Transmission Revenues:
Transmission Revenues	199.2			23.3
Total Change in Transmission Revenues	199.2			23.3

Changes in Expenses and Other:
Other Operation and Maintenance	(21.8		)	(21.5		)
Depreciation and Amortization	(26.3		)	(25.3		)
Taxes Other Than Income Taxes	(19.3		)	(21.5		)
Interest and Investment Income	0.5			0.7
Carrying Costs Expense	0.1
Allowance for Equity Funds Used During Construction	(3.9		)	9.5
Non-Service Cost Components of Net Periodic Pension Cost				1.9
Interest Expense	(16.9		)	(14.5		)
Total Change in Expenses and Other	(87.6		)	(70.7		)

Income Tax Expense	(38.9		)	67.1
Equity Earnings	(3.9		)
Equity Earnings of Unconsolidated Subsidiaries				(17.1		)
Net Income Attributable to Noncontrolling Interests	(0.6		)	0.1

Nine Months Ended September 30, 2017	$	275.7
Nine Months Ended September 30, 2018				$	278.4

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

Transmission Revenues increased ~~$199~~$23 million primarily due to the ~~current year favorable impact of~~following:

An $87 million increase in revenues due to an increase in the ~~modification of the PJM OATT~~ formula ~~rates combined with an increase~~rate revenue requirement primarily driven by continued investment in transmission assets.

This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.

This increase was partially offset by:

A $64 million decrease in revenues due to a lower annual formula rate true-up in 2018 driven by implementing forward looking formula rates in 2017.

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

Other Operation and Maintenance expenses increased $22 million primarily due to increased transmission investment.

Depreciation and Amortization expenses increased ~~$26~~$25 million primarily due to a higher depreciable base.

Taxes Other Than Income Taxes increased ~~$19~~$22 million primarily due to ~~increased~~higher property taxes as a result of ~~additional~~increased transmission investment.

Allowance for Equity Funds Used During Construction ~~decreased $4~~increased $10 million primarily due to ~~the FERC~~increased transmission ~~complaint and an increase~~investment resulting in ~~the amount of short-term debt, offset by an increase in the~~a higher CWIP balance.

Interest Expense increased ~~$17~~$15 million primarily due to the following:

A $19 million increase primarily due to higher ~~outstanding~~ long-term debt balances.

This increase was partially offset by:

A $4 million decrease due to higher AFUDC borrowed funds resulting from a higher CWIP balance.

Income Tax Expense ~~increased $39~~decreased $67 million primarily due to ~~an increase~~the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

Equity Earnings of Unconsolidated Subsidiaries decreased $4$17 million primarily due to lower pretax equity earnings at ETT ~~resulting from increased property taxes, depreciation expense, and decreased AFUDC, partially offset by increased revenues. The revenue increase is primarily~~ due to ~~interim rate increases in the third quarter of 2016~~decreased revenues driven by Tax Reform and ~~higher loads, partially offset by~~ an ETT rate reduction ~~that went into effect~~implemented in March 2017.

GENERATION & MARKETING


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
Generation & Marketing	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Revenues	$	465.5		$	859.4		$	1,467.5		$	2,291.2		$	521.6		$	465.5		$	1,487.4		$	1,467.5
Fuel, Purchased Electricity and Other	354.6			567.4			1,062.7			1,490.6			405.0			354.6			1,167.8			1,062.7
Gross Margin	110.9			292.0			404.8			800.6			116.6			110.9			319.6			404.8
Other Operation and Maintenance	56.5			95.8			211.4			290.2			68.2			58.7			192.6			218.1
Asset Impairments and Other Related Charges	(2.5		)	2,254.4			10.6			2,254.4			35.0			(2.5		)	35.0			10.6
Gain on Sale of Merchant Generation Assets	—			—			(226.4		)	—			—			—			—			(226.4		)
Depreciation and Amortization	6.2			50.5			17.5			149.8			12.0			6.2			26.4			17.5
Taxes Other Than Income Taxes	3.2			8.7			8.9			29.0			3.7			3.2			10.3			8.9
Operating Income (Loss)	47.5			(2,117.4		)	382.8			(1,922.8		)	(2.3		)	45.3			55.3			376.1
Interest and Investment Income	2.7			0.3			7.9			1.2			3.6			2.7			9.9			7.9
Non-Service Cost Components of Net Periodic Benefit Cost													3.8			2.2			11.5			6.7
Interest Expense	(4.0		)	(9.5		)	(14.7		)	(27.1		)	(3.8		)	(4.0		)	(11.7		)	(14.7		)
Income (Loss) Before Income Tax Expense	46.2			(2,126.6		)	376.0			(1,948.7		)
Income Before Income Tax Expense (Credit) and Equity Earnings													1.3			46.2			65.0			376.0
Income Tax Expense (Credit)	12.5			(757.4		)	129.7			(699.9		)	(3.6		)	12.5			3.7			129.7
Net Income (Loss)	33.7			(1,369.2		)	246.3			(1,248.8		)
Net Income Attributable to Noncontrolling Interests	—			—			—			—
Earnings (Loss) Attributable to AEP Common Shareholders	$	33.7		$	(1,369.2	)	$	246.3		$	(1,248.8	)
Equity Earnings of Unconsolidated Subsidiaries													0.2			—			0.5			—
Net Income													5.1			33.7			61.8			246.3
Net Loss Attributable to Noncontrolling Interests													(0.2		)	—			(0.5		)	—
Earnings Attributable to AEP Common Shareholders													$	5.3		$	33.7		$	62.3		$	246.3

Summary of MWhs Generated for Generation & Marketing


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of MWhs)				(in millions of MWhs)
Fuel Type:
Coal	2	8	10	19	4	2	10	10
Natural Gas	—	4	2	11	—	—	—	2
Wind					—	—	1	—
Total MWhs	2	12	12	30	4	2	11	12

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to AEP Common Shareholders from Generation & Marketing								(in millions)

Third Quarter of 2016	$	(1,369.2	)
Third Quarter of 2017					$	33.7

Changes in Gross Margin:
Generation	(175.4		)		(7.5		)
Retail, Trading and Marketing	(10.1		)		6.7
Other	4.4
Other Revenues					6.5
Total Change in Gross Margin	(181.1		)		5.7

Changes in Expenses and Other:
Other Operation and Maintenance	39.3				(9.5		)
Asset Impairments and Other Related Charges	2,256.9				(37.5		)
Depreciation and Amortization	44.3				(5.8		)
Taxes Other Than Income Taxes	5.5				(0.5		)
Interest and Investment Income	2.4				0.9
Non-Service Cost Components of Net Periodic Benefit Cost					1.6
Interest Expense	5.5				0.2
Total Change in Expenses and Other	2,353.9				(50.6		)

Income Tax Expense	(769.9		)
Income Tax Expense (Credit)					16.1
Equity Earnings of Unconsolidated Subsidiaries					0.2
Net Loss Attributable to Noncontrolling Interests					0.2

Third Quarter of 2017	$	33.7
Third Quarter of 2018					$	5.3

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

Generation decreased $8 million primarily due to the reduction of energy margins.

Retail, Trading and Marketing increased $7 million due to increased energy volumes.

Other Revenues increased $7 million primarily due to renewable projects placed in service and the repowering of Trent and Desert Sky.

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

Other Operation and Maintenance expenses increased $10 million primarily due to the following:

A $17 million increase due to severance accruals related to the announced merchant generation plant retirements.

This increase was partially offset by:

A $7 million decrease primarily due to the sale of certain merchant generation assets in 2017.

Asset Impairments and Other Related Chargesincreased $38 million primarily due to the $35 million impairment of Racine in the third quarter of 2018.

Depreciation and Amortization increased $6 million due to a higher depreciable base from increased investments in wind farms and renewable energy sources.

Income Tax Expense (Credit) decreased $16 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and a decrease in pretax book income.

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



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

Nine Months Ended September 30, 2017	$	246.3

Changes in Gross Margin:
Generation	(74.6		)
Retail, Trading and Marketing	(20.1		)
Other Revenues	9.5
Total Change in Gross Margin	(85.2		)

Changes in Expenses and Other:
Other Operation and Maintenance	25.5
Asset Impairments and Other Related Charges	(24.4		)
Gain on Sale of Merchant Generation Assets	(226.4		)
Depreciation and Amortization	(8.9		)
Taxes Other Than Income Taxes	(1.4		)
Interest and Investment Income	2.0
Non-Service Cost Components of Net Periodic Benefit Cost	4.8
Interest Expense	3.0
Total Change in Expenses and Other	(225.8		)

Income Tax Expense (Credit)	126.0
Equity Earnings of Unconsolidated Subsidiaries	0.5
Net Loss Attributable to Noncontrolling Interests	0.5

Nine Months Ended September 30, 2018	$	62.3

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

Generation decreased ~~$175~~$75 million primarily due to the reduction of revenues associated with the sale of certain merchant generation ~~assets.~~assets in 2017 combined with reduced energy margins in 2018.

Retail, Trading and Marketing decreased ~~$10~~$20 million primarily due to lower ~~retail~~ margins in ~~2017 partially offset by~~2018 combined with the impact of favorable wholesale trading and marketing performance in 2017.

Other Revenues increased $4$10 million primarily due to renewable projects placed in ~~service.~~service and the repowering of Trent and Desert Sky.

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

Other Operation and Maintenance expenses decreased ~~$39~~$26 million primarily due ~~to decreased plant expenses as a result of~~ the ~~sale of certain merchant generation assets.~~following:

~~Asset Impairments and Other Related Charges~~ ~~decreased $2.3 billion due to the asset impairment of certain merchant generation assets in 2016.~~

~~Depreciation and Amortization~~ ~~expenses decreased $44~~A $43 million ~~primarily due to the sale and impairment of certain merchant generation assets.~~

~~Taxes Other Than Income Taxes~~ ~~decreased $6 million~~decrease primarily due to the sale of certain merchant generation ~~assets.~~

assets in 2017.

This decrease was partially offset by:

~~Interest Expense~~ ~~decreased $6~~A $17 million ~~primarily~~increase due to ~~reduced debt as a result of~~severance accruals related to the ~~sale of certain~~announced merchant generation ~~assets.~~

~~Income Tax Expense~~ ~~increased $770 million primarily due to an increase in pretax book income resulting primarily from the impairment of certain merchant generation assets in 2016.~~

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Earnings Attributable to AEP Common Shareholders from Generation & Marketing
(in millions)

Nine Months Ended September 30, 2016 $ (1,248.8 )

Changes in Gross Margin:
Generation (376.2 )
Retail, Trading and Marketing (33.6 )
Other 14.0
Total Change in Gross Margin (395.8 )

Changes in Expenses and Other:
Other Operation and Maintenance 78.8
Asset Impairments and Other Related Charges 2,243.8
Gain on Sale of Merchant Generation Assets 226.4
Depreciation and Amortization 132.3
Taxes Other Than Income Taxes 20.1
Interest and Investment Income 6.7
Interest Expense 12.4
Total Change in Expenses and Other 2,720.5

Income Tax Expense (829.6 )

Nine Months Ended September 30, 2017 $ 246.3

~~Generation~~ ~~decreased $376 million primarily due to the reduction of revenues associated with the sale of certain merchant generation assets.~~

~~Retail, Trading and Marketing~~ ~~decreased $34 million primarily due to lower margins in 2017 combined with the impact of favorable wholesale trading and marketing performance in 2016.~~

~~Other~~ ~~increased $14 million primarily due to renewable projects placed in service.~~

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

~~Other Operation and Maintenance~~ ~~expenses decreased $79 million primarily due to decreased~~ plant ~~expenses as a result of the sale of certain merchant generation assets.~~

retirements.

Asset Impairments and Other Related Charges ~~decreased $2.2 billion~~increased $24 million due to the ~~asset~~$35 million impairment of ~~certain~~Racine in the third quarter of 2018 compared to the $11 million impairment of other merchant generation assets in ~~2016.~~2017.

Gain on Sale of Merchant Generation Assets ~~increased~~decreased $226 million due to the sale of certain merchant generation ~~assets.~~assets in 2017.

Depreciation and Amortization ~~expenses~~ increased $9 million due to a higher depreciable base from increased investments in wind farms and renewable energy sources.

Non-Service Cost Components of Net Periodic Benefit Cost decreased ~~$132~~$5 million primarily due to favorable asset returns for the ~~sale~~funded Pension and ~~impairment~~OPEB plans, favorable OPEB cost savings arrangements and the implementation of ~~certain merchant generation assets.~~ASU 2017-07.

~~Taxes Other Than~~ Income ~~Taxes~~Tax Expense (Credit) decreased ~~$20~~$126 million primarily due to a decrease in pretax book income driven by the gain on the sale of certain merchant generation ~~assets.~~

~~Interest~~assets in 2017 and ~~Investment Income~~ ~~increased $7 million primarily due~~the change in the corporate federal income tax rate from 35% in 2017 to ~~increased cash invested~~21% in 2018 as a result of ~~the sale of certain merchant generation assets.~~Tax Reform.

~~Interest Expense~~ ~~decreased $12 million primarily due to reduced debt as a result of the sale of certain merchant generation assets.~~

~~Income Tax Expense~~ ~~increased $830 million primarily due to an increase in pretax book income and state income taxes resulting primarily from the impairment of certain merchant generation assets in 2016.~~

CORPORATE AND OTHER

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017

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

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

Earnings Attributable to AEP Common Shareholders from Corporate and Other decreased from $36 million in 2016 to $5 million in 2017 primarily due to the prior year reversal of a capital loss valuation allowance related to the pending sale of certain merchant generation assets as well as tax return adjustments related to the prior year disposition of AEP’s commercial barging operations, partially offset by the gain recognized on the sale of a cost-based investment in the third quarter of 2017.

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

~~Earnings Attributable to AEP Common Shareholders from Corporate and Other decreased from income of $62 million in 2016 to~~ a loss of $11 million in 2017 to a loss of $17 million in 2018 primarily due to ~~the prior year reversal~~a $42 million increase in interest expense as a result of ~~capital loss valuation allowances~~increased debt outstanding, a $20 million impairment of an equity investment and related ~~to effectively settling~~assets in 2018 and a 2011 audit issue with the IRS and the impact of the pending sale of certain merchant generation assets as well as 2015 tax return adjustments related to the disposition of AEP’s commercial barging operations, partially offset by the$12 million gain recognized on the sale of ~~a cost-based~~an equity investment in the third quarter of 2017. These items were partially offset by a $45 million decrease in general corporate expenses and an $18 million decrease in income tax expense related to the enactment of the Kentucky state tax legislation in the second quarter of 2018.

AEP SYSTEM INCOME TAXES

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017

Income Tax Expense ~~increased $799~~decreased $345 million primarily due to ~~an increase~~the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in Income Tax Expense is also due to the third quarter of 2016 reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets as well as prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.income.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017

Income Tax Expense ~~increased $932~~decreased $704 million primarily due to ~~an increase~~the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in Income Tax Expense is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets as well as prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.income.

FINANCIAL CONDITION

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

LIQUIDITY AND CAPITAL RESOURCES

Debt and Equity Capitalization


	September 30, 2017				December 31, 2016					September 30, 2018				December 31, 2017
	(dollars in millions)									(dollars in millions)
Long-term Debt, including amounts due within one year	$	20,721.7	51.9	%	$	20,391.2	(a)	51.6	%	$	22,774.0	51.7	%	$	21,173.3	51.5	%
Short-term Debt	1,059.3		2.7		1,713.0			4.3		2,242.6		5.1		1,638.6		4.0
Total Debt	21,781.0		54.6		22,104.2		(a)	55.9		25,016.6		56.8		22,811.9		55.5
AEP Common Equity	18,069.1		45.3		17,397.0			44.0		19,016.8		43.1		18,287.0		44.4
Noncontrolling Interests	36.4		0.1		23.1			0.1		30.0		0.1		26.6		0.1
Total Debt and Equity Capitalization	$	39,886.5	100.0	%	$	39,524.3		100.0	%	$	44,063.4	100.0	%	$	41,125.5	100.0	%


~~(a)~~	Amounts include debt related to the Lawrenceburg Plant that has been classified as Liabilities Held for Sale on the balance sheet. See “Gavin, Waterford, Darby and Lawrenceburg Plants (Generation & Marketing Segment)” section of Note 6 for additional information.

AEP’s ratio of debt-to-total capital ~~decreased~~increased from ~~55.9%~~55.5% as of December 31, ~~2016~~2017 to ~~54.6%~~56.8% as of September 30, ~~2017~~2018 primarily due to ~~a decrease~~an increase in ~~short-term~~ debt due to ~~the use of proceeds from the sale of Merchant Generation Assets to pay down debt. See “Gavin, Waterford, Darby~~increasing construction expenditures for distribution and ~~Lawrenceburg Plants (Generation & Marketing Segment)” section of Note 6 for additional information.~~transmission investments.

Liquidity

Liquidity, or access to cash, is an important factor in determining AEP’s financial stability. Management believes AEP has adequate liquidity under its existing credit facilities. As of September 30, ~~2017,~~2018, AEP had a $3 billion revolving credit facility commitment to support its operations. In ~~May 2017,~~October 2018, the ~~$500 million~~ revolving credit facility ~~due in~~was increased to $4 billion and extended until June ~~2018 was terminated.~~2022. Additional liquidity is available from cash from operations and a receivables securitization agreement. Management is committed to maintaining adequate liquidity. AEP generally uses short-term borrowings to fund working capital needs, property acquisitions and construction until long-term funding is arranged. Sources of long-term funding include issuance of long-term debt, sale-leaseback or leasing agreements or common stock.

Commercial Paper Credit Facilities

AEP manages liquidity by maintaining adequate external financing commitments. As of September 30, ~~2017,~~2018, available liquidity was approximately $3$2.3 billion as illustrated in the table below:

Amount Maturity
(in millions)
Commercial Paper Backup:

Revolving Credit Facility $ 3,000.0
June 2021
Total 3,000.0

Cash and Cash Equivalents 343.9

Total Liquidity Sources 3,343.9

Less: AEP Commercial Paper Outstanding 295.0

Net Available Liquidity $ 3,048.9

~~AEP has a $3 billion revolving credit facility to support its commercial paper program.~~



		Amount		Maturity
		(in millions)
Commercial Paper Backup:
	Revolving Credit Facility	$	3,000.0	June 2021
Cash and Cash Equivalents		788.3
Total Liquidity Sources		3,788.3
Less:	AEP Commercial Paper Outstanding	1,473.2

Net Available Liquidity		$	2,315.1

AEP uses its commercial paper program to meet the short-term borrowing needs of its subsidiaries. The program is used to fund both a Utility Money Pool, which funds the utility subsidiaries, and a Nonutility Money Pool, which funds certain nonutility subsidiaries. In addition, the program also funds, as direct borrowers, the short-term debt requirements of other subsidiaries that are not participants in either money pool for regulatory or operational reasons. The maximum amount of commercial paper outstanding during the first nine months of ~~2017~~2018 was ~~$1.6~~$2.3 billion. The weighted-average interest rate for AEP’s commercial paper during ~~2017~~2018 was ~~1.19%~~2.25%.

Other Credit Facilities

An uncommitted facility gives the issuer of the facility the right to accept or decline each request made under the facility. AEP issues letters of credit on behalf of subsidiaries under ~~five~~four uncommitted facilities totaling ~~$445~~$305 million. ~~In August 2017, AEP executed a $75 million uncommitted letter of credit facility due in August 2018. As of September 30, 2017, the~~The Registrants’ maximum future ~~payment~~payments for letters of credit issued under the uncommitted facilities as of September 30, 2018 was ~~$123~~$72 millionwith maturities ranging from October ~~2017~~2018 to September ~~2018.~~2019.

Securitized Accounts ~~Receivable~~Receivables

AEP’s receivables securitization agreement provides a commitment of $750 million from bank conduits to purchase ~~receivables. The agreement expires~~receivables and was amended in ~~June 2019.~~July 2018 to include a $125 million and a $625 million facility which expire in July 2020 and 2021, respectively.

Debt Covenants and Borrowing Limitations

AEP’s credit agreements contain certain covenants and require it to maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%. The method for calculating outstanding debt and capitalization is contractually defined in AEP’s credit agreements. Debt as defined in the revolving credit agreements excludes securitization bonds and debt of AEP Credit. As of September 30, ~~2017,~~2018, this contractually-defined percentage was ~~52.4%~~55.1%. Nonperformance under these covenants could result in an event of default under these credit agreements. In addition, the acceleration of AEP’s payment obligations, or the obligations of certain of AEP’s major subsidiaries, prior to maturity under any other agreement or instrument relating to debt outstanding in excess of $50 million, would cause an event of default under these credit agreements. This condition also applies in a majority of AEP’s non-exchange traded commodity contracts and would similarly allow lenders and counterparties to declare the outstanding amounts payable. However, a default under AEP’s non-exchange traded commodity contracts would not cause an event of default under its credit agreements.

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

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

Dividend Policy and Restrictions

The Board of Directors declared a quarterly dividend of ~~$0.62~~$0.67 per share in October ~~2017.~~2018. Future dividends may vary depending upon AEP’s profit levels, operating cash flow levels and capital requirements, as well as financial and other business conditions existing at the time. Parent’s income primarily derives from common stock equity in the earnings of its utility subsidiaries. Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of the subsidiaries to transfer funds to Parent in the form of dividends.

Management does not believe these restrictions ~~related to AEP’s various financing arrangements and regulatory requirements~~ will have any significant impact on its ability to access cash to meet the payment of dividends on its common stock.

See “Dividend Restrictions” section of Note 12 for additional information.

Credit Ratings

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

CASH FLOW

AEP relies primarily on cash flows from operations, debt issuances and its existing cash and cash equivalents to fund its liquidity and investing activities. AEP’s investing and capital requirements are primarily capital expenditures, repaying of long-term debt and paying dividends to shareholders.

Nine Months Ended
September 30,
2017 2016
(in millions)
Cash and Cash Equivalents at Beginning of Period $ 210.5
$ 176.4
Net Cash Flows from Continuing Operating Activities 3,124.2
3,421.0
Net Cash Flows Used for Continuing Investing Activities (1,676.6 ) (3,428.7 )
Net Cash Flows from (Used for) Continuing Financing Activities (1,314.2 ) 46.0
Net Cash Flows Used for Discontinued Operations —
(2.5 )
Net Increase in Cash and Cash Equivalents 133.4
35.8
Cash and Cash Equivalents at End of Period $ 343.9
$ 212.2

AEP uses short-term debt, including commercial paper, as a bridge to long-term debt financing. The levels of borrowing may vary significantly due to the timing of long-term debt financings and the impact of fluctuations in cash flows.



	Nine Months Ended September 30,
	2018			2017
	(in millions)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period	$	412.6		$	403.5
Net Cash Flows from Operating Activities	3,932.6			3,124.2
Net Cash Flows Used for Investing Activities	(4,688.7		)	(1,722.7		)
Net Cash Flows from (Used for) Financing Activities	1,281.0			(1,314.2		)
Net Increase in Cash, Cash Equivalents and Restricted Cash	524.9			87.3
Cash, Cash Equivalents and Restricted Cash at End of Period	$	937.5		$	490.8

Operating Activities

Nine Months Ended
September 30,
2017 2016
(in millions)
Income from Continuing Operations $ 1,527.1
$ 245.3
Depreciation and Amortization 1,485.9
1,550.2
Deferred Income Taxes 740.9
(47.0 )
Asset Impairments and Other Related Charges 10.6
2,264.9
Gain on Sale of Merchant Generation Assets (226.4 ) —
Provision for Refund – Global Settlement, Net (93.3 ) —
Accrued Taxes, Net (310.1 ) (393.0 )
Other (10.5 ) (199.4 )
Net Cash Flows from Continuing Operating Activities $ 3,124.2
$ 3,421.0



	Nine Months Ended September 30,
	2018			2017
	(in millions)
Net Income	$	1,566.5		$	1,527.1
Non-Cash Adjustments to Net Income (a)	1,728.7			2,030.6
Mark-to-Market of Risk Management Contracts	(95.4		)	(56.2		)
Pension Contributions to Qualified Plant Trust	—			(93.3		)
Property Taxes	304.8			291.4
Deferred Fuel Over/Under Recovery, Net	210.6			81.0
Recovery of Ohio Capacity Costs, Net	52.7			65.6
Provision for Refund - Global Settlement, Net	(5.5		)	(93.3		)
Change in Other Noncurrent Assets	161.6			(334.6		)
Change in Other Noncurrent Liabilities	141.9			205.7
Change in Certain Components of Working Capital	(133.3		)	(499.8		)
Net Cash Flows from Operating Activities	$	3,932.6		$	3,124.2


(a)	Non-Cash Adjustments to Net Income includes Depreciation and Amortization, Deferred Income Taxes, Allowance for Equity Funds Used During Construction, Amortization of Nuclear Fuel, Gain on Sale of Merchant Generation Assets and Gain on Sale of Equity Investments.

Net Cash Flows from Continuing Operating Activities were $3.1 billion in 2017 consisting primarily of Income from Continuing Operations of $1.5 billion and $1.5 billion of noncash Depreciation and Amortization. In addition, AEP recorded a gain of $226 million on the sale of certain merchant generation assets. AEP also recorded asset impairments of $11 million. See Note 6 - Impairment, Disposition and Assets and Liabilities Held for Sale for a complete discussion of this sale and these impairments. Deferred and Accrued Taxes changed primarily due to the income tax impacts associated with the sale of certain merchant generation assets and the receipt of a tax refund related to the U.K. Windfall Tax. AEP refunded $93 million to customers as part of the Ohio Global Settlement reached in 2016. 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.

Net Cash Flows from ~~Continuing~~ Operating Activities ~~were $3.4 billion in~~ ~~2016~~ ~~consisting primarily of Income from Continuing Operations of $245~~increased by $808 million and $1.6 billion of noncash Depreciation and Amortization. AEP also had asset impairments of $2.3 billion during the third quarter of 2016. See Note 6 - Impairment, Disposition and Assets and Liabilities Held for Sale and Impairments for a complete discussion of asset impairments and other related charges. Accrued Taxes decreased primarily due to the ~~impacts of bonus depreciation related to the Protecting Americans~~following:

A $496 million increase in cash from ~~Tax Hikes Act of 2015. Deferred Income Taxes decreased~~Change in Other Noncurrent Assets primarily due to ~~the tax effect~~changes in regulatory assets as a result of the ~~asset impairment~~impact of the FERC settlement on regulated AEP subsidiaries with rider recovery mechanisms in addition to the settlement of certain regulatory assets as a result of Ohio and West Virginia jurisdictional orders related to Tax Reform. See Note 4 - Rate Matters for additional information.

A $367 million increase in cash from Change in Certain Components of Working Capital. This increase is primarily due to lower employee-related payments, increased provisions for refund related to Tax Reform and decreased Fuel, Material and Supplies balances, partially offset by antiming of receivables and payables.

A $130 million increase in ~~tax versus book temporary differences~~cash from ~~operations, which includes provisions related~~Deferred Fuel Over/Under Recovery, Net primarily due to fluctuations of fuel and purchase power costs at PSO and the ~~Protecting Americans from~~reduction of ENEC balances at APCo and WPCo as a result of the West Virginia Tax ~~Hikes Act~~Reform Order.

A $93 million increase in cash due to a pension contribution made in the second quarter of 2015. 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.2017.

An $88 million increase in cash due to Provision for Refund - Global Settlement, Net. Refunds were primarily issued in 2017.

These increases in cash were partially offset by:

A $263 million decrease in cash from Net Income, after non-cash adjustments. See Results of Operations for additional information.

Investing Activities


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
	(in millions)						(in millions)
Construction Expenditures	$	(3,778.2	)	$	(3,387.0	)	$	(4,688.4	)	$	(3,778.2	)
Acquisitions of Nuclear Fuel	(73.2		)	(127.6		)	(26.1		)	(73.2		)
Proceeds from Sale of Merchant Generation Assets	2,159.6			—			—			2,159.6
Other	15.2			85.9			25.8			(30.9		)
Net Cash Flows Used for Continuing Investing Activities	$	(1,676.6	)	$	(3,428.7	)
Net Cash Flows Used for Investing Activities							$	(4,688.7	)	$	(1,722.7	)

Net Cash Flows Used for Continuing Investing Activities were $1.7 billion in 2017 primarily due to Construction Expenditures for environmental, distribution and transmission investments, partially offset by the proceeds received from the sale of certain merchant generation assets. See Note 6 - Impairment, Disposition and Assets and Liabilities Held for Sale for a complete discussion of this sale.

~~Net Cash Flows Used for Continuing Investing Activities were $3.4 billion in 2016 primarily due to Construction Expenditures for environmental, distribution and transmission investments.~~

~~Financing Activities~~

Nine Months Ended
September 30,
2017 2016
(in millions)
Issuance of Common Stock, Net $ —
$ 34.2
Issuance/Retirement of Debt, Net (338.2 ) 930.3
Make Whole Premium on Extinguishment of Long-term Debt (46.1 ) —
Dividends Paid on Common Stock (875.0 ) (829.8 )
Other (54.9 ) (88.7 )
Net Cash Flows from (Used for) Continuing Financing Activities $ (1,314.2 ) $ 46.0

Net Cash Flows Used for ~~Continuing Financing~~Investing Activities increased by $3 billion primarily due to the following:

A $2.2 billion decrease in 2017 were $1.3 billion. AEP’s net debt retirements were $338 million. The net retirements include retirements of $978 million of senior unsecured notes, $356 million of pollution control bonds, $258 million of securitization bonds, $835 million of other debt notes and repayments of $654 million of short term debt offset by issuances of $2.3 billion of senior unsecured notes, $242 million of pollution control bonds and $254 million of other debt notes. AEP also paid $46 million for a make whole premium on the early extinguishment of debt relatedcash due to the sale of certain merchant generation ~~assets.~~assets in 2017. See Note 6 - ~~Impairment, Disposition~~Dispositions and ~~Assets~~Impairments for additional information.

A $910 million decrease in cash due to increased construction expenditures, primarily due to increases in Transmission and ~~Liabilities Held for Sale for a complete discussion~~Distribution Utilities of ~~this sale.~~$653 million and AEP ~~paid common stock dividends~~Transmission Holdco of ~~$875~~$140 million. ~~See Note~~ 12 -

Financing Activities ~~for a complete discussion of long-term debt issuances and retirements.~~



	Nine Months Ended September 30,
	2018			2017
	(in millions)
Issuance of Common Stock, Net	$	62.5		$	—
Issuance/Retirement of Debt, Net	2,216.5			(338.2		)
Dividends Paid on Common Stock	(922.5		)	(875.0		)
Other	(75.5		)	(101.0		)
Net Cash Flows from (Used for) Financing Activities	$	1,281.0		$	(1,314.2	)

Net Cash Flows from ~~Continuing~~(Used for) Financing Activities in ~~2016~~ ~~were $46 million. AEP’s net debt issuances were $930 million. The net issuances included an~~increased by $2.6 billion primarily due to the following:

A $1.3 billion increase in cash from short-term ~~borrowing~~debt primarily due to increased borrowings of $678 million, issuances of $950 million of senior unsecured notes, $191 million of pollution control bonds and $430 million of other debt notes offset by retirements of $507 million of senior unsecured notes, $289 million of securitization bonds, $251 million of pollution control bonds and $261 million of other debt notes. AEP paid common stock dividends of $830 million.commercial paper. See Note 12 - Financing Activities for ~~a complete discussion~~additional information.

An $829 million increase in cash due to increased issuances of long-term ~~debt~~debt. See Note 12 - Financing Activities for additional information.

A $468 million increase in cash due to decreased retirements of long-term debt. See Note 12 - Financing Activities for additional information.

A $62 million increase in cash due to increased proceeds from issuances ~~and retirements.~~of common stock.

These increases in cash were partially offset by:

A $48 million decrease due to increased common stock dividend payments primarily due to increased dividends per share from 2017 to 2018.

In October ~~2017,~~2018, I&M retired $1$4 million of Notes Payable related to DCC Fuel.

~~In October~~

BUDGETED CONSTRUCTION EXPENDITURES

Management forecasts approximately $24 billion of construction expenditures for 2018 to 2021. Estimated construction expenditures are subject to periodic review and modification and may vary based on the ongoing effects of regulatory constraints, environmental regulations, business opportunities, market volatility, economic trends, weather, legal reviews and the ability to access capital. Management expects to fund these construction expenditures through cash flows from operations and financing activities. Generally, the Registrant Subsidiaries use cash or short-term borrowings under the money pool to fund these expenditures until long-term funding is arranged. For complete information of forecasted construction expenditures, see the “Budgeted Construction Expenditures” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2017 ~~AEP Texas retired $41 million of 5.625% Pollution Control Bonds due in 2017.~~Annual Report.

OFF-BALANCE SHEET ARRANGEMENTS

AEP’s current guidelines restrict the use of off-balance sheet financing entities or structures to traditional operating lease arrangements that AEP enters in the normal course of business. The following identifies significant off-balance sheet arrangements:


	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
	(in millions)				(in millions)
Rockport Plant, Unit 2 Future Minimum Lease Payments	$	812.4	$	886.2	$	664.7	$	738.4
Railcars Maximum Potential Loss from Lease Agreement	16.9		18.4		13.9		17.9

For complete information on each of these off-balance sheet arrangements, see the ~~“Off-balance~~“Off-Balance Sheet Arrangements” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the ~~2016~~2017 Annual Report.

CONTRACTUAL OBLIGATION INFORMATION

A summary of contractual obligations is included in the ~~2016~~2017 Annual Report and has not changed significantly from year-end other than the debt issuances and retirements discussed in the “Cash Flow” section above.

CYBER SECURITY

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See the “Critical Accounting Policies and Estimates” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the ~~2016~~2017 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets, the accounting for pension and other postretirement benefits and the impact of new accounting pronouncements.

ACCOUNTING PRONOUNCEMENTS

See Note 2 - New Accounting Pronouncements ~~Adopted During 2017~~

The FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory” simplifying the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first-out or the retail inventory method. Under the new standard, inventory should be at the lower of costfor information related to accounting pronouncements adopted in 2018 and ~~net realizable value. The new accounting guidance is~~pronouncements effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. Management adopted ASU 2015-11 prospectively, effective January 1, 2017. There was no impact on results of operations, financial position or cash flows at adoption.

The FASB issued ASU 2016-09 “Compensation – Stock Compensation” simplifying the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities

and classification on the statements of cash flows. Under the new standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit on the statements of income. Under current GAAP, excess tax benefits are recognized in additional paid-in capital while tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or on the statements of income. Management adopted ASU 2016-09 effective January 1, 2017. As a result of the adoption of this guidance, management made an accounting policy election to recognize the effect of forfeitures in compensation cost when they occur. There was an immaterial impact on results of operations and financial position and no impact on cash flows at adoption.

~~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, determine the transaction price and allocate the price to specific performance obligations to recognize the revenue when the obligation is completed. The amendments in this update also require disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts. The FASB deferred implementation of ASU 2014-09 under the terms in ASU 2015-14, “Revenue from Contracts with Customers (Topic: 606): Deferral of the Effective Date.” The new accounting guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted. Management continues to analyze the impact of the new revenue standard and related ASUs.

During 2016 and 2017, revenue contract assessments were completed. Material revenue streams were identified within the AEP System and representative contract/transaction types were sampled. Performance obligations identified within each material revenue stream were evaluated to determine whether the obligations were satisfied at a point in time or over time. Contracts determined to be satisfied over time generally qualified for the invoicing practical expedient since the invoiced amounts reasonably represented the value to customers of performance obligations fulfilled to date. Based upon the completed assessments, management does not expect a material impact to the timing of revenue recognized or net income and plans to elect the modified retrospective transition approach upon adoption.

The FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” enhancing the reporting model for financial instruments. Under the new standard, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are required to be measured at fair value with changes in fair value recognized in net income. The new standard also amends disclosure requirements and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheets or the accompanying notes to the financial statements. The amendments also clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted. The amendments will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net income. Management plans to adopt ASU 2016-01 effective January 1, 2018.

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

lease classification will remain the same, but will be more subjective under the new standard. The new accounting guidance is effective for annual periods beginning after December 15, 2018 with early adoption permitted. The guidance will be applied by means of a modified retrospective approach. The modified retrospective approach will require lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. Management continues to analyze the impact of the new lease standard. During 2016 and 2017, lease contract assessments were completed. The AEP System lease population was identified and representative lease contracts were sampled. Based upon the completed assessments, management prepared a system gap analysis to outline new disclosure compliance requirements compared to current system capabilities. Multiple lease system options were also evaluated. Management plans to elect certain of the following practical expedients upon adoption:



~~Practical Expedient~~		~~Description~~
~~Overall Expedients (for leases commenced prior to adoption date and must be adopted as a package)~~		Do not need to reassess whether any expired or existing contracts are/or contain leases, do not need to reassess the lease classification for any expired or existing leases and do not need to reassess initial direct costs for any existing leases.
~~Lease and Non-lease Components (elect by class of underlying asset)~~		~~Elect as an accounting policy to not separate non-lease components from lease components and instead account for each lease and associated non-lease component as a single lease component.~~
~~Short-term Lease (elect by class of underlying asset)~~		~~Elect as an accounting policy to not apply the recognition requirements to short-term leases.~~
~~Lease term~~		~~Elect to use hindsight to determine the lease term.~~

Evaluation of new lease contracts continues and the process of implementing a compliant lease system solution began in the third quarter of 2017. Management expects the new standard to impact financial position, but not results of operations or cash flows. Management also continues to monitor unresolved industry implementation issues, including items related to pole attachments, easements and right-of-ways, and will analyze the related impacts to lease accounting. Management plans to adopt ASU 2016-02 effective January 1, 2019.

The FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments” requiring an allowance to be recorded for all expected credit losses for financial assets. The allowance for credit losses is based on historical information, current conditions and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net income. Management plans to adopt ASU 2016-13 effective January 1, 2020.

The FASB issued ASU 2016-18 “Restricted Cash” clarifying the treatment of restricted cash on the statements of cash flows. Under the new standard, amounts considered restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statements of cash flows. The new accounting guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted in any interim or annual period. The guidance will be applied by means of a retrospective approach. Management is analyzing the impact of the new standard. Management plans to adopt ASU 2016-18 effective for the 2017 Annual Report.

The FASB issued ASU 2017-07 “Compensation - Retirement Benefits” requiring that an employer report the service cost component of pension and postretirement benefits in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. In addition, only the service cost component will be eligible for capitalization as applicable following labor. For 2016, AEP’s actual non-service cost components were a credit of $66 million, of which approximately 37% was capitalized. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Management plans to adopt ASU 2017-07 effective January 1, 2018.

The FASB issued ASU 2017-12 “Derivatives and Hedging” amending the recognition and presentation requirements for hedge accounting activities. The objectives are to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and reduce the complexity of applying hedge accounting. Under the new standard, the concept of recognizing hedge ineffectiveness within the statements of income for cash flow hedges, which has historically been immaterial to AEP, will be eliminated. In addition, certain required tabular disclosures relating to fair value and cash flow hedges will be modified. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted for any interim or annual period after August 2017. Management is analyzing the impact of this new standard, including the possibility of early adoption, and at this time, cannot estimate the impact of adoption on net income.

~~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 operations and financial position that may result from any such future changes. Future pronouncements issued by the FASB could have an impact on future net income and financial position.future.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

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

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

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

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

The following table summarizes the reasons for changes in total MTM value as compared to December 31, ~~2016:~~2017:

																									MTM Risk Management Contract Net Assets (Liabilities)
Nine Months Ended September 30, 2017
Nine Months Ended September 30, 2018													Nine Months Ended September 30, 2018

	Vertically Integrated Utilities			Transmission and Distribution Utilities			Generation & Marketing			Total			Vertically Integrated Utilities			Transmission and Distribution Utilities			Generation & Marketing			Total
	(in millions)												(in millions)
Total MTM Risk Management Contract Net Assets (Liabilities) as of December 31, 2016	$	5.2		$	(118.2	)	$	164.2		$	51.2
(Gain) Loss from Contracts Realized/Settled During the Period and Entered in a Prior Period	(7.0		)	3.4			(32.8		)	(36.4		)
Total MTM Risk Management Contract Net Assets (Liabilities) as of December 31, 2017													$	42.1		$	(131.3	)	$	163.9		$	74.7
Gain from Contracts Realized/Settled During the Period and Entered in a Prior Period													(29.3		)	(3.4		)	(16.7		)	(49.4		)
Fair Value of New Contracts at Inception When Entered During the Period (a)	—			—			26.7			26.7			—			—			15.1			15.1
Changes in Fair Value Due to Market Fluctuations During the Period (b)	—			—			10.5			10.5			—			—			7.0			7.0
Changes in Fair Value Allocated to Regulated Jurisdictions (c)	64.9			(23.2		)	—			41.7			94.8			40.6			—			135.4
Total MTM Risk Management Contract Net Assets (Liabilities) as of September 30, 2017	$	63.1		$	(138.0	)	$	168.6		93.7
Total MTM Risk Management Contract Net Assets (Liabilities) as of September 30, 2018													$	107.6		$	(94.1	)	$	169.3		182.8
Commodity Cash Flow Hedge Contracts										(75.6		)										(23.2		)
Interest Rate and Foreign Currency Cash Flow Hedge Contracts										4.2
Fair Value Hedge Contracts										(1.4		)										(34.2		)
Collateral Deposits										13.5												(13.1		)
Total MTM Derivative Contract Net Assets as of September 30, 2017										$	34.4
Total MTM Derivative Contract Net Assets as of September 30, 2018																						$	112.3


(a)	Reflects fair value on primarily long-term structured contracts which are typically with customers that seek fixed pricing to limit their risk against fluctuating energy prices. The contract prices are valued against market curves associated with the delivery location and delivery term. A significant portion of the total volumetric position has been economically hedged.


(b)	Market fluctuations are attributable to various factors such as supply/demand, weather, etc.


(c)	Relates to the net gains (losses) of those contracts that are not reflected on the statements of income. These net gains (losses) are recorded as regulatory liabilities/assets or accounts payable.

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

Credit Risk

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

AEP has risk management contracts with numerous counterparties. Since open risk management contracts are valued based on changes in market prices of the related commodities, exposures change daily. As of September 30, ~~2017,~~2018, credit exposure net of collateral to sub investment grade counterparties was approximately ~~7.9%~~6.5%, expressed in terms of net MTM assets, net receivables and the net open positions for contracts not subject to MTM (representing economic risk even though there may not be risk of accounting loss). As of September 30, ~~2017,~~2018, the following table approximates AEP’s counterparty credit quality and exposure based on netting across commodities, instruments and legal entities where applicable:


Counterparty Credit Quality	Exposure Before Credit Collateral		Credit Collateral		Net Exposure		Number of Counterparties >10% of Net Exposure	Net Exposure of Counterparties >10%		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)									(in millions, except number of counterparties)
Investment Grade	$	619.6	$	2.2	$	617.4	3	$	352.2	$	491.4	$	2.2	$	489.2	3	$	268.7
Split Rating	5.6		—		5.6		2	5.6
Noninvestment Grade	—		—		—		—	—		0.6		0.6		—		—	—
No External Ratings:
Internal Investment Grade	119.2		—		119.2		3	78.7		122.5		—		122.5		3	77.8
Internal Noninvestment Grade	75.4		11.5		63.9		3	40.5		52.6		10.5		42.1		2	29.1
Total as of September 30, 2017	$	819.8	$	13.7	$	806.1
Total as of September 30, 2018										$	667.1	$	13.3	$	653.8

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

Value at Risk (VaR) Associated with Risk Management Contracts

Management uses a risk measurement model, which calculates VaR, to measure AEP’s commodity price risk in the risk management portfolio. The VaR is based on the variance-covariance method using historical prices to estimate volatilities and correlations and assumes a 95% confidence level and a one-day holding period. Based on this VaR analysis, as of September 30, ~~2017,~~2018, a near term typical change in commodity prices is not expected to materially impact net income, cash flows or financial condition.

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

VaR Model

Trading Portfolio


Nine Months Ended	Nine Months Ended							Twelve Months Ended								Nine Months Ended							Twelve Months Ended
September 30, 2017								December 31, 2016
September 30, 2018																September 30, 2018							December 31, 2017
End	End	High		Average		Low		End		High		Average		Low		End	High		Average		Low		End		High		Average		Low
(in millions)	(in millions)							(in millions)								(in millions)							(in millions)
$	0.2	$	0.4	$	0.1	$	0.1	$	0.2	$	1.1	$	0.2	$	0.1	0.2	$	1.8	$	0.3	$	0.1	$	0.2	$	0.5	$	0.2	$	0.1

VaR Model

Non-Trading Portfolio


Nine Months Ended	Nine Months Ended							Twelve Months Ended								Nine Months Ended							Twelve Months Ended
September 30, 2017								December 31, 2016
September 30, 2018																September 30, 2018							December 31, 2017
End	End	High		Average		Low		End		High		Average		Low		End	High		Average		Low		End		High		Average		Low
(in millions)	(in millions)							(in millions)								(in millions)							(in millions)
$	0.7	$	6.5	$	0.9	$	0.3	$	5.6	$	8.4	$	1.5	$	0.4	0.6	$	16.5	$	2.9	$	0.4	$	4.1	$	6.5	$	1.0	$	0.3

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

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

Interest Rate Risk

~~Management utilizes an Earnings at Risk (EaR) model~~AEP is exposed to ~~measure~~ interest rate market fluctuations in the normal course of business operations. AEP has outstanding short and long-term debt which is subject to a variable rate. AEP manages interest rate risk ~~exposure. EaR statistically quantifies~~by limiting variable-rate exposures to a percentage of total debt, by entering into interest rate derivative instruments and by monitoring the ~~extent to which~~effects of market changes in interest rates. For the nine months ended September 30, 2018 and 2017, a 100 basis point change in the benchmark rate on AEP’s variable rate debt would impact pretax interest expense ~~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~~annually 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 September 30, 2017 and December 31, 2016, the estimated EaR on AEP’s debt portfolio for the following twelve months was $30$25 million and ~~$29~~$28 million, respectively.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions, except per-share and share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
REVENUES
Vertically Integrated Utilities	$	2,453.8		$	2,538.3		$	6,819.3		$	6,864.6		$	2,610.2		$	2,453.8		$	7,332.4		$	6,819.3
Transmission and Distribution Utilities	1,149.7			1,245.4			3,242.7			3,398.9			1,180.9			1,149.7			3,450.0			3,242.7
Generation & Marketing	441.5			823.3			1,386.8			2,192.5			486.5			441.5			1,399.3			1,386.8
Other Revenues	59.7			45.2			165.7			134.0			55.5			59.7			212.9			165.7
TOTAL REVENUES	4,104.7			4,652.2			11,614.5			12,590.0			4,333.1			4,104.7			12,394.6			11,614.5

EXPENSES
Fuel and Other Consumables Used for Electric Generation	707.4			880.1			1,865.3			2,236.1			840.4			707.4			1,909.1			1,865.3
Purchased Electricity for Resale	718.1			774.0			2,156.9			2,134.6			784.7			718.1			2,551.7			2,156.9
Other Operation	636.1			771.1			1,842.5			2,150.7			826.0			644.0			2,332.7			1,884.1
Maintenance	268.0			286.3			859.4			854.4			316.6			269.0			911.0			862.6
Asset Impairments and Other Related Charges	(2.5		)	2,264.9			10.6			2,264.9
Gain on Sale of Merchant Generation Assets	—			—			(226.4		)	—			—			—			—			(226.4		)
Depreciation and Amortization	518.5			539.3			1,485.9			1,550.2			602.6			518.5			1,695.5			1,485.9
Taxes Other Than Income Taxes	272.6			264.4			792.0			767.9			294.2			272.6			863.0			792.0
TOTAL EXPENSES	3,118.2			5,780.1			8,786.2			11,958.8			3,664.5			3,129.6			10,263.0			8,820.4

OPERATING INCOME (LOSS)	986.5			(1,127.9		)	2,828.3			631.2
OPERATING INCOME													668.6			975.1			2,131.6			2,794.1

Other Income (Expense):
Interest and Investment Income	2.4			2.0			12.7			6.5			5.4			2.4			11.3			12.7
Carrying Costs Income	2.6			1.7			14.2			11.9			0.9			2.6			7.2			14.2
Allowance for Equity Funds Used During Construction	20.0			25.6			62.2			86.1			30.9			20.0			92.4			62.2
Non-Service Cost Components of Net Periodic Benefit Cost													31.9			11.4			95.3			34.2
Gain on Sale of Equity Investment	12.4			—			12.4			—			—			12.4			—			12.4
Interest Expense	(223.3		)	(225.3		)	(668.0		)	(667.2		)	(256.8		)	(223.3		)	(733.1		)	(668.0		)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE (CREDIT) AND EQUITY EARNINGS	800.6			(1,323.9		)	2,261.8			68.5
INCOME BEFORE INCOME TAX EXPENSE (CREDIT) AND EQUITY EARNINGS													480.9			800.6			1,604.7			2,261.8

Income Tax Expense (Credit)	264.0			(534.5		)	797.8			(134.0		)	(80.7		)	264.0			93.5			797.8
Equity Earnings of Unconsolidated Subsidiaries	20.1			25.2			63.1			42.8			18.1			20.1			55.3			63.1

INCOME (LOSS) FROM CONTINUING OPERATIONS	556.7			(764.2		)	1,527.1			245.3

LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX	—			—			—			(2.5		)

NET INCOME (LOSS)	556.7			(764.2		)	1,527.1			242.8
NET INCOME													579.7			556.7			1,566.5			1,527.1

Net Income Attributable to Noncontrolling Interests	12.0			1.6			15.2			5.3			2.1			12.0			6.1			15.2

EARNINGS (LOSS) ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	544.7		$	(765.8	)	$	1,511.9		$	237.5
EARNINGS ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS													$	577.6		$	544.7		$	1,560.4		$	1,511.9

WEIGHTED AVERAGE NUMBER OF BASIC AEP COMMON SHARES OUTSTANDING	491,840,722			491,697,809			491,781,643			491,422,921			492,984,741			491,840,722			492,649,456			491,781,643

BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS FROM CONTINUING OPERATIONS	$	1.11		$	(1.56	)	$	3.07		$	0.49
BASIC LOSS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS FROM DISCONTINUED OPERATIONS	—			—			—			(0.01		)
TOTAL BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	1.11		$	(1.56	)	$	3.07		$	0.48
TOTAL BASIC EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS													$	1.17		$	1.11		$	3.17		$	3.07

WEIGHTED AVERAGE NUMBER OF DILUTED AEP COMMON SHARES OUTSTANDING	492,986,307			491,813,858			492,428,586			491,596,861			493,940,543			492,986,307			493,526,937			492,428,586

DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS FROM CONTINUING OPERATIONS	$	1.10		$	(1.56	)	$	3.07		$	0.49
DILUTED LOSS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS FROM DISCONTINUED OPERATIONS	—			—			—			(0.01		)
TOTAL DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	1.10		$	(1.56	)	$	3.07		$	0.48
TOTAL DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS													$	1.17		$	1.10		$	3.16		$	3.07

CASH DIVIDENDS DECLARED PER SHARE	$	0.59		$	0.56		$	1.77		$	1.68		$	0.62		$	0.59		$	1.86		$	1.77



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net Income (Loss) $ 556.7
$ (764.2 ) $ 1,527.1
$ 242.8

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES

Cash Flow Hedges, Net of Tax of $(8.1) and $(15.4) for the Three Months Ended September 30, 2017 and 2016, Respectively, and $(12.2) and $(11.2) for the Nine Months Ended September 30, 2017 and 2016, Respectively (15.0 ) (28.6 ) (22.6 ) (20.8 )
Securities Available for Sale, Net of Tax of $0.5 and $0.3 for the Three Months Ended September 30, 2017 and 2016, Respectively, and $1.5 and $1 for the Nine Months Ended September 30, 2017 and 2016, Respectively 0.9
0.5
2.7
1.7
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $0.1 and $0.1 for the Three Months Ended September 30, 2017 and 2016, Respectively, and $0.4 and $0.2 for the Nine Months Ended September 30, 2017 and 2016, Respectively 0.3
0.2
0.8
0.4

TOTAL OTHER COMPREHENSIVE LOSS (13.8 ) (27.9 ) (19.1 ) (18.7 )

TOTAL COMPREHENSIVE INCOME (LOSS) 542.9
(792.1 ) 1,508.0
224.1

Total Comprehensive Income Attributable to Noncontrolling Interests 12.0
1.6
15.2
5.3

TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS $ 530.9
$ (793.7 ) $ 1,492.8
$ 218.8



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Net Income	$	579.7		$	556.7		$	1,566.5		$	1,527.1

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Cash Flow Hedges, Net of Tax of $2.7 and $(8.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $3.9 and $(12.2) for the Nine Months Ended September 30, 2018 and 2017, Respectively	10.2			(15.0		)	14.7			(22.6		)
Securities Available for Sale, Net of Tax of $0 and $0.5 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0 and $1.5 for the Nine Months Ended September 30, 2018 and 2017, Respectively	—			0.9			—			2.7
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.4) and $0.1 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(1.1) and $0.4 for the Nine Months Ended September 30, 2018 and 2017, Respectively	(1.4		)	0.3			(4.0		)	0.8

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	8.8			(13.8		)	10.7			(19.1		)

TOTAL COMPREHENSIVE INCOME	588.5			542.9			1,577.2			1,508.0

Total Comprehensive Income Attributable to Noncontrolling Interests	2.1			12.0			6.1			15.2

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	586.4		$	530.9		$	1,571.1		$	1,492.8



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	AEP Common Shareholders																			AEP Common Shareholders
	Common Stock								Accumulated Other Comprehensive Income (Loss)											Common Stock											Accumulated Other Comprehensive Income (Loss)
	Shares	Amount		Paid-in Capital		Retained Earnings						Noncontrolling Interests				Total			Shares		Amount			Paid-in Capital			Retained Earnings				Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests				Total
TOTAL EQUITY - DECEMBER 31, 2015	511.4	$	3,324.0	$	6,296.5	$	8,398.3		Accumulated Other Comprehensive Income (Loss)	$	(127.1	)		$	13.2			$	17,904.9

Issuance of Common Stock	0.6	4.3		29.9													34.2
Common Stock Dividends						(826.4		)					(3.4		)		(829.8		)
Other Changes in Equity				3.6									6.0				9.6
Net Income						237.5							5.3				242.8
Other Comprehensive Loss									(18.7		)						(18.7		)
TOTAL EQUITY - SEPTEMBER 30, 2016	512.0	$	3,328.3	$	6,330.0	$	7,809.4		$	(145.8	)		$	21.1			$	17,343.0

TOTAL EQUITY - DECEMBER 31, 2016	512.0	$	3,328.3	$	6,332.6	$	7,892.4		$	(156.3	)		$	23.1			$	17,420.1
TOTAL EQUITY – DECEMBER 31, 2016																				512.0		$	3,328.3		$	6,332.6		$	7,892.4		$	(156.3	)		$	23.1			$	17,420.1

Common Stock Dividends						(872.3		)					(2.7		)		(875.0		)									(872.3		)					(2.7		)		(875.0		)
Other Changes in Equity				51.6									0.8				52.4								51.6										0.8				52.4
Net Income						1,511.9							15.2				1,527.1											1,511.9							15.2				1,527.1
Other Comprehensive Loss									(19.1		)						(19.1		)												(19.1		)						(19.1		)
TOTAL EQUITY - SEPTEMBER 30, 2017	512.0	$	3,328.3	$	6,384.2	$	8,532.0		$	(175.4	)		$	36.4			$	18,105.5
TOTAL EQUITY – SEPTEMBER 30, 2017																				512.0		$	3,328.3		$	6,384.2		$	8,532.0		$	(175.4	)		$	36.4			$	18,105.5

TOTAL EQUITY – DECEMBER 31, 2017																				512.2		$	3,329.4		$	6,398.7		$	8,626.7		$	(67.8	)		$	26.6			$	18,313.6

Issuance of Common Stock																				1.1		7.1			55.4														62.5
Common Stock Dividends																												(919.3		)					(3.2		)		(922.5		)
Other Changes in Equity																									18.5										0.5				19.0
ASU 2018-02 Adoption																												14.0			(17.0		)						(3.0		)
ASU 2016-01 Adoption																												11.9			(11.9		)						—
Net Income																												1,560.4							6.1				1,566.5
Other Comprehensive Income																															10.7								10.7
TOTAL EQUITY – SEPTEMBER 30, 2018																				513.3		$	3,336.5		$	6,472.6		$	9,293.7		$	(86.0	)		$	30.0			$	19,046.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)


	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
CURRENT ASSETS
Cash and Cash Equivalents	$	343.9		$	210.5		$	788.3		$	214.6
Other Temporary Investments (September 30, 2017 and December 31, 2016 Amounts Include $300.5 and $322.5, Respectively, Related to Transition Funding, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, EIS, Transource Energy and Sabine)	310.7			331.7
Restricted Cash (September 30, 2018 and December 31, 2017 Amounts Include $149.2 and $198, Respectively, Related to Transition Funding, Ohio Phase-in-Recovery Funding and Appalachian Consumer Rate Relief Funding)							149.2			198.0
Other Temporary Investments (September 30, 2018 and December 31, 2017 Amounts Include $157 and $155.4, Respectively, Related to EIS and Transource Energy)							164.1			161.7
Accounts Receivable:
Customers	522.7			705.1			757.9			643.9
Accrued Unbilled Revenues	187.3			158.7			241.2			230.2
Pledged Accounts Receivable – AEP Credit	967.6			972.7			1,112.2			954.2
Miscellaneous	99.9			118.1			47.2			101.2
Allowance for Uncollectible Accounts	(36.6		)	(37.9		)	(40.4		)	(38.5		)
Total Accounts Receivable	1,740.9			1,916.7			2,118.1			1,891.0
Fuel	354.2			423.8			282.3			387.7
Materials and Supplies	562.3			543.5			565.6			565.5
Risk Management Assets	146.1			94.5			191.9			126.2
Regulatory Asset for Under-Recovered Fuel Costs	153.5			156.6			137.5			292.5
Margin Deposits	105.7			79.9			108.8			105.5
Assets Held for Sale	—			1,951.2
Prepayments and Other Current Assets	350.5			325.5			186.6			310.4
TOTAL CURRENT ASSETS	4,067.8			6,033.9			4,692.4			4,253.1

PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	20,739.3			19,848.9			21,327.3			20,760.5
Transmission	17,785.4			16,658.7			20,113.7			18,972.5
Distribution	19,589.4			18,900.8			20,763.9			19,868.5
Other Property, Plant and Equipment (Including Coal Mining and Nuclear Fuel)	3,614.1			3,444.3			3,996.9			3,706.3
Construction Work in Progress	3,710.0			3,183.9			4,995.5			4,120.7
Total Property, Plant and Equipment	65,438.2			62,036.6			71,197.3			67,428.5
Accumulated Depreciation and Amortization	17,121.7			16,397.3			17,841.6			17,167.0
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	48,316.5			45,639.3			53,355.7			50,261.5

OTHER NONCURRENT ASSETS
Regulatory Assets	5,640.0			5,625.5			3,189.9			3,587.6
Securitized Assets	1,287.8			1,486.1			1,001.4			1,211.2
Spent Nuclear Fuel and Decommissioning Trusts	2,433.0			2,256.2			2,666.0			2,527.6
Goodwill	52.5			52.5			52.5			52.5
Long-term Risk Management Assets	310.4			289.1			264.9			282.1
Deferred Charges and Other Noncurrent Assets	1,856.9			2,085.1			2,394.6			2,553.5
TOTAL OTHER NONCURRENT ASSETS	11,580.6			11,794.5			9,569.3			10,214.5

TOTAL ASSETS	$	63,964.9		$	63,467.7		$	67,617.4		$	64,729.1



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND EQUITY

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(dollars in millions)

(Unaudited)


				September 30,			December 31,						September 30,			December 31,
				2017			2016						2018			2017
CURRENT LIABILITIES	CURRENT LIABILITIES									CURRENT LIABILITIES
Accounts Payable				$	1,537.0		$	1,688.5					$	1,579.9		$	2,065.3
Short-term Debt:
Securitized Debt for Receivables – AEP Credit				750.0			673.0						750.0			718.0
Other Short-term Debt				309.3			1,040.0						1,492.6			920.6
Total Short-term Debt				1,059.3			1,713.0						2,242.6			1,638.6
Long-term Debt Due Within One Year (September 30, 2017 and December 31, 2016 Amounts Include $393.7 and $427.5, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and Sabine)				2,359.3			2,878.0
Long-term Debt Due Within One Year (September 30, 2018 and December 31, 2017 Amounts Include $420.7 and $406.9, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and Sabine)										Long-term Debt Due Within One Year (September 30, 2018 and December 31, 2017 Amounts Include $420.7 and $406.9, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and Sabine)			1,904.2			1,753.7
Risk Management Liabilities				69.4			53.4						57.3			61.6
Customer Deposits				346.6			343.2						372.5			357.0
Accrued Taxes				716.5			1,048.0						774.1			1,115.5
Accrued Interest				260.3			227.2						299.8			234.5
Regulatory Liability for Over-Recovered Fuel Costs	Regulatory Liability for Over-Recovered Fuel Costs			19.7			8.0			Regulatory Liability for Over-Recovered Fuel Costs			66.9			11.9
Liabilities Held for Sale				—			235.9
Other Current Liabilities				953.9			1,302.8						1,128.9			1,033.2
TOTAL CURRENT LIABILITIES				7,322.0			9,498.0						8,426.2			8,271.3

NONCURRENT LIABILITIES	NONCURRENT LIABILITIES									NONCURRENT LIABILITIES
Long-term Debt (September 30, 2017 and December 31, 2016 Amounts Include $1421.5 and $1,737.5, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, Transource Energy, and Sabine)				18,362.4			17,378.4
Long-term Debt (September 30, 2018 and December 31, 2017 Amounts Include $1,110 and $1,410.5, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, Transource Energy, and Sabine)										Long-term Debt (September 30, 2018 and December 31, 2017 Amounts Include $1,110 and $1,410.5, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, Transource Energy, and Sabine)			20,869.8			19,419.6
Long-term Risk Management Liabilities				352.7			316.2						287.2			322.0
Deferred Income Taxes				12,628.2			11,884.4						7,110.4			6,813.9
Regulatory Liabilities and Deferred Investment Tax Credits	Regulatory Liabilities and Deferred Investment Tax Credits			3,959.6			3,751.3			Regulatory Liabilities and Deferred Investment Tax Credits			8,643.5			8,422.3
Asset Retirement Obligations				1,919.3			1,830.6						1,975.1			1,925.5
Employee Benefits and Pension Obligations				468.9			614.1						350.7			398.1
Deferred Credits and Other Noncurrent Liabilities	Deferred Credits and Other Noncurrent Liabilities			837.0			774.6			Deferred Credits and Other Noncurrent Liabilities			807.2			830.9
TOTAL NONCURRENT LIABILITIES				38,528.1			36,549.6						40,043.9			38,132.3

TOTAL LIABILITIES				45,850.1			46,047.6						48,470.1			46,403.6

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

MEZZANINE EQUITY	MEZZANINE EQUITY									MEZZANINE EQUITY
Redeemable Noncontrolling Interest													70.0			—
Contingently Redeemable Performance Share Awards				9.3			—						30.5			11.9
TOTAL MEZZANINE EQUITY													100.5			11.9

EQUITY	EQUITY									EQUITY
Common Stock – Par Value – $6.50 Per Share:
		2017	2016								2018	2017
Shares Authorized		600,000,000	600,000,000								600,000,000	600,000,000
Shares Issued		512,048,663	512,048,520								513,301,636	512,210,644
(20,206,368 and 20,336,592 Shares were Held in Treasury as of September 30, 2017 and December 31, 2016, Respectively)				3,328.3			3,328.3
(20,204,160 and 20,205,046 Shares were Held in Treasury as of September 30, 2018 and December 31, 2017, Respectively)										(20,204,160 and 20,205,046 Shares were Held in Treasury as of September 30, 2018 and December 31, 2017, Respectively)			3,336.5			3,329.4
Paid-in Capital				6,384.2			6,332.6						6,472.6			6,398.7
Retained Earnings				8,532.0			7,892.4						9,293.7			8,626.7
Accumulated Other Comprehensive Income (Loss)	Accumulated Other Comprehensive Income (Loss)			(175.4		)	(156.3		)	Accumulated Other Comprehensive Income (Loss)			(86.0		)	(67.8		)
TOTAL AEP COMMON SHAREHOLDERS’ EQUITY	TOTAL AEP COMMON SHAREHOLDERS’ EQUITY			18,069.1			17,397.0			TOTAL AEP COMMON SHAREHOLDERS’ EQUITY			19,016.8			18,287.0

Noncontrolling Interests				36.4			23.1						30.0			26.6

TOTAL EQUITY				18,105.5			17,420.1						19,046.8			18,313.6

TOTAL LIABILITIES, MEZZANINE EQUITY AND TOTAL EQUITY	TOTAL LIABILITIES, MEZZANINE EQUITY AND TOTAL EQUITY			$	63,964.9		$	63,467.7		TOTAL LIABILITIES, MEZZANINE EQUITY AND TOTAL EQUITY			$	67,617.4		$	64,729.1



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
OPERATING ACTIVITIES
Net Income	$	1,527.1		$	242.8		$	1,566.5		$	1,527.1
Loss from Discontinued Operations, Net of Tax	—			(2.5		)
Income from Continuing Operations	1,527.1			245.3
Adjustments to Reconcile Income from Continuing Operations to Net Cash Flows from Continuing Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	1,485.9			1,550.2			1,695.5			1,485.9
Deferred Income Taxes	740.9			(47.0		)	43.0			740.9
Asset Impairments and Other Related Charges	10.6			2,264.9
Allowance for Equity Funds Used During Construction	(62.2		)	(86.1		)	(92.4		)	(62.2		)
Mark-to-Market of Risk Management Contracts	(56.2		)	56.6			(95.4		)	(56.2		)
Amortization of Nuclear Fuel	104.8			109.7			82.6			104.8
Pension Contributions to Qualified Plan Trust	(93.3		)	(84.8		)	—			(93.3		)
Property Taxes	291.4			288.3			304.8			291.4
Deferred Fuel Over/Under-Recovery, Net	81.0			(28.5		)	210.6			81.0
Gain on Sale of Merchant Generation Assets	(226.4		)	—			—			(226.4		)
Gain on Sale of Equity Investment	(12.4		)	—			—			(12.4		)
Recovery of Ohio Capacity Costs	65.6			108.8			52.7			65.6
Provision for Refund – Global Settlement, Net	(93.3		)	—			(5.5		)	(93.3		)
Change in Other Noncurrent Assets	(345.2		)	(243.4		)	161.6			(334.6		)
Change in Other Noncurrent Liabilities	205.7			41.3			141.9			205.7
Changes in Certain Components of Continuing Working Capital:
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	201.3			(240.8		)	(52.3		)	201.3
Fuel, Materials and Supplies	58.5			11.6			98.7			58.5
Accounts Payable	(91.0		)	47.8			(45.0		)	(91.0		)
Accrued Taxes, Net	(310.1		)	(393.0		)	(247.5		)	(310.1		)
Other Current Assets	(98.2		)	31.5			11.7			(98.2		)
Other Current Liabilities	(260.3		)	(211.4		)	101.1			(260.3		)
Net Cash Flows from Continuing Operating Activities	3,124.2			3,421.0
Net Cash Flows from Operating Activities							3,932.6			3,124.2

INVESTING ACTIVITIES
Construction Expenditures	(3,778.2		)	(3,387.0		)	(4,688.4		)	(3,778.2		)
Change in Other Temporary Investments, Net	34.5			109.2
Purchases of Investment Securities	(1,855.8		)	(2,454.5		)	(1,591.2		)	(1,855.8		)
Sales of Investment Securities	1,808.6			2,427.0			1,550.9			1,808.6
Acquisitions of Nuclear Fuel	(73.2		)	(127.6		)	(26.1		)	(73.2		)
Proceeds from Sale of Merchant Generation Assets	2,159.6			—			—			2,159.6
Other Investing Activities	27.9			4.2			66.1			16.3
Net Cash Flows Used for Continuing Investing Activities	(1,676.6		)	(3,428.7		)
Net Cash Flows Used for Investing Activities							(4,688.7		)	(1,722.7		)

FINANCING ACTIVITIES
Issuance of Common Stock	—			34.2			62.5			—
Issuance of Long-term Debt	2,742.7			1,559.6			3,572.0			2,742.7
Commercial Paper and Credit Facility Borrowings							205.6			—
Change in Short-term Debt, Net	(653.7		)	678.3			604.0			(653.7		)
Retirement of Long-term Debt	(2,427.2		)	(1,307.6		)	(1,959.5		)	(2,427.2		)
Commercial Paper and Credit Facility Repayments							(205.6		)	—
Make Whole Premium on Extinguishment of Long-term Debt	(46.1		)	—			(10.3		)	(46.1		)
Principal Payments for Capital Lease Obligations	(50.5		)	(81.9		)	(49.4		)	(50.5		)
Dividends Paid on Common Stock	(875.0		)	(829.8		)	(922.5		)	(875.0		)
Other Financing Activities	(4.4		)	(6.8		)	(15.8		)	(4.4		)
Net Cash Flows from (Used for) Continuing Financing Activities	(1,314.2		)	46.0
Net Cash Flows from (Used for) Financing Activities							1,281.0			(1,314.2		)

Net Cash Flows Used for Discontinued Operating Activities	—			(2.5		)
Net Cash Flows from Discontinued Investing Activities	—			—
Net Cash Flows from Discontinued Financing Activities	—			—
Net Increase in Cash, Cash Equivalents and Restricted Cash							524.9			87.3
Cash, Cash Equivalents and Restricted Cash at Beginning of Period							412.6			403.5
Cash, Cash Equivalents and Restricted Cash at End of Period							$	937.5		$	490.8

Net Increase in Cash and Cash Equivalents	133.4			35.8
Cash and Cash Equivalents at Beginning of Period	210.5			176.4
Cash and Cash Equivalents at End of Period	$	343.9		$	212.2
SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts							$	631.3		$	613.8
Net Cash Paid (Received) for Income Taxes							(27.9		)	(6.8		)
Noncash Acquisitions Under Capital Leases							43.5			44.5
Construction Expenditures Included in Current Liabilities as of September 30,							882.3			791.6
Construction Expenditures Included in Noncurrent Liabilities as of September 30,							—			71.8
Acquisition of Nuclear Fuel Included in Current Liabilities as of September 30,							12.1			0.6
Noncash Contribution of Assets by Noncontrolling Interest							84.0			—
Expected Reimbursement for Spent Nuclear Fuel Dry Cask Storage							2.1			2.8



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

AEP TEXAS INC.

AND SUBSIDIARIES

AEP TEXAS INC. AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
	(in millions of KWhs)
Retail:
Residential	3,893	3,867	9,679	9,163
Commercial	3,172	3,135	8,438	8,395
Industrial	2,054	1,867	6,243	6,025
Miscellaneous	159	157	430	429
Total Retail	9,278	9,026	24,790	24,012

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

Summary of Heating and Cooling Degree Days



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
	(in degree days)
Actual – Heating (a)	—	—	234	103
Normal – Heating (b)	—	—	194	199

Actual – Cooling (c)	1,424	1,393	2,612	2,640
Normal – Cooling (b)	1,367	1,364	2,413	2,396

(a) Heating degree days are calculated on a 55 degree temperature base.

(b) Normal Heating/Cooling represents the thirty-year average of degree days.

Third Quarter of 2018 Compared to Third Quarter of 2017



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

Third Quarter of 2017	$	64.3

Changes in Gross Margin:
Retail Margins	(4.4		)
Off-system Sales	3.7
Transmission Revenues	(0.6		)
Other Revenues	(1.4		)
Total Change in Gross Margin	(2.7		)

Changes in Expenses and Other:
Other Operation and Maintenance	(19.8		)
Depreciation and Amortization	(9.3		)
Taxes Other Than Income Taxes	(3.0		)
Allowance for Equity Funds Used During Construction	5.8
Non-Service Cost Components of Net Periodic Benefit Cost	2.2
Interest Expense	(2.0		)
Total Change in Expenses and Other	(26.1		)

Income Tax Expense	22.3

Third Quarter of 2018	$	57.8

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

Retail Margins decreased $4 million primarily due to the following:

A $6 million decrease due to lower weather-normalized margins.

A $6 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.

These decreases were partially offset by:

A $3 million increase in revenues associated with the Distribution Cost Recovery Factor revenue rider.

A $2 million increase in revenues associated with the Transmission Cost Recovery Factor revenue rider. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.

A $2 million increase in weather-related usage primarily driven by a 2% increase in cooling degree days.

Margins from Off-system Sales increased $4 million primarily due to higher affiliated PPA revenues, which were offset by a corresponding increase in Other Operation and Maintenance expenses below.

Transmission Revenues decreased $1 million primarily due to the following:

A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers. This decrease was offset in Income Tax Expense below.

This decrease was offset by:

A $6 million increase due to recovery of increased transmission investment in ERCOT.

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

Other Operation and Maintenance expenses increased $20 million primarily due to the following:

A $7 million increase in ERCOT transmission expenses. This increase was offset by an increase in Retail Margins above.

A $6 million increase in employee-related expenses.

A $5 million increase in affiliated PPA expenses. This increase was offset by an increase in Margins from Off-system sales above.

Depreciation and Amortization expenses increased $9 million primarily due to the following:

A $4 million increase due to a prior year asset retirement obligation revision for the Oklaunion Power Station.

A $3 million increase in depreciation expense primarily due to an increase in the depreciable base of transmission and distribution assets.

Taxes Other Than Income Taxes increased $3 million primarily due to increased property taxes as a result of additional capital investment and increased tax rates.

Allowance for Equity Funds Used During Construction increased $6 million primarily due to increased transmission projects.

Interest Expense increased $2 million primarily due to the following:

An $8 million increase due to the issuances of long-term debt.

This increase was offset by:

A $4 million decrease due to a higher debt component of AFUDC and increased investment primarily in transmission projects.

A $2 million decrease in securitization assets related to Transition Funding. This decrease was offset above in Other Revenues and Depreciation and Amortization.

Income Tax Expense decreased $22 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

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



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

Nine Months Ended September 30, 2017	$	146.6

Changes in Gross Margin:
Retail Margins	16.1
Off-system Sales	2.0
Transmission Revenues	1.4
Other Revenues	(1.2		)
Total Change in Gross Margin	18.3

Changes in Expenses and Other:
Other Operation and Maintenance	(45.3		)
Depreciation and Amortization	(21.9		)
Taxes Other Than Income Taxes	(9.0		)
Interest Income	(1.6		)
Allowance for Equity Funds Used During Construction	13.0
Non-Service Cost Components of Net Periodic Benefit Cost	6.5
Interest Expense	(3.3		)
Total Change in Expenses and Other	(61.6		)

Income Tax Expense	47.8

Nine Months Ended September 30, 2018	$	151.1

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

Retail Margins increased $16 million primarily due to the following:

A $16 million increase in revenues associated with the Distribution Cost Recovery Factor revenue rider.

A $13 million increase in revenues associated with the Transmission Cost Recovery Factor revenue rider. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.

A $13 million increase in weather-related usage primarily driven by a 127% increase in heating degree days partially offset by a 1% decrease in cooling degree days.

These increases were partially offset by:

An $18 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.

A $7 million decrease due to lower weather-normalized margins primarily in the residential class.

Transmission Revenues increased $1 million primarily due to the following:

A $19 million increase due to recovery of increased transmission investment in ERCOT.

This increase was partially offset by:

An $11 million decrease due to the 2018 provisions for customer refunds due to Tax Reform. This decrease was offset in Income Tax Expense below.

A $6 million decrease due to lower rates in order to pass the benefits of Tax Reform on to customers. This decrease was offset in Income Tax Expense below.

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

Other Operation and Maintenance expenses increased $45 million primarily due to the following:

A $20 million increase in ERCOT transmission expenses. This increase was partially offset by an increase in Retail Margins above.

A $9 million increase in distribution expenses.

A $9 million increase in employee-related expenses.

A $5 million increase in affiliated PPA expenses. This increase was offset by an increase in Margins from Off-system sales above.

Depreciation and Amortization expenses increased $22 million primarily due to the following:

An $11 million increase in depreciation expense primarily due to an increase in the depreciable base of transmission and distribution assets.

A $5 million increase in securitization amortizations related to Transition Funding. This increase was offset in Other Revenues above and Interest Expense below.

A $4 million increase due to a prior year asset retirement obligation revision for the Oklaunion Power Station.

A $3 million increase in amortization primarily due to advanced metering infrastructure projects and capitalized software.

Taxes Other Than Income Taxes increased $9 million primarily due to increased property taxes as a result of additional capital investment and increased tax rates.

Allowance for Equity Funds Used During Construction increased $13 million primarily due to increased transmission projects.

Non-Service Cost Components of Net Periodic Cost decreased $7 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

Interest Expense increased $3 million primarily due to the following:

A $20 million increase due to the issuances of long-term debt.

This increase was partially offset by:

A $10 million decrease due to a higher debt component of AFUDC and increased investment primarily in transmission projects.

An $8 million decrease in securitization assets related to Transition Funding. This decrease was offset above in Other Revenues and Depreciation and Amortization.

Income Tax Expense decreased $48 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

AEP TEXAS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2018 and 2017

(in millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
REVENUES
Electric Transmission and Distribution	$	404.5		$	411.5		$	1,127.0		$	1,111.4
Sales to AEP Affiliates	27.5			18.9			63.3			50.8
Other Revenues	1.4			0.8			3.0			2.1
TOTAL REVENUES	433.4			431.2			1,193.3			1,164.3

EXPENSES
Fuel and Other Consumables Used for Electric Generation	13.2			8.3			27.9			17.2
Other Operation	133.4			117.5			368.4			332.8
Maintenance	23.2			19.3			67.8			58.1
Depreciation and Amortization	133.3			124.0			364.9			343.0
Taxes Other Than Income Taxes	36.3			33.3			102.3			93.3
TOTAL EXPENSES	339.4			302.4			931.3			844.4

OPERATING INCOME	94.0			128.8			262.0			319.9

Other Income (Expense):
Interest Income	0.5			0.5			—			1.6
Allowance for Equity Funds Used During Construction	5.8			—			15.2			2.2
Non-Service Cost Components of Net Periodic Benefit Cost	3.1			0.9			9.2			2.7
Interest Expense	(37.3		)	(35.3		)	(108.9		)	(105.6		)

INCOME BEFORE INCOME TAX EXPENSE	66.1			94.9			177.5			220.8

Income Tax Expense	8.3			30.6			26.4			74.2

NET INCOME	$	57.8		$	64.3		$	151.1		$	146.6

The common stock of AEP Texas is wholly-owned by Parent.

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

AEP TEXAS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, 2018 and 2017

(in millions)

(Unaudited)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Net Income	$	57.8	$	64.3	$	151.1	$	146.6

OTHER COMPREHENSIVE INCOME, NET OF TAXES
Cash Flow Hedges, Net of Tax of $0.1 and $0.2 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0.2 and $0.4 for the Nine Months Ended September 30, 2018 and 2017, Respectively	0.3		0.2		0.8		0.7
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $0 and $0 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0 and $0.1 for the Nine Months Ended September 30, 2018 and 2017, Respectively	—		0.1		0.1		0.2

TOTAL OTHER COMPREHENSIVE INCOME	0.3		0.3		0.9		0.9

TOTAL COMPREHENSIVE INCOME	$	58.1	$	64.6	$	152.0	$	147.5

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

AEP TEXAS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

COMMON SHAREHOLDER’S EQUITY

For the Nine Months Ended September 30, 2018 and 2017

(in millions)

(Unaudited)



	Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016	$	857.9	$	814.1	$	(14.9	)	$	1,657.1

Capital Contribution from Parent	200.0							200.0
Net Income			146.6					146.6
Other Comprehensive Income					0.9			0.9
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017	$	1,057.9	$	960.7	$	(14.0	)	$	2,004.6

TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017	$	1,057.9	$	1,124.6	$	(12.6	)	$	2,169.9

Capital Contribution from Parent	100.0							100.0
ASU 2018-02 Adoption			1.8		(2.7		)	(0.9		)
Net Income			151.1					151.1
Other Comprehensive Income					0.9			0.9
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018	$	1,157.9	$	1,277.5	$	(14.4	)	$	2,421.0

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

AEP TEXAS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30, 2018 and December 31, 2017

(in millions)

(Unaudited)



	September 30,			December 31,
	2018			2017
CURRENT ASSETS
Cash and Cash Equivalents	$	0.1		$	2.0
Restricted Cash for Securitized Transition Funding	124.2			155.2
Advances to Affiliates	8.0			111.9
Accounts Receivable:
Customers	132.9			105.3
Affiliated Companies	14.3			12.3
Accrued Unbilled Revenues	73.7			75.8
Miscellaneous	0.5			1.3
Allowance for Uncollectible Accounts	(0.9		)	(0.7		)
Total Accounts Receivable	220.5			194.0
Fuel	6.9			3.6
Materials and Supplies	51.1			52.0
Risk Management Assets	0.5			0.5
Accrued Tax Benefits	14.6			41.0
Prepayments and Other Current Assets	12.0			3.6
TOTAL CURRENT ASSETS	437.9			563.8

PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	352.1			350.7
Transmission	3,302.3			3,053.6
Distribution	3,968.4			3,718.6
Other Property, Plant and Equipment	554.0			461.0
Construction Work in Progress	1,108.8			835.7
Total Property, Plant and Equipment	9,285.6			8,419.6
Accumulated Depreciation and Amortization	1,643.9			1,594.5
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	7,641.7			6,825.1

OTHER NONCURRENT ASSETS
Regulatory Assets	396.4			378.7
Securitized Transition Assets (September 30, 2018 and December 31, 2017 Amounts Include $702.9 and $869.5, Respectively, Related to Transition Funding)	717.9			891.2
Deferred Charges and Other Noncurrent Assets	97.8			114.8
TOTAL OTHER NONCURRENT ASSETS	1,212.1			1,384.7

TOTAL ASSETS	$	9,291.7		$	8,773.6

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

AEP TEXAS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER’S EQUITY

September 30, 2018 and December 31, 2017

(in millions)

(Unaudited)



	September 30,			December 31,
	2018			2017
CURRENT LIABILITIES
Advances from Affiliates	$	77.8		$	—
Accounts Payable:
General	208.8			379.4
Affiliated Companies	31.7			30.2
Long-term Debt Due Within One Year – Nonaffiliated (September 30, 2018 and December 31, 2017 Amounts Include $250.5 and $236.1, Respectively, Related to Transition Funding)	500.5			266.1
Accrued Taxes	90.8			77.2
Accrued Interest (September 30, 2018 and December 31, 2017 Amounts Include $9 and $15.9, Respectively, Related to Transition Funding)	54.3			42.2
Oklaunion Purchase Power Agreement	22.8			—
Other Current Liabilities	99.5			76.4
TOTAL CURRENT LIABILITIES	1,086.2			871.5

NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated (September 30, 2018 and December 31, 2017 Amounts Include $574.7 and $790.1, Respectively, Related to Transition Funding)	3,413.9			3,383.2
Deferred Income Taxes	902.3			913.1
Regulatory Liabilities and Deferred Investment Tax Credits	1,346.4			1,320.5
Oklaunion Purchase Power Agreement	28.7			52.0
Deferred Credits and Other Noncurrent Liabilities	93.2			63.4
TOTAL NONCURRENT LIABILITIES	5,784.5			5,732.2

TOTAL LIABILITIES	6,870.7			6,603.7

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

COMMON SHAREHOLDER’S EQUITY
Paid-in Capital	1,157.9			1,057.9
Retained Earnings	1,277.5			1,124.6
Accumulated Other Comprehensive Income (Loss)	(14.4		)	(12.6		)
TOTAL COMMON SHAREHOLDER’S EQUITY	2,421.0			2,169.9

TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY	$	9,291.7		$	8,773.6

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

AEP TEXAS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2018 and 2017

(in millions)

(Unaudited)



	Nine Months Ended September 30,
	2018			2017
OPERATING ACTIVITIES
Net Income	$	151.1		$	146.6
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	364.9			343.0
Deferred Income Taxes	(21.2		)	124.1
Allowance for Equity Funds Used During Construction	(15.2		)	(2.2		)
Mark-to-Market of Risk Management Contracts	—			0.1
Pension Contributions to Qualified Plan Trust	—			(8.8		)
Property Taxes	(19.2		)	(15.9		)
Change in Regulatory Asset – Catastrophe Reserve	(22.3		)	(72.3		)
Change in Other Noncurrent Assets	(14.2		)	(29.1		)
Change in Other Noncurrent Liabilities	67.1			7.4
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	(26.5		)	(47.6		)
Fuel, Materials and Supplies	(2.4		)	(0.1		)
Accounts Payable	(19.1		)	77.3
Accrued Taxes, Net	40.0			1.7
Other Current Assets	(6.3		)	(2.5		)
Other Current Liabilities	14.1			(31.2		)
Net Cash Flows from Operating Activities	490.8			490.5

INVESTING ACTIVITIES
Construction Expenditures	(1,096.1		)	(617.5		)
Change in Advances to Affiliates, Net	103.9			(437.0		)
Other Investing Activities	31.1			11.5
Net Cash Flows Used for Investing Activities	(961.1		)	(1,043.0		)

FINANCING ACTIVITIES
Capital Contribution from Parent	100.0			200.0
Issuance of Long-term Debt – Nonaffiliated	494.0			749.9
Change in Advances from Affiliates, Net	77.8			(169.5		)
Retirement of Long-term Debt – Nonaffiliated	(231.7		)	(248.4		)
Principal Payments for Capital Lease Obligations	(3.6		)	(3.0		)
Other Financing Activities	0.9			(0.3		)
Net Cash Flows from Financing Activities	437.4			528.7

Net Decrease in Cash, Cash Equivalents and Restricted Cash for Securitized Transition Funding	(32.9		)	(23.8		)
Cash, Cash Equivalents and Restricted Cash for Securitized Transition Funding at Beginning of Period	157.2			146.9
Cash, Cash Equivalents and Restricted Cash for Securitized Transition Funding at End of Period	$	124.3		$	123.1

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	92.2		$	101.1
Net Cash Paid (Received) for Income Taxes	(14.2		)	(23.3		)
Noncash Acquisitions Under Capital Leases	8.9			5.3
Construction Expenditures Included in Current Liabilities as of September 30,	176.4			166.1

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

AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Summary of Investment in Transmission Assets for AEPTCo


	As of September 30,				As of September 30,
	2017		2016		2018		2017
	(in millions)				(in millions)
Plant In Service	$	4,684.4	$	3,260.7	$	5,988.7	$	4,664.1
CWIP	1,383.1		1,328.6
Accumulated Depreciation	151.5		86.6
Construction Work in Progress					1,772.9		1,393.0
Accumulated Depreciation and Amortization					234.6		134.0
Total Transmission Property, Net	$	5,916.0	$	4,502.7	$	7,527.0	$	5,923.1

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income								(in millions)

Third Quarter of 2016	$	52.4
Third Quarter of 2017					$	58.6

Changes in Transmission Revenues:
Transmission Revenues	42.0				28.8
Total Change in Transmission Revenues	42.0				28.8

Changes in Expenses and Other:
Other Operation and Maintenance	(10.4		)		(7.5		)
Depreciation and Amortization	(8.0		)		(10.3		)
Taxes Other Than Income Taxes	(4.9		)		(7.6		)
Interest Income	0.1				0.3
Allowance for Equity Funds Used During Construction	(1.6		)		6.6
Interest Expense	(5.9		)		(2.7		)
Total Change in Expenses and Other	(30.7		)		(21.2		)

Income Tax Expense	(3.8		)		11.9

Third Quarter of 2017	$	59.9
Third Quarter of 2018					$	78.1

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

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

Transmission Revenues increased ~~$42~~$29 million ~~primarily~~ due to ~~a $40 million~~an increase in the formula ~~rates~~rate revenue requirement primarily driven by continued investment in transmission assets. This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.

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

Other Operation and Maintenance expenses increased ~~$10~~$8 million primarily due to increased transmission investment.

Depreciation and Amortization expenses increased $8$10 million primarily due to a higher depreciable base.

Taxes Other Than Income Taxes increased $5$8 million primarily due to ~~increased~~higher property taxes as a result of ~~additional~~increased transmission investment.

Allowance for Equity Funds Used During Construction increased $7 million primarily due to increased transmission investment resulting in a higher CWIP balance.

Interest Expense increased $6$3 million primarily due to the following:

A $5 million increase primarily due to higher ~~outstanding~~ long-term debt balances.

This increase was partially offset by:

A $2 million decrease due to higher AFUDC borrowed funds resulting from a higher CWIP balance.

Income Tax Expense ~~increased $4~~decreased $12 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and amortization of Excess ADIT, partially offset by an increase in pretax book income.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income								(in millions)
Nine Months Ended September 30, 2016	$	153.0
Nine Months Ended September 30, 2017					$	212.4

Changes in Transmission Revenues:
Transmission Revenues	191.4				51.4
Total Change in Transmission Revenues	191.4				51.4

Changes in Expenses and Other:
Other Operation and Maintenance	(19.8		)		(21.6		)
Depreciation and Amortization	(23.4		)		(27.8		)
Taxes Other Than Income Taxes	(16.6		)		(20.9		)
Interest Income	0.3				0.8
Allowance for Equity Funds Used During Construction	(3.7		)		15.7
Interest Expense	(16.3		)		(10.3		)
Total Change in Expenses and Other	(79.5		)		(64.1		)

Income Tax Expense	(40.6		)		44.5

Nine Months Ended September 30, 2017	$	224.3
Nine Months Ended September 30, 2018					$	244.2

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

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

Transmission Revenues increased ~~$191~~$51 million primarily due to the ~~current year favorable impact of~~following:

A $115 million increase in revenues due to an increase in the ~~modification of the PJM OATT~~ formula ~~rates combined with an increase~~rate revenue requirement primarily driven by continued investment in transmission assets.

This increase includes the impact of the reduction in revenue related to Tax Reform, which was offset by a decrease in Income Tax Expense below.

This increase was partially offset by:

A $64 million decrease in revenues due to a lower annual formula rate true-up in 2018 driven by implementing forward looking formula rates in 2017.

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

Other Operation and Maintenance expenses increased ~~$20~~$22 million primarily due to increased transmission investment.

Depreciation and Amortization expenses increased ~~$23~~$28 million primarily due to a higher depreciable base.

Taxes Other Than Income Taxes increased ~~$17~~$21 million primarily due to ~~increased~~higher property taxes as a result of ~~additional~~increased transmission investment.

Allowance for Equity Funds Used During Construction ~~decreased $4~~increased $16 million primarily due to ~~the FERC~~increased transmission ~~complaint and an increase~~investment resulting in ~~the amount of short term debt, offset by an increase in the~~a higher CWIP balance.

Interest Expense increased ~~$16~~$10 million primarily due to the following:

A $16 million increase primarily due to higher ~~outstanding~~ long-term debt balances.

This increase was partially offset by:

A $6 million decrease due to higher AFUDC borrowed funds resulting from a higher CWIP balance.

Income Tax Expense ~~increased $41~~decreased $45 million primarily due to ~~an increase~~the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
REVENUES
Transmission Revenues	$	35.9		$	33.5		$	99.2		$	89.6		$	46.0		$	35.6		$	132.3		$	95.7
Sales to AEP Affiliates	131.4			91.8			450.2			268.4			148.4			130.1			453.8			439.1
Other Revenues													—			(0.1		)	0.1			—
TOTAL REVENUES	167.3			125.3			549.4			358.0			194.4			165.6			586.2			534.8

EXPENSES
Other Operation	18.4			7.5			38.8			21.0			24.5			18.4			59.6			38.8
Maintenance	1.4			1.9			6.8			4.8			2.8			1.4			7.6			6.8
Depreciation and Amortization	24.8			16.8			70.9			47.5			34.9			24.6			97.5			69.7
Taxes Other Than Income Taxes	27.6			22.7			82.0			65.4			35.2			27.6			102.9			82.0
TOTAL EXPENSES	72.2			48.9			198.5			138.7			97.4			72.0			267.6			197.3

OPERATING INCOME	95.1			76.4			350.9			219.3			97.0			93.6			318.6			337.5

Other Income (Expense):
Interest Income	0.2			0.1			0.5			0.2			0.5			0.2			1.3			0.5
Allowance for Equity Funds Used During Construction	11.7			13.3			36.0			39.7			18.0			11.4			48.7			33.0
Interest Expense	(16.9		)	(11.0		)	(48.6		)	(32.3		)	(19.8		)	(17.1		)	(60.7		)	(50.4		)

INCOME BEFORE INCOME TAX EXPENSE	90.1			78.8			338.8			226.9			95.7			88.1			307.9			320.6

Income Tax Expense	30.2			26.4			114.5			73.9			17.6			29.5			63.7			108.2

NET INCOME	$	59.9		$	52.4		$	224.3		$	153.0		$	78.1		$	58.6		$	244.2		$	212.4

See Condensed Notes to Condensed ~~Consolidated~~ Financial Statements of Registrants beginning on page ~~118~~141.

AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER’S EQUITY

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Paid-in Capital		Retained Earnings		Total Member’s Equity
TOTAL MEMBER'S EQUITY – DECEMBER 31, 2015	$	1,243.0	$	309.9	$	1,552.9

Capital Contributions from Member	116.0				116.0
Net Income			153.0		153.0
TOTAL MEMBER'S EQUITY – SEPTEMBER 30, 2016	$	1,359.0	$	462.9	$	1,821.9
							Paid-in Capital		Retained Earnings		Total
TOTAL MEMBER'S EQUITY – DECEMBER 31, 2016	$	1,455.0	$	502.6	$	1,957.6	$	1,455.0	$	502.6	$	1,957.6

Capital Contributions from Member	185.5				185.5		185.5				185.5
Net Income			224.3		224.3				212.4		212.4
TOTAL MEMBER'S EQUITY – SEPTEMBER 30, 2017	$	1,640.5	$	726.9	$	2,367.4	$	1,640.5	$	715.0	$	2,355.5

TOTAL MEMBER'S EQUITY – DECEMBER 31, 2017							$	1,816.6	$	773.3	$	2,589.9

Capital Contributions from Member							582.0				582.0
Net Income									244.2		244.2
TOTAL MEMBER'S EQUITY – SEPTEMBER 30, 2018							$	2,398.6	$	1,017.5	$	3,416.1

See Condensed Notes to Condensed ~~Consolidated~~ Financial Statements of Registrants beginning on page ~~118~~141.

AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
CURRENT ASSETS
Advances to Affiliates	$	290.9	$	67.1	$	278.0	$	146.3
Accounts Receivable:
Customers	19.5		11.3		11.9		15.0
Affiliated Companies	102.8		66.6		73.0		93.2
Miscellaneous					1.1		1.3
Total Accounts Receivable	122.3		77.9		86.0		109.5
Materials and Supplies	16.0		5.0		16.4		13.6
Accrued Tax Benefits	12.7		26.0		29.8		49.4
Prepayments and Other Current Assets	8.1		2.8		3.5		7.6
TOTAL CURRENT ASSETS	450.0		178.8		413.7		326.4

TRANSMISSION PROPERTY
Transmission Property	4,570.9		3,973.5		5,833.5		5,319.7
Other Property, Plant and Equipment	113.5		99.4		155.2		126.8
Construction Work in Progress	1,383.1		981.3		1,772.9		1,324.0
Total Transmission Property	6,067.5		5,054.2		7,761.6		6,770.5
Accumulated Depreciation and Amortization	151.5		99.6		234.6		152.6
TOTAL TRANSMISSION PROPERTY – NET	5,916.0		4,954.6		7,527.0		6,617.9

OTHER NONCURRENT ASSETS
Accounts Receivable - Affiliated Companies	13.8		—
Regulatory Assets	138.0		112.3		15.3		11.7
Deferred Property Taxes	29.8		102.2		38.1		125.0
Deferred Charges and Other Noncurrent Assets	1.3		1.9		4.3		1.1
TOTAL OTHER NONCURRENT ASSETS	182.9		216.4		57.7		137.8

TOTAL ASSETS	$	6,548.9	$	5,349.8	$	7,998.4	$	7,082.1

See Condensed Notes to Condensed ~~Consolidated~~ Financial Statements of Registrants beginning on page ~~118~~141.

AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND MEMBER’S EQUITY

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
CURRENT LIABILITIES
Advances from Affiliates	$	32.8	$	4.1	$	1.1	$	15.7
Accounts Payable:
General	233.2		289.7		237.4		484.5
Affiliated Companies	50.0		43.1		79.0		66.1
Long-term Debt Due Within One Year – Nonaffiliated					50.0		50.0
Accrued Taxes	112.5		191.8		138.7		231.5
Accrued Interest	28.9		10.5		35.9		15.0
Other Current Liabilities	10.4		10.9		4.3		4.1
TOTAL CURRENT LIABILITIES	467.8		550.1		546.4		866.9

NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	2,550.0		1,932.0		2,822.6		2,500.4
Deferred Income Taxes	1,073.1		862.1		684.4		600.4
Regulatory Liabilities	60.5		44.0		509.6		493.8
Deferred Credits and Other Noncurrent Liabilities	30.1		4.0		19.3		30.7
TOTAL NONCURRENT LIABILITIES	3,713.7		2,842.1		4,035.9		3,625.3

TOTAL LIABILITIES	4,181.5		3,392.2		4,582.3		4,492.2

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

MEMBER’S EQUITY
Paid-in Capital	1,640.5		1,455.0		2,398.6		1,816.6
Retained Earnings	726.9		502.6		1,017.5		773.3
TOTAL MEMBER’S EQUITY	2,367.4		1,957.6		3,416.1		2,589.9

TOTAL LIABILITIES AND MEMBER’S EQUITY	$	6,548.9	$	5,349.8	$	7,998.4	$	7,082.1

See Condensed Notes to Condensed ~~Consolidated~~ Financial Statements of Registrants beginning on page ~~118~~141.

AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
OPERATING ACTIVITIES
Net Income	$	224.3		$	153.0		$	244.2		$	212.4
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	70.9			47.5			97.5			69.7
Deferred Income Taxes	193.0			161.2			76.3			191.9
Allowance for Equity Funds Used During Construction	(36.0		)	(39.7		)	(48.7		)	(33.0		)
Property Taxes	72.4			63.5			86.9			72.4
Long-term Accounts Receivable - Affiliated	(13.8		)	—
Long-term Accounts Receivable – Affiliated							(3.1		)	(13.8		)
Change in Other Noncurrent Assets	7.6			(6.4		)	12.7			8.6
Change in Other Noncurrent Liabilities	25.7			0.6			18.0			25.7
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	(44.4		)	(43.3		)
Accounts Receivable							23.5			(40.8		)
Materials and Supplies	(11.0		)	(1.5		)	(2.8		)	(11.0		)
Accounts Payable	8.6			(1.7		)	3.3			20.4
Accrued Taxes, Net	(66.0		)	61.2			(73.2		)	(71.2		)
Accrued Interest	18.4			11.3			20.9			18.4
Other Current Assets	(5.3		)	(0.1		)	(0.5		)	(5.3		)
Other Current Liabilities	0.5			0.1			(28.0		)	0.5
Net Cash Flows from Operating Activities	444.9			405.7			427.0			444.9

INVESTING ACTIVITIES
Construction Expenditures	(1,050.7		)	(799.8		)	(1,171.8		)	(1,050.7		)
Change in Advances to Affiliates, Net	(223.8		)	83.7			(131.7		)	(223.8		)
Acquisitions of Assets							(13.2		)	(3.8		)
Other Investing Activities	(2.9		)	(4.6		)	1.2			0.9
Net Cash Flows Used for Investing Activities	(1,277.4		)	(720.7		)	(1,315.5		)	(1,277.4		)

FINANCING ACTIVITIES
Capital Contributions from Member	185.5			116.0			582.0			185.5
Issuance of Long-term Debt - Nonaffiliated	618.3			—
Issuance of Long-term Debt – Nonaffiliated							321.1			618.3
Change in Advances from Affiliates, Net	28.7			199.0			(14.6		)	28.7
Net Cash Flows from Financing Activities	832.5			315.0			888.5			832.5

Net Change in Cash and Cash Equivalents	—			—			—			—
Cash and Cash Equivalents at Beginning of Period	—			—			—			—
Cash and Cash Equivalents at End of Period	$	—		$	—		$	—		$	—

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	28.6		$	20.0		$	38.4		$	30.4
Net Cash Paid (Received) for Income Taxes	(93.4		)	(209.8		)	(32.1		)	(93.4		)
Construction Expenditures Included in Current Liabilities as of September 30,	239.0			204.8			237.0			248.9

See Condensed Notes to Condensed ~~Consolidated~~ Financial Statements of Registrants beginning on page ~~118~~141.

APPALACHIAN POWER COMPANY

AND SUBSIDIARIES

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales


	Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of KWhs)				(in millions of KWhs)
Retail:
Residential	2,488	2,845	7,829	8,743	2,662	2,488	8,895	7,829
Commercial	1,673	1,823	4,805	5,125	1,721	1,673	4,996	4,805
Industrial	2,431	2,391	7,106	7,022	2,427	2,431	7,165	7,106
Miscellaneous	202	217	613	637	215	202	644	613
Total Retail	6,794	7,276	20,353	21,527	7,025	6,794	21,700	20,353

Wholesale	994	1,029	2,684	2,413	1,143	994	2,252	2,684

Total KWhs	7,788	8,305	23,037	23,940	8,168	7,788	23,952	23,037

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

Summary of Heating and Cooling Degree Days

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in degree days)
Actual - Heating (a) —
—
1,000
1,433
Normal - Heating (b) 2
2
1,420
1,437

Actual - Cooling (c) 805
1,049
1,180
1,437
Normal - Cooling (b) 812
808
1,179
1,177



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
	(in degree days)
Actual – Heating (a)	—	—	1,518	1,000
Normal – Heating (b)	2	2	1,410	1,420

Actual – Cooling (c)	950	805	1,495	1,180
Normal – Cooling (b)	814	812	1,184	1,179


(a)	Heating degree days are calculated on a 55 degree temperature base.


(b)	Normal Heating/Cooling represents the thirty-year average of degree days.


(c)	Cooling degree days are calculated on a 65 degree temperature base.

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income								(in millions)
Third Quarter of 2016	$	104.1
Third Quarter of 2017					$	86.0

Changes in Gross Margin:
Retail Margins	(40.6		)		(64.0		)
Off-system Sales	(1.0		)		1.4
Transmission Revenues	1.8				2.4
Other Revenues	0.5				(1.2		)
Total Change in Gross Margin	(39.3		)		(61.4		)

Changes in Expenses and Other:
Other Operation and Maintenance	12.9				(56.3		)
Depreciation and Amortization	(4.7		)		(2.9		)
Taxes Other Than Income Taxes	(0.3		)		(1.3		)
Interest Income					0.1
Carrying Costs Income	0.4				(0.2		)
Allowance for Equity Funds Used During Construction	(1.8		)		1.4
Non-Service Cost Components of Net Periodic Benefit Cost					3.2
Interest Expense	(0.8		)		(3.6		)
Total Change in Expenses and Other	5.7				(59.6		)

Income Tax Expense	15.5
Income Tax Expense (Credit)					122.1

Third Quarter of 2017	$	86.0
Third Quarter of 2018					$	87.1

Retail Margins decreased ~~$41~~$64 million primarily due to the following:

A ~~$25~~$78 million reduction in deferred fuel under-recovery related to the West Virginia Tax Reform settlement. This decrease was offset in ~~weather-related usage primarily driven by a 23% decrease in cooling degree days.~~Income Tax Expense (Credit) below.

An $8$11 million ~~decrease~~increase in ~~weather-normalized margin occurring across all retail classes.~~deferred fuel related to recoverable PJM expenses that were offset below.

A $6$10 million ~~decrease primarily~~increase in non-recoverable fuel expense related to Virginia legislation.

These decreases were partially offset by:

A $17 million increase due to ~~a decrease in rates in West Virginia and Virginia.~~an adjustment to the 2018 provisions for customer refunds related to Tax Reform. This ~~decrease is~~increase was partially offset ~~by a corresponding decrease~~ in Other Operation and Maintenance expenses and Income Tax Expense (Credit) below.

A $15 million increase in weather-related usage primarily due to an 18% increase in cooling degree days.

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

Other Operation and Maintenance expenses ~~decreased $13~~increased $56 million primarily due to the following:

A $7$39 million ~~decrease~~increase in ~~storm-related expenses.~~expenses due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.

~~A $4~~An $8 million ~~decrease~~increase in ~~generation plant maintenance~~employee-related expenses.

~~Depreciation and Amortization~~Non-Service Cost Components of Net Periodic Benefit Cost ~~expenses increased $5~~decreased $3 million primarily due to ~~a higher depreciable base.~~favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

Income Tax Expense (Credit) decreased ~~$16~~$122 million primarily due to the impact of the West Virginia Tax Reform settlement, the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book ~~income and the recording of federal income tax adjustments.~~income.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income								(in millions)
Nine Months Ended September 30, 2016	$	303.8
Nine Months Ended September 30, 2017					$	248.7

Changes in Gross Margin:
Retail Margins	(93.7		)		(61.0		)
Off-system Sales	(0.1		)		1.7
Transmission Revenues	25.9				2.8
Other Revenues	3.2				(4.6		)
Total Change in Gross Margin	(64.7		)		(61.1		)

Changes in Expenses and Other:
Other Operation and Maintenance	(8.3		)		(57.0		)
Depreciation and Amortization	(14.1		)		(15.4		)
Taxes Other Than Income Taxes	0.6				(7.8		)
Interest Income	0.3				0.2
Carrying Costs Income	0.8				0.2
Allowance for Equity Funds Used During Construction	(2.9		)		3.4
Non-Service Cost Components of Net Periodic Benefit Cost					9.5
Interest Expense	(2.8		)		(2.5		)
Total Change in Expenses and Other	(26.4		)		(69.4		)

Income Tax Expense	36.0
Income Tax Expense (Credit)					171.8

Nine Months Ended September 30, 2017	$	248.7
Nine Months Ended September 30, 2018					$	290.0

Retail Margins decreased ~~$94~~$61 million primarily due to the following:

A ~~$72~~$78 million reduction of deferred fuel under-recovery related to the West Virginia Tax Reform settlement. This decrease was offset in Income Tax Expense (Credit) below.

A $41 million decrease ~~in weather-related usage primarily driven by a 30% decrease in heating degree days and an 18% decrease in cooling degree days.~~

~~A $14 million decrease primarily~~ due to ~~prior year recognition of deferred billing in West Virginia as approved by~~ the ~~WVPSC.~~

~~A $3 million~~2018 provisions for customer refunds related to Tax Reform. This decrease ~~in weather-normalized margin primarily driven by the commercial class.~~

~~Transmission Revenues~~ ~~increased $26 million primarily due to increase in formula rates driven by continued investment in transmission assets. This increase is~~was partially offset in Other Operation and Maintenance expenses and Income Tax Expense (Credit) below.

A $28 million increase in deferred fuel related to recoverable PJM expenses that were offset below.

A $10 million increase in non-recoverable fuel expense related to Virginia legislation.

A $5 million decrease in weather-normalized margins occurring across all retail classes.

These decreases were partially offset by:

A $90 million increase in weather-related usage primarily driven by a 52% increase in heating degree days along with a 27% increase in cooling degree days.

A $6 million increase primarily due to increases from rate riders in Virginia. This increase was partially offset by an increase in Other Operation and Maintenance expenses.

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

Other Operation and Maintenance expenses increased $8$57 million primarily due to the following:

A ~~$13~~$39 million increase in expenses due to the extinguishment of regulatory asset balances as agreed to within the West Virginia Tax Reform settlement. This increase was partially offset in Retail Margins above and Income Tax Expense (Credit) below.

A $21 million increase in recoverable PJM ~~transmission~~ expenses. This increase in expense iswas primarily offset within ~~Gross Margin~~Retail Margins above.

A $6$13 million ~~gain on the sale of property~~increase in ~~2016.~~employee-related expenses.

A $9 million increase in storm-related expenses.

A $5 million increase in estimated expenses for claims related to asbestos exposure.

These increases were partially offset by:

~~An $8~~A $41 million decrease in ~~storm-related expenses.~~

~~A $5 million decrease~~PJM expenses primarily related to the annual formula rate true-up that will be refunded in ~~employee-related expenses.~~future periods.

Depreciation and Amortization expenses increased ~~$14~~$15 million primarily due to a higher depreciable base.

Taxes Other Than Income ~~Tax Expense~~Taxes ~~decreased $36~~increased $8 million primarily due to an increase in property taxes due to additional investments in utility plant.

Allowance for Equity Funds Used During Construction increased $3 million due to an increase in construction activity.

Non-Service Cost Components of Net Periodic Benefit Cost decreased $10 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

Income Tax Expense (Credit) decreased $172 million primarily due to the impact of the West Virginia Tax Reform settlement, the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book ~~income and the recording of federal income tax adjustments.~~income.

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
REVENUES
Electric Generation, Transmission and Distribution	$	674.4		$	739.0		$	2,045.0		$	2,153.3		$	716.8		$	674.4		$	2,103.1		$	2,045.0
Sales to AEP Affiliates	41.9			36.4			130.6			109.0			42.9			41.9			138.7			130.6
Other Revenues	3.0			2.8			11.8			9.4			2.3			3.0			7.6			11.8
TOTAL REVENUES	719.3			778.2			2,187.4			2,271.7			762.0			719.3			2,249.4			2,187.4

EXPENSES
Fuel and Other Consumables Used for Electric Generation	178.6			190.1			498.3			494.1			263.4			178.6			487.7			498.3
Purchased Electricity for Resale	61.1			69.2			217.1			240.9			80.4			61.1			350.8			217.1
Other Operation	115.7			117.6			366.2			349.4			131.9			117.0			380.0			370.1
Maintenance	55.8			66.8			187.8			196.3			97.2			55.8			234.9			187.8
Depreciation and Amortization	102.8			98.1			304.1			290.0			105.7			102.8			319.5			304.1
Taxes Other Than Income Taxes	32.3			32.0			93.3			93.9			33.6			32.3			101.1			93.3
TOTAL EXPENSES	546.3			573.8			1,666.8			1,664.6			712.2			547.6			1,874.0			1,670.7

OPERATING INCOME	173.0			204.4			520.6			607.1			49.8			171.7			375.4			516.7

Other Income (Expense):
Interest Income	0.3			0.3			1.1			0.8			0.4			0.3			1.3			1.1
Carrying Costs Income	0.4			—			1.0			0.2			0.2			0.4			1.2			1.0
Allowance for Equity Funds Used During Construction	2.7			4.5			6.2			9.1			4.1			2.7			9.6			6.2
Non-Service Cost Components of Net Periodic Benefit Cost													4.5			1.3			13.4			3.9
Interest Expense	(47.2		)	(46.4		)	(143.5		)	(140.7		)	(50.8		)	(47.2		)	(146.0		)	(143.5		)

INCOME BEFORE INCOME TAX EXPENSE	129.2			162.8			385.4			476.5
INCOME BEFORE INCOME TAX EXPENSE (CREDIT)													8.2			129.2			254.9			385.4

Income Tax Expense	43.2			58.7			136.7			172.7
Income Tax Expense (Credit)													(78.9		)	43.2			(35.1		)	136.7

NET INCOME	$	86.0		$	104.1		$	248.7		$	303.8		$	87.1		$	86.0		$	290.0		$	248.7



The common stock of APCo is wholly-owned by Parent.

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net Income	$	86.0		$	104.1		$	248.7		$	303.8		$	87.1		$	86.0		$	290.0		$	248.7

OTHER COMPREHENSIVE LOSS, NET OF TAXES
Cash Flow Hedges, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2017 and 2016, Respectively, and $(0.3) and $(0.3) for the Nine Months Ended September 30, 2017 and 2016, Respectively	(0.1		)	(0.2		)	(0.5		)	(0.6		)
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2017 and 2016, Respectively, and $(0.4) and $(0.5) for the Nine Months Ended September 30, 2017 and 2016, Respectively	(0.3		)	(0.3		)	(0.9		)	(1.0		)
Cash Flow Hedges, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.2) and $(0.3) for the Nine Months Ended September 30, 2018 and 2017, Respectively													(0.3		)	(0.1		)	(0.7		)	(0.5		)
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.2) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.6) and $(0.4) for the Nine Months Ended September 30, 2018 and 2017, Respectively													(0.7		)	(0.3		)	(2.3		)	(0.9		)

TOTAL OTHER COMPREHENSIVE LOSS	(0.4		)	(0.5		)	(1.4		)	(1.6		)	(1.0		)	(0.4		)	(3.0		)	(1.4		)

TOTAL COMPREHENSIVE INCOME	$	85.6		$	103.6		$	247.3		$	302.2		$	86.1		$	85.6		$	287.0		$	247.3



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

COMMON SHAREHOLDER’S EQUITY

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total			Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2015	$	260.4	$	1,828.7	$	1,388.7		$	(2.8	)	$	3,475.0
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016														$	260.4	$	1,828.7	$	1,502.8		$	(8.4	)	$	3,583.5

Common Stock Dividends					(225.0		)				(225.0		)					(90.0		)				(90.0		)
Net Income					303.8						303.8							248.7						248.7
Other Comprehensive Loss								(1.6		)	(1.6		)								(1.4		)	(1.4		)
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2016	$	260.4	$	1,828.7	$	1,467.5		$	(4.4	)	$	3,552.2
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017														$	260.4	$	1,828.7	$	1,661.5		$	(9.8	)	$	3,740.8

TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2016	$	260.4	$	1,828.7	$	1,502.8		$	(8.4	)	$	3,583.5
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017														$	260.4	$	1,828.7	$	1,714.1		$	1.3		$	3,804.5

Common Stock Dividends					(90.0		)				(90.0		)					(120.0		)				(120.0		)
ASU 2018-02 Adoption																		0.1			0.3			0.4
Net Income					248.7						248.7							290.0						290.0
Other Comprehensive Loss								(1.4		)	(1.4		)								(3.0		)	(3.0		)
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2017	$	260.4	$	1,828.7	$	1,661.5		$	(9.8	)	$	3,740.8
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018														$	260.4	$	1,828.7	$	1,884.2		$	(1.4	)	$	3,971.9



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)



	September 30,			December 31,
	2018			2017
CURRENT ASSETS
Cash and Cash Equivalents	$	2.2		$	2.9
Restricted Cash for Securitized Funding	9.9			16.3
Advances to Affiliates	23.1			23.5
Accounts Receivable:
Customers	155.7			123.1
Affiliated Companies	70.6			69.3
Accrued Unbilled Revenues	52.6			74.1
Miscellaneous	0.9			1.1
Allowance for Uncollectible Accounts	(4.0		)	(3.7		)
Total Accounts Receivable	275.8			263.9
Fuel	37.7			89.3
Materials and Supplies	98.4			99.5
Risk Management Assets	68.4			24.9
Regulatory Asset for Under-Recovered Fuel Costs	79.9			88.8
Margin Deposits	12.5			14.4
Prepayments and Other Current Assets	23.0			12.7
TOTAL CURRENT ASSETS	630.9			636.2

PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	6,490.0			6,446.9
Transmission	3,141.2			3,019.9
Distribution	3,897.2			3,763.8
Other Property, Plant and Equipment	461.4			427.9
Construction Work in Progress	602.1			483.0
Total Property, Plant and Equipment	14,591.9			14,141.5
Accumulated Depreciation and Amortization	4,086.2			3,896.4
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	10,505.7			10,245.1

OTHER NONCURRENT ASSETS
Regulatory Assets	475.3			573.9
Securitized Assets	264.5			282.3
Long-term Risk Management Assets	1.4			1.1
Deferred Charges and Other Noncurrent Assets	180.1			190.0
TOTAL OTHER NONCURRENT ASSETS	921.3			1,047.3

TOTAL ASSETS	$	12,057.9		$	11,928.6



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

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER’S EQUITY

September 30, 2018 and December 31, 2017

(Unaudited)

September 30, December 31,
2017 2016
CURRENT ASSETS
Cash and Cash Equivalents $ 2.9
$ 2.7
Restricted Cash for Securitized Funding 8.3
15.8
Advances to Affiliates 23.6
24.1
Accounts Receivable:
Customers 96.8
131.4
Affiliated Companies 59.5
54.4
Accrued Unbilled Revenues 41.1
52.7
Miscellaneous 1.3
0.9
Allowance for Uncollectible Accounts (2.7 ) (3.5 )
Total Accounts Receivable 196.0
235.9
Fuel 96.3
112.0
Materials and Supplies 100.8
98.8
Risk Management Assets 30.3
2.6
Accrued Tax Benefits 0.4
4.2
Regulatory Asset for Under-Recovered Fuel Costs 63.5
68.4
Margin Deposits 11.8
17.5
Prepayments and Other Current Assets 18.2
9.7
TOTAL CURRENT ASSETS 552.1
591.7

PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation 6,393.7
6,332.8
Transmission 2,904.4
2,796.9
Distribution 3,703.5
3,569.1
Other Property, Plant and Equipment 409.8
373.5
Construction Work in Progress 493.5
390.3
Total Property, Plant and Equipment 13,904.9
13,462.6
Accumulated Depreciation and Amortization 3,836.7
3,636.8
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET
10,068.2
9,825.8

OTHER NONCURRENT ASSETS
Regulatory Assets 1,100.1
1,121.1
Securitized Assets 288.0
305.3
Long-term Risk Management Assets 0.6
—
Deferred Charges and Other Noncurrent Assets 113.6
133.3
TOTAL OTHER NONCURRENT ASSETS 1,502.3
1,559.7

TOTAL ASSETS $ 12,122.6
$ 11,977.2



	September 30,			December 31,
	2018			2017
	(in millions)
CURRENT LIABILITIES
Advances from Affiliates	$	98.5		$	186.0
Accounts Payable:
General	219.1			264.9
Affiliated Companies	73.6			92.7
Long-term Debt Due Within One Year – Nonaffiliated	430.7			249.2
Risk Management Liabilities	0.9			1.3
Customer Deposits	88.0			86.1
Accrued Taxes	81.5			94.5
Accrued Interest	72.6			40.5
Other Current Liabilities	151.6			109.0
TOTAL CURRENT LIABILITIES	1,216.5			1,124.2

NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	3,631.0			3,730.9
Long-term Risk Management Liabilities	0.7			0.2
Deferred Income Taxes	1,581.5			1,565.7
Regulatory Liabilities and Deferred Investment Tax Credits	1,423.8			1,454.9
Asset Retirement Obligations	103.2			100.2
Employee Benefits and Pension Obligations	65.7			73.3
Deferred Credits and Other Noncurrent Liabilities	63.6			74.7
TOTAL NONCURRENT LIABILITIES	6,869.5			6,999.9

TOTAL LIABILITIES	8,086.0			8,124.1

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

COMMON SHAREHOLDER’S EQUITY
Common Stock – No Par Value:
Authorized – 30,000,000 Shares
Outstanding – 13,499,500 Shares	260.4			260.4
Paid-in Capital	1,828.7			1,828.7
Retained Earnings	1,884.2			1,714.1
Accumulated Other Comprehensive Income (Loss)	(1.4		)	1.3
TOTAL COMMON SHAREHOLDER’S EQUITY	3,971.9			3,804.5

TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY	$	12,057.9		$	11,928.6



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~.

~~APPALACHIAN POWER COMPANY AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~LIABILITIES AND COMMON SHAREHOLDER’S EQUITY~~

~~September 30, 2017 and~~ ~~December 31, 2016~~

~~(Unaudited)~~

September 30, December 31,
2017 2016
(in millions)
CURRENT LIABILITIES
Advances from Affiliates $ 69.5
$ 79.6
Accounts Payable:

General 235.4
253.7
Affiliated Companies 75.5
82.6
Long-term Debt Due Within One Year - Nonaffiliated 149.2
503.1
Risk Management Liabilities 0.9
0.3
Customer Deposits 84.0
83.1
Accrued Taxes 64.0
107.6
Accrued Interest 71.4
40.6
Other Current Liabilities 99.2
129.5
TOTAL CURRENT LIABILITIES 849.1
1,280.1

NONCURRENT LIABILITIES
Long-term Debt - Nonaffiliated 3,830.1
3,530.8
Long-term Risk Management Liabilities 0.3
0.9
Deferred Income Taxes 2,796.7
2,672.3
Regulatory Liabilities and Deferred Investment Tax Credits 634.4
627.8
Asset Retirement Obligations 101.2
108.8
Employee Benefits and Pension Obligations 92.2
108.5
Deferred Credits and Other Noncurrent Liabilities 77.8
64.5
TOTAL NONCURRENT LIABILITIES 7,532.7
7,113.6

TOTAL LIABILITIES 8,381.8
8,393.7

Rate Matters (Note 4)

Commitments and Contingencies (Note 5)

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

Outstanding – 13,499,500 Shares 260.4
260.4
Paid-in Capital 1,828.7
1,828.7
Retained Earnings 1,661.5
1,502.8
Accumulated Other Comprehensive Income (Loss) (9.8 ) (8.4 )
TOTAL COMMON SHAREHOLDER’S EQUITY 3,740.8
3,583.5

TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY $ 12,122.6
$ 11,977.2



~~See Condensed Notes to Condensed Financial Statements of Registrants beginning on page~~ ~~118~~141.

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
OPERATING ACTIVITIES
Net Income	$	248.7		$	303.8		$	290.0		$	248.7
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	304.1			290.0			319.5			304.1
Deferred Income Taxes	121.7			100.9			(83.8		)	121.7
Carrying Costs Income	(1.0		)	(0.2		)
Allowance for Equity Funds Used During Construction	(6.2		)	(9.1		)	(9.6		)	(6.2		)
Mark-to-Market of Risk Management Contracts	(28.3		)	18.4			(43.7		)	(28.3		)
Pension Contributions to Qualified Plan Trust	(10.2		)	(8.8		)	—			(10.2		)
Property Taxes	29.8			29.2
Deferred Fuel Over/Under-Recovery, Net	4.9			19.0			12.8			4.9
Change in Other Noncurrent Assets	8.3			(5.1		)	94.8			37.1
Change in Other Noncurrent Liabilities	7.9			(23.0		)	3.8			7.9
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	39.9			(20.5		)	39.4			39.9
Fuel, Materials and Supplies	14.0			(1.2		)	53.0			14.0
Accounts Payable	6.2			4.9			(21.5		)	6.2
Accrued Taxes, Net	(44.2		)	(13.9		)	(20.2		)	(44.2		)
Other Current Assets	(2.5		)	(0.2		)	(7.9		)	(2.5		)
Other Current Liabilities	9.1			(4.1		)	64.1			9.1
Net Cash Flows from Operating Activities	702.2			680.1			690.7			702.2

INVESTING ACTIVITIES
Construction Expenditures	(560.0		)	(472.7		)	(575.8		)	(560.0		)
Change in Restricted Cash for Securitized Funding	7.5			7.0
Change in Advances to Affiliates, Net	0.5			1.2			0.4			0.5
Other Investing Activities	11.8			10.6			10.0			11.8
Net Cash Flows Used for Investing Activities	(540.2		)	(453.9		)	(565.4		)	(547.7		)

FINANCING ACTIVITIES
Issuance of Long-term Debt - Nonaffiliated	320.9			314.1			103.3			320.9
Change in Advances from Affiliates, Net	(10.1		)	(96.9		)	(87.5		)	(10.1		)
Retirement of Long-term Debt - Nonaffiliated	(377.9		)	(213.6		)	(24.0		)	(377.9		)
Principal Payments for Capital Lease Obligations	(5.2		)	(4.7		)	(5.2		)	(5.2		)
Dividends Paid on Common Stock	(90.0		)	(225.0		)	(120.0		)	(90.0		)
Other Financing Activities	0.5			0.4			1.0			0.5
Net Cash Flows Used for Financing Activities	(161.8		)	(225.7		)	(132.4		)	(161.8		)

Net Increase in Cash and Cash Equivalents	0.2			0.5
Cash and Cash Equivalents at Beginning of Period	2.7			2.8
Cash and Cash Equivalents at End of Period	$	2.9		$	3.3
Net Decrease in Cash, Cash Equivalents and Restricted Cash for Securitized Funding							(7.1		)	(7.3		)
Cash, Cash Equivalents and Restricted Cash for Securitized Funding at Beginning of Period							19.2			18.5
Cash, Cash Equivalents and Restricted Cash for Securitized Funding at End of Period							$	12.1		$	11.2

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	107.1		$	113.2		$	104.5		$	107.1
Net Cash Paid for Income Taxes	24.4			55.8			26.7			24.4
Noncash Acquisitions Under Capital Leases	2.9			2.1			3.9			2.9
Construction Expenditures Included in Current Liabilities as of September 30,	107.2			66.8			87.6			107.2



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

INDIANA MICHIGAN POWER COMPANY

AND SUBSIDIARIES

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales


	Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of KWhs)				(in millions of KWhs)
Retail:
Residential	1,404	1,619	4,015	4,344	1,562	1,404	4,430	4,015
Commercial	1,313	1,405	3,640	3,780	1,363	1,313	3,748	3,640
Industrial	1,978	1,996	5,793	5,876	2,003	1,978	5,880	5,793
Miscellaneous	16	15	50	50	15	16	50	50
Total Retail	4,711	5,035	13,498	14,050	4,943	4,711	14,108	13,498

Wholesale	2,807	2,613	8,567	7,038	2,613	2,807	7,927	8,567

Total KWhs	7,518	7,648	22,065	21,088	7,556	7,518	22,035	22,065

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

Summary of Heating and Cooling Degree Days

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in degree days)
Actual - Heating (a) —
—
1,816
2,196
Normal - Heating (b) 11
10
2,430
2,449

Actual - Cooling (c) 504
741
764
1,011
Normal - Cooling (b) 574
571
835
835



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
	(in degree days)
Actual – Heating (a)	2	—	2,523	1,816
Normal – Heating (b)	10	11	2,413	2,430

Actual – Cooling (c)	722	504	1,084	764
Normal – Cooling (b)	574	574	837	835


(a)	Heating degree days are calculated on a 55 degree temperature base.


(b)	Normal Heating/Cooling represents the thirty-year average of degree days.


(c)	Cooling degree days are calculated on a 65 degree temperature base.

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income								(in millions)

Third Quarter of 2016	$	75.4
Third Quarter of 2017					$	64.9

Changes in Gross Margin:
Retail Margins ~~(a)~~	(4.4		)		42.4
Off-system Sales					(3.8		)
Transmission Revenues	(6.2		)		1.8
Other Revenues	(1.5		)		(1.5		)
Total Change in Gross Margin	(12.1		)		38.9

Changes in Expenses and Other:
Other Operation and Maintenance	(7.4		)		(13.0		)
Asset Impairments and Other Related Charges	10.5
Depreciation and Amortization	(5.9		)		(30.2		)
Taxes Other Than Income Taxes	(1.4		)		0.9
Other Income	0.1
Interest Income					1.4
Carrying Cost Income					(1.6		)
Allowance for Equity Funds Used During Construction					0.4
Non-Service Cost Components of Net Periodic Benefit Cost					3.1
Interest Expense	(0.8		)		(7.0		)
Total Change in Expenses and Other	(4.9		)		(46.0		)

Income Tax Expense	6.5				14.9

Third Quarter of 2017	$	64.9
Third Quarter of 2018					$	72.7


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

Retail Margins ~~decreased $4~~increased $42 million primarily due to the following:

~~An $18 million decrease in weather-related usage primarily due to a 32% decrease in cooling degree days.~~

A ~~$6 million decrease in weather-normalized margins.~~

~~A $5 million decrease in FERC generation wholesale municipal and cooperative revenues primarily due to formula rate adjustments.~~

~~A $2 million decrease due to increased costs for power acquired under the Unit Power Agreement between AEGCo and I&M.~~

~~These decreases were partially offset by:~~

~~A $13~~$47 million increase from rate proceedings in the I&M service ~~territory.~~territory, inclusive of a $22 million decrease due to the impact of Tax Reform in the Indiana jurisdiction. The increase in ~~retail margins~~Retail Margins relating to riders ~~has~~had corresponding increases in other expense items below.

A $9$21 million increase in weather-related usage primarily due to a 43% increase in cooling degree days.

These increases were partially offset by:

A $15 million decrease related to over/under recovery of riders.

A $2$4 million decrease due to timing differences in ~~PJM~~the recovery of increased fuel and other variable production costs not related ~~expenses~~to fuel clauses or other trackers.

A $3 million decrease due to customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.

A $3 million decrease due to lower weather-normalized margins primarily due to ~~reduced FTRs.~~wholesale customer load loss from contracts that expired at the end of 2017.

~~Transmission Revenues~~Margins from Off-system Sales decreased $6$4 million primarily due to ~~an annual formula rate true-up and reduced net PJM Network Integration Transmission Service revenues resulting from increased affiliated transmission-related charges.~~mid-year changes in the OSS sharing mechanism.

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

Other Operation and Maintenance expenses increased $7$13 million primarily due to the following:

A $9$5 million increase in ~~transmission expenses primarily due to an increase in recoverable PJM~~demand-side management expenses. This increase ~~in expense is~~was offset within Retail Margins above.

A $3$5 million increase in ~~nuclear expenses~~distribution forestry expenses.

A $4 million increase in Cook Plant refueling outage amortization expense, primarily due to anincreased costs of outages.

A $4 million increase ~~in refueling outage amortization and refueling outage expenses not deferred, partially offset by a decrease~~ in employee-related expenses.

These increases were partially offset by:

A $3$5 million decrease in ~~distribution~~transmission expenses primarily due to ~~decreased vegetation management.~~

~~Asset Impairments and Other Related Charges~~ ~~decreased $11 million due to the impairment of I&M’s Price River coal reserves~~a decrease in ~~2016.~~

recoverable PJM expenses. This decrease was partially offset within Retail Margins above.

Depreciation and Amortization expenses increased $6$30 million primarily due to a higher depreciable ~~base.~~base and increased depreciation rates approved in the 2017 Indiana and Michigan base rate cases.

Non-Service Cost Components of Net Periodic Benefit Cost decreased $3 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

Interest Expense increased $7 million primarily due to increased long-term debt balances.

Income Tax Expense decreased $7$15 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book ~~income and the regulatory accounting treatment of state income taxes.~~income.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income								(in millions)

Nine Months Ended September 30, 2016	$	201.4
Nine Months Ended September 30, 2017					$	143.8

Changes in Gross Margin:
Retail Margins ~~(a)~~	(11.2		)		105.3
Off-system Sales	0.5				(5.4		)
Transmission Revenues	(23.0		)		23.3
Other Revenues	(2.1		)		(3.2		)
Total Change in Gross Margin	(35.8		)		120.0

Changes in Expenses and Other:
Other Operation and Maintenance	(39.3		)		(2.5		)
Asset Impairments and Other Related Charges	10.5
Depreciation and Amortization	(11.6		)		(52.3		)
Taxes Other Than Income Taxes	3.2				(4.6		)
Other Income	(0.4		)
Interest Income					1.2
Carrying Cost Income					(5.3		)
Allowance for Equity Funds Used During Construction					(0.1		)
Non-Service Cost Components of Net Periodic Benefit Cost					9.0
Interest Expense	(6.7		)		(12.6		)
Total Change in Expenses and Other	(44.3		)		(67.2		)

Income Tax Expense	22.5				35.0

Nine Months Ended September 30, 2017	$	143.8
Nine Months Ended September 30, 2018					$	231.6


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

Retail Margins ~~decreased $11~~increased $105 million primarily due to the following:

~~A $33~~An $89 million increase from rate proceedings in the I&M service territory, inclusive of a $26 million decrease due to the impact of Tax Reform in the Indiana jurisdiction. The increase in Retail Margins relating to riders had corresponding increases in other expense items below.

A $51 million increase in weather-related usage primarily due to a 39% increase in heating degree days and a 42% increase in cooling degree days.

A $32 million increase in FERC generation wholesale municipal and cooperative revenues primarily due to anthe annual formula rate true-up and ~~other rate adjustments.~~

~~A $29 million decrease in weather-related usage primarily due~~changes to ~~a 24% decrease in cooling degree days and a 17% decrease in heating degree days.~~

~~An $11 million decrease in weather-normalized margins.~~

~~A $5 million decrease due to increased costs for power acquired under~~ the ~~Unit Power Agreement between AEGCo and I&M.~~formula rate.

These ~~decreases~~increases were partially offset by:

A ~~$47~~$30 million ~~increase from rate proceedings in the I&M service territory. The increase in retail margins relating to riders has corresponding increases in other items below.~~

~~A $19 million increase~~decrease related to over/under recovery of riders.

A $2$14 million decrease due to customer refunds related to Tax Reform. This decrease was offset in ~~PJM~~Income Tax Expense below.

A $10 million decrease due to timing differences in the recovery of increased fuel and other variable production costs not related ~~expenses~~to fuel clauses or other trackers.

Margins from Off-system Sales decreased $5 million primarily due to ~~reduced FTRs.~~mid-year changes in the OSS sharing mechanism.

Transmission Revenues ~~decreased~~increased $23 million primarily due to anthe annual formula rate true-up and ~~reduced net PJM Network Integration Transmission Service revenues resulting from increased affiliated transmission-related charges.~~decreased RTO provisions.

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

Other Operation and Maintenance expenses increased ~~$39~~$3 million primarily due to the following:

A ~~$38~~$10 million increase in ~~transmission expenses~~Cook Plant refueling outage amortization expense, primarily due to anincreased costs of outages.

A $7 million increase in ~~recoverable PJM~~employee-related expenses.

A $6 million increase in distribution forestry expenses.

A $5 million increase in demand-side management expenses. This increase ~~in expense~~ was offset within Retail Margins above.

A $7 million increase in nuclear expenses primarily due to an increase in refueling outage amortization, partially offset by refueling outage expenses not deferred, a decrease in employee-related expenses and material write-off.

~~A $3 million increase in distribution expenses primarily due to increased vegetation management.~~

These increases were partially offset by:

~~An $8~~A $19 million decrease in transmission expenses primarily due to ~~employee-related expenses.~~the annual formula rate true-up.

~~Asset Impairments and Other Related Charges~~ ~~decreased $11~~A $7 million decrease due to ~~the impairment of I&M’s Price River coal reserves~~an increased Nuclear Electric Insurance Limited distribution in ~~2016.~~

2018.

Depreciation and Amortization expenses increased ~~$12~~$52 million primarily due to a higher depreciable ~~base.~~base and increased depreciation rates approved in the 2017 Indiana and Michigan base rate cases.

Taxes Other Than Income Taxes ~~decreased $3~~increased $5 million primarily due to ~~property taxes.~~increased state taxes due to higher reported taxable KWh and taxable revenues and a prior period refund.

Carrying Cost Income decreased $5 million primarily due to a decrease in carrying charges for certain riders in Indiana.

Non-Service Cost Components of Net Periodic Benefit Cost decreased $9 million primarily due to favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

Interest Expense increased $7$13 million primarily due to ~~higher~~increased long-term debt balances.

Income Tax Expense decreased ~~$23~~$35 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a ~~decrease~~result of Tax Reform and amortization of Excess ADIT, partially offset by an increase in pretax book ~~income, partially offset by the recording of favorable federal income tax adjustments in 2016.~~income.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
REVENUES
Electric Generation, Transmission and Distribution	$	537.0		$	574.7		$	1,527.4		$	1,570.8		$	609.9		$	537.0		$	1,723.9		$	1,527.4
Other Revenues – Affiliated	17.1			19.5			48.2			68.7			17.1			17.1			62.2			48.2
Other Revenues – Nonaffiliated	3.6			3.4			9.9			13.2			2.7			3.6			10.1			9.9
TOTAL REVENUES	557.7			597.6			1,585.5			1,652.7			629.7			557.7			1,796.2			1,585.5

EXPENSES
Fuel and Other Consumables Used for Electric Generation	76.4			91.3			238.2			236.8			95.9			76.4			246.8			238.2
Purchased Electricity for Resale	32.9			43.7			101.2			134.3			48.9			32.9			167.7			101.2
Purchased Electricity from AEP Affiliates	62.4			64.5			166.2			165.9			60.0			62.4			181.8			166.2
Other Operation	140.5			138.9			434.2			413.9			149.3			142.0			425.8			438.8
Maintenance	51.5			45.7			153.6			134.6			57.2			51.5			169.1			153.6
Asset Impairments and Other Related Charges	—			10.5			—			10.5
Depreciation and Amortization	55.0			49.1			154.8			143.2			85.2			55.0			207.1			154.8
Taxes Other Than Income Taxes	23.9			22.5			68.3			71.5			23.0			23.9			72.9			68.3
TOTAL EXPENSES	442.6			466.2			1,316.5			1,310.7			519.5			444.1			1,471.2			1,321.1

OPERATING INCOME	115.1			131.4			269.0			342.0			110.2			113.6			325.0			264.4

Other Income (Expense):
Interest Income	2.4			1.7			11.5			9.1			1.6			0.2			2.8			1.6
Carrying Costs Income													0.6			2.2			4.6			9.9
Allowance for Equity Funds Used During Construction	3.5			4.1			8.1			10.9			3.9			3.5			8.0			8.1
Non-Service Cost Components of Net Periodic Benefit Cost													4.6			1.5			13.6			4.6
Interest Expense	(27.5		)	(26.7		)	(83.0		)	(76.3		)	(34.5		)	(27.5		)	(95.6		)	(83.0		)

INCOME BEFORE INCOME TAX EXPENSE	93.5			110.5			205.6			285.7			86.4			93.5			258.4			205.6

Income Tax Expense	28.6			35.1			61.8			84.3			13.7			28.6			26.8			61.8

NET INCOME	$	64.9		$	75.4		$	143.8		$	201.4		$	72.7		$	64.9		$	231.6		$	143.8

The common stock of I&M is wholly-owned by Parent.

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Net Income	$	64.9	$	75.4	$	143.8	$	201.4	$	72.7	$	64.9	$	231.6	$	143.8

OTHER COMPREHENSIVE INCOME, NET OF TAXES
Cash Flow Hedges, Net of Tax of $0.1 and $0.1 for the Three Months Ended September 30, 2017 and 2016, Respectively, and $0.5 and $0.5 for the Nine Months Ended September 30, 2017 and 2016, Respectively	0.3		0.3		1.0		1.0
Cash Flow Hedges, Net of Tax of $0.1 and $0.1 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $0.3 and $0.5 for the Nine Months Ended September 30, 2018 and 2017, Respectively									0.3		0.3		1.2		1.0

TOTAL COMPREHENSIVE INCOME	$	65.2	$	75.7	$	144.8	$	202.4	$	73.0	$	65.2	$	232.8	$	144.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

COMMON SHAREHOLDER’S EQUITY

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total			Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2015	$	56.6	$	980.9	$	1,015.6		$	(16.7	)	$	2,036.4
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016														$	56.6	$	980.9	$	1,130.5		$	(16.2	)	$	2,151.8

Common Stock Dividends					(93.8		)				(93.8		)					(93.7		)				(93.7		)
Net Income					201.4						201.4							143.8						143.8
Other Comprehensive Income								1.0			1.0										1.0			1.0
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2016	$	56.6	$	980.9	$	1,123.2		$	(15.7	)	$	2,145.0
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017														$	56.6	$	980.9	$	1,180.6		$	(15.2	)	$	2,202.9

TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2016	$	56.6	$	980.9	$	1,130.5		$	(16.2	)	$	2,151.8
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017														$	56.6	$	980.9	$	1,192.2		$	(12.1	)	$	2,217.6

Common Stock Dividends					(93.7		)				(93.7		)					(105.5		)				(105.5		)
ASU 2018-02 Adoption																		0.3			(2.7		)	(2.4		)
Net Income					143.8						143.8							231.6						231.6
Other Comprehensive Income								1.0			1.0										1.2			1.2
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2017	$	56.6	$	980.9	$	1,180.6		$	(15.2	)	$	2,202.9
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018														$	56.6	$	980.9	$	1,318.6		$	(13.6	)	$	2,342.5

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)


	September 30,			December 31,		September 30,			December 31,
	2017			2016		2018			2017
CURRENT ASSETS
Cash and Cash Equivalents	$	1.3		$	1.2	$	1.6		$	1.3
Advances to Affiliates	12.6			12.5		72.5			12.4
Accounts Receivable:
Customers	42.1			60.2		70.5			56.4
Affiliated Companies	42.8			51.0		51.7			50.0
Accrued Unbilled Revenues	8.4			1.5		16.1			7.3
Miscellaneous	1.1			0.7		1.9			2.0
Allowance for Uncollectible Accounts	(0.3		)	—		(0.2		)	(0.1		)
Total Accounts Receivable	94.1			113.4		140.0			115.6
Fuel	32.3			32.3		28.7			31.4
Materials and Supplies	156.5			150.8		165.7			160.6
Risk Management Assets	11.6			3.5		10.9			7.6
Accrued Tax Benefits	34.5			37.7		35.4			58.4
Regulatory Asset for Under-Recovered Fuel Costs	12.3			26.1		0.1			15.0
Accrued Reimbursement of Spent Nuclear Fuel Costs	11.0			22.1		7.9			10.8
Prepayments and Other Current Assets	26.9			19.9		20.9			20.9
TOTAL CURRENT ASSETS	393.1			419.5		483.7			434.0

PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	4,399.9			4,056.1		4,579.9			4,445.9
Transmission	1,491.4			1,472.8		1,543.3			1,504.0
Distribution	2,000.1			1,899.3		2,183.9			2,069.3
Other Property, Plant and Equipment (Including Coal Mining and Nuclear Fuel)	555.9			550.2		584.7			595.2
Construction Work in Progress	478.9			654.2		458.6			460.2
Total Property, Plant and Equipment	8,926.2			8,632.6		9,350.4			9,074.6
Accumulated Depreciation, Depletion and Amortization	3,022.5			3,005.1		3,113.9			3,024.2
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	5,903.7			5,627.5		6,236.5			6,050.4

OTHER NONCURRENT ASSETS
Regulatory Assets	941.0			916.6		545.3			579.4
Spent Nuclear Fuel and Decommissioning Trusts	2,433.0			2,256.2		2,666.0			2,527.6
Long-term Risk Management Assets	0.5			—		0.9			0.7
Deferred Charges and Other Noncurrent Assets	95.9			121.5		175.7			179.9
TOTAL OTHER NONCURRENT ASSETS	3,470.4			3,294.3		3,387.9			3,287.6

TOTAL ASSETS	$	9,767.2		$	9,341.3	$	10,108.1		$	9,772.0

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER’S EQUITY

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(dollars in millions)

(Unaudited)


	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
CURRENT LIABILITIES
Advances from Affiliates	$	177.5		$	215.2		$	—		$	211.6
Accounts Payable:
General	168.6			179.0			142.6			154.5
Affiliated Companies	72.2			75.6			65.6			98.3
Long-term Debt Due Within One Year – Nonaffiliated (September 30, 2017 and December 31, 2016 Amounts Include $83.7 and $130.9, Respectively, Related to DCC Fuel)	462.1			209.3
Long-term Debt Due Within One Year – Nonaffiliated (September 30, 2018 and December 31, 2017 Amounts Include $94.2 and $96.3, Respectively, Related to DCC Fuel)							172.7			474.7
Risk Management Liabilities	2.0			0.3			6.4			3.5
Customer Deposits	37.3			34.3			37.0			37.7
Accrued Taxes	43.8			77.2			44.7			81.3
Accrued Interest	14.3			31.7			22.2			37.5
Obligations Under Capital Leases	7.3			9.4
Other Current Liabilities	114.3			123.4			129.8			112.2
TOTAL CURRENT LIABILITIES	1,099.4			955.4			621.0			1,211.3

NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	2,196.4			2,262.1			2,889.7			2,270.4
Long-term Risk Management Liabilities	0.2			0.8			0.4			0.1
Deferred Income Taxes	1,681.8			1,527.4			1,010.0			953.8
Regulatory Liabilities and Deferred Investment Tax Credits	1,169.6			1,065.5			1,791.9			1,708.7
Asset Retirement Obligations	1,307.4			1,257.9			1,365.1			1,321.6
Deferred Credits and Other Noncurrent Liabilities	109.5			120.4			87.5			88.5
TOTAL NONCURRENT LIABILITIES	6,464.9			6,234.1			7,144.6			6,343.1

TOTAL LIABILITIES	7,564.3			7,189.5			7,765.6			7,554.4

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

COMMON SHAREHOLDER’S EQUITY
Common Stock – No Par Value:
Authorized – 2,500,000 Shares
Outstanding – 1,400,000 Shares	56.6			56.6			56.6			56.6
Paid-in Capital	980.9			980.9			980.9			980.9
Retained Earnings	1,180.6			1,130.5			1,318.6			1,192.2
Accumulated Other Comprehensive Income (Loss)	(15.2		)	(16.2		)	(13.6		)	(12.1		)
TOTAL COMMON SHAREHOLDER’S EQUITY	2,202.9			2,151.8			2,342.5			2,217.6

TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY	$	9,767.2		$	9,341.3		$	10,108.1		$	9,772.0

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
OPERATING ACTIVITIES
Net Income	$	143.8		$	201.4		$	231.6		$	143.8
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	154.8			143.2			207.1			154.8
Deferred Income Taxes	132.2			116.2			28.1			132.2
Amortization (Deferral) of Incremental Nuclear Refueling Outage Expenses, Net	15.5			(17.4		)
Asset Impairments and Other Related Charges	—			10.5
Amortization of Incremental Nuclear Refueling Outage Expenses, Net							13.5			15.5
Carrying Costs Income							(4.6		)	(9.9		)
Allowance for Equity Funds Used During Construction	(8.1		)	(10.9		)	(8.0		)	(8.1		)
Mark-to-Market of Risk Management Contracts	(7.5		)	0.5			(0.3		)	(7.5		)
Amortization of Nuclear Fuel	104.8			109.7			82.6			104.8
Pension Contribution to Qualified Plan Trust	(13.0		)	(12.7		)	—			(13.0		)
Deferred Fuel Over/Under-Recovery, Net	22.0			6.1			29.6			22.0
Change in Other Noncurrent Assets	(42.1		)	—			(7.4		)	(32.2		)
Change in Other Noncurrent Liabilities	40.9			30.0			46.3			40.9
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	19.3			17.0			6.5			19.3
Fuel, Materials and Supplies	(4.1		)	(1.1		)	(1.1		)	(4.1		)
Accounts Payable	16.6			(17.9		)	(34.7		)	16.6
Customer Deposits							(0.7		)	3.0
Accrued Taxes, Net	(30.2		)	(16.5		)	(7.1		)	(30.2		)
Accrued Interest							(15.3		)	(17.4		)
Other Current Assets	8.0			6.7			4.9			8.0
Other Current Liabilities	(28.6		)	(27.8		)	0.3			(14.2		)
Net Cash Flows from Operating Activities	524.3			537.0			571.3			524.3

INVESTING ACTIVITIES
Construction Expenditures	(469.2		)	(405.1		)	(434.5		)	(469.2		)
Change in Advances to Affiliates, Net	(0.1		)	(0.7		)	(60.1		)	(0.1		)
Purchases of Investment Securities	(1,842.2		)	(2,452.9		)	(1,589.0		)	(1,842.2		)
Sales of Investment Securities	1,808.6			2,427.0			1,550.9			1,808.6
Acquisitions of Nuclear Fuel	(73.2		)	(127.6		)	(26.1		)	(73.2		)
Other Investing Activities	7.3			7.8			9.2			7.3
Net Cash Flows Used for Investing Activities	(568.8		)	(551.5		)	(549.6		)	(568.8		)

FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated	411.1			482.7			1,168.1			411.1
Change in Advances from Affiliates, Net	(37.7		)	(268.0		)	(211.6		)	(37.7		)
Retirement of Long-term Debt – Nonaffiliated	(227.1		)	(76.8		)	(856.1		)	(227.1		)
Principal Payments for Capital Lease Obligations	(8.7		)	(29.8		)	(7.3		)	(8.7		)
Dividends Paid on Common Stock	(93.7		)	(93.8		)	(105.5		)	(93.7		)
Other Financing Activities	0.7			0.7			(9.0		)	0.7
Net Cash Flows from Financing Activities	44.6			15.0
Net Cash Flows from (Used for) Financing Activities							(21.4		)	44.6

Net Increase in Cash and Cash Equivalents	0.1			0.5			0.3			0.1
Cash and Cash Equivalents at Beginning of Period	1.2			1.1			1.3			1.2
Cash and Cash Equivalents at End of Period	$	1.3		$	1.6		$	1.6		$	1.3

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	92.0		$	85.6		$	104.4		$	92.0
Net Cash Paid (Received) for Income Taxes	(69.6		)	(36.0		)	(26.5		)	(69.6		)
Noncash Acquisitions Under Capital Leases	5.9			16.8			4.4			5.9
Construction Expenditures Included in Current Liabilities as of September 30,	74.5			83.4			66.4			74.5
Acquisition of Nuclear Fuel Included in Current Liabilities as of September 30,	0.6			0.3			12.1			0.6
Expected Reimbursement for Capital Cost of Spent Nuclear Fuel Dry Cask Storage	2.8			0.1			2.1			2.8

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

OHIO POWER COMPANY AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales


	Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of KWhs)				(in millions of KWhs)
Retail:
Residential	3,644	4,380	10,198	11,209	4,055	3,644	11,475	10,198
Commercial	3,806	4,114	10,789	11,158	3,993	3,806	11,196	10,789
Industrial	3,708	3,610	10,967	10,671	3,666	3,708	11,016	10,967
Miscellaneous	28	27	87	89	27	28	84	87
Total Retail (a)	11,186	12,131	32,041	33,127	11,741	11,186	33,771	32,041

Wholesale (b)	585	654	1,749	1,389	634	585	1,835	1,749

Total KWhs	11,771	12,785	33,790	34,516	12,375	11,771	35,606	33,790


(a)	Represents energy delivered to distribution customers.


(b)	Primarily Ohio’s contractually obligated purchases of OVEC power sold into PJM.

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

Summary of Heating and Cooling Degree Days

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in degree days)
Actual - Heating (a) —
—
1,500
1,929
Normal - Heating (b) 6
7
2,091
2,110

Actual - Cooling (c) 642
900
957
1,209
Normal - Cooling (b) 670
664
960
956



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
	(in degree days)
Actual – Heating (a)	—	—	2,158	1,500
Normal – Heating (b)	6	6	2,076	2,091

Actual – Cooling (c)	864	642	1,322	957
Normal – Cooling (b)	670	670	964	960


(a)	Heating degree days are calculated on a 55 degree temperature base.


(b)	Normal Heating/Cooling represents the thirty-year average of degree days.


(c)	Cooling degree days are calculated on a 65 degree temperature base.

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income								(in millions)

Third Quarter of 2016	$	99.9
Third Quarter of 2017					$	82.6

Changes in Gross Margin:
Retail Margins	(74.1		)		25.7
Off-system Sales	(12.0		)		12.3
Transmission Revenues	(1.8		)		(0.2		)
Other Revenues	(2.1		)		2.1
Total Change in Gross Margin	(90.0		)		39.9

Changes in Expenses and Other:
Other Operation and Maintenance	59.3				(93.8		)
Depreciation and Amortization	12.1				(13.1		)
Taxes Other Than Income Taxes	1.5				(6.5		)
Interest Income					0.1
Carrying Costs Income	(0.4		)		(0.3		)
Allowance for Equity Funds Used During Construction	0.6				1.1
Non-Service Cost Components of Net Periodic Benefit Cost					2.7
Interest Expense	1.5				(0.4		)
Total Change in Expenses and Other	74.6				(110.2		)

Income Tax Expense	(1.9		)
Income Tax Expense (Credit)					76.4

Third Quarter of 2017	$	82.6
Third Quarter of 2018					$	88.7

The major components of the ~~decrease~~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 ~~decreased $74~~increased $26 million primarily due to the following:

A ~~$52~~$46 million ~~decrease~~net increase in Basic Transmission Cost Rider revenues and recoverable PJM expenses. This increase was partially offset by an increase in Other Operation and Maintenance expenses below.

A $21 million increase in revenues associated with the Universal Service Fund (USF) ~~surcharge rate decrease.~~. This ~~decrease~~increase was offset by a corresponding ~~decrease~~increase in Other Operation and Maintenance expenses below.

~~An $18~~A $7 million ~~net decrease in recovery of equity carrying charges related to the Phase-In Recovery Rider (PIRR), net of associated amortizations.~~

~~An $8 million decrease~~increase in revenues associated with smart grid riders. This ~~decrease~~increase was partially offset by an increase in various expenses below.

A $6 million increase due to the reversal of a portion of the 2018 provisions for customer refunds primarily related to the October 2018 Ohio Tax Reform settlement. This increase was partially offset in Income Tax Expense (Credit) below.

A $4 million increase in rider revenues associated with the DIR. This increase was partially offset in various expenses below.

These increases were partially offset by:

A $5$46 million decrease ~~in state excise taxes~~ due to adjustments to the distribution decoupling under-recovery balance as a result of the 2018 Ohio Tax Reform settlement. This decrease was offset in ~~metered KWh.~~Income Tax Expense (Credit) below.

A $12 million decrease due to the recovery of lower current year losses from a power contract with OVEC. This decrease was offset by a corresponding ~~decrease in Taxes Other Than Income Taxes below.~~

~~These decreases were partially offset by:~~

A $12 million favorable impact due to the recovery of losses from a power contract with OVEC. The PUCO approved a PPA rider beginning in January 2017 to recover any net expense related to the deferral of OVEC losses starting in June 2016. This increase ~~was offset by a corresponding decrease~~ in Margins from ~~Off-System~~Off-system Sales below.

Margins from Off-system Sales ~~decreased~~increased $12 million primarily due to lower current year losses from a power contract with OVEC which was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.

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

Other Operation and Maintenance expenses ~~decreased $59~~increased $94 million primarily due to the following:

A ~~$52~~$50 million ~~decrease~~increase in recoverable PJM expenses. This increase was offset within Gross Margins above.

~~A $3 million decrease in recoverable smart grid expenses. This decrease was offset~~increase in Retail Margins above.

Depreciation and Amortization expenses ~~decreased $12~~increased $13 million primarily due to the following:

A $5$6 million ~~decrease~~increase in ~~recoverable DIR~~ depreciation expense due to an increase in ~~Ohio.~~the depreciable base of transmission and distribution assets.

A $4 million ~~decrease in amortization expenses for the collection of carrying costs on deferred capacity charges beginning June 2015.~~

~~A $4 million decrease~~increase in recoverable smart grid depreciation expenses. This ~~decrease~~increase was offset in Retail Margins above.

Taxes Other Than Income Taxes ~~decreased $2~~increased $7 million primarily due to the following:

A $5$3 million ~~decrease~~increase in rider revenues recovering state excise taxes due to ~~a decrease~~an increase in metered KWh. This ~~decrease~~increase was offset by a corresponding ~~decrease~~increase in Retail Margins above.

~~This decrease was partially offset by:~~

A $3 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.

Income Tax Expense (Credit) decreased $76 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income								(in millions)

Nine Months Ended September 30, 2016	$	244.7
Nine Months Ended September 30, 2017					$	231.1

Changes in Gross Margin:
Retail Margins	(153.8		)		121.6
Off-system Sales	(27.9		)		30.5
Transmission Revenues	(2.9		)		(9.0		)
Other Revenues	(0.3		)		0.6
Total Change in Gross Margin	(184.9		)		143.7

Changes in Expenses and Other:
Other Operation and Maintenance	144.3				(211.8		)
Depreciation and Amortization	23.3				(34.6		)
Taxes Other Than Income Taxes	(2.1		)		(17.2		)
Interest Income	1.0				(1.4		)
Carrying Costs Income	(1.0		)		(1.5		)
Allowance for Equity Funds Used During Construction	0.4				3.7
Non-Service Cost Components of Net Periodic Benefit Cost					8.3
Interest Expense	10.9				0.2
Total Change in Expenses and Other	176.8				(254.3		)

Income Tax Expense	(5.5		)
Income Tax Expense (Credit)					116.6

Nine Months Ended September 30, 2017	$	231.1
Nine Months Ended September 30, 2018					$	237.1

The major components of the ~~decrease~~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 ~~decreased $154~~increased $122 million primarily due to the following:

A ~~$140~~$155 million ~~decrease~~net increase in Basic Transmission Cost Rider revenues ~~associated with the USF surcharge rate decrease.~~and recoverable PJM expenses. This ~~decrease~~increase was partially offset by ~~a corresponding decrease~~an increase in Other Operation and Maintenance expenses below.

A ~~$21~~$61 million ~~decrease due to a prior year reversal of a regulatory provision resulting from a favorable court decision.~~

~~A $13 million decrease~~increase in revenues associated with ~~smart grid riders. This decrease was offset in various expenses below.~~

~~A $9 million net decrease in recovery of equity carrying charges related to~~ the ~~PIRR, net of associated amortizations.~~

~~A $7 million decrease in state excise taxes due to a decrease in metered KWh. This decrease was offset by a corresponding decrease in Taxes Other Than Income Taxes below.~~

~~A $3 million decrease in transmission cost recovery rider revenues. This decrease was offset in Depreciation and Amortization below.~~

~~These decreases were partially offset by:~~

A $46 million favorable impact due to the recovery of losses from a power contract with OVEC. The PUCO approved a PPA rider beginning in January 2017 to recover any net expense related to the deferral of OVEC losses starting in June 2016.Universal Service Fund (USF). This increase was offset by a corresponding ~~decrease~~increase in ~~Margins from Off-System Sales~~Other Operation and Maintenance expenses below.

~~A $6~~An $18 million increase in rider revenues associated with the DIR. This increase was partially offset in various expenses below.

~~Margins from Off-system Sales~~ ~~decreased $28~~A $9 million increase in usage primarily in the residential class.

An $8 million increase in rider revenues recovering state excise taxes due to ~~the following:~~an increase in metered KWh. This increase was offset by a corresponding increase in Taxes Other Than Income Taxes below.

These increases were partially offset by:

A $30 million decrease due to the recovery of lower current year losses from a power contract with OVEC. This decrease was offset by a corresponding increase in Margins from Off-system Sales below.

A $24 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense (Credit) below.

A $9 million net decrease in margin for the Phase-In-Recovery Rider including associated amortizations.

An $8 million decrease in Energy Efficiency/Peak Demand Reduction rider revenues. This decrease was offset by a decrease in Other Operation and Maintenance expenses below.

Margins from Off-system Sales increased $31 million primarily due to lower current year losses from a power contract with OVEC which was offset in Retail Margins above as a result of the OVEC PPA rider beginning in January 2017.

Transmission Revenues decreased $9 million due to the 2018 provisions for customer refunds due to Tax Reform. This decrease was ~~partially~~ offset ~~by:~~

~~An $18 million increase primarily due to the impact of prior year losses from a power contract with OVEC which was not included~~ in ~~the OVEC PPA rider.~~Income Tax Expense below.

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

Other Operation and Maintenance expenses ~~decreased $144~~increased $212 million primarily due to the following:

A ~~$140~~$181 million ~~decrease~~increase in recoverable PJM expenses. This increase was offset within Gross Margins above.

~~An $8 million decrease in recoverable smart grid expenses. This decrease was offset in Retail Margins above.~~

~~A $7 million decrease in securitized customer accounts receivable expenses.~~

~~A $3 million decrease in employee-related expenses.~~

These ~~decreases~~increases were partially offset by:

A ~~$12~~$55 million ~~increase~~decrease in PJM expenses primarily related to the annual formula rate true-up that will be ~~recovered~~refunded in future periods.

Depreciation and Amortizationexpenses ~~decreased $23~~increased $35 million primarily due to the following:

~~An $11 million decrease in amortization expenses for the collection of carrying costs on deferred capacity charges beginning June 2015.~~

~~An $8 million decrease in recoveries of transmission cost rider carrying costs. This decrease was partially offset in Retail Margins above.~~

A ~~$7 million decrease in recoverable DIR depreciation expense in Ohio.~~

~~A $5 million decrease in recoverable smart grid depreciation expenses. This decrease was offset in Retail Margins above.~~

~~These decreases were partially offset by:~~

~~A $5~~$13 million increase in depreciation expense due to an increase in the depreciable base of transmission and distribution assets.

A $3$13 million increase in recoverable DIR depreciation expense. This increase was offset in Retail Margins above.

A $4 million increase in amortization due to ~~amortization of~~ capitalized ~~software costs.~~software.

Taxes Other Than Income Taxes increased $2$17 million primarily due to the following:

~~A $9~~An $8 million increase in rider revenues recovering state excise taxes due to an increase in metered KWh. This increase was offset by a corresponding increase in Retail Margins above.

An $8 million increase in property taxes due to additional investments in transmission and distribution assets and higher tax rates.

~~This increase was partially offset by:~~

~~A $7 million decrease in state excise taxes due to a decrease in metered KWh. This decrease was offset by a corresponding decrease in Retail Margins above.~~

~~InterestExpense~~Non-Service Cost Components of Net Periodic Cost decreased ~~$11~~$8 million primarily due to favorable asset returns for the ~~maturity~~funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ~~a senior unsecured note in June 2016.~~ASU 2017-07.

Income Tax Expense(Credit) ~~increased $6~~decreased $117 million primarily due to ~~other book/tax differences which are accounted for on a flow-through basis and~~ the ~~recording of~~change in the corporate federal income tax ~~adjustments, partially offset by~~rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

OHIO POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
REVENUES
Electricity, Transmission and Distribution	$	736.0		$	864.4		$	2,127.8		$	2,349.2		$	772.6		$	736.0		$	2,294.8		$	2,127.8
Sales to AEP Affiliates	4.6			5.5			19.4			11.7			3.3			4.6			17.9			19.4
Other Revenues	1.4			1.4			4.8			4.8			2.4			1.4			5.3			4.8
TOTAL REVENUES	742.0			871.3			2,152.0			2,365.7			778.3			742.0			2,318.0			2,152.0

EXPENSES
Purchased Electricity for Resale	180.7			203.4			525.4			516.1			166.3			180.7			534.7			525.4
Purchased Electricity from AEP Affiliates	26.7			35.9			83.4			121.4			39.3			26.7			97.4			83.4
Amortization of Generation Deferrals	58.7			66.1			172.9			173.0			56.9			58.7			171.9			172.9
Other Operation	125.8			184.2			377.6			525.9			215.2			126.9			586.4			380.9
Maintenance	37.9			38.8			108.4			104.4			43.4			37.9			114.7			108.4
Depreciation and Amortization	57.3			69.4			165.7			189.0			70.4			57.3			200.3			165.7
Taxes Other Than Income Taxes	100.4			101.9			293.8			291.7			106.9			100.4			311.0			293.8
TOTAL EXPENSES	587.5			699.7			1,727.2			1,921.5			698.4			588.6			2,016.4			1,730.5

OPERATING INCOME	154.5			171.6			424.8			444.2			79.9			153.4			301.6			421.5

Other Income (Expense):
Interest Income	0.7			0.7			4.0			3.0			0.8			0.7			2.6			4.0
Carrying Costs Income	0.5			0.9			3.0			4.0			0.2			0.5			1.5			3.0
Allowance for Equity Funds Used During Construction	0.9			0.3			4.1			3.7			2.0			0.9			7.8			4.1
Non-Service Cost Components of Net Periodic Benefit Cost													3.8			1.1			11.6			3.3
Interest Expense	(25.7		)	(27.2		)	(76.8		)	(87.7		)	(26.1		)	(25.7		)	(76.6		)	(76.8		)

INCOME BEFORE INCOME TAX EXPENSE	130.9			146.3			359.1			367.2
INCOME BEFORE INCOME TAX EXPENSE (CREDIT)													60.6			130.9			248.5			359.1

Income Tax Expense	48.3			46.4			128.0			122.5
Income Tax Expense (Credit)													(28.1		)	48.3			11.4			128.0

NET INCOME	$	82.6		$	99.9		$	231.1		$	244.7		$	88.7		$	82.6		$	237.1		$	231.1



The common stock of OPCo is wholly-owned by Parent.

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

OHIO POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net Income	$	82.6		$	99.9		$	231.1		$	244.7		$	88.7		$	82.6		$	237.1		$	231.1

OTHER COMPREHENSIVE LOSS, NET OF TAXES
Cash Flow Hedges, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2017 and 2016, Respectively, and $(0.4) and $(0.5) for the Nine Months Ended September 30, 2017 and 2016, Respectively	(0.3		)	(0.2		)	(0.8		)	(1.0		)
Cash Flow Hedges, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.3) and $(0.4) for the Nine Months Ended September 30, 2018 and 2017, Respectively													(0.4		)	(0.3		)	(1.0		)	(0.8		)

TOTAL COMPREHENSIVE INCOME	$	82.3		$	99.7		$	230.3		$	243.7		$	88.3		$	82.3		$	236.1		$	230.3

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

OHIO POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

COMMON SHAREHOLDER’S EQUITY

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total			Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2015	$	321.2	$	838.8	$	822.3		$	4.3		$	1,986.6
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016														$	321.2	$	838.8	$	954.5		$	3.0		$	2,117.5

Common Stock Dividends					(150.0		)				(150.0		)					(130.0		)				(130.0		)
Net Income					244.7						244.7							231.1						231.1
Other Comprehensive Loss								(1.0		)	(1.0		)								(0.8		)	(0.8		)
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2016	$	321.2	$	838.8	$	917.0		$	3.3		$	2,080.3
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017														$	321.2	$	838.8	$	1,055.6		$	2.2		$	2,217.8

TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2016	$	321.2	$	838.8	$	954.5		$	3.0		$	2,117.5
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017														$	321.2	$	838.8	$	1,148.4		$	1.9		$	2,310.3

Common Stock Dividends					(130.0		)				(130.0		)					(337.5		)				(337.5		)
ASU 2018-02 Adoption																					0.4			0.4
Net Income					231.1						231.1							237.1						237.1
Other Comprehensive Loss								(0.8		)	(0.8		)								(1.0		)	(1.0		)
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2017	$	321.2	$	838.8	$	1,055.6		$	2.2		$	2,217.8
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018														$	321.2	$	838.8	$	1,048.0		$	1.3		$	2,209.3



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

OHIO POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)


	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
CURRENT ASSETS
Cash and Cash Equivalents	$	3.1		$	3.1		$	3.5		$	3.1
Restricted Cash for Securitized Funding	15.6			27.2			15.2			26.6
Advances to Affiliates	—			24.2
Accounts Receivable:
Customers	27.1			51.1			116.9			67.8
Affiliated Companies	72.0			66.3			72.4			70.2
Accrued Unbilled Revenues	24.2			21.0			32.7			29.7
Miscellaneous	1.1			0.9			0.9			1.9
Allowance for Uncollectible Accounts	(0.4		)	(0.4		)	(1.4		)	(0.6		)
Total Accounts Receivable	124.0			138.9			221.5			169.0
Materials and Supplies	42.8			45.9			38.5			41.9
Emission Allowances	23.6			20.4
Renewable Energy Credits							23.0			25.0
Risk Management Assets	0.2			0.2			0.6			0.6
Accrued Tax Benefits	15.4			0.1
Regulatory Asset for Under-Recovered Fuel Costs							34.1			115.9
Prepayments and Other Current Assets	28.1			10.9			16.7			15.8
TOTAL CURRENT ASSETS	252.8			270.9			353.1			397.9

PROPERTY, PLANT AND EQUIPMENT
Electric:
Transmission	2,349.5			2,319.2			2,484.5			2,419.2
Distribution	4,575.0			4,457.2			4,825.6			4,626.4
Other Property, Plant and Equipment	487.9			443.7			547.5			495.9
Construction Work in Progress	350.7			221.5			475.7			410.1
Total Property, Plant and Equipment	7,763.1			7,441.6			8,333.3			7,951.6
Accumulated Depreciation and Amortization	2,182.8			2,116.0			2,230.6			2,184.8
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	5,580.3			5,325.6			6,102.7			5,766.8

OTHER NONCURRENT ASSETS
Notes Receivable – Affiliated	32.3			32.3
Regulatory Assets	1,014.7			1,107.5			389.1			652.8
Securitized Assets	43.7			62.1			19.0			37.7
Long-term Risk Management Assets							0.1			—
Deferred Charges and Other Noncurrent Assets	131.2			295.5			254.6			406.5
TOTAL OTHER NONCURRENT ASSETS	1,221.9			1,497.4			662.8			1,097.0

TOTAL ASSETS	$	7,055.0		$	7,093.9		$	7,118.6		$	7,261.7



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

OHIO POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER’S EQUITY

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(dollars in millions)

(Unaudited)


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
CURRENT LIABILITIES
Advances from Affiliates	$	167.6	$	—	$	242.9	$	87.8
Accounts Payable:
General	157.8		175.4		169.2		205.8
Affiliated Companies	95.3		95.6		95.3		118.2
Long-term Debt Due Within One Year – Nonaffiliated (September 30, 2017 and December 31, 2016 Amounts Include $47 and $46.3, Respectively, Related to Ohio Phase-in-Recovery Funding)	397.0		46.4
Long-term Debt Due Within One Year – Nonaffiliated (September 30, 2018 and December 31, 2017 Amounts Include $47.7 and $47, Respectively, Related to Ohio Phase-in-Recovery Funding)					47.8		397.0
Risk Management Liabilities	7.6		5.9		5.4		6.4
Customer Deposits	62.9		71.0		77.5		69.2
Accrued Taxes	251.3		520.3		293.8		512.5
Accrued Interest	38.3		31.2
Other Current Liabilities	166.3		236.0		205.9		196.9
TOTAL CURRENT LIABILITIES	1,344.1		1,181.8		1,137.8		1,593.8

NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated (September 30, 2017 and December 31, 2016 Amounts Include $47.5 and $93.9, Respectively, Related to Ohio Phase-in-Recovery Funding)	1,321.9		1,717.5
Long-term Debt – Nonaffiliated (September 30, 2018 and December 31, 2017 Amounts Include $0 and $47.5, Respectively, Related to Ohio Phase-in-Recovery Funding)					1,668.5		1,322.3
Long-term Risk Management Liabilities	130.9		113.1		89.8		126.0
Deferred Income Taxes	1,460.7		1,346.1		742.8		762.9
Regulatory Liabilities and Deferred Investment Tax Credits	519.3		506.2		1,197.7		1,100.2
Employee Benefits and Pension Obligations	19.3		27.8
Deferred Credits and Other Noncurrent Liabilities	41.0		83.9		72.7		46.2
TOTAL NONCURRENT LIABILITIES	3,493.1		3,794.6		3,771.5		3,357.6

TOTAL LIABILITIES	4,837.2		4,976.4		4,909.3		4,951.4

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

COMMON SHAREHOLDER’S EQUITY
Common Stock – No Par Value:
Authorized – 40,000,000 Shares
Outstanding – 27,952,473 Shares	321.2		321.2		321.2		321.2
Paid-in Capital	838.8		838.8		838.8		838.8
Retained Earnings	1,055.6		954.5		1,048.0		1,148.4
Accumulated Other Comprehensive Income (Loss)	2.2		3.0		1.3		1.9
TOTAL COMMON SHAREHOLDER’S EQUITY	2,217.8		2,117.5		2,209.3		2,310.3

TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY	$	7,055.0	$	7,093.9	$	7,118.6	$	7,261.7



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

OHIO POWER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
OPERATING ACTIVITIES
Net Income	$	231.1		$	244.7		$	237.1		$	231.1
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	165.7			189.0			200.3			165.7
Amortization of Generation Deferrals	172.9			173.0			171.9			172.9
Deferred Income Taxes	117.5			28.6			(71.9		)	117.5
Carrying Costs Income	(3.0		)	(4.0		)	(1.5		)	(3.0		)
Allowance for Equity Funds Used During Construction	(4.1		)	(3.7		)	(7.8		)	(4.1		)
Mark-to-Market of Risk Management Contracts	19.5			124.7			(37.1		)	19.5
Pension Contributions to Qualified Plan Trust	(8.2		)	(7.1		)	—			(8.2		)
Property Taxes	175.9			169.1			191.1			175.9
Provision for Refund – Global Settlement, Net	(93.3		)	—			(5.5		)	(93.3		)
Change in Regulatory Assets							180.9			(82.2		)
Change in Other Noncurrent Assets	(126.7		)	(124.9		)	0.8			(44.5		)
Change in Other Noncurrent Liabilities	43.4			17.2			62.5			43.4
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	14.9			8.8			21.3			14.9
Materials and Supplies	(7.1		)	0.5			(3.7		)	(7.1		)
Accounts Payable	(31.2		)	2.0			(31.8		)	(31.2		)
Accrued Taxes, Net	(284.3		)	(291.1		)	(210.6		)	(284.3		)
Other Current Assets	(17.3		)	(5.7		)	9.1			(17.3		)
Other Current Liabilities	(34.8		)	(46.8		)	(4.3		)	(34.8		)
Net Cash Flows from Operating Activities	330.9			474.3			700.8			330.9

INVESTING ACTIVITIES
Construction Expenditures	(362.5		)	(276.4		)	(538.5		)	(362.5		)
Change in Restricted Cash for Securitized Funding	11.6			11.6
Change in Advances to Affiliates, Net	24.2			330.9			—			24.2
Other Investing Activities	6.9			9.0			15.5			6.9
Net Cash Flows from (Used for) Investing Activities	(319.8		)	75.1
Net Cash Flows Used for Investing Activities							(523.0		)	(331.4		)

FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated							392.8			—
Change in Advances from Affiliates, Net	167.6			—			155.1			167.6
Retirement of Long-term Debt – Nonaffiliated	(46.4		)	(395.9		)	(397.0		)	(46.4		)
Principal Payments for Capital Lease Obligations	(3.1		)	(3.1		)	(2.9		)	(3.1		)
Dividends Paid on Common Stock	(130.0		)	(150.0		)	(337.5		)	(130.0		)
Other Financing Activities	0.8			0.5			0.7			0.8
Net Cash Flows Used for Financing Activities	(11.1		)	(548.5		)	(188.8		)	(11.1		)
							��
Net Increase in Cash and Cash Equivalents	—			0.9
Cash and Cash Equivalents at Beginning of Period	3.1			3.1
Cash and Cash Equivalents at End of Period	$	3.1		$	4.0
Net Decrease in Cash, Cash Equivalents and Restricted Cash for Securitized Funding							(11.0		)	(11.6		)
Cash, Cash Equivalents and Restricted Cash for Securitized Funding at Beginning of Period							29.7			30.3
Cash, Cash Equivalents and Restricted Cash for Securitized Funding at End of Period							$	18.7		$	18.7

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	68.1		$	78.2		$	67.3		$	68.1
Net Cash Paid for Income Taxes	69.6			178.0			54.1			69.6
Noncash Acquisitions Under Capital Leases	3.6			2.4			3.0			3.6
Construction Expenditures Included in Current Liabilities as of September 30,	56.8			30.0			66.0			56.8



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

PUBLIC SERVICE COMPANY OF OKLAHOMA

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales


	Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of KWhs)				(in millions of KWhs)
Retail:
Residential	1,992	2,184	4,662	4,925	2,005	1,992	5,133	4,662
Commercial	1,488	1,529	3,926	4,001	1,456	1,488	4,008	3,926
Industrial	1,472	1,494	4,249	4,162	1,582	1,472	4,418	4,249
Miscellaneous	353	369	942	955	361	353	970	942
Total Retail	5,305	5,576	13,779	14,043	5,404	5,305	14,529	13,779

Wholesale	82	113	309	226	182	82	544	309

Total KWhs	5,387	5,689	14,088	14,269	5,586	5,387	15,073	14,088

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

Summary of Heating and Cooling Degree Days

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in degree days)
Actual - Heating (a) —
—
682
782
Normal - Heating (b) 1
1
1,104
1,105

Actual - Cooling (c) 1,313
1,535
2,001
2,247
Normal - Cooling (b) 1,395
1,390
2,064
2,055



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
	(in degree days)
Actual – Heating (a)	—	—	1,161	682
Normal – Heating (b)	1	1	1,082	1,104

Actual – Cooling (c)	1,433	1,313	2,352	2,001
Normal – Cooling (b)	1,396	1,395	2,063	2,064


(a)	Heating degree days are calculated on a 55 degree temperature base.


(b)	Normal Heating/Cooling represents the thirty-year average of degree days.


(c)	Cooling degree days are calculated on a 65 degree temperature base.

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Net Income								(in millions)

Third Quarter of 2016	$	52.8
Third Quarter of 2017					$	46.2

Changes in Gross Margin:
Retail Margins (a)	(15.6		)		21.3
Off-system Sales	(0.7		)		0.6
Transmission Revenues	4.1				1.0
Other Revenues	(2.0		)		0.2
Total Change in Gross Margin	(14.2		)		23.1

Changes in Expenses and Other:
Other Operation and Maintenance	(2.2		)		(18.9		)
Depreciation and Amortization	5.5				(10.6		)
Taxes Other Than Income Taxes	(0.7		)		(1.0		)
Interest Income	(0.2		)
Allowance for Equity Funds Used During Construction	(1.1		)
Other Income (Expense)					(0.2		)
Non-Service Cost Components of Net Periodic Benefit Cost					1.2
Interest Expense	1.7				(3.2		)
Total Change in Expenses and Other	3.0				(32.7		)

Income Tax Expense	4.6				23.8

Third Quarter of 2017	$	46.2
Third Quarter of 2018					$	60.4


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

Retail Margins ~~decreased $16~~increased $21 million primarily due to the following:

A ~~$17~~$20 million ~~decrease primarily~~increase due to ~~higher~~new rates implemented in ~~2016 associated with interim rates.~~March 2018, inclusive of a $9 million decrease due to the change in the corporate federal tax rate.

An $11 million ~~decrease~~increase in revenue from rate riders. This increase was partially offset by corresponding increases to riders/trackers recognized in other expense items below.

A $6 million increase in weather-related usage ~~primarily~~ due to a ~~14% decrease~~9% increase in cooling degree days.

These ~~decreases~~increases were partially offset by:

A ~~$14~~$6 million ~~increase~~decrease due to lower weather-normalized margins.

A $5 million decrease due to 2018 customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.

~~Transmission Revenues~~ ~~increased~~A $4 million ~~primarily due~~decrease related to ~~an accrual for SPP sponsor-funded transmission upgrades~~the System Reliability Rider (SRR) that ended in ~~third quarter 2016.~~

August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.

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

~~Depreciation~~Other Operation and ~~Amortization~~Maintenance expenses ~~decreased $6~~increased $19 million primarily due the following:

A $9$13 million increase in transmission expenses primarily due to increased SPP transmission services.

A $4 million increase in Energy Efficiency program costs. This increase was offset by an increase from rate riders in Retail Margins above.

A $3 million increase in generation expenses including employee-related expenses.

These increases were partially offset by:

A $3 million decrease in distribution expenses primarily ~~related~~due to ~~prior year higher estimated depreciation expense associated with interim rates.~~

the amortization of previously deferred vegetation management costs collected through the SRR. This decrease was partially offset ~~by:~~by a corresponding decrease in Retail Margins above.

~~A $4~~

Depreciation and Amortization expenses increased $11 million ~~increase~~ primarily ~~related~~due to a higher depreciable base and new ~~depreciation~~ rates implemented in ~~2017 and a higher depreciable base.~~March 2018.

Income Tax Expense decreased $5$24 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Net Income								(in millions)

Nine Months Ended September 30, 2016	$	97.4
Nine Months Ended September 30, 2017					$	71.4

Changes in Gross Margin:
Retail Margins (a)	(17.6		)		55.3
Off-system Sales	(0.9		)		0.8
Transmission Revenues	4.8				0.4
Other Revenues	(4.6		)		0.2
Total Change in Gross Margin	(18.3		)		56.7

Changes in Expenses and Other:
Other Operation and Maintenance	(31.1		)		(42.9		)
Depreciation and Amortization	12.1				(22.7		)
Taxes Other Than Income Taxes	(2.2		)		(2.6		)
Interest Income	(0.4		)
Allowance for Equity Funds Used During Construction	(4.5		)
Other Income (Expense)					(0.8		)
Non-Service Cost Components of Net Periodic Benefit Cost					3.9
Interest Expense	4.4				(7.2		)
Total Change in Expenses and Other	(21.7		)		(72.3		)

Income Tax Expense	14.0				34.0

Nine Months Ended September 30, 2017	$	71.4
Nine Months Ended September 30, 2018					$	89.8


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

Retail Margins ~~decreased $18~~increased $55 million primarily due to the following:

A ~~$15~~$37 million increase due to new rates implemented in March 2018, inclusive of a $19 million decrease due to the change in the corporate federal tax rate.

A $30 million increase in weather-related usage ~~primarily~~ due to a 70% increase in heating degree days and an ~~11% decrease~~18% increase in cooling degree ~~days and a 13% decrease in heating degree~~ days.

A ~~$14~~$24 million ~~decrease primarily due~~increase in revenue from rate riders. This increase was partially offset by corresponding increases to ~~higher rates implemented~~riders/trackers recognized in ~~2016 associated with interim rates.~~other expense items below.

These ~~decreases~~increases were partially offset by:

A $9$16 million ~~increase primarily~~decrease related to the SRR that ended in August 2017. This decrease was partially offset by a corresponding decrease recognized in other expense items below.

A $15 million decrease due to ~~higher~~2018 customer refunds related to Tax Reform. This decrease was offset in Income Tax Expense below.

A $4 million decrease due to lower weather-normalized margins.

~~A $5 million increase related to new base rates implemented in January 2017.~~

~~Transmission Revenues~~ ~~increased $5 million primarily due to an accrual for SPP sponsor-funded transmission upgrades in third quarter 2016 and additional transmission investments in SPP.~~

~~Other Revenues~~ ~~decreased $5 million primarily due to the elimination of connection charges for certain customers with advanced metering, effective with the implementation of new base rates in January 2017.~~

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

Other Operation and Maintenance expenses increased ~~$31~~$43 million primarily due to the following:

A $16 million increase in vegetation management expenses. This increase is partially offset by a corresponding increase in Retail Margins as vegetation management expenses recovered in the prior year under the System Reliability Rider are now recovered as a component of base rates in the current year.

~~A $15~~$37 million increase in transmission expenses primarily due to increased SPP transmission services.

A $12 million increase in Energy Efficiency program costs. This increase was offset by an increase from rate riders in Retail Margins above.

A $10 million increase due to the Wind Catcher Project.

A $4 million increase in generation expenses including employee-related expenses.

These increases were partially offset by:

An $11 million decrease in distribution expenses primarily due to the amortization of previously deferred vegetation management costs collected through the SRR. This decrease was partially offset by a corresponding decrease in Retail Margins above.

An $11 million decrease due to a refund associated with SPP transmission expenses incurred in prior periods.

Depreciation and Amortization expenses ~~decreased $12 million primarily due the following:~~

~~A $24 million decrease primarily related to prior year higher estimated depreciation expense associated with interim rates.~~

~~This decrease was partially offset by:~~

~~A $12 million increase primarily related to new depreciation rates implemented in 2017 and a higher depreciable base.~~

~~Allowance for Equity Funds Used During Construction~~ ~~decreased $5~~increased $23 million primarily due to a higher depreciable base and new rates implemented in March 2018.

Non-Service Cost Components of Net Periodic Benefit Cost decreased $4 million primarily due to favorable asset returns for the ~~completion~~funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ~~environmental projects.~~ASU 2017-07.

Interest Expense ~~decreased $4~~increased $7 million primarily due to the 2017 deferral of the debt component of carrying charges on environmental control costs for projects at Northeastern Plant, Unit 3 and ~~the~~ Comanche Plant.

Income Tax Expense decreased ~~$14~~$34 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

PUBLIC SERVICE COMPANY OF OKLAHOMA

CONDENSED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
REVENUES
Electric Generation, Transmission and Distribution	$	440.6		$	400.9		$	1,085.1		$	971.3		$	479.1		$	440.6		$	1,209.5		$	1,085.1
Sales to AEP Affiliates	1.1			0.1			3.2			2.0			1.1			1.1			3.7			3.2
Other Revenues	1.1			0.7			3.3			2.9			1.2			1.1			3.3			3.3
TOTAL REVENUES	442.8			401.7			1,091.6			976.2			481.4			442.8			1,216.5			1,091.6

EXPENSES
Fuel and Other Consumables Used for Electric Generation	77.9			16.4			115.8			43.0			104.4			77.9			211.5			115.8
Purchased Electricity for Resale	127.8			130.8			379.8			315.3			116.8			127.8			352.3			379.8
Purchased Electricity from AEP Affiliates	—			3.2			—			3.6
Other Operation	83.6			81.0			226.3			211.8			106.3			84.5			286.8			228.9
Maintenance	25.2			25.6			88.2			71.6			22.3			25.2			73.2			88.2
Depreciation and Amortization	31.7			37.2			97.8			109.9			42.3			31.7			120.5			97.8
Taxes Other Than Income Taxes	9.8			9.1			30.0			27.8			10.8			9.8			32.6			30.0
TOTAL EXPENSES	356.0			303.3			937.9			783.0			402.9			356.9			1,076.9			940.5

OPERATING INCOME	86.8			98.4			153.7			193.2			78.5			85.9			139.6			151.1

Other Income (Expense):
Interest Income	—			0.2			0.1			0.5
Allowance for Equity Funds Used During Construction	—			1.1			0.4			4.9
Other Income (Expense)													(0.2		)	—			(0.3		)	0.5
Non-Service Cost Components of Net Periodic Benefit Cost													2.1			0.9			6.5			2.6
Interest Expense	(13.2		)	(14.9		)	(40.2		)	(44.6		)	(16.4		)	(13.2		)	(47.4		)	(40.2		)

INCOME BEFORE INCOME TAX EXPENSE	73.6			84.8			114.0			154.0			64.0			73.6			98.4			114.0

Income Tax Expense	27.4			32.0			42.6			56.6			3.6			27.4			8.6			42.6

NET INCOME	$	46.2		$	52.8		$	71.4		$	97.4		$	60.4		$	46.2		$	89.8		$	71.4



The common stock of PSO is wholly-owned by Parent.

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

PUBLIC SERVICE COMPANY OF OKLAHOMA

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net Income	$	46.2		$	52.8		$	71.4		$	97.4		$	60.4		$	46.2		$	89.8		$	71.4

OTHER COMPREHENSIVE LOSS, NET OF TAXES
Cash Flow Hedges, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2017 and 2016, Respectively, and $(0.3) and $(0.3) for the Nine Months Ended September 30, 2017 and 2016, Respectively	(0.2		)	(0.2		)	(0.6		)	(0.6		)
Cash Flow Hedges, Net of Tax of $0 and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.2) and $(0.3) for the Nine Months Ended September 30, 2018 and 2017, Respectively													(0.2		)	(0.2		)	(0.7		)	(0.6		)

TOTAL COMPREHENSIVE INCOME	$	46.0		$	52.6		$	70.8		$	96.8		$	60.2		$	46.0		$	89.1		$	70.8



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

PUBLIC SERVICE COMPANY OF OKLAHOMA

CONDENSED STATEMENTS OF CHANGES IN

COMMON SHAREHOLDER’S EQUITY

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total			Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2015	$	157.2	$	364.0	$	594.5		$	4.2		$	1,119.9

Net Income					97.4						97.4
Other Comprehensive Loss								(0.6		)	(0.6		)
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2016	$	157.2	$	364.0	$	691.9		$	3.6		$	1,216.7

TOTAL COMMON SHAREHOLDER’S EQUITY - DECEMBER 31, 2016	$	157.2	$	364.0	$	689.5		$	3.4		$	1,214.1
TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2016														$	157.2	$	364.0	$	689.5		$	3.4		$	1,214.1

Common Stock Dividends					(52.5		)				(52.5		)					(52.5		)				(52.5		)
Net Income					71.4						71.4							71.4						71.4
Other Comprehensive Loss								(0.6		)	(0.6		)								(0.6		)	(0.6		)
TOTAL COMMON SHAREHOLDER’S EQUITY - SEPTEMBER 30, 2017	$	157.2	$	364.0	$	708.4		$	2.8		$	1,232.4
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2017														$	157.2	$	364.0	$	708.4		$	2.8		$	1,232.4

TOTAL COMMON SHAREHOLDER’S EQUITY – DECEMBER 31, 2017														$	157.2	$	364.0	$	691.5		$	2.6		$	1,215.3

Common Stock Dividends																		(37.5		)				(37.5		)
ASU 2018-02 Adoption																					0.5			0.5
Net Income																		89.8						89.8
Other Comprehensive Loss																					(0.7		)	(0.7		)
TOTAL COMMON SHAREHOLDER’S EQUITY – SEPTEMBER 30, 2018														$	157.2	$	364.0	$	743.8		$	2.4		$	1,267.4



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

PUBLIC SERVICE COMPANY OF OKLAHOMA

CONDENSED BALANCE SHEETS

ASSETS

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)


	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
CURRENT ASSETS
Cash and Cash Equivalents	$	2.1		$	1.5		$	1.9		$	1.6
Accounts Receivable:
Customers	17.8			27.5			28.8			32.5
Affiliated Companies	31.8			26.8			39.8			32.9
Miscellaneous	3.2			4.4			4.4			4.1
Allowance for Uncollectible Accounts	(0.1		)	(0.2		)	(0.2		)	(0.1		)
Total Accounts Receivable	52.7			58.5			72.8			69.4
Fuel	11.9			22.9			12.6			12.5
Materials and Supplies	42.1			44.6			43.4			42.0
Risk Management Assets	4.7			0.8			18.5			6.4
Accrued Tax Benefits	27.0			27.3			12.5			28.1
Regulatory Asset for Under-Recovered Fuel Costs	36.9			33.8			—			36.7
Prepayments and Other Current Assets	14.4			6.0			8.1			8.6
TOTAL CURRENT ASSETS	191.8			195.4			169.8			205.3

PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	1,573.8			1,559.3			1,576.3			1,577.2
Transmission	852.5			832.8			881.5			858.8
Distribution	2,414.1			2,322.4			2,543.1			2,445.1
Other Property, Plant and Equipment	286.3			233.2			308.3			287.4
Construction Work in Progress	114.0			148.2			85.7			111.3
Total Property, Plant and Equipment	5,240.7			5,095.9			5,394.9			5,279.8
Accumulated Depreciation and Amortization	1,382.8			1,272.7			1,461.2			1,393.6
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	3,857.9			3,823.2			3,933.7			3,886.2

OTHER NONCURRENT ASSETS
Regulatory Assets	393.6			340.2			352.1			368.1
Employee Benefits and Pension Assets	16.0			10.4			41.3			40.0
Deferred Charges and Other Noncurrent Assets	19.2			10.0			16.6			8.7
TOTAL OTHER NONCURRENT ASSETS	428.8			360.6			410.0			416.8

TOTAL ASSETS	$	4,478.5		$	4,379.2		$	4,513.5		$	4,508.3



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

PUBLIC SERVICE COMPANY OF OKLAHOMA

CONDENSED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER’S EQUITY

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(Unaudited)


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
	(in millions)				(in millions)
CURRENT LIABILITIES
Advances from Affiliates	$	118.0	$	52.0	$	22.0	$	149.6
Accounts Payable:
General	93.8		116.3		113.0		102.4
Affiliated Companies	43.0		56.2		42.2		48.0
Long-term Debt Due Within One Year – Nonaffiliated	0.5		0.5		0.5		0.5
Risk Management Liabilities					0.6		—
Customer Deposits	53.1		49.7		56.1		54.1
Accrued Taxes	40.8		21.0		40.5		22.6
Accrued Interest	19.5		13.9		18.9		14.1
Provision for Refund	4.1		46.1
Regulatory Liability for Over-Recovered Fuel Costs					36.0		—
Other Current Liabilities	38.5		47.8		56.5		44.7
TOTAL CURRENT LIABILITIES	411.3		403.5		386.3		436.0

NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	1,285.9		1,285.5		1,286.4		1,286.0
Deferred Income Taxes	1,152.5		1,058.8		636.6		642.0
Regulatory Liabilities and Deferred Investment Tax Credits	320.9		339.7		850.3		853.5
Asset Retirement Obligations	54.5		52.8		54.8		53.0
Deferred Credits and Other Noncurrent Liabilities	21.0		24.8		31.7		22.5
TOTAL NONCURRENT LIABILITIES	2,834.8		2,761.6		2,859.8		2,857.0

TOTAL LIABILITIES	3,246.1		3,165.1		3,246.1		3,293.0

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

COMMON SHAREHOLDER’S EQUITY
Common Stock – Par Value – $15 Per Share:
Authorized – 11,000,000 Shares
Issued – 10,482,000 Shares
Outstanding – 9,013,000 Shares	157.2		157.2		157.2		157.2
Paid-in Capital	364.0		364.0		364.0		364.0
Retained Earnings	708.4		689.5		743.8		691.5
Accumulated Other Comprehensive Income (Loss)	2.8		3.4		2.4		2.6
TOTAL COMMON SHAREHOLDER’S EQUITY	1,232.4		1,214.1		1,267.4		1,215.3

TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY	$	4,478.5	$	4,379.2	$	4,513.5	$	4,508.3



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

PUBLIC SERVICE COMPANY OF OKLAHOMA

CONDENSED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
OPERATING ACTIVITIES
Net Income	$	71.4		$	97.4		$	89.8		$	71.4
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	97.8			109.9			120.5			97.8
Deferred Income Taxes	93.7			79.5			(13.4		)	93.7
Allowance for Equity Funds Used During Construction	(0.4		)	(4.9		)	0.3			(0.4		)
Mark-to-Market of Risk Management Contracts	(3.9		)	(0.7		)	(11.5		)	(3.9		)
Pension Contributions to Qualified Plan Trust	(5.3		)	(5.6		)	—			(5.3		)
Property Taxes	(9.4		)	(8.0		)	(9.6		)	(9.4		)
Deferred Fuel Over/Under-Recovery, Net	(5.6		)	(80.2		)	73.3			(5.6		)
Provision for Refund, Net	(39.4		)	13.8			3.7			(39.4		)
Change in Other Noncurrent Assets	(19.8		)	(18.8		)	6.9			(19.8		)
Change in Other Noncurrent Liabilities	(1.4		)	(3.7		)	10.9			(1.4		)
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	5.8			4.4			(3.4		)	5.8
Fuel, Materials and Supplies	13.5			(2.4		)	(1.5		)	13.5
Accounts Payable	(18.5		)	23.1			6.9			(18.5		)
Accrued Taxes, Net	20.1			45.4			38.4			20.1
Other Current Assets	(8.2		)	(2.2		)	0.3			(8.2		)
Other Current Liabilities	1.5			(14.9		)	15.1			1.5
Net Cash Flows from Operating Activities	191.9			232.1			326.7			191.9

INVESTING ACTIVITIES
Construction Expenditures	(203.1		)	(266.8		)	(162.8		)	(203.1		)
Change in Advances to Affiliates, Net	—			29.5
Other Investing Activities	1.5			8.7			3.9			1.5
Net Cash Flows Used for Investing Activities	(201.6		)	(228.6		)	(158.9		)	(201.6		)

FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated	—			150.0
Change in Advances from Affiliates, Net	66.0			—			(127.6		)	66.0
Retirement of Long-term Debt – Nonaffiliated	(0.3		)	(150.3		)	(0.3		)	(0.3		)
Principal Payments for Capital Lease Obligations	(3.2		)	(3.0		)	(2.5		)	(3.2		)
Dividends Paid on Common Stock	(52.5		)	—			(37.5		)	(52.5		)
Other Financing Activities	0.3			0.4			0.4			0.3
Net Cash Flows from (Used for) Financing Activities	10.3			(2.9		)	(167.5		)	10.3

Net Increase in Cash and Cash Equivalents	0.6			0.6			0.3			0.6
Cash and Cash Equivalents at Beginning of Period	1.5			1.4			1.6			1.5
Cash and Cash Equivalents at End of Period	$	2.1		$	2.0		$	1.9		$	2.1

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	40.9		$	45.0		$	42.0		$	40.9
Net Cash Paid (Received) for Income Taxes	(46.6		)	(50.3		)	1.6			(46.6		)
Noncash Acquisitions Under Capital Leases	1.0			2.2			2.3			1.0
Construction Expenditures Included in Current Liabilities as of September 30,	15.1			20.2			24.3			15.1



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales


	Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(in millions of KWhs)				(in millions of KWhs)
Retail:
Residential	1,887	2,105	4,547	4,879	1,992	1,887	5,156	4,547
Commercial	1,677	1,793	4,466	4,652	1,701	1,677	4,619	4,466
Industrial	1,339	1,254	3,895	3,830	1,340	1,339	3,962	3,895
Miscellaneous	19	20	60	61	19	19	59	60
Total Retail	4,922	5,172	12,968	13,422	5,052	4,922	13,796	12,968

Wholesale	2,105	2,326	6,286	6,056	1,881	2,105	5,352	6,286

Total KWhs	7,027	7,498	19,254	19,478	6,933	7,027	19,148	19,254

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

Summary of Heating and Cooling Degree Days

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in degree days)
Actual - Heating (a) —
—
394
586
Normal - Heating (b) 1
1
747
747

Actual - Cooling (c) 1,248
1,502
1,999
2,277
Normal - Cooling (b) 1,414
1,410
2,185
2,177



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
	(in degree days)
Actual – Heating (a)	—	—	784	394
Normal – Heating (b)	1	1	733	747

Actual – Cooling (c)	1,453	1,248	2,408	1,999
Normal – Cooling (b)	1,408	1,414	2,179	2,185


(a)	Heating degree days are calculated on a 55 degree temperature base.


(b)	Normal Heating/Cooling represents the thirty-year average of degree days.


(c)	Cooling degree days are calculated on a 65 degree temperature base.

Third Quarter of ~~2017~~2018 Compared to Third Quarter of ~~2016~~2017


Reconciliation of Third Quarter of 2016 to Third Quarter of 2017
Reconciliation of Third Quarter of 2017 to Third Quarter of 2018				Reconciliation of Third Quarter of 2017 to Third Quarter of 2018
Earnings Attributable to SWEPCo Common Shareholder								(in millions)

Third Quarter of 2016	$	83.3
Third Quarter of 2017					$	73.1

Changes in Gross Margin:
Retail Margins (a)	(6.9		)		11.0
Off-system Sales	0.1
Transmission Revenues	(8.0		)		5.3
Other Revenues	(0.1		)		0.2
Total Change in Gross Margin	(14.9		)		16.5

Changes in Expenses and Other:
Other Operation and Maintenance	10.1				(18.9		)
Depreciation and Amortization	(4.0		)		(4.7		)
Taxes Other Than Income Taxes	(1.6		)		(1.8		)
Interest Income	0.7				0.4
Allowance for Equity Funds Used During Construction	0.3				0.2
Non-Service Cost Components of Net Periodic Benefit Cost					1.3
Interest Expense	0.7				(0.8		)
Total Change in Expenses and Other	6.2				(24.3		)

Income Tax Expense	10.7				12.9
Equity Earnings (Loss) of Unconsolidated Subsidiary	(2.3		)		0.4
Net Income Attributable to Noncontrolling Interest	(9.9		)		9.6

Third Quarter of 2017	$	73.1
Third Quarter of 2018					$	88.2


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

Retail Margins ~~decreased $7~~increased $11 million primarily due to the following:

An $18 million ~~decrease~~increase primarily due to rider and base rate revenue increases in Texas and Louisiana.

A $14 million increase in weather-related usage primarily due to a ~~17% decrease~~16% increase in cooling degree days.

~~This decrease was~~These increases were partially offset by:

~~An $11~~A $15 million ~~increase~~decrease due to ~~rider revenue increases in Louisiana, partially~~lower weather-normalized margins.

A $9 million decrease due to the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in ~~expense items~~Income Tax Expense below.

Transmission Revenues ~~decreased $8~~increased $5 million primarily due to an ~~accrual for~~increase in SPP ~~sponsor-funded~~ transmission ~~upgrades in third quarter 2016. This decrease is offset by a corresponding decrease in Other Operation and Maintenance expenses below.~~investments.

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

Other Operation and Maintenance expenses ~~decreased $10~~increased $19 million primarily due to ~~a $12~~the following:

A $4 million ~~accrual for~~increase due to employee-related expenses.

A $4 million increase in SPP ~~sponsor-funded~~ transmission ~~upgrades~~services.

A $3 million increase due to the Wind Catcher Project.

A $3 million increase in ~~third quarter 2016.~~Energy Efficiency program costs. This ~~decrease is partially~~increase was offset by ~~a corresponding decrease~~an increase from rate riders in ~~Transmission Revenues~~Retail Margins above.

A $2 million increase in distribution expenses.

Depreciation and Amortization expenses increased $4$5 million primarily due to a higher depreciable base.

Income Tax Expense decreased ~~$11~~$13 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

Net Income Attributable to Noncontrolling Interest decreased $10 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This decrease iswas offset by an increase ~~in Net Income Attributable to Noncontrolling Interest below.~~

~~Net Income Attributable to Noncontrolling Interest~~ ~~increased $10 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This increase is offset by a decrease~~ in Income Tax Expense above.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017


Reconciliation of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018				Reconciliation of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2018
Earnings Attributable to SWEPCo Common Shareholder								(in millions)

Nine Months Ended September 30, 2016	$	149.9
Nine Months Ended September 30, 2017					$	113.9

Changes in Gross Margin:
Retail Margins (a)	(8.4		)		49.4
Off-system Sales	3.8				(1.6		)
Transmission Revenues	(5.5		)		2.8
Other Revenues	0.3
Total Change in Gross Margin	(9.8		)		50.6

Changes in Expenses and Other:
Other Operation and Maintenance	6.6				(52.8		)
Depreciation and Amortization	(10.0		)		(17.8		)
Taxes Other Than Income Taxes	(5.8		)		(3.7		)
Interest Income	2.0				1.5
Allowance For Equity Funds Used During Construction	(8.3		)
Allowance for Equity Funds Used During Construction					2.6
Non-Service Cost Components of Net Periodic Benefit Cost					4.1
Interest Expense	(0.7		)		(3.1		)
Total Change in Expenses and Other	(16.2		)		(69.2		)

Income Tax Expense	8.7				27.3
Equity Earnings (Loss) of Unconsolidated Subsidiary	(9.4		)		6.5
Net Income Attributable to Noncontrolling Interest	(9.3		)		8.5

Nine Months Ended September 30, 2017	$	113.9
Nine Months Ended September 30, 2018					$	137.6


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

Retail Margins ~~decreased $8~~increased $49 million primarily due to the following:

A ~~$29~~$57 million ~~decrease~~increase primarily due to rider and base rate revenue increases in Texas, Louisiana and Arkansas.

A $48 million increase in weather-related usage primarily due to a ~~33% decrease~~99% increase in heating degree days and a ~~12% decrease~~20% increase in cooling degree days.

~~A $9 million decrease in FERC generation wholesale municipal and cooperative revenues due to an annual formula rate true-up.~~

~~A $3 million decrease primarily due to lower fuel cost recovery.~~

These ~~decreases~~increases were partially offset by:

A ~~$33~~$36 million ~~increase~~decrease due to ~~rider revenue increases in Louisiana, Texas and Arkansas, partially~~the 2018 provisions for customer refunds related to Tax Reform. This decrease was offset in ~~various expenses~~Income Tax Expense below.

~~Margins from Off-System Sales~~ ~~increased $4~~A $26 million decrease due to lower weather-normalized margins, primarily due to ~~higher sales prices.~~

wholesale customer load loss from contracts that expired at the end of 2017.

Transmission Revenues ~~decreased $6~~increased $3 million primarily due to ~~an accrual for~~a $14 million increase from continued SPP ~~sponsor-funded~~ transmission ~~upgrades in third quarter 2016. This decrease is~~investments, partially offset by an $11 million decrease from a ~~corresponding decrease~~2018 provision for refund related to revenues recorded in ~~Other Operation and Maintenance expenses below.~~prior periods on certain transmission assets that management believes should not have been included in the SPP formula rate.

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

Other Operation and Maintenance expenses ~~decreased $7~~increased $53 million primarily due to the following:

A $25 million increase due to the Wind Catcher Project.

A $21 million increase in SPP transmission services.

An $8 million increase in customer expenses primarily due to the following:

A $3 million increase in Energy Efficiency program costs. This increase was offset by an ~~accrual for SPP sponsor-funded transmission upgrades~~increase from rate riders in ~~third quarter 2016. This decrease is~~Retail Margins above.

A $3 million increase in customer assistance.

A $5 million increase due to employee-related expenses.

These increases were partially offset byby:

An $8 million decrease due to a ~~corresponding decrease~~refund associated with transmission expenses incurred in ~~Transmission Revenues above.~~

prior periods.

Depreciation and Amortization expenses increased ~~$10~~$18 million primarily due to a higher depreciable ~~base.~~base and higher depreciation rates from the 2017 Texas base rate case order.

Taxes Other ~~than~~Than Income Taxesincreased $6$4 million primarily due to increased franchise and property taxes.

Non-Service Cost Components of Net Periodic Benefit Cost decreased $4 million primarily due to ~~an increase in property taxes.~~favorable asset returns for the funded Pension and OPEB plans, favorable OPEB cost savings arrangements and the implementation of ASU 2017-07.

~~Allowance for Equity Funds Used During Construction~~ Interest Expense~~decreased $8~~ increased $3 million primarily due to ~~the completion of~~other interest expense accruals for refunds and true-ups in 2018 and interest expense credits in 2017 on Welsh Plant and Flint Creek Plant environmental ~~projects.~~project deferrals.

Income Tax Expense decreased $9$27 million primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, amortization of Excess ADIT and a decrease in pretax book income.

Equity Earnings (Loss) of Unconsolidated Subsidiary increased $7 million primarily due to a prior period income tax adjustment recognized in 2017.

Net Income Attributable to Noncontrolling Interest decreased $9 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This decrease iswas offset by an increase ~~in Net Income Attributable to Noncontrolling Interest below.~~

~~Equity Earnings (Loss) of Unconsolidated Subsidiary~~ ~~decreased $9 million primarily due to a prior period income tax adjustment for DHLC.~~

~~Net Income Attributable to Noncontrolling Interest~~ ~~increased $9 million primarily due to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine. This increase is offset by a decrease~~ in Income Tax Expense above.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
REVENUES
Electric Generation, Transmission and Distribution	$	509.5		$	530.5		$	1,321.8		$	1,324.1		$	526.0		$	509.5		$	1,390.4		$	1,321.8
Sales to AEP Affiliates	7.7			8.6			20.4			20.0			8.7			7.7			20.2			20.4
Other Revenues	0.4			0.6			1.4			1.6			0.6			0.4			1.2			1.4
TOTAL REVENUES	517.6			539.7			1,343.6			1,345.7			535.3			517.6			1,411.8			1,343.6

EXPENSES
Fuel and Other Consumables Used for Electric Generation	147.5			158.8			389.8			403.3			152.1			147.5			393.4			389.8
Purchased Electricity for Resale	40.0			35.9			118.7			97.5			36.6			40.0			132.7			118.7
Other Operation	80.3			89.2			232.2			243.3			99.1			81.2			292.0			234.9
Maintenance	32.6			33.8			106.5			102.0			33.6			32.6			102.2			106.5
Depreciation and Amortization	55.2			51.2			158.1			148.1			59.9			55.2			175.9			158.1
Taxes Other Than Income Taxes	25.0			23.4			72.6			66.8			26.9			25.1			76.4			72.7
TOTAL EXPENSES	380.6			392.3			1,077.9			1,061.0			408.2			381.6			1,172.6			1,080.7

OPERATING INCOME	137.0			147.4			265.7			284.7			127.1			136.0			239.2			262.9

Other Income (Expense):
Interest Income	0.7			—			2.0			—			1.1			0.7			3.5			2.0
Allowance for Equity Funds Used During Construction	0.4			0.1			1.2			9.5			0.6			0.4			3.8			1.2
Non-Service Cost Components of Net Periodic Benefit Cost													2.3			1.0			6.9			2.8
Interest Expense	(31.9		)	(32.6		)	(92.7		)	(92.0		)	(32.7		)	(31.9		)	(95.8		)	(92.7		)

INCOME BEFORE INCOME TAX EXPENSE AND EQUITY EARNINGS (LOSS)	106.2			114.9			176.2			202.2			98.4			106.2			157.6			176.2

Income Tax Expense	22.5			33.2			45.2			53.9			9.6			22.5			17.9			45.2
Equity Earnings (Loss) of Unconsolidated Subsidiary	0.4			2.7			(4.5		)	4.9			0.8			0.4			2.0			(4.5		)

NET INCOME	84.1			84.4			126.5			153.2			89.6			84.1			141.7			126.5

Net Income Attributable to Noncontrolling Interest	11.0			1.1			12.6			3.3			1.4			11.0			4.1			12.6

EARNINGS ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER	$	73.1		$	83.3		$	113.9		$	149.9		$	88.2		$	73.1		$	137.6		$	113.9



The common stock of SWEPCo is wholly-owned by Parent.

See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net Income	$	84.1		$	84.4		$	126.5		$	153.2		$	89.6		$	84.1		$	141.7		$	126.5

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Cash Flow Hedges, Net of Tax of $0.2 and $0.2 for the Three Months Ended September 30, 2017 and 2016, Respectively, and $0.6 and $0.7 for the Nine Months Ended September 30, 2017 and 2016, Respectively	0.4			0.4			1.1			1.3
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2017 and 2016, Respectively, and $(0.3) and $(0.3) for the Nine Months Ended September 30, 2017 and 2016, Respectively	(0.2		)	(0.1		)	(0.5		)	(0.5		)
Cash Flow Hedges, Net of Tax of $0.8 and $0.2 for the Three Months Ended September 30, 2018 and 2017, Respectively, and $1 and $0.6 for the Nine Months Ended September 30, 2018 and 2017, Respectively													2.7			0.4			3.6			1.1
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $(0.1) and $(0.1) for the Three Months Ended September 30, 2018 and 2017, Respectively, and $(0.3) and $(0.3) for the Nine Months Ended September 30, 2018 and 2017, Respectively													(0.3		)	(0.2		)	(1.0		)	(0.5		)

TOTAL OTHER COMPREHENSIVE INCOME	0.2			0.3			0.6			0.8			2.4			0.2			2.6			0.6

TOTAL COMPREHENSIVE INCOME	84.3			84.7			127.1			154.0			92.0			84.3			144.3			127.1

Total Comprehensive Income Attributable to Noncontrolling Interest	11.0			1.1			12.6			3.3			1.4			11.0			4.1			12.6

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER	$	73.3		$	83.6		$	114.5		$	150.7		$	90.6		$	73.3		$	140.2		$	114.5



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	SWEPCo Common Shareholder																SWEPCo Common Shareholder
	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total			Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
TOTAL EQUITY - DECEMBER 31, 2015	$	135.7	$	676.6	$	1,366.3		$	(9.4	)	$	0.5		$	2,169.7
TOTAL EQUITY – DECEMBER 31, 2016																	$	135.7	$	676.6	$	1,411.9		$	(9.4	)	$	0.4		$	2,215.2

Common Stock Dividends					(90.0		)							(90.0		)					(82.5		)							(82.5		)
Common Stock Dividends – Nonaffiliated											(3.5		)	(3.5		)											(2.7		)	(2.7		)
Net Income					149.9						3.3			153.2							113.9						12.6			126.5
Other Comprehensive Income								0.8						0.8					��					0.6						0.6
TOTAL EQUITY - SEPTEMBER 30, 2016	$	135.7	$	676.6	$	1,426.2		$	(8.6	)	$	0.3		$	2,230.2
TOTAL EQUITY – SEPTEMBER 30, 2017																	$	135.7	$	676.6	$	1,443.3		$	(8.8	)	$	10.3		$	2,257.1

TOTAL EQUITY - DECEMBER 31, 2016	$	135.7	$	676.6	$	1,411.9		$	(9.4	)	$	0.4		$	2,215.2
TOTAL EQUITY – DECEMBER 31, 2017																	$	135.7	$	676.6	$	1,426.6		$	(4.0	)	$	(0.4	)	$	2,234.5

Common Stock Dividends					(82.5		)							(82.5		)					(60.0		)							(60.0		)
Common Stock Dividends – Nonaffiliated											(2.7		)	(2.7		)											(3.2		)	(3.2		)
ASU 2018-02 Adoption																					(0.4		)	(0.9		)				(1.3		)
Net Income					113.9						12.6			126.5							137.6						4.1			141.7
Other Comprehensive Income								0.6						0.6										2.6						2.6
TOTAL EQUITY - SEPTEMBER 30, 2017	$	135.7	$	676.6	$	1,443.3		$	(8.8	)	$	10.3		$	2,257.1
TOTAL EQUITY – SEPTEMBER 30, 2018																	$	135.7	$	676.6	$	1,503.8		$	(2.3	)	$	0.5		$	2,314.3



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(in millions)

(Unaudited)


	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
CURRENT ASSETS
Cash and Cash Equivalents (September 30, 2017 and December 31, 2016 Amounts Include $0 and $8.7, Respectively, Related to Sabine)	$	2.2		$	10.3
Cash and Cash Equivalents							$	2.5		$	1.6
Advances to Affiliates	2.0			169.8			518.6			2.0
Accounts Receivable:
Customers	23.5			48.5			29.1			70.9
Affiliated Companies	37.6			29.3			32.8			30.2
Miscellaneous	20.8			17.5			20.9			25.8
Allowance for Uncollectible Accounts	(1.5		)	(1.2		)	(0.9		)	(1.3		)
Total Accounts Receivable	80.4			94.1			81.9			125.6
Fuel (September 30, 2017 and December 31, 2016 Amounts Include $43.2 and $34.3, Respectively, Related to Sabine)	93.1			107.1
Fuel (September 30, 2018 and December 31, 2017 Amounts Include $33.4 and $41.5, Respectively, Related to Sabine)							117.5			123.6
Materials and Supplies	68.8			68.4			69.0			67.9
Risk Management Assets	12.5			0.9			6.5			6.4
Accrued Tax Benefits	14.5			51.5
Regulatory Asset for Under-Recovered Fuel Costs	13.6			8.4			14.5			14.1
Prepayments and Other Current Assets	35.5			35.5			32.0			39.2
TOTAL CURRENT ASSETS	322.6			546.0			842.5			380.4

PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	4,632.9			4,607.6			4,655.6			4,624.9
Transmission	1,656.4			1,584.2			1,812.0			1,679.8
Distribution	2,084.2			2,020.6			2,146.4			2,095.8
Other Property, Plant and Equipment (September 30, 2017 and December 31, 2016 Amounts Include $266.6 and $267.5, Respectively, Related to Sabine)	701.6			670.4
Other Property, Plant and Equipment (September 30, 2018 and December 31, 2017 Amounts Include $269.6 and $266.7, Respectively, Related to Sabine)							744.4			684.1
Construction Work in Progress	145.2			113.8			234.5			233.2
Total Property, Plant and Equipment	9,220.3			8,996.6			9,592.9			9,317.8
Accumulated Depreciation and Amortization (September 30, 2017 and December 31, 2016 Amounts Include $162.8 and $155.6, Respectively, Related to Sabine)	2,670.5			2,567.1
Accumulated Depreciation and Amortization (September 30, 2018 and December 31, 2017 Amounts Include $174.7 and $165.9, Respectively, Related to Sabine)							2,798.9			2,685.8
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	6,549.8			6,429.5			6,794.0			6,632.0

OTHER NONCURRENT ASSETS
Regulatory Assets	566.4			551.2			217.8			220.6
Long-term Risk Management Assets	0.7			—
Deferred Charges and Other Noncurrent Assets	116.4			99.9			133.1			109.9
TOTAL OTHER NONCURRENT ASSETS	683.5			651.1			350.9			330.5

TOTAL ASSETS	$	7,555.9		$	7,626.6		$	7,987.4		$	7,342.9



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND EQUITY

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(Unaudited)


	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
	(in millions)						(in millions)
CURRENT LIABILITIES
Advances from Affiliates	$	48.3		$	—		$	—		$	118.7
Accounts Payable:
General	120.9			117.5			117.6			160.4
Affiliated Companies	38.5			68.5			41.3			63.7
Short-term Debt – Nonaffiliated	14.3			—			19.4			22.0
Long-term Debt Due Within One Year – Nonaffiliated	385.4			353.7			457.2			3.7
Risk Management Liabilities	0.1			0.3			0.2			0.2
Customer Deposits	61.6			62.1			62.7			62.1
Accrued Taxes	73.0			40.9			75.2			39.0
Accrued Interest	25.1			45.1			27.5			38.9
Obligations Under Capital Leases	11.4			11.8			10.8			11.2
Other Current Liabilities	77.5			83.9			101.6			78.7
TOTAL CURRENT LIABILITIES	856.1			783.8			913.5			598.6

NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	2,056.1			2,325.4			2,615.5			2,438.2
Long-term Risk Management Liabilities							2.6			—
Deferred Income Taxes	1,694.5			1,606.9			932.9			917.7
Regulatory Liabilities and Deferred Investment Tax Credits	441.3			438.9			896.7			896.4
Asset Retirement Obligations	159.0			147.1			179.3			160.3
Employee Benefits and Pension Obligations	19.9			34.1			19.3			19.5
Obligations Under Capital Leases	60.2			65.5			52.8			57.8
Deferred Credits and Other Noncurrent Liabilities	11.7			9.7			60.5			19.9
TOTAL NONCURRENT LIABILITIES	4,442.7			4,627.6			4,759.6			4,509.8

TOTAL LIABILITIES	5,298.8			5,411.4			5,673.1			5,108.4

Rate Matters (Note 4)
Commitments and Contingencies (Note 5)

EQUITY
Common Stock – Par Value – $18 Per Share:
Authorized – 7,600,000 Shares
Outstanding – 7,536,640 Shares	135.7			135.7			135.7			135.7
Paid-in Capital	676.6			676.6			676.6			676.6
Retained Earnings	1,443.3			1,411.9			1,503.8			1,426.6
Accumulated Other Comprehensive Income (Loss)	(8.8		)	(9.4		)	(2.3		)	(4.0		)
TOTAL COMMON SHAREHOLDER’S EQUITY	2,246.8			2,214.8			2,313.8			2,234.9

Noncontrolling Interest	10.3			0.4			0.5			(0.4		)

TOTAL EQUITY	2,257.1			2,215.2			2,314.3			2,234.5

TOTAL LIABILITIES AND EQUITY	$	7,555.9		$	7,626.6		$	7,987.4		$	7,342.9



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(in millions)

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
OPERATING ACTIVITIES
Net Income	$	126.5		$	153.2		$	141.7		$	126.5
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	158.1			148.1			175.9			158.1
Deferred Income Taxes	79.8			141.9			2.0			79.8
Allowance for Equity Funds Used During Construction	(1.2		)	(9.5		)	(3.8		)	(1.2		)
Mark-to-Market of Risk Management Contracts	(12.5		)	(5.8		)	2.5			(12.5		)
Pension Contributions to Qualified Plan Trust	(8.9		)	(8.3		)	—			(8.9		)
Property Taxes	(15.4		)	(13.7		)	(15.8		)	(15.4		)
Deferred Fuel Over/Under-Recovery, Net	2.4			1.2			4.4			2.4
Change in Other Noncurrent Assets	(2.9		)	18.4			(8.9		)	(2.9		)
Change in Other Noncurrent Liabilities	(5.2		)	(25.8		)	52.1			(5.2		)
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	12.1			12.2			44.3			12.1
Fuel, Materials and Supplies	13.6			33.4			5.0			13.6
Accounts Payable	(25.7		)	(17.2		)	(29.9		)	(25.7		)
Accrued Taxes, Net	69.1			14.1			38.4			69.1
Accrued Interest	(20.0		)	(20.0		)	(11.4		)	(20.0		)
Other Current Assets	0.7			(2.4		)	3.2			0.7
Other Current Liabilities	(14.6		)	(24.8		)	15.6			(14.6		)
Net Cash Flows from Operating Activities	355.9			395.0			415.3			355.9

INVESTING ACTIVITIES
Construction Expenditures	(265.3		)	(315.3		)	(336.6		)	(265.3		)
Change in Advances to Affiliates, Net	167.8			(297.4		)	(516.6		)	167.8
Other Investing Activities	3.1			(1.9		)	1.2			3.1
Net Cash Flows Used for Investing Activities	(94.4		)	(614.6		)	(852.0		)	(94.4		)

FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated	114.6			402.2			1,015.4			114.6
Change in Short-term Debt – Nonaffiliated	14.3			—			(2.6		)	14.3
Change in Advances from Affiliates, Net	48.3			(58.3		)	(118.7		)	48.3
Retirement of Long-term Debt – Nonaffiliated	(353.6		)	(3.3		)	(385.3		)	(353.6		)
Principal Payments for Capital Lease Obligations	(8.4		)	(18.6		)	(8.5		)	(8.4		)
Dividends Paid on Common Stock	(82.5		)	(90.0		)	(60.0		)	(82.5		)
Dividends Paid on Common Stock – Nonaffiliated	(2.7		)	(3.5		)	(3.2		)	(2.7		)
Other Financing Activities	0.4			1.1			0.5			0.4
Net Cash Flows from (Used for) Financing Activities	(269.6		)	229.6			437.6			(269.6		)

Net Increase (Decrease) in Cash and Cash Equivalents	(8.1		)	10.0			0.9			(8.1		)
Cash and Cash Equivalents at Beginning of Period	10.3			5.2			1.6			10.3
Cash and Cash Equivalents at End of Period	$	2.2		$	15.2		$	2.5		$	2.2

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	109.4		$	107.6		$	102.5		$	109.4
Net Cash Paid (Received) for Income Taxes	(70.5		)	(66.6		)	12.9			(70.5		)
Noncash Acquisitions Under Capital Leases	2.8			5.5			3.2			2.8
Construction Expenditures Included in Current Liabilities as of September 30,	40.7			54.3			37.0			40.7



See Condensed Notes to Condensed Financial Statements of Registrants beginning on page ~~118~~141.

INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANTS

The condensed notes to condensed financial statements are a combined presentation for the Registrants. The following list indicates Registrants to which the notes apply. Specific disclosures within each note apply to all Registrants unless indicated otherwise:



Note	Registrant	Page Number

Significant Accounting Matters	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~119~~142
New Accounting Pronouncements	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~121~~147
Comprehensive Income	AEP, AEP Texas, APCo, I&M, OPCo, PSO, SWEPCo	~~124~~151
Rate Matters	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~136~~165
Commitments, Guarantees and Contingencies	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~146~~179
~~Impairment, Disposition,~~Dispositions and ~~Assets and Liabilities Held for Sale~~Impairments	AEP, ~~I&M~~APCo	~~152~~184
Benefit Plans	AEP, AEP Texas, APCo, I&M, OPCo, PSO, SWEPCo	~~154~~185
Business Segments	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~158~~189
Derivatives and Hedging	AEP, AEP Texas, APCo, I&M, OPCo, PSO, SWEPCo	~~164~~194
Fair Value Measurements	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~176~~206
Income Taxes	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~193~~224
Financing Activities	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	~~195~~231
Variable Interest Entities	AEP	238
Revenue from Contracts with Customers	AEP, AEP Texas, AEPTCo, APCo, I&M, OPCo, PSO, SWEPCo	240

1. SIGNIFICANT ACCOUNTING MATTERS

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

General

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

In the opinion of management, the unaudited condensed interim financial statements reflect all normal and recurring accruals and adjustments necessary for a fair presentation of the net income, financial position and cash flows for the interim periods for each Registrant. Net income for the three and nine months ended September 30, ~~2017~~2018 is not necessarily indicative of results that may be expected for the year ending December 31, ~~2017.~~2018. The condensed financial statements are unaudited and should be read in conjunction with the audited ~~2016~~2017 financial statements and notes thereto, which are included in the ~~Registrants (except AEPTCo)~~Registrants’ Annual Reports on Form 10-K as filed with the SEC on February ~~27, 2017. AEPTCo should be read in conjunction with the audited 2016 financial statements and notes thereto, which are included on Form S-4 as filed with the SEC on April 5, 2017.~~22, 2018.

Earnings Per Share (EPS) (Applies to AEP)

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

The following tables present AEP’s basic and diluted EPS calculations included on the statements of income:


	Three Months Ended September 30,											Three Months Ended September 30,
	2017					2016						2018				2017
	(in millions, except per share data)											(in millions, except per share data)
			$/share						$/share					$/share				$/share
Income (Loss) from Continuing Operations	$	556.7				$	(764.2	)
Less: Net Income Attributable to Noncontrolling Interests	12.0					1.6
Earnings (Loss) Attributable to AEP Common Shareholders from Continuing Operations	$	544.7				$	(765.8	)
Earnings Attributable to AEP Common Shareholders												$	577.6			$	544.7

Weighted Average Number of Basic Shares Outstanding	491.8		$	1.11		491.7			$	(1.56	)	493.0		$	1.17	491.8		$	1.11
Weighted Average Dilutive Effect of Stock-Based Awards	1.2		(0.01		)	0.1			—			0.9		—		1.2		(0.01		)
Weighted Average Number of Diluted Shares Outstanding	493.0		$	1.10		491.8			$	(1.56	)	493.9		$	1.17	493.0		$	1.10


	Nine Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2018					2017
	(in millions, except per share data)								(in millions, except per share data)
			$/share				$/share				$/share					$/share
Income from Continuing Operations	$	1,527.1			$	245.3
Less: Net Income Attributable to Noncontrolling Interests	15.2				5.3
Earnings Attributable to AEP Common Shareholders from Continuing Operations	$	1,511.9			$	240.0
Earnings Attributable to AEP Common Shareholders									$	1,560.4				$	1,511.9

Weighted Average Number of Basic Shares Outstanding	491.8		$	3.07	491.4		$	0.49	492.6		$	3.17		491.8		$	3.07
Weighted Average Dilutive Effect of Stock-Based Awards	0.6		—		0.2		—		0.9		(0.01		)	0.6		—
Weighted Average Number of Diluted Shares Outstanding	492.4		$	3.07	491.6		$	0.49	493.5		$	3.16		492.4		$	3.07

There were no antidilutive shares outstanding as of September 30, ~~2017~~2018 and ~~2016.~~

2017.

Nonconsolidated Variable Interest Entity (Applies to AEP and SWEPCo)

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

~~Supplementary Cash Flow Information~~

Revisions to Previously Issued Financial Statements (Applies to ~~AEP)~~only AEPTCo)

In the second quarter of 2018, management identified certain transmission assets that it believes should not have been included in AEPTCo’s SPP transmission formula rates. As a result, AEPTCo recorded a pretax out of period correction of an error of approximately $17 million related to revenue recorded from 2013 through March 31, 2018 in the second quarter of 2018. Subsequent to filing the second quarter 2018 Form 10-Q, AEPTCo identified an additional error in its previously issued financial statements. This error resulted from the improper capitalization of AFUDC and subsequent revenue recorded on the AFUDC. The impact of this misstatement reduced AEPTCo’s pretax income by approximately $7 million on a cumulative basis for the period 2011 through June 30, 2018.

Management assessed the materiality of the misstatements on all previously issued AEPTCo financial statements in accordance with SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, codified in ASC 250, Presentation of Financial Statements and concluded these misstatements were not material, individually or in the aggregate, to any prior annual or interim period. In accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), management revised the prior period AEPTCo financial statements included in this report to reflect the impact of correcting the immaterial misstatements described above. In addition, management will revise the historical 2017, March 31, 2018 and June 30, 2018 periods presented in AEPTCo’s previously issued financial statements in future SEC Form 10-Q and Form 10-K filings to reflect the impact of the misstatements. The $(18) million adjustment to pretax income for the nine months ended September 30, 2017 includes adjustments of $(12) million relating to 2016 and earlier periods. The effect of recording this adjustment of $(12) million in 2017 is not material to AEPTCo’s financial statements for 2017 or any earlier period.

AEPTCo has also corrected other previously recorded immaterial out of period adjustments. The impact of these additional adjustments did not impact net income in any period.

Management also assessed the materiality of the AEPTCo’s misstatements discussed above on all previously issued and the current year AEP financial statements in accordance with ASC 250, and concluded these misstatements were not material, individually or in the aggregate, to any prior and current interim and annual period financial statements. As a result, AEP recorded the correction in the third quarter of 2018.

Statements of Income

The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s statements of income for the three and nine months ended September 30, 2017:

Nine Months Ended September 30,
Cash Flow Information 2017 2016
(in millions)
Cash Paid (Received) for:
Interest, Net of Capitalized Amounts $ 613.8
$ 637.0
Income Taxes, Net (6.8 ) 32.2
Noncash Investing and Financing Activities:
Acquisitions Under Capital Leases 44.5
65.8
Construction Expenditures Included in Current Liabilities as of September 30, 791.6
604.8
Construction Expenditures Included in Noncurrent Liabilities as of September 30, 71.8
—
Acquisition of Nuclear Fuel Included in Current Liabilities as of September 30, 0.6
0.3
Expected Reimbursement for Spent Nuclear Fuel Dry Cask Storage 2.8
—



	Three Months Ended September 30, 2017									Nine Months Ended September 30, 2017
	As Reported			Adjustments			As Adjusted			As Reported			Adjustments			As Adjusted
	(in millions)									(in millions)
TOTAL REVENUES	$	167.3		$	(1.7	)	$	165.6		$	549.4		$	(14.6	)	$	534.8

EXPENSES
Depreciation and Amortization	24.8			(0.2		)	24.6			70.9			(1.2		)	69.7
TOTAL EXPENSES	72.2			(0.2		)	72.0			198.5			(1.2		)	197.3

OPERATING INCOME	95.1			(1.5		)	93.6			350.9			(13.4		)	337.5

Other Income (Expense):
Allowance for Equity Funds Used During Construction	11.7			(0.3		)	11.4			36.0			(3.0		)	33.0
Interest Expense	(16.9		)	(0.2		)	(17.1		)	(48.6		)	(1.8		)	(50.4		)

INCOME BEFORE INCOME TAX EXPENSE	90.1			(2.0		)	88.1			338.8			(18.2		)	320.6

Income Tax Expense	30.2			(0.7		)	29.5			114.5			(6.3		)	108.2

NET INCOME	$	59.9		$	(1.3	)	$	58.6		$	224.3		$	(11.9	)	$	212.4

Balance Sheet

The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s Balance Sheet as of December 31, 2017:



	December 31, 2017
	As Reported		Adjustment			As Adjusted
CURRENT ASSETS	(in millions)
Accounts Receivable:
Customers	$	19.1	$	(4.1	)	$	15.0
Total Accounts Receivable	113.6		(4.1		)	109.5
Accrued Tax Benefits	46.6		2.8			49.4
TOTAL CURRENT ASSETS	327.7		(1.3		)	326.4

TRANSMISSION PROPERTY
Transmission Property	5,336.1		(16.4		)	5,319.7
Other Property, Plant and Equipment	131.4		(4.6		)	126.8
Construction Work in Progress	1,312.7		11.3			1,324.0
Total Transmission Property	6,780.2		(9.7		)	6,770.5
Accumulated Depreciation and Amortization	170.4		(17.8		)	152.6
TOTAL TRANSMISSION PROPERTY – NET	6,609.8		8.1			6,617.9

OTHER NONCURRENT ASSETS
Deferred Property Taxes	117.8		7.2			125.0
TOTAL OTHER NONCURRENT ASSETS	130.6		7.2			137.8

TOTAL ASSETS	$	7,068.1	$	14.0		$	7,082.1



CURRENT LIABILITIES
Accounts Payable:
General	$	473.2	$	11.3		$	484.5
Affiliated Companies	52.9		13.2			66.1
Accrued Taxes	225.4		6.1			231.5
TOTAL CURRENT LIABILITIES	836.3		30.6			866.9

NONCURRENT LIABILITIES
Deferred Income Taxes	601.7		(1.3		)	600.4
Regulatory Liabilities	493.7		0.1			493.8
TOTAL NONCURRENT LIABILITIES	3,626.5		(1.2		)	3,625.3

TOTAL LIABILITIES	4,462.8		29.4			4,492.2

MEMBER’S EQUITY
Retained Earnings	788.7		(15.4		)	773.3
TOTAL MEMBER’S EQUITY	2,605.3		(15.4		)	2,589.9

TOTAL LIABILITIES AND MEMBER’S EQUITY	$	7,068.1	$	14.0		$	7,082.1

Statement of Cash Flows

The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s statement of cash flows for the nine months ended September 30, 2017:



	Nine Months Ended September 30, 2017
	As Reported			Adjustments			As Adjusted
	(in millions)
OPERATING ACTIVITIES
Net Income	$	224.3		$	(11.9	)	$	212.4
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	70.9			(1.2		)	69.7
Deferred Income Taxes	193.0			(1.1		)	191.9
Allowance for Equity Funds Used During Construction	(36.0		)	3.0			(33.0		)
Change in Other Noncurrent Assets	7.6			1.0			8.6
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	(44.4		)	3.6			(40.8		)
Accounts Payable	8.6			11.8			20.4
Accrued Taxes, Net	(66.0		)	(5.2		)	(71.2		)
Net Cash Flows from Operating Activities	444.9			—			444.9

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

FINANCING ACTIVITIES
Net Cash Flows from Financing Activities	832.5			—			832.5

Net Change in Cash and Cash Equivalents	—			—			—
Cash and Cash Equivalents at Beginning of Period	—			—			—
Cash and Cash Equivalents at End of Period	$	—		$	—		$	—

SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	28.6		$	1.8		$	30.4
Construction Expenditures Included in Current Liabilities as of September 30,	239.0			9.9			248.9

Statement of Changes in Member’s Equity

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

Restricted Cash (Applies to AEP, AEP Texas, APCo and OPCo)

Restricted Cash primarily includes funds held by trustees for the payment of securitization bonds.

Reconciliation of Cash, Cash Equivalents and Restricted Cash

The following tables provide a reconciliation of Cash, Cash Equivalents and Restricted Cash reported on the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:



	September 30, 2018
	AEP		AEP Texas		APCo		OPCo
	(in millions)
Cash and Cash Equivalents	$	788.3	$	0.1	$	2.2	$	3.5
Restricted Cash	149.2		124.2		9.9		15.2
Total Cash, Cash Equivalents and Restricted Cash	$	937.5	$	124.3	$	12.1	$	18.7



	December 31, 2017
	AEP		AEP Texas		APCo		OPCo
	(in millions)
Cash and Cash Equivalents	$	214.6	$	2.0	$	2.9	$	3.1
Restricted Cash	198.0		155.2		16.3		26.6
Total Cash, Cash Equivalents and Restricted Cash	$	412.6	$	157.2	$	19.2	$	29.7

2. NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

The FASB deferred implementation of ASU 2014-09 under the terms in ASU 2015-14, “Revenue from Contracts with Customers (Topic: 606): Deferral of the Effective Date.” The new accounting guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted.

Management continues to analyze the impact of the new revenue standard and related ASUs. During 2016 and 2017, revenue contract assessments were completed. Material revenue streams were identified within the AEP System and representative contract/transaction types were sampled. Performance obligations identified within each material revenue stream were evaluated to determine whether the obligations were satisfied at a point in time or over time. Contracts determined to be satisfied over time generally qualified for the invoicing practical expedient since the invoiced amounts reasonably represented the value to customers of performance obligations fulfilled to date. Based upon the completed assessments, management does not expect a material impact to the timing of revenue recognized or net income and plans to elect the modified retrospective transition approach upon adoption.

The evaluation of revenue streams, new contracts and the new revenue standard’s disclosure requirements continues during the fourth quarter of 2017, in particular with respect to various ongoing industry implementation issues. Management will continue to analyze the related impacts to revenue recognition and monitor any new industry implementation issues that arise. Further, given industry conclusions related to implementation issues, including contributions in aid of construction and collectability, management does not anticipate changes to current accounting systems. Management plans to adoptadopted ASU 2014-09 effective January 1, ~~2018.~~2018, by means of the modified retrospective approach for all contracts. The adoption of ASU 2014-09 did not have a material impact on results of operations, financial position or cash flows. In that regard, the application of the new standard did not cause any significant differences in any individual financial statement line items had those line items been presented in accordance with the guidance that was in effect prior to the adoption of the new standard. Further, given the lack of material impact to the financial statements, the adoption of the new standard did not give rise to any material changes in the Registrants’ previously established accounting policies for revenue. See Note 14 - Revenue from Contracts with Customers for additional disclosures required by the new standard.

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

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

~~The new accounting guidance is~~Management adopted ASU 2016-01 effective ~~for interim and annual periods beginning after December 15, 2017 with early adoption permitted. The amendments will be applied~~January 1, 2018, by means of a cumulative-effect adjustment to the balance ~~sheet as~~sheet. The adoption of ASU 2016-01 resulted in an immaterial impact on results of operations and financial position of AEP, and no impact to results of operations or financial position of the ~~beginning~~Registrant Subsidiaries. There was no impact on cash flows of the fiscal year of adoption. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net income. Management plans to adopt ASU 2016-01 effective January 1, 2018.

Registrants.

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

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

The new accounting guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. ~~The guidance will be applied by means of a modified retrospective approach. The modified retrospective approach will require lessees and lessors~~In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements”, which provides an optional expedient to ~~recognize and measure leases at the beginning of the earliest period presented.~~

~~Management continues to analyze the impact of~~adopt the new lease ~~standard. During 2016 and 2017,~~requirements through a cumulative-effect adjustment in the period of adoption. Management plans to apply the new optional transition guidance.

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

Management plans to elect certain of the ~~following~~optional practical expedients upon adoption:



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

Evaluation of new lease contracts ~~continues and~~will continue through the ~~process of implementing a compliant lease system solution began in the third quarter of 2017.~~fourth quarter. Management expects the new standard to impact financial position ~~but~~and, at this time, cannot estimate the impact. Management does not expect any impact to results of operations or cash flows. Management also continues to monitor unresolved industry implementation issues, including items related to pole attachments, easements and right-of-ways, and will analyze the related impacts to lease accounting. Management plans to adopt ASU 2016-02 and its related guidance effective January 1, 2019.

~~ASU 2016-09 “Compensation – Stock Compensation” (ASU 2016-09)~~

In March 2016, the FASB issued ASU 2016-09 simplifying the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. Under the new standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit on the statements of income. Under current GAAP, excess tax benefits are recognized in additional paid-in capital while tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or on the statements of income.

Management adopted ASU 2016-09 effective January 1, 2017. As a result of the adoption of this guidance, management made an accounting policy election to recognize the effect of forfeitures in compensation cost when they occur. There was an immaterial impact on results of operations and financial position and no impact on cash flows at adoption.

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

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

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

~~ASU 2016-18 “Restricted Cash” (ASU 2016-18)~~

In November 2016, the FASB issued ASU 2016-18 clarifying the treatment of restricted cash on the statements of cash flows. Under the new standard, amounts considered restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statements of cash flows.

The new accounting guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted in any interim or annual period. The guidance will be applied by means of a retrospective approach. Management is analyzing the impact of the new standard. Management plans to adopt ASU 2016-18 effective for the 2017 Annual Report.

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

In March 2017, the FASB issued ASU 2017-07 requiring that an employer report the service cost component of pension and postretirement benefits in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented inon the statements of income separately from the service cost component and outside of a subtotal of income from operations. In addition, only the service cost component will be eligible for capitalization as applicable following labor. ~~For 2016, AEP’s actual non-service cost components were a credit of $66 million, of which approximately 37% was capitalized.~~

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Management ~~plans to adopt~~adopted ASU 2017-07 effective January 1, 2018. Presentation of the non-service components on a separate line outside of operating income was applied on a retrospective basis, using the amounts disclosed in the benefit plan note for the estimation basis as a practical expedient. Capitalization of only the service cost component was applied on a prospective basis.

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

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

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

ASU 2018-02 “Reclassification of ~~recognizing hedge ineffectiveness~~Certain Tax Effects from AOCI” (ASU 2018-02)

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

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

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

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

The new accounting guidance is effective for interim and annual periods beginning after December 15, ~~2018~~2019, with early adoption ~~permitted for any interim~~permitted. The amendments may be applied either retrospectively or ~~annual period~~prospectively to applicable implementation costs incurred after ~~August 2017.~~the date of adoption. Management is analyzing the impact of this new standard ~~including the possibility of early adoption,~~ and at this time, cannot estimate the impact of adoption on ~~net income.~~results of operations, financial position or cash flows. Management plans to adopt ASU 2018-15 prospectively, effective January 1, 2020.

3. COMPREHENSIVE INCOME

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

Presentation of Comprehensive Income

The following tables provide the components of changes in AOCI and details of reclassifications from AOCI for the three and nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017. The amortization of pension and OPEB AOCI components are included in the computation of net periodic pension and OPEB costs. See Note 7 - Benefit Plans for additional details.

AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2018



	Cash Flow Hedges
	Commodity			Interest Rate			Pension and OPEB			Total
	(in millions)
Balance in AOCI as of June 30, 2018	$	(30.4	)	$	(15.3	)	$	(49.1	)	$	(94.8	)
Change in Fair Value Recognized in AOCI	12.2			2.3			—			14.5
Amount of (Gain) Loss Reclassified from AOCI
Generation & Marketing Revenues (a)	(0.1		)	—			—			(0.1		)
Purchased Electricity for Resale (a)	(5.8		)	—			—			(5.8		)
Interest Expense (a)	—			0.4			—			0.4
Amortization of Prior Service Cost (Credit)	—			—			(5.0		)	(5.0		)
Amortization of Actuarial (Gains)/Losses	—			—			3.2			3.2
Reclassifications from AOCI, before Income Tax (Expense) Credit	(5.9		)	0.4			(1.8		)	(7.3		)
Income Tax (Expense) Credit	(1.3		)	0.1			(0.4		)	(1.6		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(4.6		)	0.3			(1.4		)	(5.7		)
Net Current Period Other Comprehensive Income (Loss)	7.6			2.6			(1.4		)	8.8
Balance in AOCI as of September 30, 2018	$	(22.8	)	$	(12.7	)	$	(50.5	)	$	(86.0	)

AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2017


	Cash Flow Hedges														Cash Flow Hedges
	Commodity			Interest Rate			Securities Available for Sale		Pension and OPEB			Total			Commodity			Interest Rate			Securities Available for Sale		Pension and OPEB			Total
	(in millions)														(in millions)
Balance in AOCI as of June 30, 2017	$	(36.0	)	$	(10.4	)	$	10.2	$	(125.4	)	$	(161.6	)	$	(36.0	)	$	(10.4	)	$	10.2	$	(125.4	)	$	(161.6	)
Change in Fair Value Recognized in AOCI	(15.8		)	(2.0		)	0.9		—			(16.9		)	(15.8		)	(2.0		)	0.9		—			(16.9		)
Amount of (Gain) Loss Reclassified from AOCI
Generation & Marketing Revenues(a)	(0.9		)	—			—		—			(0.9		)	(0.9		)	—			—		—			(0.9		)
Purchased Electricity for Resale(a)	4.9			—			—		—			4.9			4.9			—			—		—			4.9
Interest Expense(a)	—			0.4			—		—			0.4			—			0.4			—		—			0.4
Amortization of Prior Service Cost (Credit)	—			—			—		(5.0		)	(5.0		)	—			—			—		(5.0		)	(5.0		)
Amortization of Actuarial (Gains)/Losses	—			—			—		5.4			5.4			—			—			—		5.4			5.4
Reclassifications from AOCI, before Income Tax (Expense) Credit	4.0			0.4			—		0.4			4.8			4.0			0.4			—		0.4			4.8
Income Tax (Expense) Credit	1.4			0.2			—		0.1			1.7			1.4			0.2			—		0.1			1.7
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	2.6			0.2			—		0.3			3.1			2.6			0.2			—		0.3			3.1
Net Current Period Other Comprehensive Income (Loss)	(13.2		)	(1.8		)	0.9		0.3			(13.8		)	(13.2		)	(1.8		)	0.9		0.3			(13.8		)
Balance in AOCI as of September 30, 2017	$	(49.2	)	$	(12.2	)	$	11.1	$	(125.1	)	$	(175.4	)	$	(49.2	)	$	(12.2	)	$	11.1	$	(125.1	)	$	(175.4	)

AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Three~~Nine Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges														Cash Flow Hedges
	Commodity			Interest Rate			Securities Available for Sale		Pension and OPEB			Total			Commodity			Interest Rate			Securities Available for Sale			Pension and OPEB			Total
	(in millions)														(in millions)
Balance in AOCI as of June 30, 2016	$	1.9		$	(16.5	)	$	8.3	$	(111.6	)	$	(117.9	)
Balance in AOCI as of December 31, 2017															$	(28.4	)	$	(13.0	)	$	11.9		$	(38.3	)	$	(67.8	)
Change in Fair Value Recognized in AOCI	(26.7		)	—			0.5		—			(26.2		)	30.4			2.3			—			—			32.7
Amount of (Gain) Loss Reclassified from AOCI
Generation & Marketing Revenues(a)	(5.4		)	—			—		—			(5.4		)	(0.1		)	—			—			—			(0.1		)
Purchased Electricity for Resale(a)	1.8			—			—		—			1.8			(23.6		)	—			—			—			(23.6		)
Interest Expense(a)	—			0.6			—		—			0.6			—			0.9			—			—			0.9
Amortization of Prior Service Cost (Credit)	—			—			—		(4.8		)	(4.8		)	—			—			—			(14.7		)	(14.7		)
Amortization of Actuarial (Gains)/Losses	—			—			—		5.0			5.0			—			—			—			9.6			9.6
Reclassifications from AOCI, before Income Tax (Expense) Credit	(3.6		)	0.6			—		0.2			(2.8		)	(23.7		)	0.9			—			(5.1		)	(27.9		)
Income Tax (Expense) Credit	(1.3		)	0.2			—		—			(1.1		)	(5.0		)	0.2			—			(1.1		)	(5.9		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(2.3		)	0.4			—		0.2			(1.7		)	(18.7		)	0.7			—			(4.0		)	(22.0		)
Net Current Period Other Comprehensive Income (Loss)	(29.0		)	0.4			0.5		0.2			(27.9		)	11.7			3.0			—			(4.0		)	10.7
Balance in AOCI as of September 30, 2016	$	(27.1	)	$	(16.1	)	$	8.8	$	(111.4	)	$	(145.8	)
ASU 2018-02 Adoption (b)															(6.1		)	(2.7		)	—			(8.2		)	(17.0		)
ASU 2016-01 Adoption (b)															—			—			(11.9		)	—			(11.9		)
Balance in AOCI as of September 30, 2018															$	(22.8	)	$	(12.7	)	$	—		$	(50.5	)	$	(86.0	)

AEP

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, 2017


	Cash Flow Hedges														Cash Flow Hedges
	Commodity			Interest Rate			Securities Available for Sale		Pension and OPEB			Total			Commodity			Interest Rate			Securities Available for Sale		Pension and OPEB			Total
	(in millions)														(in millions)
Balance in AOCI as of December 31, 2016	$	(23.1	)	$	(15.7	)	$	8.4	$	(125.9	)	$	(156.3	)	$	(23.1	)	$	(15.7	)	$	8.4	$	(125.9	)	$	(156.3	)
Change in Fair Value Recognized in AOCI	(39.4		)	2.7			2.7		—			(34.0		)	(39.4		)	2.7			2.7		—			(34.0		)
Amount of (Gain) Loss Reclassified from AOCI
Generation & Marketing Revenues(a)	(5.6		)	—			—		—			(5.6		)	(5.6		)	—			—		—			(5.6		)
Purchased Electricity for Resale(a)	26.0			—			—		—			26.0			26.0			—			—		—			26.0
Interest Expense(a)	—			1.2			—		—			1.2			—			1.2			—		—			1.2
Amortization of Prior Service Cost (Credit)	—			—			—		(14.8		)	(14.8		)	—			—			—		(14.8		)	(14.8		)
Amortization of Actuarial (Gains)/Losses	—			—			—		16.0			16.0			—			—			—		16.0			16.0
Reclassifications from AOCI, before Income Tax (Expense) Credit	20.4			1.2			—		1.2			22.8			20.4			1.2			—		1.2			22.8
Income Tax (Expense) Credit	7.1			0.4			—		0.4			7.9			7.1			0.4			—		0.4			7.9
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	13.3			0.8			—		0.8			14.9			13.3			0.8			—		0.8			14.9
Net Current Period Other Comprehensive Income (Loss)	(26.1		)	3.5			2.7		0.8			(19.1		)	(26.1		)	3.5			2.7		0.8			(19.1		)
Balance in AOCI as of September 30, 2017	$	(49.2	)	$	(12.2	)	$	11.1	$	(125.1	)	$	(175.4	)	$	(49.2	)	$	(12.2	)	$	11.1	$	(125.1	)	$	(175.4	)

AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2018



		Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)
Balance in AOCI as of June 30, 2018		$	(4.9	)	$	(9.8	)	$	(14.7	)
Change in Fair Value Recognized in AOCI		—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense (a)		0.4			—			0.4
Amortization of Prior Service Cost (Credit)		—			—			—
Amortization of Actuarial (Gains)/Losses		—			—			—
Reclassifications from AOCI, before Income Tax (Expense) Credit		0.4			—			0.4
Income Tax (Expense) Credit		0.1			—			0.1
Reclassifications from AOCI, Net of Income Tax (Expense) Credit		0.3			—			0.3
Net Current Period Other Comprehensive Income (Loss)		0.3			—			0.3
Balance in AOCI as of September 30, 2018		$	(4.6	)	$	(9.8	)	$	(14.4	)

AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2017



		Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)
Balance in AOCI as of June 30, 2017		$	(4.9	)	$	(9.4	)	$	(14.3	)
Change in Fair Value Recognized in AOCI		—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense (a)		0.3			—			0.3
Amortization of Prior Service Cost (Credit)		—			(0.1		)	(0.1		)
Amortization of Actuarial (Gains)/Losses		—			0.2			0.2
Reclassifications from AOCI, before Income Tax (Expense) Credit		0.3			0.1			0.4
Income Tax (Expense) Credit		0.1			—			0.1
Reclassifications from AOCI, Net of Income Tax (Expense) Credit		0.2			0.1			0.3
Net Current Period Other Comprehensive Income (Loss)		0.2			0.1			0.3
Balance in AOCI as of September 30, 2017		$	(4.7	)	$	(9.3	)	$	(14.0	)

AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges															Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	Commodity			Interest Rate			Securities Available for Sale		Pension and OPEB			Total			(in millions)
	(in millions)
Balance in AOCI as of December 31, 2015	$	(5.2	)	$	(17.2	)	$	7.1	$	(111.8	)	$	(127.1	)
Balance in AOCI as of December 31, 2017																$	(4.5	)	$	(8.1	)	$	(12.6	)
Change in Fair Value Recognized in AOCI	(17.7		)	—			1.7		—			(16.0		)		—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Generation & Marketing Revenues	(20.7		)	—			—		—			(20.7		)
Purchased Electricity for Resale	14.2			—			—		—			14.2
Interest Expense	—			1.7			—		—			1.7
Interest Expense (a)																1.0			—			1.0
Amortization of Prior Service Cost (Credit)	—			—			—		(14.6		)	(14.6		)		—			(0.1		)	(0.1		)
Amortization of Actuarial (Gains)/Losses	—			—			—		15.2			15.2				—			0.2			0.2
Reclassifications from AOCI, before Income Tax (Expense) Credit	(6.5		)	1.7			—		0.6			(4.2		)		1.0			0.1			1.1
Income Tax (Expense) Credit	(2.3		)	0.6			—		0.2			(1.5		)		0.2			—			0.2
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(4.2		)	1.1			—		0.4			(2.7		)		0.8			0.1			0.9
Net Current Period Other Comprehensive Income (Loss)	(21.9		)	1.1			1.7		0.4			(18.7		)		0.8			0.1			0.9
Balance in AOCI as of September 30, 2016	$	(27.1	)	$	(16.1	)	$	8.8	$	(111.4	)	$	(145.8	)
ASU 2018-02 Adoption (b)																(0.9		)	(1.8		)	(2.7		)
Balance in AOCI as of September 30, 2018																$	(4.6	)	$	(9.8	)	$	(14.4	)

AEP Texas

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, 2017



		Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)
Balance in AOCI as of December 31, 2016		$	(5.4	)	$	(9.5	)	$	(14.9	)
Change in Fair Value Recognized in AOCI		—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense (a)		1.0			—			1.0
Amortization of Prior Service Cost (Credit)		—			(0.1		)	(0.1		)
Amortization of Actuarial (Gains)/Losses		—			0.4			0.4
Reclassifications from AOCI, before Income Tax (Expense) Credit		1.0			0.3			1.3
Income Tax (Expense) Credit		0.3			0.1			0.4
Reclassifications from AOCI, Net of Income Tax (Expense) Credit		0.7			0.2			0.9
Net Current Period Other Comprehensive Income (Loss)		0.7			0.2			0.9
Balance in AOCI as of September 30, 2017		$	(4.7	)	$	(9.3	)	$	(14.0	)

APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2018



	Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)
Balance in AOCI as of June 30, 2018	$	2.3		$	(2.7	)	$	(0.4	)
Change in Fair Value Recognized in AOCI	—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense (a)	(0.4		)	—			(0.4		)
Amortization of Prior Service Cost (Credit)	—			(1.3		)	(1.3		)
Amortization of Actuarial (Gains)/Losses	—			0.4			0.4
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.4		)	(0.9		)	(1.3		)
Income Tax (Expense) Credit	(0.1		)	(0.2		)	(0.3		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.3		)	(0.7		)	(1.0		)
Net Current Period Other Comprehensive Income (Loss)	(0.3		)	(0.7		)	(1.0		)
Balance in AOCI as of September 30, 2018	$	2.0		$	(3.4	)	$	(1.4	)

APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2017

Cash Flow Hedges
Interest Rate
Pension
and OPEB
Total
(in millions)
Balance in AOCI as of June 30, 2017 $ 2.5
$ (11.9 ) $ (9.4 )
Change in Fair Value Recognized in AOCI —
—
—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense (0.2 ) —
(0.2 )
Amortization of Prior Service Cost (Credit) —
(1.4 ) (1.4 )
Amortization of Actuarial (Gains)/Losses —
0.9
0.9
Reclassifications from AOCI, before Income Tax (Expense) Credit (0.2 ) (0.5 ) (0.7 )
Income Tax (Expense) Credit (0.1 ) (0.2 ) (0.3 )
Reclassifications from AOCI, Net of Income Tax (Expense) Credit (0.1 ) (0.3 ) (0.4 )
Net Current Period Other Comprehensive Loss (0.1 ) (0.3 ) (0.4 )
Balance in AOCI as of September 30, 2017 $ 2.4
$ (12.2 ) $ (9.8 )

~~APCo~~

~~Changes in Accumulated Other Comprehensive Income (Loss) by Component~~

~~For the Three Months Ended September 30, 2016~~


	Cash Flow Hedges									Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	Interest Rate			Pension and OPEB			Total			(in millions)
	(in millions)
Balance in AOCI as of June 30, 2016	$	3.2		$	(7.1	)	$	(3.9	)
Balance in AOCI as of June 30, 2017										$	2.5		$	(11.9	)	$	(9.4	)
Change in Fair Value Recognized in AOCI	—			—			—			—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.2		)	—			(0.2		)
Interest Expense (a)										(0.2		)	—			(0.2		)
Amortization of Prior Service Cost (Credit)	—			(1.2		)	(1.2		)	—			(1.4		)	(1.4		)
Amortization of Actuarial (Gains)/Losses	—			0.7			0.7			—			0.9			0.9
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.2		)	(0.5		)	(0.7		)	(0.2		)	(0.5		)	(0.7		)
Income Tax (Expense) Credit	—			(0.2		)	(0.2		)	(0.1		)	(0.2		)	(0.3		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.2		)	(0.3		)	(0.5		)	(0.1		)	(0.3		)	(0.4		)
Net Current Period Other Comprehensive Loss	(0.2		)	(0.3		)	(0.5		)
Balance in AOCI as of September 30, 2016	$	3.0		$	(7.4	)	$	(4.4	)
Net Current Period Other Comprehensive Income (Loss)										(0.1		)	(0.3		)	(0.4		)
Balance in AOCI as of September 30, 2017										$	2.4		$	(12.2	)	$	(9.8	)

APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, ~~2017~~2018


	Cash Flow Hedges									Cash Flow Hedges
	Interest Rate			Pension and OPEB			Total			Commodity			Interest Rate			Pension and OPEB			Total
	(in millions)									(in millions)
Balance in AOCI as of December 31, 2016	$	2.9		$	(11.3	)	$	(8.4	)
Balance in AOCI as of December 31, 2017										$	—		$	2.2		$	(0.9	)	$	1.3
Change in Fair Value Recognized in AOCI	—			—			—			(0.7		)	—			—			(0.7		)
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.8		)	—			(0.8		)
Purchased Electricity for Resale (a)										0.9			—			—			0.9
Interest Expense (a)										—			(0.9		)	—			(0.9		)
Amortization of Prior Service Cost (Credit)	—			(4.0		)	(4.0		)	—			—			(3.9		)	(3.9		)
Amortization of Actuarial (Gains)/Losses	—			2.6			2.6			—			—			1.0			1.0
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.8		)	(1.4		)	(2.2		)	0.9			(0.9		)	(2.9		)	(2.9		)
Income Tax (Expense) Credit	(0.3		)	(0.5		)	(0.8		)	0.2			(0.2		)	(0.6		)	(0.6		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.5		)	(0.9		)	(1.4		)	0.7			(0.7		)	(2.3		)	(2.3		)
Net Current Period Other Comprehensive Loss	(0.5		)	(0.9		)	(1.4		)
Balance in AOCI as of September 30, 2017	$	2.4		$	(12.2	)	$	(9.8	)
Net Current Period Other Comprehensive Income (Loss)										—			(0.7		)	(2.3		)	(3.0		)
ASU 2018-02 Adoption (b)										—			0.5			(0.2		)	0.3
Balance in AOCI as of September 30, 2018										$	—		$	2.0		$	(3.4	)	$	(1.4	)

APCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, ~~2016~~2017


	Cash Flow Hedges									Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	Interest Rate			Pension and OPEB			Total			(in millions)
	(in millions)
Balance in AOCI as of December 31, 2015	$	3.6		$	(6.4	)	$	(2.8	)
Balance in AOCI as of December 31, 2016										$	2.9		$	(11.3	)	$	(8.4	)
Change in Fair Value Recognized in AOCI	—			—			—			—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.8		)	—			(0.8		)
Interest Expense (a)										(0.8		)	—			(0.8		)
Amortization of Prior Service Cost (Credit)	—			(3.8		)	(3.8		)	—			(4.0		)	(4.0		)
Amortization of Actuarial (Gains)/Losses	—			2.2			2.2			—			2.6			2.6
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.8		)	(1.6		)	(2.4		)	(0.8		)	(1.4		)	(2.2		)
Income Tax (Expense) Credit	(0.2		)	(0.6		)	(0.8		)	(0.3		)	(0.5		)	(0.8		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.6		)	(1.0		)	(1.6		)	(0.5		)	(0.9		)	(1.4		)
Net Current Period Other Comprehensive Loss	(0.6		)	(1.0		)	(1.6		)
Balance in AOCI as of September 30, 2016	$	3.0		$	(7.4	)	$	(4.4	)
Net Current Period Other Comprehensive Income (Loss)										(0.5		)	(0.9		)	(1.4		)
Balance in AOCI as of September 30, 2017										$	2.4		$	(12.2	)	$	(9.8	)

I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2018



	Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)
Balance in AOCI as of June 30, 2018	$	(12.2	)	$	(1.7	)	$	(13.9	)
Change in Fair Value Recognized in AOCI	—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense (a)	0.4			—			0.4
Amortization of Prior Service Cost (Credit)	—			(0.2		)	(0.2		)
Amortization of Actuarial (Gains)/Losses	—			0.2			0.2
Reclassifications from AOCI, before Income Tax (Expense) Credit	0.4			—			0.4
Income Tax (Expense) Credit	0.1			—			0.1
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	0.3			—			0.3
Net Current Period Other Comprehensive Income (Loss)	0.3			—			0.3
Balance in AOCI as of September 30, 2018	$	(11.9	)	$	(1.7	)	$	(13.6	)

I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Pension and OPEB			Total			Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)									(in millions)
Balance in AOCI as of June 30, 2017	$	(11.3	)	$	(4.2	)	$	(15.5	)	$	(11.3	)	$	(4.2	)	$	(15.5	)
Change in Fair Value Recognized in AOCI	—			—			—			—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	0.5			—			0.5
Interest Expense (a)										0.5			—			0.5
Amortization of Prior Service Cost (Credit)	—			(0.3		)	(0.3		)	—			(0.3		)	(0.3		)
Amortization of Actuarial (Gains)/Losses	—			0.3			0.3			—			0.3			0.3
Reclassifications from AOCI, before Income Tax (Expense) Credit	0.5			—			0.5			0.5			—			0.5
Income Tax (Expense) Credit	0.2			—			0.2			0.2			—			0.2
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	0.3			—			0.3			0.3			—			0.3
Net Current Period Other Comprehensive Income	0.3			—			0.3
Net Current Period Other Comprehensive Income (Loss)										0.3			—			0.3
Balance in AOCI as of September 30, 2017	$	(11.0	)	$	(4.2	)	$	(15.2	)	$	(11.0	)	$	(4.2	)	$	(15.2	)

I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Three~~Nine Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges									Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	Interest Rate			Pension and OPEB			Total			(in millions)
	(in millions)
Balance in AOCI as of June 30, 2016	$	(12.6	)	$	(3.4	)	$	(16.0	)
Balance in AOCI as of December 31, 2017										$	(10.7	)	$	(1.4	)	$	(12.1	)
Change in Fair Value Recognized in AOCI	—			—			—			—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	0.5			—			0.5
Interest Expense (a)										1.5			—			1.5
Amortization of Prior Service Cost (Credit)	—			(0.2		)	(0.2		)	—			(0.6		)	(0.6		)
Amortization of Actuarial (Gains)/Losses	—			0.2			0.2			—			0.6			0.6
Reclassifications from AOCI, before Income Tax (Expense) Credit	0.5			—			0.5			1.5			—			1.5
Income Tax (Expense) Credit	0.2			—			0.2			0.3			—			0.3
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	0.3			—			0.3			1.2			—			1.2
Net Current Period Other Comprehensive Income	0.3			—			0.3
Balance in AOCI as of September 30, 2016	$	(12.3	)	$	(3.4	)	$	(15.7	)
Net Current Period Other Comprehensive Income (Loss)										1.2			—			1.2
ASU 2018-02 Adoption (b)										(2.4		)	(0.3		)	(2.7		)
Balance in AOCI as of September 30, 2018										$	(11.9	)	$	(1.7	)	$	(13.6	)

I&M

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Pension and OPEB			Total			Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)									(in millions)
Balance in AOCI as of December 31, 2016	$	(12.0	)	$	(4.2	)	$	(16.2	)	$	(12.0	)	$	(4.2	)	$	(16.2	)
Change in Fair Value Recognized in AOCI	—			—			—			—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	1.5			—			1.5
Interest Expense (a)										1.5			—			1.5
Amortization of Prior Service Cost (Credit)	—			(0.7		)	(0.7		)	—			(0.7		)	(0.7		)
Amortization of Actuarial (Gains)/Losses	—			0.7			0.7			—			0.7			0.7
Reclassifications from AOCI, before Income Tax (Expense) Credit	1.5			—			1.5			1.5			—			1.5
Income Tax (Expense) Credit	0.5			—			0.5			0.5			—			0.5
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	1.0			—			1.0			1.0			—			1.0
Net Current Period Other Comprehensive Income	1.0			—			1.0
Net Current Period Other Comprehensive Income (Loss)										1.0			—			1.0
Balance in AOCI as of September 30, 2017	$	(11.0	)	$	(4.2	)	$	(15.2	)	$	(11.0	)	$	(4.2	)	$	(15.2	)

~~I&M~~

OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Nine~~Three Months Ended September 30, ~~2016~~2018

Cash Flow Hedges
Interest Rate
Pension
and OPEB
Total
(in millions)
Balance in AOCI as of December 31, 2015 $ (13.3 ) $ (3.4 ) $ (16.7 )
Change in Fair Value Recognized in AOCI —
—
—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense 1.5
—
1.5
Amortization of Prior Service Cost (Credit) —
(0.6 ) (0.6 )
Amortization of Actuarial (Gains)/Losses —
0.6
0.6
Reclassifications from AOCI, before Income Tax (Expense) Credit 1.5
—
1.5
Income Tax (Expense) Credit 0.5
—
0.5
Reclassifications from AOCI, Net of Income Tax (Expense) Credit 1.0
—
1.0
Net Current Period Other Comprehensive Income 1.0
—
1.0
Balance in AOCI as of September 30, 2016 $ (12.3 ) $ (3.4 ) $ (15.7 )



	Cash Flow Hedge – Interest Rate
	(in millions)
Balance in AOCI as of June 30, 2018	$	1.7
Change in Fair Value Recognized in AOCI	—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense (a)	(0.5		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.5		)
Income Tax (Expense) Credit	(0.1		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.4		)
Net Current Period Other Comprehensive Income (Loss)	(0.4		)
Balance in AOCI as of September 30, 2018	$	1.3

OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Cash Flow Hedge – Interest Rate
	(in millions)			(in millions)
Balance in AOCI as of June 30, 2017	$	2.5		$	2.5
Change in Fair Value Recognized in AOCI	—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.5		)
Interest Expense (a)				(0.5		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.5		)	(0.5		)
Income Tax (Expense) Credit	(0.2		)	(0.2		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.3		)	(0.3		)
Net Current Period Other Comprehensive Loss	(0.3		)
Net Current Period Other Comprehensive Income (Loss)				(0.3		)
Balance in AOCI as of September 30, 2017	$	2.2		$	2.2

OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Three~~Nine Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges			Cash Flow Hedge – Interest Rate
	Interest Rate			(in millions)
	(in millions)
Balance in AOCI as of June 30, 2016	$	3.5
Balance in AOCI as of December 31, 2017				$	1.9
Change in Fair Value Recognized in AOCI	—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.3		)
Interest Expense (a)				(1.3		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.3		)	(1.3		)
Income Tax (Expense) Credit	(0.1		)	(0.3		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.2		)	(1.0		)
Net Current Period Other Comprehensive Loss	(0.2		)
Balance in AOCI as of September 30, 2016	$	3.3
Net Current Period Other Comprehensive Income (Loss)				(1.0		)
ASU 2018-02 Adoption (b)				0.4
Balance in AOCI as of September 30, 2018				$	1.3

OPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Cash Flow Hedge – Interest Rate
	(in millions)			(in millions)
Balance in AOCI as of December 31, 2016	$	3.0		$	3.0
Change in Fair Value Recognized in AOCI	—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(1.3		)
Interest Expense (a)				(1.3		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(1.3		)	(1.3		)
Income Tax (Expense) Credit	(0.5		)	(0.5		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.8		)	(0.8		)
Net Current Period Other Comprehensive Loss	(0.8		)
Net Current Period Other Comprehensive Income (Loss)				(0.8		)
Balance in AOCI as of September 30, 2017	$	2.2		$	2.2

~~OPCo~~

PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Nine~~Three Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges			Cash Flow Hedge – Interest Rate
	Interest Rate			(in millions)
	(in millions)
Balance in AOCI as of December 31, 2015	$	4.3
Balance in AOCI as of June 30, 2018				$	2.6
Change in Fair Value Recognized in AOCI	—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(1.4		)
Interest Expense (a)				(0.2		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(1.4		)	(0.2		)
Income Tax (Expense) Credit	(0.4		)	—
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(1.0		)	(0.2		)
Net Current Period Other Comprehensive Loss	(1.0		)
Balance in AOCI as of September 30, 2016	$	3.3
Net Current Period Other Comprehensive Income (Loss)				(0.2		)
Balance in AOCI as of September 30, 2018				$	2.4

PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Cash Flow Hedge – Interest Rate
	(in millions)			(in millions)
Balance in AOCI as of June 30, 2017	$	3.0		$	3.0
Change in Fair Value Recognized in AOCI	—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.4		)
Interest Expense (a)				(0.4		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.4		)	(0.4		)
Income Tax (Expense) Credit	(0.2		)	(0.2		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.2		)	(0.2		)
Net Current Period Other Comprehensive Loss	(0.2		)
Net Current Period Other Comprehensive Income (Loss)				(0.2		)
Balance in AOCI as of September 30, 2017	$	2.8		$	2.8

PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Three~~Nine Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges			Cash Flow Hedge – Interest Rate
	Interest Rate			(in millions)
	(in millions)
Balance in AOCI as of June 30, 2016	$	3.8
Balance in AOCI as of December 31, 2017				$	2.6
Change in Fair Value Recognized in AOCI	—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.3		)
Interest Expense (a)				(0.9		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.3		)	(0.9		)
Income Tax (Expense) Credit	(0.1		)	(0.2		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.2		)	(0.7		)
Net Current Period Other Comprehensive Loss	(0.2		)
Balance in AOCI as of September 30, 2016	$	3.6
Net Current Period Other Comprehensive Income (Loss)				(0.7		)
ASU 2018-02 Adoption (b)				0.5
Balance in AOCI as of September 30, 2018				$	2.4

PSO

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Cash Flow Hedge – Interest Rate
	(in millions)			(in millions)
Balance in AOCI as of December 31, 2016	$	3.4		$	3.4
Change in Fair Value Recognized in AOCI	—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(1.0		)
Interest Expense (a)				(1.0		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(1.0		)	(1.0		)
Income Tax (Expense) Credit	(0.4		)	(0.4		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.6		)	(0.6		)
Net Current Period Other Comprehensive Loss	(0.6		)
Net Current Period Other Comprehensive Income (Loss)				(0.6		)
Balance in AOCI as of September 30, 2017	$	2.8		$	2.8

~~PSO~~

SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Nine~~Three Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges			Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	Interest Rate			(in millions)
	(in millions)
Balance in AOCI as of December 31, 2015	$	4.2
Balance in AOCI as of June 30, 2018				$	(6.4	)	$	1.7		$	(4.7	)
Change in Fair Value Recognized in AOCI	—			2.3			—			2.3
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	(0.9		)
Interest Expense (a)				0.5			—			0.5
Amortization of Prior Service Cost (Credit)				—			(0.5		)	(0.5		)
Amortization of Actuarial (Gains)/Losses				—			0.1			0.1
Reclassifications from AOCI, before Income Tax (Expense) Credit	(0.9		)	0.5			(0.4		)	0.1
Income Tax (Expense) Credit	(0.3		)	0.1			(0.1		)	—
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(0.6		)	0.4			(0.3		)	0.1
Net Current Period Other Comprehensive Loss	(0.6		)
Balance in AOCI as of September 30, 2016	$	3.6
Net Current Period Other Comprehensive Income (Loss)				2.7			(0.3		)	2.4
Balance in AOCI as of September 30, 2018				$	(3.7	)	$	1.4		$	(2.3	)

SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Three Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Pension and OPEB			Total			Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)									(in millions)
Balance in AOCI as of June 30, 2017	$	(6.7	)	$	(2.3	)	$	(9.0	)	$	(6.7	)	$	(2.3	)	$	(9.0	)
Change in Fair Value Recognized in AOCI	—			—			—			—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	0.6			—			0.6
Interest Expense (a)										0.6			—			0.6
Amortization of Prior Service Cost (Credit)	—			(0.5		)	(0.5		)	—			(0.5		)	(0.5		)
Amortization of Actuarial (Gains)/Losses	—			0.2			0.2			—			0.2			0.2
Reclassifications from AOCI, before Income Tax (Expense) Credit	0.6			(0.3		)	0.3			0.6			(0.3		)	0.3
Income Tax (Expense) Credit	0.2			(0.1		)	0.1			0.2			(0.1		)	0.1
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	0.4			(0.2		)	0.2			0.4			(0.2		)	0.2
Net Current Period Other Comprehensive Income (Loss)	0.4			(0.2		)	0.2			0.4			(0.2		)	0.2
Balance in AOCI as of September 30, 2017	$	(6.3	)	$	(2.5	)	$	(8.8	)	$	(6.3	)	$	(2.5	)	$	(8.8	)

SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the ~~Three~~Nine Months Ended September 30, ~~2016~~2018


	Cash Flow Hedges									Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	Interest Rate			Pension and OPEB			Total			(in millions)
	(in millions)
Balance in AOCI as of June 30, 2016	$	(8.2	)	$	(0.7	)	$	(8.9	)
Balance in AOCI as of December 31, 2017										$	(6.0	)	$	2.0		$	(4.0	)
Change in Fair Value Recognized in AOCI	—			—			—			2.3			—			2.3
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	0.7			—			0.7
Interest Expense (a)										1.6			—			1.6
Amortization of Prior Service Cost (Credit)	—			(0.4		)	(0.4		)	—			(1.5		)	(1.5		)
Amortization of Actuarial (Gains)/Losses	—			0.2			0.2			—			0.2			0.2
Reclassifications from AOCI, before Income Tax (Expense) Credit	0.7			(0.2		)	0.5			1.6			(1.3		)	0.3
Income Tax (Expense) Credit	0.3			(0.1		)	0.2			0.3			(0.3		)	—
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	0.4			(0.1		)	0.3			1.3			(1.0		)	0.3
Net Current Period Other Comprehensive Income (Loss)	0.4			(0.1		)	0.3			3.6			(1.0		)	2.6
Balance in AOCI as of September 30, 2016	$	(7.8	)	$	(0.8	)	$	(8.6	)
ASU 2018-02 Adoption (b)										(1.3		)	0.4			(0.9		)
Balance in AOCI as of September 30, 2018										$	(3.7	)	$	1.4		$	(2.3	)

SWEPCo

Changes in Accumulated Other Comprehensive Income (Loss) by Component

For the Nine Months Ended September 30, 2017


	Cash Flow Hedges
	Interest Rate			Pension and OPEB			Total			Cash Flow Hedge – Interest Rate			Pension and OPEB			Total
	(in millions)									(in millions)
Balance in AOCI as of December 31, 2016	$	(7.4	)	$	(2.0	)	$	(9.4	)	$	(7.4	)	$	(2.0	)	$	(9.4	)
Change in Fair Value Recognized in AOCI	—			—			—			—			—			—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense	1.7			—			1.7
Interest Expense (a)										1.7			—			1.7
Amortization of Prior Service Cost (Credit)	—			(1.5		)	(1.5		)	—			(1.5		)	(1.5		)
Amortization of Actuarial (Gains)/Losses	—			0.7			0.7			—			0.7			0.7
Reclassifications from AOCI, before Income Tax (Expense) Credit	1.7			(0.8		)	0.9			1.7			(0.8		)	0.9
Income Tax (Expense) Credit	0.6			(0.3		)	0.3			0.6			(0.3		)	0.3
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	1.1			(0.5		)	0.6			1.1			(0.5		)	0.6
Net Current Period Other Comprehensive Income (Loss)	1.1			(0.5		)	0.6			1.1			(0.5		)	0.6
Balance in AOCI as of September 30, 2017	$	(6.3	)	$	(2.5	)	$	(8.8	)	$	(6.3	)	$	(2.5	)	$	(8.8	)

~~SWEPCo~~(a) Amounts reclassified to the referenced line item on the statements of income.

~~Changes in Accumulated Other Comprehensive Income (Loss) by Component~~

~~For the Nine Months Ended September 30, 2016~~

Cash Flow Hedges
Interest Rate
Pension
and OPEB
Total
(in millions)
Balance in AOCI as of December 31, 2015 $ (9.1 ) $ (0.3 ) $ (9.4 )
Change in Fair Value Recognized in AOCI —
—
—
Amount of (Gain) Loss Reclassified from AOCI
Interest Expense 2.0
—
2.0
Amortization of Prior Service Cost (Credit) —
(1.4 ) (1.4 )
Amortization of Actuarial (Gains)/Losses —
0.6
0.6
Reclassifications from AOCI, before Income Tax (Expense) Credit 2.0
(0.8 ) 1.2
Income Tax (Expense) Credit 0.7
(0.3 ) 0.4
Reclassifications from AOCI, Net of Income Tax (Expense) Credit 1.3
(0.5 ) 0.8
Net Current Period Other Comprehensive Income (Loss) 1.3
(0.5 ) 0.8
Balance in AOCI as of September 30, 2016 $ (7.8 ) $ (0.8 ) $ (8.6 )
(b) See Note 2 - New Accounting Pronouncements for additional information.

4. RATE MATTERS

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

As discussed in ~~AEP’s and AEPTCo’s~~the ~~2016~~2017 Annual ~~Reports,~~Report, the Registrants are involved in rate and regulatory proceedings at the FERC and their state commissions. The Rate Matters note within ~~AEP’s and AEPTCo’s~~the ~~2016~~2017 Annual ~~Reports~~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 ~~2017~~2018 and updates ~~AEP’s~~the 2017 Annual Report.

Regulated Generating Unit to be Retired by 2020 (Applies to AEP and ~~AEPTCo’s 2016 Annual Reports.~~PSO)

In September 2018, management announced that the Oklaunion Power Station is probable of abandonment and is to be retired by October 2020. The table below summarizes the plant investment and cost of removal, currently being recovered, for the generating unit as of September 30, 2018. See “2018 Oklahoma Base Rate Case” below for additional information.



Gross Investment		Accumulated Depreciation		Net Investment		Materials and Supplies		Cost of Removal Regulatory Liability		Expected Retirement Date	Remaining Recovery Period
(dollars in millions)
$	106.5	$	56.8	$	49.7	$	3.1	$	5.0	2020	28 years

Regulatory Assets Pending Final Regulatory Approval (Applies to all Registrants except AEPTCo and OPCo)


	AEP					AEP
	September 30,		December 31,			September 30,		December 31,
	2017		2016			2018		2017
Noncurrent Regulatory Assets	(in millions)					(in millions)

Regulatory Assets Currently Earning a Return
Plant Retirement Costs - Unrecovered Plant ~~(a)~~	$	209.1	$	159.9		$	50.3	$	50.3
Storm-Related Costs	97.4		25.1
Plant Retirement Costs - Materials and Supplies	9.1		9.1
Ohio Capacity Deferral	—		96.7
Other Regulatory Assets Pending Final Regulatory Approval	1.1		1.3			20.1		9.6
Regulatory Assets Currently Not Earning a Return
Storm-Related Costs	42.6		25.9
Storm-Related Costs (a)						151.7		128.0
Plant Retirement Costs - Asset Retirement Obligation Costs	37.2		29.6			39.7		39.7
Cook Plant Uprate Project	36.3		36.3			—		36.3
Environmental Control Projects	24.3		24.1
Cook Plant Turbine	15.1		12.8			—		15.9
Deferred Cook Plant Life Cycle Management Project Costs - Michigan	13.0		8.1
Other Regulatory Assets Pending Final Regulatory Approval	25.6		21.2			18.8		42.2
Total Regulatory Assets Pending Final Regulatory Approval (b)	$	510.8	$	450.1	Total Regulatory Assets Pending Final Regulatory Approval (b)	$	280.6	$	322.0

(a)

~~In March 2017, $41 million was reclassified from accumulated depreciation to regulatory assets related to Northeastern Plant, Unit 3.~~ As of September 30, ~~2017, the unrecovered plant balance~~2018, AEP Texas has deferred $127 million related to ~~Northeastern Plant, Unit 3 was $52 million.~~ Hurricane Harvey and is in the process of requesting securitization of the distribution portion of the regulatory asset.

(b)

In 2015, APCo recorded a $91 million reduction to accumulated depreciation related to the remaining net book value of plants retired in 2015, primarily in its Virginia jurisdiction. These plants were normal retirements at the end of their depreciable lives under the group composite method of depreciation. ~~Recovery~~APCo’s recovery of the remaining Virginia net book value for the retired plants will be considered in the Virginia SCC’s 2020 triennial review of APCo’s ~~next depreciation study. The~~generation and distribution base rates. In 2017, the Virginia SCC staff ~~has~~ requested that ~~the company~~APCo prepare a depreciation study as of December 31, 2017 and submit that study to the Virginia SCC staff in 2018. In June 2018, APCo submitted the new depreciation study, based on December 31, 2017 property balances, to the Virginia SCC staff.

APCo
September 30, December 31,
2017 2016
Noncurrent Regulatory Assets (in millions)

Regulatory Assets Currently Earning a Return
Plant Retirement Costs - Materials and Supplies $ 9.1
$ 9.1
Regulatory Assets Currently Not Earning a Return
Plant Retirement Costs - Asset Retirement Obligation Costs 37.2
29.6
Other Regulatory Assets Pending Final Regulatory Approval 0.6
0.6
Total Regulatory Assets Pending Final Regulatory Approval (a) $ 46.9
$ 39.3



	AEP Texas
	September 30,		December 31,
	2018		2017
Noncurrent Regulatory Assets	(in millions)

Regulatory Assets Currently Not Earning a Return
Storm-Related Costs (a)	$	150.2	$	123.3
Rate Case Expense	0.2		0.1
Total Regulatory Assets Pending Final Regulatory Approval	$	150.4	$	123.4


(a)	As of September 30, 2018, AEP Texas has deferred $127 millionrelated to Hurricane Harvey and is in the process of requesting securitization of the distribution portion of the regulatory asset.



	APCo
	September 30,		December 31,
	2018		2017
Noncurrent Regulatory Assets	(in millions)

Regulatory Assets Currently Earning a Return
Plant Retirement Costs - Materials and Supplies	$	9.0	$	9.1
Regulatory Assets Currently Not Earning a Return
Plant Retirement Costs - Asset Retirement Obligation Costs	39.7		39.7
Other Regulatory Assets Pending Final Regulatory Approval	0.6		0.6
Total Regulatory Assets Pending Final Regulatory Approval (a)	$	49.3	$	49.4

(a)


	I&M				I&M
	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
Noncurrent Regulatory Assets	(in millions)				(in millions)

Regulatory Assets Currently Not Earning a Return
Cook Plant Uprate Project	$	36.3	$	36.3	$	—	$	36.3
Deferred Cook Plant Life Cycle Management Project Costs - Michigan					—		14.7
Cook Plant Turbine	15.1		12.8		—		15.9
Deferred Cook Plant Life Cycle Management Project Costs - Michigan	13.0		8.1
Rockport Dry Sorbent Injection System - Indiana	9.4		6.6		—		10.4
Other Regulatory Assets Pending Final Regulatory Approval	1.5		0.9		3.4		2.0
Total Regulatory Assets Pending Final Regulatory Approval	$	75.3	$	64.7	$	3.4	$	79.3


	OPCo				PSO
	September 30,		December 31,		September 30,		December 31,
	2017		2016
��					2018		2017
Noncurrent Regulatory Assets	(in millions)				(in millions)

Regulatory Assets Currently Earning a Return
Capacity Deferral	$	—	$	96.7
Regulatory Assets Currently Not Earning a Return
Smart Grid Costs	—		4.1
Storm-Related Costs					$	—	$	3.2
Other Regulatory Assets Pending Final Regulatory Approval					0.5		0.1
Total Regulatory Assets Pending Final Regulatory Approval	$	—	$	100.8	$	0.5	$	3.3

PSO
September 30, December 31,
2017 2016
Noncurrent Regulatory Assets (in millions)

Regulatory Assets Currently Earning a Return
Plant Retirement Costs - Unrecovered Plant (a) $ 133.7
$ 84.5
Other Regulatory Assets Pending Final Regulatory Approval 0.5
0.5
Regulatory Assets Currently Not Earning a Return

Storm-Related Costs 36.7
20.0
Environmental Control Projects 24.3
13.1
Other Regulatory Assets Pending Final Regulatory Approval 0.4
—
Total Regulatory Assets Pending Final Regulatory Approval $ 195.6
$ 118.1


~~(a)~~	In March 2017, $41 million was reclassified from accumulated depreciation to regulatory assets related to Northeastern Plant, Unit 3. As of September 30, 2017, the unrecovered plant balance related to Northeastern Plant, Unit 3 was $52 million.


	SWEPCo				SWEPCo
	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
Noncurrent Regulatory Assets	(in millions)				(in millions)

Regulatory Assets Currently Earning a Return
Plant Retirement Costs - Unrecovered Plant	$	75.4	$	75.4	$	50.3	$	50.3
Other Regulatory Assets Pending Final Regulatory Approval	0.5		0.8		0.5		0.5
Regulatory Assets Currently Not Earning a Return
Asset Retirement Obligation - Arkansas, Louisiana					5.0		4.0
Rate Case Expense - Texas	4.1		1.0		4.6		4.3
Asset Retirement Obligation - Arkansas, Louisiana	3.6		2.7
Shipe Road Transmission Project - FERC	3.3		3.1		—		3.3
Environmental Control Projects	—		11.0
Other Regulatory Assets Pending Final Regulatory Approval	2.4		1.9		3.3		2.5
Total Regulatory Assets Pending Final Regulatory Approval	$	89.3	$	95.9	$	63.7	$	64.9

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

Impact of Tax Reform

Rate and regulatory matters are impacted by federal income tax implications. In December 2017, Tax Reform was enacted, which impacts outstanding rate and regulatory matters. For additional details on the impact of Tax Reform, see Note 11 - Income Taxes.

AEP Texas Rate Matters (Applies to ~~AEP)~~AEP and AEP Texas)

AEP Texas Interim Transmission and Distribution Rates

As of September 30, ~~2017,~~2018, AEP Texas’ cumulative revenues from interim base rate increases from 2008 through ~~2017,~~2018, subject to review, are estimated to be ~~$697~~$959 million. A base rate review could produce a refund to customers if AEP Texas incurs a disallowance of the transmission or distribution investment on which an interim increase was based. Management is unable to determine a range of potential losses, if any, that are reasonably possible of occurring. A revenue decrease, including a refund of interim transmission and distribution rates, could reduce future net income and cash flows and impact financial condition.

In April 2018, the PUCT adopted a rule requiring investor-owned utilities operating solely within ERCOT to make periodic filings for rate proceedings. The rule requires AEP Texas to file for a comprehensive rate review no later than May 1, 2019.

In 2018, the PUCT issued approvals to increase AEP Texas’ transmission rates by $22 million annually. The approvals included an increase in annual revenues to recover transmission capital additions of $46 million offset by a reduction in annual revenues of $24 million due to the reduction in the federal income tax rate due to Tax Reform. The approvals did not address the return of Excess ADIT benefits to customers.

In August 2018, the PUCT approved a Stipulation and Settlement agreement to amend AEP Texas’ Distribution Cost Recovery Factor to reduce annual distribution rates by approximately $24 million annually, beginning September 1, 2018. The settlement included an increase in annual revenues to recover 2017 distribution capital additions of $19 million offset by reductions in annual revenues of: (a) $21 million due to the reduction in the federal income tax rate due to Tax Reform, (b) $10 million due to Excess ADIT associated with certain depreciable property to be amortized using ARAM and (c) $12 million due to Excess ADIT that is not subject to rate normalization requirements to be refunded over 5 years.

Hurricane Harvey

In August 2017, Hurricane Harvey hit the coast of Texas, causing power outages in the AEP Texas service territory. AEP Texas has a PUCT approved catastrophe reserve in base rates and can defer incremental storm expenses. AEP Texas currently recovers approximately $1 million of storm costs annually through base rates. As of September 30, ~~2017,~~2018, the total balance of AEP Texas’ regulatory asset for deferred storm costs is approximately ~~$97~~$150 million, ~~including~~inclusive of approximately ~~$73~~

$127 millionof incremental storm expenses ~~as a regulatory asset~~ related to Hurricane Harvey. ~~Management is currently~~As of September 30, 2018, AEP Texas has recorded approximately $205 millionof capital expenditures related to Hurricane Harvey. Also, as of September 30, 2018, AEP Texas has received $10 millionin insurance proceeds, and has recorded a receivable for an additional $4 million that will be received in the ~~early stages~~fourth quarter of ~~analyzing~~2018, which were applied to the ~~impact~~Hurricane Harvey related regulatory asset and property, plant and equipment balances. Management, in conjunction with the insurance adjusters, is reviewing all damages to determine the extent of ~~potential~~coverage for additional insurance ~~claims and recoveries and, at this time, cannot estimate this amount.~~reimbursement. Any future insurance recoveries received will be applied to and will offset the regulatory asset and property, plant and equipment, as applicable. ~~AEP Texas is currently evaluating recovery options for~~

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

APCo and WPCo Rate Matters (Applies to AEP and APCo)

Virginia Legislation Affecting ~~Biennial~~Earnings Reviews

In 2015, amendments to Virginia law governing the regulation of investor-owned electric utilities were enacted. Under the amended Virginia law, APCo’s existing generation and distribution base rates ~~are~~were frozen until after the Virginia SCC ~~rules~~ruled on APCo’s next biennial ~~review, which APCo will file in March 2020 for the 2018 and 2019 test years.~~review. These amendments also ~~preclude~~precluded the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017.

In March 2018, new Virginia legislation impacting investor-owned utilities was enacted, effective July 1, 2018, that: (a) on a one-time basis, required APCo to exclude $10 million of incurred fuel expenses from the July 2018 over/under recovery calculation, (b) reduced APCo’s ~~financial statements adequately address~~base rates by $50 million annually effective July 30, 2018, on an interim basis and subject to true-up, to reflect the ~~impact of these amendments. The amendments provide that~~reduction in the federal income tax rate due to Tax Reform, (c) will require APCo ~~will absorb~~to file its ~~Virginia jurisdictional share of incremental~~next generation and distribution base rate case by March 31, 2020 using 2017, 2018 and 2019 test years (“triennial review”), (d) will require an adjustment in APCo’s base rates on April 1, 2019 to reflect actual annual reductions in corporate income taxes due to Tax Reform, (e) will require APCo to seek approval from the Virginia SCC for energy efficiency programs with projected costs ~~incurred from 2014 through 2017 that are associated with severe weather events~~in the aggregate of at least $140 million over the 10-year period ending July 1, 2028 and (f) will require APCo to construct and/or ~~natural disasters and costs associated with potential asset impairments related to new carbon emission guidelines issued~~acquire solar generation facilities in Virginia, as approved by the ~~Federal EPA.~~Virginia SCC, of at least 200 MW of aggregate capacity by July 1, 2028. Triennial reviews are subject to an earnings test which provides that 70% of any over earnings would be refunded or may be reinvested in approved energy distribution grid transformation projects and/or new utility-owned solar and wind generation facilities. The Virginia SCC’s triennial review of 2017-2019 APCo earnings could reduce future net income and cash flows and impact financial condition.

Virginia Tax Reform

In ~~2016,~~October 2018, the Virginia SCC issued an order approving APCo’s request to refund $55 million of Excess ADIT that ~~denied~~is not subject to rate normalization requirements to customers through a rider. The rider will be paid over twelve months effective November 1, 2018 and will offset APCo’s recent increase in interim fuel rates, subject to refund, that was filed with the ~~petition~~Virginia SCC.

In October 2018, APCo submitted a filing with the Virginia SCC to resolve outstanding issues related to Tax Reform. The filing incorporated amounts already refunded to customers as disclosed in “Virginia Legislation Affecting Earnings Reviews” above and, if approved, will reduce APCo’s base rates by an additional $7 million annually. The combined reduction in APCo’s base rates due to Tax Reform will refund: (a) $39 million annually of excess federal income taxes collected since January 1, 2018 until new base rates are implemented, (b) $7 million annually of Excess ADIT associated with certain depreciable property using ARAM and (c) $11 million annually of Excess ADIT that is not subject to rate normalization requirements over 10 years. APCo ~~industrial customers that requested~~anticipates a final order from the ~~issuance~~Virginia SCC in the first quarter of 2019 and expects to implement additional customer rate credits in a ~~declaratory order that would find~~tax-related rider starting in April 2019. The Virginia SCC’s review of APCo’s October 2018 Tax Reform filing could reduce future net income and cash flows and impact financial condition.

2018 West Virginia Base Rate Case

In May 2018, APCo and WPCo filed a joint request with the ~~amendments~~WVPSC to increase their combined West Virginia ~~law suspending biennial reviews unconstitutional~~base rates by $115 million ($98 million related to APCo) annually based on a 10.22% return on common equity. The proposed annual increase includes $32 million ($28 million related to APCo) due to increased annual depreciation rates and ~~accordingly, direct APCo to make biennial review filings beginning in 2016. In July 2016,~~also reflects the ~~industrial customers filed an appeal~~impact of the ~~order~~reduction in the federal income tax rate due to Tax Reform.In October 2018, APCo and WPCo filed updated schedules supporting a $95 million ($80 million related to APCo) annual increase in West Virginia base rates primarily due to the impact of West Virginia Tax Reform discussed below.

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

West Virginia Tax Reform

In ~~September 2017,~~August 2018, the ~~Supreme Court~~WVPSC approved a settlement agreement between APCo, WPCo and various intervenors that addresses the reduction in the federal income tax rate due to Tax Reform. The agreement will provide refunds to customers, through a rider, of ~~Virginia affirmed~~approximately $63 million ($51 million related to APCo) through June 2020. In addition, APCo and WPCo utilized $139 million ($125 million related to APCo) of current tax savings and Excess ADIT to offset regulatory asset balances related to carbon capture, storm damage, ENEC and vegetation management. The remaining balance of $87 million ($77 million related to APCo) of Excess ADIT that is not subject to rate normalization requirements will be addressed by the ~~Virginia SCC’s 2016 order.~~WVPSC at a later date.

ETT Rate Matters (Applies to AEP)

ETT Interim Transmission Rates

~~Parent~~AEP has a 50% equity ownership interest in ETT. Predominantly all of ETT’s revenues are based on interim rate changes that can be filed twice annually and are subject to review and possible true-up in the next filed base rate proceeding. Through September 30, ~~2017,~~2018, AEP’s share of ETT’s cumulative revenues that are subject to review is estimated to be ~~$709~~$849 million. A base rate review could produce a refund if ETT incurs a disallowance of the transmission investment on which an interim increase was based. ~~Management is unable to determine a range of potential losses, if any, that are reasonably possible of occurring.~~ A revenue decrease, including a refund of interim transmission rates, could reduce future net income and cash flows and impact financial condition. Management is unable to determine a range of potential losses, if any, that are reasonably possible of occurring.

In April 2018, the PUCT adopted a rule requiring investor-owned utilities operating solely inside ERCOT to make periodic filings for rate proceedings. The rule requires ETT to file for a comprehensive rate review no later than February 1, 2021.

In June 2018, the PUCT approved ETT’s application to reduce its transmission rates by $28 million annually, beginning June 21, 2018, to reflect the reduction in the federal income tax rate due to Tax Reform. The filing did not address the return of Excess ADIT benefits to customers.

In September 2018, ETT filed a request with the PUCT to refund $11 million of excess federal income taxes collected in 2018 prior to the reduction in transmission rates that were implemented on June 21, 2018.

I&M Rate Matters (Applies to AEP and I&M)

2017 Indiana Base Rate Case

In February 2018, I&M filed a Stipulation and Settlement Agreement for a $97 million annual increase in Indiana rates effective July 1, 2018 subject to a temporary offsetting reduction to customer bills through December 2018 for a credit rider related to the timing of estimated in-service dates of certain capital expenditures. The difference between I&M’s requested $263 million annual increase and the $97 million annual increase in the Stipulation and Settlement Agreement is primarily a result of: (a) the reduction in the federal income tax rate due to Tax Reform, (b) the feedback of credits for Excess ADIT, (c) a 9.95% return on equity, (d) longer recovery periods of regulatory assets, (e) lower depreciation expense primarily for meters, (f) an increase in the sharing of off-system sales margins with customers from 50% to 95% and (g) a refund of $4 million from July 2018 through December 2018 for the impact of Tax Reform for the period January 2018 through June 2018.

2017 Michigan Base Rate Case

In February 2018, an MPSC ALJ issued a Proposal for Decision and ~~increased vegetation management expenses. In October 2017, the MPSC staff and intervenors filed testimony. The MPSC staff~~ recommended an annual ~~net~~ revenue increase of $49 million, including an intervenor’s proposal for up to 10% of I&M’s Michigan retail customers to choose an alternate supplier for generation and a proposed ~~retirement dates~~capacity rate based on PJM’s net cost of ~~2028~~new entry value of $289/MW-day, as well as the MPSC staff’s recommended calculation of depreciation expense for both units of Rockport Plant ~~Units 1 (from 2044) and 2 (from 2022)~~through 2028 and a return on common equity of 9.8%. ~~The intervenors proposed certain adjustments to I&M’s request including no change~~If the maximum 10% of customers choose an alternate supplier starting in February 2019, the estimated annual pretax loss due to the ~~current 2044 retirement date of Rockport Plant, Unit 1, but did not propose~~reduced capacity rate would be approximately $9 million. In October 2018, I&M filed a request with the MPSC seeking authority to defer costs related to customers choosing an alternate supplier starting in February 2019.

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

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

Michigan Tax Reform

In August 2018, the MPSC approved I&M’s application to refund, through a rider, approximately $9 million annually for the impact of Tax Reform on I&M’s Michigan jurisdictional earnings effective September 1, 2018. In October 2018, I&M also made two filings with the MPSC recommending to: (a) refund $3 million over eight months for the impact of Tax Reform on Michigan jurisdictional earnings for the period April 26, 2018 through August 31, 2018, (b) refund approximately $68 million of Excess ADIT associated with certain depreciable property using ARAM and (c) refund approximately $37 million of Excess ADIT that is not subject to rate normalization requirements over 10 years. An order from ~~9.3% to 9.5%. A hearing at~~ the MPSC is ~~scheduled for November 2017. If any~~expected by the end of ~~these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.~~the first quarter of 2019.

Rockport Plant, Unit 2 ~~Selective Catalytic Reduction (SCR)~~SCR

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

KPCo Rate Matters (Applies to AEP)

2017 Kentucky Base Rate Case

In ~~June 2017, KPCo filed~~January 2018, the KPSC issued an order approving a ~~request~~non-unanimous settlement agreement with certain modifications resulting in an annual revenue increase of $12 million, effective January 2018, based on a 9.7% return on equity. The KPSC’s primary revenue requirement modification to the settlement agreement was a $14 million annual revenue reduction for the decrease in the corporate federal income tax rate due to Tax Reform. The KPSC approved: (a) the deferral of a total of $50 million of Rockport Plant UPA expenses for the years 2018 through 2022, with the ~~KPSC for a $66 million~~manner and timing of recovery of the deferral to be addressed in KPCo’s next base rate case, (b) the recovery/return of 80% of certain annual ~~increase~~PJM OATT expenses above/below the corresponding level recovered in ~~Kentucky~~ base rates, ~~based upon~~(c) KPCo’s commitment to not file a ~~proposed 10.31% return on common equity~~base rate case for three years with ~~the increase to be implemented~~rates effective no ~~later~~earlier than January 2018. The proposed increase includes: (a) lost load since KPCo last changed base rates in July 2015, (b) incremental costs related to OATT charges from PJM not currently recovered from retail ratepayers, (c)2021 and (d) increased depreciation expense ~~including~~based upon updated Big Sandy Plant, Unit 1 depreciation rates using a proposed retirement date of 2031, (d) recovery of other Big Sandy Plant, Unit 1 generation costs currently recovered through a retail rider and (e) incremental purchased power costs. Additionally, KPCo requested a $4 million annual increase in environmental surcharge revenues.

20-year depreciable life.

In ~~August 2017,~~February 2018, KPCo ~~submitted a supplemental filing~~filed with the KPSC for rehearing of the January 2018 base case order and requested an additional $2.3 million of annual revenue increases related to: (a) the calculation of federal income tax expense, (b) recovery of purchased power costs associated with forced outages and (c) capital structure adjustments. Also in February 2018, an intervenor filed for rehearing recommending that ~~decreased~~ the ~~proposed annual base~~reduced corporate federal income tax rate ~~revenue request to $60 million. The modification was due to a~~be reflected in lower ~~interest~~purchased power expense related to ~~June 2017 debt refinancings.~~ the Rockport UPA.

In ~~October 2017, various intervenors~~April 2018, KPCo and the intervenor filed testimony that included annual net revenue increase recommendations ranging from $13 million to $40 million. Intervenors recommended returns on common equity ranging from 8.6% to 8.85%. Intervenors also recommended significant delays in KPCo’s proposed recoveries of: (a) depreciation expense related to Big Sandy Plant, Unit 1 (gas unit), proposing a 30-year depreciable life instead of KPCo’s proposed 15-year life and (b) lease expense on Rockport Plant, Unit 2 billed from AEGCo, proposing that the approximate $100 million of lease expense for the period 2018 through 2022 be deferredsettlement agreement with ~~a WACC carrying charge for recovery over 10 years beginning 2023. Testimony on behalf of the Attorney General also discussed that~~ the KPSC could consider disallowing all or a portion of the costs currently being recovered over 25 years through the Big Sandy Plant, Unit 2 retirement rider. As of September 30, 2017, KPCo’s regulatory assetin which KPCo withdrew its requested increase related to the ~~retired Big Sandy Plant, Unit 2 was $289 million. A hearing at~~recovery of purchased power costs associated with forced outages and the intervenor withdrew its claim regarding the impact of the reduced corporate federal income tax rates on purchased power costs related to the Rockport UPA.

In June 2018, the KPSC ~~is scheduled for December 2017.~~issued an order approving the settlement agreement including KPCo’s requested additional revenue increase of $765 thousand related to the calculation of federal income tax expense. This rate increase was effective June 28, 2018.

~~If any~~Kentucky Tax Reform

In June 2018, the KPSC issued an order approving a settlement agreement between KPCo and an intervenor that stipulates that KPCo will refund an estimated $82 million of ~~these costs are~~Excess ADIT associated with certain depreciable property using ARAM and an estimated $93 million of Excess ADIT that is not ~~recoverable, it could reduce future net income and cash flows and impact financial condition.~~subject to rate normalization requirements over 18 years. The refund was effective July 1, 2018.

OPCo Rate Matters (Applies to AEP and OPCo)

Ohio Electric Security Plan Filings

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

In 2013, OPCo filed an application with the PUCO to approve an ESP that included proposed rate adjustments and the continuation and modification of certain existing riders, including the DIR, effective June 2015 through May 2018. The proposal also involved a PPA rider that would include OPCo’s OVEC contractual entitlement (OVEC PPA) and would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based PPA.

In 2015 the PUCO issued orders that approved OPCo’s ESP application, subject to certain modifications, with a return on common equity of 10.2% on capital costs for certain riders. The orders 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 OVEC PPA and (c) the option for OPCo to reapply in a future proceeding with a more detailed PPA proposal. Also in 2015, OPCo subsequently filed an amended OVEC PPA application that, among other things, addressed certain PPA requirements set forth in a 2015 PUCO order. In 2016, the PUCO issued an additional order on rehearing that approved the DIR caps with additional amendments.

In 2016, the PUCO issued orders ~~that approved a contested stipulation agreement related to the PPA rider application. Additionally, as~~in this proceeding. As part of ~~these~~the issued orders, the PUCO ~~approved~~approved: (a) the DIR with modified revenue caps, (b) recovery of OVEC-related net margin incurred beginning June 2016, ~~(b)~~ (c)

potential additional contingent customer credits of up to $15 million to be included in the PPA rider over the final four years of the PPA rider and ~~(c)~~(d) the limitation that OPCo will not flow through any capacity performance penalties or bonuses through the PPA rider. Additionally, subject to cost recovery and PUCO approval, OPCo agreed to develop and implement, by 2021, a solar energy project(s) of at least 400 MWs and a wind energy project(s) of at least 500 MWs, with 100% of all output to be received by OPCo. AEP affiliates could own up to 50% of these solar and wind projects. ~~In December 2016, in accordance with the stipulation agreement, OPCo filed a carbon reduction plan that focused on fuel diversification and carbon emission reductions.~~

In April 2017, the PUCO rejected all pending rehearing requests ~~and~~related to the ~~orders are all now final.~~OVEC PPA. In June 2017, intervenors filed appeals to the Supreme Court of Ohio stating that the PUCO’s approval of the OVEC PPA was unlawful and does not provide customers with rate stability. In June 2018, oral arguments were held before the Supreme Court of Ohio.

In November 2016, OPCo refiled its amended ESP extension application and supporting testimony, consistent with the terms of the modified and approved stipulation agreement and based upon a 2016 PUCO order. The amended filing proposed to extend the ESP through May 2024 and included (a) an extension of the OVEC PPA rider, (b) a proposed 10.41% return on common equity on capital costs for certain riders, (c) the continuation of riders previously approved in the June 2015 - May 2018 ESP, (d) proposed increases in rate caps related to OPCo’s DIR and (e) the addition of various new riders, including a Renewable Resource Rider.

2024.

In August 2017, OPCo and various intervenors filed a stipulation agreement with the PUCO. The stipulation extends the term of the ESP through May 2024 and includes: (a) an extension of the OVEC PPA rider, (b) a proposed 10% return on common equity on capital costs for certain riders, (c) the continuation of riders previously approved in the June 2015 - May 2018 ESP, (d) rate caps related to OPCo’s DIR ranging from $215 million to $290 million for the periods 2018 through 2021 and (e) the addition of various new riders, including a Smart City Rider and a Renewable Generation Rider. DIR rate caps will be reset in OPCo’s next distribution base rate case which must be filed by June 2020.

In April 2018, the PUCO issued an order approving the ESP extension stipulation agreement, with no significant changes. In May 2018, OPCo and various intervenors filed requests for rehearing with the PUCO. In June 2018, these requests for rehearing were approved to allow further consideration of the requests.In August 2018, the PUCO denied all requests for rehearing. In October ~~2017,~~2018, an intervenor ~~testimony opposing the stipulation agreement was~~ filed ~~recommending: (a) a return on common equity to not exceed 9.3% for riders earning a return on capital investments, (b) that OPCo should file a base distribution case concurrent~~an appeal with the conclusion of the current ESP in May 2018 and (c) denial of certain new riders proposed in OPCo’s ESP extension. The stipulation is subject to review by the PUCO. A hearing at the PUCO is scheduled for November 2017.

~~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.~~Ohio Supreme Court challenging various approved riders.

2016 SEET Filing

Ohio law provides for the return of significantly excessive earnings to ratepayers upon PUCO review. Significantly excessive earnings are measured by whether the earned return on common equity of the electric utility is significantly in excess of the return on common equity that was earned during the same period by publicly traded companies, including utilities, that face comparable business and financial risk.

In December 2016, OPCo recorded a 2016 SEET provision of $58 million based upon projected earnings data for companies in the comparable utilities risk group. In determining OPCo’s return on equity in relation to the comparable utilities risk group, management excluded the following items resolved in OPCo’s Global ~~Settlement:~~Settlement that was filed at the PUCO in December 2016 and subsequently approved in February 2017: (a) gain on the deferral of RSR costs, (b) refunds to customers related to the SEET remands and (c) refunds to customers related to fuel adjustment clause proceedings.

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

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

Ohio Tax Reform

In October 2018, the PUCO issued an order approving a September 2018 settlement agreement between OPCo and various intervenors that addresses the reduction in the federal income tax rate due to Tax Reform. The settlement will: (a) refund excess federal income tax of $20 million annually, through a rider, effective January 1, 2018 until new base rates are implemented, (b) refund an estimated $278 million of Excess ADIT associated with depreciable property through OPCo’s DIR, (c) utilize $48 million of Excess ADIT that is not subject to rate normalization to offset regulatory asset balances related to OPCo’s distribution decoupling program and (d) refund the remaining estimated $129 million of Excess ADIT that is not subject to rate normalization by December 31, 2024 through a rider.

PSO Rate Matters (Applies to AEP and PSO)

~~2017~~2018 Oklahoma Base Rate Case

increased storm expense amortization. The requested increase in annual depreciation rates includes the ~~related SPP costs. The combined total impact could result~~recovery of Oklaunion Power Station through 2028 (currently being recovered in ~~a write-off and refund of up~~rates through 2046). Management has announced plans to approximately $163 million. In addition, if similar plant recovery issues would apply to Northeastern Plant, Unit 3, the net book value of plant, including regulatory assets, materials and supplies inventory and CWIP of $346 million as of September 30, 2017, could be adversely impacted. A hearing at the OCC is scheduled to begin inretire Oklaunion Power Station by October ~~2017.~~

2020. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Oklahoma Tax Reform

In August 2018, the OCC issued an order that approved PSO’s compliance filing that addresses the reduction in the federal income tax rate due to Tax Reform. As a result of the order PSO will establish a rider to: (a) refund $3 million of excess federal income taxes collected from January 9, 2018 through February 28, 2018 by the end of 2018, (b) refund an estimated $353 million of Excess ADIT associated with certain depreciable property using ARAM and (c) refund an estimated $72 million of Excess ADIT that is not subject to rate normalization requirements over 10 years.

SWEPCo Rate Matters (Applies to AEP and SWEPCo)

2012 Texas Base Rate Case

In 2012, SWEPCo filed a request with the PUCT to increase annual base rates primarily due to the completion of the Turk Plant. In 2013, the PUCT issued an order affirming the prudence of the Turk Plant but determined that the Turk Plant’s Texas jurisdictional capital cost cap established in a previous Certificate of Convenience and Necessity case also limited SWEPCo’s recovery of AFUDC in addition to limits on its recovery of cash construction costs. ~~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.~~

Upon rehearing in 2014, the PUCT reversed its initial ruling and determined that AFUDC was excluded from the Turk Plant’s Texas jurisdictional capital cost cap. As a result, ~~in the fourth quarter of 2013,~~ SWEPCo reversed $114 million of previously recorded regulatory ~~disallowances.~~disallowances in 2013. The resulting annual base rate increase was approximately $52 million. In June 2017, the Texas District Court upheld the PUCT’s 2014 order. In July 2017, intervenors filed appeals with the Texas Third Court of Appeals.

In July 2018, the Texas Third Court of Appeals reversed the PUCT’s judgment affirming the prudence of the Turk Plant and remanded the issue back to the PUCT. In August 2018, SWEPCo filed a Motion for Reconsideration at the Court of Appeals. In October 2018, the Court of Appeals denied SWEPCo’s request. SWEPCo intends to file an appeal with the Texas Supreme Court in the fourth quarter of 2018.

If certain parts of the PUCT order are overturned and if SWEPCo cannot ultimately recover its Texas jurisdictional share of the Turk Plant investment, including AFUDC, it could reduce future net income and cash flows and impact financial condition.

2016 Texas Base Rate Case

In December 2016, SWEPCo filed a request with the PUCT for a net increase in Texas annual revenues of $69 million based upon a 10% return on common equity. In January 2018, the PUCT issued a final order approving a net increase in Texas annual revenues of $50 million based upon a return on common equity of 9.6%, effective May 2017. The ~~annual increase includes approximately:~~final order also included: (a) ~~$34 million related~~approval to additional environmental controls, including those installed at the Welsh Plant, to comply with Federal EPA mandates, (b) $25 million for additional generation, transmission and distribution investments and increased operating costs, (c) $8 million related to transmission cost recovery within SWEPCo’s regional transmission organization and (d) $2 million in additional vegetation management. As part of this filing, SWEPCo requested recovery ofrecover the Texas jurisdictional share ~~(approximately 33%)~~of environmental investments placed in service, as of June 30, 2016, at various plants, including Welsh Plant, Units 1 and 3, (b) approval of recovery of, but no return on, the Texas jurisdictional share of the net book value of Welsh Plant, Unit 2, ~~through 2042,~~(c) approval of $2 million in additional vegetation management expenses and (d) the ~~remaining life of Welsh Plant, Unit 3.~~

In April and May 2017, various intervenors and the PUCT staff filed testimony that included annual net revenue increase recommendations ranging from $36 million to $47 million. The recommended returns on common equity ranged from 9.2% to 9.35%. In addition, no parties recommended approvalrejection of SWEPCo’s proposed transmission cost recovery and certain parties recommended investment disallowances that could result in write-offs of up to approximately $89 million, including approximately $40 million related to environmental investments and $25 million related to Welsh Plant, Unit 2. A hearing at the PUCT was held in June 2017.mechanism.

~~In September~~As a result of the final order, in 2017 SWEPCo: (a) recorded an impairment charge of $19 million, which included $7 million associated with the ~~Administrative Law Judges (ALJs) issued their proposal for decision including an annual net revenue increase~~lack of ~~$50 million including recovery of Welsh Plant, Unit 2 environmental investments as of June 30, 2016. The ALJs proposed a return on common equity of 9.6% and recovery of but no~~ return on Welsh Plant, Unit 2.2 and $12 million related to other disallowed plant investments, (b) recognized $32 million of additional revenues, for the period of May 2017 through December 2017, that will be surcharged to customersand (c) recognized an additional $7 million of expenses consisting primarily of depreciation expense and vegetation management expense, offset by the deferral of rate case expense. SWEPCo implemented new rates in February 2018 billings. The ~~ALJs rejected SWEPCo’s proposed transmission cost recovery mechanism.~~$32 million of additional 2017 revenues will be collected by the end of 2018. In March 2018, the PUCT clarified and corrected portions of the final order, without changing the overall decision or amounts of the rate change. The ~~estimated potential write-off associated with the ALJs proposal is approximately $22 million which includes $9 millionassociated with the lack of a return on Welsh Plant, Unit 2.~~order has been appealed by various intervenors.

~~If any~~In April 2018, SWEPCo made an income tax rate refund tariff filing which includes an annual revenue reduction of ~~these costs are~~approximately $18 million to reflect the difference between rates collected under the final order and the rates that would be collected under Tax Reform. The filing did not ~~recoverable, including environmental investments and retirement-related costs~~address the return of Excess ADIT benefits to customers. In June 2018, the ALJ issued an order approving interim rates that provided for ~~Welsh Plant, Unit 2, it could reduce future net income and cash flows and impact financial condition.~~a reduction of residential rates of $8 million. In September 2018, the ALJ issued an order approving interim rates for the remaining customers. The matter has been sent to the PUCT for final approval.

~~Louisiana Turk Plant Prudence Review~~Texas Tax Reform

~~Beginning January 2013, SWEPCo’s formula rates, including~~In October 2018, SWEPCo filed a Stipulation and Settlement Agreement with the ~~Louisiana jurisdictional share (approximately 33%) of the Turk Plant, have been collected subject~~PUCT to refund ~~pending the outcome~~$10 million of a prudence review of the Turk Plant investment, which was placed into service in December 2012. In October 2017, the LPSC staff filed testimony contending that SWEPCo failed to continue to evaluate the suspension or cancellation of the Turk Plant during its construction period. The testimony also identified five individual items totaling approximately $51 million for potential disallowance relating to Louisiana’s jurisdictional share of Turk Plant. Asexcess federal income taxes collected, as a result of SWEPCo’s alleged failure to meet its continuing prudence obligations, the LPSC staff recommends one of the following potential unfavorable scenarios: (a) Even sharing of construction cost overruns between SWEPCo and ratepayers, (b) an imposition of a cost cap similar to Texas or (c) approximately a 1% reduction of the rate on common equity for the Turk Plant. As SWEPCo has included the full value of the Turk Plant in rate base since its in-service date, SWEPCo may be required to refund potential over-collectionsTax Reform, from January ~~2013~~1, 2018 through June 14, 2018 for residential customers and January 1, 2018 through September 19, 2018 for all other customer classes. An interim order was issued by an ALJ and the ~~date new rates are implemented. As~~refunds will be made to customers through a rider in the fourth quarter of September 30, 2017, if the LPSC adopts one of these potential scenarios, and disallows the five individual items, pretax write-offs could range from $50 million to $80 million and refund provisions, including interest, could range from $15 million to $27 million. Future annual revenue reductions could range from $3 million to $4 million. Management will continue to vigorously defend against these claims. If the LPSC orders in favor of one of these scenarios, it could reduce future net income and cash flows and impact financial condition. A hearing at the LPSC is scheduled for December 2017.2018.

2015 Louisiana Formula Rate Filing

In April 2015, SWEPCo filed its formula rate plan for test year 2014 with the LPSC. The filing included a $14 million annual increase, which was effective August 2015. In February 2018, LPSC staff filed a report approving the increase as filed. This increase is subject to ~~LPSC staff review and is subject to refund.~~refund pending commission approval. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2017 Louisiana Formula Rate Filing

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

2018 Louisiana Formula Rate Filing

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

In October 2018, the LPSC staff issued a recommendation that SWEPCo refund $11 million of excess federal income taxes collected, as a result of Tax Reform, from January 1, 2018 through July 31, 2018. A ~~hearing at~~decision by the LPSC is ~~scheduled for May~~expected in the fourth quarter of 2018.

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

Welsh Plant - Environmental Impact

~~2017, SWEPCo began recovering $131 million in investments related to its~~See “2017 Louisiana ~~jurisdictional share of environmental costs. SWEPCo has sought recovery of its project costs from retail customers in its current Texas base rate case at the PUCT~~Formula Rate Filing” and ~~is recovering these costs from wholesale customers through SWEPCo’s FERC-approved agreements. See “2016 Texas Base Rate Case” and “2017~~“2018 Louisiana Formula Rate Filing” disclosures above.

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

Arkansas Tax Reform

In September 2018, the APSC issued an order that approved SWEPCo’s application to implement a rider for SWEPCo’s Arkansas jurisdiction to address the reduction in the federal income tax rate due to Tax Reform. The rider was implemented in the first billing cycle of October 2018 and will: (a) refund $7 million over 15 months of excess federal income taxes collected from January 1, 2018 through September 30, 2018, (b) refund an ongoing estimated $655 thousand monthly from October 1, 2018 until new base rates go into effect as a result of a subsequent APSC order, (c) refund an estimated $66 million of Excess ADIT associated with certain depreciable property using ARAM and (d) refund an estimated $11 million of Excess ADIT that is not subject to rate normalization requirements over 15 months.

FERC Rate Matters

PJM Transmission Rates ~~(Applies~~(Applies to AEP, ~~AEPTCo,~~ APCo, I&M and OPCo)

In June 2016, PJM transmission owners, including AEP’s ~~eastern~~ transmission owning subsidiaries within PJM, and various state commissions filed a settlement agreement at the FERC to resolve outstanding issues related to cost responsibility for charges to transmission customers for certain transmission facilities that operate at or above 500 kV. In July 2016, certain parties filed comments at the FERC contesting the settlement agreement. ~~Upon final~~In May 2018, the FERC ~~approval,~~approved the contested settlement agreement. PJM ~~would implement~~implemented a transmission enhancement charge adjustment through the PJM OATT, which will be billable through 2025. Management expects that any refunds received would generally be returned to retail customers through existing state rider ~~mechanisms.~~mechanisms and has recorded $134 million to Customer Accounts Receivable and $75 million to Deferred Charges and Other Noncurrent Assets, with offsets to Regulatory Liabilities and Deferred Investment Tax Credits as of September 30, 2018.

FERC Transmission Complaint - AEP’s PJM Participants ~~(Applies~~(Applies to AEP, AEPTCo, APCo, I&M and OPCo)

In October 2016, ~~several~~seven parties filed a ~~joint~~ complaint at the FERC that ~~states~~alleged the base return on common equity used by AEP’s ~~eastern~~ transmission owning subsidiaries within PJM in calculating formula transmission rates under the PJM OATT is excessive and should be reduced from 10.99% to 8.32%, effective upon the date of the complaint. ~~Management believes its financial statements adequately address~~In November 2017, a FERC order set the ~~impact~~matter for hearing and settlement procedures. In March 2018, AEP’s transmission owning subsidiaries within PJM and six of the ~~complaint.~~ complainants filed a settlement agreement with the FERC (the seventh complainant abstained). If approved by the FERC the settlement agreement: (a) establishes a base ROE for AEP’s transmission owning subsidiaries within PJM of 9.85% (10.35% inclusive of the RTO incentive adder of 0.5%), effective January 1, 2018, (b) requires AEP’s transmission owning subsidiaries within PJM to provide a one-time refund of $50 million, attributable from the date of the complaint through December 31, 2017, which was credited to customer bills in the second quarter of 2018 and (c) increases the cap on the equity portion of the capital structure to 55% from 50%. As part of the settlement agreement, AEP’s transmission owning subsidiaries within PJM also filed updated transmission formula rates incorporating the reduction in the corporate federal income tax rate due to Tax Reform, effective January 1, 2018 and providing for the amortization of the portion of the Excess ADIT that is not subject to the normalization method of accounting, ratably over a ten-year period through credits to the federal income tax expense component of the revenue requirement. In April 2018, an ALJ accepted the interim settlement rates, which included the $50 million one-time refund that occurred in the second quarter of 2018. These interim rates are subject to refund or surcharge, with interest.

Modifications to AEP’s PJM Transmission Rates ~~(Applies~~(Applies to AEP, AEPTCo, APCo, I&M and OPCo)

In November 2016, AEP’s ~~eastern~~ transmission owning subsidiaries within PJM filed an application ~~with~~ at the FERC to modify the PJM OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to projected expenses. In March 2017, the FERC accepted the proposed modifications effective January 1, 2017, subject to refund, and set this matter for hearing and settlement procedures. ~~Effective January 1, 2017, the~~The modified PJM OATT formula rates ~~were implemented, subject to refund,~~are based on projected ~~2017~~ calendar year financial activity and projected plant balances. IfIn December 2017, AEP’s transmission owning subsidiaries within PJM filed an uncontested settlement agreement with the FERC ~~determines that any of these costs are not recoverable, it could reduce future net income~~resolving all outstanding issues. In April 2018, the FERC approved the uncontested settlement agreement and ~~cash flows and impact financial condition.~~rates were implemented effective January 1, 2018.

FERC Transmission Complaint - AEP’s SPP Participants ~~(Applies~~(Applies to AEP, AEPTCo, PSO and SWEPCo)

Modifications to AEP’s SPP Transmission Rates (Applies to AEP, AEPTCo, PSO and SWEPCo)

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

FERC SWEPCo Power Supply Agreements Complaint - East Texas Electric Cooperative, Inc. (ETEC) and Northeast Texas Electric Cooperative, Inc. (NTEC) (Applies to AEP and SWEPCo)

In September 2017, ETEC and NTEC filed a complaint at the FERC that states the base return on common equity used by SWEPCo in calculating ~~their~~its power supply formula rates is excessive and should be reduced from 11.1% to 8.41%, effective upon the date of the complaint. ~~Management believes its financial statements adequately address~~In November 2017, a FERC order set the ~~impact~~matter for hearing and settlement procedures.

In May 2018, SWEPCo filed a settlement agreement with ETEC and NTEC at the FERC that resolves the issues of the complaint. If approved by the FERC, ~~orders revenue reductions as~~the settlement agreement: (a) reduces the base return on common equity from 11.1% to 10.1% effective September 1, 2017, (b) requires SWEPCo to provide a ~~result~~one-time billing credit of $287 thousand to reflect the ~~complaint, including refunds~~decrease in return on common equity from September 1, 2017 through December 31, 2017 and (c) implements the ~~date of~~lower return on common equity on contracts starting January 1, 2018. In July 2018, the ~~complaint filing, it could reduce future net income and cash flows and impact financial condition.~~FERC issued an order approving the settlement.

5. COMMITMENTS, GUARANTEES AND CONTINGENCIES

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

The Registrants are subject to certain claims and legal actions arising in the ordinary course of business. In addition, the Registrants business activities are subject to extensive governmental regulation related to public health and the environment. The ultimate outcome of such pending or potential litigation against the Registrants cannot be predicted. Management accrues contingent liabilities only when management concludes that it is both probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. When management determines that it is not probable, but rather reasonably possible that a liability has been incurred at the date of the financial statements, management discloses such contingencies and the possible loss or range of loss if such estimate can be made. Any estimated range is based on currently available information and involves elements of judgment and significant uncertainties. Any estimated range of possible loss may not represent the maximum possible loss exposure. Circumstances change over time and actual results may vary significantly from estimates.

For current proceedings not specifically discussed below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on the financial statements. The Commitments, Guarantees and Contingencies note within ~~AEP’s and AEPTCo’s 2016~~the 2017 Annual ~~Reports~~Report should be read in conjunction with this report.

GUARANTEES

Liabilities for guarantees are recorded in accordance with the accounting guidance for “Guarantees.” There is no collateral held in relation to any guarantees. In the event any guarantee is drawn, there is no recourse to third parties unless specified below.

Letters of Credit (Applies to AEP, AEP Texas and OPCo)

Standby letters of credit are entered into with third parties. These letters of credit are issued in the ordinary course of business and cover items such as natural gas and electricity risk management contracts, construction contracts, insurance programs, security deposits and debt service reserves.

AEP has a $3 billion revolving credit facility due in June 2021, under which up to $1.2 billion may be issued as letters of credit on behalf of subsidiaries. As of September 30, ~~2017,~~2018, no letters of credit were issued under the $3 billion revolving credit facility. In ~~May 2017,~~October 2018, the ~~$500 million~~ revolving credit facility ~~due in~~was increased to $4 billion and extended until June ~~2018 was terminated.~~2022.

An uncommitted facility gives the issuer of the facility the right to accept or decline each request made under the facility. AEP ~~also~~ issues letters of credit on behalf of subsidiaries under ~~five~~four uncommitted facilities totaling ~~$445~~$305 million. ~~In August 2017, AEP executed a $75 million uncommitted letter of credit facility due in August 2018. As of September 30, 2017, the~~The Registrants’ maximum future payments for letters of credit issued under the uncommitted facilities as of September 30, 2018 were as follows:

Company

Amount

Maturity

Amount

Maturity

(in millions)

AEP

123.2

October 2017 to September 2018

71.8

October 2018 to September 2019

AEP Texas

2.8

January 2019

OPCo

0.6

September 2018

0.6

September 2019

AEP has $45 million of variable rate Pollution Control Bonds supported by $46 million of bilateral letters of credit maturing in July 2019.

Guarantees of Third-Party Obligations (Applies to AEP and SWEPCo)

As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining, SWEPCo provides guarantees of mine reclamation of ~~$115 million, which increased to~~ $140 ~~million in October 2017.~~million. Since SWEPCo uses self-bonding, the guarantee provides for SWEPCo to commit to use its resources to complete the reclamation in the event the work is not completed by Sabine. This guarantee ends upon depletion of reserves and completion of final reclamation. It is estimated the reserves will be depleted in 2036 with final reclamation completed by 2046 at an estimated cost of ~~$76~~$79 million. Actual reclamation costs could vary due to period inflation and any changes to actual mine reclamation. As of September 30, ~~2017,~~2018, SWEPCo has collected ~~$71~~$74 million through a rider for final mine closure and reclamation costs, of which ~~$76~~$79 million is recorded in Asset Retirement Obligations, offset by $5 million that is recorded in Deferred Charges and Other Noncurrent Assets on SWEPCo’s balance sheet.

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

Guarantees of Equity Method Investees (Applies to AEP)

In December 2016, AEP issued a performance guarantee for a 50% owned joint venture which is accounted for as an equity method investment. If the joint venture were to default on payments or performance, AEP would be required to make payments on behalf of the joint venture. As of September 30, ~~2017,~~2018, the maximum potential amount of future payments associated with this guarantee was $75 million, which expires in December 2019.

Indemnifications and Other Guarantees

Contracts

The Registrants enter into certain types of contracts which require indemnifications. Typically these contracts include, but are not limited to, sale agreements, lease agreements, purchase agreements and financing agreements. Generally, these agreements may include, but are not limited to, indemnifications around certain tax, contractual and environmental matters. With respect to sale agreements, exposure generally does not exceed the sale price. As of September 30, ~~2017,~~2018, there were no material liabilities recorded for any indemnifications.

AEPSC conducts power purchase and sale activity on behalf of APCo, I&M, KPCo and ~~OPCo~~WPCo, who are jointly and severally liable for activity conducted byon their behalf. AEPSC ~~on behalf of AEP companies related to~~also conducts power purchase and sale ~~activity.~~activity on behalf of PSO and SWEPCo, who are jointly and severally liable for activity conducted ~~by AEPSC~~ on ~~behalf of PSO and SWEPCo related to power purchase and sale activity.~~their behalf.

Master Lease Agreements (Applies to all Registrants except AEPTCo)

The Registrants lease certain equipment under master lease agreements. Under the lease agreements, the lessor is guaranteed a residual value up to a stated percentage of either the unamortized balance or the equipment cost at the end of the lease term. If the actual fair value of the leased equipment is below the guaranteed residual value at the end of the lease term, the Registrants are committed to pay the difference between the actual fair value and the residual value guarantee. Historically, at the end of the lease term the fair value has been in excess of the unamortized balance. As of September 30, ~~2017,~~2018, the maximum potential loss by Registrants for these lease agreements assuming the fair value of the equipment is zero at the end of the lease term is as follows:


Company	Maximum Potential Loss		Maximum Potential Loss
	(in millions)		(in millions)
AEP	$	42.1	$	47.7
AEP Texas			11.4
APCo	8.8		8.8
I&M	3.4		3.5
OPCo	6.0		7.6
PSO	3.3		4.1
SWEPCo	3.7		4.2

Railcar Lease (Applies to AEP, I&M and SWEPCo)

In June 2003, AEP Transportation LLC (AEP Transportation), a subsidiary of AEP, entered into an agreement with BTM Capital Corporation, as lessor, to lease 875 coal-transporting aluminum railcars. The lease is accounted for as an operating lease. In January 2008, AEP Transportation assigned the remaining 848 railcars under the original lease agreement to I&M (390 railcars) and SWEPCo (458 railcars). The assignments are accounted for as operating leases for I&M and SWEPCo. The initial lease term was five years with three consecutive five-year renewal periods for a maximum lease term of twenty years. I&M and SWEPCo ~~intend to renew these leases~~have exercised all renewal options for the ~~full~~maximum lease ~~term of twenty years via the renewal options.~~term. The future minimum lease obligations ~~are $8~~were $7 million and $9$7 million for I&M and SWEPCo, respectively, for the remaining railcars as of September 30, ~~2017.~~2018.

Under the remaining five-year lease agreement, the lessor is guaranteed that the sale proceeds under a return-and-sale option will equal at least a lessee obligation amount specified in the lease, which ~~declines from 83%~~is equal to 77% 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.~~equipment. I&M and SWEPCo have assumed the guarantee under the return-and-sale option. The maximum potential losses related to the guarantee ~~are $8~~were $5 million and ~~$10~~$5 million for I&M and SWEPCo, respectively, as of September 30, ~~2017,~~2018, assuming the fair value of the equipment is zero at the end of the current five-year lease term. However, management believes that the fair value would produce a sufficient sales price to avoid any loss.

AEPRO Boat and Barge Leases (Applies to AEP)

In October 2015, AEP signed a Purchase and Sale Agreement to sell its commercial barge transportation subsidiary, AEPRO, to a nonaffiliated party. The sale closed in November 2015. Certain of the boat and barge leases acquired by the nonaffiliated party are subject to an AEP guarantee in favor of the lessor, ensuring future payments under such leases with maturities up to 2027. As of September 30, ~~2017,~~2018, the maximum potential amount of future payments required under the guaranteed leases was ~~$52~~$46 million. In certain instances, AEP has no recourse against the nonaffiliated party if required to pay a lessor under a guarantee, but AEP would have access to sell the leased assets in order to recover payments made by AEP under the ~~guarantee to the extent of the sale proceeds.~~guarantee. As of September 30, ~~2017,~~2018, AEP’s boat and barge lease guarantee liability was $7$6 million, of which $1 million was recorded in Other Current Liabilities and $6$5 million was recorded in Deferred Credits and Other Noncurrent Liabilities on AEP’s balance sheet.

In January 2018, S&P Global Inc. downgraded the ratings of the nonaffiliated party and set their outlook to negative. In April 2018, Moody’s Investors Service Inc. also downgraded their ratings and set their outlook to negative. It is reasonably possible that enforcement of AEP’s liability for future payments under these leases could be exercised, which could reduce future net income and cash flows and impact financial condition.

ENVIRONMENTAL CONTINGENCIES (Applies to all Registrants except AEPTCo)

The Comprehensive Environmental Response Compensation and Liability Act (Superfund) and State Remediation

By-products from the generation of electricity include materials such as ash, slag, sludge, low-level radioactive waste and SNF. Coal combustion by-products, which constitute the overwhelming percentage of these materials, are typically treated and deposited in captive disposal facilities or are beneficially utilized. In addition, the generation plants and transmission and distribution facilities have used asbestos, polychlorinated biphenyls and other hazardous and nonhazardous materials. The Registrants currently incur costs to dispose of these substances safely.

~~In 2008, I&M received~~ For remediation processes not specifically discussed, management does not anticipate that the liabilities, if any, arising from such remediation processes would have a ~~letter from~~material effect on 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 was reduced. As of September 30, 2017, I&M’s accrual for all of these sites is $3 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.financial statements.

NUCLEAR CONTINGENCIES ~~(APPLIES TO~~(Applies to AEP ~~AND~~and I&M)

I&M owns and operates the two-unit 2,278 MW Cook Plant under licenses granted by the Nuclear Regulatory ~~Commission (NRC).~~Commission. I&M has a significant future financial commitment to dispose of SNF and to safely decommission and decontaminate the plant. The licenses to operate the two nuclear units at the Cook Plant expire in 2034 and 2037. The operation of a nuclear facility also involves special risks, potential liabilities and specific regulatory and safety requirements. By agreement, I&M is partially liable, together with all other electric utility companies that own nuclear generation units, for a nuclear power plant incident at any nuclear plant in the U.S. Should a nuclear incident occur at any nuclear power plant in the U.S., the resultant liability could be substantial.

Westinghouse Electric Company Bankruptcy Filing ~~(Applies to AEP and I&M)~~

OPERATIONAL CONTINGENCIES

Rockport Plant Litigation (Applies to AEP and I&M)

AEGCo and I~~&M.~~

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

~~Natural Gas Markets Lawsuits (Applies to AEP)~~

In 2002, a lawsuit was commenced 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 state and federal courts in several states making essentially the same allegations under federal or state laws against the same companies. AEP is among the companies named as defendants in some of these cases. AEP settled, received summary judgment or was 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 United States Supreme Court affirmed the U.S. Court of Appeals for the Ninth Circuit’s opinion. The cases were remanded to the district court for further proceedings. AEP had four pending cases, of which three were class actions and one was a single plaintiff case. In February 2017, a settlement was reached in the single plaintiff case. A settlement was also reached in the three class actions and the district court issued final approval of the settlement in June 2017.

Gavin Landfill Litigation (Applies to AEP and OPCo)

In August 2014, a complaint was filed in the Mason County, West Virginia Circuit Court against AEP, AEPSC, OPCo and an individual supervisor alleging wrongful death and personal injury/illness claims arising out of purported exposure to coal combustion by-product waste at the Gavin Plant landfill. As a result of OPCo transferring its generation assets to AGR, the outcome of this complaint ~~will be~~became the responsibility of AGR. The lawsuit was filed on behalf of 77 plaintiffs, consisting of 39 current and former contractors of the landfill and 38 family members of those contractors. Twelve of the family members ~~are pursuing~~pursued personal injury/illness claims (non-working direct claims) and the remainder ~~are pursuing~~pursued loss of consortium claims. The plaintiffs ~~seek~~sought compensatory and punitive damages, as well as medical monitoring. In September 2014, defendants filed a motion to dismiss the complaint, contending the case should be filed in Ohio. In August 2015, the court denied the motion. Defendants appealed that decision to the West Virginia Supreme Court. In February 2016, a decision was issued by the court denying the appeal and remanding the case to the West Virginia Mass Litigation Panel (WVMLP), rather than back to the Mason County, West Virginia Circuit Court. Defendants subsequently filed a motion to dismiss the twelve non-working direct claims under Ohio law. The WVMLP denied the motion and defendants again appealed to the West Virginia Supreme Court. ~~The West Virginia Supreme Court granted the appeal of the twelve non-working direct claims and heard oral argument in March 2017.~~ In June 2017, the West Virginia Supreme Court reversed the WVMLP decision and dismissed the claims of the twelve non-working direct claim plaintiffs. ~~Management will continue to defend against~~A settlement was reached with all of the ~~remaining claims~~plaintiffs and ~~believes~~was approved by the ~~provision recorded is adequate. Management is unable to determine~~WVMLP in June 2018. The settlement did not have a ~~range of potential additional losses that are reasonably possible of occurring.~~material impact on net income, cash flows or financial condition.

6. ~~IMPAIRMENT, DISPOSITION,~~DISPOSITIONS AND ~~ASSETS AND LIABILITIES HELD FOR SALE~~IMPAIRMENTS

The disclosures in this note apply to AEP only unless indicated otherwise.

~~IMPAIRMENT~~DISPOSITIONS

~~Merchant Generating Assets (Generation & Marketing Segment)~~

In September 2016, due to AEP’s ongoing evaluation of strategic alternatives for its merchant generation assets, declining forecasts of future energy and capacity prices, and a decreasing likelihood of cost recovery through regulatory proceedings or legislation in the state of Ohio providing for the recovery of AEP’s existing Ohio merchant generation assets, AEP performed an impairment analysis at the unit level on the remaining merchant generation assets in accordance with accounting guidance for impairments of long-lived assets. Based on the impairment analysis performed in the third quarter of 2016, AEP recorded a pretax impairment of $2.3 billion in Asset Impairments and Other Related Charges on the statement of operations.

Through the third quarter of 2017, AEP recorded an additional pretax impairment of $4 million in Asset Impairments and Other Related Charges on AEP’s statements of income related to the Merchant Coal-fired Generation Assets. In addition, AEP recorded a $7 million pretax impairment as Asset Impairments and Other Related Charges on AEP’s statements of income related to the sale of Zimmer Plant. The sale is further discussed in the “Disposition” section of this note.

~~DISPOSITION~~

Zimmer Plant (Generation & Marketing Segment)

In February 2017, AEP signed an agreement to sell its 25.4% ownership share of Zimmer Plant to a nonaffiliated party. The transaction closed in the second quarter of 2017 and did not have a material impact on net income, cash flows or financial condition. The Income before Income Tax Expense and Equity Earnings of Zimmer Plant was immaterial for the three and nine months ended September 30, ~~2017 and 2016.~~2017.

~~Tanners Creek Plant (Vertically Integrated Utilities Segment) (Applies to AEP and I&M)~~

In October 2016, I&M sold its retired Tanners Creek plant site including its associated asset retirement obligations (AROs) to a nonaffiliated party. I&M paid $92 million and the nonaffiliated party took ownership of the Tanners Creek plant site assets and assumed responsibility for environmental liabilities and AROs, including ash pond closure, asbestos abatement and decommissioning and demolition. I&M did not record a gain or loss related to this sale and will address recovery of Tanner’s Creek deferred costs in future rate proceedings. If any of the costs associated with Tanner’s Creek are not recoverable, it could reduce future net income and impact financial condition.

Gavin, Waterford, Darby and Lawrenceburg Plants (Generation & Marketing Segment)

In September 2016, AEP signed a Purchase and Sale Agreement to sell AGR’s Gavin, Waterford and Darby Plants as well as AEGCo’s Lawrenceburg Plant totaling 5,329 MWs of competitive generation assets to a nonaffiliated party. The sale closed in January 2017 for $2.2 billion, which was recorded in Investing Activities on the statement of cash flows. The net proceeds from the transaction were $1.2 billion in cash after taxes, repayment of debt associated with these assets including a make whole payment related to the debt, payment of a coal contract associated with one of the plants and transaction fees. The sale resulted in a pretax gain of $226 million that was recorded in Gain on Sale of Merchant Generation Assets on AEP’s statement of income.

IMPAIRMENTS

Other Assets (Corporate and Other) (Vertically Integrated Utilities Segment) (Applies to AEP and APCo)

~~ASSETS AND LIABILITIES HELD FOR SALE~~

In the first quarter of 2018, AEP was notified by an equity investee that it had ceased operations. AEP recorded a pretax impairment of $21 million in Other Operation on the statement of income related to the equity investment and related assets. The impairment also had an immaterial impact to APCo.

~~Gavin, Waterford, Darby and Lawrenceburg Plants~~

Merchant Generating Assets (Generation & Marketing Segment)

A project to reconstruct a defective dam structure at Racine began in the first quarter of 2017. In December 2017, and in accordance with the accounting guidance for impairments of long-lived assets, an impairment analysis was triggered by the expected costs of the dam reconstruction activities, resulting in the conclusion that the fair value of Racine, in its present condition, was $0 as of December 31, 2017. A pretax impairment charge equal to Racine’s net book value of $43 million was recognized in AEP’s 2017 statement of income.

Construction activities at Racine continued throughout 2018, accumulating new capital expenditures of $35 million as of September 30, 2018. However, due to a significant increase in estimated costs to complete the reconstruction project, in the third quarter of ~~2016, management determined Gavin, Waterford, Darby~~2018, an impairment analysis was performed. AEP performed step one of the impairment analysis using undiscounted cash flows for the estimated useful life of Racine based upon energy and ~~Lawrenceburg Plants met~~capacity price curves, which were developed internally with observable Level 2 third party quotations and unobservable Level 3 inputs, as well as management’s forecasts of operating expenses and capital expenditures. AEP performed step two of the ~~classification~~impairment analysis on Racine using a ten-year discounted cash flow model based upon similar forecasted information used in the step one test. The step two analysis resulted in a determination that the fair value of ~~held for sale. Accordingly, the four plants’ assets and liabilities have been recorded as Assets Held for Sale and Liabilities Held for Sale on AEP’s balance sheet~~Racine, in its present condition, was $0 as of ~~December 31, 2016 and as shown~~September 30, 2018. As a result, AEP recorded a pretax impairment of $35 million in Other Operation on the statement of income in the ~~table below. The Income before Income Tax Expense and Equity Earnings~~third quarter of 2018. In October 2018, AEP received authorization from the ~~four plants was approximately $116~~FERC to restart generation at Racine. Management plans to resume generation at Racine during the fourth quarter of 2018.

In the first quarter of 2017, AEP recorded a pretax impairment of $4 million ~~for~~in Other Operation on the ~~three months ended September 30, 2016 and $42 million (excluding~~statement of income related to the ~~$226~~Merchant Coal-fired Generation Assets. In addition, AEP recorded a $7 million pretax ~~gain) and $312 million for~~impairment in Other Operation on the ~~nine months ended September 30, 2017 and 2016, respectively.~~

December 31,
2016
Assets:
Fuel $ 145.5
Materials and Supplies 49.4
Property, Plant and Equipment - Net 1,756.2
Other Class of Assets That Are Not Major 0.1
Total Assets Classified as Held for Sale on the Balance Sheets $ 1,951.2

Liabilities:
Long-term Debt $ 134.8
Waterford Plant Upgrade Liability 52.2
Asset Retirement Obligations 36.7
Other Classes of Liabilities That Are Not Major 12.2
Total Liabilities Classified as Held for Sale on the Balance Sheets $ 235.9
statement of income related to the sale of Zimmer Plant.

7. BENEFIT PLANS

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

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

Components of Net Periodic Benefit Cost

The following tables provide the components of net periodic benefit cost (credit) by Registrant for the plans:

AEP


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	24.1		$	21.4		$	2.8		$	2.6		$	24.4		$	24.1		$	2.9		$	2.8
Interest Cost	50.7			52.9			14.8			15.3			46.9			50.7			11.8			14.8
Expected Return on Plan Assets	(71.1		)	(70.1		)	(25.3		)	(26.8		)	(72.6		)	(71.1		)	(25.6		)	(25.3		)
Amortization of Prior Service Cost (Credit)	0.3			0.6			(17.3		)	(17.3		)	—			0.3			(17.3		)	(17.3		)
Amortization of Net Actuarial Loss	20.7			21.0			9.2			7.8			21.3			20.7			2.7			9.2
Net Periodic Benefit Cost (Credit)	$	24.7		$	25.8		$	(15.8	)	$	(18.4	)	$	20.0		$	24.7		$	(25.5	)	$	(15.8	)


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	72.3		$	64.3		$	8.4		$	7.7		$	73.2		$	72.3		$	8.7		$	8.4
Interest Cost	152.3			158.7			44.5			45.7			140.8			152.3			35.5			44.5
Expected Return on Plan Assets	(213.5		)	(210.2		)	(76.0		)	(80.3		)	(217.7		)	(213.5		)	(76.7		)	(76.0		)
Amortization of Prior Service Cost (Credit)	0.8			1.7			(51.8		)	(51.8		)	—			0.8			(51.8		)	(51.8		)
Amortization of Net Actuarial Loss	62.1			62.9			27.5			23.5			63.9			62.1			7.9			27.5
Net Periodic Benefit Cost (Credit)	$	74.0		$	77.4		$	(47.4	)	$	(55.2	)	$	60.2		$	74.0		$	(76.4	)	$	(47.4	)

AEP Texas



	Pension Plans						OPEB
	Three Months Ended September 30,						Three Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Service Cost	$	2.3		$	2.1		$	0.3		$	0.3
Interest Cost	4.0			4.3			0.9			1.2
Expected Return on Plan Assets	(6.4		)	(6.2		)	(2.1		)	(2.2		)
Amortization of Prior Service Credit	—			—			(1.5		)	(1.5		)
Amortization of Net Actuarial Loss	1.8			1.7			0.2			0.8
Net Periodic Benefit Cost (Credit)	$	1.7		$	1.9		$	(2.2	)	$	(1.4	)



	Pension Plans						OPEB
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Service Cost	$	6.9		$	6.4		$	0.7		$	0.7
Interest Cost	12.0			12.9			2.8			3.7
Expected Return on Plan Assets	(19.2		)	(18.8		)	(6.4		)	(6.6		)
Amortization of Prior Service Credit	—			—			(4.4		)	(4.4		)
Amortization of Net Actuarial Loss	5.4			5.2			0.6			2.4
Net Periodic Benefit Cost (Credit)	$	5.1		$	5.7		$	(6.7	)	$	(4.2	)

APCo



	Pension Plans						OPEB
	Three Months Ended September 30,						Three Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Service Cost	$	2.4		$	2.3		$	0.3		$	0.3
Interest Cost	5.8			6.5			2.1			2.6
Expected Return on Plan Assets	(9.1		)	(8.9		)	(4.0		)	(4.1		)
Amortization of Prior Service Credit	—			—			(2.5		)	(2.5		)
Amortization of Net Actuarial Loss	2.6			2.6			0.4			1.6
Net Periodic Benefit Cost (Credit)	$	1.7		$	2.5		$	(3.7	)	$	(2.1	)



	Pension Plans						OPEB
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Service Cost	$	7.0		$	7.0		$	0.8		$	0.8
Interest Cost	17.6			19.3			6.2			7.9
Expected Return on Plan Assets	(27.4		)	(26.8		)	(12.0		)	(12.3		)
Amortization of Prior Service Cost (Credit)	—			0.1			(7.5		)	(7.5		)
Amortization of Net Actuarial Loss	7.9			7.8			1.4			4.7
Net Periodic Benefit Cost (Credit)	$	5.1		$	7.4		$	(11.1	)	$	(6.4	)

Pension Plans
Other Postretirement
Benefit Plans
Three Months Ended September 30, Three Months Ended September 30,
2017
2016 2017 2016
(in millions)
Service Cost $ 2.3
$ 2.1
$ 0.3
$ 0.2
Interest Cost 6.5
6.8
2.6
2.7
Expected Return on Plan Assets (8.9 ) (8.8 ) (4.1 ) (4.3 )
Amortization of Prior Service Credit —
—
(2.5 ) (2.5 )
Amortization of Net Actuarial Loss 2.6
2.6
1.6
1.4
Net Periodic Benefit Cost (Credit) $ 2.5
$ 2.7
$ (2.1 ) $ (2.5 )

Pension Plans
Other Postretirement
Benefit Plans
Nine Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(in millions)
Service Cost $ 7.0
$ 6.1
$ 0.8
$ 0.7
Interest Cost 19.3
20.4
7.9
8.1
Expected Return on Plan Assets (26.8 ) (26.5 ) (12.3 ) (13.0 )
Amortization of Prior Service Cost (Credit) 0.1
0.1
(7.5 ) (7.5 )
Amortization of Net Actuarial Loss 7.8
8.0
4.7
4.1
Net Periodic Benefit Cost (Credit) $ 7.4
$ 8.1
$ (6.4 ) $ (7.6 )

I&M


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	3.5		$	3.1		$	0.4		$	0.4		$	3.4		$	3.5		$	0.4		$	0.4
Interest Cost	6.1			6.3			1.7			1.7			5.6			6.1			1.4			1.7
Expected Return on Plan Assets	(8.6		)	(8.4		)	(3.1		)	(3.2		)	(9.0		)	(8.6		)	(3.1		)	(3.1		)
Amortization of Prior Service Credit	—			—			(2.3		)	(2.4		)	—			—			(2.4		)	(2.3		)
Amortization of Net Actuarial Loss	2.4			2.5			1.1			0.9			2.5			2.4			0.3			1.1
Net Periodic Benefit Cost (Credit)	$	3.4		$	3.5		$	(2.2	)	$	(2.6	)	$	2.5		$	3.4		$	(3.4	)	$	(2.2	)


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	10.5		$	9.2		$	1.2		$	1.1		$	10.2		$	10.5		$	1.2		$	1.2
Interest Cost	18.2			19.0			5.2			5.2			16.6			18.2			4.1			5.2
Expected Return on Plan Assets	(25.9		)	(25.2		)	(9.2		)	(9.6		)	(26.8		)	(25.9		)	(9.3		)	(9.2		)
Amortization of Prior Service Cost (Credit)	0.1			0.1			(7.0		)	(7.1		)	—			0.1			(7.1		)	(7.0		)
Amortization of Net Actuarial Loss	7.3			7.4			3.3			2.8			7.4			7.3			0.9			3.3
Net Periodic Benefit Cost (Credit)	$	10.2		$	10.5		$	(6.5	)	$	(7.6	)	$	7.4		$	10.2		$	(10.2	)	$	(6.5	)

OPCo


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	1.8		$	1.6		$	0.3		$	0.2		$	2.0		$	1.8		$	0.2		$	0.3
Interest Cost	4.8			5.1			1.6			1.8			4.4			4.8			1.3			1.6
Expected Return on Plan Assets	(6.9		)	(6.9		)	(3.0		)	(3.3		)	(7.2		)	(6.9		)	(2.9		)	(3.0		)
Amortization of Prior Service Credit	—			—			(1.7		)	(1.7		)	—			—			(1.7		)	(1.7		)
Amortization of Net Actuarial Loss	2.0			2.1			1.1			0.9			2.0			2.0			0.3			1.1
Net Periodic Benefit Cost (Credit)	$	1.7		$	1.9		$	(1.7	)	$	(2.1	)	$	1.2		$	1.7		$	(2.8	)	$	(1.7	)


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	5.6		$	4.9		$	0.7		$	0.6		$	5.8		$	5.6		$	0.7		$	0.7
Interest Cost	14.5			15.4			5.0			5.3			13.3			14.5			3.9			5.0
Expected Return on Plan Assets	(20.9		)	(20.8		)	(9.0		)	(9.7		)	(21.6		)	(20.9		)	(8.8		)	(9.0		)
Amortization of Prior Service Cost (Credit)	0.1			0.1			(5.2		)	(5.2		)	—			0.1			(5.2		)	(5.2		)
Amortization of Net Actuarial Loss	5.9			6.1			3.3			2.8			6.0			5.9			0.8			3.3
Net Periodic Benefit Cost (Credit)	$	5.2		$	5.7		$	(5.2	)	$	(6.2	)	$	3.5		$	5.2		$	(8.6	)	$	(5.2	)

PSO


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	1.7		$	1.5		$	0.2		$	0.2		$	1.7		$	1.7		$	0.1		$	0.2
Interest Cost	2.6			2.8			0.8			0.8			2.5			2.6			0.6			0.8
Expected Return on Plan Assets	(3.9		)	(3.9		)	(1.4		)	(1.5		)	(4.0		)	(3.9		)	(1.3		)	(1.4		)
Amortization of Prior Service Cost (Credit)	—			0.1			(1.1		)	(1.1		)
Amortization of Prior Service Credit													—			—			(1.1		)	(1.1		)
Amortization of Net Actuarial Loss	1.1			1.1			0.5			0.4			1.1			1.1			0.1			0.5
Net Periodic Benefit Cost (Credit)	$	1.5		$	1.6		$	(1.0	)	$	(1.2	)	$	1.3		$	1.5		$	(1.6	)	$	(1.0	)


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	4.9		$	4.6		$	0.5		$	0.5		$	5.3		$	4.9		$	0.5		$	0.5
Interest Cost	8.0			8.4			2.4			2.4			7.4			8.0			1.8			2.4
Expected Return on Plan Assets	(11.8		)	(11.6		)	(4.2		)	(4.5		)	(12.1		)	(11.8		)	(4.1		)	(4.2		)
Amortization of Prior Service Cost (Credit)	—			0.2			(3.2		)	(3.2		)
Amortization of Prior Service Credit													—			—			(3.2		)	(3.2		)
Amortization of Net Actuarial Loss	3.3			3.3			1.5			1.3			3.3			3.3			0.4			1.5
Net Periodic Benefit Cost (Credit)	$	4.4		$	4.9		$	(3.0	)	$	(3.5	)	$	3.9		$	4.4		$	(4.6	)	$	(3.0	)

SWEPCo


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	2.1		$	2.0		$	0.2		$	0.2		$	2.4		$	2.1		$	0.2		$	0.2
Interest Cost	3.1			3.1			0.9			0.9			2.8			3.1			0.7			0.9
Expected Return on Plan Assets	(4.2		)	(4.0		)	(1.5		)	(1.7		)	(4.4		)	(4.2		)	(1.6		)	(1.5		)
Amortization of Prior Service Credit	—			—			(1.3		)	(1.3		)	—			—			(1.3		)	(1.3		)
Amortization of Net Actuarial Loss	1.3			1.2			0.5			0.5			1.3			1.3			0.2			0.5
Net Periodic Benefit Cost (Credit)	$	2.3		$	2.3		$	(1.2	)	$	(1.4	)	$	2.1		$	2.3		$	(1.8	)	$	(1.2	)


	Pension Plans						Other Postretirement Benefit Plans						Pension Plans						OPEB
	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(in millions)												(in millions)
Service Cost	$	6.5		$	6.1		$	0.6		$	0.6		$	7.0		$	6.5		$	0.7		$	0.6
Interest Cost	9.2			9.3			2.7			2.7			8.5			9.2			2.1			2.7
Expected Return on Plan Assets	(12.6		)	(12.3		)	(4.7		)	(5.0		)	(13.1		)	(12.6		)	(4.8		)	(4.7		)
Amortization of Prior Service Cost (Credit)	—			0.2			(3.9		)	(3.9		)
Amortization of Prior Service Credit													—			—			(3.9		)	(3.9		)
Amortization of Net Actuarial Loss	3.7			3.6			1.7			1.5			3.8			3.7			0.5			1.7
Net Periodic Benefit Cost (Credit)	$	6.8		$	6.9		$	(3.6	)	$	(4.1	)	$	6.2		$	6.8		$	(5.4	)	$	(3.6	)

8. BUSINESS SEGMENTS

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

AEP’s Reportable Segments

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

Vertically Integrated Utilities

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

Transmission and Distribution Utilities

Transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by ~~OPCo~~AEP Texas and ~~AEP Texas.~~OPCo.

OPCo purchases energy and capacity to serve SSO customers and provides transmission and distribution services for all connected load.

AEP Transmission Holdco

Development, construction and operation of transmission facilities through investments in AEPTCo. These investments have FERC-approved returns on equity.

Generation & Marketing

Competitive generation in ERCOT and PJM.

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

Contracted renewable energy investments and management services.

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

The tables below present AEP’s reportable segment income statement information for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 and reportable segment balance sheet information as of September 30, ~~2017~~2018 and December 31, ~~2016. These amounts include certain estimates and allocations where necessary.~~2017.


	Three Months Ended September 30, 2017																	Three Months Ended September 30, 2018
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing			Corporate and Other (a)		Reconciling Adjustments			Consolidated			Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing		Corporate and Other (a)		Reconciling Adjustments			Consolidated
	(in millions)																	(in millions)
Revenues from:
External Customers	$	2,453.8	$	1,149.7	$	45.1	$	441.5		$	14.6	$	—		$	4,104.7		$	2,610.2	$	1,180.9	$	51.9	$	486.5	$	3.6	$	—		$	4,333.1
Other Operating Segments	28.4		23.6		133.4		24.0			16.7		(226.1		)	—			26.5		30.6		135.3		35.1		20.1		(247.6		)	—
Total Revenues	$	2,482.2	$	1,173.3	$	178.5	$	465.5		$	31.3	$	(226.1	)	$	4,104.7		$	2,636.7	$	1,211.5	$	187.2	$	521.6	$	23.7	$	(247.6	)	$	4,333.1

Income (Loss) from Continuing Operations	$	297.3	$	144.0	$	76.5	$	33.7		$	5.2	$	—		$	556.7
Loss from Discontinued Operations, Net of Tax	—		—		—		—			—		—			—
Net Income (Loss)	$	297.3	$	144.0	$	76.5	$	33.7		$	5.2	$	—		$	556.7		$	345.6	$	145.2	$	74.2	$	5.1	$	9.6	$	—		$	579.7

	Three Months Ended September 30, 2016
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing			Corporate and Other (a)		Reconciling Adjustments			Consolidated
	(in millions)
Revenues from:
External Customers	$	2,538.3	$	1,245.4	$	39.5	$	823.3		$	5.7	$	—		$	4,652.2
Other Operating Segments	18.0		30.2		92.9		36.1			19.1		(196.3		)	—
Total Revenues	$	2,556.3	$	1,275.6	$	132.4	$	859.4		$	24.8	$	(196.3	)	$	4,652.2

Income (Loss) from Continuing Operations	$	343.4	$	155.7	$	69.5	$	(1,369.2	)	$	36.4	$	—		$	(764.2	)
Loss from Discontinued Operations, Net of Tax	—		—		—		—			—		—			—
Net Income (Loss)	$	343.4	$	155.7	$	69.5	$	(1,369.2	)	$	36.4	$	—		$	(764.2	)



	Three Months Ended September 30, 2017
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing		Corporate and Other (a)		Reconciling Adjustments			Consolidated
	(in millions)
Revenues from:
External Customers	$	2,453.8	$	1,149.7	$	45.1	$	441.5	$	14.6	$	—		$	4,104.7
Other Operating Segments	28.4		23.6		133.4		24.0		16.7		(226.1		)	—
Total Revenues	$	2,482.2	$	1,173.3	$	178.5	$	465.5	$	31.3	$	(226.1	)	$	4,104.7

Net Income (Loss)	$	297.3	$	144.0	$	76.5	$	33.7	$	5.2	$	—		$	556.7



	Nine Months Ended September 30, 2018
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing		Corporate and Other (a)			Reconciling Adjustments			Consolidated
	(in millions)
Revenues from:
External Customers	$	7,332.4	$	3,450.0	$	196.5	$	1,399.3	$	16.4		$	—		$	12,394.6
Other Operating Segments	61.3		60.9		408.7		88.1		55.1			(674.1		)	—
Total Revenues	$	7,393.7	$	3,510.9	$	605.2	$	1,487.4	$	71.5		$	(674.1	)	$	12,394.6

Net Income (Loss)	$	856.3	$	384.6	$	280.9	$	61.8	$	(17.1	)	$	—		$	1,566.5



	Nine Months Ended September 30, 2017
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco			Generation & Marketing		Corporate and Other (a)			Reconciling Adjustments			Consolidated
	(in millions)
Revenues from:							��
External Customers	$	6,819.3	$	3,242.7	$	125.8		$	1,386.8	$	39.9		$	—		$	11,614.5
Other Operating Segments	73.8		70.5		456.1			80.7		46.8			(727.9		)	—
Total Revenues	$	6,893.1	$	3,313.2	$	581.9		$	1,467.5	$	86.7		$	(727.9	)	$	11,614.5

Net Income (Loss)	$	639.2	$	374.3	$	278.3		$	246.3	$	(11.0	)	$	—		$	1,527.1

Nine Months Ended September 30, 2017
Vertically Integrated Utilities Transmission and Distribution Utilities AEP Transmission Holdco Generation
&
Marketing Corporate and Other (a) Reconciling Adjustments Consolidated
(in millions)
Revenues from:

External Customers $ 6,819.3
$ 3,242.7
$ 125.8
$ 1,386.8
$ 39.9
$ —
$ 11,614.5
Other Operating Segments 73.8
70.5
456.1
80.7
46.8
(727.9 ) —
Total Revenues $ 6,893.1
$ 3,313.2
$ 581.9
$ 1,467.5
$ 86.7
$ (727.9 ) $ 11,614.5

Income (Loss) from Continuing Operations $ 639.2
$ 374.3
$ 278.3
$ 246.3
$ (11.0 ) $ —
$ 1,527.1
Loss from Discontinued Operations, Net of Tax —
—
—
—
—
—
—
Net Income (Loss) $ 639.2
$ 374.3
$ 278.3
$ 246.3
$ (11.0 ) $ —
$ 1,527.1

Nine Months Ended September 30, 2016
Vertically Integrated Utilities Transmission and Distribution Utilities AEP Transmission Holdco Generation
&
Marketing Corporate and Other (a) Reconciling Adjustments Consolidated
(in millions)
Revenues from:

External Customers $ 6,864.6
$ 3,398.9
$ 110.1
$ 2,192.5
$ 23.9
$ —
$ 12,590.0
Other Operating Segments 63.2
69.6
272.6
98.7
55.2
(559.3 ) —
Total Revenues $ 6,927.8
$ 3,468.5
$ 382.7
$ 2,291.2
$ 79.1
$ (559.3 ) $ 12,590.0

Income (Loss) from Continuing Operations $ 832.6
$ 387.8
$ 209.5
$ (1,248.8 ) $ 64.2
$ —
$ 245.3
Loss from Discontinued Operations, Net of Tax —
—
—
—
(2.5 ) —
(2.5 )
Net Income (Loss) $ 832.6
$ 387.8
$ 209.5
$ (1,248.8 ) $ 61.7
$ —
$ 242.8



	September 30, 2018
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing			Corporate and Other (a)				Reconciling Adjustments				Consolidated
	(in millions)
Total Property, Plant and Equipment	$	44,553.4	$	17,619.1	$	8,130.3	$	864.1		$	384.8			$	(354.4	)	(b)	$	71,197.3
Accumulated Depreciation and Amortization	13,703.3		3,856.7		244.3		40.1			183.6				(186.4		)	(b)	17,841.6
Total Property Plant and Equipment - Net	$	30,850.1	$	13,762.4	$	7,886.0	$	824.0		$	201.2			$	(168.0	)	(b)	$	53,355.7

Total Assets	$	38,813.2	$	16,399.1	$	9,127.7	$	2,369.3		$	4,306.1		(c)	$	(3,398.0	)	(b) (d)	$	67,617.4

Long-term Debt Due Within One Year:
Nonaffiliated	$	1,306.1	$	548.5	$	50.0	$	0.1		$	(0.5	)		$	—			$	1,904.2

Long-term Debt:
Affiliated	50.0		—		—		32.2			—				(82.2		)		—
Nonaffiliated	11,563.5		5,082.2		2,966.2		(0.3		)	1,258.2				—				20,869.8

Total Long-term Debt	$	12,919.6	$	5,630.7	$	3,016.2	$	32.0		$	1,257.7			$	(82.2	)		$	22,774.0


	September 30, 2017																	December 31, 2017
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing			Corporate and Other (a)		Reconciling Adjustments				Consolidated		Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing			Corporate and Other (a)			Reconciling Adjustments				Consolidated
	(in millions)																	(in millions)
Total Property, Plant and Equipment	$	42,722.9	$	15,695.2	$	6,394.2	$	632.9		$	359.5	$	(366.5	)	(b)	$	65,438.2	$	43,294.4	$	16,371.2	$	7,110.2	$	644.6		$	374.5		$	(366.4	)	(b)	$	67,428.5
Accumulated Depreciation and Amortization	13,042.9		3,766.2		156.6		161.7			180.8		(186.5		)	(b)	17,121.7		13,153.4		3,768.3		176.6		75.0			180.6			(186.9		)	(b)	17,167.0
Total Property Plant and Equipment - Net	$	29,680.0	$	11,929.0	$	6,237.6	$	471.2		$	178.7	$	(180.0	)	(b)	$	48,316.5	$	30,141.0	$	12,602.9	$	6,933.6	$	569.6		$	193.9		$	(179.5	)	(b)	$	50,261.5

Total Assets	$	38,136.4	$	15,765.0	$	7,631.2	$	1,904.4		$	22,339.9	$	(21,812.0	)	(b) (c)	$	63,964.9	$	37,579.7	$	16,060.7	$	8,141.8	$	2,009.8		$	3,959.1	(c)	$	(3,022.0	)	(b) (d)	$	64,729.1

Long-term Debt Due Within One Year:
Non-Affiliated	$	1,107.2	$	703.4	$	—	$	0.1		$	548.6	$	—			$	2,359.3
Nonaffiliated																		$	1,038.1	$	663.1	$	50.0	$	—		$	2.5		$	—			$	1,753.7

Long-term Debt:
Affiliated	50.0		—		—		32.2			—		(82.2		)		—		50.0		—		—		32.2			—			(82.2		)		—
Non-Affiliated	10,644.2		4,738.0		2,682.1		(0.3		)	298.4		—				18,362.4
Nonaffiliated																		10,801.4		4,705.4		2,631.3		(0.3		)	1,281.8			—				19,419.6

Total Long-term Debt	$	11,801.4	$	5,441.4	$	2,682.1	$	32.0		$	847.0	$	(82.2	)		$	20,721.7	$	11,889.5	$	5,368.5	$	2,681.3	$	31.9		$	1,284.3		$	(82.2	)		$	21,173.3

	December 31, 2016
	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing			Corporate and Other (a)		Reconciling Adjustments				Consolidated
	(in millions)
Total Property, Plant and Equipment	$	41,552.6	$	14,762.2	$	5,354.0	$	364.7		$	356.6	$	(353.5	)	(b)	$	62,036.6
Accumulated Depreciation and Amortization	12,596.7		3,655.0		101.4		42.2			186.0		(184.0		)	(b)	16,397.3
Total Property Plant and Equipment - Net	$	28,955.9	$	11,107.2	$	5,252.6	$	322.5		$	170.6	$	(169.5	)	(b)	$	45,639.3

Assets Held for Sale	$	—	$	—	$	—	$	1,951.2		$	—	$	—			$	1,951.2

Total Assets	$	37,428.3	$	14,802.4	$	6,384.8	$	3,386.1		$	20,354.8	$	(18,888.7	)	(b) (c)	$	63,467.7

Long-term Debt Due Within One Year:
Non-Affiliated	$	1,519.9	$	309.4	$	—	$	500.1		$	548.6	$	—			$	2,878.0

Long-term Debt:
Affiliated	20.0		—		—		32.2			—		(52.2		)		—
Non-Affiliated	10,353.3		4,672.2		2,055.7		—			297.2		—				17,378.4

Total Long-term Debt	$	11,893.2	$	4,981.6	$	2,055.7	$	532.3		$	845.8	$	(52.2	)		$	20,256.4

Liabilities Held for Sale	$	—	$	—	$	—	$	235.9		$	—	$	—			$	235.9


(a)	Corporate and Other primarily includes the purchasing of receivables from certain AEP utility ~~subsidiaries,~~subsidiaries. This segment also includes Parent’s guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.


(b)	Includes eliminations due to an intercompany capital lease.


(c)	Includes elimination of AEP Parent’s investments in wholly-owned subsidiary companies.


(d)	Reconciling Adjustments for Total Assets primarily include ~~the~~ elimination of intercompany advances to affiliates and intercompany accounts ~~receivable along with the elimination of AEP’s investments in subsidiary companies.~~receivable.

Registrant Subsidiaries’ Reportable Segments (Applies to ~~APCo, I&M, OPCo, PSO and SWEPCo)~~all Registrant Subsidiaries except AEPTCo)

The Registrant Subsidiaries ~~besides AEPTCo,~~ each have one reportable segment, an integrated electricity generation, transmission and distribution business for APCo, I&M, PSO and SWEPCo, and an integrated electricity transmission and distribution business for AEP Texas and OPCo. Other activities are insignificant. ~~Operations~~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.

AEPTCo’s Reportable Segments

AEPTCo Parent is the holding company of seven FERC-regulated transmission-only electric utilities (State Transcos). The seven State Transcos have been identified as operating segments of AEPTCo under the accounting guidance for “Segment Reporting.” The State Transcos business consists of developing, constructing and operating transmission facilities at the request of the ~~RTO’s~~RTOs in which they operate and in replacing and upgrading facilities, assets and components of the existing AEP transmission system as needed to maintain reliability standards and provide service to AEP’s wholesale and retail customers. The State Transcos are regulated for rate-making purposes exclusively by the FERC and earn revenues through tariff rates charged for the use of their electric transmission systems.

AEPTCo’s Chief Operating Decision Maker makes operating decisions, allocates resources to and assesses performance based on these operating segments. The seven State ~~Transco~~Transcos operating segments all have similar economic characteristics and meet all of the criteria under the accounting guidance for “Segment Reporting” to be aggregated into one operating segment. As a result, AEPTCo has one reportable segment. The remainder of AEPTCo’s activity is presented in AEPTCo Parent. While not considered a reportable segment, AEPTCo Parent represents the activity of the holding company which primarily relates to debt financing activity and general corporate activities.

The tables below present AEPTCo’s reportable segment income statement information for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 and reportable segment balance sheet information as of September 30, ~~2017~~2018 and December 31, ~~2016. These amounts include certain estimates and allocations where necessary.~~2017.


	Three Months Ended September 30, 2017										Three Months Ended September 30, 2018
	State Transcos		AEPTCo Parent		Reconciling Adjustments				AEPTCo Consolidated		State Transcos		AEPTCo Parent				Reconciling Adjustments				AEPTCo Consolidated
	(in millions)										(in millions)
Revenues from:
External Customers	$	35.9	$	—	$	—			$	35.9	$	46.0	$	—			$	—			$	46.0
Sales to AEP Affiliates	131.3		—		0.1				131.4		148.4		—				—				148.4
Other Revenues											—		—				—				—
Total Revenues	$	167.2	$	—	$	0.1			$	167.3	$	194.4	$	—			$	—			$	194.4

Interest Income	$	—	$	19.5	$	(19.3	)	(a)	$	0.2	$	0.2	$	26.0			$	(25.7	)	(b)	$	0.5
Interest Expense	16.9		19.3		(19.3		)	(a)	16.9		19.8		25.7				(25.7		)	(b)	19.8
Income Tax Expense	30.2		—		—				30.2		18.4		(0.8		)		—				17.6
Equity Earnings in State Transcos	—		59.8		(59.8		)	(b)	—

Net Income	$	59.8	$	59.9	$	(59.8	)	(b)	$	59.9	$	77.1	$	1.0		(c)	$	—			$	78.1


	Three Months Ended September 30, 2016										Three Months Ended September 30, 2017
	State Transcos		AEPTCo Parent		Reconciling Adjustments				AEPTCo Consolidated		State Transcos (a)			AEPTCo Parent			Reconciling Adjustments				AEPTCo Consolidated (a)
	(in millions)										(in millions)
Revenues from:
External Customers	$	33.5	$	—	$	—			$	33.5	$	35.6		$	—		$	—			$	35.6
Sales to AEP Affiliates	91.8		—		—				91.8		130.1			—			—				130.1
Other Revenues											(0.1		)	—			—				(0.1		)
Total Revenues	$	125.3	$	—	$	—			$	125.3	$	165.6		$	—		$	—			$	165.6

Interest Income	$	—	$	14.0	$	(13.9	)	(a)	$	0.1	$	—		$	19.5		$	(19.3	)	(b)	$	0.2
Interest Expense	11.0		13.9		(13.9		)	(a)	11.0		17.1			19.3			(19.3		)	(b)	17.1
Income Tax Expense	26.4		—		—				26.4		29.5			—			—				29.5
Equity Earnings in State Transcos	—		52.3		(52.3		)	(b)	—

Net Income	$	52.3	$	52.4	$	(52.3	)	(b)	$	52.4	$	58.5		$	0.1	(c)	$	—			$	58.6


	Nine Months Ended September 30, 2017										Nine Months Ended September 30, 2018
	State Transcos		AEPTCo Parent		Reconciling Adjustments				AEPTCo Consolidated		State Transcos (a)		AEPTCo Parent			Reconciling Adjustments				AEPTCo Consolidated (a)
	(in millions)										(in millions)
Revenues from:
External Customers	$	99.2	$	—	$	—			$	99.2	$	132.3	$	—		$	—			$	132.3
Sales to AEP Affiliates	450.2		—		—				450.2		453.8		—			—				453.8
Other Revenues											0.1		$	—		$	—			0.1
Total Revenues	$	549.4	$	—	$	—			$	549.4	$	586.2	$	—		$	—			$	586.2

Interest Income	$	0.1	$	58.0	$	(57.6	)	(a)	$	0.5	$	0.4	$	76.2		$	(75.3	)	(b)	$	1.3
Interest Expense	48.6		57.6		(57.6		)	(a)	48.6		60.7		75.3			(75.3		)	(b)	60.7
Income Tax Expense	114.3		0.2		—				114.5		63.7		—			—				63.7
Equity Earnings in State Transcos	—		224.0		(224.0		)	(b)	—

Net Income	$	224.0	$	224.3	$	(224.0	)	(b)	$	224.3	$	243.6	$	0.6	(c)	$	—			$	244.2


	Nine Months Ended September 30, 2016										Nine Months Ended September 30, 2017
	State Transcos		AEPTCo Parent		Reconciling Adjustments				AEPTCo Consolidated		State Transcos (a)		AEPTCo Parent			Reconciling Adjustments				AEPTCo Consolidated (a)
	(in millions)										(in millions)
Revenues from:
External Customers	$	89.6	$	—	$	—			$	89.6	$	95.7	$	—		$	—			$	95.7
Sales to AEP Affiliates	268.4		—		—				268.4		439.1		—			—				439.1
Other Revenues											—		—			—				—
Total Revenues	$	358.0	$	—	$	—			$	358.0	$	534.8	$	—		$	—			$	534.8

Interest Income	$	—	$	41.8	$	(41.6	)	(a)	$	0.2	$	0.1	$	58.0		$	(57.6	)	(b)	$	0.5
Interest Expense	32.3		41.6		(41.6		)	(a)	32.3		50.4		57.6			(57.6		)	(b)	50.4
Income Tax Expense	73.9		—		—				73.9		108.0		0.2			—				108.2
Equity Earnings in State Transcos	—		153.0		(153.0		)	(b)	—

Net Income	$	153.0	$	153.0	$	(153.0	)	(b)	$	153.0	$	212.1	$	0.3	(c)	$	—			$	212.4


	September 30, 2017										September 30, 2018
	State Transcos		AEPTCo Parent		Reconciling Adjustments				AEPTCo Consolidated		State Transcos			AEPTCo Parent			Reconciling Adjustments				AEPTCo Consolidated
	(in millions)										(in millions)
Total Transmission Property	$	6,067.5	$	—	$	—			$	6,067.5	$	7,761.6	(a)	$	—		$	—			$	7,761.6	(a)
Accumulated Depreciation and Amortization	151.5		—		—				151.5		234.6		(a)	—			—				234.6		(a)
Total Transmission Property – Net	$	5,916.0	$	—	$	—			$	5,916.0	$	7,527.0	(a)	$	—		$	—			$	7,527.0	(a)

Notes Receivable - Affiliated	$	—	$	2,500.0	$	(2,500.0	)	(c)	$	—	$	—		$	2,900.0		$	(2,900.0	)	(d)	$	—

Total Assets	$	6,455.2	$	5,010.8	$	(4,917.1	)	(d)	$	6,548.9	$	7,983.6	(a)	$	2,988.4	(e)	$	(2,973.6	)	(f)	$	7,998.4	(a)

Total Long-term Debt	$	2,475.6	$	2,574.4	$	(2,500.0	)	(c)	$	2,550.0	$	2,900.0		$	2,872.6		$	(2,900.0	)	(d)	$	2,872.6


	December 31, 2016										December 31, 2017
	State Transcos		AEPTCo Parent		Reconciling Adjustments				AEPTCo Consolidated		State Transcos			AEPTCo Parent			Reconciling Adjustments				AEPTCo Consolidated
	(in millions)										(in millions)
Total Transmission Property	$	5,054.2	$	—	$	—			$	5,054.2	$	6,770.5	(a)	$	—		$	—			$	6,770.5	(a)
Accumulated Depreciation and Amortization	99.6		—		—				99.6		152.6		(a)	—			—				152.6		(a)
Total Transmission Property – Net	$	4,954.6	$	—	$	—			$	4,954.6	$	6,617.9	(a)	$	—		$	—			$	6,617.9	(a)

Notes Receivable - Affiliated	$	—	$	1,950.0	$	(1,950.0	)	(c)	$	—	$	—		$	2,550.4		$	(2,550.4	)	(d)	$	—

Total Assets	$	5,337.5	$	3,947.8	$	(3,935.5	)	(d)	$	5,349.8	$	7,086.9	(a)	$	2,590.1	(e)	$	(2,594.9	)	(f)	$	7,082.1	(a)

Total Long-term Debt	$	1,932.0	$	1,950.0	$	(1,950.0	)	(c)	$	1,932.0	$	2,575.0		$	2,550.4		$	(2,575.0	)	(d)	$	2,550.4


(a)	The amounts presented reflect the revisions made to AEPTCo’s previously issued financial statements. For additional details on revisions made to AEPTCo’s financial statements, see Note 1- Significant Accounting Matters.


(b)	Elimination of intercompany interest income/interest expense on affiliated debt arrangement.


~~(b)~~(c)	~~Elimination~~Includes the elimination of AEPTCo Parent’s equity earnings in the State Transcos.


~~(c)~~(d)	Elimination of intercompany debt.


~~(d)~~(e)	Includes the elimination of AEPTCo Parent’s investments in State Transcos.


(f)	Primarily relates to the elimination of ~~AEPTCo Parent’s investment in the State Transcos and Note~~Notes Receivable from the State Transcos.

9. DERIVATIVES AND HEDGING

The disclosures in this note apply to all Registrants unless indicated otherwise. For the periods presented, AEPTCo did not have any ~~Derivative~~derivative and ~~Hedging~~hedging activity.

The Registrants adopted ASU 2017-12 in the second quarter of 2018, effective January 1, 2018. See Note 2 - New Accounting Pronouncements for additional information.

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

AEPSC is agent for and transacts on behalf of AEP subsidiaries, including the Registrant Subsidiaries. ~~AEP Energy Partners, LLC~~AEPEP is agent for and transacts on behalf of other AEP subsidiaries.

The Registrants are exposed to certain market risks as major power producers and participants in the electricity, capacity, natural gas, coal and emission allowance markets. These risks include commodity price risks which may be subject to capacity risk, interest rate risk, credit risk and foreign currency exchange risk. These risks represent the risk of loss that may impact the Registrants due to changes in the underlying market prices or rates. Management utilizes derivative instruments to manage these risks.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

The strategy surrounding the use of derivative instruments primarily focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. The risk management strategies also include the use of derivative instruments for trading purposes which focus on seizing market opportunities to create value driven by expected changes in the market prices of the commodities. To accomplish these objectives, the Registrants primarily employ risk management contracts including physical and financial forward purchase-and-sale contracts and, to a lesser extent, OTC swaps and options. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

The Registrants utilize power, capacity, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other commodity contracts to manage the risk associated with the energy business. The Registrants utilize interest rate derivative contracts in order to manage the interest rate exposure associated with the commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. The Registrants also utilize derivative contracts to manage interest rate risk associated with debt financing. For disclosure purposes, these risks are grouped as “Interest Rate.” The amount of risk taken is determined by the Commercial Operations, Energy Supply and Finance groups in accordance with established risk management policies as approved by the Finance Committee of the Board of Directors.

The following tables represent the gross notional volume of the Registrants’ outstanding derivative contracts:

Notional Volume of Derivative Instruments

September 30, ~~2017~~2018


Primary Risk Exposure	Unit of Measure	AEP		APCo		I&M		OPCo		PSO		SWEPCo		Unit of Measure	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
		(in millions)													(in millions)
Commodity:
Power	MWhs	406.0		73.7		45.8		10.6		13.7		34.5		MWhs	415.7		—		88.7		52.8		8.0		19.0		13.0
Coal	Tons	0.5		—		0.2		—		—		0.3		Tons	0.2		—		—		0.2		—		—		—
Natural Gas	MMBtus	48.1		2.0		1.2		—		—		18.3		MMBtus	84.4		—		8.4		4.9		—		—		16.1
Heating Oil and Gasoline	Gallons	7.9		1.5		0.7		1.8		0.8		0.9		Gallons	8.3		1.7		1.6		0.8		2.0		0.8		0.9
Interest Rate	USD	$	53.2	$	—	$	—	$	—	$	—	$	—	USD	$	37.7	$	—	$	—	$	—	$	—	$	—	$	—

Interest Rate	USD	$	1,000.0	$	—	$	—	$	—	$	—	$	—	USD	$	500.0	$	—	$	—	$	—	$	—	$	—	$	—

Notional Volume of Derivative Instruments

December 31, ~~2016~~2017


Primary Risk Exposure	Unit of Measure	AEP		APCo		I&M		OPCo		PSO		SWEPCo		Unit of Measure	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
		(in millions)													(in millions)
Commodity:
Power	MWhs	348.0		51.9		19.9		11.2		11.9		14.2		MWhs	358.7		—		57.4		38.5		10.4		10.3		22.7
Coal	Tons	1.5		—		0.5		—		—		1.0		Tons	2.0		—		—		2.0		—		—		—
Natural Gas	MMBtus	32.8		—		—		—		—		—		MMBtus	53.7		—		1.1		0.7		—		—		18.3
Heating Oil and Gasoline	Gallons	7.4		1.4		0.7		1.6		0.8		0.9		Gallons	6.9		1.4		1.3		0.7		1.6		0.7		0.8
Interest Rate	USD	$	75.2	$	0.1	$	0.1	$	—	$	—	$	—	USD	$	50.7	$	—	$	—	$	—	$	—	$	—	$	—

Interest Rate	USD	$	500.0	$	—	$	—	$	—	$	—	$	—	USD	$	500.0	$	—	$	—	$	—	$	—	$	—	$	—

Fair Value Hedging Strategies (Applies to AEP)

Parent enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives may be designated as fair value hedges.

Cash Flow Hedging Strategies

The Registrants utilize cash flow hedges on certain derivative transactions for the purchase and sale of power (“Commodity”) in order to manage the variable price risk related to forecasted purchases and sales. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and purchases. The Registrants do not hedge all commodity price risk.

The Registrants utilize a variety of interest rate derivative transactions in order to manage interest rate risk exposure. The Registrants also utilize interest rate derivative contracts to manage interest rate exposure related to future borrowings of fixed-rate debt. The Registrants do not hedge all interest rate exposure.

At times, the Registrants are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP’s risk management policy, the Registrants may utilize foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrants do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheets at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrants apply valuation adjustments for discounting, liquidity and credit quality.

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract’s term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management’s estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

According to the accounting guidance for “Derivatives and Hedging,” the Registrants reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrants are required to post or receive cash collateral based on third party contractual agreements and risk profiles. ~~The Registrants~~AEP netted cash collateral received from third parties against short-term and long-term risk management assets in the amounts of $15 million and $9.4 million as of September 30, 2018 and December 31, 2017, respectively. AEP netted cash collateral paid to third parties against short-term and long-term risk management liabilities in the amounts of $1 million and $9 million as ~~follows:~~

September 30, 2017 December 31, 2016
Cash Collateral Cash Collateral Cash Collateral Cash Collateral
Received Paid Received Paid
Netted Against Netted Against Netted Against Netted Against
Risk Management Risk Management Risk Management Risk Management
Company Assets Liabilities Assets Liabilities
(in millions)
AEP $ 3.5
$ 17.0
$ 7.9
$ 7.6
APCo 0.4
0.3
0.5
0.7
I&M 0.3
0.1
0.3
0.4
OPCo 0.1
—
0.2
—
PSO —
—
0.1
—
SWEPCo —
—
0.1
—
of September 30, 2018 and December 31, 2017, respectively. The netted cash collateral from third parties against short-term and long-term risk management assets and netted cash collateral paid to third parties against short-term and long-term risk management liabilities were immaterial for the other Registrants as of September 30, 2018 and December 31, 2017.

The following tables represent the gross fair value of the Registrants’ derivative activity on the balance sheets:

AEP

Fair Value of Derivative Instruments

September 30, 2018



	Risk Management Contracts		Hedging Contracts						Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)			Interest Rate (a)
	(in millions)
Current Risk Management Assets	$	359.9	$	29.1		$	—		$	389.0	$	(197.1	)	$	191.9
Long-term Risk Management Assets	295.3		10.6			—			305.9		(41.0		)	264.9
Total Assets	655.2		39.7			—			694.9		(238.1		)	456.8

Current Risk Management Liabilities	232.4		7.5			0.5			240.4		(183.1		)	57.3
Long-term Risk Management Liabilities	240.0		55.4			33.7			329.1		(41.9		)	287.2
Total Liabilities	472.4		62.9			34.2			569.5		(225.0		)	344.5

Total MTM Derivative Contract Net Assets (Liabilities)	$	182.8	$	(23.2	)	$	(34.2	)	$	125.4	$	(13.1	)	$	112.3

Fair Value of Derivative Instruments

December 31, 2017


	Risk Management Contracts		Hedging Contracts						Gross Amounts of Risk Management Assets/ Liabilities Recognized				Gross Amounts Offset in the Statement of Financial Position (b)				Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)			Risk Management Contracts			Hedging Contracts						Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)			Interest Rate (a)										Commodity (a)				Commodity (a)			Interest Rate (a)
	(in millions)																			(in millions)
Current Risk Management Assets	$	277.4	$	8.1		$	4.2				$	289.7			$	(143.6			)	$	146.1		$	389.0		$	17.5		$	2.5	$	409.0		$	(282.8	)	$	126.2
Long-term Risk Management Assets	348.1		3.8			—			351.9				(41.5		)		310.4			300.9			6.3			—			307.2		(25.1		)	282.1
Total Assets	625.5		11.9			4.2			641.6				(185.1		)		456.5			689.9			23.8			2.5			716.2		(307.9		)	408.3

Current Risk Management Liabilities	202.2		13.5			1.4			217.1				(147.7		)		69.4			334.6			9.0			—			343.6		(282.0		)	61.6
Long-term Risk Management Liabilities	329.6		74.0			—			403.6				(50.9		)		352.7			280.6			58.3			8.6			347.5		(25.5		)	322.0
Total Liabilities	531.8		87.5			1.4			620.7				(198.6		)		422.1			615.2			67.3			8.6			691.1		(307.5		)	383.6

Total MTM Derivative Contract Net Assets (Liabilities)	$	93.7	$	(75.6	)	$	2.8		$	20.9			$	13.5			$	34.4		$	74.7		$	(43.5	)	$	(6.1	)	$	25.1	$	(0.4	)	$	24.7


Fair Value of Derivative Instruments
December 31, 2016

	Risk Management Contracts		Hedging Contracts						Gross Amounts of Risk Management Assets/ Liabilities Recognized				Gross Amounts Offset in the Statement of Financial Position (b)				Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)			Interest Rate (a)
	(in millions)
Current Risk Management Assets	$	264.4	$	13.2		$	—				$	277.6								$	(183.1	)	$	94.5
Long-term Risk Management Assets	315.0		7.7			—			322.7				(33.6		)		289.1
Total Assets	579.4		20.9			—			600.3				(216.7		)		383.6

Current Risk Management Liabilities	227.2		6.3			—			233.5				(180.1		)		53.4
Long-term Risk Management Liabilities	301.0		50.1			1.4			352.5				(36.3		)		316.2
Total Liabilities	528.2		56.4			1.4			586.0				(216.4		)		369.6

Total MTM Derivative Contract Net Assets (Liabilities)	$	51.2	$	(35.5	)	$	(1.4	)	$	14.3			$	(0.3	)		$	14.0

AEP Texas

Fair Value of Derivative Instruments

September 30, 2018



Balance Sheet Location	Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)		Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)
Current Risk Management Assets	$	0.5	$	—	$	0.5
Long-term Risk Management Assets	—		—		—
Total Assets	0.5		—		0.5

Current Risk Management Liabilities	—		—		—
Long-term Risk Management Liabilities	—		—		—
Total Liabilities	—		—		—

Total MTM Derivative Contract Net Assets	$	0.5	$	—	$	0.5

Fair Value of Derivative Instruments

December 31, 2017



Balance Sheet Location	Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)		Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)
Current Risk Management Assets	$	0.5	$	—	$	0.5
Long-term Risk Management Assets	—		—		—
Total Assets	0.5		—		0.5

Current Risk Management Liabilities	—		—		—
Long-term Risk Management Liabilities	—		—		—
Total Liabilities	—		—		—

Total MTM Derivative Contract Net Assets	$	0.5	$	—	$	0.5

APCo

Fair Value of Derivative Instruments

September 30, ~~2017~~2018


	Risk Management		Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)			of Financial Position (c)		Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)							(in millions)
Current Risk Management Assets	$	50.4	$	(20.1	)	$	30.3	$	106.6	$	(38.2	)	$	68.4
Long-term Risk Management Assets	4.9		(4.3		)	0.6		6.0		(4.6		)	1.4
Total Assets	55.3		(24.4		)	30.9		112.6		(42.8		)	69.8

Current Risk Management Liabilities	20.7		(19.8		)	0.9		39.1		(38.2		)	0.9
Long-term Risk Management Liabilities	4.8		(4.5		)	0.3		5.5		(4.8		)	0.7
Total Liabilities	25.5		(24.3		)	1.2		44.6		(43.0		)	1.6

Total MTM Derivative Contract Net Assets (Liabilities)	$	29.8	$	(0.1	)	$	29.7
Total MTM Derivative Contract Net Assets								$	68.0	$	0.2		$	68.2

Fair Value of Derivative Instruments

December 31, ~~2016~~2017


	Risk Management		Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)			of Financial Position (c)		Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)							(in millions)
Current Risk Management Assets	$	22.7	$	(20.1	)	$	2.6	$	75.6	$	(50.7	)	$	24.9
Long-term Risk Management Assets	1.9		(1.9		)	—		2.4		(1.3		)	1.1
Total Assets	24.6		(22.0		)	2.6		78.0		(52.0		)	26.0

Current Risk Management Liabilities	20.6		(20.3		)	0.3		50.6		(49.3		)	1.3
Long-term Risk Management Liabilities	2.8		(1.9		)	0.9		1.4		(1.2		)	0.2
Total Liabilities	23.4		(22.2		)	1.2		52.0		(50.5		)	1.5

Total MTM Derivative Contract Net Assets	$	1.2	$	0.2		$	1.4
Total MTM Derivative Contract Net Assets (Liabilities)								$	26.0	$	(1.5	)	$	24.5

I&M

Fair Value of Derivative Instruments

September 30, ~~2017~~2018


	Risk Management		Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)			of Financial Position (c)		Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)							(in millions)
Current Risk Management Assets	$	27.4	$	(15.8	)	$	11.6	$	39.4	$	(28.5	)	$	10.9
Long-term Risk Management Assets	3.3		(2.8		)	0.5		3.7		(2.8		)	0.9
Total Assets	30.7		(18.6		)	12.1		43.1		(31.3		)	11.8

Current Risk Management Liabilities	17.6		(15.6		)	2.0		35.2		(28.8		)	6.4
Long-term Risk Management Liabilities	3.0		(2.8		)	0.2		3.2		(2.8		)	0.4
Total Liabilities	20.6		(18.4		)	2.2		38.4		(31.6		)	6.8

Total MTM Derivative Contract Net Assets (Liabilities)	$	10.1	$	(0.2	)	$	9.9
Total MTM Derivative Contract Net Assets								$	4.7	$	0.3		$	5.0

Fair Value of Derivative Instruments

December 31, ~~2016~~2017


	Risk Management		Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)			of Financial Position (c)		Risk Management Contracts – Commodity (a)			Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)							(in millions)
Current Risk Management Assets	$	14.9	$	(11.4	)	$	3.5	$	47.2		$	(39.6	)	$	7.6
Long-term Risk Management Assets	1.1		(1.1		)	—		1.6			(0.9		)	0.7
Total Assets	16.0		(12.5		)	3.5		48.8			(40.5		)	8.3

Current Risk Management Liabilities	11.8		(11.5		)	0.3		48.5			(45.0		)	3.5
Long-term Risk Management Liabilities	1.9		(1.1		)	0.8		0.9			(0.8		)	0.1
Total Liabilities	13.7		(12.6		)	1.1		49.4			(45.8		)	3.6

Total MTM Derivative Contract Net Assets	$	2.3	$	0.1		$	2.4
Total MTM Derivative Contract Net Assets (Liabilities)								$	(0.6	)	$	5.3		$	4.7

OPCo

Fair Value of Derivative Instruments

September 30, ~~2017~~2018


	Risk Management			Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -			in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)			Financial Position (b)			of Financial Position (c)			Risk Management Contracts – Commodity (a)			Gross Amounts Offset in the Statement of Financial Position (b)		Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)									(in millions)
Current Risk Management Assets	$	0.3		$	(0.1	)	$	0.2		$	0.6		$	—	$	0.6
Long-term Risk Management Assets	—			—			—			0.1			—		0.1
Total Assets	0.3			(0.1		)	0.2			0.7			—		0.7

Current Risk Management Liabilities	7.6			—			7.6			5.4			—		5.4
Long-term Risk Management Liabilities	130.9			—			130.9			89.8			—		89.8
Total Liabilities	138.5			—			138.5			95.2			—		95.2

Total MTM Derivative Contract Net Liabilities	$	(138.2	)	$	(0.1	)	$	(138.3	)	$	(94.5	)	$	—	$	(94.5	)

Fair Value of Derivative Instruments

December 31, ~~2016~~2017


	Risk Management			Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -			in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)			Financial Position (b)			of Financial Position (c)			Risk Management Contracts – Commodity (a)			Gross Amounts Offset in the Statement of Financial Position (b)		Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)									(in millions)
Current Risk Management Assets	$	0.4		$	(0.2	)	$	0.2		$	0.6		$	—	$	0.6
Long-term Risk Management Assets	—			—			—			—			—		—
Total Assets	0.4			(0.2		)	0.2			0.6			—		0.6

Current Risk Management Liabilities	5.9			—			5.9			6.4			—		6.4
Long-term Risk Management Liabilities	113.1			—			113.1			126.0			—		126.0
Total Liabilities	119.0			—			119.0			132.4			—		132.4

Total MTM Derivative Contract Net Liabilities	$	(118.6	)	$	(0.2	)	$	(118.8	)	$	(131.8	)	$	—	$	(131.8	)

PSO

Fair Value of Derivative Instruments

September 30, ~~2017~~2018


	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of		Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)		of Financial Position (c)		Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)						(in millions)
Current Risk Management Assets	$	4.7	$	—	$	4.7	$	18.8	$	(0.3	)	$	18.5
Long-term Risk Management Assets	—		—		—		—		—			—
Total Assets	4.7		—		4.7		18.8		(0.3		)	18.5

Current Risk Management Liabilities	—		—		—		0.9		(0.3		)	0.6
Long-term Risk Management Liabilities	—		—		—		—		—			—
Total Liabilities	—		—		—		0.9		(0.3		)	0.6

Total MTM Derivative Contract Net Assets	$	4.7	$	—	$	4.7	$	17.9	$	—		$	17.9

Fair Value of Derivative Instruments

December 31, ~~2016~~2017


	Risk Management		Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)			of Financial Position (c)		Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)							(in millions)
Current Risk Management Assets	$	0.9	$	(0.1	)	$	0.8	$	6.6	$	(0.2	)	$	6.4
Long-term Risk Management Assets	—		—			—		—		—			—
Total Assets	0.9		(0.1		)	0.8		6.6		(0.2		)	6.4

Current Risk Management Liabilities	—		—			—		0.2		(0.2		)	—
Long-term Risk Management Liabilities	—		—			—		—		—			—
Total Liabilities	—		—			—		0.2		(0.2		)	—

Total MTM Derivative Contract Net Assets (Liabilities)	$	0.9	$	(0.1	)	$	0.8
Total MTM Derivative Contract Net Assets								$	6.4	$	—		$	6.4

SWEPCo

Fair Value of Derivative Instruments

September 30, ~~2017~~2018


	Risk Management		Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)			of Financial Position (c)		Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)							(in millions)
Current Risk Management Assets	$	12.7	$	(0.2	)	$	12.5	$	8.1	$	(1.6	)	$	6.5
Long-term Risk Management Assets	0.7		—			0.7		—		—			—
Total Assets	13.4		(0.2		)	13.2		8.1		(1.6		)	6.5

Current Risk Management Liabilities	0.3		(0.2		)	0.1		1.8		(1.6		)	0.2
Long-term Risk Management Liabilities	—		—			—		2.6		—			2.6
Total Liabilities	0.3		(0.2		)	0.1		4.4		(1.6		)	2.8

Total MTM Derivative Contract Net Assets	$	13.1	$	—		$	13.1	$	3.7	$	—		$	3.7

Fair Value of Derivative Instruments

December 31, ~~2016~~2017


	Risk Management		Gross Amounts Offset			Net Amounts of Assets/Liabilities
	Contracts -		in the Statement of			Presented in the Statement
Balance Sheet Location	Commodity (a)		Financial Position (b)			of Financial Position (c)		Risk Management Contracts – Commodity (a)		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
	(in millions)							(in millions)
Current Risk Management Assets	$	1.1	$	(0.2	)	$	0.9	$	7.0	$	(0.6	)	$	6.4
Long-term Risk Management Assets	—		—			—		—		—			—
Total Assets	1.1		(0.2		)	0.9		7.0		(0.6		)	6.4

Current Risk Management Liabilities	0.4		(0.1		)	0.3		0.8		(0.6		)	0.2
Long-term Risk Management Liabilities	—		—			—		—		—			—
Total Liabilities	0.4		(0.1		)	0.3		0.8		(0.6		)	0.2

Total MTM Derivative Contract Net Assets (Liabilities)	$	0.7	$	(0.1	)	$	0.6
Total MTM Derivative Contract Net Assets								$	6.2	$	—		$	6.2


(a)	Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the balance sheets on a net basis in accordance with the accounting guidance for “Derivatives and Hedging.”


(b)	Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for “Derivatives and Hedging.”


(c)	~~There are no~~All derivative contracts subject to a master netting arrangement or similar agreement ~~which~~ are ~~not~~ offset in the statement of financial position.

The tables below present the Registrants’ activity of derivative risk management contracts:

Amount of Gain (Loss) Recognized on

Risk Management Contracts

For the Three Months Ended September 30, ~~2017~~2018


Location of Gain (Loss)	AEP			APCo		I&M			OPCo			PSO		SWEPCo			AEP			AEP Texas		APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)																(in millions)
Vertically Integrated Utilities Revenues	$	0.9		$	—	$	—		$	—		$	—	$	—		$	(0.7	)	$	—	$	—		$	—		$	—		$	—		$	—
Generation & Marketing Revenues	17.7			—		—			—			—		—			19.3			—		—			—			—			—			—
Electric Generation, Transmission and Distribution Revenues	—			0.3		0.6			—			—		(0.1		)	—			—		(0.5		)	(0.1		)	—			—			—
Purchased Electricity for Resale	1.0			0.3		0.2			—			—		—			0.3			—		0.3			—			—			—			—
Other Operation	0.1			—		—			0.1			—		—			0.5			0.1		0.1			0.1			0.1			0.1			0.1
Maintenance	0.1			0.1		—			0.1			—		—			0.6			0.1		0.1			0.1			0.1			0.1			0.1
Regulatory Assets (a)	(8.8		)	0.1		(0.8		)	(8.7		)	—		0.3			(14.0		)	—		—			(3.5		)	(9.3		)	(0.6		)	(0.6		)
Regulatory Liabilities (a)	15.6			3.7		2.1			—			2.6		7.0			33.8			—		24.0			—			—			3.9			1.5
Total Gain (Loss) on Risk Management Contracts	$	26.6		$	4.5	$	2.1		$	(8.5	)	$	2.6	$	7.2		$	39.8		$	0.2	$	24.0		$	(3.4	)	$	(9.1	)	$	3.5		$	1.1

Amount of Gain (Loss) Recognized on

Risk Management Contracts

For the Three Months Ended September 30, ~~2016~~2017


Location of Gain (Loss)	AEP			APCo			I&M		OPCo			PSO			SWEPCo			AEP			AEP Texas		APCo		I&M			OPCo			PSO		SWEPCo
	(in millions)																	(in millions)
Vertically Integrated Utilities Revenues	$	2.4		$	—		$	—	$	—		$	—		$	—		$	0.9		$	—	$	—	$	—		$	—		$	—	$	—
Transmission and Distribution Utilities Revenues	0.1			—			—		—			—			—
Generation & Marketing Revenues	9.2			—			—		—			—			—			17.7			—		—		—			—			—		—
Electric Generation, Transmission and Distribution Revenues	—			1.0			1.2		0.1			—			(0.1		)	—			—		0.3		0.6			—			—		(0.1		)
Purchased Electricity for Resale	1.5			0.8			0.1		—			—			—			1.0			—		0.3		0.2			—			—		—
Other Operation	(0.4		)	—			—		(0.1		)	—			—			0.1			0.1		—		—			0.1			—		—
Maintenance	(0.4		)	(0.1		)	—		(0.1		)	(0.1		)	(0.1		)	0.1			0.1		0.1		—			0.1			—		—
Regulatory Assets (a)	(22.5		)	5.2			1.6		(95.4		)	0.1			2.8			(8.8		)	0.1		0.1		(0.8		)	(8.7		)	—		0.3
Regulatory Liabilities (a)	28.6			16.9			5.5		—			0.8			3.7			15.6			0.1		3.7		2.1			—			2.6		7.0
Total Gain (Loss) on Risk Management Contracts	$	18.5		$	23.8		$	8.4	$	(95.5	)	$	0.8		$	6.3		$	26.6		$	0.4	$	4.5	$	2.1		$	(8.5	)	$	2.6	$	7.2

Amount of Gain (Loss) Recognized on

Risk Management Contracts

For the Nine Months Ended September 30, 2018



Location of Gain (Loss)	AEP			AEP Texas		APCo			I&M			OPCo		PSO			SWEPCo
	(in millions)
Vertically Integrated Utilities Revenues	$	(9.4	)	$	—	$	—		$	—		$	—	$	—		$	—
Generation & Marketing Revenues	31.7			—		—			—			—		—			—
Electric Generation, Transmission and Distribution Revenues	—			—		(1.3		)	(7.8		)	—		—			0.1
Purchased Electricity for Resale	8.3			—		7.3			0.8			—		—			—
Other Operation	1.3			0.3		0.2			0.2			0.3		0.2			0.2
Maintenance	1.5			0.3		0.3			0.2			0.3		0.2			0.2
Regulatory Assets (a)	29.2			—		—			(0.3		)	31.8		(0.6		)	(1.7		)
Regulatory Liabilities (a)	206.2			—		127.3			11.7			0.6		34.8			7.6
Total Gain on Risk Management Contracts	$	268.8		$	0.6	$	133.8		$	4.8		$	33.0	$	34.6		$	6.4

Amount of Gain (Loss) Recognized on

Risk Management Contracts

For the Nine Months Ended September 30, 2017

Location of Gain (Loss) AEP APCo I&M OPCo PSO SWEPCo
(in millions)
Vertically Integrated Utilities Revenues $ 7.0
$ —
$ —
$ —
$ —
$ —
Generation & Marketing Revenues 38.5
—
—
—
—
—
Electric Generation, Transmission and Distribution Revenues —
0.6
6.3
—
—
—
Purchased Electricity for Resale 4.9
1.6
0.5
—
—
—
Other Operation 0.5
—
—
0.1
—
—
Maintenance 0.4
0.1
—
0.1
—
—
Regulatory Assets (a) (26.8 ) —
(1.0 ) (25.9 ) —
0.1
Regulatory Liabilities (a) 81.8
28.2
15.3
—
13.7
22.0
Total Gain (Loss) on Risk Management Contracts $ 106.3
$ 30.5
$ 21.1
$ (25.7 ) $ 13.7
$ 22.1

~~Amount of Gain (Loss) Recognized on~~

~~Risk Management Contracts~~

~~For the Nine Months Ended September 30, 2016~~


Location of Gain (Loss)	AEP			APCo			I&M			OPCo			PSO			SWEPCo			AEP			AEP Texas			APCo		I&M			OPCo			PSO		SWEPCo
	(in millions)																		(in millions)
Vertically Integrated Utilities Revenues	$	3.1		$	—		$	—		$	—		$	—		$	—		$	7.0		$	—		$	—	$	—		$	—		$	—	$	—
Transmission and Distribution Utilities Revenues	0.1			—			—			—			—			—
Generation & Marketing Revenues	50.1			—			—			—			—			—			38.5			—			—		—			—			—		—
Electric Generation, Transmission and Distribution Revenues	—			(0.8		)	3.7			0.1			—			(0.1		)	—			—			0.6		6.3			—			—		—
Sales to AEP Affiliates	—			2.1			5.8			—			—			—
Purchased Electricity for Resale	4.9			2.7			0.2			—			—			—			4.9			—			1.6		0.5			—			—		—
Other Operation	(1.3		)	(0.1		)	(0.1		)	(0.3		)	(0.1		)	(0.2		)	0.5			0.1			—		—			0.1			—		—
Maintenance	(1.6		)	(0.3		)	(0.1		)	(0.3		)	(0.2		)	(0.2		)	0.4			0.1			0.1		—			0.1			—		—
Regulatory Assets (a)	(51.0		)	(7.2		)	3.0			(115.9		)	0.4			5.5			(26.8		)	—			—		(1.0		)	(25.9		)	—		0.1
Regulatory Liabilities (a)	58.0			39.2			11.2			(15.2		)	3.2			14.7			81.8			(0.2		)	28.2		15.3			—			13.7		22.0
Total Gain (Loss) on Risk Management Contracts	$	62.3		$	35.6		$	23.7		$	(131.6	)	$	3.3		$	19.7		$	106.3		$	—		$	30.5	$	21.1		$	(25.7	)	$	13.7	$	22.1


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

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the statements of income on an accrual basis.

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the statements of income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the statements of income depending on the relevant facts and circumstances. Certain derivatives that economically hedge future commodity risk are recorded in the same expense line item on the statements of income as that of the associated risk. However, unrealized and some realized gains and losses in regulated jurisdictions for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies (Applies to AEP)

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

AEP records realized and unrealized gains or losses on interest rate swaps that are designated and qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the statements of income.

The following table shows the ~~results of~~impacts recognized on the balance sheets related to the hedged items in fair value hedging ~~gains (losses):~~relationships:

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(in millions)
Gain (Loss) on Fair Value Hedging Instruments $ 0.1
$ (1.1 ) $ (0.1 ) $ 3.0
Gain (Loss) on Fair Value Portion of Long-term Debt (0.1 ) 1.1
0.1
(3.0 )



	Carrying Amount of the Hedged Assets/(Liabilities)						Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
	September 30, 2018			December 31, 2017			September 30, 2018		December 31, 2017
	(in millions)
Long-Term Debt (a)	$	(461.4	)	$	(489.3	)	$	34.2	$	6.1


(a)	Amounts included on the balance sheets within Long-term Debt Due within One Year and Long-term Debt, respectively.

~~During the three and nine months ended September 30, 2017 and 2016,~~

The pretax effects of fair value hedge ~~ineffectiveness was immaterial.~~accounting on income were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in millions)
Gain (Loss) on Interest Rate Contracts:
Gain (Loss) on Fair Value Hedging Instruments (a)	$	(6.3	)	$	0.1		$	(28.1	)	$	(0.1	)
Gain (Loss) on Fair Value Portion of Long-term Debt (a)	6.3			(0.1		)	28.1			0.1


(a)	Gain (Loss) is included in Interest Expense on the statements of income.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power designated as cash flow hedges are included in Total Revenues or Purchased Electricity for Resale on the statements of income or in Regulatory Assets or Regulatory Liabilities on the balance sheets, depending on the specific nature of the risk being hedged. During the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, AEP applied cash flow hedging to outstanding power derivatives. During the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the Registrant Subsidiaries did not apply cash flow hedging to outstanding power derivatives.

The Registrants reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Interest Expense on the statements of income in those periods in which hedged interest payments occur. During the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, AEP applied cash flow hedging to outstanding interest rate derivatives. During the three and nine months ended September 30, 2017, ~~and 2016,~~ the Registrant Subsidiaries did not apply cash flow hedging to outstanding interest rate derivatives. During the three and nine months ended September 30, 2018 SWEPCo applied cash flow hedging to outstanding interest rate derivatives and the other Registrant Subsidiaries did not.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Depreciation and Amortization expense on the statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the Registrants did not apply cash flow hedging to any outstanding foreign currency derivatives.

~~During the three and nine months ended September 30, 2017 and 2016, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.~~

For details on effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets and the reasons for changes in cash flow hedges, see Note 3.

3 - Comprehensive Income.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets were:

Impact of Cash Flow Hedges on AEP’s Balance Sheets

September 30, 2017 December 31, 2016
Commodity Interest Rate Commodity Interest Rate
(in millions)
Hedging Assets (a) $ 4.3
$ 4.2
$ 11.2
$ —
Hedging Liabilities (a) 79.9
—
46.7
—
AOCI Gain (Loss) Net of Tax (49.2 ) (12.2 ) (23.1 ) (15.7 )
Portion Expected to be Reclassified to Net Income During the Next Twelve Months (3.6 ) (0.7 ) 4.3
(1.0 )



	September 30, 2018						December 31, 2017
	Commodity			Interest Rate			Commodity			Interest Rate
	(in millions)
AOCI Loss Net of Tax	$	(22.8	)	$	(12.7	)	$	(28.4	)	$	(13.0	)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months	14.4			(0.8		)	5.5			(0.8		)


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

As of September 30, ~~2017~~2018 the maximum length of time that AEP is hedging its exposure to variability in future cash flows related to forecasted transactions is ~~123~~183 months.

Impact of Cash Flow Hedges on the Registrant Subsidiaries’ Balance Sheets


	September 30, 2017						December 31, 2016						September 30, 2018						December 31, 2017
	Interest Rate												Interest Rate
				Expected to be						Expected to be						Expected to be						Expected to be
				Reclassified to						Reclassified to						Reclassified to						Reclassified to
				Net Income During						Net Income During						Net Income During						Net Income During
	AOCI Gain (Loss)			the Next			AOCI Gain (Loss)			the Next			AOCI Gain (Loss)			the Next			AOCI Gain (Loss)			the Next
Company	Net of Tax			Twelve Months			Net of Tax			Twelve Months			Net of Tax			Twelve Months			Net of Tax			Twelve Months
	(in millions)												(in millions)
AEP Texas													$	(4.6	)	$	(1.1	)	$	(4.5	)	$	(0.9	)
APCo	$	2.4		$	0.7		$	2.9		$	0.7		2.0			0.9			2.2			0.7
I&M	(11.0		)	(1.3		)	(12.0		)	(1.3		)	(11.9		)	(1.6		)	(10.7		)	(1.3		)
OPCo	2.2			1.1			3.0			1.1			1.3			1.3			1.9			1.1
PSO	2.8			0.8			3.4			0.8			2.4			1.0			2.6			0.8
SWEPCo	(6.3		)	(1.4		)	(7.4		)	(1.4		)	(3.7		)	(1.5		)	(6.0		)	(1.4		)

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

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

Master agreements are typically used to facilitate the netting of cash flows associated with a single counterparty and may include collateral requirements. Collateral requirements in the form of cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. Some master agreements include margining, which requires a counterparty to post cash or letters of credit in the event exposure exceeds the established threshold. A counterparty is required to post cash or letters of credit in the event exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP’s credit policy. In addition, master agreements allow for termination and liquidation of all positions in the event of a default including a failure or inability to post collateral when required.

Collateral Triggering Events

Credit Downgrade Triggers (Applies to AEP, APCo, I&M, PSO and SWEPCo)

A limited number of derivative contracts include collateral triggering events, which include a requirement to maintain certain credit ratings. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering events in contracts. ~~AEP, APCo, I&M, PSO and SWEPCo~~The Registrants have not experienced a downgrade below a specified credit rating threshold that would require the posting of additional collateral. The Registrants had immaterial derivative contracts with collateral triggering events in a net liability position as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017, respectively.

Cross-Default Triggers (Applies to AEP, APCo, I&M and ~~I&M)~~SWEPCo)

In addition, a majority of non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation that is $50 million or greater. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount that the exposure has been reduced by cash collateral posted and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering contractual netting arrangements:


	September 30, 2017						September 30, 2018
	Liabilities for				Additional		Liabilities for				Additional
	Contracts with Cross				Settlement		Contracts with Cross				Settlement
	Default Provisions				Liability if Cross		Default Provisions				Liability if Cross
	Prior to Contractual		Amount of Cash		Default Provision		Prior to Contractual		Amount of Cash		Default Provision
Company	Netting Arrangements		Collateral Posted		is Triggered		Netting Arrangements		Collateral Posted		is Triggered
	(in millions)						(in millions)
AEP	$	285.9	$	2.5	$	274.4	$	253.1	$	0.8	$	211.2
APCo	—		—		—		0.1		—		0.1
I&M	—		—		—		—		—		—
SWEPCo							2.8		—		2.8


	December 31, 2016						December 31, 2017
	Liabilities for				Additional		Liabilities for				Additional
	Contracts with Cross				Settlement		Contracts with Cross				Settlement
	Default Provisions				Liability if Cross		Default Provisions				Liability if Cross
	Prior to Contractual		Amount of Cash		Default Provision		Prior to Contractual		Amount of Cash		Default Provision
Company	Netting Arrangements		Collateral Posted		is Triggered		Netting Arrangements		Collateral Posted		is Triggered
	(in millions)						(in millions)
AEP	$	259.6	$	0.4	$	235.8	$	243.6	$	1.3	$	223.1
APCo	0.1		—		—		0.6		—		0.5
I&M	0.1		—		—		0.4		—		0.4
SWEPCo							0.2		—		0.1

10. FAIR VALUE MEASUREMENTS

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

Fair Value Hierarchy and Valuation Techniques

The accounting guidance for “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. When quoted market prices are not available, pricing may be completed using comparable securities, dealer values, operating data and general market conditions to determine fair value. Valuation models utilize various inputs such as commodity, interest rate and, to a lesser degree, volatility and credit that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, market corroborated inputs (i.e. inputs derived principally from, or correlated to, observable market data) and other observable inputs for the asset or liability.

For commercial activities, exchange traded derivatives, namely futures contracts, are generally fair valued based on unadjusted quoted prices in active markets and are classified as Level 1. Level 2 inputs primarily consist of OTC broker quotes in moderately active or less active markets, as well as exchange traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1. Management verifies price curves using these broker quotes and classifies these fair values within Level 2 when substantially all of the fair value can be corroborated. Management typically obtains multiple broker quotes, which are nonbinding in nature but are based on recent trades in the marketplace. When multiple broker quotes are obtained, the quoted bid and ask prices are averaged. In certain circumstances, a broker quote may be discarded if it is a clear outlier. Management uses a historical correlation analysis between the broker quoted location and the illiquid locations. If the points are highly correlated, these locations are included within Level 2 as well. Certain OTC and bilaterally executed derivative instruments are executed in less active markets with a lower availability of pricing information. Illiquid transactions, complex structured transactions, FTRs and counterparty credit risk may require nonmarket based inputs. Some of these inputs may be internally developed or extrapolated and utilized to estimate fair value. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3. The main driver of contracts being classified as Level 3 is the inability to substantiate energy price curves in the market. A portion of the Level 3 instruments have been economically hedged which limits potential earnings volatility.

AEP utilizes its trustee’s external pricing service to estimate the fair value of the underlying investments held in the benefit plan and nuclear trusts. AEP’s investment managers review and validate the prices utilized by the trustee to determine fair value. AEP’s management performs its own valuation testing to verify the fair values of the securities. AEP receives audit reports of the trustee’s operating controls and valuation processes. The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, cash and cash equivalents, other temporary investments and restricted cash for securitized funding are classified using the following methods. Equities are classified as Level 1 holdings if they are actively traded on exchanges. Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities. They are valued based on observable inputs, primarily unadjusted quoted prices in active markets for identical assets. Items classified as Level 2 are primarily investments in individual fixed income ~~securities and cash equivalent funds.~~securities. Fixed income securities generally do not trade on exchanges and do not have an official closing price but their valuation inputs are based on observable market data. Pricing vendors calculate bond valuations using financial models and matrices. The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation. Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments. Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt (Applies to all Registrants)

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs. These instruments are not marked-to-market. The estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange.

The book values and fair values of Long-term Debt are summarized in the following table:


	September 30, 2017				December 31, 2016						September 30, 2018				December 31, 2017
Company	Book Value		Fair Value		Book Value			Fair Value			Book Value		Fair Value		Book Value		Fair Value
	(in millions)										(in millions)
AEP	$	20,721.7	$	22,988.8	$	20,391.2	(a)	$	22,211.9	(a)	$	22,774.0	$	23,869.1	$	21,173.3	$	23,649.6
AEP Texas											3,914.4		4,019.2		3,649.3		3,964.8
AEPTCo	2,550.0		2,720.8		1,932.0			1,984.3			2,872.6		2,861.1		2,550.4		2,782.9
APCo	3,979.3		4,721.3		4,033.9			4,613.2			4,061.7		4,629.8		3,980.1		4,782.6
I&M	2,658.5		2,898.7		2,471.4			2,661.6			3,062.4		3,161.9		2,745.1		3,014.7
OPCo	1,718.9		2,068.9		1,763.9			2,092.5			1,716.3		1,941.9		1,719.3		2,064.3
PSO	1,286.4		1,448.0		1,286.0			1,419.0			1,286.9		1,373.4		1,286.5		1,457.1
SWEPCo	2,441.5		2,620.7		2,679.1			2,814.3			3,072.7		3,068.4		2,441.9		2,645.9


~~(a)~~	Amounts include debt related to the Lawrenceburg Plant that has been classified as Liabilities Held for Sale on the balance sheet and has a fair value of $172 million. See the Assets and Liabilities Held for Sale section of Note 6 for additional information.

Fair Value Measurements of Other Temporary Investments (Applies to AEP)

Other Temporary Investments include ~~funds held by trustees primarily for the payment of securitization bonds and securities available for sale, including~~ marketable securities that management intends to hold for less than one year and investments by AEP’s protected cell of EIS.

The following is a summary of Other Temporary Investments:


	September 30, 2017									September 30, 2018
			Gross		Gross							Gross		Gross
			Unrealized		Unrealized			Fair				Unrealized		Unrealized			Fair
Other Temporary Investments	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(in millions)									(in millions)
Restricted Cash (a)	$	172.9	$	—	$	—		$	172.9
Restricted Cash and Other Cash Deposits (a)										$	170.4	$	—	$	—		$	170.4
Fixed Income Securities – Mutual Funds (b)	103.9		—		(0.7		)	103.2		105.9		—		(2.8		)	103.1
Equity Securities – Mutual Funds	16.8		17.8		—			34.6		17.6		22.2		—			39.8
Total Other Temporary Investments	$	293.6	$	17.8	$	(0.7	)	$	310.7	$	293.9	$	22.2	$	(2.8	)	$	313.3


	December 31, 2016									December 31, 2017
			Gross		Gross							Gross		Gross
			Unrealized		Unrealized			Fair				Unrealized		Unrealized			Fair
Other Temporary Investments	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(in millions)									(in millions)
Restricted Cash (a)	$	211.7	$	—	$	—		$	211.7
Restricted Cash and Other Cash Deposits (a)										$	220.1	$	—	$	—		$	220.1
Fixed Income Securities – Mutual Funds (b)	92.7		—		(1.0		)	91.7		104.3		—		(1.4		)	102.9
Equity Securities – Mutual Funds	14.4		13.9		—			28.3		17.0		19.7		—			36.7
Total Other Temporary Investments	$	318.8	$	13.9	$	(1.0	)	$	331.7	$	341.4	$	19.7	$	(1.4	)	$	359.7


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


(b)	Primarily short and intermediate maturities which may be sold and do not contain maturity dates.

The following table provides the activity for fixed income and equity securities within Other Temporary Investments:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
	(in millions)								(in millions)
Proceeds from Investment Sales	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Purchases of Investments	12.6		0.6		13.6		1.6		0.8		12.6		2.2		13.6
Gross Realized Gains on Investment Sales	—		—		—		—		—		—		—		—
Gross Realized Losses on Investment Sales	—		—		—		—		—		—		—		—

For details of the reasons for changes in Securities Available for Sale included in Accumulated Other Comprehensive Income (Loss) for the three and nine months ended September 30, 2017, ~~and 2016,~~ see Note 3.3 - Comprehensive Income.

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal (Applies to AEP and I&M)

Nuclear decommissioning and spent nuclear fuel trust funds represent funds that regulatory commissions allow I&M to collect through rates to fund future decommissioning and ~~spent nuclear fuel~~SNF disposal liabilities. By rules or orders, the IURC, the MPSC and the FERC established investment limitations and general risk management guidelines. In general, limitations include:

Acceptable investments (rated investment grade or above when purchased).

Maximum percentage invested in a specific type of investment.

Prohibition of investment in obligations of AEP, I&M or their affiliates.

Withdrawals permitted only for payment of decommissioning costs and trust expenses.

I&M maintains trust funds for each regulatory jurisdiction. Regulatory approval is required to withdraw decommissioning funds. These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities. The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in these trust funds in Spent Nuclear Fuel and Decommissioning Trusts on its balance sheets. I&M records these securities at fair value. I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose. Upon adoption of ASU 2016-01 in first quarter 2018, equity securities are now recorded with changes in fair value recognized in earnings. Effective January 2018 available for sale classification only applies to investment in debt securities. Other-than-temporary impairments for investments in ~~both~~ debt ~~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 debt and equity investments held in these trusts and generally intends to sell debt securities in an unrealized loss position as part of a tax optimization strategy. Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment. I&M records unrealized gains, unrealized losses and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates. Consequently, changes in fair value of trust assets do not affect earnings or AOCI.

The following is a summary of nuclear trust fund investments:


	September 30, 2017							December 31, 2016							September 30, 2018							December 31, 2017
			Gross		Other-Than-					Gross		Other-Than-					Gross		Other-Than-					Gross		Other-Than-
	Fair		Unrealized		Temporary			Fair		Unrealized		Temporary			Fair		Unrealized		Temporary			Fair		Unrealized		Temporary
	Value		Gains		Impairments			Value		Gains		Impairments			Value		Gains		Impairments			Value		Gains		Impairments
	(in millions)														(in millions)
Cash and Cash Equivalents	$	20.5	$	—	$	—		$	18.7	$	—	$	—		$	41.6	$	—	$	—		$	17.2	$	—	$	—
Fixed Income Securities:
United States Government	974.3		32.6		(1.9		)	785.4		27.1		(5.5		)	951.9		12.2		(6.2		)	981.2		29.7		(3.6		)
Corporate Debt	60.0		3.5		(1.2		)	60.9		2.3		(1.4		)	54.4		1.1		(1.6		)	58.7		3.8		(1.2		)
State and Local Government	9.0		1.0		(0.2		)	121.1		0.4		(0.7		)	8.5		0.5		(0.2		)	8.8		0.8		(0.2		)
Subtotal Fixed Income Securities	1,043.3		37.1		(3.3		)	967.4		29.8		(7.6		)	1,014.8		13.8		(8.0		)	1,048.7		34.3		(5.0		)
Equity Securities - Domestic(a)	1,369.2		783.1		(75.4		)	1,270.1		677.9		(79.6		)	1,609.6		990.5		—			1,461.7		868.2		(75.5		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,433.0	$	820.2	$	(78.7	)	$	2,256.2	$	707.7	$	(87.2	)	$	2,666.0	$	1,004.3	$	(8.0	)	$	2,527.6	$	902.5	$	(80.5	)


(a)	Amount reported as Gross Unrealized Gains includes unrealized gains of $995.8 million and unrealized losses of $5.3 million. AEP adopted ASU 2016-01 during the first quarter of 2018 by means of a modified retrospective approach. Due to the adoption of the ASU, Other-Than-Temporary Impairments are no longer applicable to Equity Securities with readily determinable fair values.

The following table provides the securities activity within the decommissioning and SNF trusts:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
	(in millions)								(in millions)
Proceeds from Investment Sales	$	519.5	$	650.0	$	1,808.6	$	2,427.0	$	513.1	$	519.5	$	1,550.9	$	1,808.6
Purchases of Investments	525.0		656.5		1,842.2		2,452.9		521.2		525.0		1,589.0		1,842.2
Gross Realized Gains on Investment Sales	9.8		13.9		198.1		41.9		3.9		9.8		27.7		198.1
Gross Realized Losses on Investment Sales	5.2		6.5		145.4		22.2		3.5		5.2		22.2		145.4

The base cost of fixed income securities was $1 billion and ~~$938 million~~$1 billion as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The base cost of equity securities was ~~$586~~$619 million and ~~$592~~$594 million as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, ~~2017~~2018 was as follows:


	Fair Value of Fixed Income Securities		Fair Value of Fixed Income Securities
	(in millions)		(in millions)
Within 1 year	$	403.6	$	348.7
After 1 year through 5 years	287.9		331.4
After 5 years through 10 years	184.2		177.0
After 10 years	167.6		157.7
Total	$	1,043.3	$	1,014.8

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrants’ financial assets and liabilities that were accounted for at fair value on a recurring basis. As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There have not been any significant changes in management’s valuation techniques.

AEP

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, ~~2017~~2018


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Cash and Cash Equivalents (a)	$	—	$	—	$	—	$	343.9		$	343.9

Other Temporary Investments
Restricted Cash (a)	158.6		1.4		—		12.9			172.9
Restricted Cash and Other Cash Deposits (a)												$	160.8	$	—	$	—	$	9.6		$	170.4
Fixed Income Securities – Mutual Funds	103.2		—		—		—			103.2		103.1		—		—		—			103.1
Equity Securities – Mutual Funds (b)	34.6		—		—		—			34.6		39.8		—		—		—			39.8
Total Other Temporary Investments	296.4		1.4		—		12.9			310.7		303.7		—		—		9.6			313.3

Risk Management Assets
Risk Management Commodity Contracts (c) (d)	1.2		307.9		300.3		(161.4		)	448.0		1.7		270.9		361.7		(213.2		)	421.1
Cash Flow Hedges:
Commodity Hedges (c)	—		9.1		1.3		(6.1		)	4.3		—		20.9		11.7		3.1			35.7
Interest Rate/Foreign Currency Hedges	—		4.2		—		—			4.2
Total Risk Management Assets	1.2		321.2		301.6		(167.5		)	456.5		1.7		291.8		373.4		(210.1		)	456.8

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (e)	14.0		—		—		6.5			20.5		27.2		—		—		14.4			41.6
Fixed Income Securities:
United States Government	—		974.3		—		—			974.3		—		951.9		—		—			951.9
Corporate Debt	—		60.0		—		—			60.0		—		54.4		—		—			54.4
State and Local Government	—		9.0		—		—			9.0		—		8.5		—		—			8.5
Subtotal Fixed Income Securities	—		1,043.3		—		—			1,043.3		—		1,014.8		—		—			1,014.8
Equity Securities – Domestic (b)	1,369.2		—		—		—			1,369.2		1,609.6		—		—		—			1,609.6
Total Spent Nuclear Fuel and Decommissioning Trusts	1,383.2		1,043.3		—		6.5			2,433.0		1,636.8		1,014.8		—		14.4			2,666.0

Total Assets	$	1,680.8	$	1,365.9	$	301.6	$	195.8		$	3,544.1	$	1,942.2	$	1,306.6	$	373.4	$	(186.1	)	$	3,436.1

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (d)	$	3.2	$	306.6	$	205.9	$	(174.9	)	$	340.8	$	1.9	$	271.4	$	178.2	$	(200.1	)	$	251.4
Cash Flow Hedges:
Commodity Hedges (c)	—		35.3		50.7		(6.1		)	79.9		—		21.8		34.0		3.1			58.9
Fair Value Hedges	—		1.4		—		—			1.4		—		34.2		—		—			34.2
Total Risk Management Liabilities	$	3.2	$	343.3	$	256.6	$	(181.0	)	$	422.1	$	1.9	$	327.4	$	212.2	$	(197.0	)	$	344.5

AEP

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, ~~2016~~2017


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Cash and Cash Equivalents (a)	$	8.7	$	—	$	—	$	201.8		$	210.5

Other Temporary Investments
Restricted Cash (a)	173.8		5.1		—		32.8			211.7
Restricted Cash and Other Cash Deposits (a)												$	183.2	$	—	$	—	$	36.9		$	220.1
Fixed Income Securities – Mutual Funds	91.7		—		—		—			91.7		102.9		—		—		—			102.9
Equity Securities – Mutual Funds (b)	28.3		—		—		—			28.3		36.7		—		—		—			36.7
Total Other Temporary Investments	293.8		5.1		—		32.8			331.7		322.8		—		—		36.9			359.7

Risk Management Assets
Risk Management Commodity Contracts (c) (f)	6.0		379.9		192.2		(205.7		)	372.4		3.9		391.2		274.1		(285.4		)	383.8
Cash Flow Hedges:
Commodity Hedges (c)	—		16.8		1.7		(7.3		)	11.2		—		17.3		4.7		—			22.0
Fair Value Hedges												—		2.5		—		—			2.5
Total Risk Management Assets	6.0		396.7		193.9		(213.0		)	383.6		3.9		411.0		278.8		(285.4		)	408.3

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (e)	7.3		—		—		11.4			18.7		7.5		—		—		9.7			17.2
Fixed Income Securities:
United States Government	—		785.4		—		—			785.4		—		981.2		—		—			981.2
Corporate Debt	—		60.9		—		—			60.9		—		58.7		—		—			58.7
State and Local Government	—		121.1		—		—			121.1		—		8.8		—		—			8.8
Subtotal Fixed Income Securities	—		967.4		—		—			967.4		—		1,048.7		—		—			1,048.7
Equity Securities – Domestic (b)	1,270.1		—		—		—			1,270.1		1,461.7		—		—		—			1,461.7
Total Spent Nuclear Fuel and Decommissioning Trusts	1,277.4		967.4		—		11.4			2,256.2		1,469.2		1,048.7		—		9.7			2,527.6

Total Assets	$	1,585.9	$	1,369.2	$	193.9	$	33.0		$	3,182.0	$	1,795.9	$	1,459.7	$	278.8	$	(238.8	)	$	3,295.6

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (f)	$	8.2	$	352.0	$	166.7	$	(205.4	)	$	321.5	$	5.1	$	392.5	$	196.9	$	(285.0	)	$	309.5
Cash Flow Hedges:
Commodity Hedges (c)	—		29.3		24.7		(7.3		)	46.7		—		23.9		41.6		—			65.5
Fair Value Hedges	—		1.4		—		—			1.4		—		8.6		—		—			8.6
Total Risk Management Liabilities	$	8.2	$	382.7	$	191.4	$	(212.7	)	$	369.6	$	5.1	$	425.0	$	238.5	$	(285.0	)	$	383.6

AEP Texas

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2018



	Level 1		Level 2		Level 3		Other		Total
Assets:	(in millions)

Restricted Cash for Securitized Funding	$	124.2	$	—	$	—	$	—	$	124.2

Risk Management Assets
Risk Management Commodity Contracts (c)	—		0.5		—		—		0.5

Total Assets	$	124.2	$	0.5	$	—	$	—	$	124.7

AEP Texas

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2017



	Level 1		Level 2		Level 3		Other		Total
Assets:	(in millions)

Restricted Cash for Securitized Funding	$	155.2	$	—	$	—	$	—	$	155.2

Risk Management Assets
Risk Management Commodity Contracts (c)	—		0.5		—		—		0.5

Total Assets	$	155.2	$	0.5	$	—	$	—	$	155.7

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, ~~2017~~2018


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Restricted Cash for Securitized Funding ~~(a)~~	$	8.3	$	—	$	—	$	0.1		$	8.4	$	9.9	$	—	$	—	$	—		$	9.9

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	—		22.2		30.0		(21.3		)	30.9		0.2		41.8		66.7		(38.9		)	69.8

Total Assets	$	8.3	$	22.2	$	30.0	$	(21.2	)	$	39.3	$	10.1	$	41.8	$	66.7	$	(38.9	)	$	79.7

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	21.8	$	0.6	$	(21.2	)	$	1.2	$	0.3	$	40.2	$	0.2	$	(39.1	)	$	1.6

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, ~~2016~~2017


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Restricted Cash for Securitized Funding ~~(a)~~	$	15.8	$	—	$	—	$	0.1		$	15.9	$	16.3	$	—	$	—	$	—		$	16.3

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	—		20.5		3.9		(21.8		)	2.6		—		52.5		25.1		(51.6		)	26.0

Total Assets	$	15.8	$	20.5	$	3.9	$	(21.7	)	$	18.5	$	16.3	$	52.5	$	25.1	$	(51.6	)	$	42.3

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	20.7	$	2.5	$	(22.0	)	$	1.2	$	—	$	51.2	$	0.4	$	(50.1	)	$	1.5

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, ~~2017~~2018


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	$	—	$	16.3	$	12.4	$	(16.6	)	$	12.1	$	0.1	$	28.5	$	12.3	$	(29.1	)	$	11.8

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (e)	14.0		—		—		6.5			20.5		27.2		—		—		14.4			41.6
Fixed Income Securities:
United States Government	—		974.3		—		—			974.3		—		951.9		—		—			951.9
Corporate Debt	—		60.0		—		—			60.0		—		54.4		—		—			54.4
State and Local Government	—		9.0		—		—			9.0		—		8.5		—		—			8.5
Subtotal Fixed Income Securities	—		1,043.3		—		—			1,043.3		—		1,014.8		—		—			1,014.8
Equity Securities - Domestic (b)	1,369.2		—		—		—			1,369.2		1,609.6		—		—		—			1,609.6
Total Spent Nuclear Fuel and Decommissioning Trusts	1,383.2		1,043.3		—		6.5			2,433.0		1,636.8		1,014.8		—		14.4			2,666.0

Total Assets	$	1,383.2	$	1,059.6	$	12.4	$	(10.1	)	$	2,445.1	$	1,636.9	$	1,043.3	$	12.3	$	(14.7	)	$	2,677.8

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	16.4	$	2.2	$	(16.4	)	$	2.2	$	0.1	$	33.2	$	2.9	$	(29.4	)	$	6.8

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, ~~2016~~2017


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	$	—	$	12.8	$	3.0	$	(12.3	)	$	3.5	$	—	$	39.4	$	9.1	$	(40.2	)	$	8.3

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (e)	7.3		—		—		11.4			18.7		7.5		—		—		9.7			17.2
Fixed Income Securities:
United States Government	—		785.4		—		—			785.4		—		981.2		—		—			981.2
Corporate Debt	—		60.9		—		—			60.9		—		58.7		—		—			58.7
State and Local Government	—		121.1		—		—			121.1		—		8.8		—		—			8.8
Subtotal Fixed Income Securities	—		967.4		—		—			967.4		—		1,048.7		—		—			1,048.7
Equity Securities - Domestic (b)	1,270.1		—		—		—			1,270.1		1,461.7		—		—		—			1,461.7
Total Spent Nuclear Fuel and Decommissioning Trusts	1,277.4		967.4		—		11.4			2,256.2		1,469.2		1,048.7		—		9.7			2,527.6

Total Assets	$	1,277.4	$	980.2	$	3.0	$	(0.9	)	$	2,259.7	$	1,469.2	$	1,088.1	$	9.1	$	(30.5	)	$	2,535.9

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	13.3	$	0.2	$	(12.4	)	$	1.1	$	—	$	47.6	$	1.5	$	(45.5	)	$	3.6

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, ~~2017~~2018


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other		Total
Assets:	(in millions)											(in millions)

Restricted Cash for Securitized Funding ~~(a)~~	$	15.6	$	—	$	—	$	—		$	15.6	$	15.2	$	—	$	—	$	—	$	15.2

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	—		0.3		—		(0.1		)	0.2		—		0.7		—		—		0.7

Total Assets	$	15.6	$	0.3	$	—	$	(0.1	)	$	15.8	$	15.2	$	0.7	$	—	$	—	$	15.9

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	—	$	138.5	$	—		$	138.5	$	—	$	—	$	95.2	$	—	$	95.2

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, ~~2016~~2017


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other		Total
Assets:	(in millions)											(in millions)

Restricted Cash for Securitized Funding (a)	$	—	$	—	$	—	$	27.2		$	27.2

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	—		0.4		—		(0.2		)	0.2		$	—	$	0.6	$	—	$	—	$	0.6

Total Assets	$	—	$	0.4	$	—	$	27.0		$	27.4

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	—	$	119.0	$	—		$	119.0	$	—	$	—	$	132.4	$	—	$	132.4

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, ~~2017~~2018


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	$	—	$	—	$	4.8	$	(0.1	)	$	4.7	$	—	$	0.3	$	18.5	$	(0.3	)	$	18.5

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	—	$	0.1	$	(0.1	)	$	—	$	—	$	—	$	0.9	$	(0.3	)	$	0.6

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, ~~2016~~2017


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	$	—	$	0.2	$	0.7	$	(0.1	)	$	0.8	$	—	$	0.2	$	6.4	$	(0.2	)	$	6.4

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)												$	—	$	—	$	0.2	$	(0.2	)	$	—

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, ~~2017~~2018


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Cash and Cash Equivalents (a)	$	—	$	—	$	—	$	2.2		$	2.2

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	—		0.1		13.3		(0.2		)	13.2		$	—	$	0.2	$	7.9	$	(1.6	)	$	6.5

Total Assets	$	—	$	0.1	$	13.3	$	2.0		$	15.4

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	0.1	$	0.2	$	(0.2	)	$	0.1	$	—	$	—	$	4.4	$	(1.6	)	$	2.8

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, ~~2016~~2017


	Level 1		Level 2		Level 3		Other			Total		Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)											(in millions)

Cash and Cash Equivalents (a)	$	8.7	$	—	$	—	$	1.6		$	10.3

Risk Management Assets
Risk Management Commodity Contracts (c) (g)	—		0.3		0.8		(0.2		)	0.9		$	—	$	0.3	$	6.7	$	(0.6	)	$	6.4

Total Assets	$	8.7	$	0.3	$	0.8	$	1.4		$	11.2

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	—	$	0.3	$	0.1	$	(0.1	)	$	0.3	$	—	$	—	$	0.8	$	(0.6	)	$	0.2


(a)	Amounts in “Other’’ column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 and Level 2 amounts primarily represent investments in money market funds.


(b)	Amounts represent publicly traded equity securities and equity-based mutual funds.


(c)	Amounts in “Other’’ column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.’’

(d)

The September 30, ~~2017~~2018 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 12 matures $(2) million in ~~periods 2018-2020; Level 2 matures $(1)~~2018 and $(2) million in ~~2017~~periods 2019-2021 and $3 million in periods ~~2018-2020 and $(1)~~2022-2023; Level 3 matures $40 million in 2018, $122 million in periods ~~2021-2022; Level 3 matures $23 million in 2017, $77~~2019-2021, $21 million in periods ~~2018-2020, $16~~2022-2023 and $1 million in periods ~~2021-2022 and $(21) million in periods 2023-2032.~~2024-2032. Risk management commodity contracts are substantially comprised of power contracts.


(e)	Amounts in “Other’’ column primarily represent accrued interest receivables from financial institutions. Level 1 amounts primarily represent investments in money market funds.

(f)

The December 31, ~~2016~~2017 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 1 matures ~~$(2)~~$(1) million in 2018; Level 2 matures $(3) million in 2018 and $2 million in periods ~~2018-2020;~~2022-2023; Level 23 matures ~~$20~~$59 million in ~~2017, $4~~2018, $33 million in periods ~~2018-2020, $3~~2019-2021, $14 million in periods ~~2021-2022~~2022-2023 and $1$(29) million in periods ~~2023-2032; Level 3 matures $17 million in 2017, $28 million in periods 2018-2020, $11 million in periods 2021-2022 and $(31) million in periods 2023-2032.~~2024-2032. Risk management commodity contracts are substantially comprised of power contracts.


(g)	Substantially comprised of power contracts for the Registrant Subsidiaries.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy:


Three Months Ended September 30, 2017	AEP			APCo			I&M			OPCo			PSO			SWEPCo
Three Months Ended September 30, 2018																			AEP			APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)																		(in millions)
Balance as of June 30, 2017	$	87.3		$	41.3		$	15.5		$	(130.5	)	$	9.5		$	12.4
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	19.8			6.2			3.8			(0.1		)	4.0			3.8
Balance as of June 30, 2018																			$	172.3		$	60.0		$	13.2		$	(86.9	)	$	24.3		$	4.9
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)																			19.9			9.0			1.9			—			3.7			1.7
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date ~~(b)~~(a)	14.8			—			—			—			—			—			1.5			—			—			—			—			—
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(24.3		)	—			—			—			—			—			10.4			—			—			—			—			—
Settlements	(49.2		)	(16.2		)	(8.4		)	1.2			(6.9		)	(7.6		)	(56.0		)	(19.8		)	(5.5		)	0.6			(10.8		)	(2.7		)
Transfers into Level 3 (d) (e)	5.7			—			—			—			—			—
Transfers into Level 3 (c) (d)																			2.3			—			—			—			—			—
Transfers out of Level 3 ~~(e)~~(d)	0.2			—			—			—			—			—			(1.2		)	—			—			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions ~~(f)~~(e)	(9.3		)	(1.9		)	(0.7		)	(9.1		)	(1.9		)	4.5			12.0			17.3			(0.2		)	(8.9		)	0.4			(0.4		)
Balance as of September 30, 2017	$	45.0		$	29.4		$	10.2		$	(138.5	)	$	4.7		$	13.1
Balance as of September 30, 2018																			$	161.2		$	66.5		$	9.4		$	(95.2	)	$	17.6		$	3.5


Three Months Ended September 30, 2016	AEP			APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
Three Months Ended September 30, 2017																			AEP			APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)																		(in millions)
Balance as of June 30, 2016	$	149.3		$	(12.9	)	$	3.5		$	(14.6	)	$	1.1		$	1.4
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	34.2			22.7			3.8			(0.1		)	0.4			4.0
Balance as of June 30, 2017																			$	87.3		$	41.3		$	15.5		$	(130.5	)	$	9.5		$	12.4
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)																			19.8			6.2			3.8			(0.1		)	4.0			3.8
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date ~~(b)~~(a)	12.3			—			—			—			—			—			14.8			—			—			—			—			—
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(34.4		)	—			—			—			—			—			(24.3		)	—			—			—			—			—
Settlements	(37.1		)	(17.9		)	(5.0		)	0.9			(0.7		)	(4.4		)	(49.2		)	(16.2		)	(8.4		)	1.2			(6.9		)	(7.6		)
Transfers into Level 3 (d) (e)	13.1			0.1			—			—			—			—
Transfers into Level 3 (c) (d)																			5.7			—			—			—			—			—
Transfers out of Level 3 ~~(e)~~(d)	(10.0		)	—			—			—			—			—			0.2			—			—			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions ~~(f)~~(e)	(29.0		)	0.9			2.2			(95.3		)	0.3			0.3			(9.3		)	(1.9		)	(0.7		)	(9.1		)	(1.9		)	4.5
Balance as of September 30, 2016	$	98.4		$	(7.1	)	$	4.5		$	(109.1	)	$	1.1		$	1.3
Balance as of September 30, 2017																			$	45.0		$	29.4		$	10.2		$	(138.5	)	$	4.7		$	13.1


Nine Months Ended September 30, 2017	AEP			APCo			I&M			OPCo			PSO			SWEPCo
Nine Months Ended September 30, 2018																			AEP			APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)																		(in millions)
Balance as of December 31, 2016	$	2.5		$	1.4		$	2.8		$	(119.0	)	$	0.7		$	0.7
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	37.4			17.2			4.0			(1.0		)	3.1			6.0
Balance as of December 31, 2017																			$	40.3		$	24.7		$	7.6		$	(132.4	)	$	6.2		$	5.9
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)																			150.9			104.4			14.7			1.3			18.1			(4.8		)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date ~~(b)~~(a)	37.2			—			—			—			—			—			9.5			—			—			—			—			—
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(29.5		)	—			—			—			—			—			16.4			—			—			—			—			—
Settlements	(49.7		)	(18.9		)	(7.1		)	5.1			(3.8		)	(6.8		)	(212.3		)	(128.3		)	(21.9		)	3.0			(24.3		)	(1.3		)
Transfers into Level 3 (d) (e)	16.1			—			—			—			—			—
Transfers into Level 3 (c) (d)																			16.5			—			—			—			—			—
Transfers out of Level 3 ~~(e)~~(d)	(9.1		)	—			—			—			—			—			(2.5		)	—			(0.3		)	—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions ~~(f)~~(e)	40.1			29.7			10.5			(23.6		)	4.7			13.2			142.4			65.7			9.3			32.9			17.6			3.7
Balance as of September 30, 2017	$	45.0		$	29.4		$	10.2		$	(138.5	)	$	4.7		$	13.1
Balance as of September 30, 2018																			$	161.2		$	66.5		$	9.4		$	(95.2	)	$	17.6		$	3.5


Nine Months Ended September 30, 2016	AEP			APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
Nine Months Ended September 30, 2017																			AEP			APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)																		(in millions)
Balance as of December 31, 2015	$	146.9		$	11.7		$	4.3		$	15.9		$	0.6		$	0.8
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	42.1			25.5			7.0			(1.8		)	(1.0		)	7.7
Balance as of December 31, 2016																			$	2.5		$	1.4		$	2.8		$	(119.0	)	$	0.7		$	0.7
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)																			37.4			17.2			4.0			(1.0		)	3.1			6.0
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date ~~(b)~~(a)	45.5			—			—			—			—			—			37.2			—			—			—			—			—
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(16.7		)	—			—			—			—			—			(29.5		)	—			—			—			—			—
Settlements	(67.1		)	(36.2		)	(10.3		)	4.0			0.4			(8.4		)	(49.7		)	(18.9		)	(7.1		)	5.1			(3.8		)	(6.8		)
Transfers into Level 3 (d) (e)	11.2			—			—			—			—			—
Transfers into Level 3 (c) (d)																			16.1			—			—			—			—			—
Transfers out of Level 3 ~~(e)~~(d)	1.1			0.1			0.1			—			—			—			(9.1		)	—			—			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions ~~(f)~~(e)	(64.6		)	(8.2		)	3.4			(127.2		)	1.1			1.2			40.1			29.7			10.5			(23.6		)	4.7			13.2
Balance as of September 30, 2016	$	98.4		$	(7.1	)	$	4.5		$	(109.1	)	$	1.1		$	1.3
Balance as of September 30, 2017																			$	45.0		$	29.4		$	10.2		$	(138.5	)	$	4.7		$	13.1


(a)	~~Includes both affiliated and nonaffiliated transactions.~~


~~(b)~~	Included in revenues on the statements of income.


~~(c)~~(b)	Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.


~~(d)~~(c)	Represents existing assets or liabilities that were previously categorized as Level 2.


~~(e)~~(d)	Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.


~~(f)~~(e)	Relates to the net gains (losses) of those contracts that are not reflected on the statements of income. These net gains (losses) are recorded as regulatory liabilities/assets or accounts payable.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions:

Significant Unobservable Inputs

September 30, ~~2017~~2018

AEP


						Significant	Input/Range												Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted		Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input	Low			High		Average		Assets		Liabilities		Technique	Input	Low			High		Average
	(in millions)													(in millions)
Energy Contracts	$	233.8	$	252.6	Discounted Cash Flow	Forward Market Price (a)	$	(0.05	)	$	92.77	$	35.82	$	251.5	$	202.4	Discounted Cash Flow	Forward Market Price (a)	$	(0.05	)	$	161.90	$	33.54
						Counterparty Credit Risk (b)	10			539		204							Counterparty Credit Risk (b)	10			418		158
Natural Gas Contracts	0.9		—		Discounted Cash Flow	Forward Market Price (c)	2.47			3.03		2.68		—		2.8		Discounted Cash Flow	Forward Market Price (c)	2.19			2.97		2.45
FTRs	66.9		4.0		Discounted Cash Flow	Forward Market Price (a)	(9.80		)	9.37		0.32		121.9		7.0		Discounted Cash Flow	Forward Market Price (a)	(9.40		)	16.17		0.83
Total	$	301.6	$	256.6										$	373.4	$	212.2

Significant Unobservable Inputs

December 31, ~~2016~~2017

AEP


						Significant	Input/Range												Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted		Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input	Low			High		Average		Assets		Liabilities		Technique	Input	Low			High		Average
	(in millions)													(in millions)
Energy Contracts	$	183.8	$	187.1	Discounted Cash Flow	Forward Market Price (a)	$	6.51		$	86.59	$	39.40	$	225.1	$	233.7	Discounted Cash Flow	Forward Market Price (a)	$	(0.05	)	$	263.00	$	36.32
						Counterparty Credit Risk (b)	35			824		391							Counterparty Credit Risk (b)	8			456		180
Natural Gas Contracts														—		0.2		Discounted Cash Flow	Forward Market Price (c)	2.37			2.96		2.62
FTRs	10.1		4.3		Discounted Cash Flow	Forward Market Price (a)	(7.99		)	8.91		0.86		53.7		4.6		Discounted Cash Flow	Forward Market Price (a)	(55.62		)	54.88		0.41
Total	$	193.9	$	191.4										$	278.8	$	238.5

Significant Unobservable Inputs

September 30, ~~2017~~2018

APCo


						Significant	Input/Range											Significant	Input/Range
	Fair Value				Valuation	Unobservable					Weighted		Fair Value				Valuation	Unobservable					Weighted
	Assets		Liabilities		Technique	Input (a)	Low		High		Average		Assets		Liabilities		Technique	Input (a)	Low		High		Average
	(in millions)												(in millions)
Energy Contracts	$	1.0	$	0.4	Discounted Cash Flow	Forward Market Price	$	14.85	$	45.72	$	33.99	$	1.8	$	0.1	Discounted Cash Flow	Forward Market Price	$	14.98	$	59.45	$	36.30
FTRs	29.0		0.2		Discounted Cash Flow	Forward Market Price	0.08		6.36		1.20		64.9		0.1		Discounted Cash Flow	Forward Market Price	0.06		12.73		2.37
Total	$	30.0	$	0.6									$	66.7	$	0.2

Significant Unobservable Inputs

December 31, ~~2016~~2017

APCo


						Significant	Input/Range												Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted		Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average		Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in millions)													(in millions)
Energy Contracts	$	0.4	$	0.4	Discounted Cash Flow	Forward Market Price	$	19.68		$	48.55	$	36.34	$	0.8	$	0.4	Discounted Cash Flow	Forward Market Price	$	20.52		$	195.00	$	33.80
FTRs	3.5		2.1		Discounted Cash Flow	Forward Market Price	(0.23		)	8.91		2.37		24.3		—		Discounted Cash Flow	Forward Market Price	(0.36		)	7.15		1.62
Total	$	3.9	$	2.5										$	25.1	$	0.4

Significant Unobservable Inputs

September 30, ~~2017~~2018

I&M


						Significant	Input/Range												Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted		Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average		Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in millions)													(in millions)
Energy Contracts	$	0.6	$	0.3	Discounted Cash Flow	Forward Market Price	$	14.85		$	45.72	$	33.99	$	1.1	$	0.9	Discounted Cash Flow	Forward Market Price	$	14.98		$	59.45	$	36.30
FTRs	11.8		1.9		Discounted Cash Flow	Forward Market Price	(0.02		)	6.36		0.71		11.2		2.0		Discounted Cash Flow	Forward Market Price	(2.58		)	6.21		0.73
Total	$	12.4	$	2.2										$	12.3	$	2.9

Significant Unobservable Inputs

December 31, ~~2016~~2017

I&M


						Significant	Input/Range												Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted		Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average		Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in millions)													(in millions)
Energy Contracts	$	0.3	$	0.2	Discounted Cash Flow	Forward Market Price	$	19.68		$	48.55	$	36.34	$	0.5	$	0.3	Discounted Cash Flow	Forward Market Price	$	20.52		$	195.00	$	33.80
FTRs	2.7		—		Discounted Cash Flow	Forward Market Price	(7.90		)	8.91		1.32		8.6		1.2		Discounted Cash Flow	Forward Market Price	(0.36		)	5.75		0.86
Total	$	3.0	$	0.2										$	9.1	$	1.5

Significant Unobservable Inputs

September 30, ~~2017~~2018

OPCo


						Significant	Input/Range											Significant	Input/Range
	Fair Value				Valuation	Unobservable					Weighted		Fair Value				Valuation	Unobservable					Weighted
	Assets		Liabilities		Technique	Input	Low		High		Average		Assets		Liabilities		Technique	Input	Low		High		Average
	(in millions)												(in millions)
Energy Contracts	$	—	$	138.5	Discounted Cash Flow	Forward Market Price (a)	$	22.89	$	61.48	$	41.21	$	—	$	95.2	Discounted Cash Flow	Forward Market Price (a)	$	27.23	$	64.61	$	43.26
						Counterparty Credit Risk (b)	10		210		150							Counterparty Credit Risk (b)	10		188		141
Total	$	—	$	138.5									$	—	$	95.2

Significant Unobservable Inputs

December 31, ~~2016~~2017

OPCo


						Significant	Input/Range											Significant	Input/Range
	Fair Value				Valuation	Unobservable					Weighted		Fair Value				Valuation	Unobservable					Weighted
	Assets		Liabilities		Technique	Input	Low		High		Average		Assets		Liabilities		Technique	Input	Low		High		Average
	(in millions)												(in millions)
Energy Contracts	$	—	$	119.0	Discounted Cash Flow	Forward Market Price (a)	$	30.14	$	71.85	$	47.45	$	—	$	132.4	Discounted Cash Flow	Forward Market Price (a)	$	30.52	$	170.43	$	44.62
						Counterparty Credit Risk (b)	47		340		272							Counterparty Credit Risk (b)	8		190		136
Total	$	—	$	119.0									$	—	$	132.4

Significant Unobservable Inputs

September 30, ~~2017~~2018

PSO

Significant Input/Range
Fair Value Valuation Unobservable Weighted
Assets Liabilities Technique Input (a) Low High Average
(in millions)
FTRs $ 4.8
$ 0.1
Discounted Cash Flow Forward Market Price $ (9.80 ) $ 1.03
$ (0.69 )



						Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in millions)
FTRs	$	18.5	$	0.9	Discounted Cash Flow	Forward Market Price	$	(9.40	)	$	10.30	$	(1.49	)

Significant Unobservable Inputs

December 31, ~~2016~~2017

PSO

Significant Input/Range
Fair Value Valuation Unobservable Weighted
Assets Liabilities Technique Input (a) Low High Average
(in millions)
FTRs $ 0.7
$ —
Discounted Cash Flow Forward Market Price $ (7.99 ) $ 1.03
$ (0.36 )



						Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in millions)
FTRs	$	6.4	$	0.2	Discounted Cash Flow	Forward Market Price	$	(6.62	)	$	1.41	$	(0.76	)

Significant Unobservable Inputs

September 30, ~~2017~~2018

SWEPCo


						Significant	Input/Range													Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted			Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input	Low			High		Average			Assets		Liabilities		Technique	Input	Low			High		Average
	(in millions)														(in millions)
Natural Gas Contracts	$	0.9	$	—	Discounted Cash Flow	Forward Market Price (c)	$	2.47		$	3.03	$	2.68		$	—	$	2.8	Discounted Cash Flow	Forward Market Price (c)	$	2.19		$	2.97	$	2.45
FTRs	12.4		0.2		Discounted Cash Flow	Forward Market Price (a)	(9.80		)	1.03		(0.69		)	7.9		1.6		Discounted Cash Flow	Forward Market Price (a)	(9.40		)	10.30		(1.49		)
	$	13.3	$	0.2
Total															$	7.9	$	4.4

Significant Unobservable Inputs

December 31, ~~2016~~2017

SWEPCo

Significant Input/Range
Fair Value Valuation Unobservable Weighted
Assets Liabilities Technique Input (a) Low High Average
(in millions)
FTRs $ 0.8
$ 0.1
Discounted Cash Flow Forward Market Price $ (7.99 ) $ 1.03
$ (0.36 )



						Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input	Low			High		Average
	(in millions)
Natural Gas Contracts	$	—	$	0.2	Discounted Cash Flow	Forward Market Price (c)	$	2.37		$	2.96	$	2.62
FTRs	6.7		0.6		Discounted Cash Flow	Forward Market Price (a)	(6.62		)	1.41		(0.76		)
Total	$	6.7	$	0.8


(a)	Represents market prices in dollars per MWh.


(b)	Represents prices of credit default swaps used to calculate counterparty credit risk, reported in basis points.


(c)	Represents market prices in dollars per MMBtu.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts, Natural Gas Contracts and FTRs for the Registrants as of September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

Sensitivity of Fair Value Measurements



Significant Unobservable Input	Position	Change in Input	Impact on Fair Value Measurement
Forward Market Price	Buy	Increase (Decrease)	Higher (Lower)
Forward Market Price	Sell	Increase (Decrease)	Lower (Higher)
Counterparty Credit Risk	Loss	Increase (Decrease)	Higher (Lower)
Counterparty Credit Risk	Gain	Increase (Decrease)	Lower (Higher)

11. INCOME TAXES

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

Federal Tax Reform

Provisional Amounts

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

During the third quarter of 2018, the IRS proposed new regulations that reflect changes made by Tax Reform and affect taxpayers with qualified depreciable property acquired and placed in service after September 27, 2017. The Registrants expect to complete the analysis of the provisional items, including analysis of the new regulations proposed by the IRS, during the fourth quarter of 2018.

Status of Tax Reform Regulatory Proceedings

The table below summarizes the current status of Tax Reform in AEP’s various regulatory jurisdictions. See Note 4 - Rate Matters for additional information related to regulatory filings in these jurisdictions.



Registrant (Jurisdiction)	Change in Tax Rate	Excess ADIT Subject to Normalization Requirements	Excess ADIT Not Subject to Normalization Requirements
AEP Texas (Texas-Distribution)	Order Issued	Order Issued	Order Issued – Partial (a)
AEP Texas (Texas-Transmission)	Order Issued	To be addressed in a later filing	To be addressed in a later filing
APCo (Virginia)	Legislation Enacted – Case Pending (b)	Legislation Enacted – Case Pending (b)	Order Issued – Partial; Separate Case Pending (c)
APCo (West Virginia)	Order Issued	Order Issued	Order Issued
I&M (Indiana)	Order Issued	Order Issued	Order Issued
I&M (Michigan)	Order Issued; Separate Case Pending (d)	Case Pending	Case Pending
AEP (Tennessee)	Case Pending	Case Pending	Case Pending
AEP (Kentucky)	Order Issued	Order Issued	Order Issued
OPCo (Ohio)	Order Issued	Order Issued	Order Issued
PSO (Oklahoma)	Order Issued	Order Issued	Order Issued
SWEPCo (Arkansas)	Order Issued	Order Issued	Order Issued
SWEPCo (Louisiana)	Case Pending – Rates Implemented (e)	Case Pending – Rates Implemented (e)	Case Pending – Rates Implemented (e)
SWEPCo (Texas)	Order Issued (f)	To be addressed in a later filing	To be addressed in a later filing
PJM FERC Transmission	Settlement Approved (g)	Settlement Approved (g)	Settlement Approved (g)
SPP FERC Transmission	To be addressed in a later filing	To be addressed in a later filing	To be addressed in a later filing


(a)	A portion of the Excess ADIT that is not subject to rate normalization requirements is to be addressed in a later filing.


(b)	Legislation has been issued for a blanket amount that is subject to true-up and final commission approval.


(c)	In October 2018, the Virginia SCC issued an order approving APCo’s request to refund a portion of the Excess ADIT that is not subject to rate normalization requirements to customers. The remainder is to be addressed in a separate pending case.


(d)	A rider was implemented to refund the impact of Tax Reform prospectively and effective September 1, 2018. A separate filing was submitted in October 2018 for the Tax Reform impact from January 1, 2018 through August 31, 2018.


(e)	Rates have been implemented through a filed formula rate plan that is subject to true-up and final commission approval.


(f)	An interim order has been issued to lower rates. Parties continue to finalize settlement.


(g)	An administrative law judge has approved a settlement. The settlement is subject to final FERC ruling.

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

State utility commissions have issued orders or instructions requiring public utilities, including the Registrants, to record liabilities to reflect the impact of the reduction in the corporate federal income tax rate in excess of the enacted corporate federal income tax rate of 21% beginning in 2018. As described in Note 4 - Rate Matters, certain Registrants have received state utility commission orders and have reflected the lower corporate federal income tax rate in current customer rates. The table below provides a summary of the estimated provisions for revenue refund recorded by the Registrants related to the reduction in the corporate federal tax rate as of September 30, 2018:



	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Included in Current Liabilities	$	51.1	$	—	$	—	$	40.5	$	2.0	$	—	$	2.4	$	5.3
Included in Deferred Credits and Other Noncurrent Liabilities	98.4		21.9		8.6		3.7		12.8		20.8		2.3		27.6

Excess ADIT - Pending Rate Reductions

As reflected in the Registrants’ respective estimated annual ETR for 2018, AEP’s regulated public utilities began amortizing the Excess ADIT associated with certain depreciable property subject to rate normalization requirements using the ARAM during the first quarter of 2018. The amortization resulted in a reduction in the Excess ADIT balance recorded in Regulatory Liabilities and Deferred Investment Tax Credits and a reduction in Income Tax Expense. As a result of state utility commission orders or instructions, the Registrants have recorded estimated provisions for revenue refund offsetting the amortization of the Excess ADIT to the extent not yet reflected in current customer rates. The table below provides a summary of the estimated provisions for revenue refund recorded by the Registrants as of September 30, 2018:



	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Included in Current Liabilities	$	15.3	$	—	$	—	$	9.5	$	—	$	—	$	4.7	$	1.2
Included in Deferred Credits and Other Noncurrent Liabilities	20.6		6.9		0.1		0.7		1.4		3.3		—		7.8

Effective Tax Rates (ETR)

The Registrants’ interim ETR ~~for AEP’s operating companies~~ reflect the estimated annual ETR for ~~2017~~2018 and ~~2016,~~2017, adjusted for tax expense associated with certain discrete items. As previously mentioned, effective January 1, 2018, Tax Reform lowered the corporate tax rate from 35% to 21%. The interim ETR ~~differs~~differ from the federal statutory tax rate of 21% and 35% in 2018 and 2017, respectively, primarily due to ~~tax adjustments,~~ state income taxes, the amortization of the Excess ADIT, tax credits and other book/tax differences which are accounted for on a flow-through basis.

The ETR ~~from continuing operations~~ for each of the Registrants ~~are~~is included in the following table. Significant variances in the ETR are described below.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016		2018		2017		2018		2017
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%	(16.2	)%	33.0	%	5.6	%	35.3	%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
AEP Texas									12.6	%	32.2	%	14.9	%	33.6	%
AEPTCo (a)									18.4	%	33.5	%	20.7	%	33.8	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%	(962.2	)%	33.4	%	(13.8	)%	35.5	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%	15.9	%	30.6	%	10.4	%	30.1	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%	(46.4	)%	36.9	%	4.6	%	35.6	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%	5.6	%	37.2	%	8.7	%	37.4	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%	9.8	%	21.2	%	11.4	%	25.7	%


(a)	The 2017 ETRs presented above reflect the revisions made to AEPTCo's previously issued financial statements. See Note 1 - Significant Accounting Matters for additional information.

AEP

Three Months Ended September 30, ~~2017~~2018 Compared to Three Months Ended September 30, ~~2016~~2017

The decrease in the ETR iswas primarily due to the ~~prior year reversal~~discrete impact of the West Virginia and Ohio Tax Reform orders which enabled APCo, OPCo and WPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances. The West Virginia and Ohio Tax Reform orders impacted the ETR by (17.9)% and (7.8)%, respectively. See “West Virginia Tax Reform” and “Ohio Tax Reform” sections of Note 4 for additional information. Additionally, the ETR decreased as a ~~$66 million capital loss valuation allowance related~~result of the change in the corporate federal income tax rate from 35% in 2017 to ~~the pending sale~~21% in 2018 as a result of ~~certain merchant generation assets~~Tax Reform and ~~prior year tax return adjustments related~~decreased (7.4)% due to ~~the disposition~~increased 2018 amortization of ~~AEP’s commercial barging operations.~~Excess ADIT.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017

The ~~increase~~decrease in the ETR iswas primarily due to the ~~increase in pretax book income driven~~discrete impact of the West Virginia and Ohio Tax Reform orders which enabled APCo, OPCo and WPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances. The West Virginia and Ohio Tax Reform orders impacted the ETR by (5.4)% and (2.3)%, respectively. See “West Virginia Tax Reform” and “Ohio Tax Reform” sections of Note 4 for additional information. Additionally, the ~~impairment~~ETR decreased as a result of ~~certain merchant generation assets~~the change in the ~~third quarter~~corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of ~~2016. The increase~~Tax Reform, state tax legislation enacted in Kentucky in April 2018 impacted the ETR ~~is also due to~~by (1.1)% and increased 2018 amortization of Excess ADIT impacted the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.ETR by (4.7)%.

~~APCo~~AEP Texas

Three Months Ended September 30, ~~2017~~2018 Compared to Three Months Ended September 30, ~~2016~~2017

The decrease in the ETR iswas primarily due to the ~~recording of favorable~~change in the corporate federal income tax ~~adjustments~~rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and aincreased 2018 amortization of Excess ADIT.

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

The decrease in ~~pretax book income.~~the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT.

AEPTCo

~~OPCo~~

Three Months Ended September 30, ~~2017~~2018 Compared to Three Months Ended September 30, ~~2016~~2017

The ~~increase~~decrease in the ETR iswas primarily due to ~~changes~~the change in ~~other~~the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform.

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

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform.

APCo

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

The decrease in the ETR was primarily due to the discrete impact of the West Virginia Tax Reform orders which enabled APCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances. The West Virginia Tax Reform order impacted the ETR by (887.8)%. See “West Virginia Tax Reform” section of Note 4 for additional information. Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (31.7)% due to increased 2018 amortization of Excess ADIT.

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

The decrease in the ETR was primarily due to the discrete impact of the West Virginia Tax Reform orders which enabled APCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances. The West Virginia Tax Reform order impacted the ETR by (28.6)%. See “West Virginia Tax Reform” section of Note 4 for additional information. Additionally, the ETR decreased as a result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (4.9)% due to increased 2018 amortization of Excess ADIT.

I&M

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

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, increased 2018 amortization of Excess ADIT and decreased state income taxes. These decreases were partially offset by an increase in book/tax differences which are accounted for on a flow-through basis ~~and~~resulting from a change in the ~~recording of federal income tax adjustments.~~expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028.

Nine Months Ended September 30, ~~2017~~2018 Compared to Nine Months Ended September 30, ~~2016~~2017

The ~~increase~~decrease in the ETR iswas primarily due to ~~changes~~the change in ~~other~~the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform, increased 2018 amortization of Excess ADIT and decreased state income taxes. These decreases were partially offset by an increase in book/tax differences which are accounted for on a flow-through basis resulting from a change in the ~~recording of federal income tax adjustments and an increase in pretax book income.~~expected retirement date for Rockport Plant, Unit 1 from 2044 to 2028.

~~SWEPCo~~OPCo

Three Months Ended September 30, ~~2017~~2018 Compared to Three Months Ended September 30, ~~2016~~2017

The decrease in the ETR iswas primarily due to the discrete impact of the Ohio Tax Reform orders which enabled OPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances. The Ohio Tax Reform order impacted the ETR by (62.0)%. See “Ohio Tax Reform” section of Note 4 for additional information. Additionally, the ETR decreased as a ~~$10 million~~result of the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (4.1)% due to increased 2018 amortization of Excess ADIT.

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

The decrease in ~~Income~~the ETR was primarily due to the discrete impact of the Ohio Tax ~~Expense related~~Reform orders which enabled OPCo to utilize Excess ADIT not subject to rate normalization requirements to offset certain regulatory asset balances. The Ohio Tax Reform order impacted the ETR by (15.1)%. See “Ohio Tax Reform” section of Note 4 for additional information. Additionally, the ETR decreased as a result of the change in the corporate federal income tax ~~benefits~~rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and decreased (2.5)% due to increased 2018 amortization of Excess ADIT.

PSO

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

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

SWEPCo

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

The decrease in the ETR was primarily due to the change in the corporate federal income tax rate from 35% in 2017 to 21% in 2018 as a result of Tax Reform and increased 2018 amortization of Excess ADIT. The amortization of Excess ADIT impacted the ETR by (9.0)%. These decreases are partially offset by a prior year income tax benefit attributable to SWEPCo’s noncontrolling interest in Sabine.

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

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011 ~~2012 and~~through 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. ~~Although~~To resolve the ~~outcome~~issue under consideration, AEP and subsidiaries and the IRS exam team agreed to utilize the Fast Track Settlement Program in December 2017. The program was completed in March 2018 and tax years 2014 and 2015 were added to the IRS examination to reflect the impact of the Fast Track changes that were carried forward to 2014 and 2015. In June 2018, AEP settled all outstanding issues under audit for tax ~~audits is uncertain,~~years 2011-2013, and the audit was again submitted to the Joint Committee for approval in ~~management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition,~~the third quarter of 2018. As a result, the related $72 million unrecognized tax benefit was reversed in the second quarter of 2018. The settlement did not materially impact the Registrants ~~accrue interest on these uncertain~~net income, cash flows or financial condition. In the third quarter of 2018, AEP was notified that the IRS would commence an audit of the 2016 tax ~~positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.~~year in October 2018.

AEP and subsidiaries file income tax returns in various state, local or foreign jurisdictions. These taxing authorities routinely examine the tax returns. AEP and subsidiaries are currently under examination in several state and local jurisdictions. However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities. Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income. The Registrants are no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2009.

State Tax Legislation (Applies to AEP, ~~APCo,~~AEPTCo, I&M and OPCo)

~~Legislation was~~In April 2018, the Kentucky legislature enacted ~~in the~~House Bill (H.B.) 487. H.B. 487 adopts mandatory unitary combined reporting for state ~~of Illinois in July 2017 increasing the~~ corporate income tax ~~rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling~~purposes applicable for taxable years beginning on or after ~~that date. With~~January 1, 2019. H.B. 487 also adopts the ~~inclusion of~~80% federal net operating loss (NOL) limitation under Internal Revenue Code Sec. 172(a) for NOLs generated after January 1, 2018 and the ~~2.5% Illinois Replacement Tax,~~federal unlimited carryforward period for unused NOLs generated after January 1, 2018. In addition, H.B. 366 was also enacted in April 2018, which among other things, replaces the ~~total Illinois~~graduated corporate ~~income~~ tax rate ~~increased from 7.75%~~structure with a flat 5% tax rate for business income and adopts a single-sales factor apportionment formula for apportioning a corporation’s business income to ~~9.5%, effective July 1, 2017.~~Kentucky. In the second quarter of 2018, AEP recorded an $18 million benefit to Income Tax Expense as a result of remeasuring Kentucky deferred taxes under a unitary filing group. The enacted legislation isdid not ~~expected to~~ materially impact AEPTCo’s, I&M’s or OPCo’s net ~~income, cash flows or financial condition.~~income.

12. FINANCING ACTIVITIES

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

Long-term Debt Outstanding (Applies to AEP)

The following table details long-term debt outstanding:


Type of Debt	September 30, 2017		December 31, 2016			September 30, 2018		December 31, 2017
	(in millions)					(in millions)
Senior Unsecured Notes	$	16,038.6	$	14,761.0	(b)	$	18,342.1	$	16,478.3
Pollution Control Bonds	1,612.4		1,725.1			1,643.2		1,621.7
Notes Payable	224.5		326.9			233.2		260.8
Securitization Bonds	1,449.4		1,705.0			1,145.2		1,416.5
Spent Nuclear Fuel Obligation (a)	267.9		266.3			272.1		268.6
Other Long-term Debt	1,128.9		1,606.9			1,138.2		1,127.4
Total Long-term Debt Outstanding	20,721.7		20,391.2		(b)	22,774.0		21,173.3
Long-term Debt Due Within One Year	2,359.3		3,013.4		(b)	1,904.2		1,753.7
Long-term Debt	$	18,362.4	$	17,377.8	(b)	$	20,869.8	$	19,419.6

(a)

Pursuant to the Nuclear Waste Policy Act of 1982, I&M, a nuclear licensee, has an obligation to the United States Department of Energy for spent nuclear fuel disposal. The obligation includes a one-time fee for nuclear fuel consumed prior to April 7, 1983. Trust fund assets related to this obligation were ~~$311~~$316 million and ~~$311~~$312 million as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, and are included in Spent Nuclear Fuel and Decommissioning Trusts on the balance sheets.


~~(b)~~	Amounts include debt related to the Lawrenceburg Plant that has been classified as Liabilities Held for Sale on the balance sheet. See “Gavin, Waterford, Darby and Lawrenceburg Plants (Generation & Marketing Segment)” section of Note 6 for additional information.

Long-term Debt Activity

Long-term debt and other securities issued, retired and principal payments made during the first nine months of ~~2017~~2018 are shown in the tables below:


Company	Type of Debt	Principal Amount (a)		Interest Rate	Due Date	Type of Debt	Principal Amount (a)		Interest Rate	Due Date
Issuances:		(in millions)		(%)			(in millions)		(%)
AEPTCo	Senior Unsecured Notes	$	125.0	3.10	2026
AEP Texas						Senior Unsecured Notes	$	500.0	3.95	2028
AEPTCo	Senior Unsecured Notes	500.0		3.75	2047	Senior Unsecured Notes	325.0		4.25	2048
APCo	Senior Unsecured Notes	325.0		3.30	2027	Pollution Control Bonds	104.4		2.625	2022
I&M	Pollution Control Bonds	25.0		Variable	2019	Other Long-term Debt	200.0		Variable	2021
I&M	Pollution Control Bonds	40.0		2.05	2021	Notes Payable	55.5		Variable	2022
I&M	Pollution Control Bonds	52.0		Variable	2021	Pollution Control Bonds	100.0		3.05	2025
I&M	Senior Unsecured Notes	300.0		3.75	2047	Senior Unsecured Notes	350.0		3.85	2028
I&M						Senior Unsecured Notes	475.0		4.25	2048
OPCo						Senior Unsecured Notes	400.0		4.15	2048
SWEPCo						Senior Unsecured Notes	575.0		4.10	2028
SWEPCo	Other Long-term Debt	115.0		Variable	2020	Senior Unsecured Notes	450.0		3.85	2048

Non-Registrant:
AEP Texas	Pollution Control Bonds	60.0		1.75	2020
AEP Texas	Senior Unsecured Notes	400.0		2.40	2022
AEP Texas	Senior Unsecured Notes	300.0		3.80	2047
KPCo	Pollution Control Bonds	65.0		2.00	2020
KPCo	Senior Unsecured Notes	65.0		3.13	2024
KPCo	Senior Unsecured Notes	40.0		3.35	2027
KPCo	Senior Unsecured Notes	165.0		3.45	2029
KPCo	Senior Unsecured Notes	55.0		4.12	2047
Transource Missouri	Other Long-term Debt	7.0		Variable	2018
Transource Energy	Other Long-term Debt	132.1		Variable	2020	Other Long-term Debt	12.7		Variable	2020
WPCo						Pollution Control Bonds	65.0		3.00	2022
Total Issuances		$	2,771.1				$	3,612.6


(a)	Amounts indicated on the statements of cash flows are net of issuance costs and premium or discount and will not tie to the issuance amounts.

Company Type of Debt Principal Amount Paid Interest Rate Due Date
Retirements and Principal Payments: (in millions) (%)
APCo Senior Unsecured Notes $ 250.0
5.00 2017
APCo Securitization Bonds 23.5
2.008 2024
APCo Pollution Control Bonds 104.4
Variable 2017
I&M �� Notes Payable 4.9
Variable 2017
I&M Pollution Control Bonds 25.0
Variable 2017
I&M Notes Payable 22.3
Variable 2019
I&M Notes Payable 23.6
Variable 2019
I&M Notes Payable 23.9
Variable 2020
I&M Pollution Control Bonds 52.0
Variable 2017
I&M Notes Payable 24.3
Variable 2021
I&M Other Long-term Debt 1.1
6.00 2025
I&M Pollution Control Bonds 50.0
Variable 2025
OPCo Securitization Bonds 16.2
0.958 2017
OPCo Securitization Bonds 22.5
0.958 2018
OPCo Securitization Bonds 7.6
2.049 2019
OPCo Other Long-term Debt 0.1
1.149 2028
PSO Other Long-term Debt 0.3
3.00 2027
SWEPCo Senior Unsecured Notes 250.0
5.55 2017
SWEPCo Other Long-term Debt 100.0
Variable 2017
SWEPCo Other Long-term Debt 0.2
3.50 2023
SWEPCo Other Long-term Debt 0.1
4.28 2023
SWEPCo Notes Payable 3.3
4.58 2032

Non-Registrant:
AEGCo Senior Unsecured Notes 152.7
6.33 2037
AGR Other Long-term Debt 500.0
Variable 2017
KPCo Pollution Control Bonds 65.0
Variable 2017
KPCo Senior Unsecured Notes 325.0
6.00 2017
TCC Securitization Bonds 27.2
0.88 2017
TCC Securitization Bonds 161.2
5.17 2018
TCC Pollution Control Bonds 60.0
5.20 2030
Transource Missouri Other Long-term Debt 130.8
Variable 2018
Total Retirements and Principal Payments $ 2,427.2

~~In October 2017, I&M retired $1 million of Notes Payable related to DCC Fuel.~~

~~In October 2017, AEP Texas retired $41 million of 5.625% Pollution Control Bonds due in 2017.~~



Company	Type of Debt	Principal Amount Paid		Interest Rate	Due Date
Retirements and Principal Payments:		(in millions)		(%)
AEP Texas	Securitization Bonds	$	70.0	5.17	2018
AEP Texas	Senior Unsecured Notes	30.0		5.89	2018
AEP Texas	Securitization Bonds	27.6		1.976	2020
AEP Texas	Securitization Bonds	104.1		5.306	2020
APCo	Securitization Bonds	24.0		2.008	2023
I&M	Other Long-term Debt	200.0		Variable	2018
I&M	Pollution Control Bonds	100.0		1.75	2018
I&M	Senior Unsecured Notes	475.0		7.00	2019
I&M	Notes Payable	3.5		Variable	2019
I&M	Notes Payable	10.1		Variable	2019
I&M	Notes Payable	18.8		Variable	2020
I&M	Notes Payable	19.5		Variable	2021
I&M	Notes Payable	21.3		Variable	2022
I&M	Notes Payable	6.7		Variable	2022
I&M	Other Long-term Debt	1.2		6.00	2025
OPCo	Senior Unsecured Notes	350.0		6.05	2018
OPCo	Securitization Bonds	46.9		2.049	2019
OPCo	Other Long-term Debt	0.1		1.149	2028
PSO	Other Long-term Debt	0.3		3.00	2027
SWEPCo	Pollution Control Bonds	81.7		4.95	2018
SWEPCo	Senior Unsecured Notes	300.0		5.875	2018
SWEPCo	Other Long-term Debt	0.2		3.50	2023
SWEPCo	Other Long-term Debt	0.2		4.28	2023
SWEPCo	Notes Payable	3.2		4.58	2032

Non-Registrant:
AEP Energy	Notes Payable	0.1		5.75	2019
WPCo	Pollution Control Bonds	65.0		Variable	2018
Total Retirements and Principal Payments		$	1,959.5

As of September 30, ~~2017,~~2018, trustees held, on behalf of AEP, ~~$728~~$574 million of their reacquired Pollution Control Bonds. Of this total, ~~$104 million, $50 million and~~ $345 million relates to OPCo.

Long-term Debt Subsequent Events

In October 2018, I&M retired $4 million of Notes Payable related to ~~APCo, I&M and OPCo, respectively.~~DCC Fuel.

Debt Covenants (Applies to AEP and AEPTCo)

Covenants in AEPTCo’s note purchase agreements and indenture ~~also~~ limit the amount of contractually-defined priority debt (which includes a further sub-limit of $50 million of secured debt) to 10% of consolidated tangible net assets. AEPTCo’s contractually-defined priority debt was immaterial as of September 30, 2018. The method for calculating the consolidated tangible net assets is contractually defined in the note purchase agreements.

Dividend Restrictions

Utility Subsidiaries’ Restrictions

Parent depends on its utility subsidiaries to pay dividends to shareholders. AEP utility subsidiaries pay dividends to Parent provided funds are legally available. Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of the subsidiaries to transfer funds to Parent in the form of dividends.

All of the dividends declared by AEP’s utility subsidiaries that provide transmission or local distribution services are subject to a Federal Power Act restriction that prohibits the payment of dividends out of capital accounts without regulatory approval; payment of dividends is allowed out of retained earnings only. Additionally, the Federal Power Act creates a reserve on earnings attributable to hydroelectric generation plants. Because of their ownership of such plants, this reserve applies to AGR, APCo and I&M.

Certain AEP subsidiaries have credit agreements that contain ~~a covenant~~covenants that ~~limits~~limit their debt to capitalization ratio to 67.5%. As of September 30, 2017, no subsidiaries have exceeded their debt to capitalization limit. The payment of cash dividends indirectly results in an increase in the percentage of debt to total capitalization of the AEP subsidiary distributing the dividend. The method for calculating outstanding debt and capitalization is contractually defined in the credit agreements.

~~As of September 30, 2017, the~~The Federal Power Act restriction does not limit the ability of the AEP subsidiaries to pay dividends out of retained earnings.

Parent Restrictions (Applies to AEP)

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

Pursuant to the leverage restrictions in credit agreements, AEP must maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%. As of September 30, 2017, AEP has not exceeded its debt to capitalization limit. 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.

Corporate Borrowing Program - AEP System (Applies to Registrant Subsidiaries)

The AEP System uses a corporate borrowing program to meet the short-term borrowing needs of AEP’s subsidiaries. The corporate borrowing program includes a Utility Money Pool, which funds AEP’s utility ~~subsidiaries, and~~subsidiaries; a Nonutility Money Pool, which funds certain AEP nonutility ~~subsidiaries.~~subsidiaries; and direct borrowing from AEP. The AEP System Utility Money Pool operates in accordance with the terms and conditions of the AEP System Utility Money Pool agreement filed with the FERC. The amounts of outstanding loans to (borrowings from) the Utility Money Pool as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are included in Advances to Affiliates and Advances from Affiliates, respectively, on each of the Registrant Subsidiaries’ balance sheets. The Utility Money Pool participants’ money pool activity and ~~their~~ corresponding authorized borrowing limits for the nine months ended September 30, ~~2017~~2018 are described in the following table:


	Maximum				Average				Net Loans to						Maximum				Average				Net Loans to
	Borrowings		Maximum		Borrowings		Average		(Borrowings from)			Authorized			Borrowings		Maximum		Borrowings		Average		(Borrowings from)			Authorized
	from the		Loans to the		from the		Loans to the		the Utility Money			Short-term			from the		Loans to the		from the		Loans to the		the Utility Money			Short-term
	Utility		Utility		Utility		Utility		Pool as of			Borrowing			Utility		Utility		Utility		Utility		Pool as of			Borrowing
Company	Money Pool		Money Pool		Money Pool		Money Pool		September 30, 2017			Limit			Money Pool		Money Pool		Money Pool		Money Pool		September 30, 2018			Limit
	(in millions)														(in millions)
AEP Texas															$	390.6	$	106.9	$	189.9	$	47.1	$	(77.8	)	$	500.0
AEPTCo	$	467.2	$	194.8	$	235.7	$	19.3	$	162.9		$	795.0	(a)	371.3		232.7		237.9		28.1		232.7			795.0		(a)
APCo	231.5		160.7		152.2		32.2		(45.9		)	600.0			295.5		23.7		185.3		23.4		(75.4		)	600.0
I&M	367.4		12.6		205.7		12.6		(164.9		)	500.0			322.1		657.8		257.6		116.4		72.5			500.0
OPCo	280.6		56.2		141.0		27.9		(167.6		)	400.0			270.8		225.0		169.0		189.4		(242.9		)	500.0
PSO	185.2		—		121.3		—		(118.0		)	300.0			193.7		30.9		119.8		10.1		(22.0		)	300.0
SWEPCo	187.5		178.6		109.6		169.5		(48.3		)	350.0			200.1		525.5		143.2		343.3		516.6			350.0


(a)	Amount represents the combined authorized short-term borrowing limit the State Transcos have from FERC or state regulatory commissions.

The activity in the above table does not include short-term lending activity of certain AEP nonutility subsidiaries. AEP Texas’ wholly-owned subsidiary, AEP Texas North Generation Company LLC and SWEPCo’s wholly-owned subsidiary, Mutual Energy SWEPCo, LP ~~which is a participant~~are participants in the Nonutility Money Pool. The amounts of outstanding loans to the Nonutility Money Pool as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are included in Advances to Affiliates on ~~SWEPCo’s~~each subsidiaries’ balance sheets. ~~For~~The Nonutility Money Pool participants’ money pool activity for the nine months ended September 30, ~~2017, Mutual Energy SWEPCo, LP had~~2018 is described in the following ~~activity in the Nonutility Money Pool:~~table:

Maximum Average Loans
Loans Loans to the Nonutility
to the Nonutility to the Nonutility Money Pool as of
Money Pool Money Pool September 30, 2017
(in millions)
$ 2.0
$ 2.0
$ 2.0

Maximum

Average

Loans to the

Nonutility

Money Pool as of

Company

Money Pool

September 30, 2018

(in millions)

AEP Texas

8.4

8.1

8.0

SWEPCo

2.0

AEP has a direct financing relationship with AEPTCo to meet its short-term borrowing needs. The amounts of outstanding loans to (borrowings from) AEP as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are included in Advances to Affiliates and Advances from Affiliates, respectively, on AEPTCo’s balance sheets. AEPTCo’s direct borrowing and lending activity with AEP for the nine months ended September 30, ~~2017~~2018 is described in the following table:

Maximum

Average

Borrowings from

Loans to

Authorized

Maximum

Average

Borrowings from

Loans to

Authorized

Borrowings

Loans

Borrowings

Loans

AEP as of

Short-term

Borrowings

Loans

Borrowings

Loans

AEP as of

Short-term

from AEP

to AEP

from AEP

to AEP

September 30, 2017

Borrowing Limit

from AEP

to AEP

from AEP

to AEP

September 30, 2018

Borrowing Limit

(in millions)

1.1

151.9

1.1

38.9

0.9

96.1

75.0

(a)

1.1

104.7

1.1

50.0

1.1

45.3

75.0

(a)


(a)	Amount represents the combined authorized short-term borrowing limit the State Transcos have from FERC or state regulatory commissions.

The maximum and minimum interest rates for funds either borrowed from or loaned to the Utility Money Pool were as follows:


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2018		2017
Maximum Interest Rate	1.49	%	0.91	%	2.52	%	1.49	%
Minimum Interest Rate	0.92	%	0.69	%	1.81	%	0.92	%

The average interest rates for funds borrowed from and loaned to the Utility Money Pool are summarized for all Registrant Subsidiaries in the following table:


	Average Interest Rate				Average Interest Rate				Average Interest Rate				Average Interest Rate
	for Funds Borrowed				for Funds Loaned				for Funds Borrowed from				for Funds Loaned to
	from the Utility Money Pool for				to the Utility Money Pool for				the Utility Money Pool for the				the Utility Money Pool for the
	Nine Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016		2018		2017		2018		2017
AEP Texas									2.25	%	1.29	%	2.29	%	1.35	%
AEPTCo	1.36	%	0.82	%	1.04	%	0.74	%	2.26	%	1.36	%	2.04	%	1.04	%
APCo	1.24	%	0.78	%	1.28	%	0.79	%	2.22	%	1.24	%	2.19	%	1.28	%
I&M	1.24	%	0.73	%	1.27	%	0.78	%	2.16	%	1.24	%	2.06	%	1.27	%
OPCo	1.40	%	0.85	%	0.98	%	0.74	%	2.18	%	1.40	%	2.47	%	0.98	%
PSO	1.30	%	0.76	%	—	%	0.81	%	2.25	%	1.30	%	1.86	%	—	%
SWEPCo	1.26	%	0.79	%	0.98	%	0.91	%	2.31	%	1.26	%	1.87	%	0.98	%

Maximum, minimum and average interest rates for funds loaned to the Nonutility Money Pool are summarized ~~for Mutual Energy SWEPCo, LP~~ in the following table:

Maximum Minimum Average
Interest Rate Interest Rate Interest Rate
Nine Months for Funds Loaned for Funds Loaned for Funds Loaned
Ended to the Nonutility to the Nonutility to the Nonutility
September 30, Money Pool Money Pool Money Pool
2017 1.49 % — % 1.27 %
2016 0.91 % 0.69 % 0.79 %

Nine Months Ended September 30, 2018

Nine Months Ended September 30, 2017

Maximum

Minimum

Average

Maximum

Minimum

Average

Interest Rate

for Funds

Loaned to

the Nonutility

Company

Money Pool

AEP Texas

2.52

1.83

2.26

1.49

—

1.27

SWEPCo

2.52

1.83

2.26

1.49

—

1.27

AEPTCo’s maximum, minimum and average interest rates for funds either borrowed from or loaned to AEP are summarized in the following table:


	Maximum		Minimum		Maximum		Minimum		Average		Average		Maximum		Minimum		Maximum		Minimum		Average		Average
	Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate
Nine Months	for Funds		for Funds		for Funds		for Funds		for Funds		for Funds		for Funds		for Funds		for Funds		for Funds		for Funds		for Funds
Ended	Borrowed		Borrowed		Loaned		Loaned		Borrowed		Loaned		Borrowed		Borrowed		Loaned		Loaned		Borrowed		Loaned
September 30,	from AEP		from AEP		to AEP		to AEP		from AEP		to AEP		from AEP		from AEP		to AEP		to AEP		from AEP		to AEP
2018													2.52	%	1.76	%	2.52	%	1.76	%	2.26	%	2.27	%
2017	1.49	%	0.92	%	1.49	%	0.92	%	1.27	%	1.31	%	1.49	%	0.92	%	1.49	%	0.92	%	1.27	%	1.31	%
2016	0.91	%	0.69	%	0.91	%	0.69	%	0.80	%	0.81	%

Short-term Debt (Applies to AEP and SWEPCo)

Outstanding short-term debt was as follows:


		September 30, 2017				December 31, 2016					September 30, 2018				December 31, 2017
Company	Type of Debt	Outstanding Amount		Interest Rate (a)		Outstanding Amount		Interest Rate (a)		Type of Debt	Outstanding Amount		Interest Rate (a)		Outstanding Amount		Interest Rate (a)
		(in millions)				(in millions)					(dollars in millions)
AEP	Securitized Debt for Receivables (b)	$	750.0	1.17	%	$	673.0	0.70	%	Securitized Debt for Receivables (b)	$	750.0	2.06	%	$	718.0	1.22	%
AEP	Commercial Paper	295.0		1.39	%	1,040.0		1.02	%	Commercial Paper	1,473.2		2.40	%	898.6		1.85	%
SWEPCo	Notes Payable	14.3		2.88	%	—		—	%	Notes Payable	19.4		3.45	%	22.0		2.92	%
	Total Short-term Debt	$	1,059.3			$	1,713.0			Total Short-term Debt	$	2,242.6			$	1,638.6


(a)	Weighted average rate.


(b)	Amount of securitized debt for receivables as accounted for under the “Transfers and Servicing” accounting guidance.

Credit Facilities

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

Securitized Accounts Receivables – AEP Credit (Applies to AEP)

AEP Credit has a receivables securitization agreement with bank conduits. Under the securitization agreement, AEP Credit receives financing from the bank conduits for the interest in the receivables AEP Credit acquires from affiliated utility subsidiaries. These securitized transactions allow AEP Credit to repay its outstanding debt obligations, continue to purchase the operating companies’ receivables and accelerate AEP Credit’s cash collections.

AEP Credit’s receivables securitization agreement provides a commitment of $750 million from bank conduits to purchase receivables and ~~expires~~was amended in ~~June 2019.~~July 2018 to include a $125 million and a $625 million facility which expire in July 2020 and 2021, respectively.

Accounts receivable information for AEP Credit is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
	(dollars in millions)												(dollars in millions)
Effective Interest Rates on Securitization of Accounts Receivable	1.33		%	0.73		%	1.17		%	0.65		%	2.27		%	1.33		%	2.06		%	1.17		%
Net Uncollectible Accounts Receivable Written Off	$	7.0		$	7.7		$	18.2		$	17.5		$	9.6		$	7.0		$	19.0		$	18.2


	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
	(in millions)				(in millions)
Accounts Receivable Retained Interest and Pledged as Collateral Less Uncollectible Accounts	$	939.8	$	945.0	$	1,082.9	$	925.5
Short-term – Securitized Debt of Receivables	750.0		673.0		750.0		718.0
Delinquent Securitized Accounts Receivable	44.3		42.7		58.2		41.1
Bad Debt Reserves Related to Securitization	27.8		27.7		29.3		28.7
Unbilled Receivables Related to Securitization	264.2		322.1		242.1		303.2

AEP Credit’s delinquent customer accounts receivable represent accounts greater than 30 days past due.

Securitized Accounts Receivables – AEP Credit (Applies to Registrant Subsidiaries, except AEP Texas and AEPTCo)

Under this sale of receivables arrangement, the Registrant Subsidiaries sell, without recourse, certain of their customer accounts receivable and accrued unbilled revenue balances to AEP Credit and are charged a fee based on AEP Credit’s financing costs, administrative costs and uncollectible accounts experience for each Registrant ~~Subsidiary’s~~Subsidiaries’ receivables. APCo does not have regulatory authority to sell its West Virginia accounts receivable. The costs of customer accounts receivable sold are reported in Other Operation expense on the Registrant Subsidiaries’ statements of income. The Registrant Subsidiaries manage and service their customer accounts receivable, which are sold to AEP Credit. AEP Credit securitizes the eligible receivables for the operating companies and retains the remainder.

The amount of accounts receivable and accrued unbilled revenues under the sale of receivables ~~agreement for each Registrant Subsidiary was as follows:~~agreements were:


Company	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
	(in millions)				(in millions)
APCo	$	116.9	$	142.0	$	122.9	$	136.2
I&M	132.7		136.7		169.5		136.5
OPCo	356.3		388.3		413.7		367.4
PSO	143.4		110.4		163.0		115.1
SWEPCo	167.1		130.9		190.5		138.2

The fees paid ~~by the Registrant Subsidiaries~~ to AEP Credit for customer accounts receivable sold were:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016		2018		2017		2018		2017
	(in millions)								(in millions)
APCo	$	1.5	$	1.6	$	4.2	$	5.4	$	1.8	$	1.5	$	5.1	$	4.2
I&M	1.8		2.0		4.9		5.6		2.5		1.8		6.8		4.9
OPCo	6.1		8.1		16.5		23.4		7.2		6.1		18.8		16.5
PSO	2.0		1.8		5.2		4.7		2.3		2.0		6.0		5.2
SWEPCo	2.0		2.1		5.4		5.3		2.6		2.0		6.6		5.4

The ~~Registrant Subsidiaries’~~ proceeds on the sale of receivables to AEP Credit were:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016		2018		2017		2018		2017
	(in millions)								(in millions)
APCo	$	335.5	$	361.7	$	1,029.4	$	1,071.6	$	334.1	$	335.5	$	1,079.2	$	1,029.4
I&M	409.9		448.0		1,218.9		1,220.2		498.4		409.9		1,401.7		1,218.9
OPCo	616.3		750.9		1,741.7		2,011.2		695.2		616.3		2,046.9		1,741.7
PSO	407.0		390.6		1,022.6		971.9		454.9		407.0		1,171.2		1,022.6
SWEPCo	455.0		460.4		1,200.8		1,183.9		512.6		455.0		1,364.6		1,200.8

13. VARIABLE INTEREST ENTITIES

The disclosures in this note apply to AEP only.

The accounting guidance for “Variable Interest Entities” is a consolidation model that considers if a company has a variable interest in a VIE. A VIE is a legal entity that possesses any of the following conditions: the entity’s equity at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, equity owners are unable to direct the activities that most significantly impact the legal entity’s economic performance (or they possess disproportionate voting rights in relation to the economic interest in the legal entity), or the equity owners lack the obligation to absorb the legal entity’s expected losses or the right to receive the legal entity’s expected residual returns. Entities are required to consolidate a VIE when it is determined that they have a controlling financial interest in a VIE and therefore, are the primary beneficiary of that VIE, as defined by the accounting guidance for “Variable Interest Entities.” In determining whether AEP is the primary beneficiary of a VIE, management considers whether AEP has the power to direct the most significant activities of the VIE and is obligated to absorb losses or receive the expected residual returns that are significant to the VIE. Management believes that significant assumptions and judgments were applied consistently.

Desert Sky Wind Farm LLC (Desert Sky) and Trent Wind Farm LLC (Trent) (collectively “the LLCs”) were established for the purpose of repowering, owning and operating wind-powered electric energy generation facilities in Texas. In January 2018, AEP admitted a nonaffiliate as a member of the LLCs to own and repower Desert Sky and Trent. The nonaffiliate contributed full turbine sets to each project in exchange for a 20.1% interest in the LLCs. The nonaffiliates’ contribution of $84 million was recorded as Net Property, Plant and Equipment on the balance sheets, which was the fair value as of the contribution date determined based on key input assumptions of the original cost of the full turbine sets and the discounted cash flow benefit associated with the production tax credits available from repowering Desert Sky and Trent based on their expected net capacity, capacity factor and the operational availability. AEP owns 79.9% of the LLCs. As a result, management has concluded that Desert Sky and Trent, collectively, are VIE’s and that AEP is the primary beneficiary based on its power to direct the activities that most significantly impact Desert Sky and Trent’s economic performance. Also in January 2018, Desert Sky and Trent entered into a forward PPA for the sale of power to AEPEP related to deliveries of electricity beginning January 1, 2021 for a 12 year period. Prior to the effective date of the PPA, Desert Sky and Trent will sell power at market rates into ERCOT. AEP and the nonaffiliate will share tax attributes including production tax credits and cash distributions from the operation of the LLCs generally consistent with the ownership percentages. See the table below for the classification of Desert Sky and Trent’s assets and liabilities on the balance sheet:



American Electric Power Company, Inc.
Variable Interest Entities
September 30, 2018

	Desert Sky and Trent
	(in millions)
ASSETS
Current Assets	$	89.2
Net Property, Plant and Equipment	350.8
Other Noncurrent Assets	0.4
Total Assets	$	440.4

LIABILITIES AND EQUITY
Current Liabilities	$	93.4
Noncurrent Liabilities	6.1
Equity	340.9
Total Liabilities and Equity	$	440.4

AEP has a call right, which if exercised, would require the nonaffiliate to sell its noncontrolling interest in the LLCs to AEP. The call exercise period is for ninety days, beginning July 2020 for Trent and August 2020 for Desert Sky. The nonaffiliates’ interest in the LLCs is presented as Redeemable Noncontrolling Interest on the balance sheets. The nonaffiliate holds redemption rights, which if exercised, would require AEP to purchase the nonaffiliates’ noncontrolling interest in the LLCs. The redemption right exercise period is for ninety days, beginning July 2021 for Trent and August 2021 for Desert Sky. The exercise price for both the call and redemption right are determined using a discounted cash flow model with agreed input assumptions as well as potential updates to certain assumptions reasonably expected based on the actual results of the LLCs. As of September 30, 2018, AEP recorded $70 million of Redeemable Noncontrolling Interest in Mezzanine Equity on the balance sheets.

14. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

Disaggregated Revenues from Contracts with Customers

The tables below represent AEP’s reportable segment revenues from contracts with customers, net of respective provisions for refund, by type of revenue:



	Three Months Ended September 30, 2018
	Vertically Integrated Utilities		Transmission and Distribution Utilities			AEP Transmission Holdco			Generation & Marketing			Corporate and Other		Reconciling Adjustments			AEP Consolidated
	(in millions)
Retail Revenues:
Residential Revenues	$	1,048.7	$	612.2		$	—		$	—		$	—	$	—		$	1,660.9
Commercial Revenues	618.5		336.7			—			—			—		—			955.2
Industrial Revenues	573.2		123.9			—			—			—		—			697.1
Other Retail Revenues	49.0		9.8			—			—			—		—			58.8
Total Retail Revenues	2,289.4		1,082.6			—			—			—		—			3,372.0

Wholesale and Competitive Retail Revenues:
Generation Revenues (a)	224.2		—			—			115.1			—		(98.5		)	240.8
Transmission Revenues (b)	72.8		88.0			201.4			—			—		(241.6		)	120.6
Marketing, Competitive Retail and Renewable Revenues	—		—			—			399.1			—		—			399.1
Total Wholesale and Competitive Retail Revenues	297.0		88.0			201.4			514.2			—		(340.1		)	760.5

Other Revenues from Contracts with Customers (c)	40.3		69.9			0.7			12.7			21.5		49.5			194.6

Total Revenues from Contracts with Customers	2,626.7		1,240.5			202.1			526.9			21.5		(290.6		)	4,327.1

Other Revenues:
Alternative Revenues (d)	0.2		(37.9		)	(14.9		)	—			—		—			(52.6		)
Other Revenues (c)	9.8		8.9			—			(5.3		)	2.2		43.0			58.6
Total Other Revenues	10.0		(29.0		)	(14.9		)	(5.3		)	2.2		43.0			6.0

Total Revenues	$	2,636.7	$	1,211.5		$	187.2		$	521.6		$	23.7	$	(247.6	)	$	4,333.1


(a)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for Generation & Marketing is $35 million. The remaining affiliated amounts are immaterial.


(b)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEP Transmission Holdco is $147 million. The remaining affiliated amounts are immaterial.


(c)	Amounts include affiliated and nonaffiliated revenues.


(d)	The alternative revenue for Transmission and Distribution Utilities is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.



	Nine Months Ended September 30, 2018
	Vertically Integrated Utilities			Transmission and Distribution Utilities			AEP Transmission Holdco			Generation & Marketing		Corporate and Other		Reconciling Adjustments			AEP Consolidated
	(in millions)
Retail Revenues:
Residential Revenues	$	2,906.9		$	1,711.0		$	—		$	—	$	—	$	—		$	4,617.9
Commercial Revenues	1,693.9			962.6			—			—		—		—			2,656.5
Industrial Revenues	1,655.2			366.8			—			—		—		—			2,022.0
Other Retail Revenues	139.1			29.2			—			—		—		—			168.3
Total Retail Revenues	6,395.1			3,069.6			—			—		—		—			9,464.7

Wholesale and Competitive Retail Revenues:
Generation Revenues (a)	686.5			—			—			413.4		—		(155.2		)	944.7
Transmission Revenues (b)	208.4			272.6			633.9			—		—		(520.7		)	594.2
Marketing, Competitive Retail and Renewable Revenues	—			—			—			1,040.2		—		—			1,040.2
Total Wholesale and Competitive Retail Revenues	894.9			272.6			633.9			1,453.6		—		(675.9		)	2,579.1

Other Revenues from Contracts with Customers (c)	121.8			165.1			11.1			15.0		64.8		1.8			379.6

Total Revenues from Contracts with Customers	7,411.8			3,507.3			645.0			1,468.6		64.8		(674.1		)	12,423.4

Other Revenues:
Alternative Revenues (d)	(19.2		)	(48.3		)	(39.8		)	—		—		—			(107.3		)
Other Revenues (c)	1.1			51.9			—			18.8		6.7		—			78.5
Total Other Revenues	(18.1		)	3.6			(39.8		)	18.8		6.7		—			(28.8		)

Total Revenues	$	7,393.7		$	3,510.9		$	605.2		$	1,487.4	$	71.5	$	(674.1	)	$	12,394.6


(a)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for Generation & Marketing is $87 million. The remaining affiliated amounts are immaterial.


(b)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEP Transmission Holdco is $444 million. The remaining affiliated amounts are immaterial.


(c)	Amounts include affiliated and nonaffiliated revenues.


(d)	The alternative revenue for Transmission and Distribution Utilities is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.

The tables below represent revenues from contracts with customers, net of respective provisions for refund, by type of revenue for the Registrant Subsidiaries:



	Three Months Ended September 30, 2018
	AEP Texas			AEPTCo (a)			APCo			I&M		OPCo			PSO		SWEPCo
	(in millions)
Retail Revenues:
Residential Revenues	$	178.8		$	—		$	320.9		$	207.4	$	433.5		$	220.8	$	214.0
Commercial Revenues	113.7			—			155.6			139.5		222.9			122.2		142.6
Industrial Revenues	27.2			—			157.1			148.7		96.3			80.2		87.5
Other Retail Revenues	6.5			—			19.2			1.7		3.3			24.4		2.2
Total Retail Revenues	326.2			—			652.8			497.3		756.0			447.6		446.3

Wholesale Revenues:
Generation Revenues (b)	—			—			74.5			93.6		—			12.5		53.2
Transmission Revenues (c)	73.6			206.6			20.9			6.2		14.8			13.5		29.5
Total Wholesale Revenues	73.6			206.6			95.4			99.8		14.8			26.0		82.7

Other Revenues from Contracts with Customers (d)	7.5			0.2			15.9			22.4		(29.9		)	5.5		6.6

Total Revenues from Contracts with Customers	407.3			206.8			764.1			619.5		740.9			479.1		535.6

Other Revenues:
Alternative Revenues (e)	(1.0		)	(12.4		)	(1.2		)	1.5		(36.9		)	2.3		(0.3		)
Other Revenues (f)	27.1			—			(0.9		)	8.7		74.3			—		—
Total Other Revenues	26.1			(12.4		)	(2.1		)	10.2		37.4			2.3		(0.3		)

Total Revenues	$	433.4		$	194.4		$	762.0		$	629.7	$	778.3		$	481.4	$	535.3


(a)	The amounts presented reflect the revisions made to AEPTCo’s previously issued financial statements. For additional details on revisions made to AEPTCo’s financial statements, see Note 1- Significant Accounting Matters.


(b)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for APCo is $30 million primarily relating to the PPA with Kingsport. The remaining affiliated amounts are immaterial.


(c)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEPTCo is $146 million. The remaining affiliated amounts are immaterial.


(d)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for I&M is $17 million primarily relating to the barging, urea transloading and other transportation services. The remaining affiliated amounts are immaterial.


(e)	The alternative revenue for OPCo is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.


(f)	Amounts include affiliated and nonaffiliated revenues.



	Nine Months Ended September 30, 2018
	AEP Texas			AEPTCo (a)			APCo			I&M			OPCo			PSO		SWEPCo
	(in millions)
Retail Revenues:
Residential Revenues	$	453.6		$	—		$	1,017.2		$	559.4		$	1,258.4		$	531.4	$	512.3
Commercial Revenues	328.5			—			443.8			373.7			632.8			317.9		378.6
Industrial Revenues	79.7			—			455.9			424.1			287.8			220.4		248.1
Other Retail Revenues	19.1			—			57.6			5.4			9.8			64.9		6.4
Total Retail Revenues	880.9			—			1,974.5			1,362.6			2,188.8			1,134.6		1,145.4

Wholesale Revenues:
Generation Revenues (b)	—			—			194.1			349.7			—			26.7		168.8
Transmission Revenues (c)	229.6			612.9			60.2			16.9			42.8			29.4		77.3
Total Wholesale Revenues	229.6			612.9			254.3			366.6			42.8			56.1		246.1

Other Revenues from Contracts with Customers (d)	21.8			8.7			42.2			71.0			51.3			14.6		18.0

Total Revenues from Contracts with Customers	1,132.3			621.6			2,271.0			1,800.2			2,282.9			1,205.3		1,409.5

Other Revenues:
Alternative Revenues (e)	(1.1		)	(35.4		)	(20.7		)	(4.0		)	(47.2		)	11.2		2.3
Other Revenues (f)	62.1			—			(0.9		)	—			82.3			—		—
Total Other Revenues	61.0			(35.4		)	(21.6		)	(4.0		)	35.1			11.2		2.3

Total Revenues	$	1,193.3		$	586.2		$	2,249.4		$	1,796.2		$	2,318.0		$	1,216.5	$	1,411.8


(a)	The amounts presented reflect the revisions made to AEPTCo’s previously issued financial statements. For additional details on revisions made to AEPTCo’s financial statements, see Note 1- Significant Accounting Matters.


(b)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for APCo is $100 million primarily relating to the PPA with Kingsport. The remaining affiliated amounts are immaterial.


(c)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for AEPTCo is $448 million. The remaining affiliated amounts are immaterial.


(d)	Amounts include affiliated and nonaffiliated revenues. The affiliated revenue for I&M is $57 million primarily relating to barging, urea transloading and other transportation services. The remaining affiliated amounts are immaterial.


(e)	The alternative revenue for OPCo is primarily the $48 million reduction in revenue relating to the Ohio tax settlement. See the “Ohio Tax Reform” section of Note 4 for additional information.


(f)	Amounts include affiliated and nonaffiliated revenues.

Performance Obligations

AEP has performance obligations as part of its normal course of business. A performance obligation is a promise to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to a customer. The invoice practical expedient within the accounting guidance for “Revenue from Contracts with Customers” allows for the recognition of revenue from performance obligations in the amount of consideration to which there is a right to invoice the customer and when the amount for which there is a right to invoice corresponds directly to the value transferred to the customer.

The purpose of the invoice practical expedient is to depict an entity’s measure of progress toward completion of the performance obligation within a contract and can only be applied to performance obligations that are satisfied over time and when the invoice is representative of services provided to date. AEP subsidiaries elected to apply the invoice practical expedient to recognize revenue for performance obligations satisfied over time as the invoices from the respective revenue streams are representative of services or goods provided to date to the customer. Performance obligations for AEP’s subsidiaries are summarized as follows:

Retail Revenues

AEP’s subsidiaries within the Vertically Integrated Utilities and Transmission and Distribution Utilities segments have performance obligations to generate, transmit and distribute electricity for sale to rate-regulated retail customers. The performance obligation to deliver electricity is satisfied over time as the customer simultaneously receives and consumes the benefits provided. Revenues are variable as they are subject to the customer’s usage requirements.

Rate-regulated retail customers typically have the right to discontinue receiving service at will, therefore these contracts between AEP’s subsidiaries and their customers for rate-regulated services are generally limited to the services requested and received to date for such arrangements. Retail customers are generally billed on a monthly basis, and payment is typically due within 15 to 20 days after the issuance of the invoice. Payments from Retail Electric Providers are due to AEP Texas within 35 days.

Wholesale Revenues - Generation

AEP’s subsidiaries within the Vertically Integrated Utilities and Generation & Marketing segments have performance obligations to sell electricity to wholesale customers from generation assets in PJM, SPP and ERCOT. The performance obligation to deliver electricity from generation assets is satisfied over time as the customer simultaneously receives and consumes the benefits provided. Wholesale generation revenues are variable as they are subject to the customer’s usage requirements.

AEP’s subsidiaries within the Vertically Integrated Utilities and Generation & Marketing segments also have performance obligations to stand ready in order to promote grid reliability. Stand ready services are sold into PJM’s RPM capacity market. RPM entails a base auction and at least three incremental auctions for a specific PJM delivery year, with the incremental auctions spanning three years. The performance obligation to stand ready is satisfied over time and the consideration for which is variable until the occurrence of the final incremental auction, at which point the performance obligation becomes fixed.

Payments from the RTO for stand ready services are typically received within one week from the issuance of the invoice, which is typically issued weekly. Gross margin resulting from generation sales within the Vertically Integrated Utilities segment are primarily subject to margin sharing agreements with customers and vary by state, where the revenues are reflected gross in the disaggregated revenue tables above.

APCo has a performance obligation to supply wholesale electricity to KGPCo through a purchased power agreement. The FERC regulates the cost-based wholesale power transactions between APCo and KGPCo. The purchased power agreement includes a component for the recovery of transmission costs under the FERC OATT. The transmission cost component of purchased power is cost-based and regulated by the Tennessee Regulatory Authority. APCo’s performance obligation under the purchased power agreement is satisfied over time as KGPCo simultaneously receives and consumes the wholesale electricity. APCo’s revenues from the purchased power agreement are presented within the Generation Revenues line in the disaggregated revenue tables above.

Wholesale Revenues - Transmission

AEP’s subsidiaries within the Vertically Integrated Utilities, Transmission and Distribution Utilities and AEP Transmission Holdco segments have performance obligations to transmit electricity to wholesale customers through assets owned and operated by AEP subsidiaries. The performance obligation to provide transmission services in PJM, SPP and ERCOT encompass a time frame greater than a year, where the performance obligation within each RTO is partially fixed for a period of one year or less. Payments from the RTO for transmission services are typically received within one week from the issuance of the invoice, which is issued monthly for SPP and ERCOT and weekly for PJM.

AEP subsidiaries within the PJM and SPP regions collect revenues through transmission formula rates. The FERC-approved rates establish the annual transmission revenue requirement (ATRR) and transmission service rates for transmission owners. The formula rates establish rates for a one year period and also include a true-up calculation for

the prior year’s billings, allowing for over/under-recovery of the transmission owner’s ATRR. The annual true-ups meet the definition of alternative revenues in accordance with the accounting guidance for “Regulated Operations,” and are therefore presented as such in the disaggregated revenue tables above. AEP subsidiaries within the ERCOT region collect revenues through a combination of base rates and interim Transmission Costs of Services filings that are approved by the PUCT.

APCo, I&M, KGPCo, KPCo, OPCo and WPCo (AEP East Companies) are parties to the Transmission Agreement (TA), which defines how transmission costs are allocated among the AEP East Companies on a 12-month average coincident peak basis. PSO, SWEPCo and AEPSC are parties to the Transmission Coordination Agreement (TCA) by and among PSO, SWEPCo and AEPSC, in connection with the operation of the transmission assets of the two AEP utility subsidiaries. AEPTCo is a load serving entity within the PJM and SPP regions providing transmission services to affiliates in accordance with the OATT, TA and TCA. Affiliate revenues as a result of the respective TA and the TCA are reflected as Transmission Revenues in the disaggregated revenue tables above.

Marketing, Competitive Retail and Renewable Revenues

AEP’s subsidiaries within the Generation & Marketing segment have performance obligations to deliver electricity to competitive retail and wholesale customers. Performance obligations for marketing, competitive retail and renewable offtake sales are satisfied over time as the customer simultaneously receives and consumes the benefits provided. Revenues are primarily variable as they are subject to customer’s usage requirements; however, certain contracts mandate a delivery of a set quantity of electricity at a predetermined price, resulting in a fixed performance obligation.

Payment terms under marketing arrangements typically follow standard Edison Electric Institute and International Swaps and Derivatives Association terms, which call for payment in 20 days. Payments for competitive retail and offtake arrangements for renewable assets range from 15 to 60 days and are dependent on the product sold, location and the creditworthiness of customer. Invoices for marketing arrangements, competitive retail and offtake arrangements for renewable assets are issued monthly.

Fixed Performance Obligations

The following table represents the Registrants’ remaining fixed performance obligations satisfied over time as of September 30, 2018. Fixed performance obligations primarily include wholesale transmission services, electricity sales for fixed amounts of energy and stand ready services into PJM’s RPM market. The Registrant Subsidiaries amounts shown in the table below include affiliated and nonaffiliated revenues.



Company	2018		2019-2020		2021-2022		After 2022		Total
	(in millions)
AEP	$	246.1	$	258.7	$	164.8	$	349.0	$	1,018.6
AEP Texas	74.2		—		—		—		74.2
AEPTCo	166.8		—		—		—		166.8
APCo	30.7		32.9		25.5		11.6		100.7
I&M	6.3		3.0		2.9		1.4		13.6
OPCo	21.5		12.4		—		—		33.9
PSO	4.5		—		—		—		4.5
SWEPCo	9.1		—		—		—		9.1

Contract Assets and Liabilities

Contract assets are recognized when the Registrants have a right to consideration that is conditional upon the occurrence of an event other than the passage of time, such as future performance under a contract. The Registrants did not have any material contract assets as of September 30, 2018.

When the Registrants receive consideration, or such consideration is unconditionally due from a customer prior to transferring goods or services to the customer under the terms of a sales contract, they recognize a contract liability on the balance sheet in the amount of that consideration. Revenue for such consideration is subsequently recognized

in the period or periods in which the remaining performance obligations in the contract are satisfied. The Registrants’ contract liabilities typically arise from services provided under joint use agreements for utility poles. The Registrants did not have any material contract liabilities as of September 30, 2018.

Accounts Receivable from Contracts with Customers

Accounts receivable from contracts with customers are presented on the Registrants’ balance sheets within the Accounts Receivable - Customers line item. The Registrants’ balances for receivables from contracts that are not recognized in accordance with the accounting guidance for “Revenue from Contracts with Customers” included in Accounts Receivable - Customers were not material as of September 30, 2018. See “Securitized Accounts Receivable - AEP Credit” section of Note 12 for additional information related to AEP Credit’s securitized accounts receivable.

The following table represents the amount of affiliated accounts receivable from contracts with customers included in Accounts Receivable - Affiliated Companies on the Registrant Subsidiaries’ balance sheets:



Company	September 30, 2018		January 1, 2018
	(in millions)
AEPTCo	$	71.9	$	47.1
APCo	54.1		35.6
I&M	24.7		15.1
OPCo	42.5		26.1
PSO	17.1		6.1
SWEPCo	20.3		11.0

Contract Costs

Contract costs to obtain or fulfill a contract for AEP subsidiaries within the Generation & Marketing segment are accounted for under the guidance for “Other Assets and Deferred Costs” and presented as a single asset and are neither bifurcated nor reclassified between current and noncurrent assets on the Registrants’ balance sheets. Contract costs to acquire a contract are amortized in a manner consistent with the transfer of goods or services to the customer in Other Operation on the Registrants’ income statements. The Registrants did not have material contract costs as of September 30, 2018.

CONTROLS AND PROCEDURES

During the third quarter of ~~2017~~2018, management, including the principal executive officer and principal financial officer of each of the Registrants, evaluated the Registrants’ disclosure controls and procedures. Disclosure controls and procedures are defined as controls and other procedures of the Registrants that are designed to ensure that information required to be disclosed by the Registrants in the reports that they file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Registrants in the reports that they file or submit under the Exchange Act is accumulated and communicated to the Registrants’ management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of September 30, ~~2017,~~2018, these officers concluded that the disclosure controls and procedures in place are effective and provide reasonable assurance that the disclosure controls and procedures accomplished their objectives.

There was no change in the Registrants’ internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of ~~2017~~2018 that materially affected, or is reasonably likely to materially affect, the Registrants’ internal control over financial reporting.

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 ~~AEP 2016~~ Annual Report on Form 10-K ~~and~~for the ~~AEPTCo 2016 Annual Report included within AEPTCo’s Registration Statement~~year ended December 31, 2017 includes a detailed discussion of risk factors. As of September 30, ~~2017, there have been no material changes to the risk factors previously disclosed in AEPTCo’s Registration Statement. As of September 30, 2017,~~2018, the risk factor appearing in ~~AEP’s 2016~~the 2017 Annual Report on Form 10-K under the heading set forth below is supplemented and updated as follows:

~~AEP is exposed to nuclear generation risk. (Applies to AEP~~Certain elements of AEP’s transmission formula rates have been challenged, which could result in lowered rates and/or refunds of amounts previously collected and ~~I&M)~~

Through I&M, AEP owns the Cook Plant. It consists of two nuclear generating units for a rated capacity of 2,278 MWs, or about 7% of the generating capacity in the AEP System. AEP and I&M are, therefore, subject to the risks of nuclear generation, which include the following:

~~The potential harmful effects on the environment and human health due to~~thus have an adverse ~~incident/event resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials such as spent nuclear fuel.~~

~~Limitations~~effect on ~~the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations.~~

Uncertainties with respect to contingencies and assessment amounts triggered by a loss event (federal law requires owners of nuclear units to purchase the maximum available amount of nuclear liability insurance and potentially contribute to the coverage for losses of others).

~~Uncertainties with respect to the technological and~~AEP’s business, financial ~~aspects of decommissioning nuclear plants at the end of their licensed lives.~~

~~Uncertainties related to reliance on a vendor for manufacturing nuclear fuel and for providing specialized engineering services and parts.~~

~~There can be no assurance that I&M’s preparations or risk mitigation measures will be adequate if these risks are triggered.~~

The Nuclear Regulatory Commission has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could necessitate substantial capital expenditures at nuclear plants. In addition, although management has no reason to anticipate a serious nuclear incident at the Cook Plant, if an incident did occur, it could harmcondition, results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit. Moreover, a major incident at any nuclear facility in the U.S. could require AEP or I&M to make material contributory payments.

~~Costs associated with the operation (including fuel), maintenance~~ and retirement of nuclear plants continue to be more significant and less predictable than costs associated with other sources of generation, in large part due to changing regulatory requirements and safety standards, availability of nuclear waste disposal facilities and experience gained in the operation of nuclear facilities. Costs also may include replacement power, any unamortized investment at the end of the useful life of the Cook Plant (whether scheduled or premature), the carrying costs of that investment and retirement costs. The ability to obtain adequate and timely recovery of costs associated with the Cook Plant is not assured.

Westinghouse and I&M have a number of significant ongoing contracts relating to reactor services, nuclear fuel fabrication, and ongoing engineering projects. The most significant of these relate to Cook Plant fuel fabrication. In March 2017, Westinghouse filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. It intends to reorganize, not cease business operations. However, it is in the early stages of the bankruptcy process and it is unclear whether the company can successfully reorganize. In the event Westinghouse rejects I&M’s contracts, or is unable to reorganize or sell its profitable businesses in the bankruptcy, Cook Plant’s operations would be significantly impacted and potentially shut down temporarily as I&M seeks other vendors for these services.

~~AEP’s transmission investment strategy and execution bears certain risks associated with these activities.~~cash flows. (Applies to all ~~Registrants)~~Registrants other than AEP Texas)

~~Management expects that a growing~~AEP provides transmission service under rates regulated by the FERC. The FERC has approved the cost-based formula rate templates used by AEP to calculate its respective annual revenue requirements, but it has not expressly approved the amount of actual capital and operating expenditures to be used in the formula rates. All aspects of AEP’s rates accepted or approved by the FERC, including the formula rate templates, the rates of return on the actual equity portion of its respective capital structures and the approved targeted capital structures, are subject to challenge by interested parties at the FERC, or by the FERC on its own initiative. In addition, interested parties may challenge the annual implementation and calculation by AEP of its projected rates and formula rate true up pursuant to its approved formula rate templates under AEP’s ~~earnings~~formula rate implementation protocols. If a challenger can establish that any of these aspects are unjust, unreasonable, unduly discriminatory or preferential, then the FERC will make appropriate prospective adjustments to them and/or disallow any of AEP’s inclusion of those aspects in the future will be derived from transmission investments and activities. FERC policy currently favors the expansion and updating of the transmission infrastructure within its jurisdiction. If the FERC were to adopt a different policy, if states were to limit or restrict such policies, or if transmission needs do not continue or develop as projected, AEP’s strategy of investing in transmission could be impacted. Management believes AEP’s experience with transmission facilities construction and operation gives AEP an advantage over other competitors in securing authorization to install, construct and operate new transmission lines and facilities. However, there can be no assurance that PJM, SPP or other RTOs will authorize new transmission projects or will award such projects to AEP.rate setting formula.

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

In April 2018, certain intervenors filed comments at the FERC recommending a base ROE of 8.48% and a one-time refund of $184 million. The FERC trial staff filed comments recommending a base ROE of 8.41% and one-time refund of $175 million. Another intervenor recommended the refund be calculated in accordance with the base ~~return on common equity~~ROE that will ultimately be approved by the FERC. In May 2018, management filed reply comments providing further support for the 9.85% base ROE agreed to in the settlement agreement. Management believes its financial statements adequately address the impact of the settlement agreement. If the FERC orders revenue reductions in excess of the terms of the settlement agreement, it could reduce future net income and cash flows and impact financial condition. A decision from the FERC is pending.

In June 2017, a similar complaint was filed with the FERC claiming that the base ROE used by ~~western AEP affiliates, including the State Transcos that operate in~~AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.36%, effective upon the date of the complaint through September 5, 2018. In September 2018, the same parties filed another complaint at the FERC that states the base return on common equity used by AEP’s transmission owning subsidiaries within SPP in calculating formula transmission rates under the SPP OATT is excessive and should be reduced from 10.7% to 8.71%, effective upon the date of the second complaint. If the FERC orders revenue reductions as a result of ~~these complaints,~~the complaint, including refunds from the date ~~each~~of the complaint ~~was filed,~~filing, it could reduce future net income and cash flows and impact financial condition.

~~If the FERC were~~

End-use consumers and entities supplying electricity to ~~lower~~end-use consumers may also attempt to influence government and/or regulators to change the rate setting methodologies that apply to AEP, particularly if rates for delivered electricity increase substantially.

OVEC may require additional liquidity and other capital support. (Applies to AEP, APCo, I&M and OPCo)

AEP and several nonaffiliated utility companies own OVEC. The Inter-Company Power Agreement (ICPA) defines the rights and obligations and sets the power participation ratio of ~~return~~the parties to it. Under the ICPA, parties are entitled to receive and are obligated to pay for all OVEC capacity (approximately 2,400 MWs) in proportion to their respective power participation ratios. The aggregate power participation ratio of APCo, I&M and OPCo is 43.47%. If a party fails to make payments owed by it under the ICPA, OVEC may not have sufficient funds to honor its payment obligations, including its ongoing operating expenses as well as its indebtedness. As of September 30, 2018, OVEC has ~~authorized~~outstanding indebtedness of approximately $1.4 billion, of which APCo, I&M, and OPCo are collectively responsible for ~~AEP’s transmission investments~~$611 million through the ICPA. Although they are not an obligor or guarantor, APCo, I&M, and ~~facilities,~~ OPCo are responsible for their respective ratio of OVEC’s outstanding debt through the ICPA.

FirstEnergy Solutions, a nonaffiliated party, whose aggregate power participation ratio is 4.85% under the ICPA, has filed a petition seeking protection under bankruptcy law. Bankruptcy filings typically trigger review of the petitioner’s contractual obligations, including, in this instance, the ICPA. Because the ICPA is subject to FERC approval and jurisdiction, prior to the bankruptcy petition OVEC made a filing at FERC seeking, among other objectives, to confirm FERC’s jurisdiction. Litigation related to these filings continues. In addition, as a result of these and prior related developments, OVEC’s credit ratings have been impacted.

If OVEC does not have sufficient funds to honor its payment obligations, there is risk that APCo, I&M and/or OPCo may need to make payments in addition to their power participation ratio payments. Further, if ~~one~~ OVEC’s indebtedness is accelerated for any reason, there is risk that APCo, I&M and/or ~~more states were~~OPCo may be required to ~~successfully limit FERC jurisdiction~~pay some or all of such accelerated indebtedness in amounts equal to their aggregate power participation ratio of 43.47%. Also, as a result of the credit rating agencies’ actions, OVEC’s ability to access capital markets on ~~recovery of costs on transmission investment~~terms as favorable as previously may diminish and its ~~return, it could reduce future net income and cash flows and negatively impact financial condition.~~financing costs will increase.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

The Federal Mine Safety and Health Act of 1977 (Mine Act) imposes stringent health and safety standards on various mining operations. The Mine Act and its related regulations affect numerous aspects of mining operations, including training of mine personnel, mining procedures, equipment used in mine emergency procedures, mine plans and other matters. SWEPCo, through its ownership of DHLC, a wholly-owned lignite mining subsidiary of SWEPCo, is subject to the provisions of the Mine Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires companies that operate mines to include in their periodic reports filed with the SEC, certain mine safety information covered by the Mine Act. Exhibit 95 “Mine Safety Disclosure Exhibit” contains the notices of violation and proposed assessments received by DHLC under the Mine Act for the quarter ended September 30, ~~2017.~~2018.

Item 5. Other Information

None

Item 6. Exhibits

The exhibits designated with an (X) in the table below are being filed on behalf of the Registrants.

Exhibit

Description

AEP

Texas

AEPTCo

APCo

I&M

OPCo

PSO

SWEPCo

First Amendment to Fourth Amended and Restated Credit Agreement dated June 30, 2016

Aircraft Time Sharing Agreement dated September 17, 2018 between American Electric Power Service Corporation and Mr. Akins

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

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

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

AMERICAN ELECTRIC POWER COMPANY, INC.

By: /s/ Joseph M. Buonaiuto

Joseph M. Buonaiuto

Controller and Chief Accounting Officer

AEP TEXAS INC.

AEP TRANSMISSION COMPANY, LLC

APPALACHIAN POWER COMPANY

INDIANA MICHIGAN POWER COMPANY

OHIO POWER COMPANY

PUBLIC SERVICE COMPANY OF OKLAHOMA

SOUTHWESTERN ELECTRIC POWER COMPANY

By: /s/ Joseph M. Buonaiuto

Joseph M. Buonaiuto

Controller and Chief Accounting Officer

Date: October ~~26, 2017~~25, 2018

~~207~~251



	Nine Months Ended September 30,
Cash Flow Information	2017			2016
	(in millions)
Cash Paid (Received) for:
Interest, Net of Capitalized Amounts	$	613.8		$	637.0
Income Taxes, Net	(6.8		)	32.2
Noncash Investing and Financing Activities:
Acquisitions Under Capital Leases	44.5			65.8
Construction Expenditures Included in Current Liabilities as of September 30,	791.6			604.8
Construction Expenditures Included in Noncurrent Liabilities as of September 30,	71.8			—
Acquisition of Nuclear Fuel Included in Current Liabilities as of September 30,	0.6			0.3
Expected Reimbursement for Spent Nuclear Fuel Dry Cask Storage	2.8			—



	September 30, 2017				December 31, 2016
	Cash Collateral		Cash Collateral		Cash Collateral		Cash Collateral
	Received		Paid		Received		Paid
	Netted Against		Netted Against		Netted Against		Netted Against
	Risk Management		Risk Management		Risk Management		Risk Management
Company	Assets		Liabilities		Assets		Liabilities
	(in millions)
AEP	$	3.5	$	17.0	$	7.9	$	7.6
APCo	0.4		0.3		0.5		0.7
I&M	0.3		0.1		0.3		0.4
OPCo	0.1		—		0.2		—
PSO	—		—		0.1		—
SWEPCo	—		—		0.1		—