American Electric Power (AEP) 10-K 2014 FY Annual report

2014 Annual Reports

American Electric Power Company, Inc. and Subsidiary Companies

Appalachian Power Company and Subsidiaries

Indiana Michigan Power Company and Subsidiaries

Ohio Power Company and Subsidiaries

Public Service Company of Oklahoma

Southwestern Electric Power Company Consolidated

Audited Financial Statements and

Management’s Discussion and Analysis of Financial Condition and Results of Operations

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

INDEX OF ANNUAL REPORTS

		Page Number
Glossary of Terms		i
Forward-Looking Information		v
AEP Common Stock and Dividend Information		vii
American Electric Power Company, Inc. and Subsidiary Companies:
	Selected Consolidated Financial Data	1
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
	Reports of Independent Registered Public Accounting Firm	56
	Management's Report on Internal Control Over Financial Reporting	58
	Consolidated Financial Statements	59
	Index of Notes to Consolidated Financial Statements	65
Appalachian Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	168
	Report of Independent Registered Public Accounting Firm	174
	Management's Report on Internal Control Over Financial Reporting	175
	Consolidated Financial Statements	176
	Index of Notes to Financial Statements of Registrant Subsidiaries	182
Indiana Michigan Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	184
	Report of Independent Registered Public Accounting Firm	189
	Management's Report on Internal Control Over Financial Reporting	190
	Consolidated Financial Statements	191
	Index of Notes to Financial Statements of Registrant Subsidiaries	197
Ohio Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis of Results of Operations	199
	Report of Independent Registered Public Accounting Firm	206
	Management's Report on Internal Control Over Financial Reporting	207
	Consolidated Financial Statements	208
	Index of Notes to Financial Statements of Registrant Subsidiaries	214
Public Service Company of Oklahoma:
	Management’s Narrative Discussion and Analysis of Results of Operations	216
	Report of Independent Registered Public Accounting Firm	220
	Management's Report on Internal Control Over Financial Reporting	221
	Financial Statements	222
	Index of Notes to Financial Statements of Registrant Subsidiaries	228
Southwestern Electric Power Company Consolidated:
	Management’s Narrative Discussion and Analysis of Results of Operations	230
	Report of Independent Registered Public Accounting Firm	235
	Management's Report on Internal Control Over Financial Reporting	236
	Consolidated Financial Statements	237
	Index of Notes to Financial Statements of Registrant Subsidiaries	243
Index of Notes to Financial Statements of Registrant Subsidiaries		244
Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries		406

GLOSSARY OF TERMS

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

Term	Meaning
AEGCo	AEP Generating Company, an AEP electric utility subsidiary.
AEP or Parent	American Electric Power Company, Inc., an electric utility holding company.
AEP Consolidated	AEP and its majority owned consolidated subsidiaries and consolidated affiliates.
AEP Credit	AEP Credit, Inc., a consolidated variable interest entity of AEP which securitizes accounts receivable and accrued utility revenues for affiliated electric utility companies.
AEP East Companies	APCo, I&M, KPCo and OPCo.
AEP Energy	AEP Energy, Inc., a wholly-owned retail electric supplier for customers in Ohio, Illinois and other deregulated electricity markets throughout the United States.
AEP System	American Electric Power System, an electric system, owned and operated by AEP subsidiaries.
AEP Transmission Holdco	AEP Transmission Holding Company, LLC, a wholly-owned subsidiary of AEP.
AEPEP	AEP Energy Partners, Inc., a subsidiary of AEP dedicated to wholesale marketing and trading, asset management and commercial and industrial sales in the deregulated Texas market.
AEPES	AEP Energy Services, Inc., a subsidiary of AEP Resources, Inc.
AEPSC	American Electric Power Service Corporation, an AEP service subsidiary providing management and professional services to AEP and its subsidiaries.
AFUDC	Allowance for Funds Used During Construction.
AGR	AEP Generation Resources Inc., a nonregulated AEP subsidiary in the Generation & Marketing segment.
AOCI	Accumulated Other Comprehensive Income.
APCo	Appalachian Power Company, an AEP electric utility subsidiary.
APSC	Arkansas Public Service Commission.
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.
ASU	Accounting Standards Update.
BlueStar	BlueStar Energy Holdings, Inc., a wholly-owned retail electric supplier for customers in Ohio, Illinois and other deregulated electricity markets throughout the United States.  BlueStar began doing business as AEP Energy, Inc. in June 2012.
CAA	Clean Air Act.
CLECO	Central Louisiana Electric Company, a nonaffiliated utility company.
CO2	Carbon dioxide and other greenhouse gases.
Cook Plant	Donald C. Cook Nuclear Plant, a two-unit, 2,191 MW nuclear plant owned by I&M.
CRES provider	Competitive Retail Electric Service providers under Ohio law that target retail customers by offering alternative generation service.
CSPCo	Columbus Southern Power Company, a former AEP electric utility subsidiary that was merged into OPCo effective December 31, 2011.
CWIP	Construction Work in Progress.
DCC Fuel	DCC Fuel IV LLC, DCC Fuel V LLC, DCC Fuel VI LLC and DCC Fuel VII, consolidated variable interest entities formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.
DHLC	Dolet Hills Lignite Company, LLC, a wholly-owned lignite mining subsidiary of SWEPCo.
EIS	Energy Insurance Services, Inc., a nonaffiliated captive insurance company and consolidated variable interest entity of AEP.
ENEC	Expanded Net Energy Charge.

i

Term	Meaning
Energy Supply	AEP Energy Supply LLC, a nonregulated holding company for AEP’s competitive generation, wholesale and retail businesses, and a wholly-owned subsidiary of AEP.
ERCOT	Electric Reliability Council of Texas regional transmission organization.
ESP	Electric Security Plans, a PUCO requirement for electric utilities to adjust their rates by filing with the PUCO.
ETT	Electric Transmission Texas, LLC, an equity interest joint venture between AEP and Berkshire Hathaway Energy Company formed to own and operate electric transmission facilities in ERCOT.
FAC	Fuel Adjustment Clause.
FASB	Financial Accounting Standards Board.
Federal EPA	United States Environmental Protection Agency.
FERC	Federal Energy Regulatory Commission.
FGD	Flue Gas Desulfurization or scrubbers.
FTR	Financial Transmission Right, a financial instrument that entitles the holder to receive compensation for certain congestion-related transmission charges that arise when the power grid is congested resulting in differences in locational prices.
GAAP	Accounting Principles Generally Accepted in the United States of America.
I&M	Indiana Michigan Power Company, an AEP electric utility subsidiary.
IEU	Industrial Energy Users-Ohio.
IGCC	Integrated Gasification Combined Cycle, technology that turns coal into a cleaner-burning gas.
Interconnection Agreement	An agreement by and among APCo, I&M, KPCo and OPCo, which defined the sharing of costs and benefits associated with their respective generation plants.  This agreement was terminated January 1, 2014.
IRS	Internal Revenue Service.
IURC	Indiana Utility Regulatory Commission.
KGPCo	Kingsport Power Company, an AEP electric utility subsidiary.
KPCo	Kentucky Power Company, an AEP electric utility subsidiary.
KPSC	Kentucky Public Service Commission.
kV	Kilovolt.
KWh	Kilowatthour.
LPSC	Louisiana Public Service Commission.
MISO	Midwest Independent Transmission System Operator.
MLR	Member load ratio, the method used to allocate transactions among members of the Interconnection Agreement.
MMBtu	Million British Thermal Units.
MPSC	Michigan Public Service Commission.
MTM	Mark-to-Market.
MW	Megawatt.
MWh	Megawatthour.
NOx	Nitrogen oxide.
Nonutility Money Pool	Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain nonutility subsidiaries.
NSR	New Source Review.
OATT	Open Access Transmission Tariff.
OCC	Corporation Commission of the State of Oklahoma.
Ohio Phase-in-Recovery Funding	Ohio Phase-in-Recovery Funding LLC, a wholly-owned subsidiary of OPCo and a consolidated variable interest entity formed for the purpose of issuing and servicing securitization bonds related to phase-in recovery property.
OPCo	Ohio Power Company, an AEP electric utility subsidiary.
OPEB	Other Postretirement Benefit Plans.

ii

Term	Meaning
Operating Agreement	Agreement, dated January 1, 1997, as amended, by and among PSO and SWEPCo governing generating capacity allocation, energy pricing, and revenues and costs of third party sales.  AEPSC acts as the agent.
OTC	Over the counter.
OVEC	Ohio Valley Electric Corporation, which is 43.47% owned by AEP.
PCA	Power Coordination Agreement among APCo, I&M and KPCo.
PIRR	Phase-In Recovery Rider.
PJM	Pennsylvania – New Jersey – Maryland regional transmission organization.
PM	Particulate Matter.
POLR	Provider of Last Resort revenues.
PSO	Public Service Company of Oklahoma, an AEP electric utility subsidiary.
PUCO	Public Utilities Commission of Ohio.
PUCT	Public Utility Commission of Texas.
Registrant Subsidiaries	AEP subsidiaries which are SEC registrants; APCo, I&M, OPCo, PSO and SWEPCo.
Risk Management Contracts	Trading and nontrading derivatives, including those derivatives designated as cash flow and fair value hedges.
Rockport Plant	A generation plant, consisting of two 1,310 MW coal-fired generating units near Rockport, Indiana.  AEGCo and I&M jointly-own Unit 1.  In 1989, AEGCo and I&M entered into a sale-and-leaseback transaction with Wilmington Trust Company, an unrelated, unconsolidated trustee for Rockport Plant, Unit 2.
RPM	Reliability Pricing Model.
RSR	Retail Stability Rider.
RTO	Regional Transmission Organization, responsible for moving electricity over large interstate areas.
Sabine	Sabine Mining Company, a lignite mining company that is a consolidated variable interest entity for AEP and SWEPCo.
SEC	U.S. Securities and Exchange Commission.
SEET	Significantly Excessive Earnings Test.
SIA	System Integration Agreement, effective June 15, 2000, as amended, provides contractual basis for coordinated planning, operation and maintenance of the power supply sources of the combined AEP.
SNF	Spent Nuclear Fuel.
SO2	Sulfur dioxide.
SPP	Southwest Power Pool regional transmission organization.
SSO	Standard service offer.
Stall Unit	J. Lamar Stall Unit at Arsenal Hill Plant, a 534 MW natural gas unit owned by SWEPCo.
SWEPCo	Southwestern Electric Power Company, an AEP electric utility subsidiary.
TCC	AEP Texas Central Company, an AEP electric utility subsidiary.
Texas Restructuring Legislation	Legislation enacted in 1999 to restructure the electric utility industry in Texas.
TNC	AEP Texas North Company, an AEP electric utility subsidiary.
Transition Funding	AEP Texas Central Transition Funding I LLC, AEP Texas Central Transition Funding II LLC and AEP Texas Central Transition Funding III LLC, wholly-owned subsidiaries of TCC and consolidated variable interest entities formed for the purpose of issuing and servicing securitization bonds related to Texas Restructuring Legislation.
Transource Energy	Transource Energy, LLC, a consolidated variable interest entity formed for the purpose of investing in utilities which develop, acquire, construct, own and operate transmission facilities in accordance with FERC-approved rates.
Transource Missouri	A 100% wholly-owned subsidiary of Transource Energy.
Turk Plant	John W. Turk, Jr. Plant, a 600 MW coal-fired plant in Arkansas that is 73% owned by SWEPCo.

iii

Term	Meaning
Utility Money Pool	Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain utility subsidiaries.
VIE	Variable Interest Entity.
Virginia SCC	Virginia State Corporation Commission.
WPCo	Wheeling Power Company, an AEP electric utility subsidiary.
WVPSC	Public Service Commission of West Virginia.

iv

FORWARD-LOOKING INFORMATION

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

Ÿ	The economic climate, growth or contraction within and changes in market demand and demographic patterns in our service territory.
Ÿ	Inflationary or deflationary interest rate trends.
Ÿ	Volatility in the financial markets, particularly developments affecting the availability of capital on reasonable terms and developments impairing our ability to finance new capital projects and refinance existing debt at attractive rates.
Ÿ	The availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material.
Ÿ	Electric load, customer growth and the impact of competition, including competition for retail customers.
Ÿ	Weather conditions, including storms and drought conditions, and our ability to recover significant storm restoration costs.
Ÿ	Available sources and costs of, and transportation for, fuels and the creditworthiness and performance of fuel suppliers and transporters.
Ÿ	Availability of necessary generation capacity and the performance of our generation plants.
Ÿ	Our ability to recover increases in fuel and other energy costs through regulated or competitive electric rates.
Ÿ	Our ability to build or acquire generation capacity and transmission lines and facilities (including our ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms and to recover those costs.
Ÿ	New legislation, litigation and government regulation, including oversight of nuclear generation, energy commodity trading and new or heightened requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances or additional regulation of fly ash and similar combustion products that could impact the continued operation, cost recovery and/or profitability of our generation plants and related assets.
Ÿ	Evolving public perception of the risks associated with fuels used before, during and after the generation of electricity, including nuclear fuel.
Ÿ	A reduction in the federal statutory tax rate could result in an accelerated return of deferred federal income taxes to customers.
Ÿ	Timing and resolution of pending and future rate cases, negotiations and other regulatory decisions, including rate or other recovery of new investments in generation, distribution and transmission service and environmental compliance.
Ÿ	Resolution of litigation.
Ÿ	Our ability to constrain operation and maintenance costs.
Ÿ	Our ability to develop and execute a strategy based on a view regarding prices of electricity and other energy-related commodities.
Ÿ	Prices and demand for power that we generate and sell at wholesale.
Ÿ	Changes in technology, particularly with respect to new, developing, alternative or distributed sources of generation.
Ÿ	Our ability to recover through rates or market prices any remaining unrecovered investment in generation units that may be retired before the end of their previously projected useful lives.
Ÿ	Volatility and changes in markets for capacity and electricity, coal and other energy-related commodities, particularly changes in the price of natural gas and capacity auction returns.
Ÿ	Changes in utility regulation and the allocation of costs within regional transmission organizations, including ERCOT, PJM and SPP.

v

Ÿ	The transition to market for generation in Ohio, including the implementation of ESPs and our ability to recover investments in our Ohio generation assets.
Ÿ	Our ability to successfully and profitably manage our separate competitive generation assets.
Ÿ	Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading market.
Ÿ	Actions of rating agencies, including changes in the ratings of our debt.
Ÿ	The impact of volatility in the capital markets on the value of the investments held by our pension, other postretirement benefit plans, captive insurance entity and nuclear decommissioning trust and the impact of such volatility on future funding requirements.
Ÿ	Accounting pronouncements periodically issued by accounting standard-setting bodies.
Ÿ	Other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes, cyber security threats and other catastrophic events.

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

vi

AEP COMMON STOCK AND DIVIDEND INFORMATION

The AEP common stock quarterly high and low sales prices, quarter-end closing price and the cash dividends paid per share are shown in the following table:

Quarter Ended	High		Low		Quarter-End Closing Price		Dividend
December 31, 2014	$	63.22	$	51.97	$	60.72	$	0.53
September 30, 2014	55.91		49.06		52.21		0.50
June 30, 2014	55.94		49.99		55.77		0.50
March 31, 2014	50.95		45.80		50.66		0.50
December 31, 2013	$	48.40	$	43.01	$	46.74	$	0.50
September 30, 2013	47.59		41.83		43.35		0.49
June 30, 2013	51.60		42.83		44.78		0.49
March 31, 2013	48.68		42.92		48.63		0.47

AEP common stock is traded principally on the New York Stock Exchange.  As of December 31, 2014, AEP had approximately 74,000 registered shareholders.

vii

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
SELECTED CONSOLIDATED FINANCIAL DATA
	2014			2013			2012			2011			2010
	(dollars in millions, except per share amounts)
STATEMENTS OF INCOME DATA
Total Revenues	$	17,020		$	15,357		$	14,945		$	15,116		$	14,427
Operating Income	$	3,232		$	2,855		$	2,656		$	2,782		$	2,663
Income Before Extraordinary Items	$	1,638		$	1,484		$	1,262		$	1,576		$	1,218
Extraordinary Items, Net of Tax	—			—			—			373			—
Net Income	1,638			1,484			1,262			1,949			1,218
Net Income Attributable to Noncontrolling Interests	4			4			3			3			4
NET INCOME ATTRIBUTABLE TO AEP SHAREHOLDERS	1,634			1,480			1,259			1,946			1,214
Preferred Stock Dividend Requirements of Subsidiaries Including Capital Stock Expense	—			—			—			5			3
EARNINGS ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	1,634		$	1,480		$	1,259		$	1,941		$	1,211
BALANCE SHEETS DATA
Total Property, Plant and Equipment	$	64,305		$	60,285		$	57,454		$	55,670		$	53,740
Accumulated Depreciation and Amortization	20,188			19,288			18,691			18,699			18,066
Total Property, Plant and Equipment – Net	$	44,117		$	40,997		$	38,763		$	36,971		$	35,674
Total Assets	$	59,633		$	56,414		$	54,367		$	52,223		$	50,455
Total AEP Common Shareholders’ Equity	$	16,820		$	16,085		$	15,237		$	14,664		$	13,622
Noncontrolling Interests	$	4		$	1		$	—		$	1		$	—
Cumulative Preferred Stock Not Subject to Mandatory Redemption	$	—		$	—		$	—		$	—		$	60
Long-term Debt (a)	$	18,684		$	18,377		$	17,757		$	16,516		$	16,811
Obligations Under Capital Leases (a)	$	552		$	538		$	449		$	458		$	474
AEP COMMON STOCK DATA
Basic Earnings per Share Attributable to AEP Common Shareholders:
Income Before Extraordinary Items	$	3.34		$	3.04		$	2.60		$	3.25		$	2.53
Extraordinary Items, Net of Tax	—			—			—			0.77			—
Total Basic Earnings per Share Attributable to AEP Common Shareholders	$	3.34		$	3.04		$	2.60		$	4.02		$	2.53
Weighted Average Number of Basic Shares Outstanding (in millions)	489			487			485			482			479
Market Price Range:
High	$	63.22		$	51.60		$	45.41		$	41.71		$	37.94
Low	$	45.80		$	41.83		$	36.97		$	33.09		$	28.17
Year-end Market Price	$	60.72		$	46.74		$	42.68		$	41.31		$	35.98
Cash Dividends Declared per AEP Common Share	$	2.03		$	1.95		$	1.88		$	1.85		$	1.71
Dividend Payout Ratio	60.78		%	64.14		%	72.31		%	46.02		%	67.59		%
Book Value per AEP Common Share	$	34.37		$	32.98		$	31.35		$	30.36		$	28.32

(a) Includes portion due within one year.

1

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

RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Company Overview

American Electric Power Company, Inc. (AEP) is one of the largest investor-owned electric public utility holding companies in the United States.  Our electric utility operating companies provide generation, transmission and distribution services to more than five million retail customers in Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia.

Our subsidiaries operate an extensive portfolio of assets including:

• Approximately 37,600 megawatts of generating capacity, one of the largest complements of generation in the United States.

• Approximately 40,000 miles of transmission lines, including 2,110miles of 765 kV lines, the backbone of the electric interconnection grid in the Eastern United States.

• Approximately 222,000miles of distribution lines that deliver electricity to 5.3 million customers.

• Substantial commodity transportation assets (approximately 4,990railcars, approximately 2,800 barges, 47 towboats, 20 harbor boats and a coal handling terminal with approximately 18 million tons of annual capacity).  Our commercial barging operations annually transport approximately 48 million tons of coal and dry bulk commodities.  Approximately 35% of the barging is for transportation of agricultural products, 34% for coal, 17% for steel and 14% for other commodities.

Customer Demand

In comparison to 2013, our weather-normalized retail sales increased 1% for the year ended December 31, 2014. Our 2014 industrial sales increased 0.4% compared to 2013, despite the closure of Ormet, a large aluminum company in October 2013. Excluding Ormet, our industrial sales volumes increased by 3.9%. Our 2014 residential and commercial sales increased 1.1% and 1.7%, respectively, compared to 2013.

In 2015, we anticipate weather-normalized retail sales will increase by 0.6%. The industrial class is expected to grow by 2% in 2015, primarily related to a number of new oil and natural gas expansions, especially around the major shale gas areas within AEP’s footprint. Weather-normalized residential sales are projected to increase by 0.2%, primarily related to projected customer growth. Commercial class energy sales are projected to decrease by 0.4%.

Corporate Separation

Background

On December 31, 2013, as approved by the FERC and the PUCO, OPCo transferred its generation assets and related generation liabilities at net book value to AGR.  In accordance with Ohio law, OPCo remains responsible to provide power and capacity to OPCo customers who have not switched electric providers.  Effective January 1, 2014, OPCo began purchasing power from both affiliated and nonaffiliated entities, subject to PUCO approval, to meet the energy and capacity needs of customers. On December 31, 2013, subsequent to the transfer of OPCo’s generation assets and associated liabilities to AGR, AGR transferred at net book value its ownership (867 MW) in Amos Plant, Unit 3 to APCo and one-half of its interest (780 MW) in the Mitchell Plant to KPCo.  

2

Other Impacts of Corporate Separation

The Interconnection Agreement was terminated effective January 1, 2014.  The AEP System Interim Allowance Agreement which provided for, among other things, the transfer of SO₂ emission allowances associated with transactions under the Interconnection Agreement was also terminated.

Effective January 1, 2014, the FERC approved the following:

• A PCA among APCo, I&M and KPCo with AEPSC as the agent to coordinate the participants’ respective power supply resources.

• A Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as agent to address open commitments related to the termination of the Interconnection Agreement and responsibilities to PJM.

• A Power Supply Agreement between AGR and OPCo for AGR to supply capacity for OPCo’s switched (at $188.88/MW day) and non-switched retail load for the period January 1, 2014 through May 31, 2015 and to supply the energy needs of OPCo’s non-switched retail load that was not acquired through auctions in 2014.

For a further discussion of corporate separation, see the “Corporate Separation” section of Note 1.

Merchant Fleet Alternatives

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

Merchant Portion of Turk Plant

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

The APSC granted approval for SWEPCo to build the Turk Plant by issuing a Certificate of Environmental Compatibility and Public Need (CECPN) for the SWEPCo Arkansas jurisdictional share of the Turk Plant (approximately 20%). Following an appeal by certain intervenors, the Arkansas Supreme Court issued a decision that reversed the APSC’s grant of the CECPN. In June 2010, in response to an Arkansas Supreme Court decision, the APSC issued an order which reversed and set aside the previously granted CECPN. This 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 is recovered under cost-based rate recovery in Texas, Louisiana, and through SWEPCo’s wholesale customers.

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.

3

Ohio Electric Security Plan Filings

2009 - 2011 ESP

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

June 2012 - May 2015 Ohio ESP Including Capacity Charge

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

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

As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012. The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs. In April and May 2013, OPCo and various intervenors filed appeals with the Supreme Court of Ohio challenging portions of the PUCO’s ESP order, including the RSR. As of December 31, 2014, OPCo’s incurred deferred capacity costs balance was $422 million, including debt carrying costs.

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

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

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

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Proposed June 2015 - May 2018 ESP

In December 2013, OPCo filed an application with the PUCO to approve an ESP that includes proposed rate adjustments and the continuation and modification of certain existing riders effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders and estimates an average decrease in rates of 9% over the three-year term of the plan for customers who receive their RPM capacity and energy auction-based generation through OPCo. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement. In May 2014, intervenors and the PUCO staff filed testimony that provided various recommendations including the rejection and/or modification of various riders, including the Distribution Investment Rider and the proposed PPA. Hearings at the PUCO in the ESP case were held in June 2014.

In July 2014, OPCo submitted a separate application to continue the RSR established in the June 2012 - May 2015 ESP to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh, until the balance of the capacity deferrals has been collected.

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

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

2012 Texas Base Rate Case

Upon rehearing in January 2014, the PUCT reversed its initial ruling and determined that AFUDC was excluded from the Turk Plant’s Texas jurisdictional capital cost cap.  As a result, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances.  The resulting annual base rate increase is approximately $52 million.  In May 2014, intervenors filed appeals of the order with the Texas District Court.  In June 2014, SWEPCo intervened in those appeals and filed initial responses.  If certain parts of the PUCT order are overturned it could reduce future net income and cash flows and impact financial condition.  See the “2012 Texas Base Rate Case” section of Note 4.

2012 Louisiana Formula Rate Filing

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

2014 Oklahoma Base Rate Case

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

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In June 2014, a non-unanimous stipulation agreement between PSO, the OCC staff and certain intervenors was filed with the OCC. The parties to the stipulation recommended no overall change to the transmission rider or to annual revenues, other than additional revenues through a separate rider related to advanced metering costs, and that the terms of the stipulation be effective November 2014. The advanced metering rider would provide $24 million of revenues over 14 months beginning in November 2014 and increase to $27 million in 2016. New depreciation rates are recommended for advanced metering investments and existing meters, also to be effective November 2014. Additionally, the stipulation recommends recovery of regulatory assets for 2013 storms and regulatory case expenses. In July 2014, the Attorney General joined in the stipulation agreement. In October 2014, the Administrative Law Judge (ALJ) recommended approval of the stipulation agreement and interim rates were implemented in November 2014, subject to refund. In November 2014, intervenors filed exceptions to the ALJ's report. An order is anticipated in the first quarter of 2015. If the OCC were to disallow any portion of this settlement agreement, it could reduce future net income and cash flows and impact financial condition. See the “2014 Oklahoma Base Rate Case” section of Note 4.

2014 Virginia Biennial Base Rate Case

In March 2014, APCo filed a biennial generation and distribution base rate case with the Virginia SCC. In accordance with a Virginia statute, APCo did not request an increase in base rates as its Virginia retail combined rate of return on common equity for 2012 and 2013 was within the statutory range of the approved return on common equity of 10.9%. The filing included a request to decrease generation depreciation rates, effective February 2015, primarily due to the change in the expected service life of certain plants. Additionally, the filing included a request to amortize $7 million annually for two years, beginning February 2015, related to IGCC and other deferred costs. APCo also requested approval to amortize $38 million related to an accumulated deferred Virginia state income tax (ADVSIT) liability over 20 years, beginning February 2015.

In November 2014, the Virginia SCC issued an order concluding that APCo's adjusted earned rate of return on common equity for 2012 and 2013, reflecting their ordered adjustments, was above the allowed threshold. The order included (a) a $6 million refund to customers for the years 2012 through 2013, (b) the write-off of $10 million of IGCC pre-construction costs, (c) approval to amortize a $38 million ADVSIT liability over 20 years, beginning February 2015 and (d) no change to generation depreciation rates with rates to be reviewed again in the next biennial rate case. The order also approved a new return on common equity of 9.7% effective for 2014 and 2015. The Virginia SCC did not rule on a Virginia SCC staff recommendation to write-down certain costs, for ratemaking purposes, for the biennial period based on APCo’s earnings within the statutory equity range. In January 2015, the Virginia SCC initiated a separate proceeding to address the proper treatment of APCo’s authorized regulatory assets. If any of these costs, or any additional costs that may be subject to review, are not recoverable, it could reduce future net income and cash flows and impact financial condition. See the “2014 Virginia Biennial Base Rate Case” section of Note 4.

Potential New Virginia Legislation Affecting Biennial Reviews

In February 2015, amendments to Virginia law governing the regulation of investor-owned electric utilities were approved by the Virginia General Assembly and have been sent to the Governor. If these amendments are enacted, APCo’s existing generation and distribution base rates would freeze until after the Virginia SCC rules on APCo’s next biennial review, which APCo would file in March 2020 for the 2018 and 2019 test years. These amendments would also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. Management continues to monitor this potential new legislation in Virginia.

2014 West Virginia Base Rate Case

In June 2014, APCo filed a request with the WVPSC to increase annual base rates by $181 million, based upon a 10.62% return on common equity, to be effective in the second quarter of 2015.  The filing included a request to increase generation depreciation rates primarily due to the increase in plant investment and changes in the expected service lives of various generating units.  The filing also requested recovery of $89 million over five years related to 2012 West Virginia storm costs, IGCC and other deferred costs.  In addition to the base rate request, the filing also included a request to implement a rider of approximately $45 million annually to recover vegetation management costs, including

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a return on capital investment.  In December 2014 and January 2015, intervenors filed testimony which proposed total annual revenue increases ranging from $35 million to $59 million based upon returns on common equity ranging from 9% to 10% and regulatory asset disallowances ranging from $7 million to $9 million.  Additionally, other intervenors proposed that the revenue requirement be based on a return on common equity of 8.7% and that $89 million of regulatory assets be disallowed.  Intervenors also recommended a disallowance of approximately $44 million related to the December 2013 transfer of OPCo's two-thirds interest in the Amos Plant, Unit 3 to APCo.  Hearings at the WVPSC were held in January 2015.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. See the “2014 West Virginia Base Rate Case” section of Note 4.

Plant Transfer

APCo and WPCo provide retail electric service at bundled rates approved by the WVPSC, with rates set on a cost-of-service basis, to their respective customers. West Virginia generally allows for timely recovery of fuel costs through an expanded net energy cost which trues-up to actual expenses. In March 2014, APCo and WPCo filed a request with the WVPSC for approval to transfer at net book value to WPCo a one-half interest in the Mitchell Plant, comprising 780 MW of average annual generating capacity presently owned by AGR. In April 2014, APCo and WPCo filed testimony that supported their request and proposed a base rate surcharge of $113 million, to be offset by an equal reduction in the ENEC revenues, to be effective upon the transfer of the Mitchell Plant to WPCo. In June 2014, the FERC issued an order approving a request by AGR and WPCo to transfer AGR’s one-half interest in the Mitchell Plant to WPCo.

In October 2014, a stipulation agreement between APCo, WPCo, the WVPSC staff and intervenors in the case was filed with the WVPSC. The stipulation agreement recommended approval for WPCo to acquire, at net book value, the one-half interest in the Mitchell Plant, excluding certain assets, and to pay AGR $20 million upon transfer, which WPCo will record as a regulatory asset, include in rate base and recover over the life of the plant. Additionally, the agreement stated that 82.5% of the costs associated with the acquired interest will be reflected in rates effective from the date of the transfer via a surcharge with an offset in ENEC revenues of $93 million. The remaining 17.5% of the costs associated with the acquired interest is to be included in rates by January 2020. The agreement also proposed that WPCo share the energy margins for 82.5% of the plant’s output with ratepayers and that WPCo retain all of the energy margins from sales into the wholesale market on the remaining 17.5%, to offset fixed costs associated with this portion, until the remaining portion is included in rates. In December 2014, the WVPSC issued an order that approved the settlement agreement, subject to certain modifications related to 82.5% of the energy and capacity margin sharing. The WVPSC determined that the sharing mechanism that was proposed is reasonable and will be adopted provided the result of the sharing mechanism will be adjusted, if necessary, so that the sharing mechanism does not result in a net cost to ratepayers that exceeds the actual variable cost of generation. In January 2015, the transfer of the one-half interest in the Mitchell Plant to WPCo was completed. See the “Plant Transfer” section of APCo Rate Matters in Note 4.

Kentucky Fuel Adjustment Clause Review

In August 2014, the KPSC issued an order initiating a review of KPCo's FAC from November 2013 through April 2014. In January 2015, the KPSC issued an order disallowing certain FAC costs during the period of January 2014 through May 2015 while KPCo owns and operates both Big Sandy Plant, Unit 2 and its one-half interest in the Mitchell Plant. Additionally, the KPSC directed KPCo to refund to customers $13 million of fuel costs, by the end of the second quarter of 2015, collected during the FAC review period of January 2014 through April 2014. As a result of this order, KPCo recorded a regulatory disallowance of $36 million in December 2014. In February 2015, KPCo filed an appeal of this order with the Franklin County Circuit Court.

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2014 Kentucky Base Rate Case

In December 2014, KPCo filed a request with the KPSC for an increase in rates of $70 million, which consists of a $75 million increase in rider rates, offset by a $5 million decrease in annual base rates, to be effective July 2015. The net increase reflects KPCo's ownership interest in the Mitchell Plant, riders to recover the Big Sandy Plant retirement and operational costs and the inclusion of an environmental compliance plan related to the Mitchell Plant FGD. Additionally, the filing included a request to recover deferred storm costs. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

PJM Capacity Auction

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

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

	PJM Base
PJM Auction Period	Auction Price
	(per MW day)
June 2013 through May 2014	$	27.73
June 2014 through May 2015	125.99
June 2015 through May 2016	136.00
June 2016 through May 2017	59.37
June 2017 through May 2018	120.00

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

In conjunction with other utility companies, we continue to address mutual concerns related to the PJM capacity auction process. Through this advocacy effort, the FERC has accepted PJM recommendations which should have the impact of reducing capacity price volatility beginning in the June 2018 time period.

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

In this same filing, PJM proposed with FERC supplemental capacity auctions for the June 2016 through May 2017 and June 2017 through May 2018 auction periods. These supplemental auctions would address capacity performance and reliability issues in these interim years, and if accepted, would allow AGR to re-offer at least part of the capacity already cleared for these years at a higher price. A FERC order is expected in the first half of 2015.

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Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC. Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC. As of December 31, 2014, SWEPCo has incurred costs of $164 million and has remaining contractual construction obligations of $108 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. See "Climate Change, CO₂ Regulation and Energy Policy" section of “Environmental Issues” below.  As of December 31, 2014, the net book value of Welsh Plant, Units 1 and 3 was $388 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.   

LITIGATION

In the ordinary course of business, we are involved in employment, commercial, environmental and regulatory litigation.  Since it is difficult to predict the outcome of these proceedings, we cannot predict the eventual resolution, timing or amount of any loss, fine or penalty.  We assess the probability of loss for each contingency and accrue a liability for cases that have a probable likelihood of loss if the loss can be estimated.  For details on our regulatory proceedings and pending litigation see Note 4 – Rate Matters and Note 6 – Commitments, Guarantees and Contingencies.  Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

Rockport Plant Litigation

In July 2013, the Wilmington Trust Company filed a complaint in U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will be unlawfully burdened by the terms of the modified NSR consent decree after the Rockport Plant, Unit 2 lease expiration in December 2022.  The terms of the consent decree allow the installation of environmental emission control equipment, repowering or retirement of the unit.  The plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement.  The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff.  The New York court has granted our motion to transfer this case to the U.S. District Court for the Southern District of Ohio.  In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.  We will continue to defend against the remaining claims.  We are unable to determine a range of potential losses that are reasonably possible of occurring.

ENVIRONMENTAL ISSUES

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

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

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

Environmental Controls Impact on the Generating Fleet

The rules and proposed environmental controls discussed in the next several sections will have a material impact on the generating units in the AEP System.  We continue to evaluate the impact of these rules, project scope and technology available to achieve compliance.  As of December 31, 2014, the AEP System had a total generating capacity of nearly 37,600 MWs, of which over 23,700 MWs are coal-fired.  We continue to refine the cost estimates of complying with these rules and other impacts of the environmental proposals on our coal-fired generating facilities.  Based upon our estimates, additional investment to meet these proposed requirements ranges from approximately $2.8 billion to $3.3 billion through 2020.  These amounts include investments to convert some of our coal generation to natural gas.  If natural gas conversion is not completed, these units could be retired sooner than planned.

The cost estimates will change depending on the timing of implementation and whether the Federal EPA provides flexibility in the final rules.  The cost estimates will also change based on: (a) the states’ implementation of these regulatory programs, including the potential for state implementation plans (SIPs) or federal implementation plans (FIPs) that impose more stringent standards, (b) additional rulemaking activities in response to court decisions, (c) the actual performance of the pollution control technologies installed on our units, (d) changes in costs for new pollution controls, (e) new generating technology developments, (f) total MWs of capacity retired and replaced, including the type and amount of such replacement capacity and (g) other factors.  In addition, we are continuing to evaluate the economic feasibility of environmental investments on nonregulated plants.

Subject to the factors listed above and based upon our continuing evaluation, we intend to retire the following plants or units of plants before or during 2016:

Company	Plant Name and Unit	Generating Capacity
		(in MWs)
AGR	Kammer Plant	630
AGR	Muskingum River Plant	1,440
AGR	Picway Plant	100
APCo	Clinch River Plant, Unit 3	235
APCo	Glen Lyn Plant	335
APCo	Kanawha River Plant	400
APCo/AGR	Sporn Plant	600
I&M	Tanners Creek Plant	995
KPCo	Big Sandy Plant, Unit 2	800
PSO	Northeastern Station, Unit 4	470
SWEPCo	Welsh Plant, Unit 2	528
Total		6,533

As of December 31, 2014, the net book value of the AGR units listed above was zero.  The net book value, before cost of removal, including related material and supplies inventory and CWIP balances, of the regulated plants in the table above was $980 million.  See Note 5 for further discussion.

In addition, we are in the process of obtaining permits following the KPSC's approval for the conversion of KPCo's 278 MW Big Sandy Plant, Unit 1 to natural gas. As of December 31, 2014, the net book value, before cost of removal, including related material and supplies inventory and CWIP balances of Big Sandy Plant, Unit 1 was $114 million.

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

Clean Air Act Requirements

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions.  The states implement and administer many of these programs and could impose additional or more stringent requirements.

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

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

The Federal EPA issued a Clean Air Visibility Rule (CAVR), detailing how the CAA’s requirement that certain facilities install best available retrofit technology (BART) to address regional haze in federal parks and other protected areas.  BART requirements apply to facilities built between 1962 and 1977 that emit more than 250 tons per year of certain pollutants in specific industrial categories, including power plants.  CAVR will be implemented through SIPs or, if SIPs are not adequate or are not developed on schedule, through FIPs.  The Federal EPA proposed disapproval of SIPs in a few states, including Arkansas.  Arkansas is developing a revised submittal.  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 rule is being challenged in the U.S. Court of Appeals for the District of Columbia Circuit.

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

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

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

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Cross-State Air Pollution Rule (CSAPR)

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

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

Mercury and Other Hazardous Air Pollutants (HAPs) Regulation

In 2012, the Federal EPA issued a rule addressing a broad range of HAPs from coal and oil-fired power plants.  The rule establishes unit-specific emission rates for mercury, PM (as a surrogate for particles of nonmercury metals) and hydrogen chloride (as a surrogate for acid gases) for units burning coal on a site-wide 30-day rolling average basis.  In addition, the rule proposes work practice standards, such as boiler tune-ups, for controlling emissions of organic HAPs and dioxin/furans.  The effective date of the final rule was April 16, 2012 and compliance is required within three years.  Petitions for administrative reconsideration and judicial review were filed.  In 2012, the Federal EPA published a notice announcing that it would accept comments on its reconsideration of certain issues related to the new source standards, including clarification of the requirements that apply during periods of start-up and shut down, measurement issues and the application of variability factors that may have an impact on the level of the standards.  The Federal EPA issued revisions to the new source standards consistent with the proposed rule, except the start-up and shut down provisions in March 2013.  The Federal EPA is still considering additional changes to the start-up and shut down provisions. In April 2014, the U.S. Court of Appeals for the District of Columbia Circuit denied all of the petitions for review of the April 2012 final rule. Industry trade groups and several states filed petitions for further review in the U.S. Supreme Court and the court granted those petitions in November 2014.

The final rule contains a slightly less stringent PM limit for existing sources than the original proposal and allows operators to exclude periods of start-up and shut down from the emissions averaging periods.  We have obtained a one-year administrative extension at several units to facilitate the installation of controls or to avoid a serious reliability problem.  In addition, the Federal EPA issued an enforcement policy describing the circumstances under which an administrative consent order might be issued to provide a fifth year for the installation of controls or completion of reliability upgrades.  We remain concerned about the availability of compliance extensions, the inability to foreclose citizen suits being filed under the CAA for failure to achieve compliance by the required deadlines and the lack of coordination among the Mercury and Air Toxics Standards schedule and other environmental requirements.

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Climate Change, CO₂ Regulation and Energy Policy

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

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

We estimate that our 2014 emissions were approximately 120 million metric tons.  This represents a reduction of 18% compared to our 2005 CO₂ emissions of approximately 146 million metric tons.

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

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

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

13

Federal and state legislation or regulations that mandate limits on the emission of CO₂ could result in significant increases in capital expenditures and operating costs, which in turn, could lead to increased liquidity needs and higher financing costs.  Excessive costs to comply with future legislation or regulations might force our utility subsidiaries to close some coal-fired facilities and could lead to possible impairment of assets.  Public perception may ultimately have a significant impact on future legislation and regulation.

To the extent climate change affects a region’s economic health, it could also affect our revenues.  Our financial performance is tied to the health of the regional economies we serve.  The price of energy, as a factor in a region's cost of living as well as an important input into the cost of goods, has an impact on the economic health of our communities.  The cost of additional regulatory requirements would normally be borne by consumers through higher prices for energy and purchased goods.

Coal Combustion Residual Rule

In 2010, the Federal EPA published a proposed rule to regulate the disposal and beneficial re-use of coal combustion residuals (CCR), including fly ash and bottom ash generated at coal-fired electric generating units and also FGD gypsum generated at some coal-fired plants.  The proposed rule contained two alternative proposals.  One proposal would impose federal hazardous waste disposal and management standards on these materials and another would allow states to retain primary authority to regulate the beneficial re-use and disposal of these materials under state solid waste management standards, including minimum federal standards for disposal and management.  Both proposals would impose stringent requirements for the construction of new coal ash landfills and existing unlined surface impoundments.

Various environmental organizations and industry groups filed a petition seeking to establish deadlines for a final rule.  To comply with a court-ordered deadline, the Federal EPA issued a prepublication copy of its final rule in December 2014. The rule is expected to be published in the Federal Register during the first quarter of 2015 and become effective six months following publication.

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

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

14

Clean Water Act (CWA) Regulations

In 2014, the Federal EPA issued a final rule setting forth standards for existing power plants that is intended to reduce mortality of aquatic organisms pinned against a plant’s cooling water intake screen (impingement) or entrained in the cooling water.  Entrainment is when small fish, eggs or larvae are drawn into the cooling water system and affected by heat, chemicals or physical stress.  The final rule affects all plants withdrawing more than two million gallons of cooling water per day. The rule offers seven technology options to comply with the impingement standard and requires site-specific studies to determine appropriate entrainment compliance measures at facilities withdrawing more than 125 million gallons per day. Additional requirements may be imposed as a result of consultation with other federal agencies to protect threatened and endangered species and their habitats. Facilities with existing closed cycle recirculating cooling systems, as defined in the rule, are not expected to require any technology changes. Facilities subject to both the impingement standard and site-specific entrainment studies will typically be given at least three years to conduct and submit the results of those studies to the permit agency. Compliance timeframes will then be established by the permit agency through each facility’s National Pollutant Discharge Elimination System (NPDES) permit for installation of any required technology changes, as those permits are renewed over the next five to eight years. Petitions for review of the final rule have been filed by industry and environmental groups and are currently pending in the U.S. Court of Appeals for the Second Circuit.

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

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

15

RESULTS OF OPERATIONS

SEGMENTS

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

Our reportable segments and their related business activities are outlined below:

Vertically Integrated Utilities

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

Transmission and Distribution Utilities

• Transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by OPCo, TCC and TNC.

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

AEP Transmission Holdco

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

Generation & Marketing

• Nonregulated generation in ERCOT and PJM.

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

AEP River Operations

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

16

The table below presents Earnings Attributable to AEP Common Shareholders by segment for the years ended December 31, 2014, 2013 and 2012.

	Years Ended December 31,
	2014		2013		2012
	(in millions)
Vertically Integrated Utilities	$	708	$	677	$	800
Transmission and Distribution Utilities	355		358		389
AEP Transmission Holdco	151		80		43
Generation & Marketing	367		228		100
AEP River Operations	49		12		15
Corporate and Other (a)	4		125		(88		)
Earnings Attributable to AEP Common Shareholders	$	1,634	$	1,480	$	1,259

(a) While not considered a reportable segment, Corporate and Other primarily includes the purchasing of receivables from certain AEP utility subsidiaries. This segment also includes Parent's guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.

AEP CONSOLIDATED

2014 Compared to 2013

Earnings Attributable to AEP Common Shareholders increased from $1,480 million in 2013 to $1,634 million in 2014 primarily due to:

• Impairments during 2013 for the following:

• Muskingum River Plant, Unit 5.

• A decision from the KPSC disallowing scrubber costs on KPCo's Big Sandy Plant.

• A net increase in weather-related usage.

• Higher market prices and increased sales volumes.

• An increase in transmission investment which resulted in higher revenues and income.

• Successful rate proceedings during 2014 in our various jurisdictions.

These increases were partially offset by:

• A favorable U.K. Windfall Tax decision by the U.S. Supreme Court in 2013.

• An increase in depreciation expense due to increased investments.

• An increase in regulatory provisions in 2014.

• An increase in fuel expense due to the termination of a long-term coal contract.

• An increase in plant maintenance.

• An increase in vegetation management expenses.

17

2013 Compared to 2012

Earnings Attributable to AEP Common Shareholders increased from $1,259 million in 2012 to $1,480 million in 2013 primarily due to:

• Successful rate proceedings in our various jurisdictions.

• 2012 impairments of certain Ohio generation plants.

• A decrease in Ohio depreciation expense due to impairments of certain Ohio generation plants.

• A favorable U.K. Windfall Tax decision by the U.S. Supreme Court in 2013.

These increases were partially offset by:

• Impairments during 2013 for the following:

• Muskingum River Plant, Unit 5.

• A write-off from a disallowance of a portion of Amos Plant, Unit 3 pursuant to a Virginia SCC order.

• A decision from the KPSC disallowing scrubber costs on KPCo's Big Sandy Plant.

• The loss of retail generation customers in Ohio to various CRES providers.

• 2012 reversal of a 2011 recorded obligation to contribute to Partnership with Ohio and Ohio Growth Fund as a result of the PUCO's February 2012 rejection of OPCo's modified stipulation.

Our results of operations by operating segment are discussed below.

VERTICALLY INTEGRATED UTILITIES

	Years Ended December 31,
Vertically Integrated Utilities	2014			2013			2012
	(in millions)
Revenues	$	9,484		$	9,992		$	9,418
Fuel and Purchased Electricity	3,953			4,770			4,408
Gross Margin	5,531			5,222			5,010
Other Operation and Maintenance	2,515			2,276			2,219
Asset Impairments and Other Related Charges	—			72			13
Depreciation and Amortization	1,033			941			873
Taxes Other Than Income Taxes	370			372			344
Operating Income	1,613			1,561			1,561
Interest and Investment Income	4			7			5
Carrying Costs Income	6			14			28
Allowance for Equity Funds Used During Construction	47			35			72
Interest Expense	(526		)	(540		)	(520		)
Income Before Income Tax Expense and Equity Earnings	1,144			1,077			1,146
Income Tax Expense	434			398			345
Equity Earnings of Unconsolidated Subsidiaries	2			2			2
Net Income	712			681			803
Net Income Attributable to Noncontrolling Interests	4			4			3
Earnings Attributable to AEP Common Shareholders	$	708		$	677		$	800

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Summary of KWh Energy Sales for Vertically Integrated Utilities
	Years Ended December 31,
	2014	2013		2012
	(in millions of KWhs)
Retail:
Residential	34,073	33,851		33,199
Commercial	25,048	25,037		25,278
Industrial	35,281	34,216		34,692
Miscellaneous	2,311	2,284		2,356
Total Retail	96,713	95,388		95,525
Wholesale (a)	34,241	NM	(b)	NM	(b)
Total KWhs	130,954	95,388		95,525

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

(b) 2014 is not comparable to 2013 or 2012 due to the 2013 asset transfers related to corporate separation in Ohio on December 31, 2013 and the termination of the Interconnection Agreement effective January 1, 2014.

NM    Not meaningful.

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

Summary of Heating and Cooling Degree Days for Vertically Integrated Utilities
	Years Ended December 31,
	2014	2013	2012
	(in degree days)
Eastern Region
Actual – Heating (a)	3,313	2,949	2,216
Normal – Heating (b)	2,740	2,734	2,774
Actual – Cooling (c)	932	1,040	1,253
Normal – Cooling (b)	1,080	1,080	1,079
Western Region
Actual – Heating (a)	1,840	1,772	1,070
Normal – Heating (b)	1,510	1,501	1,537
Actual – Cooling (c)	2,049	2,163	2,635
Normal – Cooling (b)	2,203	2,202	2,186

(a) Eastern Region and Western Region heating degree days are calculated on a 55 degree temperature base.

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

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

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2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Earnings Attributable to AEP Common Shareholders from Vertically Integrated Utilities

(in millions)

Year Ended December 31, 2013	$	677
Changes in Gross Margin:
Retail Margins	212
Off-system Sales	123
Transmission Revenues	22
Other Revenues	(48		)
Total Change in Gross Margin	309
Changes in Expenses and Other:
Other Operation and Maintenance	(239		)
Asset Impairments and Other Related Charges	72
Depreciation and Amortization	(92		)
Taxes Other Than Income Taxes	2
Interest and Investment Income	(3		)
Carrying Costs Income	(8		)
Allowance for Equity Funds Used During Construction	12
Interest Expense	14
Total Change in Expenses and Other	(242		)
Income Tax Expense	(36		)
Year Ended December 31, 2014	$	708

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

•	Retail Margins increased $212 million primarily due to the following:
	•	The effect of successful rate proceedings in our service territories, which include:
		•	A $129 million rate increase for APCo.
		•	A $55 million rate increase for KPCo.
		•	A $45 million rate increase for I&M.
		•	A $22 million rate increase for SWEPCo.
		•	A $12 million rate increase for PSO.
		•	A $9 million rate increase for WPCo.
	For the rate increases described above, $153 million relates to riders/trackers which have corresponding increases in other expense items below.
	•	A $14 million increase due to favorable weather conditions.
	These increases were partially offset by:
	•	A $43 million increase in PJM expenses net of recovery or offsets.
	•	A $36 million decrease due to a fuel proceeding disallowance.
•	Margins from Off-system Sales increased $123 million primarily due to higher market prices and changes in margin sharing.
•	Transmission Revenues increased $22 million primarily due to increased investment in the PJM region.
•	Other Revenues decreased $48 million primarily due to a decrease in barging because River Transportation Division (RTD) is no longer serving plants transferred from OPCo to AGR as of December 31, 2013 as a result of corporate separation in Ohio. This decrease in RTD revenue has a corresponding decrease in Other Operation and Maintenance expenses for barging as discussed below.

20

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

•	Other Operation and Maintenance expenses increased $239 million primarily due to the following:
	•	A $56 million increase in recoverable expenses, primarily including PJM expenses, currently fully recovered in rate recovery riders/trackers, partially offset by RTD expenses for barging activities.
	•	A $46 million increase in employee related expenses.
	•	A $45 million increase in transmission services related to PJM and SPP services.
	•	A $43 million increase in plant outage and maintenance expense primarily due to higher planned and advanced spending.
	•	A $26 million increase in distribution and transmission vegetation management expenses primarily due to higher advanced spending.
	•	A $25 million increase due to a favorable settlement of an insurance claim in the first quarter of 2013.
	•	A $10 million increase due to the write-off of IGCC costs in Virginia.
	•	An $8 million increase due to an accrual for future environmental remediation costs.
	These increases were partially offset by:
	•	A $30 million write-off in the first quarter of 2013 of previously deferred 2012 Virginia storm costs resulting from the 2013 enactment of a Virginia law.
	•	A $23 million decrease in storm expense primarily in the APCo service territory.
•	Asset Impairments and Other Related Charges decreased $72 million primarily due to the following:
	•	A $39 million decrease due to APCo's 2013 write-off from a regulatory disallowance of a portion of Amos Plant, Unit 3 pursuant to a Virginia SCC order approving the transfer of Amos Plant, Unit 3.
	•	A $33 million decrease due to KPCo's 2013 write-off of scrubber costs on the Big Sandy Plant and other generation costs in accordance with the KPSC's October 2013 order.
•	Depreciation and Amortization expenses increased $92 million primarily due to higher depreciable base.
•	Carrying Cost Income decreased $8 million primarily due to the November 2013 securitization of the West Virginia ENEC deferral balance.
•	Allowance for Equity Funds Used During Construction increased $12 million primarily due to increases in environmental construction and transmission projects.
•	Interest Expense decreased $14 million primarily due to the following:
	•	A $6 million decrease due to the retirement of KPCo Senior Unsecured Notes in the third quarter of 2013.
	•	A $4 million decrease due to the redemption of I&M Senior Unsecured Notes in the fourth quarter of 2013.
	•	A $4 million decrease due to rate approvals in Louisiana and Texas as well as an increase in the debt component of AFUDC due to increased transmission and environmental projects.
•	Income Tax Expense increased $36 million primarily due to an increase in pretax book income, the recording of state income tax adjustments and other book/tax differences which are accounted for on a flow-through basis, partially offset by the recording of federal income tax adjustments.

21

2013 Compared to 2012

Reconciliation of Year Ended December 31, 2012 to Year Ended December 31, 2013

Earnings Attributable to AEP Common Shareholders from Vertically Integrated Utilities

(in millions)

Year Ended December 31, 2012	$	800
Changes in Gross Margin:
Retail Margins	196
Off-system Sales	(26		)
Transmission Revenues	41
Other Revenues	1
Total Change in Gross Margin	212
Changes in Expenses and Other:
Other Operation and Maintenance	(57		)
Asset Impairments and Other Related Charges	(59		)
Depreciation and Amortization	(68		)
Taxes Other Than Income Taxes	(28		)
Interest and Investment Income	2
Carrying Costs Income	(14		)
Allowance for Equity Funds Used During Construction	(37		)
Interest Expense	(20		)
Total Change in Expenses and Other	(281		)
Income Tax Expense	(53		)
Net Income Attributable to Noncontrolling Interests	(1		)
Year Ended December 31, 2013	$	677

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

•	Retail Margins increased $196 million primarily due to the following:
	•	Successful rate proceedings in our service territories, which include:
		•	A $153 million rate increase for SWEPCo.
		•	A $112 million rate increase for I&M.
		•	A $9 million rate increase for APCo.
				For the rate increases described above, $42 million relates to riders/trackers which have corresponding increases in other expense items below.
	•	A $29 million increase in weather-related usage in our eastern and western regions primarily due to increases of 33% and 66%, respectively, in heating degree days, partially offset by decreases in our eastern and western regions of 17% and 18%, respectively, in cooling degree days.
	These increases were partially offset by:
	•	A $15 million decrease in SWEPCo's municipal and cooperative revenues primarily due to lower realizations from changes in sales volume mix.
	•	A $23 million decrease due to lower weather normalized retail sales.
	•	A $12 million increase in other variable electric generation expenses.
	•	A $9 million deferral of APCo's additional wind purchase costs in 2012 as a result of the June 2012 Virginia SCC fuel factor order.
	•	A $9 million decrease due to adjustments for previously disallowed environmental costs by the November 2011 Virginia SCC order subsequently determined in 2012 to be appropriate for recovery by the Supreme Court of Virginia.

22

• Margins from Off-system Sales decreased $26 million primarily due to lower PJM capacity revenue, reduced trading and marketing margins, partially offset by higher prices and volumes.

• Transmission Revenues increased $41 million primarily due to increased investment in the PJM and SPP regions.  These increased revenues are partially offset by Other Operation and Maintenance expenses below.

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

•	Other Operation and Maintenance expenses increased $57 million primarily due to the following:
	•	A $33 million increase in recoverable PJM and other expenses currently recovered dollar-for-dollar in rate recovery riders/trackers.
	•	A $30 million write-off in 2013 of previously deferred 2012 Virginia storm costs resulting from the 2013 enactment of a Virginia law.
	•	A $22 million increase in storm-related expenses primarily in APCo's service territory.
	•	A $21 million increase in plant outage expenses.
	These increases were partially offset by:
	•	A $26 million decrease due to expenses related to the 2012 sustainable cost reductions.
	•	A $25 million decrease due to an agreement reached to settle an insurance claim in 2013.
•	Asset Impairments and Other Related Charges increased $59 million primarily due to the following:
	•	A $39 million increase due to APCo's 2013 write-off from a regulatory disallowance of a portion of Amos Plant, Unit 3 pursuant to a Virginia SCC order approving the transfer of Amos Plant, Unit 3.
	•	A $33 million increase due to KPCo's 2013 write-off of scrubber costs on the Big Sandy Plant and other generation costs in accordance with the KPSC's October 2013 order.
	These increases were partially offset by:
	•	A 2012 write-off of an additional $13 million related to SWEPCo's expected Texas jurisdictional portion of the Turk Plant in excess of the Texas capital cost cap.
•	Depreciation and Amortization expenses increased $68 million primarily due to the following:
	•	A $40 million increase due to the Turk Plant being placed in service in December 2012.
	•	A $26 million increase due to higher depreciable base and higher depreciation rates reflecting a change in Tanners Creek Plant's estimated life approved by the MPSC effective April 2012 and by the IURC effective March 2013.  The majority of the increase in depreciation for Tanners Creek Plant's life is offset within Gross Margin.
	•	Overall higher depreciable property balances.
	These increases were partially offset by:
	•	A $13 million decrease in amortization as a result of the cessation of the Virginia Environmental and Reliability surcharge and the Virginia Environmental Rate Adjustment Clause in January 2013 and March 2013, respectively.
•	Taxes Other Than Income Taxes increased $28 million primarily due to increased property taxes as a result of increased capital investments.
•	Carrying Costs Income decreased $14 million primarily due to an increased recovery of Virginia environmental costs in new base rates as approved by the Virginia SCC in late January 2012 and decreased carrying charges related to the Dresden Plant.
•	Allowance for Equity Funds Used During Construction decreased $37 million primarily due to completed construction of the Turk Plant in December 2012.
•	Interest Expense increased $20 million primarily due to a decrease in the debt component of AFUDC due to completed construction of the Turk Plant in December 2012, partially offset by lower average outstanding long-term debt balances and an increase in the debt component of AFUDC related to projects at the Cook Plant.
•	Income Tax Expense increased $53 million primarily due to the recording of federal and state income tax adjustments and other book/tax differences which are accounted for on a flow-through basis, partially offset by a decrease in pretax book income.

23

TRANSMISSION AND DISTRIBUTION UTILITIES

	Years Ended December 31,
Transmission and Distribution Utilities	2014			2013			2012
	(in millions)
Revenues	$	4,814		$	4,478		$	4,818
Purchased Electricity	1,520			1,627			2,071
Amortization of Generation Deferrals	111			—			—
Gross Margin	3,183			2,851			2,747
Other Operation and Maintenance	1,276			1,003			911
Depreciation and Amortization	658			591			561
Taxes Other Than Income Taxes	453			435			428
Operating Income	796			822			847
Interest and Investment Income	11			2			4
Carrying Costs Income	27			16			24
Allowance for Equity Funds Used During Construction	12			8			6
Interest Expense	(280		)	(292		)	(291		)
Income Before Income Tax Expense	566			556			590
Income Tax Expense	211			198			201
Net Income	355			358			389
Net Income Attributable to Noncontrolling Interests	—			—			—
Earnings Attributable to AEP Common Shareholders	$	355		$	358		$	389

Summary of KWh Energy Sales for Transmission and Distribution Utilities
	Years Ended December 31,
	2014	2013		2012
	(in millions of KWhs)
Retail:
Residential	26,209	25,531		25,581
Commercial	25,307	24,631		24,746
Industrial	21,830	22,668		24,902
Miscellaneous	713	710		716
Total Retail (a)	74,059	73,540		75,945
Wholesale (b)	2,198	NM	(c)	NM	(c)
Total KWhs	76,257	73,540		75,945

(a) Represents energy delivered to distribution customers.

(b) Ohio's contractually obligated purchases of OVEC power sold into PJM.

(c) 2014 is not comparable to 2013 or 2012 due to the 2013 asset transfers related to corporate separation in Ohio on December 31, 2013 and the termination of the Interconnection Agreement effective January 1, 2014.

NM    Not meaningful.

24

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

Summary of Heating and Cooling Degree Days for Transmission and Distribution Utilities
	Years Ended December 31,
	2014	2013	2012
	(in degree days)
Eastern Region
Actual – Heating (a)	3,734	3,383	2,610
Normal – Heating (b)	3,230	3,229	3,276
Actual – Cooling (c)	949	1,029	1,248
Normal – Cooling (b)	960	954	948
Western Region
Actual – Heating (a)	428	368	177
Normal – Heating (b)	337	337	352
Actual – Cooling (d)	2,553	2,737	3,100
Normal – Cooling (b)	2,618	2,608	2,584

(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.

25

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Earnings Attributable to AEP Common Shareholders from Transmission and Distribution Utilities

(in millions)

Year Ended December 31, 2013	$	358
Changes in Gross Margin:
Retail Margins	236
Off-System Sales	3
Transmission Revenues	71
Other Revenues	22
Total Change in Gross Margin	332
Changes in Expenses and Other:
Other Operation and Maintenance	(273		)
Depreciation and Amortization	(67		)
Taxes Other Than Income Taxes	(18		)
Interest and Investment Income	9
Carrying Costs Income	11
Allowance for Equity Funds Used During Construction	4
Interest Expense	12
Total Change in Expenses and Other	(322		)
Income Tax Expense	(13		)
Year Ended December 31, 2014	$	355

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

• Retail Margins increased $236 million primarily due to the following:

• A $106 million increase in revenues primarily associated with Ohio rate riders/trackers and PJM revenues, partially offset by regulatory provisions.  These increases have corresponding increases in expense items discussed below.

• A $96 million increase in TCC and TNC revenues primarily due to the recovery of ERCOT transmission expenses which is offset in Other Operation and Maintenance below.

• Transmission Revenues increased $71 million primarily due to:

• A $58 million increase primarily due to increased transmission revenues from customers who have switched to alternative CRES providers, rate increases for customers in the PJM region and increased transmission investment. This increase in transmission revenues related to CRES providers primarily offsets lost revenues included in Retail Margins above.

• A $14 million increase primarily due to increased transmission investment in ERCOT.

• Other Revenues increased $22 million primarily due to an increase in Texas securitization revenues which is offset in Depreciation and Amortization and Interest Expense below.

26

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

• Other Operation and Maintenance expenses increased $273 million primarily due to the following:

• A $213 million increase in recoverable expenses, including PJM expenses, ERCOT expenses and the Ohio storm amortization, currently fully recovered in rate recovery riders/trackers.

• A $19 million increase in expenses related to various distribution services as a result of advanced spending.

• An $18 million increase in remitted Universal Service Fund (USF) surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This increase is offset by an increase in Retail Margins above.

• A $9 million increase in vegetation management expenses primarily due to advanced spending.

• Depreciation and Amortization expenses increased $67 million primarily due to the following:

• A $39 million increase in amortization related to OPCo and TCC securitizations, which are partially offset in Retail Margins and Other Revenues above.

• A $28 million increase due to an increase in the depreciable base of transmission and distribution assets.

• Taxes Other Than Income Taxes increased $18 million primarily due to increased property taxes.

• Interest and Investment Income increased $9 million primarily due to interest on affiliated notes resulting from corporate separation.

• Carrying Costs Income increased $11 million primarily due to increased capacity deferral carrying charges.

• Interest Expense decreased $12 million primarily due to reduced TCC securitization long-term debt outstanding, which is partially offset in Other Revenues above.

• Income Tax Expense increased $13 million primarily due to an increase in pretax book income and by the recording of federal and state income tax adjustments.

27

2013 Compared to 2012

Reconciliation of Year Ended December 31, 2012 to Year Ended December 31, 2013

Earnings Attributable to AEP Common Shareholders from Transmission and Distribution Utilities

(in millions)

Year Ended December 31, 2012	$	389
Changes in Gross Margin:
Retail Margins	55
Off-System Sales	1
Transmission Revenues	46
Other Revenues	2
Total Change in Gross Margin	104
Changes in Expenses and Other:
Other Operation and Maintenance	(92		)
Depreciation and Amortization	(30		)
Taxes Other Than Income Taxes	(7		)
Interest and Investment Income	(2		)
Carrying Costs Income	(8		)
Allowance for Equity Funds Used During Construction	2
Interest Expense	(1		)
Total Change in Expenses and Other	(138		)
Income Tax Expense	3
Year Ended December 31, 2013	$	358

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

•	Retail Margins increased $55 million primarily due to the following:
	•	A $123 million increase in revenues associated with OPCo's USF surcharge and Distribution Investment Recovery Rider.  A portion of these increases have corresponding increases in other expense items below.
	•	A $17 million increase related to favorable regulatory proceedings for OPCo.
	These increases were partially offset by:
	•	A $40 million decrease related to Ohio customers switching to alternative CRES providers.  This decrease in Retail Margins is partially offset by an increase in Transmission Revenues related to CRES providers detailed below.
	•	A $35 million decrease due to OPCo's partial reversal in 2012 of a 2011 fuel provision related to CRES providers.
•	Transmission Revenues increased $46 million primarily due to increased transmission revenues from Ohio customers who switched to alternative CRES providers.

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

•	Other Operation and Maintenance expenses increased $92 million primarily due to the following:
	•	An $86 million increase in remitted USF surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers.  This increase was offset by a corresponding increase in Retail Margins above.
	•	A $30 million net increase related to the reversal of an obligation to contribute to Partnership with Ohio and Ohio Growth Fund as a result of the PUCO's February 2012 rejection of the Ohio modified stipulation and the PUCO's August 2012 approval of the June 2012-May 2015 ESP.
	These increases were partially offset by:
	•	A $14 million decrease in expenses related to the 2012 sustainable cost reductions.
	•	A $13 million decrease in Ohio's gridSMART® expenses primarily due to a reduction in the operation and maintenance component of the gridSMART® rider for prior years' over collections.  This decrease was partially offset by a corresponding increase in Depreciation and Amortization.
•	Depreciation and Amortization expenses increased $30 million primarily due to the following:
	•	An $8 million increase due to OPCo's and TCC's issuance of securitization bonds in August 2013 and March 2012, respectively.  This increase in OPCo's and TCC's securitization related amortizations are offset within Gross Margin.
	•	A $7 million increase due to increased investment in distribution and transmission plant.
	•	A $4 million increase in Ohio's gridSMART® expenses primarily due to an increase in the depreciation component of the gridSMART® rider to recover prior years' under collections.  This increase was offset by a corresponding decrease in Operation and Maintenance expenses above.
•	Taxes Other Than Income Taxes increased $7 million primarily due to increased property taxes.
•	Carrying Costs Income decreased $8 million primarily due to the first quarter 2012 recording of debt carrying costs prior to TCC's issuance of securitization bonds in March 2012.
•	Income Tax Expense decreased $3 million primarily due to a decrease in pretax book income, partially offset by the recording of state income tax adjustments.

29

AEP TRANSMISSION HOLDCO

	Years Ended December 31,
AEP Transmission Holdco	2014			2013			2012
	(in millions)
Transmission Revenues	$	192		$	78		$	24
Gross Margin	192			78			24
Other Operation and Maintenance	29			12			9
Depreciation and Amortization	24			10			3
Taxes Other Than Income Taxes	32			20			5
Operating Income	107			36			7
Carrying Costs Income	—			—			1
Allowance for Equity Funds Used During Construction	45			30			14
Interest Expense	(23		)	(10		)	(3		)
Income Before Income Tax Expense	129			56			19
Income Tax Expense	63			29			17
Equity Earnings of Unconsolidated Subsidiaries	85			53			41
Net Income	151			80			43
Net Income Attributable to Noncontrolling Interests	—			—			—
Earnings Attributable to AEP Common Shareholders	$	151		$	80		$	43

Summary of Net Plant In Service and CWIP for Transmission Holdco

	As of December 31,
	2014		2013		2012
	(in millions)
Net Plant In Service	$	1,801	$	982	$	374
CWIP	889		645		370

30

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Earnings Attributable to AEP Common Shareholders from Transmission Holdco

(in millions)

Year Ended December 31, 2013	$	80
Changes in Transmission Revenues:
Transmission Revenues	114
Total Change in Transmission Revenues	114
Changes in Expenses and Other:
Other Operation and Maintenance	(17		)
Depreciation and Amortization	(14		)
Taxes Other Than Income Taxes	(12		)
Allowance for Equity Funds Used During Construction	15
Interest Expense	(13		)
Total Change in Expenses and Other	(41		)
Income Tax Expense	(34		)
Equity Earnings	32
Year Ended December 31, 2014	$	151

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

• Transmission Revenues increased $114 million primarily due to an increase in projects placed in-service by our wholly-owned transmission subsidiaries.

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

• Other Operation and Maintenance expenses increased $17 million primarily due to increased transmission investment.

• Depreciation and Amortization expenses increased $14 million primarily due to higher depreciable base.

• Taxes Other Than Income Taxes increased $12 million primarily due to increased property taxes.

• Allowance for Equity Funds Used During Construction increased $15 million primarily due to increased transmission investment.

• Interest Expense increased $13 million primarily due to higher outstanding long-term debt balances.

• Income Tax Expense increased $34 million primarily due to an increase in pretax book income.

• Equity Earnings increased $32 million primarily due to an increase in transmission investment by ETT.

31

2013 Compared to 2012

Reconciliation of Year Ended December 31, 2012 to Year Ended December 31, 2013

Earnings Attributable to AEP Common Shareholders from Transmission Holdco

(in millions)

Year Ended December 31, 2012	$	43
Changes in Transmission Revenues:
Transmission Revenues	54
Total Change in Transmission Revenues	54
Changes in Expenses and Other:
Other Operation and Maintenance	(3		)
Depreciation and Amortization	(7		)
Taxes Other Than Income Taxes	(15		)
Carrying Costs Income	(1		)
Allowance for Equity Funds Used During Construction	16
Interest Expense	(7		)
Total Change in Expenses and Other	(17		)
Income Tax Expense	(12		)
Equity Earnings	12
Year Ended December 31, 2013	$	80

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

• Transmission Revenues increased $54 million primarily due to an increase in projects placed in-service by our wholly-owned transmission subsidiaries.

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

• Other Operation and Maintenance expenses increased $3 million primarily due increased transmission investment.

• Depreciation and Amortization expenses increased $7 million primarily due to higher depreciable base.

• Taxes Other Than Income Taxes increased $15 million primarily due to increased property taxes.

• Allowance for Equity Funds Used During Construction increased $16 million primarily due to increased transmission investment.

• Interest Expense increased $7 million primarily due to higher outstanding long-term debt balances.

• Income Tax Expense increased $12 million primarily due to an increase in pretax book income, partially offset by other book/tax differences which are accounted for on a flow-through basis.

• Equity Earnings increased $12 million primarily due to an increase in transmission investment by ETT.

32

GENERATION & MARKETING

	Years Ended December 31,
Generation & Marketing	2014			2013			2012
	(in millions)
Revenues	$	3,850		$	3,665		$	3,467
Fuel, Purchased Electricity and Other	2,436			2,305			2,065
Gross Margin	1,414			1,360			1,402
Other Operation and Maintenance	550			523			507
Asset Impairments and Other Related Charges	—			154			287
Depreciation and Amortization	227			236			349
Taxes Other Than Income Taxes	50			54			62
Operating Income	587			393			197
Interest and Investment Income	5			2			1
Interest Expense	(46		)	(55		)	(83		)
Income Before Income Tax Expense	546			340			115
Income Tax Expense	179			112			15
Net Income	367			228			100
Net Income Attributable to Noncontrolling Interests	—			—			—
Earnings Attributable to AEP Common Shareholders	$	367		$	228		$	100

Summary of MWhs Generated for Generation & Marketing
	Years Ended December 31,
	2014	2013	2012
	(in millions of MWhs)
Fuel Type:
Coal	38	38	37
Natural Gas	7	6	11
Wind	1	1	1
Total MWhs	46	45	49

33

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Earnings Attributable to AEP Common Shareholders from Generation & Marketing

(in millions)

Year Ended December 31, 2013	$	228
Changes in Gross Margin:
Generation	57
Retail, Trading and Marketing	(4		)
Other	1
Total Change in Gross Margin	54
Changes in Expenses and Other:
Other Operation and Maintenance	(27		)
Asset Impairments and Other Related Charges	154
Depreciation and Amortization	9
Taxes Other Than Income Taxes	4
Interest and Investment Income	3
Interest Expense	9
Total Change in Expenses and Other	152
Income Tax Expense	(67		)
Year Ended December 31, 2014	$	367

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 increased $57 million primarily due to $111 million of increased demand and market prices driven by cold temperatures in the first quarter of 2014, partially offset by $54 million due to the termination of a long-term coal contract.

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

• Other Operation and Maintenance expenses increased $27 million primarily due to increased ARO costs related to planned retirements.

• Asset Impairments and Other Related Charges decreased by $154 million primarily due to the 2013 impairment of Muskingum River Plant, Unit 5.

• Depreciation and Amortization expenses decreased $9 million primarily due to the 2013 impairment of Muskingum River Plant, Unit 5.

• Interest Expense decreased $9 million primarily due to lower outstanding long-term debt balances and lower long-term interest rates.

• Income Tax Expense increased $67 million primarily due to an increase in pretax book income.

34

2013 Compared to 2012

Reconciliation of Year Ended December 31, 2012 to Year Ended December 31, 2013

Earnings Attributable to AEP Common Shareholders from Generation & Marketing

(in millions)

Year Ended December 31, 2012	$	100
Changes in Gross Margin:
Generation	(44		)
Retail, Trading and Marketing	4
Other	(2		)
Total Change in Gross Margin	(42		)
Changes in Expenses and Other:
Other Operation and Maintenance	(16		)
Asset Impairments and Other Related Charges	133
Depreciation and Amortization	113
Taxes Other Than Income Taxes	8
Interest and Investment Income	1
Interest Expense	28
Total Change in Expenses and Other	267
Income Tax Expense	(97		)
Year Ended December 31, 2013	$	228

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 $44 million primarily due to the following:
	•	A $336 million decrease in affiliated sales to OPCo primarily due to customers switching to alternative CRES providers as well as a reduction in industrial usage.
	This decrease was partially offset by the following:
	•	A $221 million net increase in sales to AEP affiliates under the Interconnection Agreement.
	•	A $63 million decrease in fuel expenses due to a reduction in generation at the Lawrenceburg Plant.

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

•	Other Operation and Maintenance expenses increased $16 million primarily due to a 2013 adjustment of $14 million to impaired plant investment as a result of changes to asset retirement obligations for asbestos removal and retirement of ash disposal facilities at impaired plants.
•	Asset Impairments and Other Related Charges decreased $133 million due to the following:
	•	A 2012 impairment of $287 million for certain Ohio generation plants, which includes $13 million of related materials and supplies inventory.
	This decrease was partially offset by:
	•	A 2013 impairment of $154 million for Muskingum River Plant, Unit 5.
•	Depreciation and Amortization expenses decreased $113 million primarily due to depreciation ceasing on certain Ohio generation plants that were impaired in November 2012 and June 2013.
•	Interest Expense decreased $28 million primarily due to lower outstanding long-term debt balances and lower long-term interest rates.
•	Income Tax Expense increased $97 million primarily due to an increase in pretax book income and by the recording of state income tax adjustments.

35

AEP RIVER OPERATIONS

2014 Compared to 2013

Earnings attributable to AEP Common Shareholders from our AEP River Operations segment increased from $12 million in 2013 to $49 million in 2014 due to a 28% increase in barge freight revenue for 2014 compared to 2013. The increase in 2014 freight revenue over 2013 was driven by strong barge freight demand particularly for export grain, strong northbound imports of fertilizer, salt and steel and increased shipments of domestic coal.

2013 Compared to 2012

Earnings attributable to AEP Common Shareholders from our AEP River Operations segment decreased from $15 million in 2012 to $12 million in 2013 primarily due to significant reductions in export grain and coal demand.  In addition, low water levels in the first and fourth quarters of 2013 limited barge loads and tow sizes.

CORPORATE AND OTHER

2014 Compared to 2013

Earnings attributable to AEP Common Shareholders from Corporate and Other decreased from $125 million in 2013 to $4 million in 2014 primarily due to a favorable U.K. Windfall Tax decision by the U.S. Supreme Court in 2013.

2013 Compared to 2012

Earnings attributable to AEP Common Shareholders from Corporate and Other increased from a loss of $88 million in 2012 to income of $125 million in 2013 primarily due to a favorable U.K. Windfall Tax decision by the U.S. Supreme Court in 2013 as well as a reduction in interest expense associated with the early retirement of debt in 2012.

AEP SYSTEM INCOME TAXES

2014 Compared to 2013

Income Tax Expense increased $258 million primarily due to an increase in pretax book income and the recording of state income tax adjustments and by a favorable U.K. Windfall Tax decision by the U.S. Supreme Court in 2013.

2013 Compared to 2012

Income Tax Expense increased $80 million primarily due to an increase in pretax book income and the recording of state income tax adjustments, partially offset by a favorable U.K. Windfall Tax decision by the U.S. Supreme Court in 2013.

36

FINANCIAL CONDITION

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

LIQUIDITY AND CAPITAL RESOURCES

Debt and Equity Capitalization

	December 31,
	2014				2013
	(dollars in millions)
Long-term Debt, including amounts due within one year	$	18,684	50.7	%	$	18,377	52.2	%
Short-term Debt	1,346		3.6		757		2.1
Total Debt	20,030		54.3		19,134		54.3
AEP Common Equity	16,820		45.7		16,085		45.7
Noncontrolling Interests	4		—		1		—
Total Debt and Equity Capitalization	$	36,854	100.0	%	$	35,220	100.0	%

Our ratio of debt-to-total capital remained unchanged at 54.3% as of December 31, 2014 and 2013.

Liquidity

Liquidity, or access to cash, is an important factor in determining our financial stability.  We believe we have adequate liquidity under our existing credit facilities.  As of December 31, 2014, we had $3.5 billion in aggregate credit facility commitments to support our operations.  Additional liquidity is available from cash from operations and a receivables securitization agreement.  We are committed to maintaining adequate liquidity.  We generally use short-term borrowings to fund working capital needs, property acquisitions and construction until long-term funding is arranged.  Sources of long-term funding include issuance of long-term debt, sale-leaseback or leasing agreements or common stock.

Commercial Paper Credit Facilities

We manage our liquidity by maintaining adequate external financing commitments.  As of December 31, 2014, our available liquidity was approximately $3 billion as illustrated in the table below:

	Amount		Maturity
	(in millions)
Commercial Paper Backup:
Revolving Credit Facility	$	1,750	June 2017
Revolving Credit Facility	1,750		July 2018
Total	3,500
Cash and Cash Equivalents	163
Total Liquidity Sources	3,663
Less: AEP Commercial Paper Outstanding	602
Letters of Credit Issued	63
Net Available Liquidity	$	2,998

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

37

We use our commercial paper program to meet the short-term borrowing needs of our subsidiaries.  The program is used to fund both a Utility Money Pool, which funds the utility subsidiaries, and a Nonutility Money Pool, which funds the majority of the nonutility subsidiaries.  In addition, the program also funds, as direct borrowers, the short-term debt requirements of other subsidiaries that are not participants in either money pool for regulatory or operational reasons.  The maximum amount of commercial paper outstanding during 2014 was $877 million.  The weighted-average interest rate for our commercial paper during 2014 was 0.29%.

Other Credit Facilities

In January 2014, we issued letters of credit utilizing the entire amount available under an $85 million uncommitted facility. In October 2014, we renewed the uncommitted facility through October 2015 and increased the size of the facility to $100 million.  As of December 31, 2014, the maximum future payments issued under the uncommitted facility was $81 million with a maturity date of July 2015. An uncommitted facility gives the issuer of the facility the right to accept or decline each request we make under the facility.

Financing Plan

As of December 31, 2014, we have $2.5 billion of long-term debt due within one year which includes $785 million of Pollution Control Bonds with mandatory tender dates and credit support for variable interest rates that requires the debt be classified as current.  Also included in our long-term debt due within one year is $427 million of securitization bonds and DCC Fuel notes which will be repaid.  We plan to refinance the majority of our other maturities due within one year.

Securitized Accounts Receivables

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

Debt Covenants and Borrowing Limitations

Our credit agreements contain certain covenants and require us to maintain our percentage of debt to total capitalization at a level that does not exceed 67.5%.  The method for calculating outstanding debt and capitalization is contractually defined in our credit agreements.  Debt as defined in the credit agreements excludes securitization bonds and debt of AEP Credit.  As of December 31, 2014, this contractually-defined percentage was 51%.  Nonperformance under these covenants could result in an event of default under these credit agreements.  As of December 31, 2014, we complied with all of the covenants contained in these credit agreements.  In addition, the acceleration of our payment obligations, or the obligations of certain of our major subsidiaries, prior to maturity under any other agreement or instrument relating to debt outstanding in excess of $50 million, would cause an event of default under these credit agreements.  This condition also applies in a majority of our non-exchange traded commodity contracts and would similarly allow lenders and counterparties to declare the outstanding amounts payable.  However, a default under our non-exchange traded commodity contracts would not cause an event of default under our credit agreements.

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

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

38

Dividend Policy and Restrictions

The Board of Directors declared a quarterly dividend of $0.53 per share in January 2015.  Future dividends may vary depending upon our profit levels, operating cash flow levels and capital requirements, as well as financial and other business conditions existing at the time.  Our income derives from our common stock equity in the earnings of our utility subsidiaries.  Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of our utility subsidiaries to transfer funds to us in the form of dividends.  However, we do not believe these restrictions will have any significant impact on Parent’s ability to access cash to meet the payment of dividends on its common stock.

Credit Ratings

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

CASH FLOW

Managing our cash flows is a major factor in maintaining our liquidity strength.

	Years Ended December 31,
	2014			2013			2012
	(in millions)
Cash and Cash Equivalents at Beginning of Period	$	118		$	279		$	221
Net Cash Flows from Operating Activities	4,613			4,106			3,804
Net Cash Flows Used for Investing Activities	(4,406		)	(3,818		)	(3,391		)
Net Cash Flows Used for Financing Activities	(162		)	(449		)	(355		)
Net Increase (Decrease) in Cash and Cash Equivalents	45			(161		)	58
Cash and Cash Equivalents at End of Period	$	163		$	118		$	279

Cash from operations and short-term borrowings provides working capital and allows us to meet other short-term cash needs.

Operating Activities

	Years Ended December 31,
	2014		2013		2012
	(in millions)
Net Income	$	1,638	$	1,484	$	1,262
Depreciation and Amortization	1,929		1,743		1,782
Other	1,046		879		760
Net Cash Flows from Operating Activities	$	4,613	$	4,106	$	3,804

Net Cash Flows from Operating Activities were $4.6 billion in 2014 consisting primarily of Net Income of $1.6 billion, and $1.9 billion of noncash Depreciation and Amortization.  Other changes represent items that had a current period cash flow impact, such as changes in working capital, as well as items that represent future rights or obligations to receive or pay cash, such as regulatory assets and liabilities.  Deferred Income Taxes increased primarily due to provisions in the Tax Increase Prevention Act of 2014 and an increase in tax versus book temporary differences from operations.  The reduction in Fuel, Material and Supplies balance reflect a decrease in fuel inventory due to cold winter weather and increased generation.  

39

Net Cash Flows from Operating Activities were $4.1 billion in 2013 consisting primarily of Net Income of $1.5 billion, $1.7 billion of noncash Depreciation and Amortization and $226 million of Asset Impairments related to Muskingum River Plant, Unit 5, Big Sandy and Amos Plants, partially offset by $214 million of Ohio capacity deferrals as a result of a 2012 PUCO order.  Other changes represent items that had a current period cash flow impact, such as changes in working capital, as well as items that represent future rights or obligations to receive or pay cash, such as regulatory assets and liabilities.  Deferred Income Taxes increased primarily due to provisions in the Taxpayer Relief Act of 2012 and an increase in tax versus book temporary differences from operations.  Significant changes in other items include the favorable impact of a decrease in fuel inventory and net cash flows for Accrued Taxes as a result of the recognition of the tax benefit related to the U.K. Windfall Tax.

Net Cash Flows from Operating Activities were $3.8 billion in 2012 consisting primarily of Net Income of $1.3 billion, $1.8 billion of noncash Depreciation and Amortization and $287 million in Asset Impairments related to certain Ohio generation assets.  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.  A significant change in other items includes the unfavorable impact of an increase in fuel inventory due to the mild winter weather.  Deferred Income Taxes increased primarily due to provisions in the Small Business Jobs Act and the Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act and an increase in tax versus book temporary differences from operations.  During 2012, we also contributed $200 million to our qualified pension trust.

Investing Activities

	Years Ended December 31,
	2014			2013			2012
	(in millions)
Construction Expenditures	$	(4,134	)	$	(3,624	)	$	(3,025	)
Acquisitions of Nuclear Fuel	(116		)	(154		)	(107		)
Acquisitions of Assets/Businesses	(65		)	(32		)	(94		)
Proceeds from Sales of Assets	6			21			18
Other	(97		)	(29		)	(183		)
Net Cash Flows Used for Investing Activities	$	(4,406	)	$	(3,818	)	$	(3,391	)

Net Cash Flows Used for Investing Activities were $4.4 billion in 2014 primarily due to Construction Expenditures for environmental, distribution and transmission investments. We also purchased transmission assets for $38 million.

Net Cash Flows Used for Investing Activities were $3.8 billion in 2013 primarily due to Construction Expenditures for environmental, distribution and transmission investments.

Net Cash Flows Used for Investing Activities were $3.4 billion in 2012 primarily due to Construction Expenditures for new generation, environmental, distribution and transmission investments.  Acquisitions of Assets/Businesses include our March 2012 purchase of BlueStar for $70 million.

Financing Activities

	Years Ended December 31,
	2014			2013			2012
	(in millions)
Issuance of Common Stock, Net	$	73		$	84		$	83
Issuance/Retirement of Debt, Net	876			385			544
Proceeds from Nuclear Fuel Sale/Leaseback	—			110			—
Dividends Paid on Common Stock	(998		)	(954		)	(916		)
Other	(113		)	(74		)	(66		)
Net Cash Flows Used for Financing Activities	$	(162	)	$	(449	)	$	(355	)

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Net Cash Flows Used for Financing Activities in 2014 were $162 million.  Our net debt issuances were $876 million.  The net issuances included issuances of $1.6 billion of senior unsecured notes and other debt notes, $444 million of pollution control bonds and an increase in short-term borrowing of $589 million offset by retirements of $1.1 billion of notes, $412 million of pollution control bonds and $306 million of securitization bonds.  We paid common stock dividends of $998 million.  See Note 14 – Financing Activities.

Net Cash Flows Used for Financing Activities in 2013 were $449 million.  Our net debt issuances were $385 million.  The net issuances included issuances of $745 million of senior unsecured notes, $1 billion draws on a $1 billion term credit facility, $647 million of securitization bonds, $328 million of notes payable and other debt and $305 million of pollution control bonds offset by retirements of $1.8 billion of senior unsecured and other debt notes, $331 million of pollution control bonds, $243 million of securitization bonds and a decrease in short-term borrowing of $224 million.  We paid common stock dividends of $954 million.

Net Cash Flows Used for Financing Activities in 2012 were $355 million.  Our net debt issuances were $544 million. The net issuances included issuances of $1.7 billion of senior unsecured notes, $800 million of securitization bonds, $287 million of notes payable and other debt and $65 million of pollution control bonds offset by retirements of $902 million of senior unsecured and other debt notes, $315 million of junior subordinate debentures, $220 million of pollution control bonds, $206 million of securitization bonds and a decrease in short-term borrowing of $669 million.  We paid common stock dividends of $916 million.

The following financing activities occurred during 2014:

AEP Common Stock:

• During 2014, we issued 1.6 million shares of common stock under our incentive compensation, employee saving and dividend reinvestment plans and received net proceeds of $73 million.

Debt:

• During 2014, we issued approximately $2.1 billion of long-term debt, including $1.3 billion of senior notes at interest rates ranging from 2.61% to 5.52% and $200 million of pollution control revenue bonds at interest rates ranging from 1.625% to 1.75%, $244 million of pollution control revenue bonds at variable interest rates and $359 million of other debt at variable interest rates.  The proceeds from these issuances were used to fund long-term debt maturities and our construction programs.

• During 2014, we entered no interest rate derivatives and settled $4.7 million of such transactions.  The settlements resulted in net cash received of $3 million.  As of December 31, 2014, we had in place $815 million of notional interest rate derivatives designated as cash flow and fair value hedges.

In 2015:

• In January 2015, TCC retired $120 million of Securitization Bonds.

• In January 2015, OPCo retired $22 million of Securitization Bonds.

• In January 2015, SWEPCo remarketed $54 million of 1.6% Pollution Control Bonds due in 2019.

• In January 2015, PSO issued $87.5 million of 3.17% and $87.5 million of 4.09% Senior Unsecured Notes due in 2025 and 2045, respectively.

• In January and February 2015, I&M retired $23 million of Notes Payable related to DCC Fuel.

• In February 2015, APCo retired $11 million of Securitization Bonds.

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BUDGETED CONSTRUCTION EXPENDITURES

We forecast approximately $4.5 billion of construction expenditures including debt AFUDC for 2015.  For 2016 and 2017, we forecast construction expenditures of $3.8 billion and $3.9 billion, respectively.  The expenditures are generally for transmission, generation, distribution and required environmental investment to comply with Federal EPA rules.  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.  We expect to fund these construction expenditures through cash flows from operations and financing activities.  Generally, the subsidiaries use cash or short-term borrowings under the money pool to fund these expenditures until long-term funding is arranged.  The 2015 estimated construction expenditures include generation, transmission and distribution related investments, as well as expenditures for compliance with environmental regulations as follows:

	2015 Budgeted Construction Expenditures
Segment	Environmental		Generation		Transmission		Distribution		Other		Total
	(in millions)
Vertically Integrated Utilities	$	594	$	496	$	472	$	654	$	110	$	2,326
Transmission and Distribution Utilities	2		2		359		545		64		972
AEP Transmission Holdco	—		—		988		—		7		995
Generation & Marketing	65		70		—		—		10		145
AEP River Operations	—		9		—		—		—		9
Corporate and Other	—		—		—		—		12		12
Total	$	661	$	577	$	1,819	$	1,199	$	203	$	4,459

OFF-BALANCE SHEET ARRANGEMENTS

Our current guidelines restrict the use of off-balance sheet financing entities or structures to traditional operating lease arrangements that we enter in the normal course of business.  The following identifies significant off-balance sheet arrangements.

Rockport Plant, Unit 2

AEGCo and I&M entered into a sale-and-leaseback transaction in 1989 with Wilmington Trust Company (Owner Trustee), an unrelated unconsolidated trustee for Rockport Plant, Unit 2 (the Plant).  The Owner Trustee was capitalized with equity from six owner participants with no relationship to AEP or any of its subsidiaries and debt from a syndicate of banks and certain institutional investors.  The future minimum lease payments for AEGCo and I&M are $592 million each as of December 31, 2014.

The gain from the sale was deferred and is being amortized over the term of the lease, which expires in 2022.  The Owner Trustee owns the Plant and leases it to AEGCo and I&M.  Our subsidiaries account for the lease as an operating lease with the future payment obligations included in Note 13.  The lease term is for 33 years with potential renewal options.  At the end of the lease term, AEGCo and I&M have the option to renew the lease or the Owner Trustee can sell the Plant.  We, as well as our subsidiaries, have no ownership interest in the Owner Trustee and do not guarantee its debt.

Railcars

In June 2003, we entered into an agreement with BTM Capital Corporation, as lessor, to lease 875 coal-transporting aluminum railcars.  The initial lease term was five years with three consecutive five-year renewal periods for a maximum lease term of twenty years.  We intend to maintain the lease for the full lease term of twenty years via the renewal options.  The lease is accounted for as an operating lease.  The future minimum lease obligation is $24 million for the remaining railcars as of December 31, 2014.  Under a return-and-sale option, the lessor is guaranteed that the sale proceeds will equal at least a specified lessee obligation amount which declines with each five-year renewal.  As of

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December 31, 2014, the maximum potential loss was approximately $19 million assuming the fair value of the equipment is zero at the end of the current five-year lease term.  However, we believe that the fair value would produce a sufficient sales price to avoid any loss.  We have other railcar lease arrangements that do not utilize this type of financing structure.

CONTRACTUAL OBLIGATION INFORMATION

Our contractual cash obligations include amounts reported on the balance sheets and other obligations disclosed in our footnotes.  The following table summarizes our contractual cash obligations as of December 31, 2014:

Payments Due by Period
Contractual Cash Obligations	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in millions)
Short-term Debt (a)	$	1,346	$	—	$	—	$	—	$	1,346
Interest on Fixed Rate Portion of Long-term Debt (b)	819		1,530		1,285		7,079		10,713
Fixed Rate Portion of Long-term Debt (c)	1,180		2,629		3,057		9,938		16,804
Variable Rate Portion of Long-term Debt (d)	1,323		548		33		—		1,904
Capital Lease Obligations (e)	134		218		109		239		700
Noncancelable Operating Leases (e)	293		520		462		693		1,968
Fuel Purchase Contracts (f)	2,154		2,815		1,931		2,501		9,401
Energy and Capacity Purchase Contracts	363		405		426		2,087		3,281
Construction Contracts for Capital Assets (g)	1,332		1,604		814		1,571		5,321
Total	$	8,944	$	10,269	$	8,117	$	24,108	$	51,438

(a) Represents principal only excluding interest.

(b) Interest payments are estimated based on final maturity dates of debt securities outstanding as of December 31, 2014 and do not reflect anticipated future refinancing, early redemptions or debt issuances.

(c) See “Long-term Debt” section of Note 14.  Represents principal only, excluding interest.

(d) See “Long-term Debt” section of Note 14.  Represents principal only, excluding interest.  Variable rate debt had interest rates that ranged between 0.04% and 1.89% as of December 31, 2014.

(e) See Note 13.

(f) Represents contractual obligations to purchase coal, natural gas, uranium and other consumables as fuel for electric generation along with related transportation of the fuel.

(g) Represents only capital assets for which we have signed contracts.  Actual payments are dependent upon and may vary significantly based upon the decision to build, regulatory approval schedules, timing and escalation of project costs.

Our $124 million liability related to uncertainty in Income Taxes is not included above because we cannot reasonably estimate the cash flows by period.

Our pension funding requirements are not included in the above table.  As of December 31, 2014, we expect to make contributions to our pension plans totaling $93 million in 2015.  Estimated contributions of $93 million in 2016 and $97 million in 2017 may vary significantly based on market returns, changes in actuarial assumptions and other factors.  Based upon the projected benefit obligation and fair value of assets available to pay pension benefits, our pension plans were 95.1% funded as of December 31, 2014.

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In addition to the amounts disclosed in the contractual cash obligations table above, we make additional commitments in the normal course of business.  These commitments include standby letters of credit, guarantees for the payment of obligation performance bonds and other commitments.  As of December 31, 2014, our commitments outstanding under these agreements are summarized in the table below:

Amount of Commitment Expiration Per Period
Other Commercial Commitments	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in millions)
Standby Letters of Credit (a)	$	63	$	—	$	—	$	—	$	63
Guarantees of the Performance of Outside Parties (b)	—		—		—		115		115
Guarantees of Our Performance (c)	991		12		—		59		1,062
Total Commercial Commitments	$	1,054	$	12	$	—	$	174	$	1,240

(a) We enter into standby letters of credit (LOCs) with third parties.  These LOCs cover items such as natural gas and electricity risk management contracts, construction contracts, insurance programs, security deposits and debt service reserves.  AEP, on behalf of our subsidiaries, and/or the subsidiaries issued all of these LOCs in the ordinary course of business.  There is no collateral held in relation to any guarantees in excess of our ownership percentages.  In the event any LOC is drawn, there is no recourse to third parties.  The maximum future payments of these LOCs are $63 million with maturities ranging from February 2015 to March 2016.  See “Letters of Credit” section of Note 6.

(b) See “Guarantees of Third-Party Obligations” section of Note 6.

(c) We issued performance guarantees and indemnifications for energy trading and various sale agreements.

SIGNIFICANT TAX LEGISLATION

The Small Business Jobs Act extended the time for claiming bonus depreciation and increased the deduction to 100% for 2011 and decreased the deduction to 50% for 2012.  The American Taxpayer Relief Act of 2012 provided for the extension of several business and energy industry tax deductions and credits, including the one-year extension of the 50% bonus depreciation to 2013.  The Tax Increase Prevention Act of 2014 also included a one-year extension of the 50% bonus depreciation and provided for the extension of research and development, employment and several energy tax credits for 2014. These enacted provisions had no material impact on net income or financial condition but did have a favorable impact on cash flows in 2013 and 2014 and are expected to have a favorable impact on cash flows in 2015.

CYBER SECURITY

Cyber security presents a growing risk for electric utility systems because a cyber-attack could affect critical energy infrastructure.  Breaches to the cyber security of the grid or to our system are potentially disruptive to people, property and commerce and create risk for our business, investors and customers.  In February 2013, President Obama signed an executive order that addresses how government agencies will operate and support the functions in cyber security as well as redefines how the government interfaces with critical infrastructure, such as the electric grid.  We already operate under regulatory cyber security standards to protect critical infrastructure.  The cyber security framework that is being developed through this executive order will be reviewed by FERC and the U.S. Department of Energy (DOE).  In 2014, the DOE developed an Energy Sector Cyber Security Framework Implementation Guide for utilities to use in adopting and implementing the National Institute of Standards and Technology framework. We are actively engaged in the framework adoption process.

The electric utility industry is one of the few critical infrastructure functions with mandatory cyber security requirements under the authority of FERC. The Energy Policy Act of 2005 gave FERC the authority to oversee reliability of the bulk power system, including the authority to approve mandatory cyber security reliability standards. North American Electric Reliability Corporation (NERC), which FERC certified as the nation's Electric Reliability Organization,

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developed critical infrastructure protection cyber security reliability standards. In 2013, as part of our industry’s continuing program to advance threat sharing and coordination, we participated in the NERC GridEx II exercise.  This effort, led by NERC, tested and developed the coordination and interaction between utilities and various government agencies relative to potential cyber and physical threats against the nation’s electric grid.

We protect our critical cyber assets, such as our data centers, power plants, transmission operations centers and business network, using multiple layers of cyber security and authentication.  We constantly scan the system for risks or threats. Cyber hackers have been able to breach a number of very secure facilities, from federal agencies, banks and retailers to social media sites.  As these events become known and develop, we continually assess our own cyber security tools and processes to determine where we might need to strengthen our defenses. We continually review our business continuity plan to develop an effective recovery effort that decreases our response times, limits financial impacts and maintains customer confidence following any business interruption. Management works closely with a broad range of departments, including Legal, Regulatory, Corporate Communications and Information Technology Security, to ensure the corporate response to consequences of any breach or potential breach is appropriate both for internal and external audiences based on the specific circumstances surrounding the event.

We continue to take steps to enhance our capabilities for identifying risks or threats and have shared that knowledge with our utility peers, industry and federal agencies.  We operate our own Cyber Security Operations Center.  Funding for this included a grant from the American Recovery and Reinvestment Act – U.S. Department of Energy Smart Grid Demonstration Program.  This facility was initially designed as a pilot cyber threat and information-sharing center specifically for the electric sector and is fully operational.

We have partnered with a major defense contractor who has significant cyber security experience and technical capabilities developed through their work with the U.S. Department of Defense.  We work with a consortium of other utilities across the country, learning how best to share information about potential threats and collaborating with each other.  We continue to work with a nonaffiliated entity to conduct several seminars each year about recognizing and investigating cyber vulnerabilities.  Through these types of efforts, we are working to protect ourselves while helping our industry advance its cyber security capabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures, including amounts related to legal matters and contingencies.  We consider an accounting estimate to be critical if:

• It requires assumptions to be made that were uncertain at the time the estimate was made; and

• Changes in the estimate or different estimates that could have been selected could have a material effect on net income or financial condition.

We discuss the development and selection of critical accounting estimates as presented below with the Audit Committee of AEP’s Board of Directors and the Audit Committee reviews the disclosures relating to them.

We believe that the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate.  However, actual results can differ significantly from those estimates.

The sections that follow present information about our critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate.

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Regulatory Accounting

Nature of Estimates Required

Our financial statements reflect the actions of regulators that can result in the recognition of revenues and expenses in different time periods than enterprises that are not rate-regulated.

We recognize regulatory assets (deferred expenses to be recovered in the future) and regulatory liabilities (deferred future revenue reductions or refunds) for the economic effects of regulation.  Specifically, we match the timing of expense and income recognition with regulated revenues.  We also record liabilities for refunds, or probable refunds, to customers that have not been made.

Assumptions and Approach Used

When incurred costs are probable of recovery through regulated rates, we record them as regulatory assets on the balance sheet.  We review the probability of recovery at each balance sheet date and whenever new events occur.  Similarly, we record regulatory liabilities when a determination is made that a refund is probable or when ordered by a commission.  Examples of new events that affect probability include changes in the regulatory environment, issuance of a regulatory commission order or passage of new legislation.  The assumptions and judgments used by regulatory authorities continue to have an impact on the recovery of costs as well as the return of revenues, rate of return earned on invested capital and timing and amount of assets to be recovered through regulated rates.  If recovery of a regulatory asset is no longer probable, we write off that regulatory asset as a charge against earnings.  A write-off of regulatory assets or establishment of a regulatory liability may also reduce future cash flows since there will be no recovery through regulated rates.

Effect if Different Assumptions Used

A change in the above assumptions may result in a material impact on our net income.  Refer to Note 5 for further detail related to regulatory assets and regulatory liabilities.

Revenue Recognition – Unbilled Revenues

Nature of Estimates Required

We record revenues when energy is delivered to the customer.  The determination of sales to individual customers is based on the reading of their meters, which we perform on a systematic basis throughout the month.  At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue accrual is recorded.  This estimate is reversed in the following month and actual revenue is recorded based on meter readings.  In accordance with the applicable state commission regulatory treatment in Arkansas, Louisiana, Oklahoma and Texas, PSO and SWEPCo do not record the fuel portion of unbilled revenue.

The changes in unbilled electric utility revenues for our Vertically Integrated Utilities segment were $(29) million, $(9) million and $13 million for the years ended December 31, 2014, 2013 and 2012, respectively.  The changes in unbilled electric revenues are primarily due to changes in weather and rate increases.  Accrued unbilled revenues for the Vertically Integrated Utilities segment were $254 million and $283 million as of December 31, 2014 and 2013, respectively.

The changes in unbilled electric utility revenues for our Transmission and Distribution Utilities segment were $16 million, $(22) million and $(12) million for the years ended December 31, 2014, 2013 and 2012, respectively.  The changes in unbilled electric revenues are primarily due to changes in weather and rate increases.  Accrued unbilled revenues for the Transmission and Distribution Utilities segment were $181 million and $165 million as of December 31, 2014 and 2013, respectively.

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In March 2012, our Generation & Marketing segment acquired an independent retail electric supplier.  The change in unbilled electric utility revenues for our Generation & Marketing segment was $9 million, $10 million and $34 million for the years ended December 31, 2014, 2013 and 2012, respectively.  Accrued unbilled revenues for the Generation & Marketing segment were $50 million and $41 million as of December 31, 2014 and 2013, respectively.

Assumptions and Approach Used

For each operating company, we compute the monthly estimate for unbilled revenues as net generation (generation plus purchases less sales) less the current month’s billed KWh plus the prior month’s unbilled KWh.  However, due to meter reading issues, meter drift and other anomalies, a separate monthly calculation limits the unbilled estimate within a range of values.  This limiter calculation is derived from an allocation of billed KWh to the current month and previous month, on a cycle-by-cycle basis, and by dividing the current month aggregated result by the billed KWh.  The limits are statistically set at one standard deviation from this percentage to determine the upper and lower limits of the range.  The unbilled estimate is compared to the limiter calculation and adjusted for variances exceeding the upper and lower limits.

For certain contracts, we calculate unbilled revenues by contract using the most recent historic daily activity adjusted for significant known changes in usage.

Effect if Different Assumptions Used

Significant fluctuations in energy demand for the unbilled period, weather, line losses or changes in the composition of customer classes could impact the accuracy of the unbilled revenue estimate.  A 1% change in the limiter calculation when it is outside the range would increase or decrease unbilled revenues by 1% of the accrued unbilled revenues.

Accounting for Derivative Instruments

Nature of Estimates Required

We consider fair value techniques, valuation adjustments related to credit and liquidity and judgments related to the probability of forecasted transactions occurring within the specified time period to be critical accounting estimates.  These estimates are considered significant because they are highly susceptible to change from period to period and are dependent on many subjective factors.

Assumptions and Approach Used

We measure the fair values of derivative instruments and hedge instruments accounted for using MTM accounting based primarily on exchange prices and broker quotes.  If a quoted market price is not available, we estimate the fair value based on the best market information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and other assumptions.  Fair value estimates, based upon the best market information available, involve uncertainties and matters of significant judgment.  These uncertainties include projections of macroeconomic trends and future commodity prices, including supply and demand levels and future price volatility.

We reduce fair values by estimated valuation adjustments for items such as discounting, liquidity and credit quality.  We calculate liquidity adjustments by utilizing bid/ask spreads to estimate the potential fair value impact of liquidating open positions over a reasonable period of time.  We calculate credit adjustments on our risk management contracts using estimated default probabilities and recovery rates relative to our counterparties or counterparties with similar credit profiles and contractual netting agreements.

With respect to hedge accounting, we assess hedge effectiveness and evaluate a forecasted transaction’s probability of occurrence within the specified time period as provided in the original hedge documentation.

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Effect if Different Assumptions Used

There is inherent risk in valuation modeling given the complexity and volatility of energy markets.  Therefore, it is possible that results in future periods may be materially different as contracts settle.

The probability that hedged forecasted transactions will not occur by the end of the specified time period could change operating results by requiring amounts currently classified in Accumulated Other Comprehensive Income (Loss) to be classified into operating income.

For additional information regarding derivatives, hedging and fair value measurements, see Notes 10 and 11.  See “Fair Value Measurements of Assets and Liabilities” section of Note 1 for fair value calculation policy.

Long-Lived Assets

Nature of Estimates Required

In accordance with the requirements of “Property, Plant and Equipment” accounting guidance, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any such assets may not be recoverable including planned abandonments and a probable disallowance for rate-making on a plant under construction or the assets meet the held-for-sale criteria.  We utilize a group composite method of depreciation to estimate the useful lives of long-lived assets.  The evaluations of long-lived, held-and-used assets may result from abandonments, significant decreases in the market price of an asset, a significant adverse change in the extent or manner in which an asset is being used or in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of an asset, as well as other economic or operations analyses.  If the carrying amount is not recoverable, we record an impairment to the extent that the fair value of the asset is less than its book value.  Performing an impairment evaluation involves a significant degree of estimation and judgment in areas such as identifying circumstances that indicate an impairment may exist, identifying and grouping affected assets and developing the undiscounted and discounted future cash flows (used to estimate fair value in the absence of market-based value, in some instances) associated with the asset.  For assets held for sale, an impairment is recognized if the expected net sales price is less than its book value.  For regulated assets, the earnings impact of an impairment charge could be offset by the establishment of a regulatory asset if rate recovery is probable.  For nonregulated assets, any impairment charge is recorded against earnings.

Assumptions and Approach Used

The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties other than in a forced or liquidation sale.  Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available.  In the absence of quoted prices for identical or similar assets in active markets, we estimate fair value using various internal and external valuation methods including cash flow projections or other market indicators of fair value such as bids received, comparable sales or independent appraisals.  Cash flow estimates are based on relevant information available at the time the estimates are made.  Estimates of future cash flows are, by nature, highly uncertain and may vary significantly from actual results.  Also, when measuring fair value, management evaluates the characteristics of the asset or liability to determine if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.  Such characteristics include, for example, the condition and location of the asset or restrictions of the use of the asset.  We perform depreciation studies that include a review of any external factors that may affect the useful life to determine composite depreciation rates and related lives which are subject to periodic review by state regulatory commissions for cost-based regulated assets.  The fair value of the asset could be different using different estimates and assumptions in these valuation techniques.

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Effect if Different Assumptions Used

In connection with the evaluation of long-lived assets in accordance with the requirements of “Property, Plant and Equipment” accounting guidance, the fair value of an asset can vary if different estimates and assumptions would have been used in our applied valuation techniques.  The estimate for depreciation rates takes into account the history of interim capital replacements and the amount of salvage expected.  In cases of impairment, we made our best estimate of fair value using valuation methods based on the most current information at that time.  Fluctuations in realized sales proceeds versus the estimated fair value of the asset are generally due to a variety of factors including, but not limited to, differences in subsequent market conditions, the level of bidder interest, timing and terms of the transactions and our analysis of the benefits of the transaction.

Pension and Other Postretirement Benefits

We maintain a qualified, defined benefit pension plan (Qualified Plan), which covers substantially all nonunion and certain union employees, and unfunded, nonqualified supplemental plans (Nonqualified Plans) to provide benefits in excess of amounts permitted under the provisions of the tax law for participants in the Qualified Plan (collectively the Pension Plans).  Additionally, we entered into individual employment contracts with certain current and retired executives that provide additional retirement benefits as a part of the Nonqualified Plans.  We also sponsor other postretirement benefit plans to provide health and life insurance benefits for retired employees (Postretirement Plans).  The Pension Plans and Postretirement Plans are collectively referred to as the Plans.

For a discussion of investment strategy, investment limitations, target asset allocations and the classification of investments within the fair value hierarchy, see “Investments Held in Trust for Future Liabilities” and “Fair Value Measurements of Assets and Liabilities” sections of Note 1.  See Note 8 for information regarding costs and assumptions for employee retirement and postretirement benefits.

The following table shows the net periodic cost (credit) of the Plans:

	Years Ended December 31,
Net Periodic Benefit Cost (Credit)	2014			2013			2012
	(in millions)
Pension Plans	$	158		$	180		$	134
Postretirement Plans	(77		)	(17		)	89

The net periodic benefit cost is calculated based upon a number of actuarial assumptions, including expected long-term rates of return on the Plans’ assets.  In developing the expected long-term rate of return assumption for 2015, we evaluated input from actuaries and investment consultants, including their reviews of asset class return expectations as well as long-term inflation assumptions.  We also considered historical returns of the investment markets and changes in tax rates which affect a portion of the Postretirement Plans’ assets.  We anticipate that the investment managers we employ for the Plans will invest the assets to generate future returns averaging 6% for the Qualified Plan and 6.75% for the Postretirement Plans.

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The expected long-term rate of return on the Plans’ assets is based on our targeted asset allocation and our expected investment returns for each investment category.  Our assumptions are summarized in the following table:

	Pension Plans				Other Postretirement Benefit Plans
			Assumed/				Assumed/
	2015		Expected		2015		Expected
	Target		Long-Term		Target		Long-Term
	Asset		Rate of		Asset		Rate of
	Allocation		Return		Allocation		Return
Equity	30	%	8.50	%	65	%	8.50	%
Fixed Income	55	%	4.10	%	33	%	4.10	%
Other Investments	15	%	7.30	%	—	%	—	%
Cash and Cash Equivalents	—	%	—	%	2	%	2.80	%
Total	100	%			100	%

We regularly review the actual asset allocation and periodically rebalance the investments to our targeted allocation.  We believe that 6% and 6.75% are reasonable estimates of the long-term rate of return on the Plans’ assets.  The Pension Plans’ assets had an actual gain of 10.6% and 8.1% for the years ended December 31, 2014 and 2013, respectively.  The Postretirement Plans’ assets had an actual gain of 7.2% and 14.3% for the years ended December 31, 2014 and 2013, respectively.  We will continue to evaluate the actuarial assumptions, including the expected rate of return, at least annually, and will adjust the assumptions as necessary.

We base our determination of pension expense or income on a market-related valuation of assets, which reduces year-to-year volatility.  This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur.  Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets.  Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded.  As of December 31, 2014, we had cumulative gains of approximately $270 million that remain to be recognized in the calculation of the market-related value of assets.  These unrecognized net actuarial gains may result in decreases in the future pension costs depending on several factors, including whether such gains at each measurement date exceed the corridor in accordance with “Compensation – Retirement Benefits” accounting guidance.

The method used to determine the discount rate that we utilize for determining future obligations is a duration-based method in which a hypothetical portfolio of high quality corporate bonds is constructed with cash flows matching the benefit plan liability.  The composite yield on the hypothetical bond portfolio is used as the discount rate for the plan.  The discount rate as of December 31, 2014 under this method was 4% for the Qualified Plan, 3.9% for the Nonqualified Plans and 4% for the Postretirement Plans.  Due to the effect of the unrecognized actuarial gains and based on an expected rate of return on the Pension Plans’ assets of 6%, discount rates of 4% and 3.9% and various other assumptions including adoption of updated mortality tables that the Society of Actuaries issued in October 2014, we estimate that the pension costs for the Pension Plans will approximate $129 million, $96 million and $66 million in 2015, 2016 and 2017, respectively.  Based on an expected rate of return on the Postretirement Plans’ assets of 6.75%, a discount rate of 4% and various other assumptions including adoption of updated mortality tables that the Society of Actuaries issued in October 2014, we estimate credits will approximate $94 million, $98 million and $103 million in 2015, 2016 and 2017, respectively.  Future actual costs will depend on future investment performance, changes in future discount rates and various other factors related to the populations participating in the Plans.  The actuarial assumptions used may differ materially from actual results.  The effects of a 50 basis point change to selective actuarial assumptions are included in the “Effect if Different Assumptions Used” section below.

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The value of the Pension Plans’ assets increased to $5 billion as of December 31, 2014 from $4.7 billion as of December 31, 2013 primarily due to investment returns and company contributions in excess of benefit payments.  During 2014, the Qualified Plan paid $289 million and the Nonqualified Plans paid $7 million in benefits to plan participants.  The value of the Postretirement Plans’ assets remained unchanged at $1.7 billion as of December 31, 2014 and 2013 primarily due to investment returns and contributions by the company and the participants offsetting benefit payments.  The Postretirement Plans paid $134 million in benefits to plan participants during 2014.

Nature of Estimates Required

We sponsor pension and other retirement and postretirement benefit plans in various forms covering all employees who meet eligibility requirements.  We account for these benefits under “Compensation” and “Plan Accounting” accounting guidance.  The measurement of our pension and postretirement benefit obligations, costs and liabilities is dependent on a variety of assumptions.

Assumptions and Approach Used

The critical assumptions used in developing the required estimates include the following key factors:

• Discount rate

• Compensation increase rate

• Cash balance crediting rate

• Health care cost trend rate

• Expected return on plan assets

Other assumptions, such as retirement, mortality and turnover, are evaluated periodically and updated to reflect actual experience.

Effect if Different Assumptions Used

The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, longer or shorter life spans of participants or higher or lower lump sum versus annuity payout elections by plan participants.  These differences may result in a significant impact to the amount of pension and postretirement benefit expense recorded.  If a 50 basis point change were to occur for the following assumptions, the approximate effect on the financial statements would be as follows:

	Pension Plans						Other Postretirement Benefit Plans
	+0.5%			-0.5%			+0.5%			-0.5%
	(in millions)
Effect on December 31, 2014 Benefit Obligations
Discount Rate	$	(282	)	$	311		$	(78	)	$	86
Compensation Increase Rate	20			(19		)	NA			NA
Cash Balance Crediting Rate	70			(63		)	NA			NA
Health Care Cost Trend Rate	NA			NA			34			(30		)
Effect on 2014 Periodic Cost
Discount Rate	(17		)	19			(5		)	5
Compensation Increase Rate	5			(4		)	NA			NA
Cash Balance Crediting Rate	14			(13		)	NA			NA
Health Care Cost Trend Rate	NA			NA			5			(4		)
Expected Return on Plan Assets	(22		)	22			(8		)	8
NA   Not applicable.

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ACCOUNTING PRONOUNCEMENTS

Pronouncements Adopted in 2015

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

Pronouncements Effective in the Future

The FASB issued ASU 2014-09 "Revenue from Contracts with Customers" clarifying the method used to determine the timing and requirements for revenue recognition on the statements of income. Under the new standard, an entity must identify the performance obligations in a contract, the transaction price and allocate the price to specific performance obligations to recognize the revenue when the obligation is completed. The amendments in this update also require disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016. We are analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on revenue or net income. We plan to adopt ASU 2014-09 effective January 1, 2017.

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

Future Accounting Changes

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

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

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

Our Generation & Marketing segment conducts marketing, risk management and retail activities in ERCOT, PJM and MISO.  This segment is exposed to certain market risks as a marketer of wholesale and retail electricity.  These risks

52

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

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

The following table summarizes the reasons for changes in total MTM value as compared to December 31, 2013:

MTM Risk Management Contract Net Assets (Liabilities)
Year Ended December 31, 2014
	Vertically Integrated Utilities			Transmission and Distribution Utilities			Generation & Marketing			Total
	(in millions)
Total MTM Risk Management Contract Net Assets as of December 31, 2013	$	32		$	3		$	157		$	192
Gain from Contracts Realized/Settled During the Period and Entered in a Prior Period	(17		)	(3		)	(39		)	(59		)
Fair Value of New Contracts at Inception When Entered During the Period (a)	—			—			12			12
Changes in Fair Value Due to Market Fluctuations During the Period (b)	—			—			10			10
Changes in Fair Value Allocated to Regulated Jurisdictions (c)	21			46			—			67
Total MTM Risk Management Contract Net Assets as of December 31, 2014	$	36		$	46		$	140		222
Commodity Cash Flow Hedge Contracts										2
Interest Rate and Foreign Currency Cash Flow Hedge Contracts										(1		)
Fair Value Hedge Contracts										(6		)
Collateral Deposits										32
Total MTM Derivative Contract Net Assets as of December 31, 2014										$	249

(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.

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See Note 10 – Derivatives and Hedging and Note 11 – Fair Value Measurements for additional information related to our risk management contracts.  The following tables and discussion provide information on our credit risk and market volatility risk.

Credit Risk

We limit credit risk in our wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis.  We use Moody’s Investors Service, Standard & Poor’s and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

We have risk management contracts with numerous counterparties.  Since open risk management contracts are valued based on changes in market prices of the related commodities, our exposures change daily.  As of December 31, 2014, our credit exposure net of collateral to sub investment grade counterparties was approximately 8.4%, 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 December 31, 2014, the following table approximates our counterparty credit quality and exposure based on netting across commodities, instruments and legal entities where applicable:

Counterparty Credit Quality	Exposure Before Credit Collateral		Credit Collateral		Net Exposure		Number of Counterparties >10% of Net Exposure	Net Exposure of Counterparties >10%
	(in millions, except number of counterparties)
Investment Grade	$	628	$	3	$	625	2	$	249
Split Rating	21		—		21		1	21
Noninvestment Grade	2		2		—		—	—
No External Ratings:
Internal Investment Grade	83		—		83		3	41
Internal Noninvestment Grade	83		16		67		2	36
Total as of December 31, 2014	$	817	$	21	$	796	8	$	347
Total as of December 31, 2013	$	787	$	18	$	769	9	$	381

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

Value at Risk (VaR) Associated with Risk Management Contracts

We use a risk measurement model, which calculates VaR, to measure our commodity price risk in the risk management portfolio.  The VaR is based on the variance-covariance method using historical prices to estimate volatilities and correlations and assumes a 95% confidence level and a one-day holding period.  Based on this VaR analysis, as of December 31, 2014, a near term typical change in commodity prices is not expected to materially impact net income, cash flows or financial condition.

54

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

VaR Model

Trading Portfolio

Twelve Months Ended								Twelve Months Ended
December 31, 2014								December 31, 2013
End		High		Average		Low		End		High		Average		Low
(in millions)								(in millions)
$	—	$	3	$	1	$	—	$	—	$	1	$	—	$	—

VaR Model

Non-Trading Portfolio

Twelve Months Ended
December 31, 2014
End		High		Average		Low
(in millions)
$	2	$	3	$	1	$	—

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

As our VaR calculation captures recent price movements, we also perform regular stress testing of the trading portfolio to understand our exposure to extreme price movements.  We employ a historical-based method whereby the current trading portfolio is subjected to actual, observed price movements from the last several years in order to ascertain which historical price movements translated into the largest potential MTM loss.  We then research the underlying positions, price movements and market events that created the most significant exposure and report the findings to the Risk Executive Committee, Regulated Risk Committee, or Competitive Risk Committee as appropriate.

Interest Rate Risk

We utilize an Earnings at Risk (EaR) model to measure interest rate market risk exposure. EaR statistically quantifies the extent to which our interest expense could vary over the next twelve months and gives a probabilistic estimate of different levels of interest expense.  The resulting EaR is interpreted as the dollar amount by which actual interest expense for the next twelve months could exceed expected interest expense with a one-in-twenty chance of occurrence.  The primary drivers of EaR are from the existing floating rate debt (including short-term debt) as well as long-term debt issuances in the next twelve months.  As calculated on debt outstanding as of December 31, 2014 and 2013, the estimated EaR on our debt portfolio for the following twelve months was $33 million and $32 million, respectively.

55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

American Electric Power Company, Inc.:

We have audited the accompanying consolidated balance sheets of American Electric Power Company, Inc. and subsidiary companies (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Electric Power Company, Inc. and subsidiary companies as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Columbus, Ohio

February 20, 2015

56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

American Electric Power Company, Inc.:

We have audited the internal control over financial reporting of American Electric Power Company, Inc. and subsidiary companies (the "Company") as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2014 of the Company and our report dated February 20, 2015 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Columbus, Ohio

February 20, 2015

57

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of American Electric Power Company, Inc. and subsidiary companies (AEP) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  AEP’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of AEP’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control – Integrated Framework.  Based on management’s assessment, AEP’s internal control over financial reporting was effective as of December 31, 2014.

AEP’s independent registered public accounting firm has issued an attestation report on AEP’s internal control over financial reporting.  The Report of Independent Registered Public Accounting Firm appears on the previous page.

58

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2014, 2013 and 2012

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

	Years Ended December 31,
	2014			2013			2012
REVENUES
Vertically Integrated Utilities	$	9,397		$	9,347		$	8,785
Transmission and Distribution Utilities	4,553			4,279			4,659
Generation & Marketing	2,384			1,208			882
Other Revenues	686			523			619
TOTAL REVENUES	17,020			15,357			14,945
EXPENSES
Fuel and Other Consumables Used for Electric Generation	4,272			4,068			4,111
Purchased Electricity for Resale	2,086			1,491			1,169
Other Operation	3,225			2,904			2,962
Maintenance	1,361			1,179			1,115
Asset Impairments and Other Related Charges	—			226			300
Depreciation and Amortization	1,929			1,743			1,782
Taxes Other Than Income Taxes	915			891			850
TOTAL EXPENSES	13,788			12,502			12,289
OPERATING INCOME	3,232			2,855			2,656
Other Income (Expense):
Interest and Investment Income	7			58			8
Carrying Costs Income	33			30			53
Allowance for Equity Funds Used During Construction	103			73			93
Interest Expense	(885		)	(906		)	(988		)
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY EARNINGS	2,490			2,110			1,822
Income Tax Expense	942			684			604
Equity Earnings of Unconsolidated Subsidiaries	90			58			44
NET INCOME	1,638			1,484			1,262
Net Income Attributable to Noncontrolling Interests	4			4			3
EARNINGS ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	1,634		$	1,480		$	1,259
WEIGHTED AVERAGE NUMBER OF BASIC AEP COMMON SHARES OUTSTANDING	488,592,997			486,619,555			484,682,469
TOTAL BASIC EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	3.34		$	3.04		$	2.60
WEIGHTED AVERAGE NUMBER OF DILUTED AEP COMMON SHARES OUTSTANDING	488,899,840			487,040,956			485,084,694
TOTAL DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	3.34		$	3.04		$	2.60

See Notes to Consolidated Financial Statements beginning on page 65.

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AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2014, 2013 and 2012

(in millions)

	Years Ended December 31,
	2014		2013		2012
Net Income	$	1,638	$	1,484	$	1,262
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Cash Flow Hedges, Net of Tax of $3, $8 and $8 in 2014, 2013 and 2012, Respectively	5		15		(15		)
Securities Available for Sale, Net of Tax of $0, $1 and $1 in 2014, 2013 and 2012, Respectively	1		3		2
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $3, $12 and $16 in 2014, 2013 and 2012, Respectively	5		22		31
Pension and OPEB Funded Status, Net of Tax of $1, $95 and $62 in 2014, 2013 and 2012, Respectively	1		177		115
TOTAL OTHER COMPREHENSIVE INCOME	12		217		133
TOTAL COMPREHENSIVE INCOME	1,650		1,701		1,395
Total Comprehensive Income Attributable to Noncontrolling Interests	4		4		3
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	1,646	$	1,697	$	1,392

See Notes to Consolidated Financial Statements beginning on page 65.

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AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Years Ended December 31, 2014, 2013 and 2012

(in millions)

	AEP Common Shareholders
	Common Stock
	Shares	Amount		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total
TOTAL EQUITY – DECEMBER 31, 2011	504	$	3,274	$	5,970	$	5,890		$	(470	)	$	1		$	14,665
Issuance of Common Stock	2	15		68											83
Common Stock Dividends ($1.88/share)						(913		)				(3		)	(916		)
Other Changes in Equity				11								(1		)	10
Net Income						1,259						3			1,262
Other Comprehensive Income									133						133
TOTAL EQUITY – DECEMBER 31, 2012	506	3,289		6,049		6,236			(337		)	—			15,237
Issuance of Common Stock	2	14		70											84
Common Stock Dividends ($1.95/share)						(950		)				(4		)	(954		)
Other Changes in Equity				12								1			13
Net Income						1,480						4			1,484
Other Comprehensive Income									217						217
Pension and OPEB Adjustment Related to Mitchell Plant									5						5
TOTAL EQUITY – DECEMBER 31, 2013	508	3,303		6,131		6,766			(115		)	1			16,086
Issuance of Common Stock	2	10		63											73
Common Stock Dividends ($2.03/share)						(994		)				(4		)	(998		)
Other Changes in Equity				10								3			13
Net Income						1,634						4			1,638
Other Comprehensive Income									12						12
TOTAL EQUITY – DECEMBER 31, 2014	510	$	3,313	$	6,204	$	7,406		$	(103	)	$	4		$	16,824

See Notes to Consolidated Financial Statements beginning on page 65.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

ASSETS

December 31, 2014 and 2013

(in millions)

	December 31,
	2014			2013
CURRENT ASSETS
Cash and Cash Equivalents	$	163		$	118
Other Temporary Investments     (December 31, 2014 and 2013 Amounts Include $371 and $335, Respectively, Related to Transition Funding, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and EIS)	386			353
Accounts Receivable:
Customers	727			746
Accrued Unbilled Revenues	146			157
Pledged Accounts Receivable – AEP Credit	987			945
Miscellaneous	87			72
Allowance for Uncollectible Accounts	(21		)	(60		)
Total Accounts Receivable	1,926			1,860
Fuel	587			701
Materials and Supplies	738			722
Risk Management Assets	178			160
Regulatory Asset for Under-Recovered Fuel Costs	127			80
Margin Deposits	95			70
Prepayments and Other Current Assets	278			246
TOTAL CURRENT ASSETS	4,478			4,310
PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	25,727			25,074
Transmission	12,433			10,893
Distribution	17,157			16,377
Other Property, Plant and Equipment (Including Plant to be Retired, Coal Mining and Nuclear Fuel)	5,770			5,470
Construction Work in Progress	3,218			2,471
Total Property, Plant and Equipment	64,305			60,285
Accumulated Depreciation and Amortization	20,188			19,288
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	44,117			40,997
OTHER NONCURRENT ASSETS
Regulatory Assets	4,264			4,376
Securitized Assets	2,072			2,373
Spent Nuclear Fuel and Decommissioning Trusts	2,096			1,932
Goodwill	91			91
Long-term Risk Management Assets	294			297
Deferred Charges and Other Noncurrent Assets	2,221			2,038
TOTAL OTHER NONCURRENT ASSETS	11,038			11,107
TOTAL ASSETS	$	59,633		$	56,414

See Notes to Consolidated Financial Statements beginning on page 65.

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AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND EQUITY

December 31, 2014 and 2013

(dollars in millions)

			December 31,
			2014			2013
CURRENT LIABILITIES
Accounts Payable			$	1,287		$	1,266
Short-term Debt:
Securitized Debt for Receivables – AEP Credit			744			700
Other Short-term Debt			602			57
Total Short-term Debt			1,346			757
Long-term Debt Due Within One Year (December 31, 2014 and 2013 Amounts Include $431 and $416, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding and Sabine)			2,503			1,549
Risk Management Liabilities			92			90
Customer Deposits			324			299
Accrued Taxes			871			822
Accrued Interest			239			245
Regulatory Liability for Over-Recovered Fuel Costs			55			119
Other Current Liabilities			1,250			965
TOTAL CURRENT LIABILITIES			7,967			6,112
NONCURRENT LIABILITIES
Long-term Debt (December 31, 2014 and 2013 Amounts Include $2,260 and $2,532, Respectively, Related to Transition Funding, DCC Fuel, Ohio Phase-in-Recovery Funding, Appalachian Consumer Rate Relief Funding, Transource Energy and Sabine)			16,181			16,828
Long-term Risk Management Liabilities			131			177
Deferred Income Taxes			10,986			10,300
Regulatory Liabilities and Deferred Investment Tax Credits			3,892			3,694
Asset Retirement Obligations			1,951			1,835
Employee Benefits and Pension Obligations			630			415
Deferred Credits and Other Noncurrent Liabilities			1,071			967
TOTAL NONCURRENT LIABILITIES			34,842			34,216
TOTAL LIABILITIES			42,809			40,328
Rate Matters (Note 4)
Commitments and Contingencies (Note 6)
EQUITY
Common Stock – Par Value – $6.50 Per Share:
	2014	2013
Shares Authorized	600,000,000	600,000,000
Shares Issued	509,739,159	508,113,964
(20,336,592 Shares were Held in Treasury as of December 31, 2014 and 2013)			3,313			3,303
Paid-in Capital			6,204			6,131
Retained Earnings			7,406			6,766
Accumulated Other Comprehensive Income (Loss)			(103		)	(115		)
TOTAL AEP COMMON SHAREHOLDERS’ EQUITY			16,820			16,085
Noncontrolling Interests			4			1
TOTAL EQUITY			16,824			16,086
TOTAL LIABILITIES AND EQUITY			$	59,633		$	56,414

See Notes to Consolidated Financial Statements beginning on page 65.

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AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014, 2013 and 2012

(in millions)

	Years Ended December 31,
	2014			2013			2012
OPERATING ACTIVITIES
Net Income	$	1,638		$	1,484		$	1,262
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	1,929			1,743			1,782
Deferred Income Taxes	878			709			636
Asset Impairments and Other Related Charges	—			226			300
Carrying Costs Income	(33		)	(30		)	(53		)
Allowance for Equity Funds Used During Construction	(103		)	(73		)	(93		)
Mark-to-Market of Risk Management Contracts	(53		)	38			57
Amortization of Nuclear Fuel	144			131			136
Pension and Postemployment Benefit Reserves	80			172			120
Pension Contributions to Qualified Plan Trust	(71		)	—			(200		)
Property Taxes	(42		)	(35		)	(19		)
Fuel Over/Under-Recovery, Net	(36		)	62			157
Deferral of Ohio Capacity Costs, Net	(114		)	(214		)	(65		)
Change in Other Noncurrent Assets	26			(184		)	(171		)
Change in Other Noncurrent Liabilities	242			(169		)	7
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	(72		)	5			(16		)
Fuel, Materials and Supplies	102			122			(224		)
Accounts Payable	(80		)	95			(60		)
Accrued Taxes, Net	4			85			174
Other Current Assets	(36		)	5			(3		)
Other Current Liabilities	210			(66		)	77
Net Cash Flows from Operating Activities	4,613			4,106			3,804
INVESTING ACTIVITIES
Construction Expenditures	(4,134		)	(3,624		)	(3,025		)
Change in Other Temporary Investments, Net	(31		)	(11		)	(27		)
Purchases of Investment Securities	(1,088		)	(927		)	(1,047		)
Sales of Investment Securities	1,032			858			988
Acquisitions of Nuclear Fuel	(116		)	(154		)	(107		)
Acquisitions of Assets/Businesses	(65		)	(32		)	(94		)
Insurance Proceeds Related to Cook Plant Fire	—			72			—
Proceeds from Sales of Assets	6			21			18
Other Investing Activities	(10		)	(21		)	(97		)
Net Cash Flows Used for Investing Activities	(4,406		)	(3,818		)	(3,391		)
FINANCING ACTIVITIES
Issuance of Common Stock, Net	73			84			83
Issuance of Long-term Debt	2,067			3,207			2,856
Commercial Paper and Credit Facility Borrowings	—			17			25
Change in Short-term Debt, Net	589			(221		)	(654		)
Retirement of Long-term Debt	(1,780		)	(2,598		)	(1,643		)
Commercial Paper and Credit Facility Repayments	—			(20		)	(40		)
Proceeds from Nuclear Fuel Sale/Leaseback	—			110			—
Principal Payments for Capital Lease Obligations	(120		)	(82		)	(71		)
Dividends Paid on Common Stock	(998		)	(954		)	(916		)
Other Financing Activities	7			8			5
Net Cash Flows Used for Financing Activities	(162		)	(449		)	(355		)
Net Increase (Decrease) in Cash and Cash Equivalents	45			(161		)	58
Cash and Cash Equivalents at Beginning of Period	118			279			221
Cash and Cash Equivalents at End of Period	$	163		$	118		$	279

See Notes to Consolidated Financial Statements beginning on page 65.

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AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

INDEX OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Page Number
Organization and Summary of Significant Accounting Policies	66
New Accounting Pronouncements	82
Comprehensive Income	83
Rate Matters	86
Effects of Regulation	97
Commitments, Guarantees and Contingencies	100
Acquisition and Impairments	106
Benefit Plans	108
Business Segments	119
Derivatives and Hedging	124
Fair Value Measurements	131
Income Taxes	138
Leases	143
Financing Activities	146
Stock-based Compensation	151
Variable Interest Entities	156
Property, Plant and Equipment	161
Cost Reduction Programs	164
Unaudited Quarterly Financial Information	165
Goodwill and Other Intangible Assets	166

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AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Our principal business is the generation, transmission and distribution of electric power.  The subsidiaries that conduct most of these activities are regulated by the FERC under the Federal Power Act and the Energy Policy Act of 2005 and maintain accounts in accordance with the FERC and other regulatory guidelines.  Most of these companies are subject to further regulation with regard to rates and other matters by state regulatory commissions except Energy Supply subsidiaries.

We provide competitive electric and gas supply for residential, commercial and industrial customers in Ohio, Illinois and other deregulated electricity markets and also provide energy management solutions throughout the United States, including energy efficiency services through our independent retail electric supplier.

We also engage in wholesale electricity, natural gas and other commodity marketing and risk management activities in the United States and provide various energy-related services.  In addition, our operations include nonregulated wind farms and barging operations.

Corporate Separation

Background

On December 31, 2013, as approved by the FERC and the PUCO, OPCo transferred its generation assets and related generation liabilities at net book value to AGR.  In accordance with Ohio law, OPCo remains responsible to provide power and capacity to OPCo customers who have not switched electric providers.  Effective January 1, 2014, OPCo began purchasing power from both affiliated and nonaffiliated entities, subject to PUCO approval, to meet the energy and capacity needs of customers. On December 31, 2013, subsequent to the transfer of OPCo’s generation assets and associated liabilities to AGR, AGR transferred at net book value its ownership (867 MW) in Amos Plant, Unit 3 to APCo and one-half of its interest (780 MW) in the Mitchell Plant to KPCo.  

Other Impacts of Corporate Separation

The Interconnection Agreement was terminated effective January 1, 2014.  The AEP System Interim Allowance Agreement which provided for, among other things, the transfer of SO₂ emission allowances associated with transactions under the Interconnection Agreement was also terminated.

Effective January 1, 2014, the FERC approved:

• A PCA among APCo, I&M and KPCo with AEPSC as the agent to coordinate the participants’ respective power supply resources.  Under the PCA, APCo, I&M and KPCo are individually responsible for planning their respective capacity obligations and there are no capacity equalization charges/credits under the PCA on deficit/surplus companies.   Further, the PCA allows, but does not obligate, APCo, I&M and KPCo to participate collectively under a common fixed resource requirement capacity plan in PJM and to participate in specified collective off-system sales and purchase activities.

• A Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as agent.  The Bridge Agreement is an interim arrangement to: (a) address the treatment of purchases and sales made by AEPSC on behalf of member companies that extend beyond termination of the Interconnection Agreement and (b) address how member companies will fulfill their existing obligations under the PJM Reliability Assurance Agreement through the 2014/2015 PJM planning year.  Under the Bridge Agreement, AGR is committed to use its capacity to help meet the PJM capacity obligations of member companies through May 31, 2015.

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• A Power Supply Agreement (PSA) between AGR and OPCo for AGR to supply capacity for OPCo’s switched (at $188.88/MW day) and non-switched retail load for the period January 1, 2014 through May 31, 2015 and to supply the energy needs of OPCo’s non-switched retail load that was not acquired through auctions in 2014.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Rates and Service Regulation

Our public utility subsidiaries’ rates are regulated by the FERC and state regulatory commissions in our eleven state operating territories.  The FERC also regulates our affiliated transactions, including AEPSC intercompany service billings which are generally at cost, under the 2005 Public Utility Holding Company Act and the Federal Power Act.  The FERC also has jurisdiction over the issuances and acquisitions of securities of our public utility subsidiaries, the acquisition or sale of certain utility assets and mergers with another electric utility or holding company.  For non-power goods and services, the FERC requires a nonregulated affiliate to bill an affiliated public utility company at no more than market while a public utility must bill the higher of cost or market to a nonregulated affiliate.  The state regulatory commissions also regulate certain intercompany transactions under various orders and affiliate statutes.  Both the FERC and state regulatory commissions are permitted to review and audit the relevant books and records of companies within a public utility holding company system.

The FERC regulates wholesale power markets and wholesale power transactions.  Our wholesale power transactions are generally market-based.  Wholesale power transactions are cost-based regulated when we negotiate and file a cost-based contract with the FERC or the FERC determines that we have “market power” in the region where the transaction occurs.  We have entered into wholesale power supply contracts with various municipalities and cooperatives that are FERC-regulated, cost-based contracts.  These contracts are generally formula rate mechanisms, which are trued up to actual costs annually.  

The state regulatory commissions regulate all of the distribution operations and rates of our retail public utilities on a cost basis.  The state regulatory commissions also regulate the retail generation/power supply operations and rates except in Ohio and the ERCOT region of Texas.  The ESP rates in Ohio continue the process of transitioning generation/power supply rates over time to market rates.  In the ERCOT region of Texas, the generation/supply business is under customer choice and market pricing and is conducted by Texas Retail Electric Providers (REPs).  Through our nonregulated subsidiaries, we enter into short and long-term wholesale transactions to buy or sell capacity, energy and ancillary services in the ERCOT market.  In addition, these nonregulated subsidiaries control certain wind and coal-fired generation assets, the power from which is marketed and sold in ERCOT.  We have no active REPs in ERCOT.

The FERC also regulates our wholesale transmission operations and rates.  The FERC claims jurisdiction over retail transmission rates when retail rates are unbundled in connection with restructuring.  OPCo’s retail transmission rates in Ohio, APCo’s retail transmission rates in Virginia, I&M’s retail transmission rates in Michigan and TCC’s and TNC’s retail transmission rates in Texas are unbundled.  OPCo’s retail transmission rates in Ohio, APCo’s retail transmission rates in Virginia and I&M’s retail transmission rates in Michigan are based on formula rates included in the PJM OATT that are cost-based.  Although TCC’s and TNC’s retail transmission rates in Texas are unbundled, retail transmission rates are regulated, on a cost basis, by the PUCT.  Bundled retail transmission rates are regulated, on a cost basis, by the state commissions.  Transmission rates for our seven wholly-owned transmission subsidiaries within our AEP Transmission Holdco segment are based on formula rates included in the applicable RTO’s OATT that are cost-based.

In addition, the FERC regulates the SIA, the Operating Agreement, the Transmission Agreement and the Transmission Coordination Agreement, all of which are still active and allocate shared system costs and revenues among the utility subsidiaries that are parties to each agreement.  In accordance with our October 2012 filing with the FERC, the Interconnection Agreement was terminated effective January 1, 2014.  The AEP System Interim Allowance Agreement which provided for, among other things, the transfer of SO₂ emission allowances associated with transactions under the Interconnection Agreement was also terminated.  In December 2013, the FERC issued orders approving the creation of a PCA, effective January 1, 2014.  Also effective January 1, 2014, the FERC approved the creation of a Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as the agent. Effective June 1, 2014, the FERC approved the cancellation of the System Transmission Integration Agreement.

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Principles of Consolidation

Our consolidated financial statements include our wholly-owned and majority-owned subsidiaries and VIEs of which we are the primary beneficiary.  Intercompany items are eliminated in consolidation.  We use the equity method of accounting for equity investments where we exercise significant influence but do not hold a controlling financial interest.  Such investments are initially recorded at cost in Deferred Charges and Other Noncurrent Assets on the balance sheets. Our proportionate share of the investee's equity earnings is included in Equity Earnings of Unconsolidated Subsidiaries on the statements of income. Equity method investments are required to be tested for impairment when it is determined there may be an other-than-temporary loss in value. We have ownership interests in generating units that are jointly-owned.  Our proportionate share of the operating costs associated with such facilities is included on the statements of income and our proportionate share of the assets and liabilities are reflected on the balance sheets.

Accounting for the Effects of Cost-Based Regulation

As the owner of rate-regulated electric public utility companies, our financial statements reflect the actions of regulators that result in the recognition of certain revenues and expenses in different time periods than enterprises that are not rate-regulated.  In accordance with accounting guidance for “Regulated Operations,” we record regulatory assets (deferred expenses) and regulatory liabilities (deferred revenue reductions or refunds) to reflect the economic effects of regulation in the same accounting period by matching expenses with their recovery through regulated revenues and by matching income with its passage to customers in cost-based regulated rates.

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  These estimates include, but are not limited to, inventory valuation, allowance for doubtful accounts, goodwill, intangible and long-lived asset impairment, unbilled electricity revenue, valuation of long-term energy contracts, the effects of regulation, long-lived asset recovery, storm costs, the effects of contingencies and certain assumptions made in accounting for pension and postretirement benefits.  The estimates and assumptions used are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements.  Actual results could ultimately differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents include temporary cash investments with original maturities of three months or less.

Other Temporary Investments

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

We classify our investments in marketable securities as available-for-sale or held-to-maturity in accordance with the provisions of “Investments – Debt and Equity Securities” accounting guidance.  We do not have any investments classified as trading.

Available-for-sale securities reflected in Other Temporary Investments are carried at fair value with the unrealized gain or loss, net of tax, reported in AOCI.  Held-to-maturity securities reflected in Other Temporary Investments are carried at amortized cost.  The cost of securities sold is based on the specific identification or weighted average cost method.

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In evaluating potential impairment of securities with unrealized losses, we considered, among other criteria, the current fair value compared to cost, the length of time the security's fair value has been below cost, our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value and current economic conditions.  See “Fair Value Measurements of Other Temporary Investments” in Note 11.

Inventory

Fossil fuel inventories are generally carried at average cost with the exception of AGR and TNC which are carried at the lower of average cost or market.  Materials and supplies inventories are carried at average cost.

Accounts Receivable

Customer accounts receivable primarily include receivables from wholesale and retail energy customers, receivables from energy contract counterparties related to our risk management activities and customer receivables primarily related to other revenue-generating activities.

We recognize revenue from electric power sales when we deliver power to our customers.  To the extent that deliveries have occurred but a bill has not been issued, we accrue and recognize, as Accrued Unbilled Revenues on the balance sheets, an estimate of the revenues for energy delivered since the last billing.

AEP Credit factors accounts receivable on a daily basis, excluding receivables from risk management activities, for I&M, KGPCo, KPCo, OPCo, PSO, SWEPCo and a portion of APCo.  Since APCo does not have regulatory authority to sell accounts receivable in its West Virginia regulatory jurisdiction, only a portion of APCo’s accounts receivable are sold to AEP Credit.  AEP Credit has a receivables securitization agreement with bank conduits.  Under the securitization agreement, AEP Credit receives financing from the bank conduits for the interest in the billed and unbilled receivables AEP Credit acquires from affiliated utility subsidiaries.

Allowance for Uncollectible Accounts

Generally, AEP Credit records bad debt expense based upon a 12-month rolling average of bad debt write-offs in proportion to gross accounts receivable purchased from participating AEP subsidiaries.  For receivables related to APCo’s West Virginia operations, the bad debt reserve is calculated based on a rolling two-year average write-off in proportion to gross accounts receivable.  For customer accounts receivables related to our risk management activities, accounts receivables are reviewed for bad debt reserves at a specific counterparty level basis.  For the wires business of TCC and TNC, bad debt reserves are calculated using the specific identification of receivable balances greater than 120 days delinquent, and for those balances less than 120 days where the collection is doubtful.  For miscellaneous accounts receivable, bad debt expense is recorded for all amounts outstanding 180 days or greater at 100%, unless specifically identified.  Miscellaneous accounts receivable items open less than 180 days may be reserved using specific identification for bad debt reserves.

Emission Allowances

In regulated jurisdictions, we record emission allowances at cost, including the annual SO₂ and NO_x emission allowance entitlements received at no cost from the Federal EPA.  For our nonregulated business, we record allowances at the lower of cost or market.  We follow the inventory model for these allowances.  We record allowances expected to be consumed within one year in Materials and Supplies and allowances with expected consumption beyond one year in Deferred Charges and Other Noncurrent Assets on the balance sheets.  We record the consumption of allowances in the production of energy in Fuel and Other Consumables Used for Electric Generation on the statements of income at an average cost.  We report the purchases and sales of allowances in the Operating Activities section of the statements of cash flows.  We record the net margin on sales of emission allowances in Vertically Integrated Utilities Revenue on the statements of income because of its integral nature to the production process of energy and our revenue optimization strategy for our utility operations.  The net margin on sales of emission allowances affects the determination of deferred fuel or deferred emission allowance costs and the amortization of regulatory assets for certain jurisdictions.

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Property, Plant and Equipment

Regulated

Electric utility property, plant and equipment for our rate-regulated operations are stated at original cost.  Additions, major replacements and betterments are added to the plant accounts.  Under the group composite method of depreciation, continuous interim routine replacements of items such as boiler tubes, pumps, motors, etc. result in original cost retirements, less salvage, being charged to accumulated depreciation.  The group composite method of depreciation assumes that on average, asset components are retired at the end of their useful lives and thus there is no gain or loss.  The equipment in each primary electric plant account is identified as a separate group.  The depreciation rates that are established take into account the past history of interim capital replacements and the amount of removal cost incurred and salvage received.  These rates and the related lives are subject to periodic review.  Removal costs are charged to regulatory liabilities.  The costs of labor, materials and overhead incurred to operate and maintain our plants are included in operating expenses.

Long-lived assets are required to be tested for impairment when it is determined that the carrying value of the assets may no longer be recoverable or when the assets meet the held-for-sale criteria under the accounting guidance for “Impairment or Disposal of Long-Lived Assets.”  When it becomes probable that an asset in service or an asset under construction will be abandoned and regulatory cost recovery has been disallowed, the cost of that asset shall be removed from plant-in-service or CWIP and charged to expense.

The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, as opposed to a forced or liquidation sale.  Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available.  In the absence of quoted prices for identical or similar assets in active markets, fair value is estimated using various internal and external valuation methods including cash flow analysis and appraisals.

Nonregulated

Our nonregulated operations generally follow the policies of our rate-regulated operations listed above but with the following exceptions.  Property, plant and equipment of nonregulated operations are stated at fair value at acquisition (or as adjusted for any applicable impairments) plus the original cost of property acquired or constructed since the acquisition, less disposals.  Normal and routine retirements from the plant accounts, net of salvage, are charged to accumulated depreciation for most nonregulated operations under the group composite method of depreciation.  For nonregulated plant assets, a gain or loss would be recorded if the retirement is not considered an interim routine replacement.  Removal costs are charged to expense.

Allowance for Funds Used During Construction and Interest Capitalization

For regulated operations, AFUDC represents the estimated cost of borrowed and equity funds used to finance construction projects that is capitalized and recovered through depreciation over the service life of regulated electric utility plant.  We record the equity component of AFUDC in Allowance for Equity Funds Used During Construction and the debt component of AFUDC as a reduction to Interest Expense.  For nonregulated operations, including certain generating assets, interest is capitalized during construction in accordance with the accounting guidance for “Capitalization of Interest.”

Valuation of Nonderivative Financial Instruments

The book values of Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Short-term Debt approximate fair value because of the short-term maturity of these instruments.  The book value of the pre-April 1983 spent nuclear fuel disposal liability approximates the best estimate of its fair value.

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Fair Value Measurements of Assets and Liabilities

The accounting guidance for “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  When quoted market prices are not available, pricing may be completed using comparable securities, dealer values, operating data and general market conditions to determine fair value.  Valuation models utilize various inputs such as commodity, interest rate and, to a lesser degree, volatility and credit that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, market corroborated inputs (i.e. inputs derived principally from, or correlated to, observable market data) and other observable inputs for the asset or liability. The amount of risk taken is determined by the Commercial Operations, Energy Supply and Finance groups in accordance with our established risk management policies as approved by the Finance Committee of our Board of Directors.  Our market risk oversight staff independently monitors our risk policies, procedures and risk levels and provides members of the Commercial Operations Risk Committee (Regulated Risk Committee) and the Energy Supply Risk Committee (Competitive Risk Committee) various daily, weekly and/or monthly reports regarding compliance with policies, limits and procedures.  The Regulated Risk Committee consists of AEPSC's Chief Operating Officer, Chief Financial Officer, Executive Vice President of Generation, Senior Vice President of Commercial Operations and Chief Risk Officer.  The Competitive Risk Committee consists of AEPSC's Chief Operating Officer, Chief Financial Officer and Chief Risk Officer in addition to Energy Supply's President and Vice President.

For our commercial activities, exchange traded derivatives, namely futures contracts, are generally fair valued based on unadjusted quoted prices in active markets and are classified as Level 1.  Level 2 inputs primarily consist of OTC broker quotes in moderately active or less active markets, as well as exchange traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1.  We verify our price curves using these broker quotes and classify these fair values within Level 2 when substantially all of the fair value can be corroborated.  We typically obtain multiple broker quotes, which are nonbinding in nature, but are based on recent trades in the marketplace.  When multiple broker quotes are obtained, we average the quoted bid and ask prices.  In certain circumstances, we may discard a broker quote if it is a clear outlier.  We use a historical correlation analysis between the broker quoted location and the illiquid locations.  If the points are highly correlated we include these locations within Level 2 as well.  Certain OTC and bilaterally executed derivative instruments are executed in less active markets with a lower availability of pricing information.  Illiquid transactions, complex structured transactions, FTRs and counterparty credit risk may require nonmarket based inputs.  Some of these inputs may be internally developed or extrapolated and utilized to estimate fair value.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3.  The main driver of our contracts being classified as Level 3 is the inability to substantiate our energy price curves in the market.  A significant portion of our Level 3 instruments have been economically hedged which greatly limits potential earnings volatility.

We utilize our trustee’s external pricing service in our estimate of the fair value of the underlying investments held in the benefit plan and nuclear trusts.  Our investment managers review and validate the prices utilized by the trustee to determine fair value.  We perform our own valuation testing to verify the fair values of the securities.  We receive audit reports of our trustee’s operating controls and valuation processes.  The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the benefits and nuclear trusts, Cash and Cash Equivalents and Other Temporary Investments are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds.  Fixed income securities 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

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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.  Benefit plan assets included in Level 3 are primarily real estate and private equity investments that are valued using methods requiring judgment including appraisals. The fair value of real estate investments is measured using market capitalization rates, recent sales of comparable investments and independent third-party appraisals. The fair value of private equity investments is measured using cost and purchase multiples, operating results, discounted future cash flows and market based comparable data. Depending on the specific situation, one or multiple approaches are used to determine the valuation of a real estate or private equity investment.

Deferred Fuel Costs

The cost of fuel and related emission allowances and emission control chemicals/consumables is charged to Fuel and Other Consumables Used for Electric Generation expense when the fuel is burned or the allowance or consumable is utilized.  The cost of fuel also includes the cost of nuclear fuel burned which is computed primarily on the units-of-production method.  In regulated jurisdictions with an active FAC, fuel cost over-recoveries (the excess of fuel-related revenues over applicable fuel costs incurred) are generally deferred as current regulatory liabilities and under-recoveries (the excess of applicable fuel costs incurred over fuel-related revenues) are generally deferred as current regulatory assets.  Fuel cost over-recovery and under-recovery balances are classified as noncurrent when there is a phase-in plan or the FAC has been suspended.  These deferrals are amortized when refunded or when billed to customers in later months with the state regulatory commissions’ review and approval.  The amount of an over-recovery or under-recovery can also be affected by actions of the state regulatory commissions.  On a routine basis, state regulatory commissions review and/or audit our fuel procurement policies and practices, the fuel cost calculations and FAC deferrals.  When a FAC under-recovery is no longer probable of recovery, we adjust our FAC deferrals and record provisions for estimated refunds to recognize these probable outcomes.

Changes in fuel costs, including purchased power in Kentucky for KPCo, in Indiana and Michigan for I&M, in Ohio (through the ESP related to standard service offer load served) for OPCo, in Arkansas, Louisiana and Texas for SWEPCo, in Oklahoma for PSO and in Virginia and West Virginia (upon securitization in November 2013) for APCo are reflected in rates in a timely manner generally through the FAC.  Changes in fuel costs, including purchased power in Ohio (from 2009 through 2011) for OPCo and in West Virginia (prior to securitization in November 2013) for APCo are reflected in rates through FAC phase-in plans.  The FAC generally includes some sharing of off-system sales margins.  In West Virginia for APCo, all of the margins from off-system sales are given to customers through the FAC.  Prior to corporate separation, none of the margins from off-system sales were given to customers through the FAC in Ohio for OPCo.  A portion of margins from off-system sales are given to customers through the FAC and other rate mechanisms in Oklahoma for PSO, Arkansas, Louisiana and Texas for SWEPCo, Virginia for APCo and in Indiana and Michigan for I&M.  Where the FAC or off-system sales sharing mechanism is capped, frozen or non-existent, changes in fuel costs or sharing of off-system sales impact earnings.

Revenue Recognition

Regulatory Accounting

Our financial statements reflect the actions of regulators that can result in the recognition of revenues and expenses in different time periods than enterprises that are not rate-regulated.  Regulatory assets (deferred expenses) and regulatory liabilities (deferred revenue reductions or refunds) are recorded to reflect the economic effects of regulation in the same accounting period by matching expenses with their recovery through regulated revenues and by matching income with its passage to customers in cost-based regulated rates.

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When regulatory assets are probable of recovery through regulated rates, we record them as assets on the balance sheets.  We test for probability of recovery at each balance sheet date or whenever new events occur.  Examples of new events include the issuance of a regulatory commission order or passage of new legislation.  If it is determined that recovery of a regulatory asset is no longer probable, we write off that regulatory asset as a charge against income.

Electricity Supply and Delivery Activities

Revenues are recognized from retail and wholesale electricity sales and electricity transmission and distribution delivery services.  For regulated and nonregulated operations, we recognize the revenues on the statements of income upon delivery of the energy to the customer and include unbilled as well as billed amounts.  In accordance with the applicable state commission regulatory treatment, PSO and SWEPCo do not record the fuel portion of unbilled revenue.

Most of the power produced at our generation plants is sold to PJM or SPP.  We also purchase power from PJM and SPP to supply our customers.  Generally, these power sales and purchases for the regulated subsidiaries are reported on a net basis as revenues on the statements of income.  However, purchases of power in excess of sales to PJM or SPP, on an hourly net basis, used to serve retail load are recorded gross as Purchased Electricity for Resale on the statements of income. With the exception of certain dedicated load bilateral power supply contracts, the transactions of our nonregulated subsidiaries are reported as gross purchases or sales.

Physical energy purchases arising from non-derivative contracts are accounted for on a gross basis in Purchased Electricity for Resale on the statements of income.  Energy purchases arising from non-trading derivative contracts are recorded based on the transaction’s facts and circumstances.  Purchases under non-trading derivatives used to serve accrual based obligations are recorded in Purchased Electricity for Resale on the statements of income.  All other non-trading derivative purchases are recorded net in revenues.

In general, we record expenses when purchased electricity is received and when expenses are incurred, with the exception of certain power purchase contracts that are derivatives and accounted for using MTM accounting where generation/supply rates are not cost-based regulated.  In jurisdictions where the generation/supply business is subject to cost-based regulation, the unrealized MTM amounts are deferred as regulatory assets (for losses) and regulatory liabilities (for gains).

Energy Marketing and Risk Management Activities

We engage in wholesale power, coal and natural gas marketing and risk management activities focused on wholesale markets where we own assets and adjacent markets.  Our activities include the purchase and sale of energy under forward contracts at fixed and variable prices.  These contracts include physical transactions, exchange-traded futures, and to a lesser extent, OTC swaps and options.  We engage in certain energy marketing and risk management transactions with RTOs.

We recognize revenues and expenses from wholesale marketing and risk management transactions that are not derivatives upon delivery of the commodity.  We use MTM accounting for wholesale marketing and risk management transactions that are derivatives unless the derivative is designated in a qualifying cash flow hedge relationship or a normal purchase or sale.  We include unrealized and realized gains and losses on wholesale marketing and risk management transactions that are accounted for using MTM in revenues or expense on the transaction's facts and circumstances.   In jurisdictions subject to cost-based regulation, we defer unrealized MTM amounts and some realized gains and losses as regulatory assets (for losses) and regulatory liabilities (for gains).  We include unrealized MTM gains and losses resulting from derivative contracts on the balance sheets as Risk Management Assets or Liabilities as appropriate.

Certain qualifying wholesale marketing and risk management derivative transactions are designated as hedges of variability in future cash flows as a result of forecasted transactions (cash flow hedge).  We initially record the effective portion of the cash flow hedge’s gain or loss as a component of AOCI.  When the forecasted transaction is realized and affects net income, we subsequently reclassify the gain or loss on the hedge from AOCI into revenues or expenses

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within the same financial statement line item as the forecasted transaction on the statements of income.  Excluding those jurisdictions subject to cost-based regulation, we recognize the ineffective portion of the gain or loss in revenues or expense immediately on the statements of income, depending on the specific nature of the associated hedged risk.  In regulated jurisdictions, we defer the ineffective portion as regulatory assets (for losses) and regulatory liabilities (for gains).  See “Accounting for Cash Flow Hedging Strategies” section of Note 10.

Barging Activities

AEP River Operations’ revenue is recognized based on percentage of voyage completion.  The proportion of freight transportation revenue to be recognized is determined by applying a percentage to the contractual charges for such services.  The percentage is determined by dividing the number of miles from the loading point to the position of the barge as of the end of the accounting period by the total miles to the destination specified in the customer’s freight contract.  The position of the barge at accounting period end is determined by our computerized barge tracking system.

SPP Integrated Power Market

In March 2014, SPP changed from an energy imbalance service market to a fully integrated power market. In the past, PSO and SWEPCo would satisfy their load requirements with their own generation resources or through the Operating Agreement. In the new integrated power market, PSO and SWEPCo operate as standalone entities by offering their respective generation into the SPP power market, which then economically dispatches the resources. This change further enables retail customers to obtain power through either internal generation or power purchases from the SPP market. The new integrated power market now operates in a similar manner as the PJM power market for the AEP East Companies. The change in the SPP integrated power market did not have a significant effect on the 2014 results of operations or cash flows.

Levelization of Nuclear Refueling Outage Costs

In accordance with regulatory orders, I&M defers incremental operation and maintenance costs associated with periodic refueling outages at its Cook Plant and amortizes the costs over the period beginning with the month following the start of each unit’s refueling outage and lasting until the end of the month in which the same unit’s next scheduled refueling outage begins.  I&M adjusts the amortization amount as necessary to ensure full amortization of all deferred costs by the end of the refueling cycle.

Maintenance

We expense maintenance costs as incurred.  If it becomes probable that we will recover specifically-incurred costs through future rates, we establish a regulatory asset to match the expensing of those maintenance costs with their recovery in cost-based regulated revenues.  In certain regulatory jurisdictions, we defer costs above the level included in base rates and amortize those deferrals commensurate with recovery through rate riders.

Income Taxes and Investment Tax Credits

We use the liability method of accounting for income taxes.  Under the liability method, we provide deferred income taxes for all temporary differences between the book and tax basis of assets and liabilities which will result in a future tax consequence.

When the flow-through method of accounting for temporary differences is reflected in regulated revenues (that is, when deferred taxes are not included in the cost of service for determining regulated rates for electricity), we record deferred income taxes and establish related regulatory assets and liabilities to match the regulated revenues and tax expense.

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We account for investment tax credits under the flow-through method except where regulatory commissions reflect investment tax credits in the rate-making process on a deferral basis.  We amortize deferred investment tax credits over the life of the plant investment.

We account for uncertain tax positions in accordance with the accounting guidance for “Income Taxes.”  We classify interest expense or income related to uncertain tax positions as interest expense or income as appropriate and classify penalties as Other Operation expense.

Excise Taxes

We act as an agent for some state and local governments and collect from customers certain excise taxes levied by those state or local governments on our customers.  We do not recognize these taxes as revenue or expense.

Debt

We defer gains and losses from the reacquisition of debt used to finance regulated electric utility plants and amortize the deferral over the remaining term of the reacquired debt in accordance with their rate-making treatment unless the debt is refinanced.  If we refinance the reacquired debt associated with the regulated business, the reacquisition costs attributable to the portions of the business subject to cost-based regulatory accounting are generally deferred and amortized over the term of the replacement debt consistent with its recovery in rates.  Operations not subject to cost-based rate regulation report gains and losses on the reacquisition of debt in Interest Expense on the statements of income upon reacquisition.

We defer debt discount or premium and debt issuance expenses and amortize generally utilizing the straight-line method over the term of the related debt.  The straight-line method approximates the effective interest method and is consistent with the treatment in rates for regulated operations.  We include the net amortization expense in Interest Expense on the statements of income.

Goodwill and Intangible Assets

When we acquire businesses, we record the fair value of all assets and liabilities, including intangible assets.  To the extent that consideration exceeds the fair value of identified assets, we record goodwill.  We do not amortize goodwill and intangible assets with indefinite lives.  We test acquired goodwill and other intangible assets with indefinite lives for impairment at least annually at their estimated fair value.  We test goodwill at the reporting unit level and other intangibles at the asset level.  Fair value is the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale.  Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available.  In the absence of quoted prices for identical or similar assets in active markets, we estimate fair value using various internal and external valuation methods.  We amortize intangible assets with finite lives over their respective estimated lives to their estimated residual values.  We also review the lives of the amortizable intangibles with finite lives on an annual basis.

Investments Held in Trust for Future Liabilities

We have several trust funds with significant investments intended to provide for future payments of pension and OPEB benefits, nuclear decommissioning and spent nuclear fuel disposal.  All of our trust funds’ investments are diversified and managed in compliance with all laws and regulations.  Our investment strategy for trust funds is to use a diversified portfolio of investments to achieve an acceptable rate of return while managing the interest rate sensitivity of the assets relative to the associated liabilities.  To minimize investment risk, the trust funds are broadly diversified among classes of assets, investment strategies and investment managers.  We regularly review the actual asset allocations and periodically rebalance the investments to targeted allocations when appropriate.  Investment policies and guidelines allow investment managers in approved strategies to use financial derivatives to obtain or manage market exposures and to hedge assets and liabilities.  The investments are reported at fair value under the “Fair Value Measurements and Disclosures” accounting guidance.

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Benefit Plans

All benefit plan assets are invested in accordance with each plan’s investment policy.  The investment policy outlines the investment objectives, strategies and target asset allocations by plan.

The investment philosophies for our benefit plans support the allocation of assets to minimize risks and optimize net returns.  Strategies used include:

• Maintaining a long-term investment horizon.

• Diversifying assets to help control volatility of returns at acceptable levels.

• Managing fees, transaction costs and tax liabilities to maximize investment earnings.

• Using active management of investments where appropriate risk/return opportunities exist.

• Keeping portfolio structure style-neutral to limit volatility compared to applicable benchmarks.

• Using alternative asset classes such as real estate and private equity to maximize return and provide additional portfolio diversification.

The investment policy for the pension fund allocates assets based on the funded status of the pension plan.  The objective of the asset allocation policy is to reduce the investment volatility of the plan over time.  Generally, more of the investment mix will be allocated to fixed income investments as the plan becomes better funded.  Assets will be transferred away from equity investments into fixed income investments based on the market value of plan assets compared to the plan’s projected benefit obligation.  The current target asset allocations are as follows:

Pension Plan Assets	Target
Equity	30.0	%
Fixed Income	55.0	%
Other Investments	15.0	%
OPEB Plans Assets	Target
Equity	65.0	%
Fixed Income	33.0	%
Cash	2.0	%

The investment policy for each benefit plan contains various investment limitations.  The investment policies establish concentration limits for securities and prohibit the purchase of securities issued by AEP (with the exception of proportionate and immaterial holdings of AEP securities in passive index strategies).  However, our investment policies do not preclude the benefit trust funds from receiving contributions in the form of AEP securities, provided that the AEP securities acquired by each plan may not exceed the limitations imposed by law.  Each investment manager's portfolio is compared to a diversified benchmark index.

For equity investments, the limits are as follows:

• No security in excess of 5% of all equities.

• Cash equivalents must be less than 10% of an investment manager's equity portfolio.

• No individual stock may be more than 10% and 7% for pension and OPEB investments, respectively, of each manager's equity portfolio.

• No investment in excess of 5% of an outstanding class of any company.

• No securities may be bought or sold on margin or other use of leverage.

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For fixed income investments, the concentration limits must not exceed:

• 3% in any single issuer.

• 5% for private placements.

• 5% for convertible securities.

• 60% for bonds rated AA+ or lower.

• 50% for bonds rated A+ or lower.

• 10% for bonds rated BBB- or lower.

For obligations of non-government issuers within the fixed income portfolio, the following limitations apply:

• AAA rated debt: a single issuer should account for no more than 5% of the portfolio.

• AA+, AA, AA- rated debt: a single issuer should account for no more than 3% of the portfolio.

• Debt rated A+ or lower:  a single issuer should account for no more than 2% of the portfolio.

• No more than 10% of the portfolio may be invested in high yield and emerging market debt combined at any time.

A portion of the pension assets is invested in real estate funds to provide diversification, add return and hedge against inflation.  Real estate properties are illiquid, difficult to value and not actively traded.  The pension plan uses external real estate investment managers to invest in commingled funds that hold real estate properties.  To mitigate investment risk in the real estate portfolio, commingled real estate funds are used to ensure that holdings are diversified by region, property type and risk classification.  Real estate holdings include core, value-added and development risk classifications and some investments in Real Estate Investment Trusts (REITs), which are publicly traded real estate securities.

A portion of the pension assets is invested in private equity.  Private equity investments add return and provide diversification and typically require a long-term time horizon to evaluate investment performance.  Private equity is classified as an alternative investment because it is illiquid, difficult to value and not actively traded.  The pension plan uses limited partnerships and commingled funds to invest across the private equity investment spectrum.   Our private equity holdings are with multiple general partners who help monitor the investments and provide investment selection expertise.  The holdings are currently comprised of venture capital, buyout and hybrid debt and equity investment instruments.  Commingled private equity funds are used to enhance the holdings’ diversity.

We participate in a securities lending program with BNY Mellon to provide incremental income on idle assets and to provide income to offset custody fees and other administrative expenses.  We lend securities to borrowers approved by BNY Mellon in exchange for collateral.  All loans are collateralized by at least 102% of the loaned asset’s market value and the collateral is invested.  The difference between the rebate owed to the borrower and the collateral rate of return determines the earnings on the loaned security.  The securities lending program’s objective is providing modest incremental income with a limited increase in risk.

We hold trust owned life insurance (TOLI) underwritten by The Prudential Insurance Company in the OPEB plan trusts.  The strategy for holding life insurance contracts in the taxable Voluntary Employees' Beneficiary Association (VEBA) trust is to minimize taxes paid on the asset growth in the trust.  Earnings on plan assets are tax-deferred within the TOLI contract and can be tax-free if held until claims are paid.  Life insurance proceeds remain in the trust and are used to fund future retiree medical benefit liabilities.  With consideration to other investments held in the trust, the cash value of the TOLI contracts is invested in two diversified funds.  A portion is invested in a commingled fund with underlying investments in stocks that are actively traded on major international equity exchanges.  The other portion of the TOLI cash value is invested in a diversified, commingled fixed income fund with underlying investments in government bonds, corporate bonds and asset-backed securities.

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Cash and cash equivalents are held in each trust to provide liquidity and meet short-term cash needs. Cash equivalent funds are used to provide diversification and preserve principal.  The underlying holdings in the cash funds are investment grade money market instruments including commercial paper, certificates of deposit, treasury bills and other types of investment grade short-term debt securities.  The cash funds are valued each business day and provide daily liquidity.

Nuclear Trust Funds

Nuclear decommissioning and spent nuclear fuel trust funds represent funds that regulatory commissions allow us to collect through rates to fund future decommissioning and spent nuclear fuel disposal liabilities.  By rules or orders, the IURC, the MPSC and the FERC established investment limitations and general risk management guidelines.  In general, limitations include:

• Acceptable investments (rated investment grade or above when purchased).

• Maximum percentage invested in a specific type of investment.

• Prohibition of investment in obligations of AEP or its affiliates.

• Withdrawals permitted only for payment of decommissioning costs and trust expenses.

We maintain trust records for each regulatory jurisdiction. 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.

We record securities held in these trust funds as Spent Nuclear Fuel and Decommissioning Trusts on the balance sheets.  We record these securities at fair value.  We classify securities in the trust funds as available-for-sale due to their long-term purpose.  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.  We record unrealized gains and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates.  Consequently, changes in fair value of trust assets do not affect earnings or AOCI.  See the “Nuclear Contingencies” section of Note 6 for additional discussion of nuclear matters.  See “Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal” section of Note 11 for disclosure of the fair value of assets within the trusts.

Comprehensive Income(Loss)

Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources.  It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.  Comprehensive income (loss) has two components: net income (loss) and other comprehensive income (loss).

Stock-Based Compensation Plans

As of December 31, 2014, we had performance units and restricted stock units outstanding under the Amended and Restated American Electric Power System Long-Term Incentive Plan (LTIP).  This plan was last approved by shareholders in April 2010.  Upon vesting, performance units are paid in cash and restricted stock units are settled in AEP Common Shares, except for restricted stock units granted after January 1, 2013 and vesting to executive officers, which are paid in cash.

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We maintain a variety of tax qualified and nonqualified deferred compensation plans for employees and non-employee directors that include, among other options, an investment in or an investment return equivalent to that of AEP common stock.  This includes career share accounts maintained under the American Electric Power System Stock Ownership Requirement Plan, which facilitates executives in meeting minimum stock ownership requirements assigned to them by the Human Resources Committee of the Board of Directors.  Career shares are derived from vested performance units granted to employees under the LTIP.  Career shares are equal in value to shares of AEP common stock and become payable to executives in cash after their service ends.  Career shares accrue additional dividend shares in an amount equal to dividends paid on AEP Common shares, and are reinvested in such shares at the closing market price on the dividend payments date.

We compensate our non-employee directors, in part, with stock units under the American Electric Power Company, Inc. Stock Unit Accumulation Plan for Non-Employee Directors.  These stock units become payable in cash to directors after their service ends.

We measure and recognize compensation expense for all share-based payment awards to employees and directors, including stock options, based on estimated fair values. For share-based payment awards with service only vesting conditions, we recognize compensation expense using the straight-line single-option method.  Stock-based compensation expense recognized on the statements of income for the years ended December 31, 2014, 2013 and 2012 is based on awards ultimately expected to vest.  Therefore, stock-based compensation expense has been reduced to reflect estimated forfeitures.  Accounting guidance for “Compensation - Stock Compensation” requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

For the years ended December 31, 2014, 2013 and 2012, compensation expense is included in Net Income for the performance units, career shares, restricted stock units and the non-employee director’s stock units.  See Note 15 for additional discussion.

Earnings Per Share (EPS)

Shown below are income statement amounts attributable to AEP common shareholders:

	Years Ended December 31,
Amounts Attributable to AEP Common Shareholders	2014		2013		2012
	(in millions)
Net Income	$	1,638	$	1,484	$	1,262
Net Income Attributable to Noncontrolling Interests	4		4		3
Earnings Attributable to AEP Common Shareholders	$	1,634	$	1,480	$	1,259

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.

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The following table presents our basic and diluted EPS calculations included on the statements of income:

	Years Ended December 31,
	2014				2013				2012
	(in millions, except per share data)
			$/share				$/share				$/share
Earnings Attributable to AEP Common Shareholders	$	1,634			$	1,480			$	1,259
Weighted Average Number of Basic Shares Outstanding	488.6		$	3.34	486.6		$	3.04	484.7		$	2.60
Weighted Average Dilutive Effect of Restricted Stock Units	0.3		—		0.4		—		0.4		—
Weighted Average Number of Diluted Shares Outstanding	488.9		$	3.34	487.0		$	3.04	485.1		$	2.60

There were no antidilutive shares outstanding as of December 31, 2014, 2013 and 2012.

OPCo Revised Depreciation Rates

Effective December 1, 2011, we revised book depreciation rates for certain of OPCo’s generation plants consistent with shortened depreciable lives for the generating units.  This change in depreciable lives resulted in a $52 million increase in depreciation expense in 2012.

In the fourth quarter of 2012, we impaired certain Ohio generating units (see Note 7).  As a result of this impairment of the full book value of these assets, we ceased depreciation on these generating units effective December 1, 2012.

In the second quarter of 2013, we impaired Muskingum River Plant, Unit 5 (MR5).  As a result of this impairment of the full book value of this generating unit, we ceased depreciation on MR5 effective July 1, 2013.

The effect of these revised depreciation rates and impairments is reported in the Generation & Marketing segment.

Supplementary Related Party Information

AEP and several nonaffiliated utility companies jointly own OVEC.  As of December 31, 2014, AEP’s ownership and investment in OVEC were 43.47% and $4.4 million, respectively.

OVEC’s owners are members to an intercompany power agreement.  Participants of this agreement are entitled to receive and obligated to pay for all OVEC generating capacity, approximately 2,200 MWs, in proportion to their respective power participation ratios.  The aggregate power participation ratio of certain AEP utility subsidiaries is 43.47%.  The proceeds from the sale of power by OVEC are designed to be sufficient for OVEC to meet its operating expenses and fixed costs and provide a return on capital.  The intercompany power agreement ends in June 2040.

AEP and other nonaffiliated owners authorized environmental investments related to their ownership interests. OVEC financed capital expenditures totaling $1.3 billion in connection with the engineering and construction of FGD projects and the associated waste disposal landfills at its two generation plants.  These environmental projects were funded through debt issuances.  As of December 31, 2014, both generation plants were operating with environmental controls.

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The following details related party transactions for the years ended December 31, 2014, 2013 and 2012:

	Years Ended December 31,
Related Party Transactions	2014		2013		2012
	(in millions)
AEP Consolidated Revenues – Other Revenues:
OVEC – Barging and Other Transportation Services	$	24	$	21	$	30
AEP Consolidated Expenses – Purchased Electricity for Resale:
OVEC	268		289		273

Supplementary Income Statement Information

The following table provides the components of Depreciation and Amortization for the years ended December 31, 2014, 2013 and 2012:

	Years Ended December 31,
Depreciation and Amortization	2014		2013		2012
	(in millions)
Depreciation and Amortization of Property, Plant and Equipment	$	1,605	$	1,472	$	1,505
Amortization of Certain Securitized Assets	310		248		224
Amortization of Regulatory Assets and Liabilities	14		23		53
Total Depreciation and Amortization	$	1,929	$	1,743	$	1,782

Supplementary Cash Flow Information

	Years Ended December 31,
Cash Flow Information	2014		2013			2012
	(in millions)
Cash Paid (Received) for:
Interest, Net of Capitalized Amounts	$	838	$	882		$	931
Income Taxes	117		(55		)	(82		)
Noncash Investing and Financing Activities:
Acquisitions Under Capital Leases	135		182			63
Construction Expenditures Included in Current Liabilities as of December 31,	559		492			439
Acquisition of Nuclear Fuel Included in Current Liabilities as of December 31,	45		—			35
Assumption of Liabilities Related to Acquisitions	—		—			56
Expected Reimbursement for Spent Nuclear Fuel Dry Cask Storage	3		4			30

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2.  NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

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

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

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

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

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3.  COMPREHENSIVE INCOME

Presentation of Comprehensive Income

The following tables provide the components of changes in AOCI for the years ended December 31, 2014 and 2013.  All amounts in the following tables are presented net of related income taxes.

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2014
	Cash Flow Hedges								Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Securities Available for Sale		Amortization of Deferred Costs		Changes in Funded Status			Total
	(in millions)
Balance in AOCI as of December 31, 2013	$	—		$	(23	)	$	7	$	134	$	(233	)	$	(115	)
Change in Fair Value Recognized in AOCI	(10		)	—			1		—		1			(8		)
Amounts Reclassified from AOCI	11			4			—		5		—			20
Net Current Period Other Comprehensive Income	1			4			1		5		1			12
Balance in AOCI as of December 31, 2014	$	1		$	(19	)	$	8	$	139	$	(232	)	$	(103	)

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2013
	Cash Flow Hedges								Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Securities Available for Sale		Amortization of Deferred Costs		Changes in Funded Status			Total
	(in millions)
Balance in AOCI as of December 31, 2012	$	(8	)	$	(30	)	$	4	$	112	$	(415	)	$	(337	)
Change in Fair Value Recognized in AOCI	10			2			3		—		177			192
Amounts Reclassified from AOCI	(2		)	5			—		22		—			25
Net Current Period Other Comprehensive Income	8			7			3		22		177			217
Pension and OPEB Adjustment Related to Mitchell Plant	—			—			—		—		5			5
Balance in AOCI as of December 31, 2013	$	—		$	(23	)	$	7	$	134	$	(233	)	$	(115	)

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Reclassifications from Accumulated Other Comprehensive Income

The following table provides details of reclassifications from AOCI for the years ended December 31, 2014 and 2013.  The amortization of pension and OPEB AOCI components are included in the computation of net periodic pension and OPEB costs.  See Note 8 for additional details.

Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Years Ended December 31, 2014 and 2013
	Amount of (Gain) Loss Reclassified from AOCI
	Years Ended December 31,
	2014			2013
Gains and Losses on Cash Flow Hedges	(in millions)
Commodity:
Vertically Integrated Utilities Revenues	$	—		$	(1	)
Generation & Marketing Revenues	59			(10		)
Purchased Electricity for Resale	(39		)	8
Regulatory Assets/(Liabilities), Net (a)	(3		)	—
Subtotal – Commodity	17			(3		)
Interest Rate and Foreign Currency:
Interest Expense	6			7
Subtotal – Interest Rate and Foreign Currency	6			7
Reclassifications from AOCI, before Income Tax (Expense) Credit	23			4
Income Tax (Expense) Credit	8			1
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	15			3
Pension and OPEB
Amortization of Prior Service Cost (Credit)	(21		)	(21		)
Amortization of Actuarial (Gains)/Losses	29			55
Reclassifications from AOCI, before Income Tax (Expense) Credit	8			34
Income Tax (Expense) Credit	3			12
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	5			22
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit	$	20		$	25

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

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The following table provides details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets and the reasons for changes in cash flow hedges for the year ended December 31, 2012.  All amounts in the following table are presented net of related income taxes.

Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
Year Ended December 31, 2012
	Commodity			Interest Rate and Foreign Currency			Total
	(in millions)
Balance in AOCI as of December 31, 2011	$	(3	)	$	(20	)	$	(23	)
Changes in Fair Value Recognized in AOCI	(15		)	(14		)	(29		)
Amount of (Gain) or Loss Reclassified from AOCI to Statement of Income/within Balance Sheet:
Vertically Integrated Utilities Revenues	—			—			—
Generation & Marketing Revenues	(5		)	—			(5		)
Purchased Electricity for Resale	13			—			13
Other Operation Expense	—			—			—
Maintenance Expense	—			—			—
Interest Expense	—			4			4
Property, Plant and Equipment	—			—			—
Regulatory Assets (a)	2			—			2
Balance in AOCI as of December 31, 2012	$	(8	)	$	(30	)	$	(38	)

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

The following table provides details of changes in unrealized gains and losses related to securities available for sale and the reasons for changes for the year ended December 31, 2012.  All amounts in the following table are presented net of related income taxes.

Total Accumulated Other Comprehensive Income (Loss) Activity for Securities Available for Sale
Year Ended December 31, 2012
	(in millions)
Balance in AOCI as of December 31, 2011	$	2
Changes in Fair Value Recognized in AOCI	2
Amount of (Gain) or Loss Reclassified from AOCI to Statement of Income:
Interest Income	—
Balance in AOCI as of December 31, 2012	$	4

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4.  RATE MATTERS

Our subsidiaries are involved in rate and regulatory proceedings at the FERC and their state commissions.  Rate matters can have a material impact on net income, cash flows and possibly financial condition.  Our recent significant rate orders and pending rate filings are addressed in this note.

OPCo Rate Matters

Ohio Electric Security Plan Filings

2009 – 2011 ESP

The PUCO issued an order in March 2009 that modified and approved the ESP which established rates at the start of the April 2009 billing cycle through 2011. OPCo collected the 2009 annualized revenue increase over the last nine months of 2009. The order also provided a phase-in FAC, which was authorized to be recovered through a non-bypassable surcharge over the period 2012 through 2018. The PUCO’s March 2009 order was appealed to the Supreme Court of Ohio, which issued an opinion and remanded certain issues back to the PUCO.

In October 2011, the PUCO issued an order in the remand proceeding, which was subsequently appealed. In February 2014, the Supreme Court of Ohio affirmed the PUCO’s decision and rejected all appeals.

In August 2012, the PUCO issued an order in a separate proceeding which implemented a PIRR to recover deferred fuel costs in rates beginning September 2012. The PUCO ruled that carrying charges should be calculated without an offset for accumulated deferred income taxes and that a long-term debt rate should be applied when collections begin. In November 2012, OPCo appealed that PUCO order to the Supreme Court of Ohio claiming a long-term debt rate modified the previously adjudicated 2009 - 2011 ESP order, which granted a weighted average cost of capital (WACC) rate. In November 2012, the IEU and the Ohio Consumers' Counsel (OCC) also filed appeals of the PUCO decision which principally argued that the PUCO should have reduced the deferred fuel balance to reflect the prior “improper” collection of POLR revenues. IEU's appeal also argued that carrying costs should be reduced due to an accumulated deferred income tax credit which, as of December 31, 2014, could reduce carrying costs by $26 million including $14 million of unrecognized equity carrying costs. In December 2014, IEU filed a motion to withdraw its argument related to the collection of POLR revenues. In January 2015, the OCC filed a request to dismiss its appeal altogether. Oral arguments at the Supreme Court of Ohio were held in February 2015. OPCo argued for a remand to reinstate the WACC carrying charges initially approved by the PUCO and challenged the IEU argument that the carrying charges should be reduced due to an accumulated deferred income tax credit. A decision from the Supreme Court of Ohio is pending.

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

June 2012 – May 2015 ESP Including Capacity Charge

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

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

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As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012.  The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs.  As of December 31, 2014, OPCo’s incurred deferred capacity costs balance of $422 million, including debt carrying costs, was recorded in regulatory assets on the balance sheet.

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

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

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

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

Proposed June 2015 – May 2018 ESP

In December 2013, OPCo filed an application with the PUCO to approve an ESP that includes proposed rate adjustments and the continuation and modification of certain existing riders, including the Distribution Investment Rider (DIR), effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders and estimates an average decrease in rates of 9% over the three-year term of the plan for customers who receive their RPM capacity and energy auction-based generation through OPCo. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement. The PPA would initially be based upon the OVEC contractual entitlement and could, upon further approval, be expanded to include other contracts involving other Ohio legacy generation assets. In May 2014, intervenors and the PUCO staff filed testimony that provided various recommendations including the rejection and/or modification of various riders, including the DIR and the proposed PPA. Hearings at the PUCO in the ESP case were held in June 2014.

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In July 2014, OPCo submitted a separate application to continue the RSR established in the June 2012 - May 2015 ESP to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh until the balance of the capacity deferrals has been collected. In December 2014, the PUCO staff and intervenors filed comments related to the RSR application. The PUCO staff recommended approval of the application. Intervenors objected to the application and recommended approval of a pending motion to dismiss.

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

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

Significantly Excessive Earnings Test Filings

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

In March 2014, the PUCO approved a stipulation agreement between OPCo and the PUCO staff that there were no significantly excessive earnings in 2011 for CSPCo or OPCo. In May 2014 and December 2014, the PUCO approved stipulation agreements between OPCo and the PUCO staff that there were no significantly excessive earnings for OPCo in 2012 and 2013, respectively.

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

Corporate Separation

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

Storm Damage Recovery Rider (SDRR)

In December 2012, OPCo submitted an application with the PUCO to establish initial SDRR rates to recover 2012 incremental storm distribution expenses. In April 2014, the PUCO approved a stipulation agreement to recover $55 million over a 12-month period. The agreement also provided that carrying charges using a long-term debt rate will be assessed from April 2013 until recovery begins, but no additional carrying charges will accrue during the actual recovery period. Compliance tariffs were filed with the PUCO and new rates were implemented in April 2014. In May 2014, the PUCO upheld the settlement agreement on rehearing.

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2009 Fuel Adjustment Clause Audit

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

In August 2012, intervenors filed an appeal with the Supreme Court of Ohio claiming the settlement credit ordered by the PUCO should have reflected the remaining gain not already flowed through the FAC, with carrying charges. In September 2014, the Supreme Court of Ohio upheld the PUCO order. A review of the coal reserve valuation by an outside consultant is still pending. If the PUCO ultimately determines that additional amounts should benefit ratepayers as a result of the consultant’s review of the coal reserve valuation, it could reduce future net income and cash flows and impact financial condition.

2010 and 2011 Fuel Adjustment Clause Audits

The PUCO-selected outside consultant issued its 2010 and 2011 FAC audit reports which included a recommendation that the PUCO reexamine the carrying costs on the deferred FAC balance and determine whether the carrying costs on the balance should be net of accumulated income taxes with the use of a WACC. In May 2014, the PUCO issued an order that generally approved OPCo's 2010-2011 fuel costs and rejected the auditor recommendation to adjust the WACC carrying charges related to accumulated deferred income taxes. Additionally, the PUCO requested further review related to an affiliate barging agreement and the modification of certain fuel procurement processes and practices.Further, the order provided for the auditor to address any remaining concerns in the next audit report, as deemed necessary. In July 2014, the PUCO issued an order that denied all requests for rehearing.

2012 and 2013 Fuel Adjustment Clause Audits

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

Ormet

Ormet, a large aluminum company, had a contract to purchase power from OPCo through 2018. In February 2013, Ormet filed for bankruptcy and subsequently shut down operations in October 2013. Based upon previous PUCO rulings providing rate assistance to Ormet, the PUCO is expected to permit OPCo to recover unpaid Ormet amounts through the Economic Development Rider (EDR), except where recovery from ratepayers is limited to $20 million related to previously deferred payments from Ormet’s October and November 2012 power bills. In February 2014, a stipulation agreement between OPCo and Ormet was filed with the PUCO. The stipulation recommended approval of OPCo’s right to fully recover approximately $49 million of foregone revenues through the EDR. Intervenor comments were also filed objecting to full recovery of these foregone revenues. In March 2014, the PUCO issued an order in OPCo’s EDR filing allowing OPCo to include $39 million of Ormet-related foregone revenues in the EDR effective April 2014. The order stated that if the stipulation agreement between OPCo and Ormet is subsequently adopted by the PUCO, OPCo could file an application to modify the EDR rate for the remainder of the period requesting recovery of the remaining $10 million of Ormet deferrals which, as of December 31, 2014, is recorded in regulatory assets on the balance sheet. In April 2014, an intervenor filed testimony objecting to $5 million of the remaining foregone revenues. A hearing at the PUCO related to the stipulation agreement was held in May 2014.

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

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

Ohio IGCC Plant

In 2005, OPCo filed an application with the PUCO seeking authority to recover costs of building and operating an IGCC power plant. As of December 31, 2014, OPCo has collected $24 million in pre-construction costs authorized in a 2006 PUCO order. Intervenors filed motions and comments with the PUCO requesting that OPCo refund all collected pre-construction costs to Ohio ratepayers with interest. In December 2014, a stipulation agreement between OPCo, the PUCO staff and intervenors was filed at the PUCO. The parties to the stipulation agreement proposed that OPCo will refund $13 million to its customers. In February 2015, the PUCO approved the stipulation agreement.

SWEPCo Rate Matters

2012 Texas Base Rate Case

In July 2012, SWEPCo filed a request with the PUCT to increase annual base rates primarily due to the completion of the Turk Plant. In October 2013, the PUCT issued an order affirming the prudence of the Turk Plant but determined that the Turk Plant’s Texas jurisdictional capital cost cap established in a previous Certificate of Convenience and Necessity case also limited SWEPCo’s recovery of AFUDC in addition to limits on its recovery of cash construction costs. Additionally, the PUCT deferred consideration of the requested increase in depreciation expense related to the change in the 2016 retirement date of the Welsh Plant, Unit 2. As of December 31, 2014, the net book value of Welsh Plant, Unit 2 was $84 million, before cost of removal, including materials and supplies inventory and CWIP. See “Regulated Generating Units to be Retired Before or During 2016” section of Note 5.

Upon rehearing in January 2014, the PUCT reversed its initial ruling and determined that AFUDC was excluded from the Turk Plant’s Texas jurisdictional capital cost cap. As a result, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances. The resulting annual base rate increase is approximately $52 million. In March 2014, the PUCT issued an order related to the January 2014 PUCT ruling and in April 2014, this order became final. In May 2014, intervenors filed appeals of that order with the Texas District Court. In June 2014, SWEPCo intervened in those appeals and filed initial responses.

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

Texas Transmission Cost Recovery Factor Filing

In May 2014, SWEPCo filed an application with the PUCT to implement its transmission cost recovery factor (TCRF) requesting additional annual revenue of $15 million. The TCRF is designed to recover increases from the amounts included in SWEPCo’s Texas retail base rates for transmission infrastructure improvement costs and wholesale transmission charges under a tariff approved by the FERC. SWEPCo’s application included Turk Plant transmission-related costs. In November 2014, the PUCT issued an order approving a proposal for decision, issued by an Administrative Law Judge in October 2014, that recommended approval of SWEPCo's application with an increase in annual revenue of $14 million. In December 2014, the PUCT order became final and TCRF rates were implemented.

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2012 Louisiana Formula Rate Filing

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

2014 Louisiana Formula Rate Filing

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

Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC.  Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC.  As of December 31, 2014, SWEPCo has incurred costs of $164 million and has remaining contractual construction obligations of $108 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. As of December 31, 2014, the net book value of Welsh Plant, Units 1 and 3 was $388 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. 

APCo and WPCo Rate Matters

Plant Transfer

APCo and WPCo provide retail electric service at bundled rates approved by the WVPSC, with rates set on a cost-of-service basis, to their respective customers. West Virginia generally allows for timely recovery of fuel costs through an expanded net energy cost which trues-up to actual expenses. In March 2014, APCo and WPCo filed a request with the WVPSC for approval to transfer at net book value to WPCo a one-half interest in the Mitchell Plant, comprising 780 MW of average annual generating capacity presently owned by AGR. In April 2014, APCo and WPCo filed testimony that supported their request and proposed a base rate surcharge of $113 million, to be offset by an equal reduction in the ENEC revenues, to be effective upon the transfer of the Mitchell Plant to WPCo until APCo's West Virginia base rates are updated. See the "2014 West Virginia Base Rate Case" below. In June 2014, the FERC issued an order approving a request by AGR and WPCo to transfer AGR’s one-half interest in the Mitchell Plant to WPCo.

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In October 2014, a stipulation agreement between APCo, WPCo, the WVPSC staff and intervenors in the case was filed with the WVPSC. The stipulation agreement recommended approval for WPCo to acquire, at net book value, the one-half interest in the Mitchell Plant, excluding certain assets, and to pay AGR $20 million upon transfer, which WPCo will record as a regulatory asset, include in rate base and recover over the life of the plant. Additionally, the agreement stated that 82.5% of the costs associated with the acquired interest will be reflected in rates effective from the date of the transfer via a surcharge with an offset in ENEC revenues of $93 million. The remaining 17.5% of the costs associated with the acquired interest is to be included in rates by January 2020. The agreement also proposed that WPCo share the energy margins for 82.5% of the plant’s output with ratepayers and that WPCo retain all of the energy margins from sales into the wholesale market on the remaining 17.5%, to offset fixed costs associated with this portion, until the remaining portion is included in rates. In December 2014, the WVPSC issued an order that approved the settlement agreement, subject to certain modifications related to 82.5% of the energy and capacity margin sharing. The WVPSC determined that the sharing mechanism that was proposed is reasonable and will be adopted provided the result of the sharing mechanism will be adjusted, if necessary, so that the sharing mechanism does not result in a net cost to ratepayers that exceeds the actual variable cost of generation. In January 2015, the transfer of the one-half interest in the Mitchell Plant to WPCo was completed.

2014 Virginia Biennial Base Rate Case

In March 2014, APCo filed a biennial generation and distribution base rate case with the Virginia SCC. In accordance with a Virginia statute, APCo did not request a change in base rates as its Virginia retail combined rate of return on common equity for 2012 and 2013 was within the statutory range of the approved return on common equity of 10.9%. The filing included a request to decrease generation depreciation rates, effective February 2015, primarily due to changes in the expected service lives of various generating units and the extended recovery through 2040 of the net book value of certain planned 2015 plant retirements. Additionally, the filing included a request to amortize $7 million annually for two years, beginning February 2015, related to IGCC and other deferred costs. APCo also requested approval to amortize $38 million related to an accumulated deferred Virginia state income tax (ADVSIT) liability over 20 years, beginning February 2015.

In November 2014, the Virginia SCC issued an order concluding that APCo's adjusted earned rate of return on common equity for 2012 and 2013, reflecting their ordered adjustments, was above the allowed threshold. The order included (a) a $6 million refund to customers for the years 2012 through 2013, (b) the write-off of $10 million of IGCC pre-construction costs, (c) approval to amortize a $38 million ADVSIT liability over 20 years, beginning February 2015 and (d) no change to generation depreciation rates with rates to be reviewed again in the next biennial rate case. The order also approved a new return on common equity of 9.7% effective for 2014 and 2015. Management believes its financial statements adequately address the impact of this order for 2014.

The Virginia SCC did not rule on a Virginia SCC staff recommendation to write-down certain costs, for ratemaking purposes, for the biennial period based on APCo’s earnings within the statutory equity range. In January 2015, the Virginia SCC initiated a separate proceeding to address the proper treatment of APCo’s authorized regulatory assets. As of December 31, 2014, APCo’s authorized regulatory assets under review in the separate proceeding, based upon the Virginia SCC staff recommendation, are estimated to be $15 million. In February 2015, initial briefs related to this proceeding were filed by various parties. If any of these costs, or any additional costs that may be subject to review, are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Potential New Virginia Legislation Affecting Biennial Reviews

In February 2015, amendments to Virginia law governing the regulation of investor-owned electric utilities were approved by the Virginia General Assembly and have been sent to the Governor. If these amendments are enacted, APCo’s existing generation and distribution base rates would freeze until after the Virginia SCC rules on APCo’s next biennial review, which APCo would file in March 2020 for the 2018 and 2019 test years. These amendments would also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. Management continues to monitor this potential new legislation in Virginia.

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2014 West Virginia Base Rate Case

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

2013 Virginia Transmission Rate Adjustment Clause (Transmission RAC)

In December 2013, APCo filed with the Virginia SCC to increase its transmission RAC revenues by $50 million annually to be effective May 2014.  In March 2014, the Virginia SCC issued an order approving a stipulation agreement between APCo and the Virginia SCC staff increasing the transmission RAC revenues by $49 million annually, subject to true-up, effective May 2014. Pursuant to the order, the Virginia SCC staff will audit APCo’s transmission RAC under-recoveries and report its findings and recommendations in testimony in APCo’s next transmission RAC proceeding in 2015.

PSO Rate Matters

2014 Oklahoma Base Rate Case

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

In April and May 2014, testimony was filed by the OCC staff and intervenors with recommendations that included adjustments to annual base rates ranging from an increase of $16 million to a reduction of $22 million, primarily based upon the determination of depreciation rates and a return on common equity between 9.18% and 9.5%. Additionally, the recommendations did not support the advanced metering rider or the expansion of the transmission rider. In May 2014, PSO filed rebuttal testimony that included an updated annual base rate increase request of $42 million to reflect certain updated costs.

In June 2014, a non-unanimous stipulation agreement between PSO, the OCC staff and certain intervenors was filed with the OCC. The parties to the stipulation recommended no overall change to the transmission rider or to annual revenues, other than additional revenues through a separate rider related to advanced metering costs, and that the terms of the stipulation be effective November 2014. The advanced metering rider would provide $24 million of revenues over 14 months beginning in November 2014 and increase to $27 million in 2016. New depreciation rates are recommended for advanced metering investments and existing meters, also to be effective November 2014. Further, the stipulation recommends a return on common equity of 9.85% to be used only in the formula to calculate AFUDC, factoring of customer receivables and for riders with an equity component. Additionally, the stipulation recommends

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recovery of regulatory assets for 2013 storms and regulatory case expenses. In July 2014, the Attorney General joined in the stipulation agreement. A hearing at the OCC was held in July 2014. In October 2014, the Administrative Law Judge (ALJ) recommended approval of the stipulation agreement and interim rates were implemented in November 2014, subject to refund. In November 2014, intervenors opposing the stipulation agreement filed exceptions to the ALJ's report and oral arguments were held at the OCC in December 2014. An order is anticipated in the first quarter of 2015. If the OCC were to disallow any portion of this settlement agreement, it could reduce future net income and cash flows and impact financial condition.

I&M Rate Matters

2011 Indiana Base Rate Case

In February 2013, the IURC issued an order that granted an $85 million annual increase in base rates based upon a return on common equity of 10.2%and adjusted the authorized annual increase in base rates to $92 million in March 2013. In April 2014, the Indiana Office of Utility Consumer Counselor (OUCC) filed an appeal to the Indiana Supreme Court related to the inclusion of a prepaid pension asset in rate base, which is approximately $7 million in annual revenues. In August 2014, the Indiana Supreme Court denied the appeal filed by the OUCC.

Cook Plant Life Cycle Management Project (LCM Project)

In 2012, I&M filed a petition with the IURC and the MPSC for approval of the LCM Project, which consists of a group of capital projects to ensure the safe and reliable operations of the Cook Plant through its licensed life (2034 for Unit 1 and 2037 for Unit 2). The estimated cost of the LCM Project is $1.2 billion to be incurred through 2018, excluding AFUDC.  As of December 31, 2014, I&M has incurred costs of $550 million related to the LCM Project, including AFUDC.

In July 2013, the IURC approved I&M’s proposed project with the exception of an estimated $23 million related to certain items that might accommodate a future potential power uprate which the IURC stated I&M could seek recovery of in a subsequent base rate case. I&M will recover approved costs through an LCM rider which will be determined in semi-annual proceedings. The IURC authorized deferral accounting for costs incurred related to certain projects effective January 2012 to the extent such costs are not reflected in rates. In May 2014, the IURC issued a final order approving the LCM rider rates that were implemented in January 2014.

In January 2013, the MPSC approved a Certificate of Need (CON) for the LCM Project and authorized deferral accounting for costs incurred related to the approved projects effective January 2013 until these costs are included in rates. In February 2013, intervenors filed appeals with the Michigan Court of Appeals objecting to the issuance of the CON as well as the amount of the CON related to the LCM Project. In October 2014, the Michigan Court of Appeals issued an order that affirmed the MPSC decision in part, but reversed the portion of the MPSC decision related to certain costs. The order indicated that I&M could recover those costs in a future Michigan base case if they can show that the costs were reasonable and prudent.

If I&M is not ultimately permitted to recover its LCM Project costs, it could reduce future net income and cash flows and impact financial condition.

Tanners Creek Plant

I&M announced that it would retire Tanners Creek Plant by June 2015 to comply with proposed environmental regulations. I&M is currently recovering depreciation and a return on the net book value of the Tanners Creek Plant in base rates and plans to seek recovery of all of the plant’s retirement related costs in its next Indiana and Michigan base rate cases.

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In December 2013, I&M filed an application with the MPSC seeking approval of revised depreciation rates for Rockport Plant, Unit 1 and the Tanners Creek Plant due to the retirement of the Tanners Creek Plant in 2015. Upon the retirement of the Tanners Creek Plant, I&M proposed that, for purposes of determining its depreciation rates, the net book value of the Tanners Creek Plant be recovered over the remaining life of the Rockport Plant.

In September 2014, a settlement agreement was approved by the MPSC that included the authorization for I&M to implement revised depreciation rates for Rockport Plant, Unit 1, effective upon the retirement date of the Tanners Creek Plant. Upon implementation of the revised depreciation rates, I&M is authorized to reduce customer rates through a credit rider until the revised rates for Rockport Plant, Unit 1 are included in base rates.

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

As of December 31, 2014, the net book value of the Tanners Creek Plant was $340 million, before cost of removal, including material and supplies inventory and CWIP.  See “Regulated Generating Units to be Retired Before or During 2016” section of Note 5. If I&M is ultimately not permitted to fully recover its net book value of the Tanners Creek Plant and its retirement-related costs, it could reduce future net income and cash flows and impact financial condition.

Transmission, Distribution and Storage System Improvement Charge (TDSIC)

In October 2014, I&M filed petitions with the IURC for approval of a TDSIC Rider and approval of I&M’s seven-year TDSIC Plan, from 2015 through 2021, for eligible transmission, distribution and storage system improvements. The initial estimated cost of the capital improvements and associated operation and maintenance expenses included in the TDSIC Plan of $787 million, excluding AFUDC, will be updated annually. The TDSIC Plan included distribution investments specific to the Indiana jurisdiction. The TDSIC Rider will allow the periodic adjustment of I&M's rates to provide for timely recovery of 80% of approved TDSIC Plan costs. I&M will defer the remaining 20% of approved TDSIC Plan costs to be recovered in I&M's next general rate case. I&M is not seeking a rate adjustment in this proceeding but is seeking approval of a TDSIC Rider rate adjustment mechanism for subsequent proceedings. In January 2015, intervenors filed testimony that recommended denial of certain portions of the TDSIC Plan including recommended changes to the capital structure, recovery of requested operation and maintenance cost allocations and the rate design within the TDSIC Rider mechanism. A hearing at the IURC was held in February 2015. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

KPCo Rate Matters

Plant Transfer

In December 2012, KPCo filed a request with the KPSC for approval to transfer at net book value to KPCo a one-half interest in the Mitchell Plant, comprising 780 MW of average annual generating capacity. KPCo also requested that costs related to the Big Sandy Plant, Unit 2 FGD project be established as a regulatory asset. As of December 31, 2014, the net book value of Big Sandy Plant, Unit 2 was $253 million, before cost of removal, including materials and supplies inventory and CWIP. See “Regulated Generating Units to be Retired Before or During 2016” section of Note 5.

In October 2013, the KPSC issued an order approving a modified settlement agreement between KPCo, Kentucky Industrial Utility Customers, Inc. and the Sierra Club. The modified settlement approved the transfer of a one-half interest in the Mitchell Plant to KPCo at net book value on December 31, 2013 with the limitation that the net book value of the Mitchell Plant transfer not exceed the amount to be determined by a WVPSC order. In December 2014,

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the WVPSC issued the Mitchell Plant transfer order with no disallowances. See the "Plant Transfer" disclosure above within the APCo and WPCo Rate Matters section. The modified settlement agreement approved by the KPSC also included the implementation of an Asset Transfer Rider to collect $44 million annually effective January 2014, subject to true-up, and allowed KPCo to retain any off-system sales margins above the $15.3 million annual level in base rates. Additionally, the settlement allows for KPCo to file a Certificate of Public Convenience and Necessity to convert Big Sandy Plant, Unit 1 to natural gas, provided the cost is approximately $60 million, and addressed potential greenhouse gas initiatives on the Mitchell Plant. The settlement also approved recovery, including a return, of coal-related retirement costs related to Big Sandy Plant over 25 years when base rates are set (no earlier than June 2015) in the next base rate case, but rejected KPCo’s request to defer FGD project costs for Big Sandy Plant, Unit 2. In December 2013, the transfer of a one-half interest in the Mitchell Plant to KPCo was completed.

In December 2013, the Attorney General filed an appeal with the Franklin County Circuit Court. In May 2014, KPCo's motion to dismiss the appeal was denied. In May 2014, KPCo filed motions for reconsideration and clarification with the Franklin County Circuit Court. In June 2014, the motion for reconsideration was denied but the motion to clarify was granted, thereby limiting the appeal to the issues of law presented in the Attorney General's appeal. If any part of the KPSC order is overturned, it could reduce future net income and cash flows and impact financial condition.

Kentucky Fuel Adjustment Clause Review

In August 2014, the KPSC issued an order initiating a review of KPCo's FAC from November 2013 through April 2014. In January 2015, the KPSC issued an order disallowing certain FAC costs during the period of January 2014 through May 2015 while KPCo owns and operates both Big Sandy Plant, Unit 2 and its one-half interest in the Mitchell Plant. Additionally, the KPSC directed KPCo to refund to customers $13 million of fuel costs, by the end of the second quarter of 2015, collected during the FAC review period of January 2014 through April 2014. As a result of this order, KPCo recorded a regulatory disallowance of $36 million in December 2014. In February 2015, KPCo filed an appeal of this order with the Franklin County Circuit Court.

2014 Kentucky Base Rate Case

In December 2014, KPCo filed a request with the KPSC for an increase in rates of $70 million, which consists of a $75 million increase in rider rates, offset by a $5 million decrease in annual base rates, to be effective July 2015. The net increase reflects KPCo's ownership interest in the Mitchell Plant, riders to recover the Big Sandy Plant retirement and operational costs and the inclusion of an environmental compliance plan related to the Mitchell Plant FGD. Additionally, the filing included a request to recover deferred storm costs. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

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5.  EFFECTS OF REGULATION

Regulated Generating Units to be Retired Before or During 2016

The following regulated generating units are probable of abandonment.  Accordingly, CWIP and Plant in Service has been reclassified as Other Property, Plant and Equipment on the balance sheet as of December 31, 2014.  The following table summarizes the plant investment and cost of removal, currently being recovered, for each generating unit as of December 31, 2014.

Plant Name and Unit	Company	Gross Investment		Accumulated Depreciation		Net Investment		Cost of Removal Regulatory Liability		Expected Retirement Date	Remaining Recovery Period
(in millions)
Tanners Creek Plant, Units 1-4	I&M	$	711	$	384	$	327	$	89	2015	16 years
Big Sandy Plant, Unit 2	KPCo	455		208		247		51		2015	26 years
Northeastern Station, Unit 4	PSO	182		91		91		11		2016	26 years
Welsh Plant, Unit 2	SWEPCo	175		96		79		20		2016	26 years
Total		$	1,523	$	779	$	744	$	171

In accordance with accounting guidance for “Regulated Operations,” APCo regulated generating units expected to be retired before or during 2016 are not considered probable of abandonment.

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Regulatory Assets

Regulatory assets are comprised of the following items:

	December 31,				Remaining Recovery Period
	2014		2013
Current Regulatory Assets	(in millions)
Under-recovered Fuel Costs - earns a return	$	121	$	61	1 year
Under-recovered Fuel Costs - does not earn a return	6		19		1 year
Total Current Regulatory Assets	$	127	$	80
Noncurrent Regulatory Assets
Regulatory assets pending final regulatory approval:
Regulatory Assets Currently Earning a Return
Storm Related Costs	$	20	$	22
West Virginia Vegetation Management Program	20		—
Ohio Economic Development Rider	—		14
Other Regulatory Assets Pending Final Regulatory Approval	—		4
Regulatory Assets Currently Not Earning a Return
Storm Related Costs	100		161
Carbon Capture and Storage Product Validation Facility	13		13
IGCC Pre-Construction Costs	11		—
Ormet Special Rate Recovery Mechanism	10		36
Expanded Net Energy Charge - Coal Inventory	3		21
Indiana Under-Recovered Capacity Costs	—		22
Other Regulatory Assets Pending Final Regulatory Approval	49		37
Total Regulatory Assets Pending Final Regulatory Approval	226		330
Regulatory assets approved for recovery:
Regulatory Assets Currently Earning a Return
Ohio Capacity Deferral	422		288		4 years
Ohio Fuel Adjustment Clause	378		445		4 years
Unamortized Loss on Reacquired Debt	66		81		29 years
Texas Meter Replacement Costs	59		77		13 years
Ohio Distribution Decoupling	35		31		2 years
Ohio Transmission Cost Recovery Rider	28		87		2 years
Storm Related Costs	13		17		4 years
Red Rock Generating Facility	10		10		42 years
RTO Formation/Integration Costs	9		12		5 years
Other Regulatory Assets Approved for Recovery	21		18		various
Regulatory Assets Currently Not Earning a Return
Income Taxes, Net	1,268		1,390		53 years
Pension and OPEB Funded Status	1,273		1,157		13 years
Peak Demand Reduction/Energy Efficiency	62		44		2 years
Virginia Transmission Rate Adjustment Clause	53		47		2 years
Medicare Subsidy	46		51		10 years
Postemployment Benefits	39		40		4 years
Cook Plant Nuclear Refueling Outage Levelization	38		58		2 years
Storm Related Costs	26		18		4 years
Indiana Under-Recovered Capacity Costs	25		—		1 year
United Mine Workers of America Pension Withdrawal	25		27		11 years
Under-Recovery of PJM Expense	22		—		2 years
Under-Recovered gridSMART® Costs	16		8		2 years
Under-Recovery of Transmission Cost Recovery Factor	15		20		1 year
Under-Recovered Distribution Investment Rider	10		9		2 years
Unrealized Loss on Forward Commitments	10		—		3 years
Litigation Settlement	9		10		11 years
Deferred Restructuring Costs	8		11		4 years
Vegetation Management	5		14		1 year
Virginia Environmental Rate Adjustment Clause	3		27		1 year
Other Regulatory Assets Approved for Recovery	44		49		various
Total Regulatory Assets Approved for Recovery	4,038		4,046
Total Noncurrent Regulatory Assets	$	4,264	$	4,376

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Regulatory Liabilities

Regulatory liabilities are comprised of the following items:

	December 31,				Remaining
	2014		2013		Refund Period
Current Regulatory Liabilities	(in millions)
Over-recovered Fuel Costs - pays a return	$	—	$	9
Over-recovered Fuel Costs - does not pay a return	55		110		1 year
Total Current Regulatory Liabilities	$	55	$	119
Noncurrent Regulatory Liabilities and
Deferred Investment Tax Credits
Regulatory liabilities pending final regulatory determination:
Regulatory Liabilities Currently Paying a Return
Other Regulatory Liabilities Pending Final Regulatory Determination	$	—	$	5
Regulatory Liabilities Currently Not Paying a Return
Provision for Regulatory Loss	35		—
Other Regulatory Liabilities Pending Final Regulatory Determination	17		3
Total Regulatory Liabilities Pending Final Regulatory Determination	52		8
Regulatory liabilities approved for payment:
Regulatory Liabilities Currently Paying a Return
Asset Removal Costs	2,660		2,589		(a)
Louisiana Refundable Construction Financing Costs	58		78		4 years
Advanced Metering Infrastructure Surcharge	44		68		6 years
Deferred Investment Tax Credits	26		29		46 years
Excess Earnings	11		12		39 years
Other Regulatory Liabilities Approved for Payment	4		1		various
Regulatory Liabilities Currently Not Paying a Return
Excess Asset Retirement Obligations for Nuclear
Decommissioning Liability	695		597		(b)
Deferred Investment Tax Credits	112		121		50 years
Unrealized Gain on Forward Commitments	92		35		18 years
Over-Recovery of Transition Charges	47		40		13 years
Spent Nuclear Fuel Liability	44		43		(b)
Indiana Off-system Sales Margin Sharing	19		—		2 years
Peak Demand Reduction/Energy Efficiency	3		18		2 years
Deferred State Income Tax Coal Credits	—		28
Over-Recovery of PJM Expense	—		14
Other Regulatory Liabilities Approved for Payment	25		13		various
Total Regulatory Liabilities Approved for Payment	3,840		3,686
Total Noncurrent Regulatory Liabilities and Deferred Investment Tax Credits	$	3,892	$	3,694

(a) Relieved as removal costs are incurred.

(b) Relieved when plant is decommissioned.

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6.  COMMITMENTS, GUARANTEES AND CONTINGENCIES

We are subject to certain claims and legal actions arising in our ordinary course of business.  In addition, our business activities are subject to extensive governmental regulation related to public health and the environment.  The ultimate outcome of such pending or potential litigation against us cannot be predicted.  For current proceedings not specifically discussed below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on our financial statements.

COMMITMENTS

Construction and Commitments

The AEP System has substantial construction commitments to support its operations and environmental investments.  In managing the overall construction program and in the normal course of business, we contractually commit to third-party construction vendors for certain material purchases and other construction services.  The subsidiaries purchase fuel, materials, supplies, services and property, plant and equipment under contract as part of their normal course of business.  Certain supply contracts contain penalty provisions for early termination.

The following table summarizes our actual contractual commitments as of December 31, 2014:

Contractual Commitments	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in millions)
Fuel Purchase Contracts (a)	$	2,240	$	2,735	$	1,825	$	2,104	$	8,904
Energy and Capacity Purchase Contracts	363		405		426		2,087		3,281
Construction Contracts for Capital Assets (b)	191		—		—		—		191
Total	$	2,794	$	3,140	$	2,251	$	4,191	$	12,376

(a) Represents contractual commitments to purchase coal, natural gas, uranium and other consumables as fuel for electric generation along with related transportation of the fuel.

(b) Represents only capital assets for which we have signed contracts.  Actual payments are dependent upon and may vary significantly based upon the decision to build, regulatory approval schedules, timing and escalation of project costs.

GUARANTEES

We record liabilities for guarantees in accordance with the accounting guidance for “Guarantees.”  There is no collateral held in relation to any guarantees.  In the event any guarantee is drawn, there is no recourse to third parties unless specified below.

Letters of Credit

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

We have two revolving credit facilities totaling $3.5 billion, under which we may issue up to $1.2 billion as letters of credit.  As of December 31, 2014, the maximum future payments for letters of credit issued under the revolving credit facilities were $63 million with maturities ranging from February 2015 to March 2016.

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In January 2014, we issued letters of credit under an $85 million uncommitted facility.  In October 2014, the uncommitted facility was renewed through October 2015 and increased to $100 million. As of December 31, 2014, the maximum future payments for letters of credit issued under the revolving credit facilities were $81 million with a maturity of July 2015. An uncommitted facility gives the issuer of the facility the right to accept or decline each request we make under the facility.

We have $477 million of variable rate Pollution Control Bonds supported by bilateral letters of credit for $483 million.  The letters of credit have maturities ranging from March 2015 to July 2017.  In February 2015, $78 million of bilateral letters of credit maturing in March 2015 were extended to March 2017.

Guarantees of Third-Party Obligations

SWEPCo

As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining, SWEPCo provides guarantees of mine reclamation of $115 million.  Since SWEPCo uses self-bonding, the guarantee provides for SWEPCo to commit to use its resources to complete the reclamation in the event the work is not completed by Sabine.  This guarantee ends upon depletion of reserves and completion of final reclamation.  Based on the latest study completed in 2010, we estimate the reserves will be depleted in 2036 with final reclamation completed by 2046 at an estimated cost of approximately $58 million.  Actual reclamation costs could vary due to period inflation and any changes to actual mine reclamation.  As of December 31, 2014, SWEPCo has collected approximately $64 million through a rider for final mine closure and reclamation costs, of which $16 million is recorded in Deferred Credits and Other Noncurrent Liabilities and $48 million is recorded in Asset Retirement Obligations on the balance sheet.

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

Indemnifications and Other Guarantees

Contracts

We enter into several types of contracts which require indemnifications.  Typically these contracts include, but are not limited to, sale agreements, lease agreements, purchase agreements and financing agreements.  Generally, these agreements may include, but are not limited to, indemnifications around certain tax, contractual and environmental matters.  With respect to sale agreements, our exposure generally does not exceed the sale price.  As of December 31, 2014, there were no material liabilities recorded for any indemnifications.

Lease Obligations

We lease certain equipment under master lease agreements.  See “Master Lease Agreements” and “Railcar Lease” sections of Note 13 for disclosure of lease residual value guarantees.

ENVIRONMENTAL CONTINGENCIES

The Comprehensive Environmental Response Compensation and Liability Act (Superfund) and State Remediation

By-products from the generation of electricity include materials such as ash, slag, sludge, low-level radioactive waste and SNF.  Coal combustion by-products, which constitute the overwhelming percentage of these materials, are typically treated and deposited in captive disposal facilities or are beneficially utilized.  In addition, our generation plants and transmission and distribution facilities have used asbestos, polychlorinated biphenyls and other hazardous and nonhazardous materials.  We currently incur costs to dispose of these substances safely.

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Superfund addresses clean-up of hazardous substances that have been released to the environment.  The Federal EPA administers the clean-up programs.  Several states have enacted similar laws.  As of December 31, 2014, our subsidiaries are named by the Federal EPA as a Potentially Responsible Party (PRP) for four sites for which alleged liability is unresolved.  There are nine additional sites for which our subsidiaries have received information requests which could lead to PRP designation.  Our subsidiaries have also been named potentially liable at three sites under state law including the I&M site discussed in the next paragraph.  In those instances where we have been named a PRP or defendant, our disposal or recycling activities were in accordance with the then-applicable laws and regulations.  Superfund does not recognize compliance as a defense, but imposes strict liability on parties who fall within its broad statutory categories.  Liability has been resolved for a number of sites with no significant effect on net income.

In 2008, I&M received a letter from the Michigan Department of Environmental Quality (MDEQ) concerning conditions at a site under state law and requesting I&M take voluntary action necessary to prevent and/or mitigate public harm.  I&M started remediation work in accordance with a plan approved by MDEQ.  In September 2014, I&M recorded an accrual for remediation at certain additional sites in Michigan. As of December 31, 2014, I&M’s accrual for all of these sites is approximately $15 million.  As the remediation work is completed, I&M’s cost may change as new information becomes available concerning either the level of contamination at the site or changes in the scope of remediation.  We cannot predict the amount of additional cost, if any.

We evaluate the potential liability for each Superfund site separately, but several general statements can be made about our potential future liability.  Allegations that materials were disposed at a particular site are often unsubstantiated and the quantity of materials deposited at a site can be small and often nonhazardous.  Although Superfund liability has been interpreted by the courts as joint and several, typically many parties are named as PRPs for each site and several of the parties are financially sound enterprises.  At present, our estimates do not anticipate material cleanup costs for any of our identified Superfund sites, except the I&M sites discussed above.

NUCLEAR CONTINGENCIES

I&M owns and operates the two-unit 2,191 MW Cook Plant under licenses granted by the Nuclear Regulatory Commission (NRC).  We have a significant future financial commitment to dispose of SNF and to safely decommission and decontaminate the plant.  The licenses to operate the two nuclear units at the Cook Plant expire in 2034 and 2037.  The operation of a nuclear facility also involves special risks, potential liabilities and specific regulatory and safety requirements.  By agreement, I&M is partially liable, together with all other electric utility companies that own nuclear generating 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 liability could be substantial.

Decommissioning and Low Level Waste Accumulation Disposal

The cost to decommission a nuclear plant is affected by NRC regulations and the SNF disposal program.  Decommissioning costs are accrued over the service life of the Cook Plant.  The most recent decommissioning cost study was performed in 2012.  According to that study, the estimated cost of decommissioning and disposal of low-level radioactive waste ranges from $1.3 billion to $1.7 billion in 2012 nondiscounted dollars.  The wide range in estimated costs is caused by variables in assumptions.  I&M recovers estimated decommissioning costs for the Cook Plant in its rates.  The amounts recovered in rates were $9 million, $10 million and $14 million for the years ended December 31, 2014, 2013 and 2012, respectively.  Decommissioning costs recovered from customers are deposited in external trusts.

As of December 31, 2014 and 2013, the total decommissioning trust fund balance was $1.8 billion and $1.6 billion, respectively.  Trust fund earnings increase the fund assets and decrease the amount remaining to be recovered from ratepayers.  The decommissioning costs (including interest, unrealized gains and losses and expenses of the trust funds) increase or decrease the recorded liability.

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I&M continues to work with regulators and customers to recover the remaining estimated costs of decommissioning the Cook Plant.  However, future net income and cash flows would be reduced and financial condition could be impacted if the cost of SNF disposal and decommissioning continues to increase and cannot be recovered.

SNF Disposal

The federal government is responsible for permanent SNF disposal and assesses fees to nuclear plant owners for SNF disposal.  A fee of one mill per KWh for fuel consumed after April 6, 1983 at the Cook Plant was being collected from customers and remitted to the U.S. Treasury. This fee was terminated in May 2014.  As of December 31, 2014 and 2013, fees and related interest of $266 million and $265 million, respectively, for fuel consumed prior to April 7, 1983 have been recorded as Long-term Debt and funds collected from customers along with related earnings totaling $309 million and $309 million, respectively, to pay the fee are recorded as part of Spent Nuclear Fuel and Decommissioning Trusts.  I&M has not paid the government the pre-April 1983 fees due to continued delays and uncertainties related to the federal disposal program.

In 2011, I&M signed a settlement agreement with the federal government which permits I&M to make annual filings to recover certain SNF storage costs incurred as a result of the government’s delays in accepting SNF for permanent storage.  Under the settlement agreement, I&M received $22 million, $31 million and $20 million in 2014, 2013 and 2012, respectively, to recover costs and will be eligible to receive additional payment of annual claims for allowed costs that are incurred through December 31, 2016.  The proceeds reduced costs for dry cask storage.  As of December 31, 2014, I&M has deferred $13 million in Prepayments and Other Current Assets and $2 million in Deferred Charges and Other Noncurrent Assets on the balance sheet of dry cask storage and related operation and maintenance costs for recovery under this agreement.

See “Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal” section of Note 11 for disclosure of the fair value of assets within the trusts.

Nuclear Incident Liability

I&M carries insurance coverage for a nuclear incident at the Cook Plant for property damage, decommissioning and decontamination in the amount of $2.8 billion.  Insurance coverage for a nonnuclear incident at the Cook Plant is $1.7 billion.  Additional insurance provides coverage for a weekly indemnity payment resulting from an insured accidental outage.  I&M utilizes industry mutual insurers for the placement of this insurance coverage.  Participation in this mutual insurance requires a contingent financial obligation of up to $44 million for I&M which is assessable if the insurer’s financial resources would be inadequate to pay for losses.

The Price-Anderson Act, extended through December 31, 2025, establishes insurance protection for public liability arising from a nuclear incident at $13.6 billion and covers any incident at a licensed reactor in the U.S.  Commercially available insurance, which must be carried for each licensed reactor, provides $375 million of coverage.  In the event of a nuclear incident at any nuclear plant in the U.S., the remainder of the liability would be provided by a deferred premium assessment of $121 million on each licensed reactor in the U.S. payable in annual installments of $19 million.  As a result, I&M could be assessed $242 million per nuclear incident payable in annual installments of $38 million.  The number of incidents for which payments could be required is not limited.

In the event of an incident of a catastrophic nature, I&M is initially covered for the first $375 million through commercially available insurance.  The next level of liability coverage of up to $13.2 billion would be covered by claims made under the Price-Anderson Act.  If the liability were in excess of amounts recoverable from insurance and retrospective claim payments made under the Price-Anderson Act, I&M would seek to recover those amounts from customers through rate increases.  In the event nuclear losses or liabilities are underinsured or exceed accumulated funds and recovery from customers is not possible, it could reduce future net income and cash flows and impact financial condition.

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OPERATIONAL CONTINGENCIES

Insurance and Potential Losses

We maintain insurance coverage normal and customary for an integrated electric utility, subject to various deductibles.  We also maintain property and casualty insurance that may cover certain physical damage or third-party injuries caused by cyber security incidents. Our insurance includes coverage for all risks of physical loss or damage to our nonnuclear assets, subject to insurance policy conditions and exclusions.  Covered property generally includes power plants, substations, facilities and inventories.  Excluded property generally includes transmission and distribution lines, poles and towers.  Our insurance programs also generally provide coverage against loss arising from certain claims made by third parties and are in excess of retentions absorbed by us.  Coverage is generally provided by a combination of our protected cell of EIS and/or various industry mutual and/or commercial insurance carriers.

See “Nuclear Contingencies” section of this footnote for a discussion of nuclear exposures and related insurance.

Some potential losses or liabilities may not be insurable or the amount of insurance carried may not be sufficient to meet potential losses and liabilities, including, but not limited to, liabilities relating to a cyber security incident or damage to the Cook Plant and costs of replacement power in the event of an incident at the Cook Plant.  Future losses or liabilities, if they occur, which are not completely insured, unless recovered from customers, could reduce future net income and cash flows and impact financial condition.

Rockport Plant Litigation

In July 2013, the Wilmington Trust Company filed a complaint in U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will be unlawfully burdened by the terms of the modified NSR consent decree after the Rockport Plant, Unit 2 lease expiration in December 2022.  The terms of the consent decree allow the installation of environmental emission control equipment, repowering or retirement of the unit.  The plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement.  The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff.  The New York court has granted our motion to transfer this case to the U.S. District Court for the Southern District of Ohio.  In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.  We will continue to defend against the remaining claims.  We are unable to determine a range of potential losses that are reasonably possible of occurring.

Natural Gas Markets Lawsuits

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

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the U.S. Supreme Court granted the defendants' previously filed petition for further review with the U.S. Supreme Court on the preemption issue. Oral argument occurred in January 2015.  We will continue to defend the cases.  We believe the provision we have is adequate. We are unable to determine the amount of potential additional losses that are reasonably possible of occurring.

Wage and Hours Lawsuit

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

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

National Do Not Call Registry Lawsuit

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

Gavin Landfill Litigation

In August 2014, a complaint was filed in the Mason County, West Virginia Circuit Court against AEP, AEPSC, OPCo and an individual supervisor alleging wrongful death and personal injury/illness claims arising out of purported exposure to coal combustion by-product waste at the Gavin Plant landfill.  The lawsuit was filed on behalf of 77 plaintiffs, consisting of 39 current and former contractors of the landfill and 38 family members of those contractors.  Eleven of the family members are pursuing personal injury/illness claims and the remainder are pursuing loss of consortium claims.  The plaintiffs seek compensatory and punitive damages, as well as medical monitoring.  In September 2014, we filed a motion to dismiss the complaint, contending the case should be filed in Ohio.  That motion is pending.  We will continue to defend against the claims.  We are unable to determine a range of potential losses that are reasonably possible of occurring.

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7.  ACQUISITION AND IMPAIRMENTS

ACQUISITION

2012

BlueStar Energy (Generation & Marketing segment)

In March 2012, we completed the acquisition of BlueStar Energy Holdings, Inc. (BlueStar) and its independent retail electric supplier BlueStar Energy Solutions for $70 million.  This transaction also included goodwill of $15 million, intangible assets associated with sales contracts and customer accounts of $58 million and liabilities associated with supply contracts of $25 million.  BlueStar has been in operation since 2002.  Beginning in June 2012, BlueStar began doing business as AEP Energy.  AEP Energy provides electric supply for retail customers in Ohio, Illinois and other deregulated electricity markets and also provides energy solutions throughout the United States, including demand response and energy efficiency services.

IMPAIRMENTS

2013

Amos Plant, Unit 3 (Vertically Integrated Utilities segment)

In July 2013, the Virginia SCC approved the transfer of a two-thirds interest in the Amos Plant, Unit 3 to APCo but, for rate purposes, reduced the proposed transfer price by $83 million pretax.  The Virginia jurisdictional share of the reduced price is approximately $39 million.  In December 2013, the WVPSC issued an order that approved the transfer of a two-thirds interest in the Amos Plant, Unit 3 to APCo but deferred a final decision related to the $83 million pretax reduction in transfer price until APCo’s next base rate case.  The West Virginia and FERC jurisdictional share of the potential reduced transfer price is approximately $44 million.  Upon evaluation, management believes the West Virginia jurisdictional share is probable of recovery.  As a result of the Virginia order, in the fourth quarter of 2013, we recorded a pretax impairment of $39 million in Asset Impairments and Other Related Charges on the statement of income.  

Big Sandy Plant, Unit 2 FGD Project (Vertically Integrated Utilities segment)

In the third quarter of 2013, KPCo recorded a pretax write-off of $33 million in Asset Impairments and Other Related Charges on the statement of income primarily related to the Big Sandy Plant, Unit 2 FGD project as disallowed by the KPSC.  

Muskingum River Plant, Unit 5 (Generation & Marketing segment)

In May 2013, the U.S. District Court for the Southern District of Ohio approved a modification to the consent decree, which was initially entered into in 2007, requiring certain types of pollution control equipment to be installed at certain AEP plants, including the 600 MW Muskingum River Plant, Unit 5 (MR5) coal-fired generation plant.  Under the modification to the consent decree, we have the option to cease burning coal and retire MR5 in 2015 or to cease burning coal in 2015 and complete a natural gas refueling project no later than June 2017.  In the second quarter of 2013, based on the approval of the modified consent decree and changes in other market factors, we re-evaluated potential courses of action with respect to the planned operation of MR5 and concluded that completion of a refueling project, which would have extended the useful life of MR5, is remote.  As a result, management completed an impairment analysis and concluded that MR5 was impaired.  Under a market-based value approach, using level 3 unobservable inputs, management determined that the fair value of this generating unit was zero based on the lack of installed environmental control equipment and the nature and condition of this generating unit.  In the second quarter of 2013, we recorded a pretax impairment of $154 million in Asset Impairments and Other Related Charges on the statement of income which includes a $6 million pretax impairment of related material and supplies inventory.  Management expects to retire the plant in 2015.

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2012

Beckjord Plant, Unit 6, Conesville Plant, Unit 3, Kammer Plant, Units 1-3, Muskingum River Plant, Units 1-4, Sporn Plant, Units 2 and 4 and Picway Plant, Unit 5 (Generation & Marketing segment)

In October 2012, we filed applications with the FERC proposing to terminate the Interconnection Agreement and seeking to complete the corporate separation of OPCo's generation assets.  Based on the intention to terminate the Interconnection Agreement and the FERC filing, we performed an evaluation of the recoverability of generation assets.  As a result, in November 2012, we, using generating unit specific estimated future cash flows, concluded that we had a material impairment of certain Ohio generation assets.  Under a market-based value approach, using level 3 unobservable inputs, we determined that the fair value of these generating units was zero based on the lack of installed environmental control equipment and the nature and condition of these generating units.  In the fourth quarter of 2012, we recorded a pretax impairment of $287 million in Asset Impairments and Other Related Charges on the statement of income related to Beckjord Plant, Unit 6, Conesville Plant, Unit 3, Kammer Plant, Units 1-3, Muskingum River Plant, Units 1-4, Sporn Plant, Units 2 and 4 and Picway Plant, Unit 5 generating units which includes $13 million of related material and supplies inventory.

Turk Plant (Vertically Integrated Utilities segment)

In 2012, SWEPCo recorded a pretax write-off of $13 million in Asset Impairments and Other Related Charges on the statement of income related to unrecoverable construction costs subject to the Texas capital costs cap portion of the Turk Plant.

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8.  BENEFIT PLANS

For a discussion of investment strategy, investment limitations, target asset allocations and the classification of investments within the fair value hierarchy, see “Investments Held in Trust for Future Liabilities” and “Fair Value Measurements of Assets and Liabilities” sections of Note 1.

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

We recognize the funded status associated with our defined benefit pension and OPEB plans in the balance sheets. Disclosures about the plans are required by the “Compensation – Retirement Benefits” accounting guidance.  We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of other comprehensive income, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost.  We record a regulatory asset instead of other comprehensive income for qualifying benefit costs of our regulated operations that for ratemaking purposes are deferred for future recovery.  The cumulative funded status adjustment is equal to the remaining unrecognized deferrals for unamortized actuarial losses or gains, prior service costs and transition obligations, such that remaining deferred costs result in an AOCI equity reduction or regulatory asset and deferred gains result in an AOCI equity addition or regulatory liability.

Actuarial Assumptions for Benefit Obligations

The weighted-average assumptions as of December 31 of each year used in the measurement of our benefit obligations are shown in the following table:

	Pension Plans						Other Postretirement Benefit Plans
Assumptions	2014			2013			2014		2013
Discount Rate	4.00	%		4.70	%		4.00	%	4.70	%
Rate of Compensation Increase	4.80	%	(a)	4.85	%	(a)	NA		NA

(a) Rates are for base pay only.  In addition, an amount is added to reflect target incentive compensation for exempt employees and overtime and incentive pay for nonexempt employees.

NA Not applicable.

We use a duration-based method to determine the discount rate for our plans.  A hypothetical portfolio of high quality corporate bonds is constructed with cash flows matching the benefit plan liability.  The composite yield on the hypothetical bond portfolio is used as the discount rate for the plan.

For 2014, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 12% per year, with an average increase of 4.8%.

We updated our mortality assumption for the December 31, 2014 benefit obligation measurements based on mortality tables issued by the Society of Actuaries in October 2014. These updates increased our benefit obligations by approximately $128 million for the pension plans and $8 million for the OPEB plans.

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Actuarial Assumptions for Net Periodic Benefit Costs

The weighted-average assumptions as of January 1 of each year used in the measurement of our benefit costs are shown in the following table:

	Pension Plans						Other Postretirement Benefit Plans
	2014		2013		2012		2014		2013		2012
Discount Rate	4.70	%	3.95	%	4.55	%	4.70	%	3.95	%	4.75	%
Expected Return on Plan Assets	6.00	%	6.50	%	7.25	%	6.75	%	7.00	%	7.25	%
Rate of Compensation Increase	4.85	%	4.95	%	4.85	%	NA		NA		NA

NA Not applicable.

The expected return on plan assets was determined by evaluating historical returns, the current investment climate (yield on fixed income securities and other recent investment market indicators), rate of inflation and current prospects for economic growth.

The health care trend rate assumptions as of January 1 of each year used for OPEB plans measurement purposes are shown below:

Health Care Trend Rates	2014		2013
Initial	6.50	%	6.75	%
Ultimate	5.00	%	5.00	%
Year Ultimate Reached	2020		2020

Assumed health care cost trend rates have a significant effect on the amounts reported for the OPEB health care plans.  A 1% change in assumed health care cost trend rates would have the following effects:

	1% Increase		1% Decrease
	(in millions)
Effect on Total Service and Interest Cost Components of Net Periodic Postretirement Health Care Benefit Cost	$	4	$	(3	)
Effect on the Health Care Component of the Accumulated Postretirement Benefit Obligation	77		(60		)

Significant Concentrations of Risk within Plan Assets

In addition to establishing the target asset allocation of plan assets, the investment policy also places restrictions on securities to limit significant concentrations within plan assets.  The investment policy establishes guidelines that govern maximum market exposure, security restrictions, prohibited asset classes, prohibited types of transactions, minimum credit quality, average portfolio credit quality, portfolio duration and concentration limits.  The guidelines were established to mitigate the risk of loss due to significant concentrations in any investment.  We monitor the plans to control security diversification and ensure compliance with our investment policy.  As of December 31, 2014, the assets were invested in compliance with all investment limits.  See “Investments Held in Trust for Future Liabilities” section of Note 1 for limit details.

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Benefit Plan Obligations, Plan Assets and Funded Status as of December 31, 2014 and 2013

The following tables provide a reconciliation of the changes in the plans’ benefit obligations, fair value of plan assets and funded status as of December 31.  The benefit obligation for the defined benefit pension and OPEB plans are the projected benefit obligation and the accumulated benefit obligation, respectively.

	Pension Plans						Other Postretirement  Benefit Plans
	2014			2013			2014			2013
Change in Benefit Obligation	(in millions)
Benefit Obligation as of January 1,	$	4,841		$	5,205		$	1,456		$	1,849
Service Cost	72			69			14			23
Interest Cost	221			203			67			71
Actuarial (Gain) Loss	387			(305		)	(14		)	(395		)
Benefit Payments	(296		)	(331		)	(134		)	(140		)
Participant Contributions	—			—			42			39
Medicare Subsidy	—			—			8			9
Benefit Obligation as of December 31,	$	5,225		$	4,841		$	1,439		$	1,456
Change in Fair Value of Plan Assets
Fair Value of Plan Assets as of January 1,	$	4,711		$	4,696		$	1,699		$	1,568
Actual Gain on Plan Assets	474			340			83			208
Company Contributions	79			6			4			24
Participant Contributions	—			—			42			39
Benefit Payments	(296		)	(331		)	(134		)	(140		)
Fair Value of Plan Assets as of December 31,	$	4,968		$	4,711		$	1,694		$	1,699
Funded (Underfunded) Status as of December 31,	$	(257	)	$	(130	)	$	255		$	243

Amounts Recognized on the Balance Sheets as of December 31, 2014 and 2013

	Pension Plans						Other Postretirement Benefit Plans
	December 31,
	2014			2013			2014			2013
	(in millions)
Deferred Charges and Other Noncurrent Assets – Prepaid Benefit Costs	$	—		$	—		$	337		$	264
Other Current Liabilities – Accrued Short-term Benefit Liability	(6		)	(7		)	(4		)	(4		)
Employee Benefits and Pension Obligations – Accrued Long-term Benefit Liability	(251		)	(123		)	(78		)	(17		)
Funded (Underfunded) Status	$	(257	)	$	(130	)	$	255		$	243

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Amounts Included in AOCI and Regulatory Assets as of December 31, 2014 and 2013

	Pension Plans				Other Postretirement Benefit Plans
	December 31,
	2014		2013		2014			2013
Components	(in millions)
Net Actuarial Loss	$	1,612	$	1,561	$	420		$	428
Prior Service Cost (Credit)	5		8		(624		)	(693		)
Recorded as
Regulatory Assets	$	1,418	$	1,343	$	(149	)	$	(191	)
Deferred Income Taxes	70		79		(19		)	(26		)
Net of Tax AOCI	129		147		(36		)	(48		)

Components of the change in amounts included in AOCI and Regulatory Assets during the years ended December 31, 2014 and 2013 are as follows:

	Pension Plans						Other Postretirement Benefit Plans
	Years Ended December 31,
	2014			2013			2014			2013
Components	(in millions)
Actuarial (Gain) Loss During the Year	$	175		$	(367	)	$	14		$	(496	)
Amortization of Actuarial Loss	(124		)	(183		)	(22		)	(65		)
Amortization of Prior Service Credit (Cost)	(3		)	(3		)	69			69
Change for the Year	$	48		$	(553	)	$	61		$	(492	)

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Pension and Other Postretirement Benefits Plans’ Assets

The following table presents the classification of pension plan assets within the fair value hierarchy as of December 31, 2014:

Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in millions)
Equities:
Domestic	$	589	$	—	$	—	$	—		$	589		11.9	%
International	502		—		—		—			502			10.1	%
Options	—		14		—		—			14			0.3	%
Real Estate Investment Trusts	54		—		—		—			54			1.1	%
Common Collective Trust – Global	—		377		—		—			377			7.6	%
Common Collective Trust – International	—		19		—		—			19			0.4	%
Subtotal – Equities	1,145		410		—		—			1,555			31.4	%
Fixed Income:
Common Collective Trust – Debt	—		30		—		—			30			0.6	%
United States Government and Agency Securities	—		450		—		—			450			9.0	%
Corporate Debt	—		1,799		—		—			1,799			36.2	%
Foreign Debt	—		401		—		—			401			8.1	%
State and Local Government	—		15		—		—			15			0.3	%
Other – Asset Backed	—		29		—		—			29			0.6	%
Subtotal – Fixed Income	—		2,724		—		—			2,724			54.8	%
Infrastructure	—		—		13		—			13			0.3	%
Real Estate	—		—		236		—			236			4.7	%
Alternative Investments	—		—		379		—			379			7.6	%
Securities Lending	—		220		—		—			220			4.4	%
Securities Lending Collateral (a)	—		—		—		(222		)	(222		)	(4.5	)%
Cash and Cash Equivalents	—		53		—		—			53			1.1	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		10			10			0.2	%
Total	$	1,145	$	3,407	$	628	$	(212	)	$	4,968		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

The following table sets forth a reconciliation of changes in the fair value of assets classified as Level 3 in the fair value hierarchy for the pension assets:

	Infrastructure		Real Estate			Alternative Investments		Total Level 3
	(in millions)
Balance as of January 1, 2014	$	—	$	238		$	330	$	568
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	—		6			32		38
Relating to Assets Sold During the Period	—		19			16		35
Purchases and Sales	13		(27		)	1		(13		)
Transfers into Level 3	—		—			—		—
Transfers out of Level 3	—		—			—		—
Balance as of December 31, 2014	$	13	$	236		$	379	$	628

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The following table presents the classification of OPEB plan assets within the fair value hierarchy as of December 31, 2014:

Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in millions)
Equities:
Domestic	$	466	$	—	$	—	$	—	$	466	27.5	%
International	567		—		—		—		567		33.5	%
Options	—		16		—		—		16		1.0	%
Common Collective Trust – Global	—		30		—		—		30		1.8	%
Subtotal – Equities	1,033		46		—		—		1,079		63.8	%
Fixed Income:
Common Collective Trust – Debt	—		104		—		—		104		6.1	%
United States Government and Agency Securities	—		71		—		—		71		4.2	%
Corporate Debt	—		125		—		—		125		7.4	%
Foreign Debt	—		21		—		—		21		1.3	%
State and Local Government	—		6		—		—		6		0.3	%
Other – Asset Backed	—		5		—		—		5		0.3	%
Subtotal – Fixed Income	—		332		—		—		332		19.6	%
Trust Owned Life Insurance:
International Equities	—		10		—		—		10		0.6	%
United States Bonds	—		212		—		—		212		12.5	%
Subtotal – Trust Owned Life Insurance	—		222		—		—		222		13.1	%
Cash and Cash Equivalents	47		10		—		—		57		3.3	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		4		4		0.2	%
Total	$	1,080	$	610	$	—	$	4	$	1,694	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

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The following table presents the classification of pension plan assets within the fair value hierarchy as of December 31, 2013:

Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in millions)
Equities:
Domestic	$	1,092	$	—	$	—	$	—		$	1,092		23.2	%
International	514		—		—		—			514			10.9	%
Real Estate Investment Trusts	58		—		—		—			58			1.2	%
Common Collective Trust – International	—		10		—		—			10			0.2	%
Subtotal – Equities	1,664		10		—		—			1,674			35.5	%
Fixed Income:
Common Collective Trust – Debt	—		26		—		—			26			0.5	%
United States Government and Agency Securities	—		387		—		—			387			8.2	%
Corporate Debt	—		1,600		—		—			1,600			34.0	%
Foreign Debt	—		344		—		—			344			7.3	%
State and Local Government	—		28		—		—			28			0.6	%
Other – Asset Backed	—		33		—		—			33			0.7	%
Subtotal – Fixed Income	—		2,418		—		—			2,418			51.3	%
Real Estate	—		—		238		—			238			5.0	%
Alternative Investments	—		—		330		—			330			7.0	%
Securities Lending	—		35		—		—			35			0.8	%
Securities Lending Collateral (a)	—		—		—		(45		)	(45		)	(0.9	)%
Cash and Cash Equivalents	—		48		—		—			48			1.0	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		13			13			0.3	%
Total	$	1,664	$	2,511	$	568	$	(32	)	$	4,711		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

The following table sets forth a reconciliation of changes in the fair value of assets classified as Level 3 in the fair value hierarchy for the pension assets:

	Real Estate			Alternative Investments		Total Level 3
	(in millions)
Balance as of January 1, 2013	$	220		$	195	$	415
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	26			15		41
Relating to Assets Sold During the Period	—			15		15
Purchases and Sales	(8		)	105		97
Transfers into Level 3	—			—		—
Transfers out of Level 3	—			—		—
Balance as of December 31, 2013	$	238		$	330	$	568

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The following table presents the classification of OPEB plan assets within the fair value hierarchy as of December 31, 2013:

Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in millions)
Equities:
Domestic	$	473	$	—	$	—	$	—	$	473	27.9	%
International	616		—		—		—		616		36.2	%
Common Collective Trust – Global	—		15		—		—		15		0.9	%
Subtotal – Equities	1,089		15		—		—		1,104		65.0	%
Fixed Income:
Common Collective Trust – Debt	—		88		—		—		88		5.2	%
United States Government and Agency Securities	—		56		—		—		56		3.3	%
Corporate Debt	—		110		—		—		110		6.5	%
Foreign Debt	—		22		—		—		22		1.2	%
State and Local Government	—		5		—		—		5		0.3	%
Other – Asset Backed	—		8		—		—		8		0.5	%
Subtotal – Fixed Income	—		289		—		—		289		17.0	%
Trust Owned Life Insurance:
International Equities	—		13		—		—		13		0.8	%
United States Bonds	—		211		—		—		211		12.4	%
Subtotal – Trust Owned Life Insurance	—		224		—		—		224		13.2	%
Cash and Cash Equivalents	68		9		—		—		77		4.5	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		5		5		0.3	%
Total	$	1,157	$	537	$	—	$	5	$	1,699	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

Determination of Pension Expense

We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year volatility.  This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur.  Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return.

The accumulated benefit obligation for the pension plans is as follows:

	December 31,
Accumulated Benefit Obligation	2014		2013
	(in millions)
Qualified Pension Plan	$	4,982	$	4,638
Nonqualified Pension Plans	76		77
Total	$	5,058	$	4,715

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For our underfunded pension plans that had an accumulated benefit obligation in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets of these plans as of December 31, 2014 and 2013 were as follows:

	Underfunded Pension Plans
	December 31,
	2014			2013
	(in millions)
Projected Benefit Obligation	$	5,225		$	4,841
Accumulated Benefit Obligation	$	5,058		$	4,715
Fair Value of Plan Assets	4,968			4,711
Underfunded Accumulated Benefit Obligation	$	(90	)	$	(4	)

Estimated Future Benefit Payments and Contributions

We expect contributions and payments for the pension plans of $93 million and the OPEB plans of $6 million during 2015.  For the pension plans, this amount includes the payment of unfunded nonqualified benefits plus contributions to the qualified trust fund of at least the minimum amount required by the Employee Retirement Income Security Act.  For the qualified pension plan, we may also make additional discretionary contributions to maintain the funded status of the plan.  For the OPEB plans, expected payments include the payment of unfunded benefits.

The table below reflects the total benefits expected to be paid from the plan or from our assets.  The payments include the participants’ contributions to the plan for their share of the cost.  Effective for employees hired after December 2013, we will not provide retiree medical coverage.  Future benefit payments are dependent on the number of employees retiring, whether the retiring employees elect to receive pension benefits as annuities or as lump sum distributions, future integration of the benefit plans with changes to Medicare and other legislation, future levels of interest rates and variances in actuarial results.  The estimated payments for pension benefits and OPEB are as follows:

	Pension Plans		Other Postretirement Benefit Plans
	Pension Payments		Benefit Payments		Medicare Subsidy Receipts
	(in millions)
2015	$	315	$	129	$	—
2016	323		129		—
2017	334		130		—
2018	341		132		—
2019	350		132		—
Years 2020 to 2024, in Total	1,822		688		2

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Components of Net Periodic Benefit Cost

The following table provides the components of our net periodic benefit cost (credit) for the plans for the years ended December 31, 2014, 2013 and 2012:

	Pension Plans									Other Postretirement Benefit Plans
	Years Ended December 31,
	2014			2013			2012			2014			2013			2012
	(in millions)
Service Cost	$	72		$	69		$	76		$	14		$	23		$	47
Interest Cost	221			203			223			67			71			103
Expected Return on Plan Assets	(262		)	(278		)	(319		)	(111		)	(107		)	(101		)
Amortization of Transition Obligation	—			—			—			—			—			1
Amortization of Prior Service Cost (Credit)	3			3			(1		)	(69		)	(69		)	(18		)
Amortization of Net Actuarial Loss	124			183			155			22			65			57
Net Periodic Benefit Cost (Credit)	158			180			134			(77		)	(17		)	89
Capitalized Portion	(52		)	(56		)	(42		)	25			5			(28		)
Net Periodic Benefit Cost (Credit) Recognized in Expense	$	106		$	124		$	92		$	(52	)	$	(12	)	$	61

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on the balance sheet during 2015 are shown in the following table:

	Pension Plans		Other Postretirement Benefit Plans
Components	(in millions)
Net Actuarial Loss	$	108	$	17
Prior Service Cost (Credit)	2		(69		)
Total Estimated 2015 Amortization	$	110	$	(52	)
Expected to be Recorded as
Regulatory Asset	$	94	$	(38	)
Deferred Income Taxes	6		(5		)
Net of Tax AOCI	10		(9		)
Total	$	110	$	(52	)

American Electric Power System Retirement Savings Plan

We sponsor the American Electric Power System Retirement Savings Plan, a defined contribution retirement savings plan for substantially all employees who are not covered by a retirement savings plan of the United Mine Workers of America (UMWA).  It is a qualified plan offering participants an opportunity to contribute a portion of their pay with features under Section 401(k) of the Internal Revenue Code.  The matching contributions to the plan are 100% of the first 1% of eligible employee contributions and 70% of the next 5% of contributions.  The cost for matching contributions totaled $70 million in 2014, $67 million in 2013 and $66 million in 2012.

UMWA Benefits

We provide UMWA pension, health and welfare benefits for certain unionized employees, retirees and their survivors who meet eligibility requirements.  UMWA trustees make final interpretive determinations with regard to all benefits.  The pension benefits are administered by UMWA trustees and contributions are made to their trust funds.  The health and welfare benefits are administered by us and benefits are paid from our general assets.

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The UMWA pension benefits are administered through a multiemployer plan that is different from single-employer plans as an employer’s contributions may be used to provide benefits to employees of other participating employers.  Required contributions not made by any employer may result in other employers bearing the unfunded plan obligations, while a withdrawing employer may be subject to a withdrawal liability.  UMWA pension benefits are provided through the United Mine Workers of America 1974 Pension Plan (Employer Identification Number: 52-1050282, Plan Number 2), which under the Pension Protection Act of 2006 (PPA) was in Critical Status for the plan year ending June 30, 2014 and in Seriously Endangered Status for the plan year ending June 30, 2013, without utilization of extended amortization provisions.  The Plan adopted a funding improvement plan in May 2012, as required under the PPA.

Contributions to the UMWA pension plan in 2014, 2013 and 2012 were made under a collective bargaining agreement that is scheduled to expire December 31, 2017.  We contributed immaterial amounts in 2014, 2013 and 2012 that represent less than 5% of the total contributions in the plan’s latest annual report for the years ended June 30, 2014, 2013 and 2012.  The contributions we made included a surcharge of 5% beginning December 2014 and are scheduled to include a surcharge of 10% beginning July 2015.  There are no minimum contributions for future years.

Based upon the plan to retrofit the Rockport Plant with dry sorbent injection technology to meet environmental emission control requirements and the timing of the closure of Cook Coal Terminal expected to be in or after 2025, we recorded a UWMA withdrawal liability in 2013.  The withdrawal liability regulatory asset recorded on the balance sheet should be recovered in future billings for transloading services before the planned closure. As of December 31, 2014 and 2013, the regulatory asset balance was $25 million and $27 million, respectively.

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9.  BUSINESS SEGMENTS

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

Our reportable segments and their related business activities are outlined below:

Vertically Integrated Utilities

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

Transmission and Distribution Utilities

• Transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by OPCo, TCC and TNC.

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

AEP Transmission Holdco

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

Generation & Marketing

• Nonregulated generation in ERCOT and PJM.

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

AEP River Operations

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

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

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The tables below present our reportable segment income statement information for the years ended December 31, 2014, 2013 and 2012and reportable segment balance sheet information as of December 31, 2014 and 2013.  These amounts include certain estimates and allocations where necessary.

	Vertically Integrated Utilities			Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing			AEP River Operations		Corporate and Other(a)		Reconciling Adjustments				Consolidated
	(in millions)
Year Ended December 31, 2014
Revenues from:
External Customers	$	9,397	(b)	$	4,553	$	74	$	2,384	(b)	$	642	$	22	$	(52	)	(c)	$	17,020
Other Operating Segments	87		(b)	261		118		1,466		(b)	58		73		(2,063		)		—
Total Revenues	$	9,484		$	4,814	$	192	$	3,850		$	700	$	95	$	(2,115	)		$	17,020
Depreciation and Amortization	1,033			658		24		227			31		—		(44		)	(d)	1,929
Interest and Investment Income	4			11		—		5			—		7		(20		)		7
Carrying Costs Income	6			27		—		—			—		—		—				33
Interest Expense	526			280		23		46			17		26		(33		)	(d)	885
Income Tax Expense	434			211		63		179			40		15		—				942
Net Income	712			355		151		367			49		4		—				1,638
Gross Property Additions	2,055			1,038		948		165			4		17		(28		)		4,199

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	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing		AEP River Operations		Corporate and Other(a)			Reconciling Adjustments				Consolidated
	(in millions)
Year Ended December 31, 2013
Revenues from:
External Customers	$	9,347	$	4,279	$	27	$	1,208	$	544	$	32		$	(80	)	(c)	$	15,357
Other Operating Segments	645		199		51		2,457		19		57			(3,428		)		—
Total Revenues	$	9,992	$	4,478	$	78	$	3,665	$	563	$	89		$	(3,508	)		$	15,357
Asset Impairments and Other Related Charges	$	72	$	—	$	—	$	154	$	—	$	—		$	—			$	226
Depreciation and Amortization	941		591		10		236		31		—			(66		)	(d)	1,743
Interest and Investment Income	7		2		—		2		—		69			(22		)		58
Carrying Costs Income	14		16		—		—		—		—			—				30
Interest Expense	540		292		10		55		17		27			(35		)	(d)	906
Income Tax Expense (Credit)	398		198		29		112		7		(60		)	—				684
Net Income	681		358		80		228		12		125			—				1,484
Gross Property Additions	1,822		871		843		185		7		9			(81		)		3,656

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	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing		AEP River Operations		Corporate and Other(a)			Reconciling Adjustments				Consolidated
	(in millions)
Year Ended December 31, 2012
Revenues from:
External Customers	$	8,785	$	4,659	$	7	$	882	$	647	$	25		$	(60	)	(c)	$	14,945
Other Operating Segments	633		159		17		2,585		20		58			(3,472		)		—
Total Revenues	$	9,418	$	4,818	$	24	$	3,467	$	667	$	83		$	(3,532	)		$	14,945
Asset Impairments and Other Related Charges	$	13	$	—	$	—	$	287	$	—	$	—		$	—			$	300
Depreciation and Amortization	873		561		3		349		29		—			(33		)	(d)	1,782
Interest and Investment Income	5		4		—		1		—		22			(24		)		8
Carrying Costs Income	28		24		1		—		—		—			—				53
Interest Expense	520		291		3		83		17		112			(38		)	(d)	988
Income Tax Expense	345		201		17		15		7		19			—				604
Net Income (Loss)	803		389		43		100		15		(88		)	—				1,262
Gross Property Additions	1,801		664		392		249		31		2			(20		)		3,119

	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing		AEP River Operations		Corporate and Other(a)		Reconciling Adjustments				Consolidated
	(in millions)
December 31, 2014
Total Property, Plant and Equipment	$	39,402	$	13,024	$	2,714	$	8,394	$	700	$	343	$	(272	)	(d)	$	64,305
Accumulated Depreciation and Amortization	12,773		3,481		25		3,603		217		188		(99		)	(d)	20,188
Total Property, Plant and Equipment – Net	$	26,629	$	9,543	$	2,689	$	4,791	$	483	$	155	$	(173	)	(d)	$	44,117
Total Assets	$	33,750	$	14,495	$	3,575	$	6,329	$	749	$	21,081	$	(20,346	)	(d) (e)	$	59,633
Investments in Equity Method Investees	26		1		548		—		58		15		—				648
Long-term Debt Due Within One Year:
Affiliated	$	111	$	—	$	—	$	86	$	—	$	—	$	(197	)		$	—
Non-Affiliated	1,352		405		—		740		3		3		—				2,503
Long-term Debt:
Affiliated	20		—		—		32		—		—		(52		)		—
Non-Affiliated	8,634		5,256		1,153		217		80		841		—				16,181
Total Long-term Debt	$	10,117	$	5,661	$	1,153	$	1,075	$	83	$	844	$	(249	)		$	18,684

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	Vertically Integrated Utilities		Transmission and Distribution Utilities		AEP Transmission Holdco		Generation & Marketing		AEP River Operations		Corporate and Other(a)		Reconciling Adjustments				Consolidated
	(in millions)
December 31, 2013
Total Property, Plant and Equipment	$	37,545	$	12,143	$	1,636	$	8,277	$	638	$	315	$	(269	)	(d)	$	60,285
Accumulated Depreciation and Amortization	12,250		3,342		10		3,409		189		173		(85		)	(d)	19,288
Total Property, Plant and Equipment – Net	$	25,295	$	8,801	$	1,626	$	4,868	$	449	$	142	$	(184	)	(d)	$	40,997
Total Assets	$	32,791	$	14,165	$	2,245	$	6,426	$	673	$	19,645	$	(19,531	)	(d) (e)	$	56,414
Investments in Equity Method Investees	24		—		480		—		54		11		—				569
Long-term Debt Due Within One Year:
Affiliated	$	—	$	—	$	—	$	179	$	5	$	—	$	(184	)		$	—
Non-Affiliated	720		697		—		126		2		4		—				1,549
Long-term Debt:
Affiliated	151		—		—		118		10		—		(279		)		—
Non-Affiliated	9,265		5,360		620		664		83		836		—				16,828
Total Long-term Debt	$	10,136	$	6,057	$	620	$	1,087	$	100	$	840	$	(463	)		$	18,377

(a) Corporate and Other primarily includes the purchasing of receivables from certain AEP utility subsidiaries. This segment also includes Parent's guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.

(b) Includes the impact of the corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013, as well as the impact of the termination of the Interconnection Agreement effective January 1, 2014.

(c) Reconciling Adjustments for External Customers primarily include eliminations as a result of corporate separation in Ohio.

(d) Includes eliminations due to an intercompany capital lease.

(e) Reconciling Adjustments for Total Assets primarily include the elimination of intercompany advances to affiliates and intercompany accounts receivable along with the elimination of AEP's investments in subsidiary companies.

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10.  DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

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

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

Our strategy surrounding the use of derivative instruments primarily focuses on managing our risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies.  Our risk management strategies also include the use of derivative instruments for trading purposes, focusing on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which we transact.  To accomplish our objectives, we primarily employ risk management contracts including physical and financial forward purchase-and-sale contracts and, to a lesser extent, OTC swaps and options.  Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.”  Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

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

The following table represents the gross notional volume of our outstanding derivative contracts as of December 31, 2014 and 2013:

Notional Volume of Derivative Instruments

	Volume
	December 31,				Unit of
Primary Risk Exposure	2014		2013		Measure
	(in millions)
Commodity:
Power	334		406		MWhs
Coal	3		4		Tons
Natural Gas	106		127		MMBtus
Heating Oil and Gasoline	6		6		Gallons
Interest Rate	$	152	$	191	USD
Interest Rate and Foreign Currency	$	815	$	820	USD

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Fair Value Hedging Strategies

We enter into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt.  Certain interest rate derivative transactions effectively modify our exposure to interest rate risk by converting a portion of our fixed-rate debt to a floating rate.  Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

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

Our vehicle fleet and barge operations are exposed to gasoline and diesel fuel price volatility. We enter into financial heating oil and gasoline derivative contracts in order to mitigate price risk of our future fuel purchases. We discontinued cash flow hedge accounting for these derivative contracts effective March 31, 2014. During the year ended December 31, 2013, we designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. We do not hedge all fuel price risk.

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

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

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON OUR FINANCIAL STATEMENTS

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheets at fair value.  The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes.  If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions.  In order to determine the relevant fair values of our derivative instruments, we also apply valuation adjustments for discounting, liquidity and credit quality.

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due.  Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions.  Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts.  Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract’s term and at the time a contract settles.  Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with our estimates of current market consensus for forward prices in the current period.  This is particularly true for longer term contracts.  Cash flows may vary based on market conditions, margin requirements and the timing of settlement of our risk management contracts.

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According to the accounting guidance for “Derivatives and Hedging,” we reflect the fair values of our derivative instruments subject to netting agreements with the same counterparty net of related cash collateral.  For certain risk management contracts, we are required to post or receive cash collateral based on third party contractual agreements and risk profiles.  For the December 31, 2014 and 2013 balance sheets, we netted $4 million and $4 million, respectively, of cash collateral received from third parties against short-term and long-term risk management assets and $35 million and $13 million, respectively, of cash collateral paid to third parties against short-term and long-term risk management liabilities.

The following tables represent the gross fair value impact of our derivative activity on the balance sheets as of December 31, 2014 and 2013:

Fair Value of Derivative Instruments

December 31, 2014

	Risk Management Contracts		Hedging Contracts					Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in millions)
Current Risk Management Assets	$	392	$	30	$	3		$	425	$	(247	)	$	178
Long-term Risk Management Assets	367		3		—			370		(76		)	294
Total Assets	759		33		3			795		(323		)	472
Current Risk Management Liabilities	329		23		1			353		(261		)	92
Long-term Risk Management Liabilities	208		8		9			225		(94		)	131
Total Liabilities	537		31		10			578		(355		)	223
Total MTM Derivative Contract Net Assets (Liabilities)	$	222	$	2	$	(7	)	$	217	$	32		$	249

Fair Value of Derivative Instruments

December 31, 2013

	Risk Management Contracts		Hedging Contracts					Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in millions)
Current Risk Management Assets	$	347	$	12	$	4		$	363	$	(203	)	$	160
Long-term Risk Management Assets	368		3		—			371		(74		)	297
Total Assets	715		15		4			734		(277		)	457
Current Risk Management Liabilities	292		11		1			304		(214		)	90
Long-term Risk Management Liabilities	237		3		15			255		(78		)	177
Total Liabilities	529		14		16			559		(292		)	267
Total MTM Derivative Contract Net  Assets (Liabilities)	$	186	$	1	$	(12	)	$	175	$	15		$	190

(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 primarily include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."  Amounts also include de-designated risk management contracts.

(c) There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

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The table below presents our activity of derivative risk management contracts for the years ended December 31, 2014, 2013 and 2012:

Amount of Gain (Loss) Recognized on

Risk Management Contracts

	Years Ended December 31,
Location of Gain (Loss)	2014			2013			2012
	(in millions)
Vertically Integrated Utilities Revenues	$	35		$	15		$	10
Generation & Marketing Revenues	53			49			50
Regulatory Assets (a)	(11		)	(2		)	(43		)
Regulatory Liabilities (a)	193			(5		)	8
Total Gain on Risk Management Contracts	$	270		$	57		$	25

(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.

Our accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship.  Depending on the exposure, we designate a hedging instrument as a fair value hedge or a cash flow hedge.

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes.  Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the 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.  However, unrealized and some realized gains and losses in regulated jurisdictions for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

We record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the statements of income.  The following table shows the results of our hedging gains (losses) during 2014, 2013, and 2012:

	Years Ended December 31,
	2014			2013			2012
	(in millions)
Gain (Loss) on Fair Value Hedging Instruments	$	4		$	(10	)	$	—	(a)
Gain (Loss) on Fair Value Portion of Long-term Debt	(4		)	10			—		(a)

(a) The fair value changes were immaterial.

For 2014, 2013 and 2012, hedge ineffectiveness was immaterial.

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Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power and natural gas designated as cash flow hedges are included in Revenues or Purchased Electricity for Resale on 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 2014, 2013 and 2012, we designated power and natural gas derivatives as cash flow hedges.

We reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the statements of income.  During 2013 and 2012, we designated heating oil and gasoline derivatives as cash flow hedges. The impact of cash flow hedge accounting for these derivative contracts was immaterial and was discontinued effective March 31, 2014.

We reclassify gains and losses on interest rate derivative hedges related to our debt financings from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Interest Expense on the statements of income in those periods in which hedged interest payments occur.  During 2014, 2013 and 2012, we designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to our foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on 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 2014 and 2013, we did not designate any foreign currency derivatives as cash flow hedges.  During 2012, we designated foreign currency derivatives as cash flow hedges.

During 2014, 2013 and 2012, hedge ineffectiveness was immaterial or nonexistent for all cash flow hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets and the reasons for changes in cash flow hedges for the years ended December 31, 2014, 2013 and 2012, see Note 3.

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Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets as of December 31, 2014 and 2013 were:

Impact of Cash Flow Hedges on the Balance Sheet
December 31, 2014
	Commodity		Interest Rate and Foreign Currency			Total
	(in millions)
Hedging Assets (a)	$	16	$	—		$	16
Hedging Liabilities (a)	14		1			15
AOCI Gain (Loss) Net of Tax	1		(19		)	(18		)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months	4		(2		)	2

Impact of Cash Flow Hedges on the Balance Sheet
December 31, 2013
	Commodity		Interest Rate and Foreign Currency			Total
	(in millions)
Hedging Assets (a)	$	7	$	—		$	7
Hedging Liabilities (a)	6		2			8
AOCI Loss Net of Tax	—		(23		)	(23		)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months	—		(4		)	(4		)

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

The actual amounts that we reclassify from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.  As of December 31, 2014, the maximum length of time that we are hedging (with contracts subject to the accounting guidance for “Derivatives and Hedging”) our exposure to variability in future cash flows related to forecasted transactions was 72 months.

Credit Risk

We limit credit risk in our wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis.  We use Moody’s, Standard and Poor’s and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

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

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Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs), a limited number of derivative and non-derivative contracts primarily related to our competitive retail auction loads, and guaranties for contractual obligations, we are obligated to post an additional amount of collateral if our credit ratings decline below a specified rating threshold. The amount of collateral required fluctuates based on market prices and our total exposure. On an ongoing basis, our risk management organization assesses the appropriateness of these collateral triggering items in contracts. AEP and its subsidiaries have not experienced a downgrade below a specified rating threshold that would require the posting of additional collateral. The following table represents our exposure if our credit ratings were to decline below a specified rating threshold as of December 31, 2014 and 2013:

	December 31,
	2014		2013
	(in millions)
Fair Value of Contracts with Credit Downgrade Triggers	$	—	$	3
Amount of Collateral AEP Subsidiaries Would Have been Required to Post for Derivative Contracts as well as Derivative and Non-Derivative Contracts Subject to the Same Master Netting Arrangement	—		—
Amount of Collateral AEP Subsidiaries Would Have Been Required to Post Attributable to RTOs and ISOs	36		28
Amount of Collateral Attributable to Other Contracts (a)	281		5

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

In addition, a majority of our non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable.  These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, our risk management organization assesses the appropriateness of these cross-default provisions in our contracts.  The following table represents: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral we have posted and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering our contractual netting arrangements as of December 31, 2014 and 2013:

	December 31,
	2014		2013
	(in millions)
Liabilities for Contracts with Cross Default Provisions Prior to Contractual Netting Arrangements	$	235	$	293
Amount of Cash Collateral Posted	9		1
Additional Settlement Liability if Cross Default Provision is Triggered	178		235

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11.  FAIR VALUE MEASUREMENTS

Fair Value Measurements of Long-term Debt

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs.  These instruments are not marked-to-market.  The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.

The book values and fair values of Long-term Debt as of December 31, 2014 and 2013 are summarized in the following table:

	December 31,
	2014				2013
	Book Value		Fair Value		Book Value		Fair Value
	(in millions)
Long-term Debt	$	18,684	$	21,075	$	18,377	$	19,672

Fair Value Measurements of Other Temporary Investments

Other Temporary Investments include funds held by trustees primarily for the payment of securitization bonds and securities available for sale, including marketable securities that we intend to hold for less than one year and investments by our protected cell of EIS.  See “Other Temporary Investments” section of Note 1.

The following is a summary of Other Temporary Investments:

	December 31, 2014
Other Temporary Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in millions)
Restricted Cash (a)	$	280	$	—	$	—	$	280
Fixed Income Securities – Mutual Funds	81		—		—		81
Equity Securities – Mutual Funds	13		12		—		25
Total Other Temporary Investments	$	374	$	12	$	—	$	386

	December 31, 2013
Other Temporary Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in millions)
Restricted Cash (a)	$	250	$	—	$	—	$	250
Fixed Income Securities – Mutual Funds	80		—		—		80
Equity Securities – Mutual Funds	12		11		—		23
Total Other Temporary Investments	$	342	$	11	$	—	$	353

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

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The following table provides the activity for our fixed income and equity securities within Other Temporary Investments for the years ended December 31, 2014, 2013 and 2012:

	Years Ended December 31,
	2014		2013		2012
	(in millions)
Proceeds from Investment Sales	$	—	$	—	$	—
Purchases of Investments	2		17		2
Gross Realized Gains on Investment Sales	—		—		—
Gross Realized Losses on Investment Sales	—		—		—

As of December 31, 2014 and 2013, we had no Other Temporary Investments with an unrealized loss position.  As of December 31, 2014, fixed income securities were primarily debt based mutual funds with short and intermediate maturities.  Mutual funds may be sold and do not contain maturity dates.

For details of the reasons for changes in securities available for sale included in Accumulated Other Comprehensive Income (Loss) for the years ended December 31, 2014 and 2013, see Note 3.

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  See “Nuclear Trust Funds” section of Note 1.

The following is a summary of nuclear trust fund investments as of December 31, 2014 and 2013:

	December 31,
	2014							2013
	Estimated Fair Value		Gross Unrealized Gains		Other-Than-Temporary Impairments			Estimated Fair Value		Gross Unrealized Gains		Other-Than-Temporary Impairments
	(in millions)
Cash and Cash Equivalents	$	20	$	—	$	—		$	19	$	—	$	—
Fixed Income Securities:
United States Government	697		45		(5		)	609		26		(4		)
Corporate Debt	48		4		(1		)	37		2		(1		)
State and Local Government	208		1		—			255		1		—
Subtotal Fixed Income Securities	953		50		(6		)	901		29		(5		)
Equity Securities – Domestic	1,123		599		(79		)	1,012		506		(82		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,096	$	649	$	(85	)	$	1,932	$	535	$	(87	)

The following table provides the securities activity within the decommissioning and SNF trusts for the years ended December 31, 2014, 2013 and 2012:

	Years Ended December 31,
	2014		2013		2012
	(in millions)
Proceeds from Investment Sales	$	1,032	$	858	$	988
Purchases of Investments	1,086		910		1,045
Gross Realized Gains on Investment Sales	32		18		25
Gross Realized Losses on Investment Sales	15		8		9

The adjusted cost of fixed income securities was $903 million and $872 million as of December 31, 2014 and 2013, respectively.  The adjusted cost of equity securities was $524 million and $506 million as of December 31, 2014 and 2013, respectively.

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The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of December 31, 2014 was as follows:

	Fair Value of Fixed Income Securities
	(in millions)
Within 1 year	$	154
1 year – 5 years	376
5 years – 10 years	179
After 10 years	244
Total	$	953

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Fair Value Measurements of Financial Assets and Liabilities

For a discussion of fair value accounting and the classification of assets and liabilities within the fair value hierarchy, see the “Fair Value Measurements of Assets and Liabilities” section of Note 1.

The following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2014 and 2013.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in our valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2014
	Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)
Cash and Cash Equivalents (a)	$	17	$	1	$	—	$	145		$	163
Other Temporary Investments
Restricted Cash (a)	234		9		—		37			280
Fixed Income Securities – Mutual Funds	81		—		—		—			81
Equity Securities – Mutual Funds (b)	25		—		—		—			25
TotalOther Temporary Investments	340		9		—		37			386
Risk Management Assets
Risk Management Commodity Contracts (c) (d)	37		528		190		(302		)	453
Cash Flow Hedges:
Commodity Hedges (c)	—		32		—		(16		)	16
Fair Value Hedges	—		1		—		2			3
Total Risk Management Assets	37		561		190		(316		)	472
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (f)	9		—		—		11			20
Fixed Income Securities:
United States Government	—		697		—		—			697
Corporate Debt	—		48		—		—			48
State and Local Government	—		208		—		—			208
Subtotal Fixed Income Securities	—		953		—		—			953
Equity Securities – Domestic (b)	1,123		—		—		—			1,123
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,132		953		—		11			2,096
Total Assets	$	1,526	$	1,524	$	190	$	(123	)	$	3,117
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (c) (d)	$	65	$	432	$	36	$	(334	)	$	199
Cash Flow Hedges:
Commodity Hedges (c)	—		27		3		(16		)	14
Interest Rate/Foreign Currency Hedges	—		1		—		—			1
Fair Value Hedges	—		7		—		2			9
Total Risk Management Liabilities	$	65	$	467	$	39	$	(348	)	$	223

134

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2013
	Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)
Cash and Cash Equivalents (a)	$	16	$	1	$	—	$	101		$	118
Other Temporary Investments
Restricted Cash (a)	231		8		—		11			250
Fixed Income Securities – Mutual Funds	80		—		—		—			80
Equity Securities – Mutual Funds (b)	23		—		—		—			23
TotalOther Temporary Investments	334		8		—		11			353
Risk Management Assets
Risk Management Commodity Contracts (c) (g)	22		549		142		(273		)	440
Cash Flow Hedges:
Commodity Hedges (c)	—		15		—		(8		)	7
Fair Value Hedges	—		1		—		3			4
De-designated Risk Management Contracts (e)	—		—		—		6			6
Total Risk Management Assets	22		565		142		(272		)	457
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (f)	8		—		—		11			19
Fixed Income Securities:
United States Government	—		609		—		—			609
Corporate Debt	—		37		—		—			37
State and Local Government	—		255		—		—			255
Subtotal Fixed Income Securities	—		901		—		—			901
Equity Securities – Domestic (b)	1,012		—		—		—			1,012
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,020		901		—		11			1,932
Total Assets	$	1,392	$	1,475	$	142	$	(149	)	$	2,860
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)	$	30	$	475	$	22	$	(282	)	$	245
Cash Flow Hedges:
Commodity Hedges (c)	—		11		3		(8		)	6
Interest Rate/Foreign Currency Hedges	—		2		—		—			2
Fair Value Hedges	—		11		—		3			14
Total Risk Management Liabilities	$	30	$	499	$	25	$	(287	)	$	267

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

(e) Represents contracts that were originally MTM but were subsequently elected as normal under the accounting guidance for "Derivatives and Hedging."  At the time of the normal election, the MTM value was frozen and no longer fair valued.  This MTM value will be amortized into revenues over the remaining life of the contracts.

(f) Amounts in "Other" column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

(g) The December 31, 2013 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows:  Level 1 matures $4 million in 2014, $(11) million in periods 2015-2017 and $(1) million in periods 2018-2019;  Level 2 matures $25 million in 2014, $37 million in periods 2015-2017, $7 million in periods 2018-2019 and $5 million in periods 2020-2030;  Level 3 matures $27 million in 2014, $60 million in periods 2015-2017, $14 million in periods 2018-2019 and $19 million in periods 2020-2030.  Risk management commodity contracts are substantially comprised of power contracts.

There have been no transfers between Level 1 and Level 2 during the years ended December 31, 2014, 2013 and 2012.

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The following tables set forth a reconciliation of changes in the fair value of net trading derivatives and other investments classified as Level 3 in the fair value hierarchy:

Year Ended December 31, 2014	Net Risk Management Assets (Liabilities)
	(in millions)
Balance as of December 31, 2013	$	117
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	90
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	6
Purchases, Issuances and Settlements (c)	(108		)
Transfers into Level 3 (d) (e)	(8		)
Transfers out of Level 3 (e) (f)	(21		)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	75
Balance as of December 31, 2014	$	151

Year Ended December 31, 2013	Net Risk Management Assets (Liabilities)
	(in millions)
Balance as of December 31, 2012	$	86
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	(9		)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	37
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(3		)
Purchases, Issuances and Settlements (c)	(16		)
Transfers into Level 3 (d) (e)	19
Transfers out of Level 3 (e) (f)	(4		)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	7
Balance as of December 31, 2013	$	117

Year Ended December 31, 2012	Net Risk Management Assets (Liabilities)
	(in millions)
Balance as of December 31, 2011	$	69
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	(15		)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	29
Purchases, Issuances and Settlements (c)	32
Transfers into Level 3 (d) (e)	1
Transfers out of Level 3 (e) (f)	(35		)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	5
Balance as of December 31, 2012	$	86

(a) Included in revenues on the statements of income.

(b) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(c) Represents the settlement of risk management commodity contracts for the reporting period.

(d) Represents existing assets or liabilities that were previously categorized as Level 2.

(e) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(f) Represents existing assets or liabilities that were previously categorized as Level 3.

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

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The following tables quantify the significant unobservable inputs used in developing the fair value of our Level 3 positions as of December 31, 2014 and 2013:

Significant Unobservable Inputs

December 31, 2014

						Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input	Low			High		Average
	(in millions)
Energy Contracts	$	157	$	37	Discounted Cash Flow	Forward Market Price (a)	$	11.37		$	159.92	$	57.18
						Counterparty Credit Risk (b)	303
FTRs	33		2		Discounted Cash Flow	Forward Market Price (a)	(14.63		)	20.02		0.96
Total	$	190	$	39

Significant Unobservable Inputs

December 31, 2013

						Significant
	Fair Value				Valuation	Unobservable	Input/Range
	Assets		Liabilities		Technique	Input	Low			High
	(in millions)
Energy Contracts	$	132	$	22	Discounted Cash Flow	Forward Market Price (a)	$	11.42		$	120.72
						Counterparty Credit Risk (b)	316
FTRs	10		3		Discounted Cash Flow	Forward Market Price (a)	(5.10		)	10.44
Total	$	142	$	25

(a) Represents market prices in dollars per MWh.

(b) Represents average price of credit default swaps used to calculate counterparty credit risk, reported in basis points.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs as of December 31, 2014:

Sensitivity of Fair Value Measurements

December 31, 2014

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)

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12.  INCOME TAXES

The details of our consolidated income taxes as reported are as follows:

	Years Ended December 31,
	2014		2013			2012
	(in millions)
Federal:
Current	$	51	$	(45	)	$	(52	)
Deferred	796		676			698
Total Federal	847		631			646
State and Local:
Current	25		29			35
Deferred	70		24			(77		)
Total State and Local	95		53			(42		)
Income Tax Expense	$	942	$	684		$	604

The following is a reconciliation of our consolidated difference between the amount of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

	Years Ended December 31,
	2014				2013				2012
	(in millions)
Net Income	$	1,638			$	1,484			$	1,262
Income Tax Expense	942				684				604
Pretax Income	$	2,580			$	2,168			$	1,866
Income Taxes on Pretax Income at Statutory Rate (35%)	$	903			$	759			$	653
Increase (Decrease) in Income Taxes resulting from the following items:
Depreciation	54				47				39
Investment Tax Credits, Net	(13			)	(14			)	(14			)
State and Local Income Taxes, Net	64				29				(33			)
Removal Costs	(24			)	(21			)	(18			)
AFUDC	(42			)	(31			)	(39			)
Valuation Allowance	(2			)	5				6
U.K. Windfall Tax	—				(80			)	15
Other	2				(10			)	(5			)
Income Tax Expense	$	942			$	684			$	604
Effective Income Tax Rate	36.5		%		31.5		%		32.4		%

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The following table shows elements of the net deferred tax liability and significant temporary differences:

	December 31,
	2014			2013
	(in millions)
Deferred Tax Assets	$	2,653		$	2,900
Deferred Tax Liabilities	(13,599		)	(13,088		)
Net Deferred Tax Liabilities	$	(10,946	)	$	(10,188	)
Property Related Temporary Differences	$	(7,968	)	$	(7,508	)
Amounts Due from Customers for Future Federal Income Taxes	(255		)	(273		)
Deferred State Income Taxes	(811		)	(765		)
Securitized Assets	(753		)	(870		)
Regulatory Assets	(694		)	(609		)
Deferred Income Taxes on Other Comprehensive Loss	60			66
Accrued Nuclear Decommissioning	(611		)	(554		)
Net Operating Loss Carryforward	47			233
Tax Credit Carryforward	144			109
Valuation Allowance	(56		)	(97		)
All Other, Net	(49		)	80
Net Deferred Tax Liabilities	$	(10,946	)	$	(10,188	)

AEP System Tax Allocation Agreement

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

Federal and State Income Tax Audit Status

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

We, along with our subsidiaries, file income tax returns in various state, local and foreign jurisdictions.  These taxing authorities routinely examine our tax returns and we are currently under examination in several state and local jurisdictions.  However, it is possible that we have filed tax returns with positions that may be challenged by these tax authorities.  We believe that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and the ultimate resolution of these audits will not materially impact net income.  We are no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2009.

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Net Income Tax Operating Loss Carryforward

In 2012 and 2011, we recognized federal net income tax operating losses of $366 million and $226 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book-versus-tax temporary differences.  As of December 31, 2013, we had $156 million of unrealized federal net operating loss carryforward tax benefits.  Federal taxable income was sufficient enough in 2014 that these remaining federal net income tax operating loss tax benefits were realized in full. We recognized deferred state and local income tax benefits in 2012 and 2011. The state net income tax operating loss carryforwards as of December 31, 2014 are indicated in the table below:

State	State Net Income Tax Operating Loss Carryforward		Year of Expiration
	(in millions)
Louisiana	$	431	2029
Missouri	9		2034
Oklahoma	322		2034
Tennessee	3		2026
West Virginia	286		2032

We anticipate future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

As of December 31, 2013 we had $121 million of uncertain tax positions netted against the federal net income tax operating loss carryforward tax benefits. Due to the utilization of the net operating loss carryforward in 2014, $69 million is presented as a non-current uncertain tax position. As of December 31, 2014, we have $52 million of uncertain tax positions netted against tax credit and alternative minimum tax carryforward tax benefits.

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2012, 2011 and 2009, along with lower federal and state taxable income in 2010, resulted in unused federal and state income tax credits.  As of December 31, 2014, we have total federal tax credit carryforwards of $144 million and total state tax credit carryforwards of $22 million, not all of which are subject to an expiration date.  If these credits are not utilized, the federal general business tax credits of $74 million will expire in the years 2028 through 2033.

We anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused.  

In November 2014, APCo received an order from the Virginia SCC for its 2014 Virginia Biennial Base Rate Case (see Note 4). As a result of the final determination pertaining to the ability to realize future tax benefits for certain state net income tax operating loss and credit carryforwards, we determined that APCo is subject to the Virginia Minimum Tax on electric suppliers and the Virginia State Income Tax is no longer applicable. As a result, we derecognized the related state income tax benefits, which had been subject to valuation allowances.

Valuation Allowance

We assess past results and future operations to estimate and evaluate available positive and negative evidence to evaluate whether sufficient future taxable income will be generated to use existing deferred tax assets.  The positive evidence we considered is the history of positive pretax income and the fact that the tax losses resulted from temporary differences that will reverse in future periods.  On the basis of the evaluation of all available positive and negative evidence, as of December 31, 2014, a valuation allowance of $56 million for an unrealized capital loss has been recorded in order to recognize only the portion of the deferred tax assets that, more likely than not, will be realized. The amount of the deferred tax assets realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are materially impacted.

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Uncertain Tax Positions

In May 2013, the U.S. Supreme Court decided that the U.K. Windfall Tax imposed upon U.K. electric companies privatized between 1984 and 1996 is a creditable tax for U.S. federal income tax purposes.  We filed protective claims asserting the creditability of the tax, dependent upon the outcome of the case.  As a result of the favorable U.S. Supreme Court decision, we recognized a tax benefit of $80 million, plus $43 million of pretax interest income in the second quarter of 2013.  The tax benefit and interest income resulted in an increase in net income of $108 million, but did not result in the receipt of cash as of December 31, 2014. Due to the timing of the IRS audit cycle, receipt of cash is not expected within the next 12 months.

We recognize interest accruals related to uncertain tax positions in interest income or expense, as applicable, and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following table shows amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2014		2013		2012
	(in millions)
Interest Expense	$	3	$	1	$	11
Interest Income	1		51		—
Reversal of Prior Period Interest Expense	2		—		1

The following table shows balances for amounts accrued for the receipt of interest and the payment of interest and penalties:

	December 31,
	2014		2013
	(in millions)
Accrual for Receipt of Interest	$	44	$	43
Accrual for Payment of Interest and Penalties	6		5

The reconciliations of the beginning and ending amounts of unrecognized tax benefits are as follows:

	2014			2013			2012
	(in millions)
Balance as of January 1,	$	175		$	267		$	168
Increase – Tax Positions Taken During a Prior Period	18			—			23
Decrease – Tax Positions Taken During a Prior Period	(1		)	(94		)	(16		)
Increase – Tax Positions Taken During the Current Year	—			2			121
Decrease – Tax Positions Taken During the Current Year	—			—			—
Decrease – Settlements with Taxing Authorities	(1		)	—			(25		)
Decrease – Lapse of the Applicable Statute of Limitations	(9		)	—			(4		)
Balance as of December 31,	$	182		$	175		$	267

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $97 million, $87 million and $149 million for 2014, 2013 and 2012, respectively.  We believe there will be no significant net increase or decrease in unrecognized tax benefits within 12 months of the reporting date.

Federal Tax Legislation

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013.  Included in the 2012 Act was a one-year extension of 50% bonus depreciation.  The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011.  The enacted provisions did not materially impact net income or financial condition but did have a favorable impact on cash flows in 2013.

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The Tax Increase Prevention Act of 2014 (the 2014 Act) was enacted in December 2014. Included in the 2014 Act was a one-year extension of the 50% bonus depreciation. The 2014 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2013. The enacted provisions did not materially impact net income or financial condition but will have a favorable impact on future cash flows.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014.  In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry.  These final regulations did not materially impact net income, cash flows or financial condition.

State Tax Legislation

Legislation was passed by the state of Indiana in May 2011 enacting a phased reduction in corporate income tax rate from 8.5% to 6.5%.  The 8.5% Indiana corporate income tax rate will be reduced 0.5% each year beginning after June 30, 2012 with the final reduction occurring in years beginning after June 30, 2015.

In May 2011, Michigan repealed its Business Tax regime and replaced it with a traditional corporate net income tax rate of 6%, effective January 1, 2012.

During the third quarter of 2013, it was determined that the state of West Virginia had achieved certain minimum levels of shortfall reserve funds.  As a result, the West Virginia corporate income tax rate was reduced from 7% to 6.5% in 2014.  

The enacted provisions did not materially impact net income, cash flows or financial condition.

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13.  LEASES

Leases of property, plant and equipment are for remaining periods up to 35 years and require payments of related property taxes, maintenance and operating costs.  The majority of the leases have purchase or renewal options and will be renewed or replaced by other leases.

Lease rentals for both operating and capital leases are generally charged to Other Operation and Maintenance expense in accordance with rate-making treatment for regulated operations.  Additionally, for regulated operations with capital leases, a capital lease asset and offsetting liability are recorded at the present value of the remaining lease payments for each reporting period.  Capital leases for nonregulated property are accounted for as if the assets were owned and financed.  The components of rental costs are as follows:

	Years Ended December 31,
Lease Rental Costs	2014		2013		2012
	(in millions)
Net Lease Expense on Operating Leases	$	304	$	327	$	346
Amortization of Capital Leases	109		74		73
Interest on Capital Leases	26		28		29
Total Lease Rental Costs	$	439	$	429	$	448

The following table shows the property, plant and equipment under capital leases and related obligations recorded on the balance sheets.  Capital lease obligations are included in Other Current Liabilities and Deferred Credits and Other Noncurrent Liabilities on the balance sheets.

	December 31,
Property, Plant and Equipment Under Capital Leases	2014		2013
	(in millions)
Generation	$	104	$	103
Other Property, Plant and Equipment	683		627
Total Property, Plant and Equipment Under Capital Leases	787		730
Accumulated Amortization	240		197
Net Property, Plant and Equipment Under Capital Leases	$	547	$	533
Obligations Under Capital Leases
Noncurrent Liability	$	441	$	428
Liability Due Within One Year	111		110
Total Obligations Under Capital Leases	$	552	$	538

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Future minimum lease payments consisted of the following as of December 31, 2014:

Future Minimum Lease Payments	Capital Leases		Noncancelable Operating Leases
	(in millions)
2015	$	134	$	293
2016	120		267
2017	98		253
2018	63		239
2019	46		223
Later Years	239		693
Total Future Minimum Lease Payments	700		$	1,968
Less Estimated Interest Element	148
Estimated Present Value of Future Minimum Lease Payments	$	552

Master Lease Agreements

We lease certain equipment under master lease agreements.  Under the lease agreements, the lessor is guaranteed a residual value up to a stated percentage of either the unamortized balance or the equipment cost at the end of the lease term.  If the actual fair value of the leased equipment is below the guaranteed residual value at the end of the lease term, we are committed to pay the difference between the actual fair value and the residual value guarantee.  Historically, at the end of the lease term, the fair value has been in excess of the unamortized balance.  As of December 31, 2014, the maximum potential loss for these lease agreements was approximately $26 million assuming the fair value of the equipment is zero at the end of the lease term.

Rockport Lease

AEGCo and I&M entered into a sale-and-leaseback transaction in 1989 with Wilmington Trust Company (Owner Trustee), an unrelated, unconsolidated trustee for Rockport Plant, Unit 2 (the Plant).  The Owner Trustee was capitalized with equity from six owner participants with no relationship to AEP or any of its subsidiaries and debt from a syndicate of banks and securities in a private placement to certain institutional investors.

The gain from the sale was deferred and is being amortized over the term of the lease, which expires in 2022.  The Owner Trustee owns the Plant and leases it equally to AEGCo and I&M.  The lease is accounted for as an operating lease with the payment obligations included in the future minimum lease payments schedule earlier in this note.  The lease term is for 33 years with potential renewal options.  At the end of the lease term, AEGCo and I&M have the option to renew the lease or the Owner Trustee can sell the Plant.  AEP, AEGCo and I&M have no ownership interest in the Owner Trustee and do not guarantee its debt.  The future minimum lease payments for this sale-and-leaseback transaction as of December 31, 2014 are as follows:

Future Minimum Lease Payments	AEGCo		I&M
	(in millions)
2015	$	74	$	74
2016	74		74
2017	74		74
2018	74		74
2019	74		74
Later Years	222		222
Total Future Minimum Lease Payments	$	592	$	592

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Railcar Lease

In June 2003, AEP Transportation LLC (AEP Transportation), a subsidiary of AEP, entered into an agreement with BTM Capital Corporation, as lessor, to lease 875 coal-transporting aluminum railcars.  The lease is accounted for as an operating lease.  In January 2008, AEP Transportation assigned the remaining 848 railcars under the original lease agreement to I&M (390 railcars) and SWEPCo (458 railcars).  The assignment is accounted for as operating leases for I&M and SWEPCo.  The initial lease term was five years with three consecutive five-year renewal periods for a maximum lease term of twenty years.  I&M and SWEPCo intend to renew these leases for the full lease term of twenty years via the renewal options.  The future minimum lease obligations are $11 million and $13 million for I&M and SWEPCo, respectively, for the remaining railcars as of December 31, 2014.  These obligations are included in the future minimum lease payments schedule earlier in this note.

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

Sabine Dragline Lease

During 2009, Sabine entered into capital lease arrangements with a nonaffiliated company to finance the purchase of two electric draglines to be used for Sabine’s mining operations totaling $47 million.  The amounts included in the lease represented the aggregate fair value of the existing equipment and a sale-and-leaseback transaction for additional dragline rebuild costs required to keep the dragline operational.  These capital lease assets are included in Other Property, Plant and Equipment on our December 31, 2014 and 2013 balance sheets.  The short-term and long-term capital lease obligations are included in Other Current Liabilities and Deferred Credits and Other Noncurrent Liabilities on our December 31, 2014 and 2013 balance sheets.  The future payment obligations are included in our future minimum lease payments schedule earlier in this note.

I&M Nuclear Fuel Lease

In November 2013, I&M entered into a sale-and-leaseback transaction with IMP 11-2013, a nonaffiliated Ohio Trust, to lease nuclear fuel for I&M’s Cook Plant.  In November 2013, I&M sold a portion of its unamortized nuclear fuel inventory to the trust for $110 million.  The lease has a variable rate based on one month LIBOR and is accounted for as a capital lease with lease terms up to 54 months. The future payment obligations of $67 million are included in our future minimum lease payments schedule earlier in this note.  The net capital lease asset is included in Other Property, Plant and Equipment and the short-term and long-term capital lease obligations are included in Other Current Liabilities and Deferred Credits and Other Noncurrent Liabilities, respectively, on our December 31, 2014 balance sheet.  The future minimum lease payments for the sale-and-leaseback transaction as of December 31, 2014 are as follows, based on estimated fuel burn:

Future Minimum Lease Payments	I&M
	(in millions)
2015	$	32
2016	27
2017	6
2018	2
Total Future Minimum Lease Payments	$	67

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14.  FINANCING ACTIVITIES

AEP Common Stock

Listed below is a reconciliation of common stock share activity for the years ended December 31, 2014, 2013 and 2012:

Shares of AEP Common Stock	Issued	Held in Treasury
Balance, December 31, 2011	503,759,460	20,336,592
Issued	2,245,502	—
Balance, December 31, 2012	506,004,962	20,336,592
Issued	2,109,002	—
Balance, December 31, 2013	508,113,964	20,336,592
Issued	1,625,195	—
Balance, December 31, 2014	509,739,159	20,336,592

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Long-term Debt

The following details long-term debt outstanding as of December 31, 2014 and 2013:

	Weighted
	Average
	Interest
	Rate as of	Interest Rate Ranges as of		Outstanding as of
	December 31,	December 31,		December 31,
Type of Debt and Maturity	2014	2014	2013	2014			2013
				(in millions)
Senior Unsecured Notes
2014-2044	5.34%	1.65%-8.13%	1.65%-8.13%	$	12,647		$	11,799
Pollution Control Bonds (a)
2014-2038 (b)	2.66%	0.04%-6.30%	0.02%-6.30%	1,963			1,932
Notes Payable (c)
2014-2032	3.84%	0.983%-8.03%	1.164%-8.03%	357			369
Securitization Bonds
2015-2031	3.69%	0.88%-6.25%	0.88%-6.25%	2,380			2,686
Spent Nuclear Fuel Obligation (d)				266			265
Other Long-term Debt
2015-2059	1.67%	1.15%-13.718%	1.15%-13.718%	1,101			1,360
Fair Value of Interest Rate Hedges				(6		)	(9		)
Unamortized Discount, Net				(24		)	(25		)
Total Long-term Debt Outstanding				18,684			18,377
Long-term Debt Due Within One Year				2,503			1,549
Long-term Debt				$	16,181		$	16,828

(a) For certain series of pollution control bonds, interest rates are subject to periodic adjustment.  Certain series may be purchased on demand at periodic interest adjustment dates.  Letters of credit from banks and insurance policies support certain series.

(b) Certain pollution control bonds are subject to redemption earlier than the maturity date.  Consequently, these bonds have been classified for maturity purposes as Long-term Debt Due Within One Year on the balance sheets.

(c) Notes payable represent outstanding promissory notes issued under term loan agreements and credit agreements with a number of banks and other financial institutions.  At expiration, all notes then issued and outstanding are due and payable.  Interest rates are both fixed and variable.  Variable rates generally relate to specified short-term interest rates.

(d) Spent nuclear fuel obligation consists of a liability along with accrued interest for disposal of spent nuclear fuel (see "SNF Disposal" section of Note 6).

Long-term debt outstanding as of December 31, 2014 is payable as follows:

	2015		2016		2017		2018		2019		After 2019		Total
	(in millions)
Principal Amount	$	2,503	$	1,306	$	1,871	$	1,417	$	1,673	$	9,938	$	18,708
Unamortized Discount, Net													(24		)
Total Long-term Debt Outstanding													$	18,684

In January 2015 and February 2015, I&M retired $15 million and $8 million, respectively, of Notes Payable related to DCC Fuel.

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In January 2015, OPCo retired $22 million of Securitization Bonds.

In January 2015, PSO issued $87.5 million of 3.17% and $87.5 million of 4.09% Senior Unsecured Notes due in 2025 and 2045, respectively.

In January 2015, SWEPCo remarketed $54 million of 1.6% Pollution Control Bonds due in 2019.

In January 2015, TCC retired $120 million of Securitization Bonds.

In February 2015, APCo retired $11 million of Securitization Bonds.

As of December 31, 2014, trustees held, on our behalf, $385 million of our reacquired Pollution Control Bonds.

Dividend Restrictions

Parent Restrictions

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

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

Utility Subsidiaries’ Restrictions

Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of our utility subsidiaries to transfer funds to us in the form of dividends.  Specifically, several of our public utility subsidiaries have credit agreements that contain a covenant that limits their debt to capitalization ratio to 67.5%.  As of December 31, 2014, the amount of restricted net assets of AEP’s subsidiaries that may not be distributed to Parent in the form of a loan, advance or dividend was approximately $7 billion.

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

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Lines of Credit and Short-term Debt

We use our commercial paper program to meet the short-term borrowing needs of our subsidiaries.  The program is used to fund both a Utility Money Pool, which funds the utility subsidiaries, and a Nonutility Money Pool, which funds the majority of the nonutility subsidiaries.  In addition, the program also funds, as direct borrowers, the short-term debt requirements of other subsidiaries that are not participants in either money pool for regulatory or operational reasons.  As of December 31, 2014, we had credit facilities totaling $3.5 billion to support our commercial paper program.  The maximum amount of commercial paper outstanding during 2014 was $877 million and the weighted average interest rate of commercial paper outstanding during 2014 was 0.29%.  Our outstanding short-term debt was as follows:

	December 31,
	2014				2013
Type of Debt	Outstanding Amount		Interest Rate (a)		Outstanding Amount		Interest Rate (a)
	(in millions)				(in millions)
Securitized Debt for Receivables (b)	$	744	0.22	%	$	700	0.23	%
Commercial Paper	602		0.59	%	57		0.29	%
Total Short-term Debt	$	1,346			$	757

(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 6.

Securitized Accounts Receivable – AEP Credit

AEP Credit has a receivables securitization agreement with bank conduits.  Under the securitization agreement, AEP Credit receives financing from the bank conduits for the interest in the receivables AEP Credit acquires from affiliated utility subsidiaries.  AEP Credit continues to service the receivables.  These securitized transactions allow AEP Credit to repay its outstanding debt obligations, continue to purchase our operating companies’ receivables and accelerate AEP Credit’s cash collections.

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

Accounts receivable information for AEP Credit is as follows:

	Years Ended December 31,
	2014			2013			2012
	(dollars in millions)
Effective Interest Rates on Securitization of Accounts Receivable	0.22		%	0.23		%	0.26		%
Net Uncollectible Accounts Receivable Written Off	$	40		$	35		$	29

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	December 31,
	2014		2013
	(in millions)
Accounts Receivable Retained Interest and Pledged as Collateral Less Uncollectible Accounts	$	975	$	929
Total Principal Outstanding	744		700
Delinquent Securitized Accounts Receivable	44		45
Bad Debt Reserves Related to Securitization/Sale of Accounts Receivable	13		16
Unbilled Receivables Related to Securitization/Sale of Accounts Receivable	335		331

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

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15.  STOCK-BASED COMPENSATION

As approved by shareholder vote, the Amended and Restated American Electric Power System Long-Term Incentive Plan (LTIP) authorizes the use of 20 million shares of AEP common stock for various types of stock-based compensation awards to employees.  A maximum of 10 million shares may be used under this plan for full value share awards, which includes performance units, restricted shares and restricted stock units.  As of December 31, 2014, 15,825,643 shares remained available for issuance under the LTIP plan.  The AEP Board of Directors and shareholders last approved the LTIP in 2010.  The following sections provide further information regarding each type of stock-based compensation award granted by the Human Resources Committee of our Board of Directors (HR Committee).

Stock Options

We did not grant stock options in 2014, 2013 or 2012. We did have outstanding stock options from grants in earlier periods that were exercised in 2013 and 2012.  As of December 31, 2014, we have no outstanding stock options.  We recorded compensation cost for stock options over the vesting period based on the fair value on the grant date.  The LTIP does not specify a maximum contractual term for stock options.

The total intrinsic value of options exercised is as follows:

	Years Ended December 31,
Stock Options	2014		2013		2012
	(in thousands)
Intrinsic Value of Options Exercised (a)	$	—	$	3,105	$	1,699

(a) Intrinsic value is calculated as market price at exercise dates less the option exercise price.

A summary of AEP stock option transactions during the years ended December 31, 2014, 2013 and 2012 is as follows:

	2014		2013				2012
	Options	Weighted Average Exercise Price	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
	(in thousands)		(in thousands)				(in thousands)
Outstanding as of January 1,	—	NA	188		$	30.17	321		$	29.35
Granted	—	NA	—		NA		—		NA
Exercised/Converted	—	NA	(187	)	30.18		(128	)	28.21
Forfeited/Expired	—	NA	(1	)	27.95		(5	)	27.26
Outstanding as of December 31,	—	NA	—		NA		188		30.17
Options Exercisable as of December 31,	—	NA	—		NA		188		$	30.17
NA   Not applicable.

We include the proceeds received from exercised stock options in common stock and paid-in capital.

Performance Units

Our performance units have a fair value upon vesting equal to the average closing market price of AEP common stock for the last 20 trading days of the performance period.  The number of performance units held is multiplied by the performance score to determine the actual number of performance units realized.  The performance score can range from 0% to 200% and is determined at the end of the performance period based on performance measures, which include both performance and market conditions, established for each grant at the beginning of the performance period by the HR Committee.  Performance units are paid in cash, unless they are needed to satisfy a participant’s stock ownership requirement.  In that case, the number of units needed to satisfy the participant’s largest stock ownership requirement is mandatorily deferred as AEP Career Shares until after the end of the participant’s AEP career.  AEP

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Career Shares are a form of non-qualified deferred compensation that has a value equivalent to shares of AEP common stock.  AEP Career Shares are paid in cash after the participant’s termination of employment.  Amounts equivalent to cash dividends on both performance units and AEP Career Shares accrue as additional units.  We record compensation cost for performance units over a three-year vesting period.  The liability for both the performance units and AEP Career Shares, recorded in Employee Benefits and Pension Obligations on the balance sheets, is adjusted for changes in value.  The fair value of performance unit awards is based on the estimated performance score and the current 20-day average closing price of AEP common stock at the date of valuation.

The HR Committee awarded performance units and reinvested dividends on outstanding performance units and AEP Career Shares for the years ended December 31, 2014, 2013 and 2012 as follows:

	Years Ended December 31,
Performance Units	2014		2013		2012
Awarded Units (in thousands)	17		1,284		546
Weighted Average Unit Fair Value at Grant Date	$	49.73	$	46.23	$	41.38
Vesting Period (in years)	3		3		3

Performance Units and AEP Career Shares (Reinvested Dividends Portion)	Years Ended December 31,
	2014		2013		2012
Awarded Units (in thousands)	99		101		138
Weighted Average Fair Value at Grant Date	$	53.35	$	45.42	$	40.97
Vesting Period (in years)	(a)		(a)		(a)

(a) The vesting period for the reinvested dividends on performance units is equal to the remaining life of the related performance units.  Dividends on AEP Career Shares vest immediately upon grant but are not paid in cash until after the participant’s termination of employment.

Performance scores and final awards are determined and certified by the HR Committee in accordance with the pre-established performance measures within approximately a month after the end of the performance period.  The HR Committee has discretion to reduce or eliminate the number of performance units earned but may not increase the number earned.  The performance scores for all open performance periods are dependent on two equally-weighted performance measures: (a) three-year total shareholder return measured relative to the Electric Utilities Industry Standard and Poor’s 500 Index and (b) three-year cumulative earnings per share measured relative to an AEP Board of Directors approved target.  

The certified performance scores and units earned for the three-year periods ended December 31, 2014, 2013 and 2012 were as follows:

	Years Ended December 31,
Performance Units	2014		2013		2012
Certified Performance Score	147.8	%	118.8	%	99.7	%
Performance Units Earned	889,697		749,219		1,096,572
Performance Units Mandatorily Deferred as AEP Career Shares	40,831		72,883		51,056
Performance Units Voluntarily Deferred into the Incentive Compensation Deferral Program	39,526		39,691		26,337
Performance Units to be Paid in Cash	809,340		636,645		1,019,179

The cash payouts for the years ended December 31, 2014, 2013 and 2012 were as follows:

	Years Ended December 31,
Performance Units and AEP Career Shares	2014		2013		2012
	(in thousands)
Cash Payouts for Performance Units	$	29,263	$	43,925	$	44,968
Cash Payouts for AEP Career Share Distributions	4,324		3,675		11,027

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Restricted Stock Units

The HR Committee grants restricted stock units (RSUs), which generally vest, subject to the participant’s continued employment, over at least three years in approximately equal annual increments.  Additional RSUs granted as dividends vest on the same date as the underlying RSUs on which the dividends were awarded.  Upon vesting, RSUs are converted into a share of AEP common stock, with the exception of participants subject to the disclosure requirements set forth in Section 16 of the Securities Exchange Act of 1934, who are paid in cash.  In 2014, there were no RSUs granted to Section 16 participants as AEP deferred granting these and other awards until February 2015. For awards that are settled with shares, compensation cost is measured at fair value on the grant date and recorded over the vesting period.  Fair value is determined by multiplying the number of units granted by the grant date market closing price.  For awards that are paid in cash, compensation cost is recorded over the vesting period and adjusted for changes in fair value until vested.  The fair value at vesting is determined by multiplying the number of units vested by the 20-day average closing price of AEP common stock.  The maximum contractual term of outstanding RSUs is six years from the grant date.

In 2010, the HR Committee granted a total of 165,520 RSUs to four Chief Executive Officer succession candidates as a retention incentive for these candidates.  These grants vest, subject to the candidates’ continuous employment, in three approximately equal installments on August 3, 2013, August 3, 2014 and August 3, 2015.  Of these RSUs, 55,172 vested on August 3, 2013, 55,172 vested on August 3, 2014 and 55,176 remain outstanding, excluding dividends.

The HR Committee awarded RSUs, including units awarded for dividends, for the years ended December 31, 2014, 2013 and 2012 as follows:

	Years Ended December 31,
Restricted Stock Units	2014		2013		2012
Awarded Units (in thousands)	64		644		497
Weighted Average Grant Date Fair Value	$	50.36	$	46.24	$	40.69

The total fair value and total intrinsic value of restricted stock units vested during the years ended December 31, 2014, 2013 and 2012 were as follows:

	Years Ended December 31,
Restricted Stock Units	2014		2013		2012
	(in thousands)
Fair Value of Restricted Stock Units Vested	$	18,654	$	15,325	$	10,608
Intrinsic Value of Restricted Stock Units Vested (a)	24,894		20,378		12,157

(a) Intrinsic value is calculated as market price at exercise date.

A summary of the status of our nonvested RSUs as of December 31, 2014 and changes during the year ended December 31, 2014 are as follows:

Nonvested Restricted Stock Units	Shares/Units		Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested as of January 1, 2014	1,205		$	42.64
Granted	64		50.36
Vested	(467	)	39.97
Forfeited	(19	)	44.57
Nonvested as of December 31, 2014	783		44.59

The total aggregate intrinsic value of nonvested RSUs as of December 31, 2014 was $48 million and the weighted average remaining contractual life was 1.61 years.

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Other Stock-Based Plans

We also have a Stock Unit Accumulation Plan for Non-employee Directors providing each non-employee director with AEP stock units as a substantial portion of their quarterly compensation for their services as a director.  The number of stock units provided is based on the closing price of AEP common stock on the last trading day of the quarter for which the stock units were earned.  Amounts equivalent to cash dividends on the stock units accrue as additional AEP stock units.  The stock units granted to Non-employee Directors are fully vested upon grant date.  Stock units are paid in cash upon termination of board service or up to 10 years later if the participant so elects.  Cash payments for stock units are calculated based on the average closing price of AEP common stock for the last 20 trading days prior to the distribution date.

We record compensation cost for stock units when the units are awarded and adjust the liability for changes in value based on the current 20-day average closing price of AEP common stock on the valuation date.

The cash payout for stock unit distributions was $5 million for the year ended December 31, 2014. We had no material cash payouts for stock unit distributions for the years ended December 31, 2013 and 2012.

The Board of Directors awarded stock units, including units awarded for dividends, for the years ended December 31, 2014, 2013 and 2012 as follows:

	Years Ended December 31,
Stock Unit Accumulation Plan for Non-Employee Directors	2014		2013		2012
Awarded Units (in thousands)	25		33		52
Weighted Average Grant Date Fair Value	$	54.08	$	45.81	$	41.20

Share-based Compensation Plans

Compensation cost and the actual tax benefit realized for the tax deductions from compensation cost for share-based payment arrangements recognized in income and total compensation cost capitalized in relation to the cost of an asset for the years ended December 31, 2014, 2013 and 2012 were as follows:

	Years Ended December 31,
Share-based Compensation Plans	2014		2013		2012
	(in thousands)
Compensation Cost for Share-based Payment Arrangements (a)	$	85,414	$	56,352	$	51,767
Actual Tax Benefit Realized	29,895		19,723		18,119
Total Compensation Cost Capitalized	23,063		13,165		10,707

(a) Compensation cost for share-based payment arrangements is included in Other Operation and Maintenance expenses on the statements of income.

During the years ended December 31, 2014, 2013 and 2012, there were no significant modifications affecting any of our share-based payment arrangements.

As of December 31, 2014, there was $79 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the LTIP.  Unrecognized compensation cost related to the performance units and AEP Career Shares will change as the fair value is adjusted each period and forfeitures for all award types are realized.  Our unrecognized compensation cost will be recognized over a weighted-average period of 1.35 years.

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Cash received from stock options exercised and actual tax benefit realized for the tax deductions from stock options exercised during the years ended December 31, 2014, 2013 and 2012 were as follows:

	Years Ended December 31,
Share-based Compensation Plans	2014		2013		2012
	(in thousands)
Cash Received from Stock Options Exercised	$	—	$	5,659	$	3,598
Actual Tax Benefit Realized for the Tax Deductions from Stock Options Exercised	—		1,040		618

Our practice is to use authorized but unissued shares to fulfill share commitments for stock option exercises and RSU vesting.  Although we do not currently anticipate any changes to this practice, we are permitted to use treasury shares, shares acquired in the open market specifically for distribution under the LTIP or any combination thereof for this purpose.  The number of new shares issued to fulfill vesting RSUs is generally reduced to offset our tax withholding obligation.

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16.  VARIABLE INTEREST ENTITIES

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

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

Sabine is a mining operator providing mining services to SWEPCo.  SWEPCo has no equity investment in Sabine but is Sabine’s only customer.  SWEPCo guarantees the debt obligations and lease obligations of Sabine.  Under the terms of the note agreements, substantially all assets are pledged and all rights under the lignite mining agreement are assigned to SWEPCo.  The creditors of Sabine have no recourse to any AEP entity other than SWEPCo.  Under the provisions of the mining agreement, SWEPCo is required to pay, as a part of the cost of lignite delivered, an amount equal to mining costs plus a management fee.  In addition, SWEPCo determines how much coal will be mined each year.  Based on these facts, management concluded that SWEPCo is the primary beneficiary and is required to consolidate Sabine.  SWEPCo’s total billings from Sabine for the years ended December 31, 2014, 2013 and 2012 were $151 million, $155 million and $147 million, respectively.  See the tables below for the classification of Sabine’s assets and liabilities on the balance sheets.

I&M has nuclear fuel lease agreements with DCC Fuel IV LLC, DCC Fuel V LLC, DCC Fuel VI LLC and DCC Fuel VII (collectively DCC Fuel).  DCC Fuel was formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.  DCC Fuel purchased the nuclear fuel from I&M with funds received from the issuance of notes to financial institutions.  Each entity is a single-lessee leasing arrangement with only one asset and is capitalized with all debt.  Each is a separate legal entity from I&M, the assets of which are not available to satisfy the debts of I&M.  Payments on the leases for the years ended December 31, 2014, 2013 and 2012 were $109 million, $153 million and $127 million, respectively.  The leases were recorded as capital leases on I&M’s balance sheet as title to the nuclear fuel transfers to I&M at the end of the respective lease terms, which do not exceed 54 months.  Based on our control of DCC Fuel, management concluded that I&M is the primary beneficiary and is required to consolidate DCC Fuel.  The capital leases are eliminated upon consolidation.  The lease agreements ended for DCC Fuel LLC and DCC Fuel III LLC in October 2013 and for DCC Fuel II LLC in October 2014.  See the tables below for the classification of DCC Fuel’s assets and liabilities on the balance sheets.

AEP Credit is a wholly-owned subsidiary of AEP.  AEP Credit purchases, without recourse, accounts receivable from certain utility subsidiaries of AEP to reduce working capital requirements.  AEP provides a minimum of 5% equity and up to 20% of AEP Credit’s short-term borrowing needs in excess of third party financings.  Any third party financing of AEP Credit only has recourse to the receivables securitized for such financing.  Based on our control of AEP Credit, management concluded that we are the primary beneficiary and are required to consolidate AEP Credit.  See the tables below for the classification of AEP Credit’s assets and liabilities on the balance sheets.  See “Securitized Accounts Receivables – AEP Credit” section of Note 14.

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Transition Funding was formed for the sole purpose of issuing and servicing securitization bonds related to Texas Restructuring Legislation.  Management has concluded that TCC is the primary beneficiary of Transition Funding because TCC has the power to direct the most significant activities of the VIE and TCC’s equity interest could potentially be significant.  Therefore, TCC is required to consolidate Transition Funding.  The securitized bonds totaled $1.8 billion and $2.0 billion as of December 31, 2014 and 2013, respectively.  Transition Funding has securitized transition assets of $1.6 billion and $1.9 billion as of December 31, 2014 and 2013, respectively.  The securitized transition assets represent the right to impose and collect Texas true-up costs from customers receiving electric transmission or distribution service from TCC under recovery mechanisms approved by the PUCT.  The securitization bonds are payable only from and secured by the securitized transition assets.  The bondholders have no recourse to TCC or any other AEP entity.  TCC acts as the servicer for Transition Funding’s securitized transition assets and remits all related amounts collected from customers to Transition Funding for interest and principal payments on the securitization bonds and related costs.  See the tables below for the classification of Transition Funding’s assets and liabilities on the balance sheets.

Ohio Phase-in-Recovery Funding was formed for the sole purpose of issuing and servicing securitization bonds related to phase-in recovery property.  Management has concluded that OPCo is the primary beneficiary of Ohio Phase-in-Recovery Funding because OPCo has the power to direct the most significant activities of the VIE and OPCo's equity interest could potentially be significant.  Therefore, OPCo is required to consolidate Ohio Phase-in-Recovery Funding.  The securitized bonds totaled $232 million and $267 million as of December 31, 2014 and 2013, respectively.  Ohio Phase-in-Recovery Funding has securitized assets of $110 million and $132 million as of December 31, 2014 and 2013, respectively.  The phase-in recovery property represents the right to impose and collect Ohio deferred distribution charges from customers receiving electric transmission and distribution service from OPCo under a recovery mechanism approved by the PUCO.  In August 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to OPCo or any other AEP entity.  OPCo acts as the servicer for Ohio Phase-in-Recovery Funding's securitized assets and remits all related amounts collected from customers to Ohio Phase-in-Recovery Funding for interest and principal payments on the securitization bonds and related costs.  See the table below for the classification of Ohio Phase-in-Recovery Funding's assets and liabilities on the balance sheets.

Appalachian Consumer Rate Relief Funding was formed for the sole purpose of issuing and servicing securitization bonds related to APCo's under-recovered ENEC deferral balance.  Management has concluded that APCo is the primary beneficiary of Appalachian Consumer Rate Relief Funding because APCo has the power to direct the most significant activities of the VIE and APCo's equity interest could potentially be significant.  Therefore, APCo is required to consolidate Appalachian Consumer Rate Relief Funding.  The securitized bonds totaled $368 million and $380 million as of December 31, 2014 and 2013, respectively.   Appalachian Consumer Rate Relief Funding has securitized assets of $350 million and $369 million as of December 31, 2014 and 2013, respectively.  The phase-in recovery property represents the right to impose and collect West Virginia deferred generation charges from customers receiving electric transmission, distribution and generation service from APCo under a recovery mechanism approved by the WVPSC.  In November 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to APCo or any other AEP entity.  APCo acts as the servicer for Appalachian Consumer Rate Relief Funding's securitized assets and remits all related amounts collected from customers to Appalachian Consumer Rate Relief Funding for interest and principal payments on the securitization bonds and related costs.  See the table below for the classification of Appalachian Consumer Rate Relief Funding's assets and liabilities on the balance sheets.

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

Our subsidiaries participate in one protected cell of EIS for approximately ten lines of insurance.  EIS has multiple protected cells.  Neither AEP nor its subsidiaries have an equity investment in EIS.  The AEP System is essentially this EIS cell’s only participant, but allows certain third parties access to this insurance.  Our subsidiaries and any allowed

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third parties share in the insurance coverage, premiums and risk of loss from claims.  Based on our control and the structure of the protected cell of EIS, management concluded that we are the primary beneficiary of the protected cell and are required to consolidate the protected cell of EIS.  Our insurance premium expense to the protected cell for the years ended December 31, 2014, 2013 and 2012 were $32 million, $31 million and $32 million, respectively.  See the tables below for the classification of the protected cell’s assets and liabilities on the balance sheets.

Transource Energy was formed for the purpose of investing in utilities which develop, acquire, construct, own and operate transmission facilities in accordance with FERC-approved rates. AEP has equity and voting ownership of 86.5% with the other owner having 13.5% interest. Management has concluded that Transource Energy is a VIE and that AEP is the primary beneficiary because AEP has the power to direct the most significant activities of the entity. Therefore, AEP is required to consolidate Transource Energy. AEP’s equity interest could potentially be significant. In January 2014, Transource Missouri (a wholly-owned subsidiary of Transource Energy) acquired transmission assets from the non-controlling owner and issued debt and received a capital contribution to fund the acquisition. The majority of Transource Energy’s activity resulted from the asset acquisition, construction projects, debt issuance and capital contribution. AEP has provided capital contributions to Transource Energy of $23 million and $3 million, in 2014 and 2013, respectively. In the event a Transource Missouri project is abandoned by the RTO, AEP would be required to fund additional capital. See the tables below for the classification of Transource Energy’s assets and liabilities on the balance sheets.

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

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
VARIABLE INTEREST ENTITIES
December 31, 2014
(in millions)
	SWEPCo Sabine		I&M DCC Fuel		AEP Credit		TCC Transition Funding			OPCo Ohio Phase-in- Recovery Funding			APCo Appalachian Consumer Rate Relief Funding			Protected Cell of EIS		Transource Energy
ASSETS
Current Assets	$	68	$	97	$	980	$	239		$	33		$	18		$	149	$	2
Net Property, Plant and Equipment	145		158		—		—			—			—			—		98
Other Noncurrent Assets	52		80		—		1,654		(a)	210		(b)	358		(c)	2		4
Total Assets	$	265	$	335	$	980	$	1,893		$	243		$	376		$	151	$	104
LIABILITIES AND EQUITY
Current Liabilities	$	36	$	86	$	894	$	322		$	47		$	27		$	44	$	21
Noncurrent Liabilities	228		249		—		1,553			195			347			62		55
Equity	1		—		86		18			1			2			45		28
Total Liabilities and Equity	$	265	$	335	$	980	$	1,893		$	243		$	376		$	151	$	104

(a) Includes an intercompany item eliminated in consolidation of $75 million.

(b) Includes an intercompany item eliminated in consolidation of $97 million.

(c) Includes an intercompany item eliminated in consolidation of $4 million.

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AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
VARIABLE INTEREST ENTITIES
December 31, 2013
(in millions)
	SWEPCo Sabine		I&M DCC Fuel		AEP Credit		TCC Transition Funding			OPCo Ohio Phase-in- Recovery Funding			APCo Appalachian Consumer Rate Relief			Protected Cell of EIS
ASSETS
Current Assets	$	67	$	118	$	935	$	232		$	23		$	6		$	143
Net Property, Plant and Equipment	157		157		—		—			—			—			—
Other Noncurrent Assets	51		60		1		1,918		(a)	252		(b)	378		(c)	3
Total Assets	$	275	$	335	$	936	$	2,150		$	275		$	384		$	146
LIABILITIES AND EQUITY
Current Liabilities	$	33	$	108	$	827	$	312		$	37		$	14		$	39
Noncurrent Liabilities	242		227		1		1,820			237			368			66
Equity	—		—		108		18			1			2			41
Total Liabilities and Equity	$	275	$	335	$	936	$	2,150		$	275		$	384		$	146

(a) Includes an intercompany item eliminated in consolidation of $82 million.

(b) Includes an intercompany item eliminated in consolidation of $116 million.

(c) Includes an intercompany item eliminated in consolidation of $4 million.

DHLC is a mining operator that sells 50% of the lignite produced to SWEPCo and 50% to CLECO.  SWEPCo and CLECO share the executive board seats and voting rights equally.  Each entity guarantees 50% of DHLC’s debt.  SWEPCo and CLECO equally approve DHLC’s annual budget.  The creditors of DHLC have no recourse to any AEP entity other than SWEPCo.  As SWEPCo is the sole equity owner of DHLC, it receives 100% of the management fee.  SWEPCo’s total billings from DHLC for the years ended December 31, 2014, 2013 and 2012 were $56 million, $60 million and $77 million, respectively.  We are not required to consolidate DHLC as we are not the primary beneficiary, although we hold a significant variable interest in DHLC.  Our equity investment in DHLC is included in Deferred Charges and Other Noncurrent Assets on the balance sheets.

Our investment in DHLC was:

	2014				2013
	As Reported on the Balance Sheet		Maximum Exposure		As Reported on the Balance Sheet		Maximum Exposure
	(in millions)
Capital Contribution from SWEPCo	$	8	$	8	$	8	$	8
Retained Earnings	4		4		1		1
Advance Due to Parent	56		56		—		—
Guarantee of Debt	—		48		—		61
Total Investment in DHLC	$	68	$	116	$	9	$	70

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

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

Our investment in PATH-WV was:

	December 31,
	2014				2013
	As Reported on the Balance Sheet		Maximum Exposure		As Reported on the Balance Sheet		Maximum Exposure
	(in millions)
Capital Contribution from AEP	$	19	$	19	$	19	$	19
Retained Earnings	2		2		6		6
Total Investment in PATH-WV	$	21	$	21	$	25	$	25

As of December 31, 2014, our $21 million investment in PATH-WV is included in Deferred Charges and Other Noncurrent Assets on the balance sheet.  If we cannot ultimately recover our investment related to PATH-WV, it could reduce future net income and cash flows.

160

17.  PROPERTY, PLANT AND EQUIPMENT

Depreciation, Depletion and Amortization

We provide for depreciation of Property, Plant and Equipment, excluding coal-mining properties, on a straight-line basis over the estimated useful lives of property, generally using composite rates by functional class.  The following tables provide the annual property information:

2014	Regulated							Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate Ranges	Depreciable Life Ranges	Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate Ranges	Depreciable Life Ranges
	(in millions)						(in years)	(in millions)					(in years)
Generation	$	18,394	$	7,313		1.7 - 3.5%	31 - 132	$	7,333	$	3,135	2.6 - 3.4%	35 - 66
Transmission	12,395		2,877			1.4 - 2.7%	15 - 87	38		17		2.3%	43 - 55
Distribution	17,157		4,145			2.4 - 3.7%	7 - 75	—		—		NA	NA
CWIP	3,088		(126		)	NM	NM	130		1		NM	NM
Other	4,361		2,254			2.1 - 8.6%	5 - 75	1,409		572		17.1%	25 - 50
Total	$	55,395	$	16,463				$	8,910	$	3,725

2013	Regulated							Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate Ranges	Depreciable Life Ranges	Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate Ranges	Depreciable Life Ranges
	(in millions)						(in years)	(in millions)					(in years)
Generation	$	17,873	$	7,168		1.7 - 3.7%	31 - 132	$	7,201	$	2,969	2.6 - 3.3%	35 - 66
Transmission	10,854		2,805			1.1 - 2.7%	25 - 87	39		16		2.5%	43 - 55
Distribution	16,377		3,988			2.3 - 3.8%	11 - 75	—		—		NA	NA
CWIP	2,326		(121		)	NM	NM	145		1		NM	NM
Other	4,116		1,931			2.0 - 7.9%	5 - 75	1,354		531		NM	NM
Total	$	51,546	$	15,771				$	8,739	$	3,517

2012	Regulated		Nonregulated
Functional Class of Property	Annual Composite Depreciation Rate Ranges	Depreciable Life Ranges	Annual Composite Depreciation Rate Ranges	Depreciable Life Ranges
		(in years)		(in years)
Generation	1.7 - 3.8%	31 - 132	2.6 - 3.3%	35 - 66
Transmission	1.2 - 2.8%	25 - 87	NA	NA
Distribution	2.4 - 3.9%	11 - 75	NA	NA
CWIP	NM	NM	NM	NM
Other	1.8 - 9.6%	5 - 75	NM	NM

NA    Not applicable.

NM    Not meaningful.

We provide for depreciation, depletion and amortization of coal-mining assets over each asset's estimated useful life or the estimated life of each mine, whichever is shorter, using the straight-line method for mining structures and equipment.  We use either the straight-line method or the units-of-production method to amortize mine development costs and deplete coal rights based on estimated recoverable tonnages.  We include these costs in the cost of coal charged to fuel expense.

For regulated operations, the composite depreciation rate generally includes a component for non-asset retirement obligation (non-ARO) removal costs, which is credited to Accumulated Depreciation and Amortization.  Actual removal costs incurred are charged to Accumulated Depreciation and Amortization.  Any excess of accrued non-ARO removal costs over actual removal costs incurred is reclassified from Accumulated Depreciation and Amortization and reflected as a regulatory liability.  For nonregulated operations, non-ARO removal costs are expensed as incurred.

161

Asset Retirement Obligations (ARO)

We record ARO in accordance with the accounting guidance for “Asset Retirement and Environmental Obligations” for our legal obligations for asbestos removal and for the retirement of certain ash disposal facilities, closure and monitoring of underground carbon storage facilities at Mountaineer Plant, wind farms and certain coal mining facilities, as well as for nuclear decommissioning of our Cook Plant.  We have identified, but not recognized, ARO liabilities related to electric transmission and distribution assets as a result of certain easements on property on which we have assets.  Generally, such easements are perpetual and require only the retirement and removal of our assets upon the cessation of the property’s use.  We do not estimate the retirement for such easements because we plan to use our facilities indefinitely.  The retirement obligation would only be recognized if and when we abandon or cease the use of specific easements, which is not expected.

The following is a reconciliation of the 2014 and 2013 aggregate carrying amounts of ARO:

	Carrying Amount of ARO
	(in millions)
ARO as of December 31, 2012	$	1,696
Accretion Expense	103
Liabilities Incurred	4
Liabilities Settled	(22		)
Revisions in Cash Flow Estimates	54
ARO as of December 31, 2013	1,835
Accretion Expense	95
Liabilities Incurred	42
Liabilities Settled	(34		)
Revisions in Cash Flow Estimates	81
ARO as of December 31, 2014	$	2,019

As of December 31, 2014 and 2013, our ARO liability included $1.3 billion and $1.2 billion, respectively, for nuclear decommissioning of the Cook Plant.  As of December 31, 2014 and 2013, the fair value of assets that are legally restricted for purposes of settling the nuclear decommissioning liabilities totaled $1.8 billion and $1.6 billion, respectively, and are recorded in Spent Nuclear Fuel and Decommissioning Trusts on the balance sheets.

Allowance for Funds Used During Construction (AFUDC) and Interest Capitalization

Our amounts of allowance for borrowed, including interest capitalized, and equity funds used during construction is summarized in the following table:

	Years Ended December 31,
	2014		2013		2012
	(in millions)
Allowance for Equity Funds Used During Construction	$	103	$	73	$	93
Allowance for Borrowed Funds Used During Construction	44		40		69

162

Jointly-owned Electric Facilities

We have electric facilities that are jointly-owned with nonaffiliated companies.  Using our own financing, we are obligated to pay a share of the costs of these jointly-owned facilities in the same proportion as our ownership interest.  Our proportionate share of the operating costs associated with such facilities is included on the statements of income and the investments and accumulated depreciation are reflected on the balance sheets under Property, Plant and Equipment as follows:

				Company’s Share as of December 31, 2014
	Fuel Type	Percent of Ownership		Utility Plant in Service		Construction Work in Progress		Accumulated Depreciation
				(in millions)
W.C. Beckjord Generating Station, Unit 6 (a)	Coal	12.5	%	$	—	$	—	$	—
Conesville Generating Station, Unit 4 (b)	Coal	43.5	%	336		2		66
J.M. Stuart Generating Station (c)	Coal	26.0	%	553		12		206
Wm. H. Zimmer Generating Station (a)	Coal	25.4	%	812		4		410
Dolet Hills Generating Station, Unit 1 (d)	Lignite	40.2	%	330		4		201
Flint Creek Generating Station, Unit 1 (e)	Coal	50.0	%	125		120		68
Pirkey Generating Station, Unit 1 (e)	Lignite	85.9	%	531		36		381
Oklaunion Generating Station, Unit 1 (f)	Coal	70.3	%	409		10		228
Turk Generating Plant (e)	Coal	73.33	%	1,647		1		70
Transmission	NA	(g)		82		1		49
Total				$	4,825	$	190	$	1,679

				Company’s Share as of December 31, 2013
	Fuel Type	Percent of Ownership		Utility Plant in Service		Construction Work in Progress		Accumulated Depreciation
				(in millions)
W.C. Beckjord Generating Station, Unit 6 (a)	Coal	12.5	%	$	—	$	—	$	—
Conesville Generating Station, Unit 4 (b)	Coal	43.5	%	335		2		55
J.M. Stuart Generating Station (c)	Coal	26.0	%	544		11		190
Wm. H. Zimmer Generating Station (a)	Coal	25.4	%	809		2		399
Dolet Hills Generating Station, Unit 1 (d)	Lignite	40.2	%	262		47		198
Flint Creek Generating Station, Unit 1 (e)	Coal	50.0	%	123		54		66
Pirkey Generating Station, Unit 1 (e)	Lignite	85.9	%	519		29		376
Oklaunion Generating Station, Unit 1 (f)	Coal	70.3	%	404		7		223
Turk Generating Plant (e)	Coal	73.33	%	1,638		13		35
Transmission	NA	(g)		78		—		50
Total				$	4,712	$	165	$	1,592

(a) Operated by Duke Energy Corporation, a nonaffiliated company.  AEP's portion of Beckjord Plant, Unit 6 was impaired in the fourth quarter of 2012.  See "Impairments" section of Note 7.

(b) Operated by AGR.

(c) Operated by The Dayton Power & Light Company, a nonaffiliated company.

(d) Operated by CLECO, a nonaffiliated company.

(e) Operated by SWEPCo.

(f) Operated by PSO and also jointly-owned (54.7%) by TNC.

(g) Varying percentages of ownership.

NA Not applicable.

163

18.  COST REDUCTION PROGRAMS

2014 Disposition Plant Severance

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

We recorded a charge to Other Operation expense in December 2014 primarily related to employees at the disposition plants.

	Disposition Plant Severance Activity
	(in millions)
Incurred	$	29
Settled	—
Adjustments	—
Balance as of December 31, 2014	$	29

These expenses, net of adjustments, relate primarily to severance benefits and are included primarily in Other Operation expense on the statements of income.  Of the current period expense, approximately 32% was within the Generation & Marketing segment and 68% was within the Vertically Integrated Utilities segment.   The remaining liability is included in Other Current Liabilities on the balance sheets.  We do not expect additional severance costs to be incurred related to this initiative.

2012 Sustainable Cost Reductions

In April 2012, we initiated a process to identify strategic repositioning opportunities and efficiencies that will result in sustainable cost savings.  We selected a consulting firm to facilitate an organizational and process evaluation and a second firm to evaluate our current employee benefit programs.  The process resulted in involuntary severances and was completed by the end of the first quarter of 2013.  The severance program provides two weeks of base pay for every year of service along with other severance benefits.

We recorded charges to Other Operation expense of $7 million and $47 million for the years ended December 31, 2013 and 2012, respectively, primarily related to severance benefits as a result of the sustainable cost reductions initiative.  

164

19.  UNAUDITED QUARTERLY FINANCIAL INFORMATION

In our opinion, the unaudited quarterly information reflects all normal and recurring accruals and adjustments necessary for a fair presentation of our results of operations for interim periods.  Quarterly results are not necessarily indicative of a full year’s operations because of various factors.  Our unaudited quarterly financial information is as follows:

	2014 Quarterly Periods Ended
	March 31		June 30		September 30		December 31
	(in millions – except per share amounts)
Total Revenues	$	4,648	$	4,044	$	4,302	$	4,026
Operating Income	1,041		767		925		499		(a)
Net Income	561		391		494		192		(a)
Earnings Attributable to AEP Common Shareholders	560		390		493		191
Total Basic Earnings per Share Attributable to AEP Common Shareholders (b)	1.15		0.80		1.01		0.39
Total Diluted Earnings per Share Attributable to AEP Common Shareholders (b)	1.15		0.80		1.01		0.39

	2013 Quarterly Periods Ended
	March 31		June 30			September 30			December 31
	(in millions – except per share amounts)
Total Revenues	$	3,826	$	3,582		$	4,176		$	3,773
Operating Income	755		547		(c)	875		(e)	678		(f)(g)
Net Income	364		339		(c)(d)	434		(e)	347		(f)(g)
Earnings Attributable to AEP Common Shareholders	363		338		(c)(d)	433		(e)	346		(f)(g)
Total Basic Earnings per Share Attributable to AEP Common Shareholders (b)	0.75		0.69			0.89			0.71
Total Diluted Earnings per Share Attributable to AEP Common Shareholders (b)	0.75		0.69			0.89			0.71

(a) Includes termination of a coal contract and a KPCo regulatory disallowance (see Note 4).

(b) Quarterly Earnings per Share amounts are intended to be stand-alone calculations and are not always additive to full-year amount due to rounding.

(c) Includes an impairment for Muskingum River Plant, Unit 5 (see Note 7).

(d) Includes U.K. Windfall Tax benefit (see Note 12).

(e) Includes regulatory disallowances for the Turk Plant (see Note 4) and for Big Sandy Plant, Unit 2 (see Note 7).

(f) Includes a regulatory disallowance for Amos Plant, Unit 3 (see Note 7).

(g) Includes the reversal of regulatory disallowance for the Turk Plant (see Note 4).

165

20.  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in our carrying amount of goodwill for the years ended December 31, 2014 and 2013 by operating segment are as follows:

	Vertically Integrated Utilities		AEP River Operations		Generation and Marketing		AEP Consolidated
	(in millions)
Balance as of December 31, 2012	$	37	$	39	$	15	$	91
Impairment Losses	—		—		—		—
Balance as of December 31, 2013	37		39		15		91
Impairment Losses	—		—		—		—
Balance as of December 31, 2014	$	37	$	39	$	15	$	91

In the fourth quarters of 2014 and 2013, we performed our annual impairment tests.  The fair values of the operations with goodwill were estimated using cash flow projections and other market value indicators.  There were no goodwill impairment losses.  We do not have any accumulated impairment on existing goodwill.

Other Intangible Assets

Acquired intangible assets subject to amortization were $5 million and $10 million as of December 31, 2014 and 2013, respectively, net of accumulated amortization and are included in Deferred Charges and Other Noncurrent Assets on the balance sheets.  The amortization life, gross carrying amount and accumulated amortization by major asset class are as follows:

		December 31,
		2014				2013
	Amortization Life	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(in years)	(in millions)
Acquired Customer Contracts	5	$	58	$	53	$	58	$	48

Amortization of intangible assets was $5 million, $14 million and $34 million for the years ended December 31, 2014, 2013 and 2012, respectively.  Our estimated total amortization is $3 million and $2 million for 2015 and 2016, respectively.

166

APPALACHIAN POWER COMPANY

AND SUBSIDIARIES

167

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Company Overview

As a public utility, APCo engages in the generation and purchase of electric power, and the subsequent sale, transmission and distribution of that power to 959,000 retail customers in its service territory in southwestern Virginia and southern West Virginia.  APCo consolidates Cedar Coal Company, Central Appalachian Coal Company, Southern Appalachian Coal Company and Appalachian Consumer Rate Relief Funding LLC, its wholly-owned subsidiaries.  APCo sells power at wholesale to municipalities.

Effective January 1, 2014, the Interconnection Agreement and the AEP System Interim Allowance Agreement were terminated. Also effective January 1, 2014, the FERC approved a PCA among APCo, I&M and KPCo with AEPSC as the agent to coordinate the participants’ respective power supply resources.  Under the PCA, APCo, I&M and KPCo will be individually responsible for planning their respective capacity obligations.   Further, the PCA allows, but does not obligate, APCo, I&M and KPCo to participate collectively under a common fixed resource requirement capacity plan in PJM and to participate in specified collective off-system sales and purchase activities.

Also effective January 1, 2014, the FERC approved a Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as the agent.  The Bridge Agreement is an interim arrangement to: (a) address the treatment of purchases and sales made by AEPSC on behalf of member companies that extend beyond termination of the Interconnection Agreement and (b) address how member companies will fulfill their existing obligations under the PJM Reliability Assurance Agreement through the 2014/2015 PJM planning year.  Under the Bridge Agreement, AGR is committed to meet capacity obligations of member companies.

Effective January 1, 2014, AEPSC conducts power, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other risk management activities on behalf of APCo, I&M and KPCo.  Power and natural gas risk management activities are allocated based on the three member companies’ respective equity positions.  Risk management activities primarily include power and natural gas physical transactions, financially-settled swaps and exchange-traded futures.  AEPSC settles the majority of the physical forward contracts by entering into offsetting contracts.  APCo shared in the revenues and expenses associated with these risk management activities with I&M and KPCo.

Under the SIA, AEPSC allocates physical and financial revenues and expenses from transactions with neighboring utilities, power marketers and other power and natural gas risk management activities based upon the location of such activity, with margins resulting from trading and marketing activities originating in PJM and MISO generally accruing to the benefit of APCo, I&M and KPCo and trading and marketing activities originating in SPP generally accruing to the benefit of PSO and SWEPCo.  Margins resulting from other transactions are allocated among APCo, I&M, KPCo, PSO and SWEPCo based upon the common shareholder's equity of these companies.

To minimize the credit requirements and operating constraints when operating within PJM, participating AEP companies, including APCo, agreed to a netting of all payment obligations incurred by any of the AEP companies against all balances due to the AEP companies and to hold PJM harmless from actions that any one or more AEP companies may take with respect to PJM.

APCo is jointly and severally liable for activity conducted by AEPSC on behalf of AEP companies related to power purchase and sale activity pursuant to the SIA.

168

Regulatory Activity

Plant Transfer

APCo and WPCo provide retail electric service at bundled rates approved by the WVPSC, with rates set on a cost-of-service basis, to their respective customers. West Virginia generally allows for timely recovery of fuel costs through an expanded net energy cost which trues-up to actual expenses. In March 2014, APCo and WPCo filed a request with the WVPSC for approval to transfer at net book value to WPCo a one-half interest in the Mitchell Plant, comprising 780 MW of average annual generating capacity presently owned by AGR. In April 2014, APCo and WPCo filed testimony that supported their request and proposed a base rate surcharge of $113 million, to be offset by an equal reduction in the ENEC revenues, to be effective upon the transfer of the Mitchell Plant to WPCo. In June 2014, the FERC issued an order approving a request by AGR and WPCo to transfer AGR’s one-half interest in the Mitchell Plant to WPCo.

In October 2014, a stipulation agreement between APCo, WPCo, the WVPSC staff and intervenors in the case was filed with the WVPSC. The stipulation agreement recommended approval for WPCo to acquire, at net book value, the one-half interest in the Mitchell Plant, excluding certain assets, and to pay AGR $20 million upon transfer, which WPCo will record as a regulatory asset, include in rate base and recover over the life of the plant. Additionally, the agreement stated that 82.5% of the costs associated with the acquired interest will be reflected in rates effective from the date of the transfer via a surcharge with an offset in ENEC revenues of $93 million. The remaining 17.5% of the costs associated with the acquired interest is to be included in rates by January 2020. The agreement also proposed that WPCo share the energy margins for 82.5% of the plant’s output with ratepayers and that WPCo retain all of the energy margins from sales into the wholesale market on the remaining 17.5%, to offset fixed costs associated with this portion, until the remaining portion is included in rates. In December 2014, the WVPSC issued an order that approved the settlement agreement, subject to certain modifications related to 82.5% of the energy and capacity margin sharing. The WVPSC determined that the sharing mechanism that was proposed is reasonable and will be adopted provided the result of the sharing mechanism will be adjusted, if necessary, so that the sharing mechanism does not result in a net cost to ratepayers that exceeds the actual variable cost of generation. In January 2015, the transfer of the one-half interest in the Mitchell Plant to WPCo was completed. See the “Plant Transfer” section of APCo Rate Matters in Note 4.

2014 Virginia Biennial Base Rate Case

In March 2014, APCo filed a biennial generation and distribution base rate case with the Virginia SCC. In accordance with a Virginia statute, APCo did not request an increase in base rates as its Virginia retail combined rate of return on common equity for 2012 and 2013 was within the statutory range of the approved return on common equity of 10.9%. The filing included a request to decrease generation depreciation rates, effective February 2015, primarily due to the change in the expected service life of certain plants. Additionally, the filing included a request to amortize $7 million annually for two years, beginning February 2015, related to IGCC and other deferred costs. APCo also requested approval to amortize $38 million related to an accumulated deferred Virginia state income tax (ADVSIT) liability over 20 years, beginning February 2015.

In November 2014, the Virginia SCC issued an order concluding that APCo's adjusted earned rate of return on common equity for 2012 and 2013, reflecting their ordered adjustments, was above the allowed threshold. The order included (a) a $6 million refund to customers for the years 2012 through 2013, (b) the write-off of $10 million of IGCC pre-construction costs, (c) approval to amortize a $38 million ADVSIT liability over 20 years, beginning February 2015 and (d) no change to generation depreciation rates with rates to be reviewed again in the next biennial rate case. The order also approved a new return on common equity of 9.7% effective for 2014 and 2015. The Virginia SCC did not rule on a Virginia SCC staff recommendation to write-down certain costs, for ratemaking purposes, for the biennial period based on APCo’s earnings within the statutory equity range. In January 2015, the Virginia SCC initiated a separate proceeding to address the proper treatment of APCo’s authorized regulatory assets. If any of these costs, or any additional costs that may be subject to review, are not recoverable, it could reduce future net income and cash flows and impact financial condition. See the “2014 Virginia Biennial Base Rate Case” section of Note 4.

169

Potential New Virginia Legislation Affecting Biennial Reviews

In February 2015, amendments to Virginia law governing the regulation of investor-owned electric utilities were approved by the Virginia General Assembly and have been sent to the Governor. If these amendments are enacted, APCo’s existing generation and distribution base rates would freeze until after the Virginia SCC rules on APCo’s next biennial review, which APCo would file in March 2020 for the 2018 and 2019 test years. These amendments would also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. Management continues to monitor this potential new legislation in Virginia.

2014 West Virginia Base Rate Case

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

Litigation and Environmental Issues

In the ordinary course of business, APCo is involved in employment, commercial, environmental and regulatory litigation.  Since it is difficult to predict the outcome of these proceedings, management cannot predict the eventual resolution, timing or amount of any loss, fine or penalty.  Management assesses the probability of loss for each contingency and accrues a liability for cases which have a probable likelihood of loss if the loss can be estimated.  For details on regulatory proceedings and pending litigation, see Note 4 – Rate Matters and Note 6 – Commitments, Guarantees and Contingencies.  Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 406 for additional discussion of relevant factors.

170

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
	Years Ended December 31,
	2014	2013	2012
	(in millions of KWhs)
Retail:
Residential	12,183	11,914	11,395
Commercial	6,829	6,828	6,794
Industrial	10,314	10,393	10,778
Miscellaneous	857	835	820
Total Retail	30,183	29,970	29,787
Wholesale	3,087	9,527	8,153
Total KWhs	33,270	39,497	37,940

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

Summary of Heating and Cooling Degree Days
	Years Ended December 31,
	2014	2013	2012
	(in degree days)
Actual – Heating (a)	2,645	2,377	1,783
Normal – Heating (b)	2,232	2,225	2,265
Actual – Cooling (c)	1,056	1,150	1,354
Normal – Cooling (b)	1,206	1,206	1,201

(a) Eastern Region heating degree days are calculated on a 55 degree temperature base.

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

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

171

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Net Income

(in millions)

Year Ended December 31, 2013	$	193
Changes in Gross Margin:
Retail Margins	215
Off-system Sales	(5		)
Transmission Revenues	5
Other Revenues	(21		)
Total Change in Gross Margin	194
Changes in Expenses and Other:
Other Operation and Maintenance	(63		)
Depreciation and Amortization	(58		)
Taxes Other Than Income Taxes	(12		)
Carrying Costs Income	(5		)
Other Income	4
Interest Expense	(16		)
Total Change in Expenses and Other	(150		)
Income Tax Expense	(22		)
Year Ended December 31, 2014	$	215

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

• Retail Margins increased $215 million primarily due to the following:

• A $129 million increase primarily due to increases in rates in West Virginia and Virginia.  Of these increases, $105 million relate to riders/trackers which have corresponding increases in other expense items below.

• An $81 million decrease in capacity settlement expenses, net of West Virginia recovery, due to the termination of the Interconnection Agreement.

• A $17 million increase in weather-related usage primarily due to an 11% increase in heating degree days.

These increases were partially offset by:

• A $13 million increase in PJM expenses.

• Margins from Off-system Sales decreased $5 million primarily due to reduced sales volumes.

• Transmission Revenues increased $5 million primarily due to increased Network Integration Transmission Service (NITS) revenue requirements. These NITS revenues are partially offset in Other Operation and Maintenance expenses below.

• Other Revenues decreased $21 million primarily due to the termination of the Interim Allowance Agreement in 2013.

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

• Other Operation and Maintenance expenses increased $63 million primarily due to the following:

• A $50 million increase in PJM transmission expenses. This increase was partially offset by a corresponding increase in Gross Margin above.

• A $17 million increase in steam operation and maintenance expenses, primarily driven by APCo's increased ownership of the Amos Plant. This increase is partially offset by an increase in Retail Margins detailed above.

172

• A $10 million increase due to the 2014 write-off of IGCC costs in Virginia.

• An $8 million increase in Transmission and Distribution vegetation management expenses in Virginia.

• An $8 million increase due to increased amortization of deferred transmission costs in accordance with the Virginia Transmission Rate Adjustment Clause effective May 2014. This increase in expense is offset within Retail Margins above.

• A $6 million increase in other generation primarily due to higher miscellaneous power supply and hydro expenses.

• A $5 million increase in employee-related expenses.

• A $5 million increase due to the favorable 2013 Mountaineer Carbon Capture asset retirement obligation adjustment.

• A $4 million increase in uncollectible accounts expense primarily as a result of the favorable resolution of contingencies related to pole attachments in the third quarter of 2013.

These increases were partially offset by:

• A $30 million write-off in the first quarter of 2013 of previously deferred Virginia storm costs resulting from the 2013 enactment of a Virginia law.

• A $24 million decrease in distribution maintenance expense due to $32 million of Virginia storm expenses in January and June 2013, partially offset by $8 million of West Virginia storm expenses in June 2014.

• Depreciation and Amortization expenses increased $58 million primarily due to the following:

• A $42 million increase due to an increase in depreciable base including the increased ownership in Amos Plant.

• A $6 million increase due to amortization of Virginia environmental deferrals. This increase in expense is offset within Retail Margins above.

• Taxes Other Than Income Taxes increased $12 million primarily due to the following:

• A $7 million increase in state business occupation tax and state minimum tax expense.

• A $5 million increase in amortization of real and personal property taxes.

• Carrying Costs Income decreased $5 million primarily due to the November 2013 securitization of the West Virginia ENEC deferral balance.

• Other Income increased $4 million primarily due to an increase in AFUDC income from increased transmission projects.

• Interest Expense increased $16 million primarily due to the November 2013 issuance of securitization bonds and the assumption of debt related to APCo's increased ownership of Amos Plant in December 2013. This increase is partially offset by an increase in Retail Margins detailed above.

• Income Tax Expense increased $22 million primarily due to an increase in pretax book income and by the recording of federal income tax adjustments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of accounting pronouncements.

173

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Appalachian Power Company:

We have audited the accompanying consolidated balance sheets of Appalachian Power Company and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Appalachian Power Company and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Columbus, Ohio

February 20, 2015

174

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Appalachian Power Company and subsidiaries (APCo) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  APCo’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of APCo’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control – Integrated Framework.  Based on management’s assessment, APCo’s internal control over financial reporting was effective as of December 31, 2014.

This annual report does not include an attestation report of APCo’s registered public accounting firm regarding internal control over financial reporting pursuant to the Securities and Exchange Commission rules that permit APCo to provide only management’s report in this annual report.

175

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
REVENUES
Electric Generation, Transmission and Distribution	$	2,899,402		$	3,059,577		$	2,948,762
Sales to AEP Affiliates	144,437			347,484			318,199
Other Revenues	9,239			10,345			9,970
TOTAL REVENUES	3,053,078			3,417,406			3,276,931
EXPENSES
Fuel and Other Consumables Used for Electric Generation	813,399			769,853			815,979
Purchased Electricity for Resale	456,622			232,702			211,133
Purchased Electricity from AEP Affiliates	4,661			830,959			661,238
Other Operation	427,726			311,975			332,936
Maintenance	259,348			273,164			211,702
Asset Impairments and Other Related Charges	—			39,283			—
Depreciation and Amortization	400,882			342,643			344,293
Taxes Other Than Income Taxes	122,254			110,549			102,190
TOTAL EXPENSES	2,484,892			2,911,128			2,679,471
OPERATING INCOME	568,186			506,278			597,460
Other Income (Expense):
Interest Income	1,629			2,411			1,358
Carrying Costs Income	3,045			8,086			24,602
Allowance for Equity Funds Used During Construction	7,053			2,353			1,684
Interest Expense	(209,570		)	(192,982		)	(202,074		)
INCOME BEFORE INCOME TAX EXPENSE	370,343			326,146			423,030
Income Tax Expense	154,928			132,935			165,527
NET INCOME	$	215,415		$	193,211		$	257,503

The common stock of APCo is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

176

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2014, 2013 and 2012

 (in thousands)

	Years Ended December 31,
	2014			2013		2012
Net Income	$	215,415		$	193,211	$	257,503
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Cash Flow Hedges, Net of Tax of $383, $943 and $925 in 2014, 2013 and 2012, Respectively	712			1,751		1,718
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $718, $772 and $1,937 in 2014, 2013 and 2012, Respectively	(1,333		)	1,433		3,597
Pension and OPEB Funded Status, Net of Tax of $1,455, $15,974 and $12,562 in 2014, 2013 and 2012, Respectively	2,702			29,665		23,330
TOTAL OTHER COMPREHENSIVE INCOME	2,081			32,849		28,645
TOTAL COMPREHENSIVE INCOME	$	217,496		$	226,060	$	286,148

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

177

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S EQUITY

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2011	$	260,458	$	1,573,752	$	1,160,747		$	(58,543	)	$	2,936,414
Common Stock Dividends					(170,000		)				(170,000		)
Net Income					257,503						257,503
Other Comprehensive Income								28,645			28,645
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2012	260,458		1,573,752		1,248,250			(29,898		)	3,052,562
Common Stock Dividends					(285,000		)				(285,000		)
Net Income					193,211						193,211
Other Comprehensive Income								32,849			32,849
Contribution of Amos Plant from Parent			235,810								235,810
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013	260,458		1,809,562		1,156,461			2,951			3,229,432
Common Stock Dividends					(80,000		)				(80,000		)
Net Income					215,415						215,415
Other Comprehensive Income								2,081			2,081
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014	$	260,458	$	1,809,562	$	1,291,876		$	5,032		$	3,366,928

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

178

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

December 31, 2014 and 2013

(in thousands)

	December 31,
	2014			2013
CURRENT ASSETS
Cash and Cash Equivalents	$	2,613		$	2,745
Restricted Cash for Securitized Funding	15,599			2,714
Advances to Affiliates	48,519			92,485
Accounts Receivable:
Customers	114,711			142,010
Affiliated Companies	67,294			113,793
Accrued Unbilled Revenues	58,022			55,930
Miscellaneous	1,956			412
Allowance for Uncollectible Accounts	(2,364		)	(2,443		)
Total Accounts Receivable	239,619			309,702
Fuel	113,386			191,811
Materials and Supplies	131,285			128,843
Risk Management Assets	23,792			21,171
Deferred Income Tax Benefits	23,955			—
Regulatory Asset for Under-Recovered Fuel Costs	66,076			39,811
Prepayments and Other Current Assets	13,660			13,758
TOTAL CURRENT ASSETS	678,504			803,040
PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	6,824,029			6,745,172
Transmission	2,228,029			2,160,660
Distribution	3,258,306			3,139,150
Other Property, Plant and Equipment	373,520			357,517
Construction Work in Progress	321,495			184,701
Total Property, Plant and Equipment	13,005,379			12,587,200
Accumulated Depreciation and Amortization	3,823,664			3,617,990
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	9,181,715			8,969,210
OTHER NONCURRENT ASSETS
Regulatory Assets	857,872			1,003,890
Securitized Assets	350,170			369,355
Long-term Risk Management Assets	4,891			16,948
Deferred Charges and Other Noncurrent Assets	159,230			148,205
TOTAL OTHER NONCURRENT ASSETS	1,372,163			1,538,398
TOTAL ASSETS	$	11,232,382		$	11,310,648

 See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

179

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER’S EQUITY

December 31, 2014 and 2013

	December 31,
	2014		2013
	(in thousands)
CURRENT LIABILITIES
Accounts Payable:
General	$	166,821	$	169,184
Affiliated Companies	80,602		120,789
Long-term Debt Due Within One Year – Nonaffiliated	552,212		342,360
Long-term Debt Due Within One Year – Affiliated	86,000		—
Risk Management Liabilities	11,017		8,892
Customer Deposits	71,766		66,040
Deferred Income Taxes	—		6,899
Accrued Taxes	109,482		114,699
Accrued Interest	52,141		51,899
Regulatory Liability for Over-Recovered Fuel Costs	—		107,048
Other Current Liabilities	145,017		97,566
TOTAL CURRENT LIABILITIES	1,275,058		1,085,376
NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	3,342,062		3,765,997
Long-term Debt – Affiliated	—		86,000
Long-term Risk Management Liabilities	2,057		10,241
Deferred Income Taxes	2,288,842		2,232,441
Regulatory Liabilities and Deferred Investment Tax Credits	652,867		631,225
Asset Retirement Obligations	122,300		152,608
Employee Benefits and Pension Obligations	127,980		82,264
Deferred Credits and Other Noncurrent Liabilities	54,288		35,064
TOTAL NONCURRENT LIABILITIES	6,590,396		6,995,840
TOTAL LIABILITIES	7,865,454		8,081,216
Rate Matters (Note 4)
Commitments and Contingencies (Note 6)
COMMON SHAREHOLDER’S EQUITY
Common Stock – No Par Value:
Authorized – 30,000,000 Shares
Outstanding  – 13,499,500 Shares	260,458		260,458
Paid-in Capital	1,809,562		1,809,562
Retained Earnings	1,291,876		1,156,461
Accumulated Other Comprehensive Income (Loss)	5,032		2,951
TOTAL COMMON SHAREHOLDER’S EQUITY	3,366,928		3,229,432
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY	$	11,232,382	$	11,310,648

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

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APPALACHIAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
OPERATING ACTIVITIES
Net Income	$	215,415		$	193,211		$	257,503
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	400,882			342,643			344,293
Deferred Income Taxes	144,651			75,714			138,460
Asset Impairments and Other Related Charges	—			39,283			—
Carrying Costs Income	(3,045		)	(8,086		)	(24,602		)
Amortization (Deferral) of Storm Costs	6,816			36,068			(87,992		)
Allowance for Equity Funds Used During Construction	(7,053		)	(2,353		)	(1,684		)
Mark-to-Market of Risk Management Contracts	3,302			12,288			10,130
Pension Contributions to Qualified Plan Trust	(8,963		)	—			(25,199		)
Fuel Over/Under-Recovery, Net	(119,592		)	59,174			96,774
Change in Regulatory Assets	(6,167		)	(10,108		)	(31,104		)
Change in Other Noncurrent Assets	(12,532		)	(22,894		)	(21,724		)
Change in Other Noncurrent Liabilities	48,748			15,707			24,206
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	68,586			12,470			42,161
Fuel, Materials and Supplies	75,983			28,042			(40,268		)
Accounts Payable	(62,764		)	(31,951		)	12,547
Accrued Taxes, Net	(5,380		)	81,228			(14,396		)
Other Current Assets	(962		)	5,626			3,706
Other Current Liabilities	23,812			(11,667		)	7,234
Net Cash Flows from Operating Activities	761,737			814,395			690,045
INVESTING ACTIVITIES
Construction Expenditures	(497,400		)	(380,974		)	(469,052		)
Change in Advances to Affiliates, Net	43,966			(69,461		)	(1,016		)
Other Investing Activities	(5,460		)	(1,231		)	7,209
Net Cash Flows Used for Investing Activities	(458,894		)	(451,666		)	(462,859		)
FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated	394,189			444,437			339,374
Change in Advances from Affiliates, Net	—			(173,965		)	(24,283		)
Retirement of Long-term Debt – Nonaffiliated	(612,710		)	(345,029		)	(364,875		)
Principal Payments for Capital Lease Obligations	(5,618		)	(5,550		)	(6,496		)
Dividends Paid on Common Stock	(80,000		)	(285,000		)	(170,000		)
Other Financing Activities	1,164			1,547			353
Net Cash Flows Used for Financing Activities	(302,975		)	(363,560		)	(225,927		)
Net Increase (Decrease) in Cash and Cash Equivalents	(132		)	(831		)	1,259
Cash and Cash Equivalents at Beginning of Period	2,745			3,576			2,317
Cash and Cash Equivalents at End of Period	$	2,613		$	2,745		$	3,576
SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	196,716		$	184,584		$	200,383
Net Cash Paid (Received) for Income Taxes	15,899			(27,759		)	31,418
Noncash Acquisitions Under Capital Leases	4,908			4,351			3,366
Construction Expenditures Included in Current Liabilities as of December 31,	72,009			50,829			62,177
Noncash Contribution of Amos Plant from Parent	—			235,810			—

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

181

APPALACHIAN POWER COMPANY AND SUBSIDIARIES

INDEX OF NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to APCo's financial statements are combined with the notes to financial statements for other registrant subsidiaries. Listed below are the notes that apply to APCo.  The footnotes begin on page 244.

	Page Number
Organization and Summary of Significant Accounting Policies	245
New Accounting Pronouncements	260
Comprehensive Income	261
Rate Matters	272
Effects of Regulation	282
Commitments, Guarantees and Contingencies	293
Disposition and Impairments	299
Benefit Plans	301
Business Segments	336
Derivatives and Hedging	337
Fair Value Measurements	350
Income Taxes	363
Leases	372
Financing Activities	377
Related Party Transactions	382
Variable Interest Entities	391
Property, Plant and Equipment	397
Cost Reduction Programs	404
Unaudited Quarterly Financial Information	405

182

INDIANA MICHIGAN POWER COMPANY

AND SUBSIDIARIES

183

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Company Overview

As a public utility, I&M engages in the generation and purchase of electric power, and the subsequent sale, transmission and distribution of that power to 588,000 retail customers in its service territory in northern and eastern Indiana and a portion of southwestern Michigan.  I&M consolidates Blackhawk Coal Company and Price River Coal Company, its wholly-owned subsidiaries.  I&M also consolidates DCC Fuel.  I&M sells power at wholesale to municipalities and electric cooperatives.  I&M’s River Transportation Division provides barging services to affiliates and nonaffiliated companies.  The revenues from barging represent the majority of other revenues.

Effective January 1, 2014, the Interconnection Agreement and the AEP System Interim Allowance Agreement were terminated. Effective January 1, 2014, the FERC approved a PCA among APCo, I&M and KPCo with AEPSC as the agent to coordinate the participants’ respective power supply resources.  Under the PCA, APCo, I&M and KPCo will be individually responsible for planning their respective capacity obligations.   Further, the PCA allows, but does not obligate, APCo, I&M and KPCo to participate collectively under a common fixed resource requirement capacity plan in PJM and to participate in specified collective off-system sales and purchase activities.

Also effective January 1, 2014, the FERC approved a Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as the agent.  The Bridge Agreement is an interim arrangement to: (a) address the treatment of purchases and sales made by AEPSC on behalf of member companies that extend beyond termination of the Interconnection Agreement and (b) address how member companies will fulfill their existing obligations under the PJM Reliability Assurance Agreement through the 2014/2015 PJM planning year.  Under the Bridge Agreement, AGR is committed to meet capacity obligations of member companies.

Effective January 1, 2014, AEPSC conducts power, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other risk management activities on behalf of APCo, I&M and KPCo.  Power and natural gas risk management activities are allocated based on the three member companies’ respective equity positions.  Risk management activities primarily include power and natural gas physical transactions, financially-settled swaps and exchange-traded futures.  AEPSC settles the majority of the physical forward contracts by entering into offsetting contracts.  I&M shared in the revenues and expenses associated with these risk management activities with APCo and KPCo.

Under a unit power agreement, I&M purchases AEGCo’s 50% share of the 2,620 MW Rockport Plant capacity unless it is sold to other utilities.  Another unit power agreement between AEGCo and KPCo provides for the sale of 390 MW of AEGCo’s Rockport Plant capacity to KPCo through 2022.  Under these agreements, I&M purchases 910 MW of AEGCo’s 50% share of Rockport Plant capacity.

Under the SIA, AEPSC allocates physical and financial revenues and expenses from transactions with neighboring utilities, power marketers and other power and natural gas risk management activities based upon the location of such activity, with margins resulting from trading and marketing activities originating in PJM and MISO generally accruing to the benefit of APCo, I&M and KPCo and trading and marketing activities originating in SPP generally accruing to the benefit of PSO and SWEPCo.  Margins resulting from other transactions are allocated among APCo, I&M, KPCo, PSO and SWEPCo based upon the common shareholder's equity of these companies.

To minimize the credit requirements and operating constraints when operating within PJM, participating AEP companies, including I&M, agreed to a netting of all payment obligations incurred by any of the AEP companies against all balances due to the AEP companies and to hold PJM harmless from actions that any one or more AEP companies may take with respect to PJM.

184

I&M is jointly and severally liable for activity conducted by AEPSC on behalf of AEP companies related to power purchase and sale activity pursuant to the SIA.

Regulatory Activity

Transmission, Distribution and Storage System Improvement Charge (TDSIC)

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

Litigation and Environmental Issues

In the ordinary course of business, I&M is involved in employment, commercial, environmental and regulatory litigation.  Since it is difficult to predict the outcome of these proceedings, management cannot predict the eventual resolution, timing or amount of any loss, fine or penalty.  Management assesses the probability of loss for each contingency and accrues a liability for cases which have a probable likelihood of loss if the loss can be estimated.  For details on regulatory proceedings and pending litigation, see Note 4 – Rate Matters and Note 6 – Commitments, Guarantees and Contingencies.  Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

Rockport Plant Litigation

In July 2013, the Wilmington Trust Company filed a complaint in U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will be unlawfully burdened by the terms of the modified NSR consent decree after the Rockport Plant, Unit 2 lease expiration in December 2022.  The terms of the consent decree allow the installation of environmental emission control equipment, repowering or retirement of the unit.  The plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement.  The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff.  The New York court has granted a motion to transfer this case to the U.S. District Court for the Southern District of Ohio.  In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.   Management will continue to defend against the remaining claims.  Management is unable to determine a range of potential losses that are reasonably possible of occurring.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 406 for additional discussion of relevant factors.

185

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
	Years Ended December 31,
	2014	2013	2012
	(in millions of KWhs)
Retail:
Residential	5,776	5,778	5,771
Commercial	4,884	4,943	5,001
Industrial	7,640	7,522	7,556
Miscellaneous	71	72	75
Total Retail	18,371	18,315	18,403
Wholesale	16,468	10,499	9,782
Total KWhs	34,839	28,814	28,185

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

Summary of Heating and Cooling Degree Days
	Years Ended December 31,
	2014	2013	2012
	(in degree days)
Actual – Heating (a)	4,664	4,076	3,042
Normal – Heating (b)	3,737	3,730	3,772
Actual – Cooling (c)	714	826	1,098
Normal – Cooling (b)	853	855	861

(a) Eastern Region heating degree days are calculated on a 55 degree temperature base.

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

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

186

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Net Income

(in millions)

Year Ended December 31, 2013	$	178
Changes in Gross Margin:
Retail Margins	20
Off-system Sales	60
Transmission Revenues	11
Other Revenues	(33		)
Total Change in Gross Margin	58
Changes in Expenses and Other:
Other Operation and Maintenance	(54		)
Depreciation and Amortization	(22		)
Taxes Other Than Income Taxes	2
Other Income	(5		)
Interest Expense	4
Total Change in Expenses and Other	(75		)
Income Tax Expense	(5		)
Year Ended December 31, 2014	$	156

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

• Retail Margins increased $20 million primarily due to the following:

• A $30 million increase due to rate recovery primarily due to a return on assets under the Cook Plant Life Cycle Management Project rider effective January 2014.

• A $14 million increase due to a rate increase in Indiana effective March 2013.

• An $8 million increase due to an Indiana Capacity Tracker Rider effective August 2014.

• A $5 million increase in weather related usage primarily due to a 14% increase in heating days, partially offset by a decrease in cooling degree days.

These increases were partially offset by:

• A $27 million decrease due to lower Indiana recovery of energy efficiency program costs. The decrease in revenue was partially offset by a corresponding decrease in energy efficiency expense items discussed below.

• A $14 million decrease in certain cost recovery revenues, including fuel and PJM costs.

• Margins from Off-system Sales increased $60 million due to higher market prices and increased sales volumes.

• Transmission Revenues increased by $11 million primarily due to increased investment in the PJM region.

• Other Revenues decreased $33 million primarily due to the following:

• A $29 million decrease in barging. This decrease in barging is a result of River Transportation Division (RTD) no longer serving plants transferred to AGR as a result of corporate separation in Ohio. The decrease in RTD revenue was offset by a corresponding decrease in Other Operation and Maintenance expenses for barging discussed below.

• A $4 million decrease due to an MPSC order disallowing 2012 to 2014 lost revenue related to Demand Side Management (DSM).

187

Expenses and Other changed between years as follows:

• Other Operation and Maintenance expenses increased $54 million primarily due to the following:

• A $28 million increase in transmission expenses primarily due to increased PJM expenses.  

• An $18 million increase in nuclear expenses primarily due to a prior year deferral of $8 million in expenses, as regulatory assets, for future recovery as approved by the IURC effective March 2013 and $7 million of increased refueling amortization.

• A $13 million increase in steam generation primarily due to increased employee-related expenses and increased boiler plant maintenance at Rockport Plant.

• An $11 million increase in administrative and general expenses.

• A $9 million increase in distribution expenses primarily due to metering expenses and maintenance of overhead lines.

• An $8 million increase due to accrual for future environmental remediation costs.

These increases were partially offset by:

• A $26 million decrease in RTD expenses for barging activities. The decrease in RTD expenses was offset by a corresponding decrease in Other Revenues from barging activities as discussed above.

• A $16 million decrease in customer services expense related to energy efficiency. The decrease in expenses was offset by a corresponding decrease in Retail Margins discussed above.

• Depreciation and Amortization expenses increased $22 million primarily due to a higher depreciable base.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of accounting pronouncements.

188

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Indiana Michigan Power Company:

We have audited the accompanying consolidated balance sheets of Indiana Michigan Power Company and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Indiana Michigan Power Company and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Columbus, Ohio

February 20, 2015

189

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Indiana Michigan Power Company and subsidiaries (I&M) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  I&M’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of I&M’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control – Integrated Framework.  Based on management’s assessment, I&M’s internal control over financial reporting was effective as of December 31, 2014.

This annual report does not include an attestation report of I&M’s registered public accounting firm regarding internal control over financial reporting pursuant to the Securities and Exchange Commission rules that permit I&M to provide only management’s report in this annual report.

190

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
REVENUES
Electric Generation, Transmission and Distribution	$	2,149,109		$	2,022,257		$	1,810,069
Sales to AEP Affiliates	4,198			219,399			268,408
Other Revenues – Affiliated	94,379			122,287			117,052
Other Revenues – Nonaffiliated	2,048			2,916			4,582
TOTAL REVENUES	2,249,734			2,366,859			2,200,111
EXPENSES
Fuel and Other Consumables Used for Electric Generation	476,628			434,078			464,420
Purchased Electricity for Resale	96,813			151,404			117,860
Purchased Electricity from AEP Affiliates	269,972			433,209			386,404
Other Operation	585,958			564,012			583,865
Maintenance	228,506			195,892			172,562
Depreciation and Amortization	200,196			177,727			146,619
Taxes Other Than Income Taxes	86,419			88,676			80,687
TOTAL EXPENSES	1,944,492			2,044,998			1,952,417
OPERATING INCOME	305,242			321,861			247,694
Other Income (Expense):
Interest Income	4,628			8,521			3,122
Allowance for Equity Funds Used During Construction	18,873			19,943			9,724
Interest Expense	(93,475		)	(97,710		)	(102,739		)
INCOME BEFORE INCOME TAX EXPENSE	235,268			252,615			157,801
Income Tax Expense	79,621			75,111			39,344
NET INCOME	$	155,647		$	177,504		$	118,457

The common stock of I&M is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

191

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2014, 2013 and 2012

 (in thousands)

	Years Ended December 31,
	2014			2013		2012
Net Income	$	155,647		$	177,504	$	118,457
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Cash Flow Hedges, Net of Tax of $821, $2,242 and $2,590 in 2014, 2013 and 2012, Respectively	1,524			4,163		(4,809		)
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $92, $377 and $598 in 2014, 2013 and 2012, Respectively	171			700		1,113
Pension and OPEB Funded Status, Net of Tax of $294, $4,583 and $1,634 in 2014, 2013 and 2012, Respectively	(546		)	8,511		3,034
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	1,149			13,374		(662		)
TOTAL COMPREHENSIVE INCOME	$	156,796		$	190,878	$	117,795

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

192

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S EQUITY

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2011	$	56,584	$	980,896	$	751,721		$	(28,221	)	$	1,760,980
Common Stock Dividends					(75,000		)				(75,000		)
Net Income					118,457						118,457
Other Comprehensive Loss								(662		)	(662		)
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2012	56,584		980,896		795,178			(28,883		)	1,803,775
Common Stock Dividends					(72,500		)				(72,500		)
Net Income					177,504						177,504
Other Comprehensive Income								13,374			13,374
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013	56,584		980,896		900,182			(15,509		)	1,922,153
Common Stock Dividends					(125,000		)				(125,000		)
Net Income					155,647						155,647
Other Comprehensive Income								1,149			1,149
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014	$	56,584	$	980,896	$	930,829		$	(14,360	)	$	1,953,949

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

193

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

December 31, 2014 and 2013

(in thousands)

	December 31,
	2014			2013
CURRENT ASSETS
Cash and Cash Equivalents	$	1,020		$	1,317
Advances to Affiliates	13,481			55,863
Accounts Receivable:
Customers	56,978			63,011
Affiliated Companies	72,582			78,282
Accrued Unbilled Revenues	503			17,293
Miscellaneous	1,625			5,064
Allowance for Uncollectible Accounts	(494		)	(184		)
Total Accounts Receivable	131,194			163,466
Fuel	54,623			53,807
Materials and Supplies	201,089			209,718
Risk Management Assets	22,328			15,388
Accrued Tax Benefits	24,788			48,832
Prepayments and Other Current Assets	27,968			38,103
TOTAL CURRENT ASSETS	476,491			586,494
PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	3,741,831			3,577,906
Transmission	1,358,419			1,304,225
Distribution	1,698,409			1,625,057
Other Property, Plant and Equipment (Including Plant to be Retired, Coal Mining and Nuclear Fuel)	1,490,820			1,421,361
Construction Work in Progress	537,237			427,164
Total Property, Plant and Equipment	8,826,716			8,355,713
Accumulated Depreciation, Depletion and Amortization	3,410,341			3,299,349
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	5,416,375			5,056,364
OTHER NONCURRENT ASSETS
Regulatory Assets	536,152			524,114
Spent Nuclear Fuel and Decommissioning Trusts	2,095,732			1,931,610
Long-term Risk Management Assets	3,317			11,495
Deferred Charges and Other Noncurrent Assets	137,209			143,657
TOTAL OTHER NONCURRENT ASSETS	2,772,410			2,610,876
TOTAL ASSETS	$	8,665,276		$	8,253,734

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

194

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER'S EQUITY

December 31, 2014 and 2013

(dollars in thousands)

	December 31,
	2014			2013
CURRENT LIABILITIES
Advances from Affiliates	$	142,501		$	—
Accounts Payable:
General	168,294			142,219
Affiliated Companies	76,010			93,773
Long-term Debt Due Within One Year – Nonaffiliated (December 31, 2014 and 2013 Amounts Include $85,657 and $107,143 Respectively, Related to DCC Fuel)	382,187			294,845
Risk Management Liabilities	5,223			7,029
Customer Deposits	35,206			31,103
Accrued Taxes	72,742			73,292
Accrued Interest	26,677			27,686
Obligations Under Capital Leases	42,050			46,210
Other Current Liabilities	150,566			139,088
TOTAL CURRENT LIABILITIES	1,101,456			855,245
NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	1,645,210			1,744,171
Long-term Risk Management Liabilities	1,395			6,946
Deferred Income Taxes	1,264,167			1,183,350
Regulatory Liabilities and Deferred Investment Tax Credits	1,199,694			1,112,645
Asset Retirement Obligations	1,337,179			1,255,184
Deferred Credits and Other Noncurrent Liabilities	162,226			174,040
TOTAL NONCURRENT LIABILITIES	5,609,871			5,476,336
TOTAL LIABILITIES	6,711,327			6,331,581
Rate Matters (Note 4)
Commitments and Contingencies (Note 6)
COMMON SHAREHOLDER’S EQUITY
Common Stock – No Par Value:
Authorized – 2,500,000 Shares
Outstanding  – 1,400,000 Shares	56,584			56,584
Paid-in Capital	980,896			980,896
Retained Earnings	930,829			900,182
Accumulated Other Comprehensive Income (Loss)	(14,360		)	(15,509		)
TOTAL COMMON SHAREHOLDER’S EQUITY	1,953,949			1,922,153
TOTAL LIABILITIES AND COMMON SHAREHOLDER'S EQUITY	$	8,665,276		$	8,253,734

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

195

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
OPERATING ACTIVITIES
Net Income	$	155,647		$	177,504		$	118,457
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	200,196			177,727			146,619
Deferred Income Taxes	70,225			129,109			53,067
Amortization (Deferral) of Incremental Nuclear Refueling Outage Expenses, Net	19,967			(31,328		)	13,899
Allowance for Equity Funds Used During Construction	(18,873		)	(19,943		)	(9,724		)
Mark-to-Market of Risk Management Contracts	(6,141		)	12,496			12,164
Amortization of Nuclear Fuel	144,236			130,629			135,905
Fuel Over/Under-Recovery, Net	7,791			3,254			4,175
Change in Other Noncurrent Assets	(72,900		)	(57,106		)	(2,347		)
Change in Other Noncurrent Liabilities	83,147			37,310			36,524
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	32,272			1,445			34,431
Fuel, Materials and Supplies	7,813			(8,848		)	(19,321		)
Accounts Payable	(20,426		)	(11,151		)	15,959
Accrued Taxes, Net	24,812			(23,887		)	16,897
Other Current Assets	10,575			21,287			(10,504		)
Other Current Liabilities	6,929			575			11,717
Net Cash Flows from Operating Activities	645,270			539,073			557,918
INVESTING ACTIVITIES
Construction Expenditures	(484,721		)	(508,857		)	(317,284		)
Change in Advances to Affiliates, Net	42,382			61,114			(21,263		)
Purchases of Investment Securities	(1,086,437		)	(909,998		)	(1,045,422		)
Sales of Investment Securities	1,031,793			858,406			987,550
Acquisitions of Nuclear Fuel	(116,168		)	(153,730		)	(106,714		)
Insurance Proceeds Related to Cook Plant Fire	—			72,000			—
Other Investing Activities	10,498			32,635			29,324
Net Cash Flows Used for Investing Activities	(602,653		)	(548,430		)	(473,809		)
FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated	205,616			348,874			217,900
Change in Advances from Affiliates, Net	142,501			—			—
Retirement of Long-term Debt – Nonaffiliated	(218,516		)	(370,338		)	(220,212		)
Proceeds from Nuclear Fuel Sale/Leaseback	—			110,200			—
Principal Payments for Capital Lease Obligations	(48,164		)	(8,030		)	(6,536		)
Dividends Paid on Common Stock	(125,000		)	(72,500		)	(75,000		)
Other Financing Activities	649			906			281
Net Cash Flows from (Used for) Financing Activities	(42,914		)	9,112			(83,567		)
Net Increase (Decrease) in Cash and Cash Equivalents	(297		)	(245		)	542
Cash and Cash Equivalents at Beginning of Period	1,317			1,562			1,020
Cash and Cash Equivalents at End of Period	$	1,020		$	1,317		$	1,562
SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	81,580		$	90,079		$	98,130
Net Cash Paid (Received) for Income Taxes	(10,204		)	(31,271		)	(21,196		)
Noncash Acquisitions Under Capital Leases	16,434			114,077			6,243
Construction Expenditures Included in Current Liabilities as of December 31,	66,114			85,423			112,622
Acquisition of Nuclear Fuel Included in Current Liabilities as of December 31,	44,529			35			35,493
Expected Reimbursement for Capital Cost of Spent Nuclear Fuel Dry Cask Storage	3,392			4,352			30,332

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

196

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

INDEX OF NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to I&M's financial statements are combined with the notes to financial statements for other registrant subsidiaries. Listed below are the notes that apply to I&M.  The footnotes begin on page 244.

	Page Number
Organization and Summary of Significant Accounting Policies	245
New Accounting Pronouncements	260
Comprehensive Income	261
Rate Matters	272
Effects of Regulation	282
Commitments, Guarantees and Contingencies	293
Benefit Plans	301
Business Segments	336
Derivatives and Hedging	337
Fair Value Measurements	350
Income Taxes	363
Leases	372
Financing Activities	377
Related Party Transactions	382
Variable Interest Entities	391
Property, Plant and Equipment	397
Cost Reduction Programs	404
Unaudited Quarterly Financial Information	405

197

OHIO POWER COMPANY AND SUBSIDIARIES

198

OHIO POWER COMPANY AND SUBSIDIARIES

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Company Overview

As a public utility, OPCo engages in the transmission and distribution of power to 1,466,000 retail customers in the northwestern, central, eastern and southern sections of Ohio.  OPCo purchases energy and capacity to serve its remaining generation service customers.  In accordance with the PUCO’s corporate separation order, OPCo remains responsible to provide power and capacity to OPCo customers who have not switched electric providers.  Effective January 1, 2014, OPCo purchased power from both affiliated and nonaffiliated entities, subject to auction requirements and PUCO approval, to meet the energy and capacity needs of customers.  OPCo consolidates Ohio Phase-in Recovery Funding LLC, its wholly-owned subsidiary.

Effective January 1, 2014, the Interconnection Agreement and the AEP System Interim Allowance Agreement were terminated. Also effective January 1, 2014, the FERC approved a Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as the agent.  The Bridge Agreement is an interim arrangement to: (a) address the treatment of purchases and sales made by AEPSC on behalf of member companies that extend beyond termination of the Interconnection Agreement and (b) address how member companies will fulfill their existing obligations under the PJM Reliability Assurance Agreement through the 2014/2015 PJM planning year.  Under the Bridge Agreement, AGR is committed to meet capacity obligations of member companies.

Additionally, effective January 1, 2014, AGR and OPCo received approval for a Power Supply Agreement (PSA).  The PSA provides for AGR to supply capacity for OPCo’s switched (at $188.88/MW day) and non-switched retail load for the period January 1, 2014 through May 31, 2015 and to supply the energy needs of OPCo’s non-switched retail load that is not acquired through auctions from January 1, 2014 through December 31, 2014.

In 2007, OPCo and AEGCo entered into a 10-year unit power agreement for the entire output from the Lawrenceburg Plant with an option for an additional 2-year period.  OPCo paid AEGCo for the capacity, depreciation, fuel, operation, maintenance and tax expenses.  These payments were due regardless of whether the plant operated.  Effective January 1, 2014, OPCo assigned the unit power agreement to AGR.

Effective January 1, 2014, AEPSC conducts only gasoline, diesel fuel, energy procurement and FTR price risk management activities on OPCo’s behalf.  With the transfer of OPCo’s generation assets to AGR, OPCo will no longer participate in other risk management activities.  

To minimize the credit requirements and operating constraints of operating within PJM, participating AEP companies, including OPCo, agreed to a netting of all payment obligations incurred by any of the AEP companies against all balances due to the AEP companies and to hold PJM harmless from actions that any one or more AEP companies may take with respect to PJM.

OPCo is jointly and severally liable for activity conducted by AEPSC on behalf of AEP companies related to power purchase and sale activity pursuant to the SIA.

Ormet

Ormet had a contract to purchase power from OPCo through 2018.  In October 2013, Ormet announced that it was unable to emerge from bankruptcy and shut down operations effective immediately.  The loss of Ormet's load will not have a material impact on future gross margin.

199

Regulatory Activity

Ohio Electric Security Plan Filings

2009 - 2011 ESP

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

June 2012 - May 2015 Ohio ESP Including Capacity Charge

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

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

As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012. The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs. In April and May 2013, OPCo and various intervenors filed appeals with the Supreme Court of Ohio challenging portions of the PUCO’s ESP order, including the RSR. As of December 31, 2014, OPCo’s incurred deferred capacity costs balance was $422 million, including debt carrying costs.

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

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

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

200

Proposed June 2015 - May 2018 ESP

In December 2013, OPCo filed an application with the PUCO to approve an ESP that includes proposed rate adjustments and the continuation and modification of certain existing riders effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders and estimates an average decrease in rates of 9% over the three-year term of the plan for customers who receive their RPM capacity and energy auction-based generation through OPCo. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement. In May 2014, intervenors and the PUCO staff filed testimony that provided various recommendations including the rejection and/or modification of various riders, including the Distribution Investment Rider and the proposed PPA. Hearings at the PUCO in the ESP case were held in June 2014.

In July 2014, OPCo submitted a separate application to continue the RSR established in the June 2012 - May 2015 ESP to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh, until the balance of the capacity deferrals has been collected.

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

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

Litigation and Environmental Issues

In the ordinary course of business, OPCo is involved in employment, commercial, environmental and regulatory litigation.  Since it is difficult to predict the outcome of these proceedings, management cannot predict the eventual resolution, timing or amount of any loss, fine or penalty.  Management assesses the probability of loss for each contingency and accrues a liability for cases which have a probable likelihood of loss if the loss can be estimated.  For details on regulatory proceedings and pending litigation, see Note 4 – Rate Matters and Note 6 – Commitments, Guarantees and Contingencies.  Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 406 for additional discussion of relevant factors.

201

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
	Years Ended December 31,
	2014		2013	2012
	(in millions of KWhs)
Retail:
Residential	14,637		14,486	14,485
Commercial	14,400		14,188	14,176
Industrial	14,541		15,915	18,122
Miscellaneous	123		125	120
Total Retail (a)	43,701		44,714	46,903
Wholesale	2,198	(b)	12,828	13,221
Total KWhs	45,899		57,542	60,124

(a) Represents energy delivered to distribution customers.

(b) Ohio's contractually obligated purchases of OVEC power sold into PJM.

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

Summary of Heating and Cooling Degree Days
	Years Ended December 31,
	2014	2013	2012
	(in degree days)
Actual – Heating (a)	3,734	3,383	2,610
Normal – Heating (b)	3,230	3,229	3,276
Actual – Cooling (c)	949	1,029	1,248
Normal – Cooling (b)	960	954	948

(a) Eastern Region heating degree days are calculated on a 55 degree temperature base.

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

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

202

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Net Income

(in millions)

Year Ended December 31, 2013	$	410
Changes in Gross Margin:
Retail Margins	(879		)
Off-system Sales	(124		)
Transmission Revenues	69
Other Revenues	(39		)
Total Change in Gross Margin	(973		)
Changes in Expenses and Other:
Other Operation and Maintenance	237
Asset Impairments and Other Related Charges	154
Depreciation and Amortization	169
Taxes Other Than Income Taxes	54
Other Income	8
Carrying Costs Income	10
Interest Expense	54
Total Change in Expenses and Other	686
Income Tax Expense	93
Year Ended December 31, 2014	$	216

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 amortization of generation deferrals were as follows:

• Retail Margins decreased $879 million primarily due to the following:

• A $781 million decrease due to the impacts of corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013 and an increase in regulatory provisions. In addition, this decrease includes customers switching to alternative CRES providers, partially offset by an increase in Transmission Revenues detailed below.

These decreases were partially offset by:

• A $43 million increase in revenues associated with the Storm Damage Recovery Rider. This increase in Retail Margins is offset by an increase primarily in Other Operation and Maintenance expenses below.

• Margins from Off-system Sales decreased $124 million due to corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013.

• Transmission Revenues increased $69 million primarily due to customers who have switched to alternative CRES providers, rate increases for customers in the PJM region and increased transmission investment.  The increase in transmission revenues related to CRES providers primarily offsets lost revenues included in Retail Margins above.

• Other Revenues decreased $39 million due to corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013. This decrease has a corresponding decrease in Other Operation and Maintenance expenses below.

203

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

• Other Operation and Maintenance expenses decreased $237 million primarily due to the following:

• A $447 million decrease due to corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013.

This decrease was partially offset by:

• A $129 million increase in PJM expenses. This increase was partially offset by a corresponding increase in Gross Margin above.

• A $40 million increase due to the amortization of 2012 deferred storm expenses. This increase was offset by a corresponding increase in Retail Margins above.

• An $18 million increase in remitted Universal Service Fund (USF) surcharge payments to the Ohio Department of Development to fund an energy assistance program for qualified Ohio customers. This increase was offset by a corresponding increase in Retail Margins above.

• Asset Impairments and Other Related Charges decreased $154 million primarily due to the 2013 impairment of Muskingum River Plant, Unit 5.

• Depreciation and Amortization expensesdecreased $169 million primarily due to the following:

• A $195 million decrease due to corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013.

This decrease was partially offset by:

• A $10 million increase due to an increase in depreciable base of transmission and distribution assets.

• A $9 million increase in amortization of securitized assets being recovered through the Deferred Asset Phase-In Rider. This increase was offset by a corresponding increase in Retail Margins above.

• Taxes Other Than Income Taxes decreased $54 million due to the following:

• A $62 million decrease due to corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013.

This decrease was partially offset by:

• A $9 million increase in property taxes due to increased investment in transmission and distribution assets and increased tax rates.

• Other Income increased $8 million due to corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013.

• Carrying Costs Income increased $10 million primarily due to increased capacity deferral carrying charges.

• Interest Expense decreased $54 million primarily due to corporate separation of OPCo's generation assets and liabilities that took effect December 31, 2013.

• Income Tax Expense decreased $93 million primarily due to a decrease in pretax book income.

204

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of accounting pronouncements.

205

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Ohio Power Company:

We have audited the accompanying consolidated balance sheets of Ohio Power Company and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ohio Power Company and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Columbus, Ohio

February 20, 2015

206

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Ohio Power Company and Subsidiaries (OPCo) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  OPCo’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of OPCo’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control – Integrated Framework.  Based on management’s assessment, OPCo’s internal control over financial reporting was effective as of December 31, 2014.

This annual report does not include an attestation report of OPCo’s registered public accounting firm regarding internal control over financial reporting pursuant to the Securities and Exchange Commission rules that permit OPCo to provide only management’s report in this annual report.

207

OHIO POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
REVENUES
Electric Generation, Transmission and Distribution	$	3,204,926		$	3,562,224		$	4,022,116
Sales to AEP Affiliates	165,216			1,166,854			847,294
Other Revenues – Affiliated	—			18,140			39,401
Other Revenues – Nonaffiliated	6,778			15,397			19,385
TOTAL REVENUES	3,376,920			4,762,615			4,928,196
EXPENSES
Fuel and Other Consumables Used for Electric Generation	—			1,496,856			1,471,316
Purchased Electricity for Resale	282,000			151,561			205,845
Purchased Electricity from AEP Affiliates	1,192,700			349,732			380,706
Amortization of Generation Deferrals	110,942			—			—
Other Operation	594,776			707,953			669,981
Maintenance	195,964			319,625			319,324
Asset Impairments and Other Related Charges	—			154,304			287,031
Depreciation and Amortization	213,669			382,570			511,070
Taxes Other Than Income Taxes	353,364			406,916			405,976
TOTAL EXPENSES	2,943,415			3,969,517			4,251,249
OPERATING INCOME	433,505			793,098			676,947
Other Income (Expense):
Interest Income	9,956			3,325			3,536
Carrying Costs Income	26,546			16,312			16,942
Allowance for Equity Funds Used During Construction	6,913			4,961			3,492
Interest Expense	(128,291		)	(182,046		)	(213,100		)
INCOME BEFORE INCOME TAX EXPENSE	348,629			635,650			487,817
Income Tax Expense	132,207			225,670			144,283
NET INCOME	$	216,422		$	409,980		$	343,534

The common stock of OPCo is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

208

OHIO POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
Net Income	$	216,422		$	409,980		$	343,534
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Cash Flow Hedges, Net of Tax of $796, $191 and $282 in 2014, 2013 and 2012, Respectively	(1,477		)	(355		)	(523		)
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $0, $6,736 and $6,979 in 2014, 2013 and 2012, Respectively	—			12,509			12,961
Pension and OPEB Funded Status, Net of Tax of $0, $35,225 and $10,533 in 2014, 2013 and 2012, Respectively	—			65,418			19,559
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	(1,477		)	77,572			31,997
TOTAL COMPREHENSIVE INCOME	$	214,945		$	487,552		$	375,531

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

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OHIO POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S EQUITY

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2011	$	321,201	$	1,744,099		$	2,582,600		$	(197,722	)	$	4,450,178
Common Stock Dividends						(300,000		)				(300,000		)
Net Income						343,534						343,534
Other Comprehensive Income									31,997			31,997
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2012	321,201		1,744,099			2,626,134			(165,725		)	4,525,709
Common Stock Dividends						(375,000		)				(375,000		)
Net Income						409,980						409,980
Other Comprehensive Income									77,572			77,572
Deferred State Income Tax Rate Adjustment			(4,971		)							(4,971		)
Distribution of Cook Coal Terminal to Parent						(22,303		)	19,652			(2,651		)
Distribution of OPCo Generation to Parent			(1,075,346		)	(2,005,608		)	75,580			(3,005,374		)
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013	321,201		663,782			633,203			7,079			1,625,265
Capital Contribution from Parent			175,000									175,000
Common Stock Dividends						(35,000		)				(35,000		)
Net Income						216,422						216,422
Other Comprehensive Loss									(1,477		)	(1,477		)
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014	$	321,201	$	838,782		$	814,625		$	5,602		$	1,980,210

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

210

OHIO POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

December 31, 2014 and 2013

(in thousands)

	December 31,
	2014			2013
CURRENT ASSETS
Cash and Cash Equivalents	$	2,870		$	3,004
Restricted Cash for Securitized Funding	28,687			19,387
Advances to Affiliates	312,473			339,070
Accounts Receivable:
Customers	57,906			67,054
Affiliated Companies	79,822			74,771
Accrued Unbilled Revenues	35,755			36,353
Miscellaneous	927			1,559
Allowance for Uncollectible Accounts	(171		)	(34,984		)
Total Accounts Receivable	174,239			144,753
Notes Receivable Due Within One Year – Affiliated	86,000			178,580
Materials and Supplies	60,909			53,711
Risk Management Assets	7,242			3,082
Deferred Income Tax Benefits	49,306			36,105
Accrued Tax Benefits	6,100			7,109
Prepayments and Other Current Assets	8,997			22,312
TOTAL CURRENT ASSETS	736,823			807,113
PROPERTY, PLANT AND EQUIPMENT
Electric:
Transmission	2,104,613			2,011,289
Distribution	4,087,601			3,877,532
Other Property, Plant and Equipment	390,848			364,573
Construction Work in Progress	218,667			185,428
Total Property, Plant and Equipment	6,801,729			6,438,822
Accumulated Depreciation and Amortization	2,038,120			1,973,042
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	4,763,609			4,465,780
OTHER NONCURRENT ASSETS
Notes Receivable – Affiliated	32,245			118,245
Regulatory Assets	1,318,939			1,378,697
Securitized Assets	109,999			131,582
Long-term Risk Management Assets	45,102			—
Deferred Charges and Other Noncurrent Assets	264,150			260,141
TOTAL OTHER NONCURRENT ASSETS	1,770,435			1,888,665
TOTAL ASSETS	$	7,270,867		$	7,161,558

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

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OHIO POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER'S EQUITY

December 31, 2014 and 2013

(dollars in thousands)

	December 31,
	2014		2013
CURRENT LIABILITIES
Accounts Payable:
General	$	145,328	$	146,307
Affiliated Companies	172,741		222,889
Long-term Debt Due Within One Year – Nonaffiliated (December 31, 2014 and 2013 Amounts Include $45,427 and $34,936, Respectively, Related to Ohio Phase-in-Recovery Funding)	131,497		438,595
Risk Management Liabilities	1,943		—
Customer Deposits	53,922		49,140
Accrued Taxes	420,772		429,260
Accrued Interest	34,279		40,853
Other Current Liabilities	179,093		95,194
TOTAL CURRENT LIABILITIES	1,139,575		1,422,238
NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated (December 31, 2014 and 2013 Amounts Include $187,041 and $232,466, Respectively, Related to Ohio Phase-in-Recovery Funding)	2,165,626		2,296,580
Long-term Risk Management Liabilities	3,013		—
Deferred Income Taxes	1,405,620		1,330,711
Regulatory Liabilities and Deferred Investment Tax Credits	514,691		435,499
Employee Benefits and Pension Obligations	36,662		28,329
Deferred Credits and Other Noncurrent Liabilities	25,470		22,936
TOTAL NONCURRENT LIABILITIES	4,151,082		4,114,055
TOTAL LIABILITIES	5,290,657		5,536,293
Rate Matters (Note 4)
Commitments and Contingencies (Note 6)
COMMON SHAREHOLDER'S EQUITY
Common Stock – No Par Value:
Authorized – 40,000,000 Shares
Outstanding  – 27,952,473 Shares	321,201		321,201
Paid-in Capital	838,782		663,782
Retained Earnings	814,625		633,203
Accumulated Other Comprehensive Income (Loss)	5,602		7,079
TOTAL COMMON SHAREHOLDER’S EQUITY	1,980,210		1,625,265
TOTAL LIABILITIES AND COMMON SHAREHOLDER'S EQUITY	$	7,270,867	$	7,161,558

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

212

OHIO POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
OPERATING ACTIVITIES
Net Income	$	216,422		$	409,980		$	343,534
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	213,669			382,570			511,070
Amortization of Generation Deferrals	110,942			—			—
Deferred Income Taxes	74,391			134,463			45,685
Asset Impairments and Other Related Charges	—			154,304			287,031
Carrying Costs Income	(26,546		)	(16,312		)	(16,942		)
Deferral of Storm Costs	—			(1,822		)	(53,453		)
Allowance for Equity Funds Used During Construction	(6,913		)	(4,961		)	(3,492		)
Mark-to-Market of Risk Management Contracts	(44,469		)	17,597			12,143
Pension Contributions to Qualified Plan Trust	(6,547		)	—			(43,189		)
Property Taxes	(4,589		)	(11,760		)	(3,849		)
Fuel Over/Under-Recovery, Net	62,093			36,165			10,598
Deferral of Ohio Capacity Costs, Net	(156,986		)	(214,384		)	(65,274		)
Change in Regulatory Assets	115,658			(14,362		)	(72,879		)
Change in Other Noncurrent Assets	(38,407		)	46,042			69,229
Change in Other Noncurrent Liabilities	94,136			(52,809		)	(27,039		)
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	(29,788		)	86,640			(37,787		)
Fuel, Materials and Supplies	(7,198		)	80,250			(54,945		)
Accounts Payable	(30,338		)	(2,919		)	(63,450		)
Customer Deposits	4,782			(784		)	(4,821		)
Accrued Taxes, Net	(7,212		)	23,839			41,475
Other Current Assets	1,568			7,804			9,977
Other Current Liabilities	22,923			(59,512		)	22,490
Net Cash Flows from Operating Activities	557,591			1,000,029			906,112
INVESTING ACTIVITIES
Construction Expenditures	(453,474		)	(640,050		)	(517,744		)
Change in Restricted Cash for Securitized Funding	(9,300		)	(19,387		)	—
Change in Advances to Affiliates, Net	26,597			4,330			103,036
Acquisitions of Assets	(3,519		)	(4,166		)	(2,915		)
Proceeds from Sales of Assets	1,212			62,975			7,320
Proceeds from Notes Receivable – Affiliated	178,580			—			—
Other Investing Activities	4,831			2,370			10,014
Net Cash Flows Used for Investing Activities	(255,073		)	(593,928		)	(400,289		)
FINANCING ACTIVITIES
Capital Contribution from Parent	175,000			—			—
Issuance of Long-term Debt – Nonaffiliated	—			1,378,326			—
Issuance of Long-term Debt – Affiliated	—			200,000			—
Change in Advances from Affiliates, Net	—			1,143			—
Retirement of Long-term Debt – Nonaffiliated	(438,601		)	(1,196,032		)	(194,500		)
Retirement of Long-term Debt – Affiliated	—			(400,000		)	—
Principal Payments for Capital Lease Obligations	(5,092		)	(17,199		)	(10,072		)
Dividends Paid on Common Stock	(35,000		)	(375,000		)	(300,000		)
Other Financing Activities	1,041			2,025			294
Net Cash Flows Used for Financing Activities	(302,652		)	(406,737		)	(504,278		)
Net Increase (Decrease) in Cash and Cash Equivalents	(134		)	(636		)	1,545
Cash and Cash Equivalents at Beginning of Period	3,004			3,640			2,095
Cash and Cash Equivalents at End of Period	$	2,870		$	3,004		$	3,640
SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	132,380		$	195,677		$	212,753
Net Cash Paid for Income Taxes	44,036			93,324			69,771
Noncash Acquisitions Under Capital Leases	4,842			7,655			8,602
Government Grants Included in Accounts Receivable as of December 31,	—			300			660
Construction Expenditures Included in Current Liabilities as of December 31,	43,350			92,324			84,321
Noncash Distribution of Cook Coal Terminal to Parent	—			(22,303		)	—
Noncash Distribution of OPCo Generation to Parent	—			(3,080,954		)	—

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

213

OHIO POWER COMPANY AND SUBSIDIARIES

INDEX OF NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to OPCo’s financial statements are combined with the notes to financial statements for other registrant subsidiaries. Listed below are the notes that apply to OPCo.  The footnotes begin on page 244.

	Page Number
Organization and Summary of Significant Accounting Policies	245
New Accounting Pronouncements	260
Comprehensive Income	261
Rate Matters	272
Effects of Regulation	282
Commitments, Guarantees and Contingencies	293
Disposition and Impairments	299
Benefit Plans	301
Business Segments	336
Derivatives and Hedging	337
Fair Value Measurements	350
Income Taxes	363
Leases	372
Financing Activities	377
Related Party Transactions	382
Variable Interest Entities	391
Property, Plant and Equipment	397
Cost Reduction Programs	404
Unaudited Quarterly Financial Information	405

214

PUBLIC SERVICE COMPANY OF OKLAHOMA

215

PUBLIC SERVICE COMPANY OF OKLAHOMA

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Company Overview

As a public utility, PSO engages in the generation and purchase of electric power, and the subsequent sale, transmission and distribution of that power to approximately 542,000 retail customers in its service territory in eastern and southwestern Oklahoma.  PSO sells electric power at wholesale to other utilities, municipalities and electric cooperatives. PSO shares off-system sales margins, if positive on an annual basis, with its customers.

In March 2014, SPP changed from an energy imbalance service market to a fully integrated power market. Previously, PSO and SWEPCo satisfied their load requirements with their own generation resources or through the Operating Agreement. In the new integrated power market, PSO and SWEPCo operate as standalone entities and offer their respective generation into the SPP power market. SPP then economically dispatches the resources.

AEPSC conducts power, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other risk management activities on PSO’s behalf.  PSO shares in the revenues and expenses associated with these risk management activities, as described in the preceding paragraph, with SWEPCo.  Power and natural gas risk management activities are allocated based on the Operating Agreement.  Risk management activities primarily include power and natural gas and physical transactions, financially-settled swaps and exchange-traded futures.  AEPSC settles the majority of the physical forward contracts by entering into offsetting contracts.

Under the SIA, AEPSC allocates physical and financial revenues and expenses from transactions with neighboring utilities, power marketers and other power and natural gas risk management activities based upon the location of such activity, with margins resulting from trading and marketing activities originating in PJM and MISO generally accruing to the benefit of APCo, I&M and KPCo and trading and marketing activities originating in SPP generally accruing to the benefit of PSO and SWEPCo.  Margins resulting from other transactions are allocated among APCo, I&M, KPCo, PSO and SWEPCo based upon the common shareholder's equity of these companies.

PSO is jointly and severally liable for activity conducted by AEPSC on the behalf of PSO and SWEPCo related to power purchase and sale activity pursuant to the SIA.

Regulatory Activity

2014 Oklahoma Base Rate Case

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

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

216

(ALJ) recommended approval of the stipulation agreement and interim rates were implemented in November 2014, subject to refund. In November 2014, intervenors filed exceptions to the ALJ's report. An order is anticipated in the first quarter of 2015. If the OCC were to disallow any portion of this settlement agreement, it could reduce future net income and cash flows and impact financial condition. See the “2014 Oklahoma Base Rate Case” section of PSO Rate Matters in Note 4.

Litigation and Environmental Issues

In the ordinary course of business, PSO is involved in employment, commercial, environmental and regulatory litigation.  Since it is difficult to predict the outcome of these proceedings, management cannot predict the eventual resolution, timing or amount of any loss, fine or penalty.  Management assesses the probability of loss for each contingency and accrues a liability for cases which have a probable likelihood of loss if the loss can be estimated.  For details on regulatory proceedings and pending litigation, see Note 4 – Rate Matters and Note 6 – Commitments, Guarantees and Contingencies.  Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 406 for additional discussion of relevant factors.

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
	Years Ended December 31,
	2014	2013	2012
	(in millions of KWhs)
Retail:
Residential	6,321	6,290	6,393
Commercial	5,139	5,066	5,178
Industrial	5,237	5,083	5,066
Miscellaneous	1,250	1,243	1,326
Total Retail	17,947	17,682	17,963
Wholesale	405	1,091	1,492
Total KWhs	18,352	18,773	19,455

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

Summary of Heating and Cooling Degree Days
	Years Ended December 31,
	2014	2013	2012
	(in degree days)
Actual – Heating (a)	2,113	2,107	1,271
Normal – Heating (b)	1,777	1,763	1,803
Actual – Cooling (c)	2,054	2,082	2,663
Normal – Cooling (b)	2,130	2,133	2,119

(a) Western Region heating degree days are calculated on a 55 degree temperature base.

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

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

217

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Net Income

(in millions)

Year Ended December 31, 2013	$	98
Changes in Gross Margin:
Retail Margins (a)	14
Off-system Sales	1
Other Revenues	(2		)
Total Change in Gross Margin	13
Changes in Expenses and Other:
Other Operation and Maintenance	(38		)
Depreciation and Amortization	(5		)
Taxes Other Than Income Taxes	8
Other Income	(2		)
Interest Expense	(2		)
Total Change in Expenses and Other	(39		)
Income Tax Expense	15
Year Ended December 31, 2014	$	87

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

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

• Retail Margins increased $14 million primarily due to the following:

• A $12 million increase primarily due to revenue increases from rate riders. This increase in retail margins has corresponding increases to riders/trackers recognized in other expense items below.

• A $2 million net increase in weather-related usage primarily due to a 14% increase in heating degree days, partially offset by a 12% decrease in cooling degree days.

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

• Other Operation and Maintenance expenses increased $38 million primarily due to the following:

• An $18 million increase in transmission expenses primarily due to increased SPP transmission services.

• A $9 million increase in energy efficiency program expenses.                    

• An $8 million increase in generation plant expenses.            

• A $6 million increase in general and administrative expenses.                

These increases were partially offset by:

• A $5 million decrease in distribution expenses primarily related to amortization of the 2007 and 2010 storm deferrals which were fully recovered in 2013.                

• Depreciation and Amortization expenses increased $5 million primarily due to a higher depreciable base.

• Taxes Other Than Income Taxes decreased $8 million primarily due to a 2014 property tax reduction resulting from a change in Oklahoma tax law.

• Income Tax Expense decreased $15 million primarily due to a decrease in pretax book income and by the recording of federal income tax adjustments.

218

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of accounting pronouncements.

219

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Public Service Company of Oklahoma:

We have audited the accompanying balance sheets of Public Service Company of Oklahoma (the "Company") as of December 31, 2014 and 2013, and the related statements of income, comprehensive income (loss), changes in common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Public Service Company of Oklahoma as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Columbus, Ohio

February 20, 2015

220

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Public Service Company of Oklahoma (PSO) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  PSO’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of PSO’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control – Integrated Framework.  Based on management’s assessment, PSO’s internal control over financial reporting was effective as of December 31, 2014.

This annual report does not include an attestation report of PSO’s registered public accounting firm regarding internal control over financial reporting pursuant to the Securities and Exchange Commission rules that permit PSO to provide only management’s report in this annual report.

221

PUBLIC SERVICE COMPANY OF OKLAHOMA

STATEMENTS OF INCOME

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
REVENUES
Electric Generation, Transmission and Distribution	$	1,340,307		$	1,277,711		$	1,206,583
Sales to AEP Affiliates	7,054			14,246			22,603
Other Revenues	4,215			3,565			3,752
TOTAL REVENUES	1,351,576			1,295,522			1,232,938
EXPENSES
Fuel and Other Consumables Used for Electric Generation	257,996			327,829			310,296
Purchased Electricity for Resale	385,029			246,109			208,676
Purchased Electricity from AEP Affiliates	11,024			36,891			24,378
Other Operation	262,804			225,500			213,195
Maintenance	107,952			107,076			106,835
Depreciation and Amortization	100,977			95,667			95,180
Taxes Other Than Income Taxes	36,962			45,215			43,428
TOTAL EXPENSES	1,162,744			1,084,287			1,001,988
OPERATING INCOME	188,832			211,235			230,950
Other Income (Expense):
Interest Income	249			1,096			1,308
Carrying Costs Income	—			338			1,856
Allowance for Equity Funds Used During Construction	3,071			4,187			2,007
Interest Expense	(54,641		)	(53,175		)	(55,286		)
INCOME BEFORE INCOME TAX EXPENSE	137,511			163,681			180,835
Income Tax Expense	50,582			65,885			66,694
NET INCOME	$	86,929		$	97,796		$	114,141

The common stock of PSO is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

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PUBLIC SERVICE COMPANY OF OKLAHOMA

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2014, 2013 and 2012

 (in thousands)

	Years Ended December 31,
	2014			2013			2012
Net Income	$	86,929		$	97,796		$	114,141
OTHER COMPREHENSIVE LOSS, NET OF TAXES
Cash Flow Hedges, Net of Tax of $439, $389 and $360 in 2014, 2013 and 2012, Respectively	(815		)	(723		)	(668		)
TOTAL COMPREHENSIVE INCOME	$	86,114		$	97,073		$	113,473

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

223

PUBLIC SERVICE COMPANY OF OKLAHOMA

STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S EQUITY

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2011	$	157,230	$	364,037	$	364,389		$	7,149		$	892,805
Common Stock Dividends					(90,000		)				(90,000		)
Net Income					114,141						114,141
Other Comprehensive Loss								(668		)	(668		)
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2012	157,230		364,037		388,530			6,481			916,278
Common Stock Dividends					(71,250		)				(71,250		)
Net Income					97,796						97,796
Other Comprehensive Loss								(723		)	(723		)
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2013	157,230		364,037		415,076			5,758			942,101
Net Income					86,929						86,929
Other Comprehensive Loss								(815		)	(815		)
TOTAL COMMON SHAREHOLDER'S EQUITY – DECEMBER 31, 2014	$	157,230	$	364,037	$	502,005		$	4,943		$	1,028,215

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

224

PUBLIC SERVICE COMPANY OF OKLAHOMA

BALANCE SHEETS

ASSETS

December 31, 2014 and 2013

(in thousands)

	December 31,
	2014			2013
CURRENT ASSETS
Cash and Cash Equivalents	$	1,352		$	1,277
Accounts Receivable:
Customers	28,448			32,314
Affiliated Companies	22,114			30,392
Miscellaneous	6,026			3,102
Allowance for Uncollectible Accounts	(147		)	(462		)
Total Accounts Receivable	56,441			65,346
Fuel	16,436			15,191
Materials and Supplies	50,880			52,707
Risk Management Assets	—			1,167
Deferred Income Tax Benefits	—			7,333
Accrued Tax Benefits	24,369			21,665
Regulatory Asset for Under-Recovered Fuel Costs	35,699			3,298
Prepayments and Other Current Assets	6,524			6,194
TOTAL CURRENT ASSETS	191,701			174,178
PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	1,264,724			1,203,221
Transmission	788,911			731,312
Distribution	2,080,221			1,986,032
Other Property, Plant and Equipment (Including Plant to be Retired)	421,568			393,026
Construction Work in Progress	204,753			175,890
Total Property, Plant and Equipment	4,760,177			4,489,481
Accumulated Depreciation and Amortization	1,319,554			1,323,522
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	3,440,623			3,165,959
OTHER NONCURRENT ASSETS
Regulatory Assets	154,327			156,690
Employee Benefits and Pension Assets	19,335			22,629
Deferred Charges and Other Noncurrent Assets	7,557			7,238
TOTAL OTHER NONCURRENT ASSETS	181,219			186,557
TOTAL ASSETS	$	3,813,543		$	3,526,694

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

225

PUBLIC SERVICE COMPANY OF OKLAHOMA

BALANCE SHEETS

LIABILITIES AND COMMON SHAREHOLDER'S EQUITY

December 31, 2014 and 2013

	December 31,
	2014		2013
	(in thousands)
CURRENT LIABILITIES
Advances from Affiliates	$	154,249	$	36,772
Accounts Payable:
General	92,672		150,184
Affiliated Companies	51,744		45,427
Long-term Debt Due Within One Year – Nonaffiliated	427		34,115
Risk Management Liabilities	918		85
Customer Deposits	48,700		45,379
Accrued Taxes	20,887		23,442
Accrued Interest	12,699		12,646
Other Current Liabilities	58,878		58,992
TOTAL CURRENT LIABILITIES	441,174		407,042
NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	1,040,609		965,695
Deferred Income Taxes	898,352		836,556
Regulatory Liabilities and Deferred Investment Tax Credits	334,479		327,673
Asset Retirement Obligations	37,030		22,928
Employee Benefits and Pension Obligations	20,095		10,561
Deferred Credits and Other Noncurrent Liabilities	13,589		14,138
TOTAL NONCURRENT LIABILITIES	2,344,154		2,177,551
TOTAL LIABILITIES	2,785,328		2,584,593
Rate Matters (Note 4)
Commitments and Contingencies (Note 6)
COMMON SHAREHOLDER’S EQUITY
Common Stock – Par Value – $15 Per Share:
Authorized – 11,000,000 Shares
Issued – 10,482,000 Shares
Outstanding – 9,013,000 Shares	157,230		157,230
Paid-in Capital	364,037		364,037
Retained Earnings	502,005		415,076
Accumulated Other Comprehensive Income (Loss)	4,943		5,758
TOTAL COMMON SHAREHOLDER’S EQUITY	1,028,215		942,101
TOTAL LIABILITIES AND COMMON SHAREHOLDER'S EQUITY	$	3,813,543	$	3,526,694

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

226

PUBLIC SERVICE COMPANY OF OKLAHOMA

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
OPERATING ACTIVITIES
Net Income	$	86,929		$	97,796		$	114,141
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	100,977			95,667			95,180
Deferred Income Taxes	74,756			53,788			48,916
Carrying Costs Income	—			(338		)	(1,856		)
Allowance for Equity Funds Used During Construction	(3,071		)	(4,187		)	(2,007		)
Mark-to-Market of Risk Management Contracts	1,916			(6,362		)	3,740
Pension Contributions to Qualified Plan Trust	(4,439		)	—			(12,306		)
Fuel Over/Under-Recovery, Net	(32,401		)	(12,643		)	12,258
Change in Other Noncurrent Assets	(5,228		)	(16,435		)	7,436
Change in Other Noncurrent Liabilities	(4,545		)	(15,271		)	4,762
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	8,905			(4,376		)	4,422
Fuel, Materials and Supplies	582			6,370			(3,067		)
Accounts Payable	(26,336		)	37,248			3,158
Accrued Taxes, Net	(5,562		)	332			5,006
Other Current Assets	(843		)	1,450			(970		)
Other Current Liabilities	17,830			5,877			5,538
Net Cash Flows from Operating Activities	209,470			238,916			284,351
INVESTING ACTIVITIES
Construction Expenditures	(367,490		)	(259,449		)	(224,295		)
Change in Advances to Affiliates, Net	—			10,558			29,318
Other Investing Activities	2,784			(2,059		)	1,723
Net Cash Flows Used for Investing Activities	(364,706		)	(250,950		)	(193,254		)
FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated	74,973			49,709			2,395
Change in Advances from Affiliates, Net	117,477			36,772			—
Retirement of Long-term Debt – Nonaffiliated	(34,115		)	(402		)	(229		)
Principal Payments for Capital Lease Obligations	(3,653		)	(3,498		)	(3,481		)
Dividends Paid on Common Stock	—			(71,250		)	(90,000		)
Other Financing Activities	629			613			172
Net Cash Flows from (Used for) Financing Activities	155,311			11,944			(91,143		)
Net Increase (Decrease) in Cash and Cash Equivalents	75			(90		)	(46		)
Cash and Cash Equivalents at Beginning of Period	1,277			1,367			1,413
Cash and Cash Equivalents at End of Period	$	1,352		$	1,277		$	1,367
SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	52,766		$	51,387		$	52,403
Net Cash Paid (Received) for Income Taxes	(21,150		)	8,671			27,229
Noncash Acquisitions Under Capital Leases	2,262			5,795			1,542
Construction Expenditures Included in Current Liabilities as of December 31,	38,581			63,648			27,118

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

227

PUBLIC SERVICE COMPANY OF OKLAHOMA

INDEX OF NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to PSO's financial statements are combined with the notes to financial statements for other registrant subsidiaries. Listed below are the notes that apply to PSO.  The footnotes begin on page 244.

	Page Number
Organization and Summary of Significant Accounting Policies	245
New Accounting Pronouncements	260
Comprehensive Income	261
Rate Matters	272
Effects of Regulation	282
Commitments, Guarantees and Contingencies	293
Benefit Plans	301
Business Segments	336
Derivatives and Hedging	337
Fair Value Measurements	350
Income Taxes	363
Leases	372
Financing Activities	377
Related Party Transactions	382
Variable Interest Entities	391
Property, Plant and Equipment	397
Cost Reduction Programs	404
Unaudited Quarterly Financial Information	405

228

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

229

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Company Overview

As a public utility, SWEPCo engages in the generation and purchase of electric power, and the subsequent sale, transmission and distribution of that power to approximately 528,000 retail customers in its service territory in northeastern and panhandle of Texas, northwestern Louisiana and western Arkansas.  SWEPCo consolidates its wholly-owned subsidiary, Southwest Arkansas Utilities Corporation.  SWEPCo also consolidates Sabine Mining Company, a variable interest entity.  SWEPCo sells electric power at wholesale to other utilities, municipalities and electric cooperatives. SWEPCo shares off-system sales margins with its customers.

In March 2014, SPP changed from an energy imbalance service market to a fully integrated power market. Previously, PSO and SWEPCo satisfied their load requirements with their own generation resources or through the Operating Agreement. In the new integrated power market, PSO and SWEPCo operate as standalone entities and offer their respective generation into the SPP power market. SPP then economically dispatches the resources.

AEPSC conducts power, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other risk management activities on SWEPCo’s behalf.  SWEPCo shares in the revenues and expenses associated with these risk management activities, as described in the preceding paragraph, with PSO.  Power and natural gas risk management activities are allocated based on the Operating Agreement.  Risk management activities primarily include power and natural gas and physical transactions, financially-settled swaps and exchange-traded futures.  AEPSC settles the majority of the physical forward contracts by entering into offsetting contracts.

Under the SIA, AEPSC allocates physical and financial revenues and expenses from transactions with neighboring utilities, power marketers and other power and natural gas risk management activities based upon the location of such activity, with margins resulting from trading and marketing activities originating in PJM and MISO generally accruing to the benefit of APCo, I&M and KPCo and trading and marketing activities originating in SPP generally accruing to the benefit of PSO and SWEPCo.  Margins resulting from other transactions are allocated among APCo, I&M, KPCo, PSO and SWEPCo based upon the common shareholder's equity of these companies.

SWEPCo is jointly and severally liable for activity conducted by AEPSC on the behalf of PSO and SWEPCo related to power purchase and sale activity pursuant to the SIA.

Regulatory Activity

2012 Texas Base Rate Case

Upon rehearing in January 2014, the PUCT reversed its initial ruling and determined that AFUDC was excluded from the Turk Plant’s Texas jurisdictional capital cost cap.  As a result, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances.  The resulting annual base rate increase is approximately $52 million.  In May 2014, intervenors filed appeals of the order with the Texas District Court.  In June 2014, SWEPCo intervened in those appeals and filed initial responses.  If certain parts of the PUCT order are overturned it could reduce future net income and cash flows and impact financial condition. See the “2012 Texas Base Rate Case” section of SWEPCo Rate Matters in Note 4.

230

2012 Louisiana Formula Rate Filing

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

2014 Louisiana Formula Rate Filing

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

Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC.  Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC.  As of December 31, 2014, SWEPCo has incurred costs of $164 million and has remaining contractual construction obligations of $108 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. See "Climate Change, CO₂ Regulation and Energy Policy" section of “Environmental Issues” within “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries”.  As of December 31, 2014, the net book value of Welsh Plant, Units 1 and 3 was $388 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. 

Merchant Portion of Turk Plant

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

The APSC granted approval for SWEPCo to build the Turk Plant by issuing a Certificate of Environmental Compatibility and Public Need (CECPN) for the SWEPCo Arkansas jurisdictional share of the Turk Plant (approximately 20%). Following an appeal by certain intervenors, the Arkansas Supreme Court issued a decision that reversed the APSC’s grant of the CECPN. In June 2010, in response to an Arkansas Supreme Court decision, the APSC issued an order which reversed and set aside the previously granted CECPN. This 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 is recovered under cost-based rate recovery in Texas, Louisiana, and though SWEPCo’s wholesale customers.

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.

231

Litigation and Environmental Issues

In the ordinary course of business, SWEPCo is involved in employment, commercial, environmental and regulatory litigation.  Since it is difficult to predict the outcome of these proceedings, management cannot predict the eventual resolution, timing or amount of any loss, fine or penalty.  Management assesses the probability of loss for each contingency and accrues a liability for cases which have a probable likelihood of loss if the loss can be estimated.  For details on regulatory proceedings and pending litigation, see Note 4 – Rate Matters and Note 6 – Commitments, Guarantees and Contingencies.  Adverse results in these proceedings have the potential to reduce future net income and cash flows and impact financial condition.

See the “Executive Overview” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” section beginning on page 406 for additional discussion of relevant factors.

RESULTS OF OPERATIONS

KWh Sales/Degree Days

Summary of KWh Energy Sales
	Years Ended December 31,
	2014	2013	2012
	(in millions of KWhs)
Retail:
Residential	6,311	6,431	6,301
Commercial	5,997	6,011	6,103
Industrial	5,901	5,612	5,661
Miscellaneous	80	81	81
Total Retail	18,289	18,135	18,146
Wholesale	9,411	9,018	7,762
Total KWhs	27,700	27,153	25,908

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

Summary of Heating and Cooling Degree Days
	Years Ended December 31,
	2014	2013	2012
	(in degree days)
Actual – Heating (a)	1,553	1,421	860
Normal – Heating (b)	1,230	1,226	1,259
Actual – Cooling (c)	2,043	2,248	2,605
Normal – Cooling (b)	2,279	2,275	2,256

(a) Western Region heating degree days are calculated on a 55 degree temperature base.

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

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

232

2014 Compared to 2013

Reconciliation of Year Ended December 31, 2013 to Year Ended December 31, 2014

Earnings Attributable to SWEPCo Common Shareholder

(in millions)

Year Ended December 31, 2013	$	150
Changes in Gross Margin:
Retail Margins (a)	22
Off-system Sales	10
Transmission Revenues	(5		)
Other Revenues	3
Total Change in Gross Margin	30
Changes in Expenses and Other:
Other Operation and Maintenance	(42		)
Depreciation and Amortization	(6		)
Taxes Other Than Income Taxes	(4		)
Allowance for Equity Funds Used During Construction	5
Interest Expense	4
Total Change in Expenses and Other	(43		)
Income Tax Expense	3
Year Ended December 31, 2014	$	140

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

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

• Retail Margins increased $22 million primarily due to the following:

• A $22 million increase in municipal and cooperative revenues due to formula rate adjustments.

• An $11 million net increase due to the Louisiana and Texas rate orders related to the Turk Plant.

These increases were partially offset by:

• A $10 million net decrease in weather-related usage primarily due to a 9% decrease in cooling degree days, partially offset by an increase in heating degree days.

• Margins from Off-system Sales increased $10 million primarily due to increased market prices and higher physical sales margins.

• Transmission Revenues decreased $5 million primarily due to lower SPP margins.

Expenses and Other changed between years as follows:

• Other Operation and Maintenance expenses increased $42 million primarily due to the following:

• A $15 million increase in transmission expenses primarily due to increased SPP transmission services.

• An $11 million increase in generation plant expenses.

• An $8 million increase in general and administrative expenses.

• A $4 million increase in distribution expenses primarily due to overhead line maintenance expenses.

• Depreciation and Amortization expenses increased $6 million primarily due to a higher depreciable base.

• Taxes Other Than Income Taxes increased $4 million primarily due to higher property taxes.

• Allowance for Equity Funds Used During Construction increased $5 million primarily due to increased environmental and transmission projects.

• Interest Expense decreased $4 million primarily due to an increase in the debt component of AFUDC due to increased environmental and transmission projects.

233

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

See the “Critical Accounting Policies and Estimates” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, derivative instruments, the valuation of long-lived assets and pension and other postretirement benefits.

See the “Accounting Pronouncements” section of “Combined Management’s Narrative Discussion and Analysis of Registrant Subsidiaries” beginning on page 406 for a discussion of accounting pronouncements.

234

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Southwestern Electric Power Company:

We have audited the accompanying consolidated balance sheets of Southwestern Electric Power Company Consolidated (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Southwestern Electric Power Company Consolidated as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Columbus, Ohio

February 20, 2015

235

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Southwestern Electric Power Company Consolidated (SWEPCo) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  SWEPCo’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of SWEPCo’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control – Integrated Framework.  Based on management’s assessment, SWEPCo’s internal control over financial reporting was effective as of December 31, 2014.

This annual report does not include an attestation report of SWEPCo’s registered public accounting firm regarding internal control over financial reporting pursuant to the Securities and Exchange Commission rules that permit SWEPCo to provide only management’s report in this annual report.

236

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
REVENUES
Electric Generation, Transmission and Distribution	$	1,817,863		$	1,742,575		$	1,538,533
Sales to AEP Affiliates	26,278			51,812			37,441
Other Revenues	2,256			1,416			1,860
TOTAL REVENUES	1,846,397			1,795,803			1,577,834
EXPENSES
Fuel and Other Consumables Used for Electric Generation	650,437			630,503			579,721
Purchased Electricity for Resale	178,105			169,954			131,706
Purchased Electricity from AEP Affiliates	3,766			11,172			19,229
Other Operation	272,785			250,676			230,078
Maintenance	149,243			129,742			117,415
Asset Impairments and Other Related Charges	—			—			13,000
Depreciation and Amortization	185,134			179,251			138,778
Taxes Other Than Income Taxes	84,285			80,662			72,011
TOTAL EXPENSES	1,523,755			1,451,960			1,301,938
OPERATING INCOME	322,642			343,843			275,896
Other Income (Expense):
Interest Income	299			58			1,230
Allowance for Equity Funds Used During Construction	11,947			7,338			57,054
Interest Expense	(126,127		)	(130,282		)	(88,318		)
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY EARNINGS	208,761			220,957			245,862
Income Tax Expense	66,420			69,461			45,858
Equity Earnings of Unconsolidated Subsidiary	2,218			2,323			2,509
NET INCOME	144,559			153,819			202,513
Net Income Attributable to Noncontrolling Interest	4,190			4,008			3,622
EARNINGS ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER	$	140,369		$	149,811		$	198,891

The common stock of SWEPCo is wholly-owned by AEP.

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

237

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2014, 2013 and 2012

 (in thousands)

	Years Ended December 31,
	2014			2013			2012
Net Income	$	144,559		$	153,819		$	202,513
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Cash Flow Hedges, Net of Tax of $1,186, $1,244 and $13 in 2014, 2013 and 2012, Respectively	2,202			2,311			(25		)
Amortization of Pension and OPEB Deferred Costs, Net of Tax of $506, $137 and $358 in 2014, 2013 and 2012, Respectively	(939		)	(255		)	665
Pension and OPEB Funded Status, Net of Tax of $153, $3,963 and $4,477 in 2014, 2013 and 2012, Respectively	(285		)	7,360			8,315
TOTAL OTHER COMPREHENSIVE INCOME	978			9,416			8,955
TOTAL COMPREHENSIVE INCOME	145,537			163,235			211,468
Total Comprehensive Income Attributable to Noncontrolling Interest	4,190			4,008			3,622
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SWEPCo COMMON SHAREHOLDER	$	141,347		$	159,227		$	207,846

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

238

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	SWEPCo Common Shareholder
	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
TOTAL EQUITY – DECEMBER 31, 2011	$	135,660	$	674,606	$	1,029,915		$	(26,815	)	$	391		$	1,813,757
Common Stock Dividends – Nonaffiliated											(3,752		)	(3,752		)
Net Income					198,891						3,622			202,513
Other Comprehensive Income								8,955						8,955
TOTAL EQUITY – DECEMBER 31, 2012	135,660		674,606		1,228,806			(17,860		)	261			2,021,473
Common Stock Dividends					(125,000		)							(125,000		)
Common Stock Dividends – Nonaffiliated											(3,791		)	(3,791		)
Net Income					149,811						4,008			153,819
Other Comprehensive Income								9,416						9,416
TOTAL EQUITY – DECEMBER 31, 2013	135,660		674,606		1,253,617			(8,444		)	478			2,055,917
Common Stock Dividends					(100,000		)							(100,000		)
Common Stock Dividends – Nonaffiliated											(4,253		)	(4,253		)
Net Income					140,369						4,190			144,559
Other Comprehensive Income								978						978
TOTAL EQUITY – DECEMBER 31, 2014	$	135,660	$	674,606	$	1,293,986		$	(7,466	)	$	415		$	2,097,201

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

239

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONSOLIDATED BALANCE SHEETS

ASSETS

December 31, 2014 and 2013

(in thousands)

	December 31,
	2014			2013
CURRENT ASSETS
Cash and Cash Equivalents (December 31, 2014 and 2013 Amounts Include $12,695 and $15,827, Respectively, Related to Sabine)	$	14,356		$	17,241
Advances to Affiliates	41,033			—
Accounts Receivable:
Customers	46,738			86,263
Affiliated Companies	37,114			22,389
Miscellaneous	25,625			27,175
Allowance for Uncollectible Accounts	(516		)	(1,418		)
Total Accounts Receivable	108,961			134,409
Fuel (December 31, 2014 and 2013 Amounts Include $38,920 and $37,518, Respectively, Related to Sabine)	116,955			122,026
Materials and Supplies	73,666			74,862
Risk Management Assets	31			1,179
Deferred Income Tax Benefits	9,041			177,297
Accrued Tax Benefits	15,408			158
Regulatory Asset for Under-Recovered Fuel Costs	24,024			17,949
Prepayments and Other Current Assets	25,779			20,931
TOTAL CURRENT ASSETS	429,254			566,052
PROPERTY, PLANT AND EQUIPMENT
Electric:
Generation	3,864,543			3,764,429
Transmission	1,300,729			1,165,167
Distribution	1,894,572			1,843,912
Other Property, Plant and Equipment (Including Plant to be Retired) (December 31, 2014 and 2013 Amounts Include $288,183 and $291,556, Respectively, Related to Sabine)	878,753			869,230
Construction Work in Progress	471,980			281,849
Total Property, Plant and Equipment	8,410,577			7,924,587
Accumulated Depreciation and Amortization (December 31, 2014 and 2013 Amounts Include $142,983 and $134,282, Respectively, Related to Sabine)	2,503,290			2,391,652
TOTAL PROPERTY, PLANT AND EQUIPMENT – NET	5,907,287			5,532,935
OTHER NONCURRENT ASSETS
Regulatory Assets	393,602			369,905
Deferred Charges and Other Noncurrent Assets	86,750			92,890
TOTAL OTHER NONCURRENT ASSETS	480,352			462,795
TOTAL ASSETS	$	6,816,893		$	6,561,782

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

240

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND EQUITY

December 31, 2014 and 2013

	December 31,
	2014			2013
	(in thousands)
CURRENT LIABILITIES
Advances from Affiliates	$	—		$	9,180
Accounts Payable:
General	175,109			152,653
Affiliated Companies	67,410			56,923
Long-term Debt Due Within One Year – Nonaffiliated	306,750			3,250
Risk Management Liabilities	1,082			—
Customer Deposits	59,903			56,375
Accrued Taxes	43,965			41,508
Accrued Interest	44,328			43,996
Obligations Under Capital Leases	17,557			17,899
Regulatory Liability for Over-Recovered Fuel Costs	—			7,275
Other Current Liabilities	104,553			79,622
TOTAL CURRENT LIABILITIES	820,657			468,681
NONCURRENT LIABILITIES
Long-term Debt – Nonaffiliated	1,833,687			2,040,082
Deferred Income Taxes	1,351,111			1,271,478
Regulatory Liabilities and Deferred Investment Tax Credits	458,530			472,128
Asset Retirement Obligations	92,015			87,630
Employee Benefits and Pension Obligations	25,374			14,602
Obligations Under Capital Leases	91,044			105,086
Deferred Credits and Other Noncurrent Liabilities	47,274			46,178
TOTAL NONCURRENT LIABILITIES	3,899,035			4,037,184
TOTAL LIABILITIES	4,719,692			4,505,865
Rate Matters (Note 4)
Commitments and Contingencies (Note 6)
EQUITY
Common Stock – Par Value – $18 Per Share:
Authorized –  7,600,000 Shares
Outstanding  – 7,536,640 Shares	135,660			135,660
Paid-in Capital	674,606			674,606
Retained Earnings	1,293,986			1,253,617
Accumulated Other Comprehensive Income (Loss)	(7,466		)	(8,444		)
TOTAL COMMON SHAREHOLDER’S EQUITY	2,096,786			2,055,439
Noncontrolling Interest	415			478
TOTAL EQUITY	2,097,201			2,055,917
TOTAL LIABILITIES AND EQUITY	$	6,816,893		$	6,561,782

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

241

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014, 2013 and 2012

(in thousands)

	Years Ended December 31,
	2014			2013			2012
OPERATING ACTIVITIES
Net Income	$	144,559		$	153,819		$	202,513
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	185,134			179,251			138,778
Deferred Income Taxes	239,426			81,888			260,761
Asset Impairments and Other Related Charges	—			—			13,000
Allowance for Equity Funds Used During Construction	(11,947		)	(7,338		)	(57,054		)
Mark-to-Market of Risk Management Contracts	2,133			(1,539		)	(4,159		)
Pension Contributions to Qualified Plan Trust	(3,832		)	—			(13,192		)
Fuel Over/Under-Recovery, Net	(13,350		)	(18,916		)	14,045
Change in Regulatory Liabilities	(24,559		)	(12,806		)	37,955
Change in Other Noncurrent Assets	(2,080		)	34,559			21,309
Change in Other Noncurrent Liabilities	23,590			(634		)	14,594
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	25,448			(35,472		)	(21,919		)
Fuel, Materials and Supplies	6,267			6,558			(46,106		)
Accounts Payable	4,359			12,816			3,813
Accrued Taxes, Net	(12,802		)	25,341			(16,057		)
Other Current Assets	(4,356		)	(1,398		)	(387		)
Other Current Liabilities	21,193			1,634			(3,611		)
Net Cash Flows from Operating Activities	579,183			417,763			544,283
INVESTING ACTIVITIES
Construction Expenditures	(511,388		)	(411,512		)	(542,427		)
Change in Advances to Affiliates, Net	(41,033		)	153,829			(153,829		)
Other Investing Activities	5,080			(2,074		)	1,605
Net Cash Flows Used for Investing Activities	(547,341		)	(259,757		)	(694,651		)
FINANCING ACTIVITIES
Issuance of Long-term Debt – Nonaffiliated	99,415			—			336,418
Credit Facility Borrowings	—			17,091			25,123
Change in Advances from Affiliates, Net	(9,180		)	9,180			(132,473		)
Retirement of Long-term Debt – Nonaffiliated	(3,250		)	(3,250		)	(21,625		)
Credit Facility Repayments	—			(19,694		)	(39,536		)
Principal Payments for Capital Lease Obligations	(18,318		)	(18,111		)	(16,537		)
Dividends Paid on Common Stock	(100,000		)	(125,000		)	—
Dividends Paid on Common Stock – Nonaffiliated	(4,253		)	(3,791		)	(3,752		)
Other Financing Activities	859			774			3,985
Net Cash Flows from (Used for) Financing Activities	(34,727		)	(142,801		)	151,603
Net Increase (Decrease) in Cash and Cash Equivalents	(2,885		)	15,205			1,235
Cash and Cash Equivalents at Beginning of Period	17,241			2,036			801
Cash and Cash Equivalents at End of Period	$	14,356		$	17,241		$	2,036
SUPPLEMENTARY INFORMATION
Cash Paid for Interest, Net of Capitalized Amounts	$	116,855		$	120,427		$	68,918
Net Cash Paid (Received) for Income Taxes	(152,213		)	(35,363		)	(191,638		)
Noncash Acquisitions Under Capital Leases	4,130			9,376			20,547
Construction Expenditures Included in Current Liabilities as of December 31,	94,263			63,169			55,767

See Notes to Financial Statements of Registrant Subsidiaries beginning on page 244.

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SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED

INDEX OF NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to SWEPCo’s financial statements are combined with the notes to financial statements for other registrant subsidiaries. Listed below are the notes that apply to SWEPCo.  The footnotes begin on page 244.

	Page Number
Organization and Summary of Significant Accounting Policies	245
New Accounting Pronouncements	260
Comprehensive Income	261
Rate Matters	272
Effects of Regulation	282
Commitments, Guarantees and Contingencies	293
Disposition and Impairments	299
Benefit Plans	301
Business Segments	336
Derivatives and Hedging	337
Fair Value Measurements	350
Income Taxes	363
Leases	372
Financing Activities	377
Related Party Transactions	382
Variable Interest Entities	391
Property, Plant and Equipment	397
Cost Reduction Programs	404
Unaudited Quarterly Financial Information	405

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INDEX OF NOTES TO FINANCIAL STATEMENTS OF REGISTRANT SUBSIDIARIES

The notes to financial statements that follow are a combined presentation for the Registrant Subsidiaries.  The following list indicates the registrants to which the footnotes apply:

		Page Number
Organization and Summary of Significant Accounting Policies	APCo, I&M, OPCo, PSO, SWEPCo	245
New Accounting Pronouncements	APCo, I&M, OPCo, PSO, SWEPCo	260
Comprehensive Income	APCo, I&M, OPCo, PSO, SWEPCo	261
Rate Matters	APCo, I&M, OPCo, PSO, SWEPCo	272
Effects of Regulation	APCo, I&M, OPCo, PSO, SWEPCo	282
Commitments, Guarantees and Contingencies	APCo, I&M, OPCo, PSO, SWEPCo	293
Disposition and Impairments	APCo, OPCo, SWEPCo	299
Benefit Plans	APCo, I&M, OPCo, PSO, SWEPCo	301
Business Segments	APCo, I&M, OPCo, PSO, SWEPCo	336
Derivatives and Hedging	APCo, I&M, OPCo, PSO, SWEPCo	337
Fair Value Measurements	APCo, I&M, OPCo, PSO, SWEPCo	350
Income Taxes	APCo, I&M, OPCo, PSO, SWEPCo	363
Leases	APCo, I&M, OPCo, PSO, SWEPCo	372
Financing Activities	APCo, I&M, OPCo, PSO, SWEPCo	377
Related Party Transactions	APCo, I&M, OPCo, PSO, SWEPCo	382
Variable Interest Entities	APCo, I&M, OPCo, PSO, SWEPCo	391
Property, Plant and Equipment	APCo, I&M, OPCo, PSO, SWEPCo	397
Cost Reduction Programs	APCo, I&M, OPCo, PSO, SWEPCo	404
Unaudited Quarterly Financial Information	APCo, I&M, OPCo, PSO, SWEPCo	405

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1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

The principal business conducted by the Registrant Subsidiaries is the generation, transmission and distribution of electric power.  These companies are subject to regulation by the FERC under the Federal Power Act and the Energy Policy Act of 2005 and maintain accounts in accordance with the FERC and other regulatory guidelines.  These companies are subject to further regulation with regard to rates and other matters by state regulatory commissions.

The Registrant Subsidiaries also engage in wholesale electricity marketing and risk management activities in the United States.  I&M provides barging services to both affiliated and nonaffiliated companies.  SWEPCo, through consolidated and nonconsolidated affiliates, conducts lignite mining operations to fuel certain of its generation facilities.

Corporate Separation

Background

On December 31, 2013, as approved by the FERC and the PUCO, OPCo transferred its generation assets and related generation liabilities at net book value to AGR.  In accordance with Ohio law, OPCo remains responsible to provide power and capacity to OPCo customers who have not switched electric providers.  Effective January 1, 2014, OPCo began purchasing power from both affiliated and nonaffiliated entities, subject to PUCO approval, to meet the energy and capacity needs of customers. In April 2013, and in connection with corporate separation of OPCo’s generation assets and liabilities, OPCo sold the majority of its assets related to its wholly-owned subsidiary, Conesville Coal Preparation Company (CCPC).  Also in connection with corporate separation, OPCo transferred its ownership of Cook Coal Terminal to AEGCo in August 2013. On December 31, 2013, subsequent to the transfer of OPCo’s generation assets and associated liabilities to AGR, AGR transferred at net book value its ownership (867 MW) in Amos Plant, Unit 3 to APCo.  

Significant Accounting Issues

Shown below are the carrying amounts of OPCo generation assets, liabilities and equity that were distributed to AGR on December 31, 2013:

	December 31, 2013
ASSETS	(in thousands)
Current Assets	$	777,677
Net Property, Plant and Equipment	5,685,415
Other Noncurrent Assets	259,801
Total Assets	$	6,722,893
LIABILITIES AND EQUITY
Long-term Debt	$	1,411,825
Other Current Liabilities	633,505
Other Noncurrent Liabilities	1,672,189
Equity	3,005,374
Total Liabilities and Equity	$	6,722,893

As noted above, APCo’s acquisition of the two-thirds ownership in Amos Plant, Unit 3 qualifies as an acquisition of a business under common control, which is typically accounted for as if the transfer had occurred at the beginning of the earliest period presented, pursuant to accounting guidance for “Business Combinations.”  However, management determined the retrospective application of this transfer to be quantitatively and qualitatively immaterial when taken as a whole in relation to APCo’s financial statements.  As a result, APCo’s financial statements were not retrospectively adjusted to reflect the transfer.

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All regulatory assets and regulatory liabilities related to OPCo’s generation activities remained on OPCo’s balance sheet subsequent to OPCo’s transfer of generation assets and associated liabilities to AGR.  As previously approved by the PUCO, these regulatory assets and liabilities will be recovered/refunded primarily through OPCo non-bypassable riders.

Substantially all of the current income tax receivables and payables related to OPCo’s generation activities prior to December 31, 2013 remained on OPCo’s balance sheet.  These current income tax receivables and payables are the responsibility of OPCo.  Deferred tax assets and liabilities related to APCo’s acquired share of Amos Plant, Unit 3 and KPCo’s acquired share of the Mitchell Plant were transferred to APCo and KPCo, respectively, based upon their respective plant-related asset and liability values.  Following these transfers, APCo and KPCo adjusted their deferred tax balances and related regulatory assets to reflect their respective deferred state tax rates.

Long-term Debt

In the fourth quarter of 2013, OPCo:

• Drew down an additional $400 million of Long-term Debt – Nonaffiliated on an existing $1 billion term credit facility and subsequently assigned $1 billion of Long-term Debt – Nonaffiliated that was drawn down on this term credit facility to AGR.

• Received $297 million of Notes Receivable – Affiliated from AGR with terms and conditions similar to OPCo Pollution Control Bonds.

• Retired $200 million of Long-term Debt – Affiliated in the fourth quarter of 2013.

• Assigned $115 million of Long-term Debt – Nonaffiliated to AGR related to certain OPCo Pollution Control Bonds.

• Retired $50 million of Long-term Debt – Nonaffiliated related to OPCo Pollution Control Bonds.

On December 31, 2013, APCo:

• Was assigned $300 million of Long-term Debt – Nonaffiliated from AGR related to a term credit facility.

• Issued $86 million in Long-term Debt – Affiliated to AGR.

Other Impacts of Corporate Separation

The Interconnection Agreement was terminated effective January 1, 2014.  The AEP System Interim Allowance Agreement which provided for, among other things, the transfer of SO₂ emission allowances associated with transactions under the Interconnection agreement was also terminated.

Effective January 1, 2014, the FERC approved:

• A PCA among APCo, I&M and KPCo with AEPSC as the agent to coordinate the participants’ respective power supply resources.  Under the PCA, APCo, I&M and KPCo are individually responsible for planning their respective capacity obligations and there are no capacity equalization charges/credits under the PCA on deficit/surplus companies.   Further, the PCA allows, but does not obligate, APCo, I&M and KPCo to participate collectively under a common fixed resource requirement capacity plan in PJM and to participate in specified collective off-system sales and purchase activities.

• A Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as agent.  The Bridge Agreement is an interim arrangement to: (a) address the treatment of purchases and sales made by AEPSC on behalf of member companies that extend beyond termination of the Interconnection Agreement and (b) address how member companies will fulfill their existing obligations under the PJM Reliability Assurance Agreement through the 2014/2015 PJM planning year.  Under the Bridge Agreement, AGR is committed to use its capacity to help meet the PJM capacity obligations of member companies through May 31, 2015.

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• A Power Supply Agreement (PSA) between AGR and OPCo for AGR to supply capacity for OPCo’s switched (at $188.88/MW day) and non-switched retail load for the period January 1, 2014 through May 31, 2015 and to supply the energy needs of OPCo’s non-switched retail load that was not acquired through auctions in 2014.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Rates and Service Regulation

The Registrant Subsidiaries’ rates are regulated by the FERC and state regulatory commissions in the nine state operating territories in which they operate.  The FERC also regulates the Registrant Subsidiaries’ affiliated transactions, including AEPSC intercompany service billings which are generally at cost, under the 2005 Public Utility Holding Company Act and the Federal Power Act.  The FERC also has jurisdiction over the issuances and acquisitions of securities of the public utility subsidiaries, the acquisition or sale of certain utility assets and mergers with another electric utility or holding company.  For non-power goods and services, the FERC requires a nonregulated affiliate to bill an affiliated public utility company at no more than market while a public utility must bill the higher of cost or market to a nonregulated affiliate.  The state regulatory commissions also regulate certain intercompany transactions under various orders and affiliate statutes.  Both the FERC and state regulatory commissions are permitted to review and audit the relevant books and records of companies within a public utility holding company system.

The FERC regulates wholesale power markets and wholesale power transactions.  The Registrant Subsidiaries’ wholesale power transactions are generally market-based.  Wholesale power transactions are cost-based regulated when the Registrant Subsidiaries negotiate and file a cost-based contract with the FERC or the FERC determines that the Registrant Subsidiaries have “market power” in the region where the transaction occurs.  The Registrant Subsidiaries have entered into wholesale power supply contracts with various municipalities and cooperatives that are FERC-regulated, cost-based contracts.  These contracts are generally formula rate mechanisms, which are trued up to actual costs annually.  

The state regulatory commissions regulate all of the retail distribution operations and rates of the Registrant Subsidiaries on a cost basis.  The state regulatory commissions also regulate the retail generation/power supply operations and rates except in Ohio.  The ESP rates in Ohio continue the process of transitioning generation/power supply rates over time to market rates.

The FERC also regulates the Registrant Subsidiaries’ wholesale transmission operations and rates.  The FERC claims jurisdiction over retail transmission rates when retail rates are unbundled in connection with restructuring.  OPCo’s retail transmission rates in Ohio, APCo’s retail transmission rates in Virginia and I&M’s retail transmission rates in Michigan are unbundled and are based on formula rates included in the PJM OATT that are cost-based.  Bundled retail transmission rates are regulated, on a cost basis, by the state commissions.

In addition, the FERC regulates the SIA, the Operating Agreement, the Transmission Agreement and the Transmission Coordination Agreement, all of which are still active and allocate shared system costs and revenues among the Registrant Subsidiaries that are parties to each agreement.  In accordance with management's October 2012 filing with the FERC, the Interconnection Agreement was terminated effective January 1, 2014.  The AEP System Interim Allowance Agreement which provided for, among other things, the transfer of SO₂ emission allowances associated with transactions under the Interconnection Agreement was also terminated.  In December 2013, the FERC issued orders approving the creation of a PCA, effective January 1, 2014.  Also effective January 1, 2014, the FERC approved the creation of a Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as the agent. Effective June 1, 2014, the FERC approved the cancellation of the System Transmission Integration Agreement.

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Principles of Consolidation

The consolidated financial statements for APCo include the Registrant Subsidiary, its wholly-owned subsidiaries and Appalachian Consumer Rate Relief Funding (a substantially-controlled VIE).  The consolidated financial statements for I&M include the Registrant Subsidiary, its wholly-owned subsidiaries and DCC Fuel (substantially-controlled VIEs).  The consolidated financial statements for OPCo include the Registrant Subsidiary and Ohio Phase-in-Recovery Funding (a substantially-controlled VIE).  The consolidated financial statements for SWEPCo include the Registrant Subsidiary and Sabine (a substantially-controlled VIE).  Intercompany items are eliminated in consolidation.  The Registrant Subsidiaries use the equity method of accounting for equity investments where they exercise significant influence but do not hold a controlling financial interest.  Such investments are initially recorded at cost in Deferred Charges and Other Noncurrent Assets on the balance sheets. The proportionate share of the investee's equity earnings is included in Equity Earnings of Unconsolidated Subsidiaries on the statements of income.  Equity method investments are required to be tested for impairment when it is determined there may be an other-than-temporary loss in value. I&M, PSO and SWEPCo have ownership interests in generating units that are jointly-owned.  The proportionate share of the operating costs associated with such facilities is included in the income statements and the assets and liabilities are reflected in the balance sheets.  See Note 16 − Variable Interest Entities and Note 17 − Property, Plant and Equipment.

Accounting for the Effects of Cost-Based Regulation

As rate-regulated electric public utility companies, the Registrant Subsidiaries’ financial statements reflect the actions of regulators that result in the recognition of certain revenues and expenses in different time periods than enterprises that are not rate-regulated.  In accordance with accounting guidance for “Regulated Operations,” the Registrant Subsidiaries record regulatory assets (deferred expenses) and regulatory liabilities (deferred revenue reductions or refunds) to reflect the economic effects of regulation in the same accounting period by matching expenses with their recovery through regulated revenues and by matching income with its passage to customers in cost-based regulated rates.

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  These estimates include, but are not limited to, inventory valuation, allowance for doubtful accounts, long-lived asset impairment, unbilled electricity revenue, valuation of long-term energy contracts, the effects of regulation, long-lived asset recovery, storm costs, the effects of contingencies and certain assumptions made in accounting for pension and postretirement benefits.  The estimates and assumptions used are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements.  Actual results could ultimately differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents include temporary cash investments with original maturities of three months or less.

Restricted Cash for Securitized Funding

Restricted Cash for Securitized Funding includes funds held by trustees primarily for the payment of securitization bonds.

Inventory

Fossil fuel inventories are carried at average cost.  Materials and supplies inventories are carried at average cost.

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Accounts Receivable

Customer accounts receivable primarily include receivables from wholesale and retail energy customers, receivables from energy contract counterparties related to risk management activities and customer receivables primarily related to other revenue-generating activities.

Revenue is recognized from electric power sales when power is delivered to customers.  To the extent that deliveries have occurred but a bill has not been issued, the Registrant Subsidiaries accrue and recognize, as Accrued Unbilled Revenues on the balance sheets, an estimate of the revenues for energy delivered since the last billing.

AEP Credit factors accounts receivable on a daily basis, excluding receivables from risk management activities, through purchase agreements with I&M, OPCo, PSO, SWEPCo and a portion of APCo.  Since APCo does not have regulatory authority to sell accounts receivable in its West Virginia regulatory jurisdiction, only a portion of APCo’s accounts receivable are sold to AEP Credit.  See “Sale of Receivables – AEP Credit” section of Note 14 for additional information.

Allowance for Uncollectible Accounts

Generally, AEP Credit records bad debt expense related to receivables purchased from the Registrant Subsidiaries under a sale of receivables agreement.  For receivables related to APCo’s West Virginia operations, the bad debt reserve is calculated based on a rolling two-year average write-off in proportion to gross accounts receivable.  For customer accounts receivables relating to risk management activities, accounts receivables are reviewed for bad debt reserves at a specific counterparty level basis.  For miscellaneous accounts receivable, bad debt expense is recorded for all amounts outstanding 180 days or greater at 100%, unless specifically identified.  Miscellaneous accounts receivable items open less than 180 days may be reserved using specific identification for bad debt reserves.

Concentrations of Credit Risk and Significant Customers

The Registrant Subsidiaries do not have any significant customers that comprise 10% or more of their operating revenues as of December 31, 2014.

The Registrant Subsidiaries monitor credit levels and the financial condition of their customers on a continuing basis to minimize credit risk.  The regulatory commissions allow recovery in rates for a reasonable level of bad debt costs.  Management believes adequate provisions for credit loss have been made in the accompanying Registrant Subsidiary financial statements.

Emission Allowances

The Registrant Subsidiaries in regulated jurisdictions record emission allowances at cost, including the annual SO₂ and NO_x emission allowance entitlements received at no cost from the Federal EPA.  Prior to corporate separation and the distribution of all emission allowances to AGR on December 31, 2013, OPCo recorded allowances at the lower of cost or market.  The Registrant Subsidiaries follow the inventory model for these allowances.  Allowances expected to be consumed within one year are reported in Materials and Supplies.  Allowances with expected consumption beyond one year are included in Deferred Charges and Other Noncurrent Assets.  These allowances are consumed in the production of energy and are recorded in Fuel and Other Consumables Used for Electric Generation at an average cost.  The purchases and sales of allowances are reported in the Operating Activities section of the statements of cash flows.  The net margin on sales of emission allowances is included in Electric Generation, Transmission and Distribution Revenues for nonaffiliated transactions and in Sales to AEP Affiliates for affiliated transactions because of its integral nature to the production process of energy and the Registrant Subsidiaries’ revenue optimization strategy for their operations.  The net margin on sales of emission allowances affects the determination of deferred fuel or deferred emission allowance costs and the amortization of regulatory assets for certain jurisdictions.

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Property, Plant and Equipment

Regulated

Electric utility property, plant and equipment for rate-regulated operations are stated at original cost. Additions, major replacements and betterments are added to the plant accounts.  Under the group composite method of depreciation, continuous interim routine replacements of items such as boiler tubes, pumps, motors, etc. result in original cost retirements, less salvage, being charged to accumulated depreciation.  The group composite method of depreciation assumes that on average, asset components are retired at the end of their useful lives and thus there is no gain or loss.  The equipment in each primary electric plant account is identified as a separate group.  The depreciation rates that are established take into account the past history of interim capital replacements and the amount of removal cost incurred and salvage received.  These rates and the related lives are subject to periodic review.  Removal costs are charged to regulatory liabilities.  The costs of labor, materials and overhead incurred to operate and maintain plants are included in operating expenses.

Long-lived assets are required to be tested for impairment when it is determined that the carrying value of the assets may no longer be recoverable or when the assets meet the held-for-sale criteria under the accounting guidance for “Impairment or Disposal of Long-Lived Assets.”  When it becomes probable that an asset in service or an asset under construction will be abandoned and regulatory cost recovery has been disallowed, the cost of that asset shall be removed from plant-in-service or CWIP and charged to expense.

The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, as opposed to a forced or liquidation sale.  Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available.  In the absence of quoted prices for identical or similar assets in active markets, fair value is estimated using various internal and external valuation methods including cash flow analysis and appraisals.

Nonregulated

Nonregulated operations generally follow the policies of rate-regulated operations listed above but with the following exceptions.  Property, plant and equipment of nonregulated operations are stated at fair value at acquisition (or as adjusted for any applicable impairments) plus the original cost of property acquired or constructed since the acquisition, less disposals.  Normal and routine retirements from the plant accounts, net of salvage, are charged to accumulated depreciation for most nonregulated operations under the group composite method of depreciation.  A gain or loss would be recorded if the retirement is not considered an interim routine replacement.  Removal costs are charged to expense.

Allowance for Funds Used During Construction and Interest Capitalization

For regulated operations, AFUDC represents the estimated cost of borrowed and equity funds used to finance construction projects that is capitalized and recovered through depreciation over the service life of regulated electric utility plant.  The Registrant Subsidiaries record the equity component of AFUDC in Allowance for Equity Funds Used During Construction and the debt component of AFUDC as a reduction to Interest Expense.  For nonregulated operations, including certain generating assets, interest is capitalized during construction in accordance with the accounting guidance for “Capitalization of Interest.”

Valuation of Nonderivative Financial Instruments

The book values of Cash and Cash Equivalents, Advances to/from Affiliates, Accounts Receivable and Accounts Payable approximate fair value because of the short-term maturity of these instruments.  The book value of the pre-April 1983 spent nuclear fuel disposal liability for I&M approximates the best estimate of its fair value.

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Fair Value Measurements of Assets and Liabilities

The accounting guidance for “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  When quoted market prices are not available, pricing may be completed using comparable securities, dealer values, operating data and general market conditions to determine fair value.  Valuation models utilize various inputs such as commodity, interest rate and, to a lesser degree, volatility and credit that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, market corroborated inputs (i.e. inputs derived principally from, or correlated to, observable market data) and other observable inputs for the asset or liability.  The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP’s Board of Directors.  The AEP System’s market risk oversight staff independently monitors risk policies, procedures and risk levels and provides members of the Commercial Operations Risk Committee (Regulated Risk Committee) various daily, weekly and/or monthly reports regarding compliance with policies, limits and procedures.  The Regulated Risk Committee consists of AEPSC’s Chief Operating Officer, Chief Financial Officer, Executive Vice President of Generation, Senior Vice President of Commercial Operations and Chief Risk Officer.

For commercial activities, exchange traded derivatives, namely futures contracts, are generally fair valued based on unadjusted quoted prices in active markets and are classified as Level 1.  Level 2 inputs primarily consist of OTC broker quotes in moderately active or less active markets, as well as exchange traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1.  Management verifies price curves using these broker quotes and classifies these fair values within Level 2 when substantially all of the fair value can be corroborated.  Management typically obtains multiple broker quotes, which are nonbinding in nature but are based on recent trades in the marketplace.  When multiple broker quotes are obtained, the quoted bid and ask prices are averaged.  In certain circumstances, a broker quote may be discarded if it is a clear outlier.  Management uses a historical correlation analysis between the broker quoted location and the illiquid locations.  If the points are highly correlated, these locations are included within Level 2 as well.  Certain OTC and bilaterally executed derivative instruments are executed in less active markets with a lower availability of pricing information.  Illiquid transactions, complex structured transactions, FTRs and counterparty credit risk may require nonmarket based inputs.  Some of these inputs may be internally developed or extrapolated and utilized to estimate fair value.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3.  The main driver of contracts being classified as Level 3 is the inability to substantiate energy price curves in the market.  A significant portion of the Level 3 instruments have been economically hedged which greatly limits potential earnings volatility.

AEP utilizes its trustee’s external pricing service 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 benefits and nuclear trusts, Restricted Cash for Securitized Funding and Cash and Cash Equivalents are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs, primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalent funds.  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

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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.  Benefit plan assets included in Level 3 are primarily real estate and private equity investments that are valued using methods requiring judgment including appraisals. The fair value of real estate investments is measured using market capitalization rates, recent sales of comparable investments and independent third-party appraisals. The fair value of private equity investments is measured using cost and purchase multiples, operating results, discounted future cash flows and market based comparable data. Depending on the specific situation, one or multiple approaches are used to determine the valuation of a real estate or private equity investment.

Deferred Fuel Costs

The cost of fuel and related emission allowances and emission control chemicals/consumables is charged to Fuel and Other Consumables Used for Electric Generation expense when the fuel is burned or the allowance or consumable is utilized.  The cost of fuel also includes the cost of nuclear fuel burned which is computed primarily on the units-of-production method.  In regulated jurisdictions with an active FAC, fuel cost over-recoveries (the excess of fuel-related revenues over applicable fuel costs incurred) are generally deferred as current regulatory liabilities and under-recoveries (the excess of applicable fuel costs incurred over fuel-related revenues) are generally deferred as current regulatory assets.  Fuel cost over-recovery and under-recovery balances are classified as noncurrent when there is a phase-in plan or the FAC has been suspended.  These deferrals are amortized when refunded or when billed to customers in later months with the state regulatory commissions’ review and approval.  The amount of an over-recovery or under-recovery can also be affected by actions of the state regulatory commissions.  On a routine basis, state regulatory commissions review and/or audit the Registrant Subsidiaries’ fuel procurement policies and practices, the fuel cost calculations and FAC deferrals.  When a FAC under-recovery is no longer probable of recovery, the Registrant Subsidiaries adjust their FAC deferrals and record provisions for estimated refunds to recognize these probable outcomes.

Changes in fuel costs, including purchased power in Indiana and Michigan for I&M, in Ohio (through the ESP related to standard service offer load served) for OPCo, in Arkansas, Louisiana and Texas for SWEPCo, in Oklahoma for PSO and in Virginia and West Virginia (upon securitization in November 2013) for APCo are reflected in rates in a timely manner generally through the FAC.  Changes in fuel costs, including purchased power in Ohio (from 2009 through 2011) for OPCo and in West Virginia (prior to securitization in November 2013) for APCo are reflected in rates through FAC phase-in plans.  The FAC generally includes some sharing of off-system sales margins.  In West Virginia for APCo, all of the margins from off-system sales are given to customers through the FAC.  Prior to corporate separation, none of the margins from off-system sales were given to customers through the FAC in Ohio for OPCo.  A portion of margins from off-system sales are given to customers through the FAC and other rate mechanisms in Oklahoma for PSO, Arkansas, Louisiana and Texas for SWEPCo, Virginia for APCo and in Indiana and Michigan for I&M.  Where the FAC or off-system sales sharing mechanism is capped, frozen or non-existent, changes in fuel costs or sharing of off-system sales impact earnings.

Revenue Recognition

Regulatory Accounting

The financial statements of the Registrant Subsidiaries reflect the actions of regulators that can result in the recognition of revenues and expenses in different time periods than enterprises that are not rate-regulated.  Regulatory assets (deferred expenses) and regulatory liabilities (deferred revenue reductions or refunds) are recorded to reflect the economic effects of regulation in the same accounting period by matching expenses with their recovery through regulated revenues and by matching income with its passage to customers in cost-based regulated rates.

When regulatory assets are probable of recovery through regulated rates, the Registrant Subsidiaries record them as assets on the balance sheets.  The Registrant Subsidiaries test for probability of recovery at each balance sheet date or whenever new events occur.  Examples of new events include the issuance of a regulatory commission order or passage of new legislation.  If it is determined that recovery of a regulatory asset is no longer probable, the Registrant Subsidiaries write off that regulatory asset as a charge against income.

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Electricity Supply and Delivery Activities

The Registrant Subsidiaries recognize revenues from retail and wholesale electricity sales and electricity transmission and distribution delivery services.  The Registrant Subsidiaries recognize the revenues on the statements of income upon delivery of the energy to the customer and include unbilled as well as billed amounts.  In accordance with the applicable state commission regulatory treatment, PSO and SWEPCo do not record the fuel portion of unbilled revenue.

Most of the power produced at the generation plants of APCo and I&M is sold to PJM.  Most of the power produced at the generation plants of PSO and SWEPCo is sold to SPP. The Regulated Subsidiaries purchase power from PJM and SPP to supply power to their customers.  Generally, these power sales and purchases are reported on a net basis as revenues on the statements of income.  However, purchases of power in excess of sales to PJM or SPP, on an hourly net basis, used to serve retail load are recorded gross as Purchased Electricity for Resale on the statements of income.

Physical energy purchases arising from non-derivative contracts are accounted for on a gross basis in Purchased Electricity for Resale on the statements of income.  Energy purchases arising from non-trading derivative contracts are recorded based on the transaction’s facts and circumstances.  Purchases under non-trading derivatives used to serve accrual based obligations are recorded in Purchased Electricity for Resale on the statements of income.  All other non-trading derivative purchases are recorded net in revenues.

In general, the Registrant Subsidiaries record expenses when purchased electricity is received and when expenses are incurred.  APCo, I&M, PSO and SWEPCo defer unrealized MTM amounts as regulatory assets (for losses) and regulatory liabilities (for gains).

Energy Marketing and Risk Management Activities

AEPSC, on behalf of APCo, I&M, PSO and SWEPCo, engages in wholesale power, coal and natural gas marketing and risk management activities focused on wholesale markets where the AEP System owns assets and adjacent markets.  These activities include the purchase-and-sale of energy under forward contracts at fixed and variable prices.  These contracts include physical transactions, exchange-traded futures, and to a lesser extent, OTC swaps and options.  Certain energy marketing and risk management transactions are with RTOs.

The Registrant Subsidiaries recognize revenues and expenses from wholesale marketing and risk management transactions that are not derivatives upon delivery of the commodity.  The Registrant Subsidiaries use MTM accounting for wholesale marketing and risk management transactions that are derivatives unless the derivative is designated in a qualifying cash flow hedge relationship or a normal purchase or sale.  The Registrant Subsidiaries include realized gains and losses on wholesale marketing and risk management transactions in revenues or expense based on the transaction's facts and circumstances.  For APCo, I&M, PSO and SWEPCo, unrealized MTM amounts and some realized gains and losses are deferred as regulatory assets (for losses) and regulatory liabilities (for gains).  Unrealized MTM gains and losses are included on the balance sheets as Risk Management Assets or Liabilities as appropriate.

Certain qualifying wholesale marketing and risk management derivatives transactions are designated as hedges of variability in future cash flows as a result of forecasted transactions (cash flow hedge).  The Registrant Subsidiaries initially record the effective portion of the cash flow hedge’s gain or loss as a component of AOCI.  When the forecasted transaction is realized and affects net income, the Registrant Subsidiaries subsequently reclassify the gain or loss on the hedge from AOCI into revenues or expenses within the same financial statement line item as the forecasted transaction on their statements of income.  The Registrant Subsidiaries defer the ineffective portion as regulatory assets (for losses) and regulatory liabilities (for gains).  See “Accounting for Cash Flow Hedging Strategies” section of Note 10.

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SPP Integrated Power Market

In March 2014, SPP changed from an energy imbalance service market to a fully integrated power market. In the past, PSO and SWEPCo would satisfy their load requirements with their own generation resources or through the Operating Agreement. In the new integrated power market, PSO and SWEPCo operate as standalone entities by offering their respective generation into the SPP power market, which then economically dispatches the resources. This change further enables retail customers to obtain power through either internal generation or power purchases from the SPP market. The new integrated power market now operates in a similar manner as the PJM power market for the AEP East Companies. The change in the SPP integrated power market did not have a significant effect on the 2014 results of operations or cash flows.

Levelization of Nuclear Refueling Outage Costs

In accordance with regulatory orders, I&M defers incremental operation and maintenance costs associated with periodic refueling outages at its Cook Plant and amortizes the costs over the period beginning with the month following the start of each unit’s refueling outage and lasting until the end of the month in which the same unit’s next scheduled refueling outage begins.  I&M adjusts the amortization amount as necessary to ensure full amortization of all deferred costs by the end of the refueling cycle.

Maintenance

The Registrant Subsidiaries expense maintenance costs as incurred.  If it becomes probable that the Registrant Subsidiaries will recover specifically-incurred costs through future rates, a regulatory asset is established to match the expensing of those maintenance costs with their recovery in cost-based regulated revenues.  In certain regulatory jurisdictions, the Registrant Subsidiaries defer costs above the level included in base rates and amortize those deferrals commensurate with recovery through rate riders.

Income Taxes and Investment Tax Credits

The Registrant Subsidiaries use the liability method of accounting for income taxes.  Under the liability method, deferred income taxes are provided for all temporary differences between the book and tax basis of assets and liabilities which will result in a future tax consequence.

When the flow-through method of accounting for temporary differences is reflected in regulated revenues (that is, when deferred taxes are not included in the cost of service for determining regulated rates for electricity), deferred income taxes are recorded and related regulatory assets and liabilities are established to match the regulated revenues and tax expense.

Investment tax credits are accounted for under the flow-through method except where regulatory commissions have reflected investment tax credits in the rate-making process on a deferral basis.  Investment tax credits that have been deferred are amortized over the life of the plant investment.

The Registrant Subsidiaries account for uncertain tax positions in accordance with the accounting guidance for “Income Taxes.”  The Registrant Subsidiaries classify interest expense or income related to uncertain tax positions as interest expense or income as appropriate and classify penalties as Other Operation expense.

Excise Taxes

As agents for some state and local governments, the Registrant Subsidiaries collect from customers certain excise taxes levied by those state or local governments on customers.  The Registrant Subsidiaries do not record these taxes as revenue or expense.

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Debt

Gains and losses from the reacquisition of debt used to finance regulated electric utility plants are deferred and amortized over the remaining term of the reacquired debt in accordance with their rate-making treatment unless the debt is refinanced.  If the reacquired debt associated with the regulated business is refinanced, the reacquisition costs attributable to the portions of the business that are subject to cost-based regulatory accounting are generally deferred and amortized over the term of the replacement debt consistent with its recovery in rates.  Operations not subject to cost-based rate regulation report gains and losses on the reacquisition of debt in Interest Expense on the statements of income upon reacquisition.

Debt discount or premium and debt issuance expenses are deferred and amortized generally utilizing the straight-line method over the term of the related debt.  The straight-line method approximates the effective interest method and is consistent with the treatment in rates for regulated operations.  The net amortization expense is included in Interest Expense on the statements of income.

Investments Held in Trust for Future Liabilities

AEP has several trust funds with significant investments intended to provide for future payments of pension and OPEB benefits, nuclear decommissioning and spent nuclear fuel disposal.  All of the trust funds’ investments are diversified and managed in compliance with all laws and regulations.  The investment strategy for trust funds is to use a diversified portfolio of investments to achieve an acceptable rate of return while managing the interest rate sensitivity of the assets relative to the associated liabilities.  To minimize investment risk, the trust funds are broadly diversified among classes of assets, investment strategies and investment managers.  Management regularly reviews the actual asset allocations and periodically rebalances the investments to targeted allocations when appropriate.  Investment policies and guidelines allow investment managers in approved strategies to use financial derivatives to obtain or manage market exposures and to hedge assets and liabilities.  The investments are reported at fair value under the “Fair Value Measurements and Disclosures” accounting guidance.

Benefit Plans

All benefit plan assets are invested in accordance with each plan’s investment policy.  The investment policy outlines the investment objectives, strategies and target asset allocations by plan.

The investment philosophies for AEP’s benefit plans support the allocation of assets to minimize risks and optimize net returns.  Strategies used include:

• Maintaining a long-term investment horizon.

• Diversifying assets to help control volatility of returns at acceptable levels.

• Managing fees, transaction costs and tax liabilities to maximize investment earnings.

• Using active management of investments where appropriate risk/return opportunities exist.

• Keeping portfolio structure style-neutral to limit volatility compared to applicable benchmarks.

• Using alternative asset classes such as real estate and private equity to maximize return and provide additional portfolio diversification.

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The investment policy for the pension fund allocates assets based on the funded status of the pension plan.  The objective of the asset allocation policy is to reduce the investment volatility of the plan over time.  Generally, more of the investment mix will be allocated to fixed income investments as the plan becomes better funded.  Assets will be transferred away from equity investments into fixed income investments based on the market value of plan assets compared to the plan’s projected benefit obligation.  The current target asset allocations are as follows:

Pension Plan Assets	Target
Equity	30.0	%
Fixed Income	55.0	%
Other Investments	15.0	%
OPEB Plans Assets	Target
Equity	65.0	%
Fixed Income	33.0	%
Cash	2.0	%

The investment policy for each benefit plan contains various investment limitations.  The investment policies establish concentration limits for securities and prohibit the purchase of securities issued by AEP (with the exception of proportionate and immaterial holdings of AEP securities in passive index strategies).  However, the investment policies do not preclude the benefit trust funds from receiving contributions in the form of AEP securities, provided that the AEP securities acquired by each plan may not exceed the limitations imposed by law.  Each investment manager's portfolio is compared to a diversified benchmark index.

For equity investments, the limits are as follows:

• No security in excess of 5% of all equities.

• Cash equivalents must be less than 10% of an investment manager's equity portfolio.

• No individual stock may be more than 10% and 7% for pension and OPEB investments, respectively, of each manager's equity portfolio.

• No investment in excess of 5% of an outstanding class of any company.

• No securities may be bought or sold on margin or other use of leverage.

For fixed income investments, the concentration limits must not exceed:

• 3% in any single issuer.

• 5% for private placements.

• 5% for convertible securities.

• 60% for bonds rated AA+ or lower.

• 50% for bonds rated A+ or lower.

• 10% for bonds rated BBB- or lower.

For obligations of non-government issuers within the fixed income portfolio, the following limitations apply:

• AAA rated debt: a single issuer should account for no more than 5% of the portfolio.

• AA+, AA, AA- rated debt: a single issuer should account for no more than 3% of the portfolio.

• Debt rated A+ or lower:  a single issuer should account for no more than 2% of the portfolio.

• No more than 10% of the portfolio may be invested in high yield and emerging market debt combined at any time.

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A portion of the pension assets is invested in real estate funds to provide diversification, add return and hedge against inflation.  Real estate properties are illiquid, difficult to value and not actively traded.  The pension plan uses external real estate investment managers to invest in commingled funds that hold real estate properties.  To mitigate investment risk in the real estate portfolio, commingled real estate funds are used to ensure that holdings are diversified by region, property type and risk classification.  Real estate holdings include core, value-added and development risk classifications and some investments in Real Estate Investment Trusts (REITs), which are publicly traded real estate securities.

A portion of the pension assets is invested in private equity.  Private equity investments add return and provide diversification and typically require a long-term time horizon to evaluate investment performance.  Private equity is classified as an alternative investment because it is illiquid, difficult to value and not actively traded.  The pension plan uses limited partnerships and commingled funds to invest across the private equity investment spectrum.   The private equity holdings are with multiple general partners who help monitor the investments and provide investment selection expertise.  The holdings are currently comprised of venture capital, buyout and hybrid debt and equity investment instruments.  Commingled private equity funds are used to enhance the holdings’ diversity.

AEP participates in a securities lending program with BNY Mellon to provide incremental income on idle assets and to provide income to offset custody fees and other administrative expenses.  AEP lends securities to borrowers approved by BNY Mellon in exchange for collateral.  All loans are collateralized by at least 102% of the loaned asset’s market value and the collateral is invested.  The difference between the rebate owed to the borrower and the collateral rate of return determines the earnings on the loaned security.  The securities lending program’s objective is providing modest incremental income with a limited increase in risk.

Trust owned life insurance (TOLI) underwritten by The Prudential Insurance Company is held in the OPEB plan trusts.  The strategy for holding life insurance contracts in the taxable Voluntary Employees' Beneficiary Association (VEBA) trust is to minimize taxes paid on the asset growth in the trust.  Earnings on plan assets are tax-deferred within the TOLI contract and can be tax-free if held until claims are paid.  Life insurance proceeds remain in the trust and are used to fund future retiree medical benefit liabilities.  With consideration to other investments held in the trust, the cash value of the TOLI contracts is invested in two diversified funds.  A portion is invested in a commingled fund with underlying investments in stocks that are actively traded on major international equity exchanges.  The other portion of the TOLI cash value is invested in a diversified, commingled fixed income fund with underlying investments in government bonds, corporate bonds and asset-backed securities.

Cash and cash equivalents are held in each trust to provide liquidity and meet short-term cash needs. Cash equivalent funds are used to provide diversification and preserve principal.  The underlying holdings in the cash funds are investment grade money market instruments including commercial paper, certificates of deposit, treasury bills and other types of investment grade short-term debt securities.  The cash funds are valued each business day and provide daily liquidity.

Nuclear Trust Funds

Nuclear decommissioning and spent nuclear fuel trust funds represent funds that regulatory commissions allow I&M to collect through rates to fund future decommissioning and spent nuclear fuel disposal liabilities.  By rules or orders, the IURC, the MPSC and the FERC established investment limitations and general risk management guidelines.  In general, limitations include:

• Acceptable investments (rated investment grade or above when purchased).

• Maximum percentage invested in a specific type of investment.

• Prohibition of investment in obligations of AEP, I&M or their affiliates.

• Withdrawals permitted only for payment of decommissioning costs and trust expenses.

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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.  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 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.  See the “Nuclear Contingencies” section of Note 6 for additional discussion of nuclear matters.  See “Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal” section of Note 11 for disclosure of the fair value of assets within the trusts.

Comprehensive Income(Loss)

Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources.  It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.  Comprehensive income (loss) has two components: net income (loss) and other comprehensive income (loss).

Earnings Per Share (EPS)

The Registrant Subsidiaries are wholly-owned subsidiaries of AEP.  Therefore, none are required to report EPS.

OPCo Revised Depreciation Rates

Effective December 1, 2011, OPCo revised book depreciation rates for certain of OPCo’s generation plants consistent with shortened depreciable lives for the generating units.  This change in depreciable lives resulted in a $52 million increase in depreciation expense in 2012.

In the fourth quarter of 2012, OPCo impaired the generating units discussed above (see Note 7).  As a result of this impairment of the full book value of these assets, OPCo ceased depreciation on these generating units effective December 1, 2012.

In the second quarter of 2013, OPCo impaired Muskingum River Plant, Unit 5 (MR5).  As a result of this impairment of the full book value of this generating unit, OPCo ceased depreciation on MR5 effective July 1, 2013.

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Supplementary Income Statement Information

The following tables provide the components of Depreciation and Amortization for the years ended December 31, 2014, 2013 and 2012:

2014
Depreciation and Amortization	APCo		I&M		OPCo			PSO		SWEPCo
	(in thousands)
Depreciation and Amortization of Property, Plant and Equipment	$	383,314	$	199,249	$	188,336		$	99,670	$	183,253
Amortization of Certain Securitized Assets	—		—		43,467			—		—
Amortization of Regulatory Assets and Liabilities	17,568		947		(18,134		)	1,307		1,881
Total Depreciation and Amortization	$	400,882	$	200,196	$	213,669		$	100,977	$	185,134

2013
Depreciation and Amortization	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Depreciation and Amortization of Property, Plant and Equipment	$	334,251	$	175,852	$	358,023	$	94,533	$	177,352
Amortization of Certain Securitized Assets	—		—		19,992		—		—
Amortization of Regulatory Assets and Liabilities	8,392		1,875		4,555		1,134		1,899
Total Depreciation and Amortization	$	342,643	$	177,727	$	382,570	$	95,667	$	179,251

2012
Depreciation and Amortization	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Depreciation and Amortization of Property, Plant and Equipment	$	322,122	$	143,674	$	495,854	$	90,642	$	136,874
Amortization of Certain Securitized Assets	—		—		—		—		—
Amortization of Regulatory Assets and Liabilities	22,171		2,945		15,216		4,538		1,904
Total Depreciation and Amortization	$	344,293	$	146,619	$	511,070	$	95,180	$	138,778

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2. NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

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

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

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

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

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3.  COMPREHENSIVE INCOME

Presentation of Comprehensive Income

The following tables provide the components of changes in AOCI for the years ended December 31, 2014 and 2013.  All amounts in the following tables are presented net of related income taxes.

APCo
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2014
	Cash Flow Hedges					Pension and OPEB
	Commodity			Interest Rate and Foreign Currency		Amortization of Deferred Costs			Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2013	$	94		$	3,090	$	20,551		$	(20,784	)	$	2,951
Change in Fair Value Recognized in AOCI	1,686			—		—			2,702			4,388
Amounts Reclassified from AOCI	(1,780		)	806		(1,333		)	—			(2,307		)
Net Current Period Other Comprehensive Income (Loss)	(94		)	806		(1,333		)	2,702			2,081
Balance in AOCI as of December 31, 2014	$	—		$	3,896	$	19,218		$	(18,082	)	$	5,032

APCo
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2013
	Cash Flow Hedges					Pension and OPEB
	Commodity			Interest Rate and Foreign Currency		Amortization of Deferred Costs		Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2012	$	(644	)	$	2,077	$	19,118	$	(50,449	)	$	(29,898	)
Change in Fair Value Recognized in AOCI	768			—		—		29,665			30,433
Amounts Reclassified from AOCI	(30		)	1,013		1,433		—			2,416
Net Current Period Other Comprehensive Income	738			1,013		1,433		29,665			32,849
Balance in AOCI as of December 31, 2013	$	94		$	3,090	$	20,551	$	(20,784	)	$	2,951

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I&M
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2014
	Cash Flow Hedges						Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Amortization of Deferred Costs		Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2013	$	46		$	(15,976	)	$	4,901	$	(4,480	)	$	(15,509	)
Change in Fair Value Recognized in AOCI	1,130			—			—		(546		)	584
Amounts Reclassified from AOCI	(1,176		)	1,570			171		—			565
Net Current Period Other Comprehensive Income (Loss)	(46		)	1,570			171		(546		)	1,149
Balance in AOCI as of December 31, 2014	$	—		$	(14,406	)	$	5,072	$	(5,026	)	$	(14,360	)

I&M
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2013
	Cash Flow Hedges						Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Amortization of Deferred Costs		Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2012	$	(446	)	$	(19,647	)	$	4,201	$	(12,991	)	$	(28,883	)
Change in Fair Value Recognized in AOCI	477			2,249			—		8,511			11,237
Amounts Reclassified from AOCI	15			1,422			700		—			2,137
Net Current Period Other Comprehensive Income	492			3,671			700		8,511			13,374
Balance in AOCI as of December 31, 2013	$	46		$	(15,976	)	$	4,901	$	(4,480	)	$	(15,509	)

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OPCo
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2014
	Cash Flow Hedges						Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Amortization of Deferred Costs		Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2013	$	105		$	6,974		$	58,447	$	(58,447	)	$	7,079
Change in Fair Value Recognized in AOCI	—			—			—		—			—
Amounts Reclassified from AOCI	(105		)	(1,372		)	—		—			(1,477		)
Net Current Period Other Comprehensive Loss	(105		)	(1,372		)	—		—			(1,477		)
Balance in AOCI as of December 31, 2014	$	—		$	5,602		$	58,447	$	(58,447	)	$	5,602

OPCo
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2013
	Cash Flow Hedges						Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Amortization of Deferred Costs		Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2012	$	(912	)	$	8,095		$	45,938	$	(218,846	)	$	(165,725	)
Change in Fair Value Recognized in AOCI	982			—			—		65,418			66,400
Amounts Reclassified from AOCI	22			(1,359		)	12,509		—			11,172
Net Current Period Other Comprehensive Income (Loss)	1,004			(1,359		)	12,509		65,418			77,572
Distribution of Cook Coal Terminal to Parent	—			—			—		19,652			19,652
Distribution of OPCo Generation to Parent	13			238			—		75,329			75,580
Balance in AOCI as of December 31, 2013	$	105		$	6,974		$	58,447	$	(58,447	)	$	7,079

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PSO
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2014
	Cash Flow Hedges
	Commodity			Interest Rate and Foreign Currency			Total
	(in thousands)
Balance in AOCI as of December 31, 2013	$	57		$	5,701		$	5,758
Change in Fair Value Recognized in AOCI	—			—			—
Amounts Reclassified from AOCI	(57		)	(758		)	(815		)
Net Current Period Other Comprehensive Loss	(57		)	(758		)	(815		)
Balance in AOCI as of December 31, 2014	$	—		$	4,943		$	4,943

PSO
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2013
	Cash Flow Hedges
	Commodity			Interest Rate and Foreign Currency			Total
	(in thousands)
Balance in AOCI as of December 31, 2012	$	21		$	6,460		$	6,481
Change in Fair Value Recognized in AOCI	68			—			68
Amounts Reclassified from AOCI	(32		)	(759		)	(791		)
Net Current Period Other Comprehensive Income (Loss)	36			(759		)	(723		)
Balance in AOCI as of December 31, 2013	$	57		$	5,701		$	5,758

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SWEPCo
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2014
	Cash Flow Hedges						Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Amortization of Deferred Costs			Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2013	$	66		$	(13,304	)	$	4,523		$	271		$	(8,444	)
Change in Fair Value Recognized in AOCI	—			—			—			(285		)	(285		)
Amounts Reclassified from AOCI	(66		)	2,268			(939		)	—			1,263
Net Current Period Other Comprehensive Income (Loss)	(66		)	2,268			(939		)	(285		)	978
Balance in AOCI as of December 31, 2014	$	—		$	(11,036	)	$	3,584		$	(14	)	$	(7,466	)

SWEPCo
Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2013
	Cash Flow Hedges						Pension and OPEB
	Commodity			Interest Rate and Foreign Currency			Amortization of Deferred Costs			Changes in Funded Status			Total
	(in thousands)
Balance in AOCI as of December 31, 2012	$	22		$	(15,571	)	$	4,778		$	(7,089	)	$	(17,860	)
Change in Fair Value Recognized in AOCI	83			—			—			7,360			7,443
Amounts Reclassified from AOCI	(39		)	2,267			(255		)	—			1,973
Net Current Period Other Comprehensive Income (Loss)	44			2,267			(255		)	7,360			9,416
Balance in AOCI as of December 31, 2013	$	66		$	(13,304	)	$	4,523		$	271		$	(8,444	)

265

Reclassifications from Accumulated Other Comprehensive Income

The following tables provide details of reclassifications from AOCI for the years ended December 31, 2014 and 2013.  The amortization of pension and OPEB AOCI components are included in the computation of net periodic pension and OPEB costs.  See Note 8 for additional details.

APCo
Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Years Ended December 31, 2014 and 2013
	Amount of (Gain) Loss Reclassified from AOCI
	Years Ended December 31,
	2014			2013
Gains and Losses on Cash Flow Hedges	(in thousands)
Commodity:
Electric Generation, Transmission and Distribution Revenues	$	—		$	(80	)
Purchased Electricity for Resale	(527		)	90
Other Operation Expense	(10		)	(37		)
Maintenance Expense	(20		)	(31		)
Property, Plant and Equipment	(17		)	(35		)
Regulatory Assets/(Liabilities), Net (a)	(2,165		)	47
Subtotal – Commodity	(2,739		)	(46		)
Interest Rate and Foreign Currency:
Interest Expense	1,241			1,559
Subtotal – Interest Rate and Foreign Currency	1,241			1,559
Reclassifications from AOCI, before Income Tax (Expense) Credit	(1,498		)	1,513
Income Tax (Expense) Credit	(524		)	530
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(974		)	983
Pension and OPEB
Amortization of Prior Service Cost (Credit)	(5,129		)	(5,129		)
Amortization of Actuarial (Gains)/Losses	3,079			7,334
Reclassifications from AOCI, before Income Tax (Expense) Credit	(2,050		)	2,205
Income Tax (Expense) Credit	(717		)	772
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(1,333		)	1,433
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit	$	(2,307	)	$	2,416

266

I&M
Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Years Ended December 31, 2014 and 2013
	Amount of (Gain) Loss Reclassified from AOCI
	Years Ended December 31,
	2014			2013
Gains and Losses on Cash Flow Hedges	(in thousands)
Commodity:
Electric Generation, Transmission and Distribution Revenues	$	—		$	(155	)
Purchased Electricity for Resale	(812		)	219
Other Operation Expense	(7		)	(23		)
Maintenance Expense	(7		)	(14		)
Property, Plant and Equipment	(10		)	(20		)
Regulatory Assets/(Liabilities), Net (a)	(973		)	16
Subtotal – Commodity	(1,809		)	23
Interest Rate and Foreign Currency:
Interest Expense	2,413			2,188
Subtotal – Interest Rate and Foreign Currency	2,413			2,188
Reclassifications from AOCI, before Income Tax (Expense) Credit	604			2,211
Income Tax (Expense) Credit	210			774
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	394			1,437
Pension and OPEB
Amortization of Prior Service Cost (Credit)	(794		)	(794		)
Amortization of Actuarial (Gains)/Losses	1,056			1,872
Reclassifications from AOCI, before Income Tax (Expense) Credit	262			1,078
Income Tax (Expense) Credit	91			378
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	171			700
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit	$	565		$	2,137

267

OPCo
Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Years Ended December 31, 2014 and 2013
	Amount of (Gain) Loss Reclassified from AOCI
	Years Ended December 31,
	2014			2013
Gains and Losses on Cash Flow Hedges	(in thousands)
Commodity:
Electric Generation, Transmission and Distribution Revenues	$	—		$	(415	)
Purchased Electricity for Resale	—			576
Other Operation Expense	(11		)	(56		)
Maintenance Expense	(11		)	(26		)
Property, Plant and Equipment	(18		)	(45		)
Regulatory Assets/(Liabilities), Net (a)	(122		)	—
Subtotal – Commodity	(162		)	34
Interest Rate and Foreign Currency:
Depreciation and Amortization Expense	(13		)	7
Interest Expense	(2,098		)	(2,098		)
Subtotal – Interest Rate and Foreign Currency	(2,111		)	(2,091		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(2,273		)	(2,057		)
Income Tax (Expense) Credit	(796		)	(720		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(1,477		)	(1,337		)
Pension and OPEB
Amortization of Prior Service Cost (Credit)	—			(5,840		)
Amortization of Actuarial (Gains)/Losses	—			25,085
Reclassifications from AOCI, before Income Tax (Expense) Credit	—			19,245
Income Tax (Expense) Credit	—			6,736
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	—			12,509
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit	$	(1,477	)	$	11,172

268

PSO
Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Years Ended December 31, 2014 and 2013
	Amount of (Gain) Loss Reclassified from AOCI
	Years Ended December 31,
	2014			2013
Gains and Losses on Cash Flow Hedges	(in thousands)
Commodity:
Other Operation Expense	$	(8	)	$	(25	)
Maintenance Expense	(9		)	(10		)
Property, Plant and Equipment	(13		)	(15		)
Regulatory Assets/(Liabilities), Net (a)	(58		)	—
Subtotal – Commodity	(88		)	(50		)
Interest Rate and Foreign Currency:
Interest Expense	(1,167		)	(1,167		)
Subtotal – Interest Rate and Foreign Currency	(1,167		)	(1,167		)
Reclassifications from AOCI, before Income Tax (Expense) Credit	(1,255		)	(1,217		)
Income Tax (Expense) Credit	(440		)	(426		)
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit	$	(815	)	$	(791	)

269

SWEPCo
Reclassifications from Accumulated Other Comprehensive Income (Loss)
For the Years Ended December 31, 2014 and 2013
	Amount of (Gain) Loss Reclassified from AOCI
	Years Ended December 31,
	2014			2013
Gains and Losses on Cash Flow Hedges	(in thousands)
Commodity:
Other Operation Expense	$	(13	)	$	(29	)
Maintenance Expense	(10		)	(15		)
Property, Plant and Equipment	(11		)	(17		)
Regulatory Assets/(Liabilities), Net (a)	(67		)	—
Subtotal – Commodity	(101		)	(61		)
Interest Rate and Foreign Currency:
Interest Expense	3,488			3,488
Subtotal – Interest Rate and Foreign Currency	3,488			3,488
Reclassifications from AOCI, before Income Tax (Expense) Credit	3,387			3,427
Income Tax (Expense) Credit	1,185			1,199
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	2,202			2,228
Pension and OPEB
Amortization of Prior Service Cost (Credit)	(1,912		)	(1,785		)
Amortization of Actuarial (Gains)/Losses	468			1,393
Reclassifications from AOCI, before Income Tax (Expense) Credit	(1,444		)	(392		)
Income Tax (Expense) Credit	(505		)	(137		)
Reclassifications from AOCI, Net of Income Tax (Expense) Credit	(939		)	(255		)
Total Reclassifications from AOCI, Net of Income Tax (Expense) Credit	$	1,263		$	1,973

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

270

The following table provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets and the reasons for changes in cash flow hedges for the year ended December 31, 2012.  All amounts in the following table are presented net of related income taxes.

Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
Year Ended December 31, 2012
Commodity	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance in AOCI as of December 31, 2011	$	(1,309	)	$	(819	)	$	(1,748	)	$	(69	)	$	(62	)
Changes in Fair Value Recognized in AOCI	(1,310		)	(987		)	(2,002		)	104			100
Amount of (Gain) or Loss Reclassified from AOCI to Statement of Income/within Balance Sheet:
Electric Generation, Transmission and Distribution Revenues	(16		)	(43		)	(109		)	—			—
Purchased Electricity for Resale	440			1,151			3,002			—			—
Other Operation Expense	(25		)	(14		)	(35		)	(14		)	(11		)
Maintenance Expense	—			(2		)	(5		)	1			—
Property, Plant and Equipment	(14		)	(10		)	(15		)	(1		)	(5		)
Regulatory Assets (a)	1,590			278			—			—			—
Balance in AOCI as of December 31, 2012	$	(644	)	$	(446	)	$	(912	)	$	21		$	22
Interest Rate and Foreign Currency	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance in AOCI as of December 31, 2011	$	1,024		$	(14,465	)	$	9,454		$	7,218		$	(15,462	)
Changes in Fair Value Recognized in AOCI	—			(5,777		)	—			—			(2,778		)
Amount of (Gain) or Loss Reclassified from AOCI to Statement of Income/within Balance Sheet:
Depreciation and Amortization Expense	—			—			4			—			—
Interest Expense	1,053			595			(1,363		)	(758		)	2,669
Balance in AOCI as of December 31, 2012	$	2,077		$	(19,647	)	$	8,095		$	6,460		$	(15,571	)
Total – Cash Flow Hedges	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance in AOCI as of December 31, 2011	$	(285	)	$	(15,284	)	$	7,706		$	7,149		$	(15,524	)
Changes in Fair Value Recognized in AOCI	(1,310		)	(6,764		)	(2,002		)	104			(2,678		)
Amount of (Gain) or Loss Reclassified from AOCI to Statement of Income/within Balance Sheet:
Electric Generation, Transmission and Distribution Revenues	(16		)	(43		)	(109		)	—			—
Purchased Electricity for Resale	440			1,151			3,002			—			—
Other Operation Expense	(25		)	(14		)	(35		)	(14		)	(11		)
Maintenance Expense	—			(2		)	(5		)	1			—
Depreciation and Amortization Expense	—			—			4			—			—
Interest Expense	1,053			595			(1,363		)	(758		)	2,669
Property, Plant and Equipment	(14		)	(10		)	(15		)	(1		)	(5		)
Regulatory Assets (a)	1,590			278			—			—			—
Balance in AOCI as of December 31, 2012	$	1,433		$	(20,093	)	$	7,183		$	6,481		$	(15,549	)

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

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4.  RATE MATTERS

The Registrant Subsidiaries are involved in rate and regulatory proceedings at the FERC and their state commissions.  Rate matters can have a material impact on net income, cash flows and possibly financial condition.  The Registrant Subsidiaries’ recent significant rate orders and pending rate filings are addressed in this note.

OPCo Rate Matters

Ohio Electric Security Plan Filings

2009 – 2011 ESP

The PUCO issued an order in March 2009 that modified and approved the ESP which established rates at the start of the April 2009 billing cycle through 2011. OPCo collected the 2009 annualized revenue increase over the last nine months of 2009. The order also provided a phase-in FAC, which was authorized to be recovered through a non-bypassable surcharge over the period 2012 through 2018. The PUCO’s March 2009 order was appealed to the Supreme Court of Ohio, which issued an opinion and remanded certain issues back to the PUCO.

In October 2011, the PUCO issued an order in the remand proceeding, which was subsequently appealed. In February 2014, the Supreme Court of Ohio affirmed the PUCO’s decision and rejected all appeals.

In August 2012, the PUCO issued an order in a separate proceeding which implemented a PIRR to recover deferred fuel costs in rates beginning September 2012. The PUCO ruled that carrying charges should be calculated without an offset for accumulated deferred income taxes and that a long-term debt rate should be applied when collections begin. In November 2012, OPCo appealed that PUCO order to the Supreme Court of Ohio claiming a long-term debt rate modified the previously adjudicated 2009 - 2011 ESP order, which granted a weighted average cost of capital (WACC) rate. In November 2012, the IEU and the Ohio Consumers' Counsel (OCC) also filed appeals of the PUCO decision which principally argued that the PUCO should have reduced the deferred fuel balance to reflect the prior “improper” collection of POLR revenues. IEU's appeal also argued that carrying costs should be reduced due to an accumulated deferred income tax credit which, as of December 31, 2014, could reduce carrying costs by $26 million including $14 million of unrecognized equity carrying costs. In December 2014, IEU filed a motion to withdraw its argument related to the collection of POLR revenues. In January 2015, the OCC filed a request to dismiss its appeal altogether. Oral arguments at the Supreme Court of Ohio were held in February 2015. OPCo argued for a remand to reinstate the WACC carrying charges initially approved by the PUCO and challenged the IEU argument that the carrying charges should be reduced due to an accumulated deferred income tax credit. A decision from the Supreme Court of Ohio is pending.

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

June 2012 – May 2015 ESP Including Capacity Charge

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

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

272

As part of the August 2012 ESP order, the PUCO established a non-bypassable RSR, effective September 2012.  The RSR was collected from customers at $3.50/MWh through May 2014 and is currently collected at $4.00/MWh for the period June 2014 through May 2015, with $1.00/MWh applied to the recovery of deferred capacity costs.  As of December 31, 2014, OPCo’s incurred deferred capacity costs balance of $422 million, including debt carrying costs, was recorded in regulatory assets on the balance sheet.

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

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

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

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

Proposed June 2015 – May 2018 ESP

In December 2013, OPCo filed an application with the PUCO to approve an ESP that includes proposed rate adjustments and the continuation and modification of certain existing riders, including the Distribution Investment Rider (DIR), effective June 2015 through May 2018. The proposal included a return on common equity of 10.65% on capital costs for certain riders and estimates an average decrease in rates of 9% over the three-year term of the plan for customers who receive their RPM capacity and energy auction-based generation through OPCo. The proposal also included a purchased power agreement (PPA) rider that would allow retail customers to receive a rate stabilizing charge or credit by hedging market-based prices with a cost-based purchase power agreement. The PPA would initially be based upon the OVEC contractual entitlement and could, upon further approval, be expanded to include other contracts involving other Ohio legacy generation assets. In May 2014, intervenors and the PUCO staff filed testimony that provided various recommendations including the rejection and/or modification of various riders, including the DIR and the proposed PPA. Hearings at the PUCO in the ESP case were held in June 2014.

273

In July 2014, OPCo submitted a separate application to continue the RSR established in the June 2012 - May 2015 ESP to collect the unrecovered portion of the deferred capacity costs at the rate of $4.00/MWh until the balance of the capacity deferrals has been collected. In December 2014, the PUCO staff and intervenors filed comments related to the RSR application. The PUCO staff recommended approval of the application. Intervenors objected to the application and recommended approval of a pending motion to dismiss.

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

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

Significantly Excessive Earnings Test Filings

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

In March 2014, the PUCO approved a stipulation agreement between OPCo and the PUCO staff that there were no significantly excessive earnings in 2011 for CSPCo or OPCo. In May 2014 and December 2014, the PUCO approved stipulation agreements between OPCo and the PUCO staff that there were no significantly excessive earnings for OPCo in 2012 and 2013, respectively.

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

Corporate Separation

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

Storm Damage Recovery Rider (SDRR)

In December 2012, OPCo submitted an application with the PUCO to establish initial SDRR rates to recover 2012 incremental storm distribution expenses. In April 2014, the PUCO approved a stipulation agreement to recover $55 million over a 12-month period. The agreement also provided that carrying charges using a long-term debt rate will be assessed from April 2013 until recovery begins, but no additional carrying charges will accrue during the actual recovery period. Compliance tariffs were filed with the PUCO and new rates were implemented in April 2014. In May 2014, the PUCO upheld the settlement agreement on rehearing.

2009 Fuel Adjustment Clause Audit

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

274

In August 2012, intervenors filed an appeal with the Supreme Court of Ohio claiming the settlement credit ordered by the PUCO should have reflected the remaining gain not already flowed through the FAC, with carrying charges. In September 2014, the Supreme Court of Ohio upheld the PUCO order. A review of the coal reserve valuation by an outside consultant is still pending. If the PUCO ultimately determines that additional amounts should benefit ratepayers as a result of the consultant’s review of the coal reserve valuation, it could reduce future net income and cash flows and impact financial condition.

2010 and 2011 Fuel Adjustment Clause Audits

The PUCO-selected outside consultant issued its 2010 and 2011 FAC audit reports which included a recommendation that the PUCO reexamine the carrying costs on the deferred FAC balance and determine whether the carrying costs on the balance should be net of accumulated income taxes with the use of a WACC. In May 2014, the PUCO issued an order that generally approved OPCo's 2010-2011 fuel costs and rejected the auditor recommendation to adjust the WACC carrying charges related to accumulated deferred income taxes. Additionally, the PUCO requested further review related to an affiliate barging agreement and the modification of certain fuel procurement processes and practices.Further, the order provided for the auditor to address any remaining concerns in the next audit report, as deemed necessary. In July 2014, the PUCO issued an order that denied all requests for rehearing.

2012 and 2013 Fuel Adjustment Clause Audits

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

Ormet

Ormet, a large aluminum company, had a contract to purchase power from OPCo through 2018. In February 2013, Ormet filed for bankruptcy and subsequently shut down operations in October 2013. Based upon previous PUCO rulings providing rate assistance to Ormet, the PUCO is expected to permit OPCo to recover unpaid Ormet amounts through the Economic Development Rider (EDR), except where recovery from ratepayers is limited to $20 million related to previously deferred payments from Ormet’s October and November 2012 power bills. In February 2014, a stipulation agreement between OPCo and Ormet was filed with the PUCO. The stipulation recommended approval of OPCo’s right to fully recover approximately $49 million of foregone revenues through the EDR. Intervenor comments were also filed objecting to full recovery of these foregone revenues. In March 2014, the PUCO issued an order in OPCo’s EDR filing allowing OPCo to include $39 million of Ormet-related foregone revenues in the EDR effective April 2014. The order stated that if the stipulation agreement between OPCo and Ormet is subsequently adopted by the PUCO, OPCo could file an application to modify the EDR rate for the remainder of the period requesting recovery of the remaining $10 million of Ormet deferrals which, as of December 31, 2014, is recorded in regulatory assets on the balance sheet. In April 2014, an intervenor filed testimony objecting to $5 million of the remaining foregone revenues. A hearing at the PUCO related to the stipulation agreement was held in May 2014.

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

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

275

Ohio IGCC Plant

In 2005, OPCo filed an application with the PUCO seeking authority to recover costs of building and operating an IGCC power plant. As of December 31, 2014, OPCo has collected $24 million in pre-construction costs authorized in a 2006 PUCO order. Intervenors filed motions and comments with the PUCO requesting that OPCo refund all collected pre-construction costs to Ohio ratepayers with interest. In December 2014, a stipulation agreement between OPCo, the PUCO staff and intervenors was filed at the PUCO. The parties to the stipulation agreement proposed that OPCo will refund $13 million to its customers. In February 2015, the PUCO approved the stipulation agreement.

SWEPCo Rate Matters

2012 Texas Base Rate Case

In July 2012, SWEPCo filed a request with the PUCT to increase annual base rates primarily due to the completion of the Turk Plant. In October 2013, the PUCT issued an order affirming the prudence of the Turk Plant but determined that the Turk Plant’s Texas jurisdictional capital cost cap established in a previous Certificate of Convenience and Necessity case also limited SWEPCo’s recovery of AFUDC in addition to limits on its recovery of cash construction costs. Additionally, the PUCT deferred consideration of the requested increase in depreciation expense related to the change in the 2016 retirement date of the Welsh Plant, Unit 2. As of December 31, 2014, the net book value of Welsh Plant, Unit 2 was $84 million, before cost of removal, including materials and supplies inventory and CWIP. See “Regulated Generating Units to be Retired Before or During 2016” section of Note 5.

Upon rehearing in January 2014, the PUCT reversed its initial ruling and determined that AFUDC was excluded from the Turk Plant’s Texas jurisdictional capital cost cap. As a result, in the fourth quarter of 2013, SWEPCo reversed $114 million of previously recorded regulatory disallowances. The resulting annual base rate increase is approximately $52 million. In March 2014, the PUCT issued an order related to the January 2014 PUCT ruling and in April 2014, this order became final. In May 2014, intervenors filed appeals of that order with the Texas District Court. In June 2014, SWEPCo intervened in those appeals and filed initial responses.

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

Texas Transmission Cost Recovery Factor Filing

In May 2014, SWEPCo filed an application with the PUCT to implement its transmission cost recovery factor (TCRF) requesting additional annual revenue of $15 million. The TCRF is designed to recover increases from the amounts included in SWEPCo’s Texas retail base rates for transmission infrastructure improvement costs and wholesale transmission charges under a tariff approved by the FERC. SWEPCo’s application included Turk Plant transmission-related costs. In November 2014, the PUCT issued an order approving a proposal for decision, issued by an Administrative Law Judge in October 2014, that recommended approval of SWEPCo's application with an increase in annual revenue of $14 million. In December 2014, the PUCT order became final and TCRF rates were implemented.

2012 Louisiana Formula Rate Filing

In 2012, SWEPCo initiated a proceeding to establish new formula base rates in Louisiana, including recovery of the Louisiana jurisdictional share (approximately 29%) of the Turk Plant. In February 2013, a settlement was filed and approved by the LPSC. The settlement increased Louisiana total rates by approximately $2 million annually, effective March 2013, which consisted of an increase in base rates of approximately $85 million annually offset by a decrease in fuel and other rates of approximately $83 million annually.  The March 2013 base rates are based on a 10% return on common equity and cost recovery of the Louisiana jurisdictional share of the Turk Plant and Stall Unit. The rates are subject to refund based on the staff review of the cost of service and the prudency review of the Turk Plant. The

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settlement also provided that the LPSC review base rates in 2014 and 2015 and that SWEPCo recover non-fuel Turk Plant costs and a full weighted-average cost of capital return on the prudently incurred Turk Plant investment in jurisdictional rate base, effective January 2013. In December 2014, the LPSC approved a settlement agreement related to the staff review of the cost of service. The settlement agreement reduced the requested revenue increase by $3 million, primarily due to the timing of both the allowed recovery of certain existing regulatory assets and the establishment of a regulatory asset for certain previously expensed costs. If the LPSC orders refunds based upon the pending prudence review of the Turk Plant investment, it could reduce future net income and cash flows and impact financial condition.

2014 Louisiana Formula Rate Filing

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

Welsh Plant, Units 1 and 3 - Environmental Projects

To comply with pending Federal EPA regulations, SWEPCo is currently constructing environmental control projects to meet mercury and air toxics standards for Welsh Plant, Units 1 and 3 at a cost of approximately $410 million, excluding AFUDC.  Management currently estimates that the total environmental projects to be completed through 2020 for Welsh Plant, Units 1 and 3 will cost approximately $600 million, excluding AFUDC.  As of December 31, 2014, SWEPCo has incurred costs of $164 million and has remaining contractual construction obligations of $108 million related to these projects.  SWEPCo will seek recovery of these project costs from customers through filings at the state commissions and the FERC. As of December 31, 2014, the net book value of Welsh Plant, Units 1 and 3 was $388 million, before cost of removal, including materials and supplies inventory and CWIP.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition. 

APCo Rate Matters

Plant Transfer

APCo and WPCo provide retail electric service at bundled rates approved by the WVPSC, with rates set on a cost-of-service basis, to their respective customers. West Virginia generally allows for timely recovery of fuel costs through an expanded net energy cost which trues-up to actual expenses. In March 2014, APCo and WPCo filed a request with the WVPSC for approval to transfer at net book value to WPCo a one-half interest in the Mitchell Plant, comprising 780 MW of average annual generating capacity presently owned by AGR. In April 2014, APCo and WPCo filed testimony that supported their request and proposed a base rate surcharge of $113 million, to be offset by an equal reduction in the ENEC revenues, to be effective upon the transfer of the Mitchell Plant to WPCo until APCo's West Virginia base rates are updated. See the "2014 West Virginia Base Rate Case" below. In June 2014, the FERC issued an order approving a request by AGR and WPCo to transfer AGR’s one-half interest in the Mitchell Plant to WPCo.

In October 2014, a stipulation agreement between APCo, WPCo, the WVPSC staff and intervenors in the case was filed with the WVPSC. The stipulation agreement recommended approval for WPCo to acquire, at net book value, the one-half interest in the Mitchell Plant, excluding certain assets, and to pay AGR $20 million upon transfer, which WPCo will record as a regulatory asset, include in rate base and recover over the life of the plant. Additionally, the agreement stated that 82.5% of the costs associated with the acquired interest will be reflected in rates effective from the date of the transfer via a surcharge with an offset in ENEC revenues of $93 million. The remaining 17.5% of the costs associated with the acquired interest is to be included in rates by January 2020. The agreement also proposed

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that WPCo share the energy margins for 82.5% of the plant’s output with ratepayers and that WPCo retain all of the energy margins from sales into the wholesale market on the remaining 17.5%, to offset fixed costs associated with this portion, until the remaining portion is included in rates. In December 2014, the WVPSC issued an order that approved the settlement agreement, subject to certain modifications related to 82.5% of the energy and capacity margin sharing. The WVPSC determined that the sharing mechanism that was proposed is reasonable and will be adopted provided the result of the sharing mechanism will be adjusted, if necessary, so that the sharing mechanism does not result in a net cost to ratepayers that exceeds the actual variable cost of generation. In January 2015, the transfer of the one-half interest in the Mitchell Plant to WPCo was completed.

2014 Virginia Biennial Base Rate Case

In March 2014, APCo filed a biennial generation and distribution base rate case with the Virginia SCC. In accordance with a Virginia statute, APCo did not request a change in base rates as its Virginia retail combined rate of return on common equity for 2012 and 2013 was within the statutory range of the approved return on common equity of 10.9%. The filing included a request to decrease generation depreciation rates, effective February 2015, primarily due to changes in the expected service lives of various generating units and the extended recovery through 2040 of the net book value of certain planned 2015 plant retirements. Additionally, the filing included a request to amortize $7 million annually for two years, beginning February 2015, related to IGCC and other deferred costs. APCo also requested approval to amortize $38 million related to an accumulated deferred Virginia state income tax (ADVSIT) liability over 20 years, beginning February 2015.

In November 2014, the Virginia SCC issued an order concluding that APCo's adjusted earned rate of return on common equity for 2012 and 2013, reflecting their ordered adjustments, was above the allowed threshold. The order included (a) a $6 million refund to customers for the years 2012 through 2013, (b) the write-off of $10 million of IGCC pre-construction costs, (c) approval to amortize a $38 million ADVSIT liability over 20 years, beginning February 2015 and (d) no change to generation depreciation rates with rates to be reviewed again in the next biennial rate case. The order also approved a new return on common equity of 9.7% effective for 2014 and 2015. Management believes its financial statements adequately address the impact of this order for 2014.

The Virginia SCC did not rule on a Virginia SCC staff recommendation to write-down certain costs, for ratemaking purposes, for the biennial period based on APCo’s earnings within the statutory equity range. In January 2015, the Virginia SCC initiated a separate proceeding to address the proper treatment of APCo’s authorized regulatory assets. As of December 31, 2014, APCo’s authorized regulatory assets under review in the separate proceeding, based upon the Virginia SCC staff recommendation, are estimated to be $15 million. In February 2015, initial briefs related to this proceeding were filed by various parties. If any of these costs, or any additional costs that may be subject to review, are not recoverable, it could reduce future net income and cash flows and impact financial condition.

Potential New Virginia Legislation Affecting Biennial Reviews

In February 2015, amendments to Virginia law governing the regulation of investor-owned electric utilities were approved by the Virginia General Assembly and have been sent to the Governor. If these amendments are enacted, APCo’s existing generation and distribution base rates would freeze until after the Virginia SCC rules on APCo’s next biennial review, which APCo would file in March 2020 for the 2018 and 2019 test years. These amendments would also preclude the Virginia SCC from performing biennial reviews of APCo’s earnings for the years 2014 through 2017. Management continues to monitor this potential new legislation in Virginia.

2014 West Virginia Base Rate Case

In June 2014, APCo filed a request with the WVPSC to increase annual base rates by $156 million, based upon a 10.62% return on common equity, to be effective in the second quarter of 2015.  The filing included a request to increase generation depreciation rates primarily due to the increase in plant investment and changes in the expected service lives of various generating units.  The filing also requested recovery of $77 million over five years related to 2012 West Virginia storm costs, IGCC and other deferred costs.  In addition to the base rate request, the filing also included

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a request to implement a rider of approximately $38 million annually to recover vegetation management costs, including a return on capital investment.  In October 2014, the WVPSC approved APCo's motion to revise the procedural schedule which included a request to change the date of implementation of the new rates to May 2015.  In December 2014 and January 2015, intervenors filed testimony which proposed total annual revenue increases ranging from $30 million to $51 million based upon returns on common equity ranging from 9% to 10% and regulatory asset disallowances ranging from $6 million to $8 million.  Additionally, other intervenors proposed that the revenue requirement be based on a return on common equity of 8.7% and that $77 million of regulatory assets be disallowed.  Intervenors also recommended a disallowance of approximately $38 million related to the December 2013 transfer of OPCo's two-thirds interest in the Amos Plant, Unit 3 to APCo.  Hearings at the WVPSC were held in January 2015.  If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2013 Virginia Transmission Rate Adjustment Clause (Transmission RAC)

In December 2013, APCo filed with the Virginia SCC to increase its transmission RAC revenues by $50 million annually to be effective May 2014.  In March 2014, the Virginia SCC issued an order approving a stipulation agreement between APCo and the Virginia SCC staff increasing the transmission RAC revenues by $49 million annually, subject to true-up, effective May 2014. Pursuant to the order, the Virginia SCC staff will audit APCo’s transmission RAC under-recoveries and report its findings and recommendations in testimony in APCo’s next transmission RAC proceeding in 2015.

WPCo Merger with APCo

In December 2011, APCo and WPCo filed an application with the WVPSC requesting authority to merge WPCo into APCo. In December 2014, the WVPSC issued an order that dismissed the docket related to the merger of WPCo into APCo. See the “Plant Transfer” section of APCo Rate Matters.

PSO Rate Matters

2014 Oklahoma Base Rate Case

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

In April and May 2014, testimony was filed by the OCC staff and intervenors with recommendations that included adjustments to annual base rates ranging from an increase of $16 million to a reduction of $22 million, primarily based upon the determination of depreciation rates and a return on common equity between 9.18% and 9.5%. Additionally, the recommendations did not support the advanced metering rider or the expansion of the transmission rider. In May 2014, PSO filed rebuttal testimony that included an updated annual base rate increase request of $42 million to reflect certain updated costs.

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

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in the stipulation agreement. A hearing at the OCC was held in July 2014. In October 2014, the Administrative Law Judge (ALJ) recommended approval of the stipulation agreement and interim rates were implemented in November 2014, subject to refund. In November 2014, intervenors opposing the stipulation agreement filed exceptions to the ALJ's report and oral arguments were held at the OCC in December 2014. An order is anticipated in the first quarter of 2015. If the OCC were to disallow any portion of this settlement agreement, it could reduce future net income and cash flows and impact financial condition.

I&M Rate Matters

2011 Indiana Base Rate Case

In February 2013, the IURC issued an order that granted an $85 million annual increase in base rates based upon a return on common equity of 10.2%and adjusted the authorized annual increase in base rates to $92 million in March 2013. In April 2014, the Indiana Office of Utility Consumer Counselor (OUCC) filed an appeal to the Indiana Supreme Court related to the inclusion of a prepaid pension asset in rate base, which is approximately $7 million in annual revenues. In August 2014, the Indiana Supreme Court denied the appeal filed by the OUCC.

Cook Plant Life Cycle Management Project (LCM Project)

In 2012, I&M filed a petition with the IURC and the MPSC for approval of the LCM Project, which consists of a group of capital projects to ensure the safe and reliable operations of the Cook Plant through its licensed life (2034 for Unit 1 and 2037 for Unit 2). The estimated cost of the LCM Project is $1.2 billion to be incurred through 2018, excluding AFUDC.  As of December 31, 2014, I&M has incurred costs of $550 million related to the LCM Project, including AFUDC.

In July 2013, the IURC approved I&M’s proposed project with the exception of an estimated $23 million related to certain items that might accommodate a future potential power uprate which the IURC stated I&M could seek recovery of in a subsequent base rate case. I&M will recover approved costs through an LCM rider which will be determined in semi-annual proceedings. The IURC authorized deferral accounting for costs incurred related to certain projects effective January 2012 to the extent such costs are not reflected in rates. In May 2014, the IURC issued a final order approving the LCM rider rates that were implemented in January 2014.

In January 2013, the MPSC approved a Certificate of Need (CON) for the LCM Project and authorized deferral accounting for costs incurred related to the approved projects effective January 2013 until these costs are included in rates. In February 2013, intervenors filed appeals with the Michigan Court of Appeals objecting to the issuance of the CON as well as the amount of the CON related to the LCM Project. In October 2014, the Michigan Court of Appeals issued an order that affirmed the MPSC decision in part, but reversed the portion of the MPSC decision related to certain costs. The order indicated that I&M could recover those costs in a future Michigan base case if they can show that the costs were reasonable and prudent.

If I&M is not ultimately permitted to recover its LCM Project costs, it could reduce future net income and cash flows and impact financial condition.

Tanners Creek Plant

I&M announced that it would retire Tanners Creek Plant by June 2015 to comply with proposed environmental regulations. I&M is currently recovering depreciation and a return on the net book value of the Tanners Creek Plant in base rates and plans to seek recovery of all of the plant’s retirement related costs in its next Indiana and Michigan base rate cases.

In December 2013, I&M filed an application with the MPSC seeking approval of revised depreciation rates for Rockport Plant, Unit 1 and the Tanners Creek Plant due to the retirement of the Tanners Creek Plant in 2015. Upon the retirement of the Tanners Creek Plant, I&M proposed that, for purposes of determining its depreciation rates, the net book value of the Tanners Creek Plant be recovered over the remaining life of the Rockport Plant.

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In September 2014, a settlement agreement was approved by the MPSC that included the authorization for I&M to implement revised depreciation rates for Rockport Plant, Unit 1, effective upon the retirement date of the Tanners Creek Plant. Upon implementation of the revised depreciation rates, I&M is authorized to reduce customer rates through a credit rider until the revised rates for Rockport Plant, Unit 1 are included in base rates.

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

As of December 31, 2014, the net book value of the Tanners Creek Plant was $340 million, before cost of removal, including material and supplies inventory and CWIP.  See “Regulated Generating Units to be Retired Before or During 2016” section of Note 5. If I&M is ultimately not permitted to fully recover its net book value of the Tanners Creek Plant and its retirement-related costs, it could reduce future net income and cash flows and impact financial condition.

Transmission, Distribution and Storage System Improvement Charge (TDSIC)

In October 2014, I&M filed petitions with the IURC for approval of a TDSIC Rider and approval of I&M’s seven-year TDSIC Plan, from 2015 through 2021, for eligible transmission, distribution and storage system improvements. The initial estimated cost of the capital improvements and associated operation and maintenance expenses included in the TDSIC Plan of $787 million, excluding AFUDC, will be updated annually. The TDSIC Plan included distribution investments specific to the Indiana jurisdiction. The TDSIC Rider will allow the periodic adjustment of I&M's rates to provide for timely recovery of 80% of approved TDSIC Plan costs. I&M will defer the remaining 20% of approved TDSIC Plan costs to be recovered in I&M's next general rate case. I&M is not seeking a rate adjustment in this proceeding but is seeking approval of a TDSIC Rider rate adjustment mechanism for subsequent proceedings. In January 2015, intervenors filed testimony that recommended denial of certain portions of the TDSIC Plan including recommended changes to the capital structure, recovery of requested operation and maintenance cost allocations and the rate design within the TDSIC Rider mechanism. A hearing at the IURC was held in February 2015. If any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

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5.  EFFECTS OF REGULATION

Regulated Generating Units to be Retired Before or During 2016

The following regulated generating units are probable of abandonment.  Accordingly, CWIP and Plant in Service has been reclassified as Other Property, Plant and Equipment on the balance sheet as of December 31, 2014.  The following table summarizes the plant investment and cost of removal, currently being recovered, for each generating unit as of December 31, 2014.

Plant Name and Unit	Company	Gross Investment		Accumulated Depreciation		Net Investment		Cost of Removal Regulatory Liability		Expected Retirement Date	Remaining Recovery Period
		(in thousands)
Tanners Creek Plant, Units 1-4	I&M	$	711,034	$	383,643	$	327,391	$	89,333	2015	16 years
Northeastern Station, Unit 4	PSO	182,138		90,925		91,213		11,189		2016	26 years
Welsh Plant, Unit 2	SWEPCo	175,217		95,828		79,389		19,536		2016	26 years
Total		$	1,068,389	$	570,396	$	497,993	$	120,058

In accordance with accounting guidance for “Regulated Operations,” APCo regulated generating units expected to be retired before or during 2016 are not considered probable of abandonment.

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Regulatory Assets

Regulatory assets and liabilities are comprised of the following items:

	APCo
	December 31,				Remaining Recovery Period
Regulatory Assets:	2014		2013
	(in thousands)
Current Regulatory Assets
Under-recovered Fuel Costs - earns a return	$	60,726	$	39,811	1 year
Under-recovered Fuel Costs - does not earn a return	5,350		—		1 year
Total Current Regulatory Assets	$	66,076	$	39,811
Noncurrent Regulatory Assets
Regulatory assets pending final regulatory approval:
Regulatory Assets Currently Earning a Return
Vegetation Management Program - West Virginia	$	19,089	$	—
Regulatory Assets Currently Not Earning a Return
Storm Related Costs - West Virginia	65,206		65,206
Carbon Capture and Storage Product Validation Facility - West Virginia, FERC	13,264		13,264
IGCC Pre-Construction Costs - West Virginia, FERC	10,838		—
Demand Response Program Costs - Virginia	8,791		5,012
Expanded Net Energy Charge - Coal Inventory	3,421		20,528
Expanded Net Energy Charge - Construction Surcharge	2,307		—
Amos Plant Transfer Costs - West Virginia	1,377		—
Carbon Capture and Storage Commercial Scale Facility - West Virginia, FERC	1,287		1,287
Transmission Agreement Phase-In - West Virginia	—		3,313
Environmental Rate Adjustment Clause - Virginia	—		2,440
Other Regulatory Assets Pending Final Regulatory Approval	168		168
Total Regulatory Assets Pending Final Regulatory Approval	125,748		111,218
Regulatory assets approved for recovery:
Regulatory Assets Currently Earning a Return
Storm Related Costs - Virginia	12,963		17,167		4 years
Unamortized Loss on Reacquired Debt	11,067		11,622		28 years
RTO Formation/Integration Costs	2,498		3,473		5 years
Other Regulatory Assets Approved for Recovery	—		665
Regulatory Assets Currently Not Earning a Return
Income Taxes, Net	381,707		531,302		24 years
Pension and OPEB Funded Status	212,485		192,464		13 years
Virginia Transmission Rate Adjustment Clause	53,164		47,322		2 years
Postemployment Benefits	17,760		19,772		4 years
Storm Related Costs - West Virginia	8,488		11,100		4 years
Deferred Restructuring Costs - West Virginia	6,519		8,525		4 years
Medicare Subsidy - West Virginia, FERC	5,888		6,477		10 years
Asset Retirement Obligation	4,418		6,453		3 years
Unrealized Loss on Forward Commitments	4,081		4		3 years
Virginia Generation Rate Adjustment Clause	3,832		6,491		1 year
Virginia Environmental Rate Adjustment Clause	3,304		27,426		1 year
Transmission Agreement Phase-In	2,875		—		3 years
Other Regulatory Assets Approved for Recovery	1,075		2,409		various
Total Regulatory Assets Approved for Recovery	732,124		892,672
Total Noncurrent Regulatory Assets	$	857,872	$	1,003,890

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	APCo
	December 31,				Remaining Refund Period
Regulatory Liabilities:	2014		2013
	(in thousands)
Current Regulatory Liabilities
Over-recovered Fuel Costs - does not pay a return	$	—	$	107,048
Total Current Regulatory Liabilities	$	—	$	107,048
Noncurrent Regulatory Liabilities and
Deferred Investment Tax Credits
Regulatory liabilities pending final regulatory determination:
Regulatory Liabilities Currently Not Paying a Return
Expanded Net Energy Charge - Construction Surcharge	$	5,383	$	—
Over-Recovered Deferred Wind Power Costs - Virginia	4,498		—
Felman Special Rate Mechanism - West Virginia	2,152		—
Other Regulatory Liabilities Pending Final Regulatory Determination	—		249
Total Regulatory Liabilities Pending Final Regulatory Determination	12,033		249
Regulatory liabilities approved for payment:
Regulatory Liabilities Currently Paying a Return
Asset Removal Costs	617,267		583,723		(a)
Deferred Investment Tax Credits	1,312		1,863		46 years
Regulatory Liabilities Currently Not Paying a Return
Unrealized Gain on Forward Commitments	19,660		15,853		3 years
Over-Recovered Customer Rate Relief - West Virginia	2,570		413		1 year
Deferred State Income Tax Coal Credits - Virginia	—		28,255
Other Regulatory Liabilities Approved for Payment	25		869		various
Total Regulatory Liabilities Approved for Payment	640,834		630,976
Total Noncurrent Regulatory Liabilities and Deferred Investment Tax Credits	$	652,867	$	631,225

(a) Relieved as removal costs are incurred.

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	I&M
	December 31,				Remaining Recovery Period
Regulatory Assets:	2014		2013
	(in thousands)
Current Regulatory Assets
Under-recovered Fuel Costs -earns a return	$	773	$	—	1 year
Under-recovered Fuel Costs -does not earn a return	—		3,397
Total Current Regulatory Assets	$	773	$	3,397
Noncurrent Regulatory Assets
Regulatory assets pending final regulatory approval:
Regulatory Assets Currently Not Earning a Return
Cook Plant Turbine	$	6,596	$	3,452
Stranded Costs on Abandoned Plants	3,897		3,896
Deferred Cook Plant Life Cycle Management Project Costs - Michigan	1,222		164
Storm Related Costs - Indiana	1,074		1,836
Under-Recovered Capacity Costs - Indiana	—		21,945
Deferred Cook Plant Life Cycle Management Project Costs - Indiana	—		4,093
Other Regulatory Assets Pending Final Regulatory Approval	860		—
Total Regulatory Assets Pending Final Regulatory Approval	13,649		35,386
Regulatory assets approved for recovery:
Regulatory Assets Currently Earning a Return
Unamortized Loss on Reacquired Debt	13,272		21,508		18 years
Cook Plant, Unit 2 Baffle Bolts - Indiana	6,949		7,248		24 years
RTO Formation/Integration Costs	1,801		2,544		5 years
Other Regulatory Assets Approved for Recovery	764		522		various
Regulatory Assets Currently Not Earning a Return
Income Taxes, Net	255,002		250,478		28 years
Pension and OPEB Funded Status	107,857		100,132		13 years
Cook Plant Nuclear Refueling Outage Levelization	38,012		57,979		2 years
Under-Recovered Capacity Costs - Indiana	25,053		—		1 year
Under-Recovered PJM Expense - Indiana	21,872		—		2 years
Peak Demand Reduction/Energy Efficiency	16,616		4,457		2 years
Medicare Subsidy	10,201		11,221		10 years
Postemployment Benefits	9,999		9,096		4 years
Litigation Settlement	9,468		10,382		11 years
Deferred Cook Plant Life Cycle Management Project Costs - Indiana	2,162		—		5 years
Deferred Restructuring Costs - Michigan	1,159		2,423		1 year
Off-system Sales Margin Sharing	—		4,409
River Transportation Division Expenses	—		4,090
Other Regulatory Assets Approved for Recovery	2,316		2,239		various
Total Regulatory Assets Approved for Recovery	522,503		488,728
Total Noncurrent Regulatory Assets	$	536,152	$	524,114

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	I&M
	December 31,				Remaining Refund Period
Regulatory Liabilities:	2014		2013
	(in thousands)
Current Regulatory Liabilities
Over-recovered Fuel Costs - does not pay a return	$	7,142	$	—	1 year
Over-recovered Fuel Costs - pays a return	—		1,976
Total Current Regulatory Liabilities	$	7,142	$	1,976
Noncurrent Regulatory Liabilities and
Deferred Investment Tax Credits
Regulatory liabilities pending final regulatory determination:
Regulatory Liabilities Currently Not Paying a Return
Other Regulatory Liabilities Pending Final Regulatory Determination	$	102	$	113
Total Regulatory Liabilities Pending Final Regulatory Determination	102		113
Regulatory liabilities approved for payment:
Regulatory Liabilities Currently Paying a Return
Asset Removal Costs	378,471		389,025		(a)
Regulatory Liabilities Currently Not Paying a Return
Excess Asset Retirement Obligations for Nuclear Decommissioning Liability	694,856		597,113		(b)
Spent Nuclear Fuel Liability	43,519		43,416		(b)
Deferred Investment Tax Credits	38,323		43,200		22 years
Unrealized Gain on Forward Commitments	19,646		10,810		3 years
Off-system Sales Margin Sharing - Indiana	19,409		—		2 years
Over-Recovered River Transportation Division Expenses	5,347		—		1 year
Peak Demand Reduction/Energy Efficiency	—		15,021
Over-Recovered PJM Expense	—		13,924
Other Regulatory Liabilities Approved for Payment	21		23		various
Total Regulatory Liabilities Approved for Payment	1,199,592		1,112,532
Total Noncurrent Regulatory Liabilities and Deferred Investment Tax Credits	$	1,199,694	$	1,112,645

(a) Relieved as removal costs are incurred.

(b) Relieved when plant is decommissioned.

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	OPCo
	December 31,				Remaining Recovery Period
Regulatory Assets:	2014		2013
	(in thousands)
Current Regulatory Assets
Under-recovered Fuel Costs - does not earn a return	$	—	$	15,829
Total Current Regulatory Assets	$	—	$	15,829
Noncurrent Regulatory Assets
Regulatory assets pending final regulatory approval:
Regulatory Assets Currently Earning a Return
Ohio Economic Development Rider	$	—	$	13,854
Regulatory Assets Currently Not Earning a Return
Ormet Special Rate Recovery Mechanism	10,483		35,631
Storm Related Costs	—		57,589
Total Regulatory Assets Pending Final Regulatory Approval	10,483		107,074
Regulatory assets approved for recovery:
Regulatory Assets Currently Earning a Return
Ohio Capacity Deferral	422,120		288,060		4 years
Ohio Fuel Adjustment Clause	377,500		444,959		4 years
Ohio Distribution Decoupling	35,069		31,329		2 years
Ohio Transmission Cost Recovery Rider	27,894		86,621		2 years
Unamortized Loss on Reacquired Debt	11,694		13,033		24 years
Ohio Economic Development Rider	4,129		791		1 year
RTO Formation/Integration Costs	3,740		5,232		5 years
Regulatory Assets Currently Not Earning a Return
Pension and OPEB Funded Status	195,422		188,722		13 years
Income Taxes, Net	137,462		150,183		27 years
Peak Demand Reduction/Energy Efficiency	29,067		18,529		2 years
Under-Recovered gridSMART® Costs	15,891		8,396		2 years
Storm Related Costs	15,215		—		1 year
Medicare Subsidy	10,322		11,354		10 years
Under-Recovered Distribution Investment Rider	9,873		8,677		2 years
Enhanced Service Reliability Plan	6,504		6,836		2 years
Postemployment Benefits	6,139		6,198		4 years
Partnership with Ohio Contribution	415		1,410		1 year
Other Regulatory Assets Approved for Recovery	—		1,293		various
Total Regulatory Assets Approved for Recovery	1,308,456		1,271,623
Total Noncurrent Regulatory Assets	$	1,318,939	$	1,378,697

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	OPCo
	December 31,				Remaining Refund Period
	2014		2013
Regulatory Liabilities:	(in thousands)
Current Regulatory Liabilities
Over-recovered Fuel Costs - does not pay a return	$	46,264	$	—	1 year
Total Current Regulatory Liabilities	$	46,264	$	—
Noncurrent Regulatory Liabilities and Deferred Investment Tax Credits
Regulatory liabilities pending final regulatory determination:
Regulatory Liabilities Currently Paying a Return
IGCC Preconstruction Costs	$	—	$	4,782
Regulatory Liabilities Currently Not Paying a Return
Provision for Regulatory Loss	35,172		—
Other Regulatory Liabilities Pending Final Regulatory Determination	439		216
Total Regulatory Liabilities Pending Final Regulatory Determination	35,611		4,998
Regulatory liabilities approved for payment:
Regulatory Liabilities Currently Paying a Return
Asset Removal Costs	423,218		421,061		(a)
Deferred Investment Tax Credits	67		165		7 years
Regulatory Liabilities Currently Not Paying a Return
Unrealized Gain on Forward Commitments	47,287		2,920		18 years
Deferred Asset Phase-In Rider	7,121		4,334		6 years
Low Income Customers/Economic Recovery	1,307		1,724		1 year
Other Regulatory Liabilities Approved for Payment	80		297		various
Total Regulatory Liabilities Approved for Payment	479,080		430,501
Total Noncurrent Regulatory Liabilities and Deferred Investment Tax Credits	$	514,691	$	435,499

(a)    Relieved as removal costs are incurred.

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	PSO
	December 31,				Remaining Recovery Period
	2014		2013
Regulatory Assets:	(in thousands)
Current Regulatory Assets
Under-recovered Fuel Costs -earns a return	$	35,699	$	3,298	1 year
Total Current Regulatory Assets	$	35,699	$	3,298
Noncurrent Regulatory Assets
Regulatory assets pending final regulatory approval:
Regulatory Assets Currently Not Earning a Return
Storm Related Costs	$	16,614	$	18,743
Other Regulatory Assets Pending Final Regulatory Approval	1,079		845
Total Regulatory Assets Pending Final Regulatory Approval	17,693		19,588
Regulatory assets approved for recovery:
Regulatory Assets Currently Earning a Return
Red Rock Generating Facility	9,502		9,728		42 years
Unamortized Loss on Reacquired Debt	7,987		9,455		19 years
Regulatory Assets Currently Not Earning a Return
Pension and OPEB Funded Status	89,648		77,171		13 years
Peak Demand Reduction/Energy Efficiency	9,162		11,333		2 years
Deferred System Reliability Rider Expenses	8,296		—		1 year
Medicare Subsidy	4,899		5,389		10 years
Vegetation Management	2,898		13,963		1 year
Income Taxes, Net	1,937		88		35 years
Deferral of Major Generation Overhauls	1,333		2,933		3 years
Base Load Purchase Power Contract	—		6,400
Other Regulatory Assets Approved for Recovery	972		642		various
Total Regulatory Assets Approved for Recovery	136,634		137,102
Total Noncurrent Regulatory Assets	$	154,327	$	156,690

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	PSO
	December 31,				Remaining Refund Period
	2014		2013
Regulatory Liabilities:	(in thousands)
Noncurrent Regulatory Liabilities and
Deferred Investment Tax Credits
Regulatory liabilities pending final regulatory determination:
Regulatory Liabilities Currently Not Paying a Return
Over-recovery of Costs Related to Advanced Metering	$	3,942	$	2,635
Other Regulatory Liabilities Pending Final Regulatory Determination	248		248
Total Regulatory Liabilities Pending Final Regulatory Determination	4,190		2,883
Regulatory liabilities approved for payment:
Regulatory Liabilities Currently Paying a Return
Asset Removal Costs	275,415		276,418		(a)
Regulatory Liabilities Currently Not Paying a Return
Deferred Investment Tax Credits	46,928		46,753		50 years
Base Load Purchase Power Contract	6,087		—		1 year
Over-Recovered Base Plan Funding Costs	1,393		—		2 years
Other Regulatory Liabilities Approved for Payment	466		1,619		various
Total Regulatory Liabilities Approved for Payment	330,289		324,790
Total Noncurrent Regulatory Liabilities and Deferred Investment Tax Credits	$	334,479	$	327,673

(a) Relieved as removal costs are incurred.

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	SWEPCo
	December 31,				Remaining Recovery Period
	2014		2013
Regulatory Assets:	(in thousands)
Current Regulatory Assets
Under-recovered Fuel Costs - earns a return	$	24,024	$	17,949	1 year
Total Current Regulatory Assets	$	24,024	$	17,949
Noncurrent Regulatory Assets
Regulatory assets pending final regulatory approval:
Regulatory Assets Currently Not Earning a Return
Rate Case Expense	$	8,126	$	7,934
Shipe Road Transmission Project	2,287		—
Carbon Capture and Storage Commercial Scale Facility	440		1,143
Other Regulatory Assets Pending Final Regulatory Approval	1,262		1,951
Total Regulatory Assets Pending Final Regulatory Approval	12,115		11,028
Regulatory assets approved for recovery:
Regulatory Assets Currently Earning a Return
Unamortized Loss on Reacquired Debt	6,952		8,165		29 years
Acquisition of Valley Electric Membership Corporation (VEMCO)	1,756		4,100		1 year
Other Regulatory Assets Approved for Recovery	68		—		various
Regulatory Assets Currently Not Earning a Return
Income Taxes, Net	254,856		247,827		31 years
Pension and OPEB Funded Status	99,920		89,672		13 years
Medicare Subsidy	5,333		5,866		10 years
Deferred Restructuring Costs - Louisiana	5,129		—		4 years
Vegetation Management Program - Louisiana	2,522		—		1 year
Peak Demand Reduction/Energy Efficiency	2,176		2,584		2 years
Unrealized Loss on Forward Commitments	1,144		3		1 year
Other Regulatory Assets Approved for Recovery	1,631		660		various
Total Regulatory Assets Approved for Recovery	381,487		358,877
Total Noncurrent Regulatory Assets (a)	$	393,602	$	369,905

(a) Additionally, as of December 31, 2013, SWEPCo has recorded approximately $42 million in Customer Accounts Receivable on the balance sheet to reflect revenues, retroactive to January 2013, resulting from the PUCT decision in the Texas Base Rate Case.  The majority of these amounts were collected through a rider that was billed to customers.

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	SWEPCo
	December 31,				Remaining Refund Period
	2014		2013
Regulatory Liabilities:	(in thousands)
Current Regulatory Liabilities
Over-recovered Fuel Costs - pays a return	$	—	$	7,275
Total Current Regulatory Liabilities	$	—	$	7,275
Noncurrent Regulatory Liabilities and
Deferred Investment Tax Credits
Regulatory liabilities approved for payment:
Regulatory Liabilities Currently Paying a Return
Asset Removal Costs	$	384,268	$	372,381	(a)
Refundable Construction Financing Costs - Louisiana	58,177		77,664		4 years
Excess Earnings - Texas	2,831		2,903		39 years
Over-Recovered Generation Recovery Rider Costs - Arkansas	1,724		1,254		2 years
Other Regulatory Liabilities Approved for Payment	—		32		various
Regulatory Liabilities Currently Not Paying a Return
Deferred Investment Tax Credits	9,831		11,207		16 years
Vegetation Management Program - Texas	556		4,002		1 year
Other Regulatory Liabilities Approved for Payment	1,143		2,685		various
Total Regulatory Liabilities Approved for Payment	458,530		472,128
Total Noncurrent Regulatory Liabilities and Deferred Investment Tax Credits	$	458,530	$	472,128

(a) Relieved as removal costs are incurred.

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6.  COMMITMENTS, GUARANTEES AND CONTINGENCIES

The Registrant Subsidiaries are subject to certain claims and legal actions arising in their ordinary course of business.  In addition, their business activities are subject to extensive governmental regulation related to public health and the environment.  The ultimate outcome of such pending or potential litigation cannot be predicted.  For current proceedings not specifically discussed below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on the financial statements.

COMMITMENTS

Construction and Commitments– Affecting APCo,  I&M, OPCo, PSO and SWEPCo

The Registrant Subsidiaries have substantial construction commitments to support their operations and environmental investments.  In managing the overall construction program and in the normal course of business, the Registrant Subsidiaries contractually commit to third-party construction vendors for certain material purchases and other construction services.  

The Registrant Subsidiaries also purchase fuel, materials, supplies, services and property, plant and equipment under contract as part of their normal course of business.  Certain supply contracts contain penalty provisions for early termination.

The following tables summarize the Registrant Subsidiaries’ actual contractual commitments as of December 31, 2014:

Contractual Commitments - APCo	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in thousands)
Fuel Purchase Contracts (a)	$	499,262	$	568,842	$	482,135	$	479,243	$	2,029,482
Energy and Capacity Purchase Contracts	32,584		66,454		70,306		502,176		671,520
Construction Contracts for Capital Assets (b)	41,043		—		—		—		41,043
Total	$	572,889	$	635,296	$	552,441	$	981,419	$	2,742,045

Contractual Commitments - I&M	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in thousands)
Fuel Purchase Contracts (a)	$	369,768	$	443,603	$	247,902	$	443,053	$	1,504,326
Energy and Capacity Purchase Contracts	111,138		225,965		242,359		755,621		1,335,083
Construction Contracts for Capital Assets (b)	11,316		—		—		—		11,316
Total	$	492,222	$	669,568	$	490,261	$	1,198,674	$	2,850,725

Contractual Commitments - OPCo	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in thousands)
Energy and Capacity Purchase Contracts	$	208,622	$	57,146	$	60,635	$	513,136	$	839,539
Construction Contracts for Capital Assets (b)	10,002		—		—		—		10,002
Total	$	218,624	$	57,146	$	60,635	$	513,136	$	849,541

Contractual Commitments - PSO	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in thousands)
Fuel Purchase Contracts (a)	$	165,303	$	187,904	$	94,800	$	142,200	$	590,207
Energy and Capacity Purchase Contracts	71,137		163,753		171,067		390,679		796,636
Construction Contracts for Capital Assets (b)	1,540		—		—		—		1,540
Total	$	237,980	$	351,657	$	265,867	$	532,879	$	1,388,383

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Contractual Commitments - SWEPCo	Less Than 1 Year		2-3 Years		4-5 Years		After 5 Years		Total
	(in thousands)
Fuel Purchase Contracts (a)	$	286,428	$	309,213	$	155,327	$	187,548	$	938,516
Energy and Capacity Purchase Contracts	19,798		56,582		62,240		216,311		354,931
Construction Contracts for Capital Assets (b)	18,284		—		—		—		18,284
Total	$	324,510	$	365,795	$	217,567	$	403,859	$	1,311,731

(a) Represents contractual commitments to purchase coal, natural gas, uranium and other consumables as fuel for electric generation along with related transportation of the fuel.

(b) Represents only capital assets for which there are signed contracts.  Actual payments are dependent upon and may vary significantly based upon the decision to build, regulatory approval schedules, timing and escalation of project costs.

GUARANTEES

Liabilities for guarantees are recorded in accordance with the accounting guidance for “Guarantees.”  There is no collateral held in relation to any guarantees.  In the event any guarantee is drawn, there is no recourse to third parties unless specified below.

Letters of Credit – Affecting APCo, I&M and OPCo

Certain Registrant Subsidiaries enter into standby letters of credit with third parties.  These letters of credit are issued in the ordinary course of business and cover items such as insurance programs, security deposits and debt service reserves.

AEP has two revolving credit facilities totaling $3.5 billion, under which up to $1.2 billion may be issued as letters of credit.  As of December 31, 2014, the maximum future payments for letters of credit issued under the revolving credit facilities were as follows:

Company	Amount		Maturity
	(in thousands)
I&M	$	150	March 2015
OPCo	4,200		June 2015

The Registrant Subsidiaries have $307 million of variable rate Pollution Control Bonds supported by bilateral letters of credit for $310 million as follows:

Company	Pollution Control Bonds		Bilateral Letters of Credit		Maturity of Bilateral Letters of Credit
	(in thousands)
APCo	$	229,650	$	232,293	March 2016 to March 2017
I&M	77,000		77,886		March 2015 (a)
(a) In February 2015, maturity dates were extended to March 2017.

Guarantees of Third-Party Obligations – Affecting SWEPCo

As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining, SWEPCo provides guarantees of mine reclamation of $115 million.  Since SWEPCo uses self-bonding, the guarantee provides for SWEPCo to commit to use its resources to complete the reclamation in the event the work is not completed by Sabine.  This guarantee ends upon depletion of reserves and completion of final reclamation.  Based on the latest study completed in 2010, it is estimated the reserves will be depleted in 2036 with final reclamation completed by 2046 at an estimated cost of approximately $58 million.  Actual reclamation costs could vary due to period inflation and any

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changes to actual mine reclamation.  As of December 31, 2014, SWEPCo has collected approximately $64 million through a rider for final mine closure and reclamation costs, of which $16 million is recorded in Deferred Credits and Other Noncurrent Liabilities and $48 million is recorded in Asset Retirement Obligations on SWEPCo’s balance sheet.

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

Indemnifications and Other Guarantees – Affecting APCo, I&M, OPCo, PSO and SWEPCo

Contracts

The Registrant Subsidiaries enter into certain types of contracts which require indemnifications.  Typically these contracts include, but are not limited to, sale agreements, lease agreements, purchase agreements and financing agreements.  Generally, these agreements may include, but are not limited to, indemnifications around certain tax, contractual and environmental matters.  With respect to sale agreements, exposure generally does not exceed the sale price.  As of December 31, 2014, there were no material liabilities recorded for any indemnifications.

APCo, I&M and OPCo are jointly and severally liable for activity conducted by AEPSC on behalf of AEP companies related to power purchase and sale activity pursuant to the SIA.  PSO and SWEPCo are jointly and severally liable for activity conducted by AEPSC on behalf of PSO and SWEPCo related to power purchase and sale activity pursuant to the SIA.

Lease Obligations

Certain Registrant Subsidiaries lease certain equipment under master lease agreements.  See “Master Lease Agreements” and “Railcar Lease” sections of Note 13 for disclosure of lease residual value guarantees.

ENVIRONMENTAL CONTINGENCIES

The Comprehensive Environmental Response Compensation and Liability Act (Superfund) and State Remediation – Affecting APCo, I&M, OPCo, PSO and SWEPCo

By-products from the generation of electricity include materials such as ash, slag, sludge, low-level radioactive waste and SNF.  Coal combustion by-products, which constitute the overwhelming percentage of these materials, are typically treated and deposited in captive disposal facilities or are beneficially utilized.  In addition, the generation plants and transmission and distribution facilities have used asbestos, polychlorinated biphenyls and other hazardous and nonhazardous materials.  The Registrant Subsidiaries currently incur costs to dispose of these substances safely.

Superfund addresses clean-up of hazardous substances that have been released to the environment.  The Federal EPA administers the clean-up programs.  Several states have enacted similar laws.  As of December 31, 2014, APCo and OPCo are named as a Potentially Responsible Party (PRP) for one site and three sites, respectively, by the Federal EPA.  There are seven additional sites for which APCo, I&M, OPCo and SWEPCo have received information requests which could lead to PRP designation.  I&M has also been named potentially liable at two sites under state law including the I&M site discussed in the next paragraph.  SWEPCo has also been named potentially liable at one site under state law.  In those instances where the Registrant Subsidiaries have been named a PRP or defendant, disposal or recycling activities were in accordance with the then-applicable laws and regulations.  Superfund does not recognize compliance as a defense, but imposes strict liability on parties who fall within its broad statutory categories.  Liability has been resolved for a number of sites with no significant effect on net income.

In 2008, I&M received a letter from the Michigan Department of Environmental Quality (MDEQ) concerning conditions at a site under state law and requesting I&M take voluntary action necessary to prevent and/or mitigate public harm.  I&M started remediation work in accordance with a plan approved by MDEQ.    In September 2014, I&M recorded an accrual for remediation at certain additional sites in Michigan. As of December 31, 2014, I&M’s accrual

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for all of these sites is approximately $15 million.  As the remediation work is completed, I&M’s cost may change as new information becomes available concerning either the level of contamination at the site or changes in the scope of remediation.  Management cannot predict the amount of additional cost, if any.

Management evaluates the potential liability for each Superfund site separately, but several general statements can be made about potential future liability.  Allegations that materials were disposed at a particular site are often unsubstantiated and the quantity of materials deposited at a site can be small and often nonhazardous.  Although Superfund liability has been interpreted by the courts as joint and several, typically many parties are named as PRPs for each site and several of the parties are financially sound enterprises.  At present, management’s estimates do not anticipate material cleanup costs for identified Superfund sites, except the I&M sites discussed above.

NUCLEAR CONTINGENCIES – AFFECTING I&M

I&M owns and operates the two-unit 2,191MW Cook Plant under licenses granted by the Nuclear Regulatory Commission (NRC).  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 generating 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 liability could be substantial.

Decommissioning and Low Level Waste Accumulation Disposal

The cost to decommission a nuclear plant is affected by NRC regulations and the SNF disposal program.  Decommissioning costs are accrued over the service life of the Cook Plant.  The most recent decommissioning cost study was performed in 2012.  According to that study, the estimated cost of decommissioning and disposal of low-level radioactive waste ranges from $1.3 billion to $1.7 billion in 2012 nondiscounted dollars.  The wide range in estimated costs is caused by variables in assumptions.  I&M recovers estimated decommissioning costs for the Cook Plant in its rates.  The amounts recovered in rates were $9 million, $10 million and $14 million for the years ended December 31, 2014, 2013 and 2012, respectively.  Decommissioning costs recovered from customers are deposited in external trusts.

As of December 31, 2014 and 2013, the total decommissioning trust fund balance was $1.8 billion and $1.6 billion, respectively.  Trust fund earnings increase the fund assets and decrease the amount remaining to be recovered from ratepayers.  The decommissioning costs (including interest, unrealized gains and losses and expenses of the trust funds) increase or decrease the recorded liability.

I&M continues to work with regulators and customers to recover the remaining estimated costs of decommissioning the Cook Plant.  However, future net income and cash flows would be reduced and financial condition could be impacted if the cost of SNF disposal and decommissioning continues to increase and cannot be recovered.

SNF Disposal

The federal government is responsible for permanent SNF disposal and assesses fees to nuclear plant owners for SNF disposal.  A fee of one mill per KWh for fuel consumed after April 6, 1983 at the Cook Plant is being collected from customers and remitted to the U.S. Treasury.  This fee was terminated in May 2014. As of December 31, 2014 and 2013, fees and related interest of $266 million and $265 million, respectively, for fuel consumed prior to April 7, 1983 have been recorded as Long-term Debt and funds collected from customers along with related earnings totaling $309 million and $309 million, respectively, to pay the fee are recorded as part of Spent Nuclear Fuel and Decommissioning Trusts.  I&M has not paid the government the pre-April 1983 fees due to continued delays and uncertainties related to the federal disposal program.

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In 2011, I&M signed a settlement agreement with the federal government which permits I&M to make annual filings to recover certain SNF storage costs incurred as a result of the government’s delays in accepting SNF for permanent storage.  Under the settlement agreement, I&M received $22 million, $31 million and $20 million in 2014, 2013 and 2012, respectively, to recover costs and will be eligible to receive additional payment of annual claims for allowed costs that are incurred through December 31, 2016.  The proceeds reduced costs for dry cask storage.  As of December 31, 2014, I&M has deferred $13 million in Prepayments and Other Current Assets and $2 million in Deferred Charges and Other Noncurrent Assets on the balance sheet of dry cask storage and related operation and maintenance costs for recovery under this agreement.

See “Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal” section of Note 11 for disclosure of the fair value of assets within the trusts.

Nuclear Incident Liability

I&M carries insurance coverage for a nuclear incident at the Cook Plant for property damage, decommissioning and decontamination in the amount of $2.8 billion.  Insurance coverage for a nonnuclear incident at the Cook Plant is $1.7 billion.  Additional insurance provides coverage for a weekly indemnity payment resulting from an insured accidental outage.  I&M utilizes industry mutual insurers for the placement of this insurance coverage.  Participation in this mutual insurance requires a contingent financial obligation of up to $44 million for I&M which is assessable if the insurer’s financial resources would be inadequate to pay for losses.

The Price-Anderson Act, extended through December 31, 2025, establishes insurance protection for public liability arising from a nuclear incident at $13.6 billion and covers any incident at a licensed reactor in the U.S.  Commercially available insurance, which must be carried for each licensed reactor, provides $375 million of coverage.  In the event of a nuclear incident at any nuclear plant in the U.S., the remainder of the liability would be provided by a deferred premium assessment of $121 million on each licensed reactor in the U.S. payable in annual installments of $19 million.  As a result, I&M could be assessed $242 million per nuclear incident payable in annual installments of $38 million.  The number of incidents for which payments could be required is not limited.

In the event of an incident of a catastrophic nature, I&M is initially covered for the first $375 million through commercially available insurance.  The next level of liability coverage of up to $13.2 billion would be covered by claims made under the Price-Anderson Act.  If the liability were in excess of amounts recoverable from insurance and retrospective claim payments made under the Price-Anderson Act, I&M would seek to recover those amounts from customers through rate increases.  In the event nuclear losses or liabilities are underinsured or exceed accumulated funds and recovery from customers is not possible, it could reduce future net income and cash flows and impact financial condition.

OPERATIONAL CONTINGENCIES

Insurance and Potential Losses – Affecting APCo, I&M, OPCo, PSO and SWEPCo

The Registrant Subsidiaries maintain insurance coverage normal and customary for electric utilities, subject to various deductibles.  The Registrant Subsidiaries also maintain property and casualty insurance that may cover certain physical damage or third-party injuries caused by cyber security incidents. Insurance coverage includes all risks of physical loss or damage to nonnuclear assets, subject to insurance policy conditions and exclusions.  Covered property generally includes power plants, substations, facilities and inventories.  Excluded property generally includes transmission and distribution lines, poles and towers.  The insurance programs also generally provide coverage against loss arising from certain claims made by third parties and are in excess of retentions absorbed by the Registrant Subsidiaries.  Coverage is generally provided by a combination of the protected cell of EIS and/or various industry mutual and/or commercial insurance carriers.

See “Nuclear Contingencies” section of this footnote for a discussion of I&M’s nuclear exposures and related insurance.

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Some potential losses or liabilities may not be insurable or the amount of insurance carried may not be sufficient to meet potential losses and liabilities, including, but not limited to, liabilities relating to a cyber security incident or damage to the Cook Plant and costs of replacement power in the event of an incident at the Cook Plant.  Future losses or liabilities, if they occur, which are not completely insured, unless recovered from customers, could reduce future net income and cash flows and impact financial condition.

Rockport Plant Litigation – Affecting I&M

In July 2013, the Wilmington Trust Company filed a complaint in U.S. District Court for the Southern District of New York against AEGCo and I&M alleging that it will be unlawfully burdened by the terms of the modified NSR consent decree after the Rockport Plant, Unit 2 lease expiration in December 2022.  The terms of the consent decree allow the installation of environmental emission control equipment, repowering or retirement of the unit.  The plaintiff further alleges that the defendants’ actions constitute breach of the lease and participation agreement.  The plaintiff seeks a judgment declaring that the defendants breached the lease, must satisfy obligations related to installation of emission control equipment and indemnify the plaintiff.  The New York court has granted the motion to transfer this case to the U.S. District Court for the Southern District of Ohio.  In October 2013, a motion to dismiss the case was filed on behalf of AEGCo and I&M. In January 2015, the court issued an opinion and order granting the motion in part and denying the motion in part. The court dismissed certain of the plaintiffs’ claims. Several claims remain, including the claim for breach of the participation agreement and a claim alleging breach of an implied covenant of good faith and fair dealing.   Management will continue to defend against the remaining claims.  Management is unable to determine a range of potential losses that are reasonably possible of occurring.

Wage and Hours Lawsuit – Affecting PSO

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

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

Gavin Landfill Litigation – Affecting OPCo

In August 2014, a complaint was filed in the Mason County, West Virginia Circuit Court against AEP, AEPSC, OPCo and an individual supervisor alleging wrongful death and personal injury/illness claims arising out of purported exposure to coal combustion by-product waste at the Gavin Plant landfill.  The lawsuit was filed on behalf of 77 plaintiffs, consisting of 39 current and former contractors of the landfill and 38 family members of those contractors.  Eleven of the family members are pursuing personal injury/illness claims and the remainder are pursuing loss of consortium claims.  The plaintiffs seek compensatory and punitive damages, as well as medical monitoring.  In September 2014, management filed a motion to dismiss the complaint, contending the case should be filed in Ohio.  That motion is pending.  Management will continue to defend against the claims.  Management is unable to determine a range of potential losses that are reasonably possible of occurring.

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7.  DISPOSITION AND IMPAIRMENTS

DISPOSITION

2013

Conesville Coal Preparation Company – Affecting OPCo

In April 2013, OPCo closed on the sale of its Conesville Coal Preparation Company.  This sale did not have a significant impact on OPCo’s financial statements.

IMPAIRMENTS

2013

Amos Plant, Unit 3 – Affecting APCo

In July 2013, the Virginia SCC approved the transfer of OPCo’s two-thirds interest in the Amos Plant, Unit 3 to APCo but, for rate purposes, reduced the proposed transfer price by $83 million pretax.  The Virginia jurisdictional share of the reduced price is approximately $39 million.  In December 2013, the WVPSC issued an order that approved the transfer of OPCo’s two-thirds interest in the Amos Plant, Unit 3 to APCo but deferred a final decision related to the $83 million pretax reduction in transfer price until APCo’s next base rate case.  The West Virginia and FERC jurisdictional share of the potential reduced transfer price is approximately $44 million.  Upon evaluation, management believes the West Virginia jurisdictional share is probable of recovery.  As a result of the Virginia order, in the fourth quarter of 2013, management recorded a pretax impairment of $39 million in Asset Impairments and Other Related Charges on the statement of income.  

Muskingum River Plant, Unit 5 – Affecting OPCo

In May 2013, the U.S. District Court for the Southern District of Ohio approved a modification to the consent decree, which was initially entered into in 2007, requiring certain types of pollution control equipment to be installed at certain AEP plants, including OPCo’s 600MW Muskingum River Plant, Unit 5 (MR5) coal-fired generation plant.  Under the modification to the consent decree, OPCo has the option to cease burning coal and retire MR5 in 2015 or to cease burning coal in 2015 and complete a natural gas refueling project no later than June 2017.  In the second quarter of 2013, based on the approval of the modified consent decree and changes in other market factors, management re-evaluated potential courses of action with respect to the planned operation of MR5 and concluded that completion of a refueling project, which would have extended the useful life of MR5, is remote.  As a result, management completed an impairment analysis and concluded that MR5 was impaired.  Under a market-based value approach, using level 3 unobservable inputs, management determined that the fair value of this generating unit was zero based on the lack of installed environmental control equipment and the nature and condition of this generating unit.  In the second quarter of 2013, OPCo recorded a pretax impairment of $154 million in Asset Impairments and Other Related Charges on the statement of income which includes a $6 million pretax impairment of related material and supplies inventory.  Management expects to retire the plant in 2015.

299

2012

Beckjord Plant, Unit 6, Conesville Plant, Unit 3, Kammer Plant, Units 1-3, Muskingum River Plant, Units 1-4, Sporn Plant, Units 2 and 4 and Picway Plant, Unit 5 – Affecting OPCo

In October 2012, management filed applications with the FERC proposing to terminate the Interconnection Agreement and seeking to complete the corporate separation of OPCo's generation assets.  Based on the intention to terminate the Interconnection Agreement and the FERC filing, management performed an evaluation of the recoverability of generation assets.  As a result, in November 2012, management, using generating unit specific estimated future cash flows, concluded that OPCo had a material impairment of certain generation assets.  Under a market-based value approach, using level 3 unobservable inputs, management determined that the fair value of these generating units was zero based on the lack of installed environmental control equipment and the nature and condition of these generating units.  In the fourth quarter of 2012, OPCo recorded a pretax impairment of $287 million in Asset Impairments and Other Related Charges on the statement of income related to Beckjord Plant, Unit 6, Conesville Plant, Unit 3, Kammer Plant, Units 1-3, Muskingum River Plant, Units 1-4, Sporn Plant, Units 2 and 4 and Picway Plant, Unit 5 generating units which includes $13 million of related material and supplies inventory.

Turk Plant – Affecting SWEPCo

In 2012, SWEPCo recorded a pretax write-off of $13 million in Asset Impairments and Other Related Charges on the statement of income related to unrecoverable construction costs subject to the Texas capital costs cap portion of the Turk Plant.

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8.  BENEFIT PLANS

For a discussion of investment strategy, investment limitations, target asset allocations and the classification of investments within the fair value hierarchy, see “Investments Held in Trust for Future Liabilities” and “Fair Value Measurements of Assets and Liabilities” sections of Note 1.

The Registrant Subsidiaries participate in an AEP sponsored qualified pension plan and two unfunded nonqualified pension plans.  Substantially all employees are covered by the qualified plan or both the qualified and a nonqualified pension plan.  The Registrant Subsidiaries also participate in OPEB plans sponsored by AEP to provide health and life insurance benefits for retired employees.

Due to the Registrant Subsidiaries’ participation in AEP’s benefits plans, the assumptions used by the actuary and the accounting for the plans by each subsidiary are the same.  This section details the assumptions that apply to all Registrant Subsidiaries and the rate of compensation increase for each subsidiary.

The Registrant Subsidiaries recognize the funded status associated with defined benefit pension and OPEB plans in their balance sheets.  Disclosures about the plans are required by the “Compensation – Retirement Benefits” accounting guidance.  The Registrant Subsidiaries recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of other comprehensive income, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost.  The Registrant Subsidiaries record a regulatory asset instead of other comprehensive income for qualifying benefit costs of regulated operations that for ratemaking purposes are deferred for future recovery.  The cumulative funded status adjustment is equal to the remaining unrecognized deferrals for unamortized actuarial losses or gains, prior service costs and transition obligations, such that remaining deferred costs result in an AOCI equity reduction or regulatory asset and deferred gains result in an AOCI equity addition or regulatory liability.

Actuarial Assumptions for Benefit Obligations

The weighted-average assumptions as of December 31 of each year used in the measurement of the Registrant Subsidiaries’ benefit obligations are shown in the following tables:

	Pension Plans				Other Postretirement Benefit Plans
Assumption	2014		2013		2014		2013
Discount Rate	4.00	%	4.70	%	4.00	%	4.70	%

	Pension Plans
Assumption – Rate of Compensation Increase (a)	2014		2013
APCo	4.45	%	4.60	%
I&M	4.80	%	4.90	%
OPCo	4.80	%	5.00	%
PSO	4.80	%	4.90	%
SWEPCo	4.80	%	4.85	%

(a) Rates are for base pay only.  In addition, an amount is added to reflect target incentive compensation for exempt employees and overtime and incentive pay for nonexempt employees.

A duration-based method is used to determine the discount rate for the plans.  A hypothetical portfolio of high quality corporate bonds is constructed with cash flows matching the benefit plan liability.  The composite yield on the hypothetical bond portfolio is used as the discount rate for the plan.  The discount rate is the same for each Registrant Subsidiary.

301

For 2014, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 12% per year, with the average increase shown in the table above.  The compensation increase rates reflect variations in each Registrant Subsidiaries' population participating in the pension plan.

Updated mortality assumptions based on mortality tables issued by the Society of Actuaries in October 2014 were used for the December 31, 2014 benefit obligation measurements. These updates resulted in approximate benefit obligation increases by Registrant Subsidiary as shown in the following table:

	Pension Plans		Other Postretirement Benefit Plans
Increase in Benefit Obligation	(in thousands)
APCo	$	17,946	$	2,271
I&M	15,117		1,644
OPCo	14,525		310
PSO	6,811		555
SWEPCo	6,445		775

Actuarial Assumptions for Net Periodic Benefit Costs

The weighted-average assumptions as of January 1 of each year used in the measurement of each Registrant Subsidiaries’ benefit costs are shown in the following tables:

	Pension Plans						Other Postretirement Benefit Plans
Assumptions	2014		2013		2012		2014		2013		2012
Discount Rate	4.70	%	3.95	%	4.55	%	4.70	%	3.95	%	4.75	%
Expected Return on Plan Assets	6.00	%	6.50	%	7.25	%	6.75	%	7.00	%	7.25	%

	Pension Plans
Assumption – Rate of Compensation Increase	2014		2013		2012
APCo	4.60	%	4.70	%	4.70	%
I&M	4.90	%	5.00	%	5.00	%
OPCo	5.00	%	5.00	%	5.00	%
PSO	4.90	%	4.90	%	4.90	%
SWEPCo	4.85	%	4.75	%	4.75	%

The expected return on plan assets was determined by evaluating historical returns, the current investment climate (yield on fixed income securities and other recent investment market indicators), rate of inflation and current prospects for economic growth.  The expected return on plan assets is the same for each Registrant Subsidiary.

The health care trend rate assumptions as of January 1 of each year used for OPEB plans measurement purposes are shown below:

Health Care Trend Rates	2014		2013
Initial	6.50	%	6.75	%
Ultimate	5.00	%	5.00	%
Year Ultimate Reached	2020		2020

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Assumed health care cost trend rates have a significant effect on the amounts reported for the OPEB health care plans.  A 1% change in assumed health care cost trend rates would have the following effects:

	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Effect on Total Service and Interest Cost Components of Net Periodic Postretirement Health Care Benefit Cost:
1% Increase	$	902		$	343		$	308		$	158		$	179
1% Decrease	(691		)	(264		)	(237		)	(121		)	(138		)
Effect on the Health Care Component of the Accumulated Postretirement Benefit Obligation:
1% Increase	$	17,260		$	7,117		$	7,251		$	3,377		$	3,742
1% Decrease	(13,614		)	(5,630		)	(5,736		)	(2,671		)	(2,960		)

Significant Concentrations of Risk within Plan Assets

In addition to establishing the target asset allocation of plan assets, the investment policy also places restrictions on securities to limit significant concentrations within plan assets.  The investment policy establishes guidelines that govern maximum market exposure, security restrictions, prohibited asset classes, prohibited types of transactions, minimum credit quality, average portfolio credit quality, portfolio duration and concentration limits.  The guidelines were established to mitigate the risk of loss due to significant concentrations in any investment.  Management monitors the plans to control security diversification and ensure compliance with the investment policy.  As of December 31, 2014, the assets were invested in compliance with all investment limits.  See “Investments Held in Trust for Future Liabilities” section of Note 1 for limit details.

Benefit Plan Obligations, Plan Assets and Funded Status as of December 31, 2014 and 2013

The following tables provide a reconciliation of the changes in the plans’ benefit obligations, fair value of plan assets and funded status as of December 31.  The benefit obligation for the defined benefit pension and OPEB plans are the projected benefit obligation and the accumulated benefit obligation, respectively.

APCo	Pension Plans						Other Postretirement Benefit Plans
	2014			2013			2014			2013
Change in Benefit Obligation	(in thousands)
Benefit Obligation as of January 1,	$	663,231		$	718,460		$	279,884		$	348,990
Service Cost	7,036			6,171			1,448			2,566
Interest Cost	29,624			27,662			12,788			13,454
Actuarial (Gain) Loss	41,671			(45,619		)	(8,975		)	(66,056		)
Benefit Payments	(38,757		)	(43,443		)	(26,584		)	(27,220		)
Participant Contributions	—			—			7,196			6,600
Medicare Subsidy	—			—			1,391			1,550
Benefit Obligation as of December 31,	$	702,805		$	663,231		$	267,148		$	279,884
Change in Fair Value of Plan Assets
Fair Value of Plan Assets as of January 1,	$	627,995		$	621,570		$	284,840		$	267,758
Actual Gain on Plan Assets	44,052			49,832			11,836			34,289
Company Contributions	8,999			36			3,345			3,413
Participant Contributions	—			—			7,196			6,600
Benefit Payments	(38,757		)	(43,443		)	(26,584		)	(27,220		)
Fair Value of Plan Assets as of December 31,	$	642,289		$	627,995		$	280,633		$	284,840
Funded (Underfunded) Status as of December 31,	$	(60,516	)	$	(35,236	)	$	13,485		$	4,956

303

I&M	Pension Plans						Other Postretirement Benefit Plans
	2014			2013			2014			2013
Change in Benefit Obligation	(in thousands)
Benefit Obligation as of January 1,	$	574,699		$	618,973		$	166,497		$	218,553
Service Cost	10,068			8,736			1,947			3,219
Interest Cost	26,293			24,100			7,638			8,221
Actuarial (Gain) Loss	38,466			(41,631		)	(4,925		)	(52,800		)
Benefit Payments	(31,578		)	(35,479		)	(15,730		)	(16,613		)
Participant Contributions	—			—			5,168			4,745
Medicare Subsidy	—			—			1,064			1,172
Benefit Obligation as of December 31,	$	617,948		$	574,699		$	161,659		$	166,497
Change in Fair Value of Plan Assets
Fair Value of Plan Assets as of January 1,	$	559,143		$	552,026		$	206,214		$	194,128
Actual Gain on Plan Assets	55,295			42,584			6,664			23,844
Company Contributions	8,877			12			92			110
Participant Contributions	—			—			5,168			4,745
Benefit Payments	(31,578		)	(35,479		)	(15,730		)	(16,613		)
Fair Value of Plan Assets as of December 31,	$	591,737		$	559,143		$	202,408		$	206,214
Funded (Underfunded) Status as of December 31,	$	(26,211	)	$	(15,556	)	$	40,749		$	39,717

OPCo	Pension Plans						Other Postretirement Benefit Plans
	2014			2013			2014			2013
Change in Benefit Obligation	(in thousands)
Benefit Obligation as of January 1,	$	523,643		$	1,068,186		$	171,164		$	466,290
Transfer of OPCo Generation Benefit Obligation	—			(499,725		)	—			(250,843		)
Service Cost	5,140			5,285			1,026			2,882
Interest Cost	22,105			21,939			7,601			9,494
Actuarial (Gain) Loss	6,761			(34,373		)	(4,286		)	(44,149		)
Benefit Payments	(31,399		)	(37,669		)	(17,353		)	(18,844		)
Participant Contributions	—			—			5,564			5,199
Medicare Subsidy	—			—			981			1,135
Benefit Obligation as of December 31,	$	526,250		$	523,643		$	164,697		$	171,164
Change in Fair Value of Plan Assets
Fair Value of Plan Assets as of January 1,	$	501,634		$	1,015,115		$	211,994		$	366,301
Transfer of OPCo Generation Plan Assets	—			(506,076		)	—			(170,650		)
Actual Gain on Plan Assets	21,679			30,264			6,007			29,576
Company Contributions	6,547			—			—			412
Participant Contributions	—			—			5,564			5,199
Benefit Payments	(31,399		)	(37,669		)	(17,353		)	(18,844		)
Fair Value of Plan Assets as of December 31,	$	498,461		$	501,634		$	206,212		$	211,994
Funded (Underfunded) Status as of December 31,	$	(27,789	)	$	(22,009	)	$	41,515		$	40,830

304

PSO	Pension Plans						Other Postretirement Benefit Plans
	2014			2013			2014			2013
Change in Benefit Obligation	(in thousands)
Benefit Obligation as of January 1,	$	260,710		$	279,685		$	77,779		$	99,680
Service Cost	5,207			5,562			839			1,372
Interest Cost	12,057			10,993			3,574			3,793
Actuarial (Gain) Loss	25,708			(15,381		)	(952		)	(22,070		)
Benefit Payments	(18,277		)	(20,149		)	(7,305		)	(7,741		)
Participant Contributions	—			—			2,304			2,229
Medicare Subsidy	—			—			467			516
Benefit Obligation as of December 31,	$	285,405		$	260,710		$	76,706		$	77,779
Change in Fair Value of Plan Assets
Fair Value of Plan Assets as of January 1,	$	264,597		$	264,823		$	96,333		$	90,521
Actual Gain on Plan Assets	24,607			19,892			4,709			11,324
Company Contributions	4,555			31			—			—
Participant Contributions	—			—			2,304			2,229
Benefit Payments	(18,277		)	(20,149		)	(7,305		)	(7,741		)
Fair Value of Plan Assets as of December 31,	$	275,482		$	264,597		$	96,041		$	96,333
Funded (Underfunded) Status as of December 31,	$	(9,923	)	$	3,887		$	19,335		$	18,554

SWEPCo	Pension Plans						Other Postretirement Benefit Plans
	2014			2013			2014			2013
Change in Benefit Obligation	(in thousands)
Benefit Obligation as of January 1,	$	270,564		$	285,560		$	86,997		$	109,948
Service Cost	6,618			7,011			1,012			1,693
Interest Cost	12,651			11,454			3,992			4,301
Actuarial (Gain) Loss	27,511			(12,818		)	(2,296		)	(23,852		)
Benefit Payments	(19,178		)	(20,643		)	(7,731		)	(8,057		)
Participant Contributions	—			—			2,532			2,410
Medicare Subsidy	—			—			499			554
Benefit Obligation as of December 31,	$	298,166		$	270,564		$	85,005		$	86,997
Change in Fair Value of Plan Assets
Fair Value of Plan Assets as of January 1,	$	278,946		$	279,699		$	107,750		$	99,846
Actual Gain on Plan Assets	26,482			19,823			3,881			13,551
Company Contributions	3,902			67			—			—
Participant Contributions	—			—			2,532			2,410
Benefit Payments	(19,178		)	(20,643		)	(7,731		)	(8,057		)
Fair Value of Plan Assets as of December 31,	$	290,152		$	278,946		$	106,432		$	107,750
Funded (Underfunded) Status as of December 31,	$	(8,014	)	$	8,382		$	21,427		$	20,753

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Amounts Recognized on the Registrant Subsidiaries' Balance Sheets as of December 31, 2014 and 2013

	Pension Plans						Other Postretirement Benefit Plans
	December 31,
APCo	2014			2013			2014			2013
	(in thousands)
Deferred Charges and Other Noncurrent Assets – Prepaid Benefit Costs	$	—		$	—		$	56,498		$	27,945
Other Current Liabilities – Accrued Short-term Benefit Liability	(39		)	(34		)	(2,884		)	(2,970		)
Employee Benefits and Pension Obligations – Accrued Long-term Benefit Liability	(60,477		)	(35,202		)	(40,129		)	(20,019		)
Funded (Underfunded) Status	$	(60,516	)	$	(35,236	)	$	13,485		$	4,956

	Pension Plans						Other Postretirement Benefit Plans
	December 31,
I&M	2014			2013			2014		2013
	(in thousands)
Deferred Charges and Other Noncurrent Assets – Prepaid Benefit Costs	$	—		$	—		$	40,749	$	39,590
Other Current Liabilities – Accrued Short-term Benefit Liability	(28		)	(43		)	—		—
Deferred Credits and Other Noncurrent Liabilities – Accrued Long-term Benefit Liability	(26,183		)	(15,513		)	—		127
Funded (Underfunded) Status	$	(26,211	)	$	(15,556	)	$	40,749	$	39,717

	Pension Plans						Other Postretirement Benefit Plans
	December 31,
OPCo	2014			2013			2014		2013
	(in thousands)
Deferred Charges and Other Noncurrent Assets – Prepaid Benefit Costs	$	—		$	—		$	41,515	$	39,496
Other Current Liabilities – Accrued Short-term Benefit Liability	(1		)	(1		)	—		—
Employee Benefits and Pension Obligations – Accrued Long-term Benefit Liability	(27,788		)	(22,008		)	—		1,334
Funded (Underfunded) Status	$	(27,789	)	$	(22,009	)	$	41,515	$	40,830

	Pension Plans						Other Postretirement Benefit Plans
	December 31,
PSO	2014			2013			2014		2013
	(in thousands)
Employee Benefits and Pension Assets – Prepaid Benefit Costs	$	—		$	5,280		$	19,335	$	17,349
Other Current Liabilities – Accrued Short-term Benefit Liability	(190		)	(107		)	—		—
Employee Benefits and Pension Obligations – Accrued Long-term Benefit Liability	(9,733		)	(1,286		)	—		1,205
Funded (Underfunded) Status	$	(9,923	)	$	3,887		$	19,335	$	18,554

306

	Pension Plans						Other Postretirement Benefit Plans
	December 31,
SWEPCo	2014			2013			2014		2013
	(in thousands)
Deferred Charges and Other Noncurrent Assets – Prepaid Benefit Costs	$	—		$	9,506		$	21,427	$	19,210
Other Current Liabilities – Accrued Short-term Benefit Liability	(82		)	(79		)	—		—
Employee Benefits and Pension Obligations – Accrued Long-term Benefit Liability	(7,932		)	(1,045		)	—		1,543
Funded (Underfunded) Status	$	(8,014	)	$	8,382		$	21,427	$	20,753

Amounts Included in AOCI and Regulatory Assets as of December 31, 2014 and 2013

APCo	Pension Plans				Other Postretirement Benefit Plans
	December 31,
	2014		2013		2014			2013
Components	(in thousands)
Net Actuarial Loss	$	235,000	$	220,047	$	65,841		$	72,732
Prior Service Cost (Credit)	523		720		(90,626		)	(100,676		)
Recorded as
Regulatory Assets	$	232,815	$	217,937	$	(20,330	)	$	(25,473	)
Deferred Income Taxes	948		991		(1,559		)	(865		)
Net of Tax AOCI	1,760		1,839		(2,896		)	(1,606		)

I&M	Pension Plans				Other Postretirement Benefit Plans
	December 31,
	2014		2013		2014			2013
Components	(in thousands)
Net Actuarial Loss	$	137,945	$	138,367	$	54,444		$	54,949
Prior Service Cost (Credit)	510		705		(85,117		)	(94,538		)
Recorded as
Regulatory Assets	$	134,121	$	134,560	$	(26,264	)	$	(34,428	)
Deferred Income Taxes	1,517		1,579		(1,543		)	(1,807		)
Net of Tax AOCI	2,817		2,933		(2,866		)	(3,354		)

OPCo	Pension Plans				Other Postretirement Benefit Plans
	December 31,
	2014		2013		2014			2013
Components	(in thousands)
Net Actuarial Loss	$	226,755	$	227,668	$	30,651		$	29,804
Prior Service Cost (Credit)	393		550		(62,377		)	(69,300		)
Recorded as
Regulatory Assets	$	227,148	$	228,218	$	(31,726	)	$	(39,496	)

307

PSO	Pension Plans				Other Postretirement Benefit Plans
	December 31,
	2014		2013		2014			2013
Components	(in thousands)
Net Actuarial Loss	$	102,641	$	93,688	$	25,242		$	25,712
Prior Service Cost (Credit)	536		832		(38,771		)	(43,061		)
Recorded as
Regulatory Assets	$	103,177	$	94,520	$	(13,529	)	$	(17,349	)

SWEPCo	Pension Plans				Other Postretirement Benefit Plans
	December 31,
	2014		2013		2014			2013
Components	(in thousands)
Net Actuarial Loss	$	104,903	$	95,492	$	32,377		$	32,772
Prior Service Cost (Credit)	655		1,004		(46,826		)	(51,982		)
Recorded as
Regulatory Assets	$	105,558	$	96,496	$	(8,959	)	$	(11,836	)
Deferred Income Taxes	—		—		(1,921		)	(2,580		)
Net of Tax AOCI	—		—		(3,569		)	(4,794		)

Components of the change in amounts included in AOCI and Regulatory Assets by Registrant Subsidiary during the years ended December 31, 2014 and 2013 are as follows:

Pension Plans – Components	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Actuarial Loss During the Year	$	31,546		$	14,163		$	11,509		$	15,706		$	16,457
Amortization of Actuarial Loss	(16,593		)	(14,585		)	(12,422		)	(6,753		)	(7,046		)
Amortization of Prior Service Cost	(197		)	(195		)	(157		)	(296		)	(349		)
Change for the Year Ended December 31, 2014	$	14,756		$	(617	)	$	(1,070	)	$	8,657		$	9,062

Pension Plans – Components	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Actuarial Gain During the Year	$	(58,411	)	$	(51,388	)	$	(253,392	)	$	(19,599	)	$	(16,133	)
Amortization of Actuarial Loss	(25,025		)	(21,688		)	(19,833		)	(9,845		)	(10,214		)
Amortization of Prior Service Cost	(198		)	(195		)	(157		)	(297		)	(349		)
Change for the Year Ended December 31, 2013	$	(83,634	)	$	(73,271	)	$	(273,382	)	$	(29,741	)	$	(26,696	)

Other Postretirement Benefit Plans – Components	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Actuarial (Gain) Loss During the Year	$	(2,309	)	$	1,863		$	3,226		$	639		$	840
Amortization of Actuarial Loss	(4,582		)	(2,368		)	(2,379		)	(1,109		)	(1,235		)
Amortization of Prior Service Credit	10,050			9,421			6,923			4,290			5,156
Change for the Year Ended December 31, 2014	$	3,159		$	8,916		$	7,770		$	3,820		$	4,761

Other Postretirement Benefit Plans – Components	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Actuarial Gain During the Year	$	(82,192	)	$	(63,460	)	$	(111,922	)	$	(27,305	)	$	(30,523	)
Amortization of Actuarial Loss	(12,249		)	(7,526		)	(8,633		)	(3,476		)	(3,928		)
Amortization of Prior Service Credit	10,050			9,421			6,962			4,289			5,156
Change for the Year Ended December 31, 2013	$	(84,391	)	$	(61,565	)	$	(113,593	)	$	(26,492	)	$	(29,295	)

308

Pension and Other Postretirement Benefits Plans’ Assets

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2014:

APCo
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	76,107	$	—	$	—	$	—		$	76,107		11.9	%
International	64,930		—		—		—			64,930			10.1	%
Options	—		1,822		—		—			1,822			0.3	%
Real Estate Investment Trusts	7,019		—		—		—			7,019			1.1	%
Common Collective Trust – Global	—		48,751		—		—			48,751			7.6	%
Common Collective Trust – International	—		2,390		—		—			2,390			0.4	%
Subtotal – Equities	148,056		52,963		—		—			201,019			31.4	%
Fixed Income:
Common Collective Trust – Debt	—		3,904		—		—			3,904			0.6	%
United States Government and Agency Securities	—		58,164		—		—			58,164			9.0	%
Corporate Debt	—		232,667		—		—			232,667			36.2	%
Foreign Debt	—		51,806		—		—			51,806			8.1	%
State and Local Government	—		1,927		—		—			1,927			0.3	%
Other – Asset Backed	—		3,766		—		—			3,766			0.6	%
Subtotal – Fixed Income	—		352,234		—		—			352,234			54.8	%
Infrastructure	—		—		1,617		—			1,617			0.3	%
Real Estate	—		—		30,487		—			30,487			4.7	%
Alternative Investments	—		—		48,985		—			48,985			7.6	%
Securities Lending	—		28,414		—		—			28,414			4.4	%
Securities Lending Collateral (a)	—		—		—		(28,641		)	(28,641		)	(4.5	)%
Cash and Cash Equivalents	—		6,888		—		—			6,888			1.1	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		1,286			1,286			0.2	%
Total	$	148,056	$	440,499	$	81,089	$	(27,355	)	$	642,289		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

309

I&M
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	70,116	$	—	$	—	$	—		$	70,116		11.9	%
International	59,820		—		—		—			59,820			10.1	%
Options	—		1,678		—		—			1,678			0.3	%
Real Estate Investment Trusts	6,467		—		—		—			6,467			1.1	%
Common Collective Trust – Global	—		44,914		—		—			44,914			7.6	%
Common Collective Trust – International	—		2,201		—		—			2,201			0.4	%
Subtotal – Equities	136,403		48,793		—		—			185,196			31.4	%
Fixed Income:
Common Collective Trust – Debt	—		3,597		—		—			3,597			0.6	%
United States Government and Agency Securities	—		53,586		—		—			53,586			9.0	%
Corporate Debt	—		214,355		—		—			214,355			36.2	%
Foreign Debt	—		47,728		—		—			47,728			8.1	%
State and Local Government	—		1,775		—		—			1,775			0.3	%
Other – Asset Backed	—		3,470		—		—			3,470			0.6	%
Subtotal – Fixed Income	—		324,511		—		—			324,511			54.8	%
Infrastructure	—		—		1,490		—			1,490			0.3	%
Real Estate	—		—		28,088		—			28,088			4.7	%
Alternative Investments	—		—		45,130		—			45,130			7.6	%
Securities Lending	—		26,178		—		—			26,178			4.4	%
Securities Lending Collateral (a)	—		—		—		(26,386		)	(26,386		)	(4.5	)%
Cash and Cash Equivalents	—		6,345		—		—			6,345			1.1	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		1,185			1,185			0.2	%
Total	$	136,403	$	405,827	$	74,708	$	(25,201	)	$	591,737		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

310

OPCo
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	59,064	$	—	$	—	$	—		$	59,064		11.9	%
International	50,390		—		—		—			50,390			10.1	%
Options	—		1,414		—		—			1,414			0.3	%
Real Estate Investment Trusts	5,448		—		—		—			5,448			1.1	%
Common Collective Trust – Global	—		37,834		—		—			37,834			7.6	%
Common Collective Trust – International	—		1,854		—		—			1,854			0.4	%
Subtotal – Equities	114,902		41,102		—		—			156,004			31.4	%
Fixed Income:
Common Collective Trust – Debt	—		3,030		—		—			3,030			0.6	%
United States Government and Agency Securities	—		45,139		—		—			45,139			9.0	%
Corporate Debt	—		180,566		—		—			180,566			36.2	%
Foreign Debt	—		40,205		—		—			40,205			8.1	%
State and Local Government	—		1,496		—		—			1,496			0.3	%
Other – Asset Backed	—		2,923		—		—			2,923			0.6	%
Subtotal – Fixed Income	—		273,359		—		—			273,359			54.8	%
Infrastructure	—		—		1,255		—			1,255			0.3	%
Real Estate	—		—		23,660		—			23,660			4.7	%
Alternative Investments	—		—		38,016		—			38,016			7.6	%
Securities Lending	—		22,051		—		—			22,051			4.4	%
Securities Lending Collateral (a)	—		—		—		(22,227		)	(22,227		)	(4.5	)%
Cash and Cash Equivalents	—		5,345		—		—			5,345			1.1	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		998			998			0.2	%
Total	$	114,902	$	341,857	$	62,931	$	(21,229	)	$	498,461		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

311

PSO
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	32,642	$	—	$	—	$	—		$	32,642		11.9	%
International	27,849		—		—		—			27,849			10.1	%
Options	—		781		—		—			781			0.3	%
Real Estate Investment Trusts	3,011		—		—		—			3,011			1.1	%
Common Collective Trust - Global	—		20,910		—		—			20,910			7.6	%
Common Collective Trust – International	—		1,025		—		—			1,025			0.4	%
Subtotal – Equities	63,502		22,716		—		—			86,218			31.4	%
Fixed Income:
Common Collective Trust – Debt	—		1,675		—		—			1,675			0.6	%
United States Government and Agency Securities	—		24,947		—		—			24,947			9.0	%
Corporate Debt	—		99,792		—		—			99,792			36.2	%
Foreign Debt	—		22,220		—		—			22,220			8.1	%
State and Local Government	—		827		—		—			827			0.3	%
Other – Asset Backed	—		1,615		—		—			1,615			0.6	%
Subtotal – Fixed Income	—		151,076		—		—			151,076			54.8	%
Infrastructure	—		—		693		—			693			0.3	%
Real Estate	—		—		13,076		—			13,076			4.7	%
Alternative Investments	—		—		21,010		—			21,010			7.6	%
Securities Lending	—		12,187		—		—			12,187			4.4	%
Securities Lending Collateral (a)	—		—		—		(12,284		)	(12,284		)	(4.5	)%
Cash and Cash Equivalents	—		2,954		—		—			2,954			1.1	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		552			552			0.2	%
Total	$	63,502	$	188,933	$	34,779	$	(11,732	)	$	275,482		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

312

SWEPCo
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	34,382	$	—	$	—	$	—		$	34,382		11.9	%
International	29,332		—		—		—			29,332			10.1	%
Options	—		823		—		—			823			0.3	%
Real Estate Investment Trusts	3,171		—		—		—			3,171			1.1	%
Common Collective Trust – Global	—		22,023		—		—			22,023			7.6	%
Common Collective Trust – International	—		1,079		—		—			1,079			0.4	%
Subtotal – Equities	66,885		23,925		—		—			90,810			31.4	%
Fixed Income:
Common Collective Trust – Debt	—		1,764		—		—			1,764			0.6	%
United States Government and Agency Securities	—		26,275		—		—			26,275			9.0	%
Corporate Debt	—		105,107		—		—			105,107			36.2	%
Foreign Debt	—		23,403		—		—			23,403			8.1	%
State and Local Government	—		871		—		—			871			0.3	%
Other – Asset Backed	—		1,701		—		—			1,701			0.6	%
Subtotal – Fixed Income	—		159,121		—		—			159,121			54.8	%
Infrastructure	—		—		730		—			730			0.3	%
Real Estate	—		—		13,772		—			13,772			4.7	%
Alternative Investments	—		—		22,129		—			22,129			7.6	%
Securities Lending	—		12,836		—		—			12,836			4.4	%
Securities Lending Collateral (a)	—		—		—		(12,938		)	(12,938		)	(4.5	)%
Cash and Cash Equivalents	—		3,111		—		—			3,111			1.1	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		581			581			0.2	%
Total	$	66,885	$	198,993	$	36,631	$	(12,357	)	$	290,152		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

The following tables set forth a reconciliation of changes in the fair value of assets classified as Level 3 in the fair value hierarchy by Registrant Subsidiary for pension assets:

APCo	Infrastructure		Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2014	$	—	$	31,757		$	43,939	$	75,696
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	—		2,829			3,276		6,105
Relating to Assets Sold During the Period	—		9,831			1,616		11,447
Purchases and Sales	1,617		(13,930		)	154		(12,159		)
Transfers into Level 3	—		—			—		—
Transfers out of Level 3	—		—			—		—
Balance as of December 31, 2014	$	1,617	$	30,487		$	48,985	$	81,089

313

I&M	Infrastructure		Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2014	$	—	$	28,275		$	39,121	$	67,396
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	—		417			3,902		4,319
Relating to Assets Sold During the Period	—		1,448			1,924		3,372
Purchases and Sales	1,490		(2,052		)	183		(379		)
Transfers into Level 3	—		—			—		—
Transfers out of Level 3	—		—			—		—
Balance as of December 31, 2014	$	1,490	$	28,088		$	45,130	$	74,708

OPCo	Infrastructure		Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2014	$	—	$	25,367		$	35,098	$	60,465
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	—		3,802			1,895		5,697
Relating to Assets Sold During the Period	—		13,219			934		14,153
Purchases and Sales	1,255		(18,728		)	89		(17,384		)
Transfers into Level 3	—		—			—		—
Transfers out of Level 3	—		—			—		—
Balance as of December 31, 2014	$	1,255	$	23,660		$	38,016	$	62,931

PSO	Infrastructure		Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2014	$	—	$	13,380		$	18,513	$	31,893
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	—		683			1,622		2,305
Relating to Assets Sold During the Period	—		2,371			799		3,170
Purchases and Sales	693		(3,358		)	76		(2,589		)
Transfers into Level 3	—		—			—		—
Transfers out of Level 3	—		—			—		—
Balance as of December 31, 2014	$	693	$	13,076		$	21,010	$	34,779

SWEPCo	Infrastructure		Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2014	$	—	$	14,106		$	19,517	$	33,623
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	—		745			1,696		2,441
Relating to Assets Sold During the Period	—		2,590			836		3,426
Purchases and Sales	730		(3,669		)	80		(2,859		)
Transfers into Level 3	—		—			—		—
Transfers out of Level 3	—		—			—		—
Balance as of December 31, 2014	$	730	$	13,772		$	22,129	$	36,631

314

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2014:

APCo
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	77,221	$	—	$	—	$	—	$	77,221	27.5	%
International	93,871		—		—		—		93,871		33.5	%
Options	—		2,712		—		—		2,712		1.0	%
Common Collective Trust – Global	—		4,905		—		—		4,905		1.8	%
Subtotal – Equities	171,092		7,617		—		—		178,709		63.8	%
Fixed Income:
Common Collective Trust – Debt	—		17,188		—		—		17,188		6.1	%
United States Government and Agency Securities	—		11,775		—		—		11,775		4.2	%
Corporate Debt	—		20,787		—		—		20,787		7.4	%
Foreign Debt	—		3,532		—		—		3,532		1.3	%
State and Local Government	—		975		—		—		975		0.3	%
Other – Asset Backed	—		820		—		—		820		0.3	%
Subtotal – Fixed Income	—		55,077		—		—		55,077		19.6	%
Trust Owned Life Insurance:
International Equities	—		1,709		—		—		1,709		0.6	%
United States Bonds	—		35,131		—		—		35,131		12.5	%
Subtotal – Trust Owned Life Insurance	—		36,840		—		—		36,840		13.1	%
Cash and Cash Equivalents	7,751		1,586		—		—		9,337		3.3	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		670		670		0.2	%
Total	$	178,843	$	101,120	$	—	$	670	$	280,633	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

315

I&M
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	55,695	$	—	$	—	$	—	$	55,695	27.5	%
International	67,705		—		—		—		67,705		33.5	%
Options	—		1,956		—		—		1,956		1.0	%
Common Collective Trust – Global	—		3,538		—		—		3,538		1.8	%
Subtotal – Equities	123,400		5,494		—		—		128,894		63.8	%
Fixed Income:
Common Collective Trust – Debt	—		12,397		—		—		12,397		6.1	%
United States Government and Agency Securities	—		8,493		—		—		8,493		4.2	%
Corporate Debt	—		14,993		—		—		14,993		7.4	%
Foreign Debt	—		2,547		—		—		2,547		1.3	%
State and Local Government	—		704		—		—		704		0.3	%
Other – Asset Backed	—		592		—		—		592		0.3	%
Subtotal – Fixed Income	—		39,726		—		—		39,726		19.6	%
Trust Owned Life Insurance:
International Equities	—		1,232		—		—		1,232		0.6	%
United States Bonds	—		25,339		—		—		25,339		12.5	%
Subtotal – Trust Owned Life Insurance	—		26,571		—		—		26,571		13.1	%
Cash and Cash Equivalents	5,590		1,144		—		—		6,734		3.3	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		483		483		0.2	%
Total	$	128,990	$	72,935	$	—	$	483	$	202,408	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

316

OPCo
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	56,743	$	—	$	—	$	—	$	56,743	27.5	%
International	68,977		—		—		—		68,977		33.5	%
Options	—		1,993		—		—		1,993		1.0	%
Common Collective Trust – Global	—		3,604		—		—		3,604		1.8	%
Subtotal – Equities	125,720		5,597		—		—		131,317		63.8	%
Fixed Income:
Common Collective Trust – Debt	—		12,630		—		—		12,630		6.1	%
United States Government and Agency Securities	—		8,653		—		—		8,653		4.2	%
Corporate Debt	—		15,274		—		—		15,274		7.4	%
Foreign Debt	—		2,595		—		—		2,595		1.3	%
State and Local Government	—		717		—		—		717		0.3	%
Other – Asset Backed	—		603		—		—		603		0.3	%
Subtotal – Fixed Income	—		40,472		—		—		40,472		19.6	%
Trust Owned Life Insurance:
International Equities	—		1,256		—		—		1,256		0.6	%
United States Bonds	—		25,815		—		—		25,815		12.5	%
Subtotal – Trust Owned Life Insurance	—		27,071		—		—		27,071		13.1	%
Cash and Cash Equivalents	5,695		1,165		—		—		6,860		3.3	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		492		492		0.2	%
Total	$	131,415	$	74,305	$	—	$	492	$	206,212	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

317

PSO
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	26,425	$	—	$	—	$	—	$	26,425	27.5	%
International	32,126		—		—		—		32,126		33.5	%
Options	—		928		—		—		928		1.0	%
Common Collective Trust – Global	—		1,679		—		—		1,679		1.8	%
Subtotal – Equities	58,551		2,607		—		—		61,158		63.8	%
Fixed Income:
Common Collective Trust – Debt	—		5,882		—		—		5,882		6.1	%
United States Government and Agency Securities	—		4,030		—		—		4,030		4.2	%
Corporate Debt	—		7,114		—		—		7,114		7.4	%
Foreign Debt	—		1,209		—		—		1,209		1.3	%
State and Local Government	—		334		—		—		334		0.3	%
Other – Asset Backed	—		281		—		—		281		0.3	%
Subtotal – Fixed Income	—		18,850		—		—		18,850		19.6	%
Trust Owned Life Insurance:
International Equities	—		585		—		—		585		0.6	%
United States Bonds	—		12,023		—		—		12,023		12.5	%
Subtotal – Trust Owned Life Insurance	—		12,608		—		—		12,608		13.1	%
Cash and Cash Equivalents	2,653		543		—		—		3,196		3.3	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		229		229		0.2	%
Total	$	61,204	$	34,608	$	—	$	229	$	96,041	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

318

SWEPCo
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	29,286	$	—	$	—	$	—	$	29,286	27.5	%
International	35,601		—		—		—		35,601		33.5	%
Options	—		1,029		—		—		1,029		1.0	%
Common Collective Trust – Global	—		1,860		—		—		1,860		1.8	%
Subtotal – Equities	64,887		2,889		—		—		67,776		63.8	%
Fixed Income:
Common Collective Trust – Debt	—		6,519		—		—		6,519		6.1	%
United States Government and Agency Securities	—		4,466		—		—		4,466		4.2	%
Corporate Debt	—		7,884		—		—		7,884		7.4	%
Foreign Debt	—		1,339		—		—		1,339		1.3	%
State and Local Government	—		370		—		—		370		0.3	%
Other – Asset Backed	—		311		—		—		311		0.3	%
Subtotal – Fixed Income	—		20,889		—		—		20,889		19.6	%
Trust Owned Life Insurance:
International Equities	—		648		—		—		648		0.6	%
United States Bonds	—		13,324		—		—		13,324		12.5	%
Subtotal – Trust Owned Life Insurance	—		13,972		—		—		13,972		13.1	%
Cash and Cash Equivalents	2,940		601		—		—		3,541		3.3	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		254		254		0.2	%
Total	$	67,827	$	38,351	$	—	$	254	$	106,432	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

319

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

APCo
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	145,515	$	��	$	—	$	—		$	145,515		23.2	%
International	68,591		—		—		—			68,591			10.9	%
Real Estate Investment Trusts	7,718		—		—		—			7,718			1.2	%
Common Collective Trust – International	—		1,302		—		—			1,302			0.2	%
Subtotal – Equities	221,824		1,302		—		—			223,126			35.5	%
Fixed Income:
Common Collective Trust – Debt	—		3,456		—		—			3,456			0.5	%
United States Government and Agency Securities	—		51,556		—		—			51,556			8.2	%
Corporate Debt	—		213,280		—		—			213,280			34.0	%
Foreign Debt	—		45,818		—		—			45,818			7.3	%
State and Local Government	—		3,730		—		—			3,730			0.6	%
Other – Asset Backed	—		4,437		—		—			4,437			0.7	%
Subtotal – Fixed Income	—		322,277		—		—			322,277			51.3	%
Real Estate	—		—		31,757		—			31,757			5.0	%
Alternative Investments	—		—		43,939		—			43,939			7.0	%
Securities Lending	—		4,689		—		—			4,689			0.8	%
Securities Lending Collateral (a)	—		—		—		(6,024		)	(6,024		)	(0.9	)%
Cash and Cash Equivalents	—		6,476		—		—			6,476			1.0	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		1,755			1,755			0.3	%
Total	$	221,824	$	334,744	$	75,696	$	(4,269	)	$	627,995		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

320

I&M
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	129,561	$	—	$	—	$	—		$	129,561		23.2	%
International	61,071		—		—		—			61,071			10.9	%
Real Estate Investment Trusts	6,872		—		—		—			6,872			1.2	%
Common Collective Trust – International	—		1,159		—		—			1,159			0.2	%
Subtotal – Equities	197,504		1,159		—		—			198,663			35.5	%
Fixed Income:
Common Collective Trust – Debt	—		3,077		—		—			3,077			0.5	%
United States Government and Agency Securities	—		45,904		—		—			45,904			8.2	%
Corporate Debt	—		189,896		—		—			189,896			34.0	%
Foreign Debt	—		40,794		—		—			40,794			7.3	%
State and Local Government	—		3,321		—		—			3,321			0.6	%
Other – Asset Backed	—		3,951		—		—			3,951			0.7	%
Subtotal – Fixed Income	—		286,943		—		—			286,943			51.3	%
Real Estate	—		—		28,275		—			28,275			5.0	%
Alternative Investments	—		—		39,121		—			39,121			7.0	%
Securities Lending	—		4,175		—		—			4,175			0.8	%
Securities Lending Collateral (a)	—		—		—		(5,363		)	(5,363		)	(0.9	)%
Cash and Cash Equivalents	—		5,766		—		—			5,766			1.0	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		1,563			1,563			0.3	%
Total	$	197,504	$	298,043	$	67,396	$	(3,800	)	$	559,143		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

321

OPCo
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	116,233	$	—	$	—	$	—		$	116,233		23.2	%
International	54,790		—		—		—			54,790			10.9	%
Real Estate Investment Trusts	6,165		—		—		—			6,165			1.2	%
Common Collective Trust – International	—		1,040		—		—			1,040			0.2	%
Subtotal – Equities	177,188		1,040		—		—			178,228			35.5	%
Fixed Income:
Common Collective Trust – Debt	—		2,761		—		—			2,761			0.5	%
United States Government and Agency Securities	—		41,183		—		—			41,183			8.2	%
Corporate Debt	—		170,365		—		—			170,365			34.0	%
Foreign Debt	—		36,599		—		—			36,599			7.3	%
State and Local Government	—		2,980		—		—			2,980			0.6	%
Other – Asset Backed	—		3,545		—		—			3,545			0.7	%
Subtotal – Fixed Income	—		257,433		—		—			257,433			51.3	%
Real Estate	—		—		25,367		—			25,367			5.0	%
Alternative Investments	—		—		35,098		—			35,098			7.0	%
Securities Lending	—		3,745		—		—			3,745			0.8	%
Securities Lending Collateral (a)	—		—		—		(4,812		)	(4,812		)	(0.9	)%
Cash and Cash Equivalents	—		5,173		—		—			5,173			1.0	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		1,402			1,402			0.3	%
Total	$	177,188	$	267,391	$	60,465	$	(3,410	)	$	501,634		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

322

PSO
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	61,309	$	—	$	—	$	—		$	61,309		23.2	%
International	28,900		—		—		—			28,900			10.9	%
Real Estate Investment Trusts	3,252		—		—		—			3,252			1.2	%
Common Collective Trust – International	—		548		—		—			548			0.2	%
Subtotal – Equities	93,461		548		—		—			94,009			35.5	%
Fixed Income:
Common Collective Trust – Debt	—		1,456		—		—			1,456			0.5	%
United States Government and Agency Securities	—		21,723		—		—			21,723			8.2	%
Corporate Debt	—		89,863		—		—			89,863			34.0	%
Foreign Debt	—		19,305		—		—			19,305			7.3	%
State and Local Government	—		1,572		—		—			1,572			0.6	%
Other – Asset Backed	—		1,870		—		—			1,870			0.7	%
Subtotal – Fixed Income	—		135,789		—		—			135,789			51.3	%
Real Estate	—		—		13,380		—			13,380			5.0	%
Alternative Investments	—		—		18,513		—			18,513			7.0	%
Securities Lending	—		1,976		—		—			1,976			0.8	%
Securities Lending Collateral (a)	—		—		—		(2,538		)	(2,538		)	(0.9	)%
Cash and Cash Equivalents	—		2,729		—		—			2,729			1.0	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		739			739			0.3	%
Total	$	93,461	$	141,042	$	31,893	$	(1,799	)	$	264,597		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

323

SWEPCo
Asset Class	Level 1		Level 2		Level 3		Other			Total			Year End Allocation
	(in thousands)
Equities:
Domestic	$	64,634	$	—	$	—	$	—		$	64,634		23.2	%
International	30,467		—		—		—			30,467			10.9	%
Real Estate Investment Trusts	3,428		—		—		—			3,428			1.2	%
Common Collective Trust – International	—		578		—		—			578			0.2	%
Subtotal – Equities	98,529		578		—		—			99,107			35.5	%
Fixed Income:
Common Collective Trust – Debt	—		1,535		—		—			1,535			0.5	%
United States Government and Agency Securities	—		22,901		—		—			22,901			8.2	%
Corporate Debt	—		94,736		—		—			94,736			34.0	%
Foreign Debt	—		20,352		—		—			20,352			7.3	%
State and Local Government	—		1,657		—		—			1,657			0.6	%
Other – Asset Backed	—		1,971		—		—			1,971			0.7	%
Subtotal – Fixed Income	—		143,152		—		—			143,152			51.3	%
Real Estate	—		—		14,106		—			14,106			5.0	%
Alternative Investments	—		—		19,517		—			19,517			7.0	%
Securities Lending	—		2,083		—		—			2,083			0.8	%
Securities Lending Collateral (a)	—		—		—		(2,676		)	(2,676		)	(0.9	)%
Cash and Cash Equivalents	—		2,877		—		—			2,877			1.0	%
Other – Pending Transactions and Accrued Income (b)	—		—		—		780			780			0.3	%
Total	$	98,529	$	148,690	$	33,623	$	(1,896	)	$	278,946		100.0	%

(a) Amounts in "Other" column primarily represent an obligation to repay collateral received as part of the Securities Lending Program.

(b) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

The following tables set forth a reconciliation of changes in the fair value of assets classified as Level 3 in the fair value hierarchy for pension assets by Registrant Subsidiary:

APCo	Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2013	$	29,063		$	25,888	$	54,951
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	3,861			1,932		5,793
Relating to Assets Sold During the Period	—			1,949		1,949
Purchases and Sales	(1,167		)	14,170		13,003
Transfers into Level 3	—			—		—
Transfers out of Level 3	—			—		—
Balance as of December 31, 2013	$	31,757		$	43,939	$	75,696

324

I&M	Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2013	$	25,811		$	22,992	$	48,803
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	3,531			1,727		5,258
Relating to Assets Sold During the Period	—			1,741		1,741
Purchases and Sales	(1,067		)	12,661		11,594
Transfers into Level 3	—			—		—
Transfers out of Level 3	—			—		—
Balance as of December 31, 2013	$	28,275		$	39,121	$	67,396

OPCo	Real Estate			Alternative Investments			Total Level 3
	(in thousands)
Balance as of January 1, 2013	$	47,464		$	42,279		$	89,743
Transfer of OPCo Generation Plan Assets	(26,218		)	(36,275		)	(62,493		)
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	5,907			3,113			9,020
Relating to Assets Sold During the Period	—			3,142			3,142
Purchases and Sales	(1,786		)	22,839			21,053
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Balance as of December 31, 2013	$	25,367		$	35,098		$	60,465

PSO	Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2013	$	12,382		$	11,030	$	23,412
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	1,430			801		2,231
Relating to Assets Sold During the Period	—			808		808
Purchases and Sales	(432		)	5,874		5,442
Transfers into Level 3	—			—		—
Transfers out of Level 3	—			—		—
Balance as of December 31, 2013	$	13,380		$	18,513	$	31,893

SWEPCo	Real Estate			Alternative Investments		Total Level 3
	(in thousands)
Balance as of January 1, 2013	$	13,078		$	11,649	$	24,727
Actual Return on Plan Assets
Relating to Assets Still Held as of the Reporting Date	1,474			841		2,315
Relating to Assets Sold During the Period	—			850		850
Purchases and Sales	(446		)	6,177		5,731
Transfers into Level 3	—			—		—
Transfers out of Level 3	—			—		—
Balance as of December 31, 2013	$	14,106		$	19,517	$	33,623

325

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

APCo
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	79,369	$	—	$	—	$	—	$	79,369	27.9	%
International	103,188		—		—		—		103,188		36.2	%
Common Collective Trust – Global	—		2,463		—		—		2,463		0.9	%
Subtotal – Equities	182,557		2,463		—		—		185,020		65.0	%
Fixed Income:
Common Collective Trust – Debt	—		14,737		—		—		14,737		5.2	%
United States Government and Agency Securities	—		9,476		—		—		9,476		3.3	%
Corporate Debt	—		18,458		—		—		18,458		6.5	%
Foreign Debt	—		3,605		—		—		3,605		1.2	%
State and Local Government	—		776		—		—		776		0.3	%
Other – Asset Backed	—		1,362		—		—		1,362		0.5	%
Subtotal – Fixed Income	—		48,414		—		—		48,414		17.0	%
Trust Owned Life Insurance:
International Equities	—		2,219		—		—		2,219		0.8	%
United States Bonds	—		35,470		—		—		35,470		12.4	%
Subtotal – Trust Owned Life Insurance	—		37,689		—		—		37,689		13.2	%
Cash and Cash Equivalents	11,441		1,470		—		—		12,911		4.5	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		806		806		0.3	%
Total	$	193,998	$	90,036	$	—	$	806	$	284,840	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

326

I&M
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	57,460	$	—	$	—	$	—	$	57,460	27.9	%
International	74,705		—		—		—		74,705		36.2	%
Common Collective Trust – Global	—		1,783		—		—		1,783		0.9	%
Subtotal – Equities	132,165		1,783		—		—		133,948		65.0	%
Fixed Income:
Common Collective Trust – Debt	—		10,669		—		—		10,669		5.2	%
United States Government and Agency Securities	—		6,860		—		—		6,860		3.3	%
Corporate Debt	—		13,363		—		—		13,363		6.5	%
Foreign Debt	—		2,610		—		—		2,610		1.2	%
State and Local Government	—		562		—		—		562		0.3	%
Other – Asset Backed	—		986		—		—		986		0.5	%
Subtotal – Fixed Income	—		35,050		—		—		35,050		17.0	%
Trust Owned Life Insurance:
International Equities	—		1,607		—		—		1,607		0.8	%
United States Bonds	—		25,679		—		—		25,679		12.4	%
Subtotal – Trust Owned Life Insurance	—		27,286		—		—		27,286		13.2	%
Cash and Cash Equivalents	8,283		1,064		—		—		9,347		4.5	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		583		583		0.3	%
Total	$	140,448	$	65,183	$	—	$	583	$	206,214	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

327

OPCo
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	59,069	$	—	$	—	$	—	$	59,069	27.9	%
International	76,799		—		—		—		76,799		36.2	%
Common Collective Trust – Global	—		1,833		—		—		1,833		0.9	%
Subtotal – Equities	135,868		1,833		—		—		137,701		65.0	%
Fixed Income:
Common Collective Trust – Debt	—		10,968		—		—		10,968		5.2	%
United States Government and Agency Securities	—		7,053		—		—		7,053		3.3	%
Corporate Debt	—		13,738		—		—		13,738		6.5	%
Foreign Debt	—		2,683		—		—		2,683		1.2	%
State and Local Government	—		577		—		—		577		0.3	%
Other – Asset Backed	—		1,014		—		—		1,014		0.5	%
Subtotal – Fixed Income	—		36,033		—		—		36,033		17.0	%
Trust Owned Life Insurance:
International Equities	—		1,652		—		—		1,652		0.8	%
United States Bonds	—		26,399		—		—		26,399		12.4	%
Subtotal – Trust Owned Life Insurance	—		28,051		—		—		28,051		13.2	%
Cash and Cash Equivalents	8,515		1,094		—		—		9,609		4.5	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		600		600		0.3	%
Total	$	144,383	$	67,011	$	—	$	600	$	211,994	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

328

PSO
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	26,842	$	—	$	—	$	—	$	26,842	27.9	%
International	34,898		—		—		—		34,898		36.2	%
Common Collective Trust – Global	—		833		—		—		833		0.9	%
Subtotal – Equities	61,740		833		—		—		62,573		65.0	%
Fixed Income:
Common Collective Trust – Debt	—		4,984		—		—		4,984		5.2	%
United States Government and Agency Securities	—		3,205		—		—		3,205		3.3	%
Corporate Debt	—		6,243		—		—		6,243		6.5	%
Foreign Debt	—		1,219		—		—		1,219		1.2	%
State and Local Government	—		262		—		—		262		0.3	%
Other – Asset Backed	—		461		—		—		461		0.5	%
Subtotal – Fixed Income	—		16,374		—		—		16,374		17.0	%
Trust Owned Life Insurance:
International Equities	—		751		—		—		751		0.8	%
United States Bonds	—		11,996		—		—		11,996		12.4	%
Subtotal – Trust Owned Life Insurance	—		12,747		—		—		12,747		13.2	%
Cash and Cash Equivalents	3,869		497		—		—		4,366		4.5	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		273		273		0.3	%
Total	$	65,609	$	30,451	$	—	$	273	$	96,333	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

329

SWEPCo
Asset Class	Level 1		Level 2		Level 3		Other		Total		Year End Allocation
	(in thousands)
Equities:
Domestic	$	30,022	$	—	$	—	$	—	$	30,022	27.9	%
International	39,034		—		—		—		39,034		36.2	%
Common Collective Trust – Global	—		932		—		—		932		0.9	%
Subtotal – Equities	69,056		932		—		—		69,988		65.0	%
Fixed Income:
Common Collective Trust – Debt	—		5,575		—		—		5,575		5.2	%
United States Government and Agency Securities	—		3,585		—		—		3,585		3.3	%
Corporate Debt	—		6,982		—		—		6,982		6.5	%
Foreign Debt	—		1,364		—		—		1,364		1.2	%
State and Local Government	—		294		—		—		294		0.3	%
Other – Asset Backed	—		515		—		—		515		0.5	%
Subtotal – Fixed Income	—		18,315		—		—		18,315		17.0	%
Trust Owned Life Insurance:
International Equities	—		840		—		—		840		0.8	%
United States Bonds	—		13,418		—		—		13,418		12.4	%
Subtotal – Trust Owned Life Insurance	—		14,258		—		—		14,258		13.2	%
Cash and Cash Equivalents	4,328		556		—		—		4,884		4.5	%
Other – Pending Transactions and Accrued Income (a)	—		—		—		305		305		0.3	%
Total	$	73,384	$	34,061	$	—	$	305	$	107,750	100.0	%

(a) Amounts in "Other" column primarily represent accrued interest, dividend receivables and transactions pending settlement.

Determination of Pension Expense

The determination of pension expense or income is based on a market-related valuation of assets which reduces year-to-year volatility.  This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur.  Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return.

The accumulated benefit obligation for the pension plans is as follows:

Accumulated Benefit Obligation	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Qualified Pension Plan	$	688,632	$	598,190	$	512,467	$	270,059	$	281,210
Nonqualified Pension Plans	464		470		69		2,750		1,749
Total as of December 31, 2014	$	689,096	$	598,660	$	512,536	$	272,809	$	282,959
Accumulated Benefit Obligation	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Qualified Pension Plan	$	653,968	$	560,443	$	512,798	$	248,472	$	256,083
Nonqualified Pension Plans	200		326		6		1,387		1,115
Total as of December 31, 2013	$	654,168	$	560,769	$	512,804	$	249,859	$	257,198

330

For the underfunded pension plans that had an accumulated benefit obligation in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets of these plans as of December 31, 2014 and 2013 were as follows:

	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Projected Benefit Obligation	$	702,805		$	617,948		$	526,250		$	2,770		$	1,790
Accumulated Benefit Obligation	$	689,096		$	598,660		$	512,536		$	2,750		$	1,749
Fair Value of Plan Assets	642,289			591,737			498,461			—			—
Underfunded Accumulated Benefit Obligation as of December 31, 2014	$	(46,807	)	$	(6,923	)	$	(14,075	)	$	(2,750	)	$	(1,749	)
	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Projected Benefit Obligation	$	663,231		$	574,699		$	523,643		$	1,394		$	1,124
Accumulated Benefit Obligation	$	654,168		$	560,769		$	512,804		$	1,387		$	1,115
Fair Value of Plan Assets	627,995			559,143			501,634			—			—
Underfunded Accumulated Benefit Obligation as of December 31, 2013	$	(26,173	)	$	(1,626	)	$	(11,170	)	$	(1,387	)	$	(1,115	)

Estimated Future Benefit Payments and Contributions

The estimated pension benefit payments and contributions to the trust are at least the minimum amount required by the Employee Retirement Income Security Act plus payment of unfunded nonqualified benefits.  For the qualified pension plan, additional discretionary contributions may also be made to maintain the funded status of the plan.   For OPEB plans, expected payments include the payment of unfunded benefits.  The following table provides the estimated contributions and payments by Registrant Subsidiary for 2015:

Company	Pension Plans		Other Postretirement Benefit Plans
	(in thousands)
APCo	$	11,631	$	2,884
I&M	12,492		—
OPCo	7,847		—
PSO	6,656		—
SWEPCo	7,840		—

The tables below reflect the total benefits expected to be paid from the plan or from the Registrant Subsidiaries' assets.  The payments include the participants’ contributions to the plan for their share of the cost.  Effective for employees hired after December 2013, retiree medical coverage will not be provided.  Future benefit payments are dependent on the number of employees retiring, whether the retiring employees elect to receive pension benefits as annuities or as lump sum distributions, future integration of the benefit plans with changes to Medicare and other legislation, future levels of interest rates and variances in actuarial results.  The estimated payments for the pension benefits and OPEB are as follows:

Pension Plans	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
2015	$	42,859	$	33,114	$	36,277	$	18,950	$	18,872
2016	43,091		33,813		36,174		19,626		18,747
2017	43,484		35,748		35,571		20,175		20,407
2018	45,122		36,948		35,822		21,118		21,019
2019	45,488		38,727		36,179		21,732		22,059
Years 2020 to 2024, in Total	236,107		209,813		176,022		109,800		118,909

331

Other Postretirement Benefit Plans: Benefit Payments	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
2015	$	24,828	$	15,088	$	16,379	$	6,989	$	7,401
2016	24,603		15,363		16,289		7,067		7,504
2017	24,468		15,484		16,088		7,074		7,674
2018	24,820		15,637		16,122		7,132		7,840
2019	24,290		15,804		16,079		7,278		7,885
Years 2020 to 2024, in Total	121,401		84,026		80,066		38,852		43,503

Other Postretirement Benefit Plans: Medicare Subsidy Receipts	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
2015	$	232	$	—	$	—	$	—	$	—
2016	236		—		—		—		—
2017	234		—		—		—		—
2018	231		—		—		—		—
2019	230		—		—		—		—
Years 2020 to 2024, in Total	1,080		—		—		—		—

Components of Net Periodic Benefit Cost

The following tables provide the components of net periodic benefit cost (credit) by Registrant Subsidiary for the years ended December 31, 2014, 2013 and 2012:

APCo	Pension Plans									Other Postretirement Benefit Plans
	Years Ended December 31,
	2014			2013			2012			2014			2013			2012
	(in thousands)
Service Cost	$	7,036		$	6,171		$	7,565		$	1,448		$	2,566		$	5,387
Interest Cost	29,624			27,662			30,211			12,788			13,454			18,462
Expected Return on Plan Assets	(33,927		)	(37,041		)	(41,944		)	(18,533		)	(18,147		)	(16,753		)
Amortization of Transition Obligation	—			—			—			—			—			780
Amortization of Prior Service Cost (Credit)	197			198			475			(10,050		)	(10,050		)	(2,862		)
Amortization of Net Actuarial Loss	16,593			25,025			20,339			4,582			12,249			10,526
Net Periodic Benefit Cost (Credit)	19,523			22,015			16,646			(9,765		)	72			15,540
Capitalized Portion	(6,819		)	(7,529		)	(6,525		)	3,411			(25		)	(6,092		)
Net Periodic Benefit Cost (Credit) Recognized in Expense	$	12,704		$	14,486		$	10,121		$	(6,354	)	$	47		$	9,448

I&M	Pension Plans									Other Postretirement Benefit Plans
	Years Ended December 31,
	2014			2013			2012			2014			2013			2012
	(in thousands)
Service Cost	$	10,068		$	8,736		$	9,908		$	1,947		$	3,219		$	6,621
Interest Cost	26,293			24,100			26,245			7,638			8,221			12,785
Expected Return on Plan Assets	(30,993		)	(32,826		)	(37,566		)	(13,454		)	(13,183		)	(12,847		)
Amortization of Transition Obligation	—			—			—			—			—			132
Amortization of Prior Service Cost (Credit)	195			195			407			(9,421		)	(9,421		)	(2,383		)
Amortization of Net Actuarial Loss	14,585			21,688			17,569			2,368			7,526			7,050
Net Periodic Benefit Cost (Credit)	20,148			21,893			16,563			(10,922		)	(3,638		)	11,358
Capitalized Portion	(4,638		)	(4,576		)	(3,114		)	2,514			760			(2,135		)
Net Periodic Benefit Cost (Credit) Recognized in Expense	$	15,510		$	17,317		$	13,449		$	(8,408	)	$	(2,878	)	$	9,223

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OPCo	Pension Plans									Other Postretirement Benefit Plans
	Years Ended December 31,
	2014			2013			2012			2014			2013			2012
	(in thousands)
Service Cost	$	5,140		$	5,285		$	11,003		$	1,026		$	2,882		$	8,748
Interest Cost	22,105			21,939			45,194			7,601			9,494			24,189
Expected Return on Plan Assets	(26,427		)	(29,919		)	(68,401		)	(13,519		)	(13,468		)	(22,555		)
Amortization of Transition Obligation	—			—			—			—			—			104
Amortization of Prior Service Cost (Credit)	157			157			743			(6,923		)	(6,962		)	(3,873		)
Amortization of Net Actuarial Loss	12,422			19,833			30,439			2,379			8,633			13,669
Net Periodic Benefit Cost (Credit)	13,397			17,295			18,978			(9,436		)	579			20,282
Capitalized Portion	(5,479		)	(6,192		)	(7,060		)	3,859			(207		)	(7,545		)
Net Periodic Benefit Cost (Credit) Recognized in Expense	$	7,918		$	11,103		$	11,918		$	(5,577	)	$	372		$	12,737

PSO	Pension Plans									Other Postretirement Benefit Plans
	Years Ended December 31,
	2014			2013			2012			2014			2013			2012
	(in thousands)
Service Cost	$	5,207		$	5,562		$	5,951		$	839		$	1,372		$	2,836
Interest Cost	12,057			10,993			12,301			3,574			3,793			5,797
Expected Return on Plan Assets	(14,604		)	(15,675		)	(18,015		)	(6,300		)	(6,089		)	(5,922		)
Amortization of Prior Service Cost (Credit)	296			297			(948		)	(4,290		)	(4,289		)	(1,079		)
Amortization of Net Actuarial Loss	6,753			9,845			8,206			1,109			3,476			3,189
Net Periodic Benefit Cost (Credit)	9,709			11,022			7,495			(5,068		)	(1,737		)	4,821
Capitalized Portion	(3,320		)	(3,384		)	(2,533		)	1,733			533			(1,629		)
Net Periodic Benefit Cost (Credit) Recognized in Expense	$	6,389		$	7,638		$	4,962		$	(3,335	)	$	(1,204	)	$	3,192

SWEPCo	Pension Plans									Other Postretirement Benefit Plans
	Years Ended December 31,
	2014			2013			2012			2014			2013			2012
	(in thousands)
Service Cost	$	6,618		$	7,011		$	7,099		$	1,012		$	1,693		$	3,324
Interest Cost	12,651			11,454			12,537			3,992			4,301			6,673
Expected Return on Plan Assets	(15,427		)	(16,509		)	(18,866		)	(7,016		)	(6,881		)	(6,795		)
Amortization of Prior Service Cost (Credit)	349			349			(793		)	(5,156		)	(5,156		)	(933		)
Amortization of Net Actuarial Loss	7,046			10,214			8,330			1,235			3,928			3,659
Net Periodic Benefit Cost (Credit)	11,237			12,519			8,307			(5,933		)	(2,115		)	5,928
Capitalized Portion	(3,391		)	(3,518		)	(2,924		)	1,791			594			(2,087		)
Net Periodic Benefit Cost (Credit) Recognized in Expense	$	7,846		$	9,001		$	5,383		$	(4,142	)	$	(1,521	)	$	3,841

333

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on each Registrant Subsidiaries’ balance sheet during 2015 are shown in the following tables:

	APCo			I&M			OPCo			PSO			SWEPCo
Pension Plans – Components	(in thousands)
Net Actuarial Loss	$	14,457		$	12,713		$	10,823		$	5,891		$	6,146
Prior Service Cost	180			181			140			252			308
Total Estimated 2015 Amortization	$	14,637		$	12,894		$	10,963		$	6,143		$	6,454
Pension Plans – Expected to be Recorded as
Regulatory Asset	$	14,560		$	12,114		$	10,963		$	6,143		$	6,454
Deferred Income Taxes	27			273			—			—			—
Net of Tax AOCI	50			507			—			—			—
Total	$	14,637		$	12,894		$	10,963		$	6,143		$	6,454
	APCo			I&M			OPCo			PSO			SWEPCo
Other Postretirement Benefit Plans – Components	(in thousands)
Net Actuarial Loss	$	3,353		$	1,814		$	1,848		$	861		$	954
Prior Service Credit	(10,050		)	(9,421		)	(6,922		)	(4,290		)	(5,156		)
Total Estimated 2015 Amortization	$	(6,697	)	$	(7,607	)	$	(5,074	)	$	(3,429	)	$	(4,202	)
Other Postretirement Benefit Plans – Expected to be Recorded as
Regulatory Asset	$	(3,693	)	$	(6,934	)	$	(5,074	)	$	(3,429	)	$	(2,687	)
Deferred Income Taxes	(1,051		)	(236		)	—			—			(530		)
Net of Tax AOCI	(1,953		)	(437		)	—			—			(985		)
Total	$	(6,697	)	$	(7,607	)	$	(5,074	)	$	(3,429	)	$	(4,202	)

American Electric Power System Retirement Savings Plan

The Registrant Subsidiaries participate in an AEP sponsored defined contribution retirement savings plan, the American Electric Power System Retirement Savings Plan, for substantially all employees who are not covered by a retirement savings plan of the United Mine Workers of America (UMWA).  This qualified plan offers participants an opportunity to contribute a portion of their pay, includes features under Section 401(k) of the Internal Revenue Code and provides for company matching contributions.  The matching contributions to the plan are 100% of the first 1% of eligible employee contributions and 70% of the next 5% of contributions.

The following table provides the cost for matching contributions to the retirement savings plans by Registrant Subsidiary for the years ended December 31, 2014, 2013 and 2012:

	Year Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	7,280	$	7,366	$	7,579
I&M	10,461		10,010		9,706
OPCo	5,207		6,502		10,798
PSO	4,026		3,784		3,732
SWEPCo	5,272		4,970		4,890

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UMWA Benefits

APCo provides UMWA pension, health and welfare benefits for certain unionized mining retirees and their survivors who meet eligibility requirements.  UMWA trustees make final interpretive determinations with regard to all benefits.  The pension benefits are administered by UMWA trustees.  APCo administers the health and welfare benefits and pays them from its general assets.

The UMWA pension benefits are administered through a multiemployer plan that is different from single-employer plans as an employer’s contributions may be used to provide benefits to employees of other participating employers.  Required contributions not made by an employer may result in other employers bearing the unfunded plan obligations, while a withdrawing employer may be subject to a withdrawal liability.  UMWA pension benefits are provided through the United Mine Workers of America 1974 Pension Plan (Employer Identification Number: 52-1050282, Plan Number 002), which under the Pension Protection Act of 2006 (PPA) was in Critical Status for the plan year ending June 30, 2014 and in Seriously Endangered Status for the plan year ending June 30, 2013, without utilization of extended amortization provisions.  The Plan adopted a funding improvement plan in May 2012, as required under the PPA.

Contributions to the UMWA pension plan in 2014, 2013 and 2012 were immaterial and represent less than 5% of the total contributions in the plan’s latest annual report for the years ended June 30, 2014, 2013 and 2012.  UMWA pension contributions included a surcharge of 5% beginning December 2014 and are scheduled to include a surcharge of 10% beginning July 2015.  There are no minimum contributions for future years.

335

9.  BUSINESS SEGMENTS

The Registrant Subsidiaries each have one reportable segment, an integrated electricity generation, transmission and distribution business, except OPCo, an electricity transmission and distribution business starting in 2014.  The Registrant Subsidiaries’ other activities are insignificant.  The Registrant Subsidiaries’ operations are managed on an integrated basis because of the substantial impact of cost-based rates and regulatory oversight on the business process, cost structures and operating results.

336

10.  DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, natural gas, coal and emission allowances.  These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates.  AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

The strategy surrounding the use of derivative instruments primarily focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies.  The risk management strategies also include the use of derivative instruments for trading purposes, focusing on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries.  To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical and financial forward purchase-and-sale contracts and, to a lesser extent, OTC swaps and options.  Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.”  Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

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

337

The following tables represent the gross notional volume of the Registrant Subsidiaries’ outstanding derivative contracts as of December 31, 2014 and 2013:

Notional Volume of Derivative Instruments

December 31, 2014

Primary Risk Exposure	Unit of Measure	APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Commodity:
Power	MWhs	32,479		23,774		20,334		16,765		20,469
Coal	Tons	279		500		—		—		1,500
Natural Gas	MMBtus	421		286		—		—		—
Heating Oil and Gasoline	Gallons	1,089		521		1,108		614		699
Interest Rate	USD	$	5,094	$	3,455	$	—	$	—	$	—

Notional Volume of Derivative Instruments

December 31, 2013

Primary Risk Exposure	Unit of Measure	APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Commodity:
Power	MWhs	48,995		33,231		34,843		13,469		17,057
Coal	Tons	31		3,389		—		1,013		1,692
Natural Gas	MMBtus	2,477		1,680		—		—		—
Heating Oil and Gasoline	Gallons	1,089		521		1,108		614		699
Interest Rate	USD	$	12,720	$	8,627	$	—	$	—	$	—

Cash Flow Hedging Strategies

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power (“Commodity”) in order to manage the variable price risk related to forecasted purchases and sales.  Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and purchases.  The Registrant Subsidiaries do not hedge all commodity price risk.

The Registrant Subsidiaries’ vehicle fleet is exposed to gasoline and diesel fuel price volatility.  AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases.  Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014. During the year ended December 31, 2013, the Registrant Subsidiaries designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013.  In March 2014, these contracts were grouped as "Commodity" with other risk management activities. The Registrant Subsidiaries do not hedge all fuel price risk.

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure.  AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts to manage interest rate exposure related to future borrowings of fixed-rate debt.  The Registrant Subsidiaries do not hedge all interest rate exposure.

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers.  In accordance with AEP’s risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar.  The Registrant Subsidiaries do not hedge all foreign currency exposure.

338

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 sheet at fair value.  The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes.  If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions.  In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due.  Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions.  Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts.  Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract’s term and at the time a contract settles.  Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management’s estimates of current market consensus for forward prices in the current period.  This is particularly true for longer term contracts.  Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral.  For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles.  For the December 31, 2014 and 2013 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

	December 31,
	2014				2013
Company	Cash Collateral Received Netted Against Risk Management Assets		Cash Collateral Paid Netted Against Risk Management Liabilities		Cash Collateral Received Netted Against Risk Management Assets		Cash Collateral Paid Netted Against Risk Management Liabilities
	(in thousands)
APCo	$	68	$	98	$	—	$	2,993
I&M	163		47		—		2,030
OPCo	—		102		—		—
PSO	—		54		—		1
SWEPCo	—		62		—		3

339

The following tables represent the gross fair value of the Registrant Subsidiaries’ derivative activity on the balance sheets as of December 31, 2014 and 2013:

APCo

Fair Value of Derivative Instruments

December 31, 2014

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	32,903	$	—	$	—	$	32,903	$	(9,111	)	$	23,792
Long-term Risk Management Assets	5,159		—		—		5,159		(268		)	4,891
Total Assets	38,062		—		—		38,062		(9,379		)	28,683
Current Risk Management Liabilities	20,161		—		—		20,161		(9,144		)	11,017
Long-term Risk Management Liabilities	2,322		—		—		2,322		(265		)	2,057
Total Liabilities	22,483		—		—		22,483		(9,409		)	13,074
Total MTM Derivative Contract Net Assets (Liabilities)	$	15,579	$	—	$	—	$	15,579	$	30		$	15,609

APCo

Fair Value of Derivative Instruments

December 31, 2013

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	46,431	$	389	$	—	$	46,820	$	(25,649	)	$	21,171
Long-term Risk Management Assets	20,948		—		—		20,948		(4,000		)	16,948
Total Assets	67,379		389		—		67,768		(29,649		)	38,119
Current Risk Management Liabilities	37,010		313		—		37,323		(28,431		)	8,892
Long-term Risk Management Liabilities	14,452		—		—		14,452		(4,211		)	10,241
Total Liabilities	51,462		313		—		51,775		(32,642		)	19,133
Total MTM Derivative Contract Net Assets (Liabilities)	$	15,917	$	76	$	—	$	15,993	$	2,993		$	18,986

(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 derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

340

I&M

Fair Value of Derivative Instruments

December 31, 2014

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	28,545	$	—	$	—	$	28,545	$	(6,217	)	$	22,328
Long-term Risk Management Assets	3,499		—		—		3,499		(182		)	3,317
Total Assets	32,044		—		—		32,044		(6,399		)	25,645
Current Risk Management Liabilities	11,326		—		—		11,326		(6,103		)	5,223
Long-term Risk Management Liabilities	1,575		—		—		1,575		(180		)	1,395
Total Liabilities	12,901		—		—		12,901		(6,283		)	6,618
Total MTM Derivative Contract Net Assets (Liabilities)	$	19,143	$	—	$	—	$	19,143	$	(116	)	$	19,027

I&M

Fair Value of Derivative Instruments

December 31, 2013

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	33,229	$	234	$	—	$	33,463	$	(18,075	)	$	15,388
Long-term Risk Management Assets	14,208		—		—		14,208		(2,713		)	11,495
Total Assets	47,437		234		—		47,671		(20,788		)	26,883
Current Risk Management Liabilities	26,779		212		—		26,991		(19,962		)	7,029
Long-term Risk Management Liabilities	9,802		—		—		9,802		(2,856		)	6,946
Total Liabilities	36,581		212		—		36,793		(22,818		)	13,975
Total MTM Derivative Contract Net Assets (Liabilities)	$	10,856	$	22	$	—	$	10,878	$	2,030		$	12,908

(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 derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

341

OPCo

Fair Value of Derivative Instruments

December 31, 2014

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	7,242	$	—	$	—	$	7,242	$	—		$	7,242
Long-term Risk Management Assets	45,102		—		—		45,102		—			45,102
Total Assets	52,344		—		—		52,344		—			52,344
Current Risk Management Liabilities	2,045		—		—		2,045		(102		)	1,943
Long-term Risk Management Liabilities	3,013		—		—		3,013		—			3,013
Total Liabilities	5,058		—		—		5,058		(102		)	4,956
Total MTM Derivative Contract Net Assets (Liabilities)	$	47,286	$	—	$	—	$	47,286	$	102		$	47,388

OPCo

Fair Value of Derivative Instruments

December 31, 2013

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	3,269	$	162	$	—	$	3,431	$	(349	)	$	3,082
Long-term Risk Management Assets	—		—		—		—		—			—
Total Assets	3,269		162		—		3,431		(349		)	3,082
Current Risk Management Liabilities	349		—		—		349		(349		)	—
Long-term Risk Management Liabilities	—		—		—		—		—			—
Total Liabilities	349		—		—		349		(349		)	—
Total MTM Derivative Contract Net Assets (Liabilities)	$	2,920	$	162	$	—	$	3,082	$	—		$	3,082

(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 derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

342

PSO

Fair Value of Derivative Instruments

December 31, 2014

	Risk Management Contracts			Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized			Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)			Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	360		$	—	$	—	$	360		$	(360	)	$	—
Long-term Risk Management Assets	—			—		—		—			—			—
Total Assets	360			—		—		360			(360		)	—
Current Risk Management Liabilities	1,332			—		—		1,332			(414		)	918
Long-term Risk Management Liabilities	—			—		—		—			—			—
Total Liabilities	1,332			—		—		1,332			(414		)	918
Total MTM Derivative Contract Net Assets (Liabilities)	$	(972	)	$	—	$	—	$	(972	)	$	54		$	(918	)

PSO

Fair Value of Derivative Instruments

December 31, 2013

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)		Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	1,078	$	84	$	—	$	1,162	$	5	$	1,167
Long-term Risk Management Assets	—		—		—		—		—		—
Total Assets	1,078		84		—		1,162		5		1,167
Current Risk Management Liabilities	81		—		—		81		4		85
Long-term Risk Management Liabilities	—		—		—		—		—		—
Total Liabilities	81		—		—		81		4		85
Total MTM Derivative Contract Net Assets (Liabilities)	$	997	$	84	$	—	$	1,081	$	1	$	1,082

(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 derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

343

SWEPCo

Fair Value of Derivative Instruments

December 31, 2014

	Risk Management Contracts			Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized			Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)			Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	471		$	—	$	—	$	471		$	(440	)	$	31
Long-term Risk Management Assets	—			—		—		—			—			—
Total Assets	471			—		—		471			(440		)	31
Current Risk Management Liabilities	1,584			—		—		1,584			(502		)	1,082
Long-term Risk Management Liabilities	—			—		—		—			—			—
Total Liabilities	1,584			—		—		1,584			(502		)	1,082
Total MTM Derivative Contract Net Assets (Liabilities)	$	(1,113	)	$	—	$	—	$	(1,113	)	$	62		$	(1,051	)

SWEPCo

Fair Value of Derivative Instruments

December 31, 2013

	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)			Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate and Foreign Currency (a)
	(in thousands)
Current Risk Management Assets	$	1,233	$	97	$	—	$	1,330	$	(151	)	$	1,179
Long-term Risk Management Assets	—		—		—		—		—			—
Total Assets	1,233		97		—		1,330		(151		)	1,179
Current Risk Management Liabilities	154		—		—		154		(154		)	—
Long-term Risk Management Liabilities	—		—		—		—		—			—
Total Liabilities	154		—		—		154		(154		)	—
Total MTM Derivative Contract Net Assets (Liabilities)	$	1,079	$	97	$	—	$	1,176	$	3		$	1,179

(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 derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

344

The tables below present the Registrant Subsidiaries’ activity of derivative risk management contracts for the years ended December 31, 2014, 2013 and 2012:

Amount of Gain (Loss) Recognized on

Risk Management Contracts

 Year Ended December 31, 2014

Location of Gain (Loss)	APCo			I&M			OPCo		PSO			SWEPCo
	(in thousands)
Electric Generation, Transmission and Distribution Revenues	$	8,732		$	13,151		$	40	$	185		$	56
Sales to AEP Affiliates	—			(854		)	—		854			—
Regulatory Assets (a)	(4,077		)	(503		)	—		(970		)	(1,142		)
Regulatory Liabilities (a)	49,555			37,410			85,944		304			16,851
Total Gain on Risk Management Contracts	$	54,210		$	49,204		$	85,984	$	373		$	15,765

Amount of Gain (Loss) Recognized on

Risk Management Contracts

 Year Ended December 31, 2013

Location of Gain (Loss)	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Electric Generation, Transmission and Distribution Revenues	$	2,019		$	10,624		$	4,886		$	371	$	647
Regulatory Assets (a)	(4		)	(26		)	(5,795		)	2,956		424
Regulatory Liabilities (a)	(338		)	(9,062		)	2,920			999		1,462
Total Gain on Risk Management Contracts	$	1,677		$	1,536		$	2,011		$	4,326	$	2,533

Amount of Gain (Loss) Recognized on

Risk Management Contracts

 Year Ended December 31, 2012

Location of Gain (Loss)	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Electric Generation, Transmission and Distribution Revenues	$	(1,149	)	$	11,437		$	11,978		$	163		$	398
Regulatory Assets (a)	(7,835		)	(9,204		)	(14,104		)	(5,304		)	(6,274		)
Regulatory Liabilities (a)	7,314			(889		)	—			(19		)	(13		)
Total Gain (Loss) on Risk Management Contracts	$	(1,670	)	$	1,344		$	(2,126	)	$	(5,160	)	$	(5,889	)

(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.

345

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.  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 Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power designated as cash flow hedges are included in Revenues or Purchased Electricity for Resale on the 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 2014, APCo and I&M designated power derivatives as cash flow hedges. During 2013 and 2012, APCo, I&M and OPCo designated power derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the statements of income.  During 2013 and 2012, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges. The impact of cash flow hedge accounting for these derivative contracts was immaterial and discontinued effective March 31, 2014.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Interest Expense on the statements of income in those periods in which hedged interest payments occur.  During 2014 and 2013, I&M designated interest rate derivatives as cash flow hedges.  During 2012, I&M and SWEPCo designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the 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 2014 and 2013, the Registrant Subsidiaries did not designate any foreign currency derivatives as cash flow hedges.  During 2012, SWEPCo designated foreign currency derivatives as cash flow hedges.

During 2014, 2013 and 2012, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets and the reasons for changes in cash flow hedges, see Note 3.

346

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets as of December 31, 2014 and 2013 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’

Balance Sheets

December 31, 2014

	Hedging Assets (a)				Hedging Liabilities (a)				AOCI Gain (Loss) Net of Tax
Company	Commodity		Interest Rate and Foreign Currency		Commodity		Interest Rate and Foreign Currency		Commodity		Interest Rate and Foreign Currency
APCo	$	—	$	—	$	—	$	—	$	—	$	3,896
I&M	—		—		—		—		—		(14,406		)
OPCo	—		—		—		—		—		5,602
PSO	—		—		—		—		—		4,943
SWEPCo	—		—		—		—		—		(11,036		)

	Expected to be Reclassified to Net Income During the Next Twelve Months
Company	Commodity		Interest Rate and Foreign Currency			Maximum Term for Exposure to Variability of Future Cash Flows
	(in thousands)					(in months)
APCo	$	—	$	275		0
I&M	—		(1,090		)	0
OPCo	—		1,372			0
PSO	—		759			0
SWEPCo	—		(1,998		)	0

Impact of Cash Flow Hedges on the Registrant Subsidiaries’

Balance Sheets

December 31, 2013

	Hedging Assets (a)				Hedging Liabilities (a)				AOCI Gain (Loss) Net of Tax
Company	Commodity		Interest Rate and Foreign Currency		Commodity		Interest Rate and Foreign Currency		Commodity		Interest Rate and Foreign Currency
APCo	$	363	$	—	$	287	$	—	$	94	$	3,090
I&M	216		—		194		—		46		(15,976		)
OPCo	162		—		—		—		105		6,974
PSO	84		—		—		—		57		5,701
SWEPCo	97		—		—		—		66		(13,304		)

	Expected to be Reclassified to Net Income During the Next Twelve Months
Company	Commodity		Interest Rate and Foreign Currency
	(in thousands)
APCo	$	94	$	(806	)
I&M	46		(1,568		)
OPCo	105		1,363
PSO	57		759
SWEPCo	66		(2,267		)

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

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

347

Credit Risk

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis.  AEPSC, on behalf of the Registrant Subsidiaries, uses Moody’s, Standard and Poor’s and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

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

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade.  The amount of collateral required fluctuates based on market prices and total exposure.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering items in contracts.  The Registrant Subsidiaries have not experienced a downgrade below investment grade.  The following tables represent the Registrant Subsidiaries' exposure if credit ratings were to decline below a specified rating threshold as of December 31, 2014 and 2013:

	December 31, 2014
Company	Fair Value  of Contracts with Credit Downgrade Triggers		Amount of Collateral Registrant Subsidiaries' Would Have Been Required to Post for Derivative Contracts as well as Non- Derivative Contracts Subject to the Same Master Netting Arrangement		Amount of Collateral the Registrant Subsidiaries' Would Have Been Required to Post Attributable to RTOs and ISOs		Amount of Collateral Attributable to Other Contracts
	(in thousands)
APCo	$	—	$	—	$	6,339	$	74
I&M	—		—		4,299		47
OPCo	—		—		—		—
PSO	—		—		693		4,111
SWEPCo	—		—		877		166

	December 31, 2013
Company	Fair Value of Contracts with Credit Downgrade Triggers		Amount of Collateral Registrant Subsidiaries' Would Have Been Required to Post for Derivative Contracts as well as Non- Derivative Contracts Subject to the Same Master Netting Arrangement		Amount of Collateral the Registrant Subsidiaries' Would Have Been Required to Post Attributable to RTOs and ISOs		Amount of Collateral Attributable to Other Contracts
	(in thousands)
APCo	$	575	$	—	$	2,539	$	208
I&M	390		—		1,722		141
OPCo	349		—		—		—
PSO	—		—		410		2,520
SWEPCo	—		—		519		194

348

In addition, a majority of the Registrant Subsidiaries’ non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable.  These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts.  The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries’ contractual netting arrangements as of December 31, 2014 and 2013:

	December 31, 2014
Company	Liabilities for Contracts with Cross Default Provisions Prior to Contractual Netting Arrangements			Amount of Cash Collateral Posted		Additional Settlement Liability if Cross Default Provision is Triggered
	(in thousands)
APCo	$	9,043		$	—	$	9,012
I&M	6,134			—		6,113
OPCo	—			—		—
PSO	—			—		—
SWEPCo	—		��	—		—

	December 31, 2013
Company	Liabilities for Contracts with Cross Default Provisions Prior to Contractual Netting Arrangements		Amount of Cash Collateral Posted		Additional Settlement Liability if Cross Default Provision is Triggered
	(in thousands)
APCo	$	19,648	$	—	$	18,568
I&M	13,326		—		12,594
OPCo	—		—		—
PSO	3		—		3
SWEPCo	3		—		3

349

11.  FAIR VALUE MEASUREMENTS

Fair Value Measurements of Long-term Debt

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs.  These instruments are not marked-to-market.  The estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange.

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of December 31, 2014 and 2013 are summarized in the following table:

	December 31,
	2014				2013
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,980,274	$	4,711,210	$	4,194,357	$	4,587,079
I&M	2,027,397		2,255,124		2,039,016		2,174,891
OPCo	2,297,123		2,709,452		2,735,175		3,007,191
PSO	1,041,036		1,216,205		999,810		1,111,149
SWEPCo	2,140,437		2,402,639		2,043,332		2,214,730

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  See “Nuclear Trust Funds” section of Note 1.

The following is a summary of nuclear trust fund investments as of December 31, 2014 and 2013:

	December 31,
	2014							2013
	Estimated Fair Value		Gross Unrealized Gains		Other-Than- Temporary Impairments			Estimated Fair Value		Gross Unrealized Gains		Other-Than- Temporary Impairments
	(in thousands)
Cash and Cash Equivalents	$	19,966	$	—	$	—		$	18,804	$	—	$	—
Fixed Income Securities:
United States Government	697,042		44,615		(5,016		)	608,875		26,114		(3,824		)
Corporate Debt	47,792		4,523		(1,018		)	36,782		2,450		(1,123		)
State and Local Government	208,553		1,206		(319		)	254,638		748		(370		)
Subtotal Fixed Income Securities	953,387		50,344		(6,353		)	900,295		29,312		(5,317		)
Equity Securities – Domestic	1,122,379		598,788		(79,142		)	1,012,511		505,538		(81,677		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,095,732	$	649,132	$	(85,495	)	$	1,931,610	$	534,850	$	(86,994	)

The following table provides the securities activity within the decommissioning and SNF trusts for the years ended December 31, 2014, 2013 and 2012:

	Years Ended December 31,
	2014		2013		2012
	(in thousands)
Proceeds from Investment Sales	$	1,031,793	$	858,406	$	987,550
Purchases of Investments	1,086,437		909,998		1,045,422
Gross Realized Gains on Investment Sales	32,305		18,326		24,605
Gross Realized Losses on Investment Sales	15,410		8,108		8,881

350

The adjusted cost of fixed income securities was $903 million and $872 million as of December 31, 2014 and 2013, respectively.  The adjusted cost of equity securities was $524 million and $506 million as of December 31, 2014 and 2013, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of December 31, 2014 was as follows:

	Fair Value of Fixed Income Securities
	(in thousands)
Within 1 year	$	154,447
1 year – 5 years	376,291
5 years – 10 years	178,436
After 10 years	244,213
Total	$	953,387

351

Fair Value Measurements of Financial Assets and Liabilities

For a discussion of fair value accounting and the classification of assets and liabilities within the fair value hierarchy, see the “Fair Value Measurements of Assets and Liabilities” section of Note 1.

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2014 and 2013.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in management’s valuation techniques.

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	15,599	$	—	$	—	$	33		$	15,632
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	206		20,197		17,654		(9,374		)	28,683
Total Assets	$	15,805	$	20,197	$	17,654	$	(9,341	)	$	44,315
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	227	$	20,339	$	1,912	$	(9,404	)	$	13,074

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2013

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	2,714	$	—	$	—	$	36		$	2,750
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	827		54,448		12,097		(29,616		)	37,756
Cash Flow Hedges:
Commodity Hedges (b)	—		389		—		(26		)	363
Total Risk Management Assets	827		54,837		12,097		(29,642		)	38,119
Total Assets	$	3,541	$	54,837	$	12,097	$	(29,606	)	$	40,869
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	700	$	49,220	$	1,535	$	(32,609	)	$	18,846
Cash Flow Hedges:
Commodity Hedges (b)	—		313		—		(26		)	287
Total Risk Management Liabilities	$	700	$	49,533	$	1,535	$	(32,635	)	$	19,133

352

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	140	$	15,893	$	16,008	$	(6,396	)	$	25,645
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	9,418		—		—		10,548			19,966
Fixed Income Securities:
United States Government	—		697,042		—		—			697,042
Corporate Debt	—		47,792		—		—			47,792
State and Local Government	—		208,553		—		—			208,553
Subtotal Fixed Income Securities	—		953,387		—		—			953,387
Equity Securities – Domestic (e)	1,122,379		—		—		—			1,122,379
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,131,797		953,387		—		10,548			2,095,732
Total Assets	$	1,131,937	$	969,280	$	16,008	$	4,152		$	2,121,377
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	154	$	11,440	$	1,304	$	(6,280	)	$	6,618

353

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2013

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	561	$	38,667	$	8,205	$	(20,766	)	$	26,667
Cash Flow Hedges:
Commodity Hedges (b)	—		234		—		(18		)	216
Total Risk Management Assets	561		38,901		8,205		(20,784		)	26,883
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	8,082		—		—		10,722			18,804
Fixed Income Securities:
United States Government	—		608,875		—		—			608,875
Corporate Debt	—		36,782		—		—			36,782
State and Local Government	—		254,638		—		—			254,638
Subtotal Fixed Income Securities	—		900,295		—		—			900,295
Equity Securities – Domestic (e)	1,012,511		—		—		—			1,012,511
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,020,593		900,295		—		10,722			1,931,610
Total Assets	$	1,021,154	$	939,196	$	8,205	$	(10,062	)	$	1,958,493
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	475	$	35,061	$	1,041	$	(22,796	)	$	13,781
Cash Flow Hedges:
Commodity Hedges (b)	—		212		—		(18		)	194
Total Risk Management Liabilities	$	475	$	35,273	$	1,041	$	(22,814	)	$	13,975

354

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	408	$	—	$	—	$	28,288		$	28,696
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		52,343		1			52,344
Total Assets	$	408	$	—	$	52,343	$	28,289		$	81,040
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	1,116	$	3,941	$	(101	)	$	4,956

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2013

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	19,387	$	—	$	—	$	12		$	19,399
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		3,269		(349		)	2,920
Cash Flow Hedges:
Commodity Hedges (b)	—		162		—		—			162
Total Risk Management Assets	—		162		3,269		(349		)	3,082
Total Assets	$	19,387	$	162	$	3,269	$	(337	)	$	22,481
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	349	$	(349	)	$	—

355

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	360	$	(360	)	$	—
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	595	$	737	$	(414	)	$	918

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2013

	Level 1		Level 2		Level 3		Other		Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	1,078	$	—	$	5	$	1,083
Cash Flow Hedges:
Commodity Hedges (b)	—		84		—		—		84
Total Risk Management Assets	$	—	$	1,162	$	—	$	5	$	1,167
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	81	$	—	$	4	$	85

356

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	12,660	$	—	$	—	$	1,696		$	14,356
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		31		439		(439		)	31
Total Assets	$	12,660	$	31	$	439	$	1,257		$	14,387
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	684	$	899	$	(501	)	$	1,082

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2013

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	15,871	$	—	$	—	$	1,370		$	17,241
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		1,233		—		(151		)	1,082
Cash Flow Hedges:
Commodity Hedges (b)	—		97		—		—			97
Total Risk Management Assets	—		1,330		—		(151		)	1,179
Total Assets	$	15,871	$	1,330	$	—	$	1,219		$	18,420
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	154	$	—	$	(154	)	$	—

(a) Amounts in "Other" column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 amounts primarily represent investment in money market funds.

(b) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(c) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

(e) Amounts represent publicly traded equity securities and equity-based mutual funds.

There have been no transfers between Level 1 and Level 2 during the years ended December 31, 2014, 2013 and 2012.

357

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:

Year Ended December 31, 2014	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of December 31, 2013	$	10,562		$	7,164		$	2,920		$	—		$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	29,694			18,593			30,768			—			—
Purchases, Issuances and Settlements (c)	(32,584		)	(20,553		)	(33,688		)	—			—
Transfers into Level 3 (d) (e)	(3,648		)	(2,475		)	—			—			—
Transfers out of Level 3 (e) (f)	(32		)	(22		)	—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	11,750			11,997			48,402			(377		)	(460		)
Balance as of December 31, 2014	$	15,742		$	14,704		$	48,402		$	(377	)	$	(460	)

Year Ended December 31, 2013	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Balance as of December 31, 2012	$	10,979		$	7,541		$	15,429		$	—	$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	(3,568		)	(2,466		)	(5,042		)	—		—
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	—			—			328			—		—
Purchases, Issuances and Settlements (c)	481			390			765			—		—
Transfers into Level 3 (d) (e)	1,340			911			1,874			—		—
Transfers out of Level 3 (e) (f)	(925		)	(637		)	(1,303		)	—		—
Transfer of OPCo Generation to Parent	—			—			(12,051		)	—		—
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	2,255			1,425			2,920			—		—
Balance as of December 31, 2013	$	10,562		$	7,164		$	2,920		$	—	$	—

358

Year Ended December 31, 2012	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Balance as of December 31, 2011	$	1,971		$	1,263		$	2,666		$	—	$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	(5,204		)	(3,554		)	(7,452		)	—		—
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	—			—			5,401			—		—
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	23			13			28			—		—
Purchases, Issuances and Settlements (c)	11,200			7,734			16,214			—		—
Transfers into Level 3 (d) (e)	1,392			860			1,909			—		—
Transfers out of Level 3 (e) (f)	(1,930		)	(1,144		)	(2,527		)	—		—
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	3,527			2,369			(810		)	—		—
Balance as of December 31, 2012	$	10,979		$	7,541		$	15,429		$	—	$	—

(a) Included in revenues on the statements of income.

(b) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(c) Represents the settlement of risk management commodity contracts for the reporting period.

(d) Represents existing assets or liabilities that were previously categorized as Level 2.

(e) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(f) Represents existing assets or liabilities that were previously categorized as Level 3.

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

359

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions as of December 31, 2014 and 2013:

Significant Unobservable Inputs

December 31, 2014

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	5,801	$	1,799	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	11,853		113		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	17,654	$	1,912

Significant Unobservable Inputs

December 31, 2013

APCo

						Significant
	Fair Value				Valuation	Unobservable	Forward Price Range
	Assets		Liabilities		Technique	Input (a)	Low			High
	(in thousands)
Energy Contracts	$	9,359	$	960	Discounted Cash Flow	Forward Market Price	$	13.04		$	80.50
FTRs	2,738		575		Discounted Cash Flow	Forward Market Price	(5.10		)	10.44
Total	$	12,097	$	1,535

360

Significant Unobservable Inputs

December 31, 2014

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input(a)	Low			High		Average
	(in thousands)
Energy Contracts	$	6,375	$	1,219	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	9,633		85		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	16,008	$	1,304

Significant Unobservable Inputs

December 31, 2013

I&M

						Significant
	Fair Value				Valuation	Unobservable	Forward Price Range
	Assets		Liabilities		Technique	Input (a)	Low			High
	(in thousands)
Energy Contracts	$	6,348	$	651	Discounted Cash Flow	Forward Market Price	$	13.04		$	80.50
FTRs	1,857		390		Discounted Cash Flow	Forward Market Price	(5.10		)	10.44
Total	$	8,205	$	1,041

Significant Unobservable Inputs

December 31, 2014

OPCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	45,101	$	3,941	Discounted Cash Flow	Forward Market Price	$	48.25		$	159.92	$	84.04
FTRs	7,242		—		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	52,343	$	3,941

Significant Unobservable Inputs

December 31, 2013

OPCo

						Significant
	Fair Value				Valuation	Unobservable	Forward Price Range
	Assets		Liabilities		Technique	Input (a)	Low			High
	(in thousands)
FTRs	$	3,269	$	349	Discounted Cash Flow	Forward Market Price	$	(5.10	)	$	10.44

361

Significant Unobservable Inputs

December 31, 2014

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

360

$

737

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

Significant Unobservable Inputs

December 31, 2014

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

439

$

899

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

(a) Represents market prices in dollars per MWh.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs for the Registrant Subsidiaries as of December 31, 2014:

Sensitivity of Fair Value Measurements

December 31, 2014

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)

362

12.  INCOME TAXES

The details of the Registrant Subsidiaries’ income taxes as reported are as follows:

Year Ended December 31, 2014	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Income Tax Expense (Credit):
Current	$	10,926		$	14,273		$	58,057		$	(24,349	)	$	(171,629	)
Deferred	144,651			70,225			74,391			74,756			239,426
Deferred Investment Tax Credits	(649		)	(4,877		)	(241		)	175			(1,377		)
Income Tax Expense	$	154,928		$	79,621		$	132,207		$	50,582		$	66,420

Year Ended December 31, 2013	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Income Tax Expense (Credit):
Current	$	58,441		$	(49,067	)	$	92,625		$	7,689	$	(10,866	)
Deferred	75,714			129,109			134,463			53,788		81,888
Deferred Investment Tax Credits	(1,220		)	(4,931		)	(1,418		)	4,408		(1,561		)
Income Tax Expense	$	132,935		$	75,111		$	225,670		$	65,885	$	69,461

Year Ended December 31, 2012	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Income Tax Expense (Credit):
Current	$	28,307		$	(9,221	)	$	100,447		$	18,634		$	(214,353	)
Deferred	138,460			53,067			45,685			48,916			260,761
Deferred Investment Tax Credits	(1,240		)	(4,502		)	(1,849		)	(856		)	(550		)
Income Tax Expense	$	165,527		$	39,344		$	144,283		$	66,694		$	45,858

Shown below for each Registrant Subsidiary is a reconciliation of the difference between the amounts of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

APCo	Years Ended December 31,
	2014				2013				2012
	(in thousands)
Net Income	$	215,415			$	193,211			$	257,503
Income Tax Expense	154,928				132,935				165,527
Pretax Income	$	370,343			$	326,146			$	423,030
Income Taxes on Pretax Income at Statutory Rate (35%)	$	129,620			$	114,151			$	148,061
Increase (Decrease) in Income Taxes Resulting from the Following Items:
Depreciation	23,527				20,286				20,424
Investment Tax Credits, Net	(649			)	(1,220			)	(1,240			)
State and Local Income Taxes, Net	6,531				2,707				3,175
Removal Costs	(6,844			)	(6,454			)	(6,641			)
AFUDC	(3,768			)	(1,420			)	(1,145			)
Valuation Allowance	(2,498			)	5,062				5,674
Other	9,009				(177			)	(2,781			)
Income Tax Expense	$	154,928			$	132,935			$	165,527
Effective Income Tax Rate	41.8		%		40.8		%		39.1		%

363

I&M	Years Ended December 31,
	2014				2013				2012
	(in thousands)
Net Income	$	155,647			$	177,504			$	118,457
Income Tax Expense	79,621				75,111				39,344
Pretax Income	$	235,268			$	252,615			$	157,801
Income Taxes on Pretax Income at Statutory Rate (35%)	$	82,344			$	88,415			$	55,230
Increase (Decrease) in Income Taxes Resulting from the Following Items:
Depreciation	12,885				10,057				8,659
Investment Tax Credits, Net	(4,877			)	(4,931			)	(4,502			)
State and Local Income Taxes, Net	7,668				(882			)	(1,559			)
Removal Costs	(11,272			)	(9,432			)	(5,490			)
AFUDC	(9,994			)	(10,555			)	(7,218			)
Other	2,867				2,439				(5,776			)
Income Tax Expense	$	79,621			$	75,111			$	39,344
Effective Income Tax Rate	33.8		%		29.7		%		24.9		%

OPCo	Years Ended December 31,
	2014				2013				2012
	(in thousands)
Net Income	$	216,422			$	409,980			$	343,534
Income Tax Expense	132,207				225,670				144,283
Pretax Income	$	348,629			$	635,650			$	487,817
Income Taxes on Pretax Income at Statutory Rate (35%)	$	122,020			$	222,478			$	170,736
Increase (Decrease) in Income Taxes Resulting from the Following Items:
Depreciation	6,665				6,759				5,239
Investment Tax Credits, Net	(241			)	(1,418			)	(1,849			)
State and Local Income Taxes, Net	8,866				3,327				(18,291			)
Parent Company Loss Benefit	(996			)	(2,154			)	(11,915			)
Other	(4,107			)	(3,322			)	363
Income Tax Expense	$	132,207			$	225,670			$	144,283
Effective Income Tax Rate	37.9		%		35.5		%		29.6		%

PSO	Years Ended December 31,
	2014				2013				2012
	(in thousands)
Net Income	$	86,929			$	97,796			$	114,141
Income Tax Expense	50,582				65,885				66,694
Pretax Income	$	137,511			$	163,681			$	180,835
Income Taxes on Pretax Income at Statutory Rate (35%)	$	48,129			$	57,288			$	63,292
Increase (Decrease) in Income Taxes Resulting from the Following Items:
Depreciation	176				164				(10			)
Investment Tax Credits, Net	(770			)	(776			)	(781			)
State and Local Income Taxes, Net	4,777				5,423				6,953
Tax Adjustments	(1,241			)	5,268				201
Other	(489			)	(1,482			)	(2,961			)
Income Tax Expense	$	50,582			$	65,885			$	66,694
Effective Income Tax Rate	36.8		%		40.3		%		36.9		%

364

SWEPCo	Years Ended December 31,
	2014				2013				2012
	(in thousands)
Net Income	$	144,559			$	153,819			$	202,513
Income Tax Expense	66,420				69,461				45,858
Pretax Income	$	210,979			$	223,280			$	248,371
Income Taxes on Pretax Income at Statutory Rate (35%)	$	73,843			$	78,148			$	86,930
Increase (Decrease) in Income Taxes Resulting from the Following Items:
Depreciation	2,944				3,086				2,105
Depletion	(4,143			)	(3,472			)	(3,276			)
Investment Tax Credits, Net	(1,377			)	(1,561			)	(550			)
State and Local Income Taxes, Net	3,083				(1,453			)	(18,010			)
AFUDC	(4,182			)	(2,381			)	(19,879			)
Other	(3,748			)	(2,906			)	(1,462			)
Income Tax Expense	$	66,420			$	69,461			$	45,858
Effective Income Tax Rate	31.5		%		31.1		%		18.5		%

The following tables show elements of the net deferred tax liability and significant temporary differences for each Registrant Subsidiary:

APCo	December 31,
	2014			2013
	(in thousands)
Deferred Tax Assets	$	446,346		$	548,966
Deferred Tax Liabilities	(2,711,233		)	(2,788,306		)
Net Deferred Tax Liabilities	$	(2,264,887	)	$	(2,239,340	)
Property Related Temporary Differences	$	(1,801,885	)	$	(1,725,853	)
Amounts Due from Customers for Future Federal Income Taxes	(70,417		)	(94,775		)
Deferred State Income Taxes	(239,724		)	(246,247		)
Regulatory Assets	(113,671		)	(104,824		)
Securitized Assets	(122,559		)	(130,834		)
Deferred Income Taxes on Other Comprehensive Loss	(2,710		)	(1,589		)
Net Operating Loss Carryforward	9,796			45,177
Tax Credit Carryforward	46,162			21,940
Valuation Allowance	—			(41,277		)
All Other, Net	30,121			38,942
Net Deferred Tax Liabilities	$	(2,264,887	)	$	(2,239,340	)

I&M	December 31,
	2014			2013
	(in thousands)
Deferred Tax Assets	$	911,811		$	843,630
Deferred Tax Liabilities	(2,190,002		)	(2,043,810		)
Net Deferred Tax Liabilities	$	(1,278,191	)	$	(1,200,180	)
Property Related Temporary Differences	$	(418,724	)	$	(390,829	)
Amounts Due from Customers for Future Federal Income Taxes	(40,580		)	(39,137		)
Deferred State Income Taxes	(138,907		)	(137,162		)
Deferred Income Taxes on Other Comprehensive Loss	7,732			8,351
Accrued Nuclear Decommissioning	(610,955		)	(553,794		)
Net Operating Loss Carryforward	—			15,690
Regulatory Assets	(74,690		)	(59,008		)
All Other, Net	(2,067		)	(44,291		)
Net Deferred Tax Liabilities	$	(1,278,191	)	$	(1,200,180	)

365

OPCo	December 31,
	2014			2013
	(in thousands)
Deferred Tax Assets	$	171,816		$	183,085
Deferred Tax Liabilities	(1,528,130		)	(1,477,691		)
Net Deferred Tax Liabilities	$	(1,356,314	)	$	(1,294,606	)
Property Related Temporary Differences	$	(926,520	)	$	(841,607	)
Amounts Due from Customers for Future Federal Income Taxes	(47,598		)	(51,946		)
Deferred State Income Taxes	(34,232		)	(28,569		)
Regulatory Assets	(242,391		)	(215,535		)
Deferred Income Taxes on Other Comprehensive Loss	(3,016		)	(3,812		)
Deferred Fuel and Purchased Power	(145,515		)	(176,192		)
All Other, Net	42,958			23,055
Net Deferred Tax Liabilities	$	(1,356,314	)	$	(1,294,606	)

PSO	December 31,
	2014			2013
	(in thousands)
Deferred Tax Assets	$	110,758		$	107,567
Deferred Tax Liabilities	(1,016,721		)	(936,791		)
Net Deferred Tax Liabilities	$	(905,963	)	$	(829,224	)
Property Related Temporary Differences	$	(805,193	)	$	(736,160	)
Amounts Due from Customers for Future Federal Income Taxes	(678		)	(31		)
Deferred State Income Taxes	(109,285		)	(99,126		)
Regulatory Assets	(39,620		)	(39,414		)
Deferred Income Taxes on Other Comprehensive Loss	(2,661		)	(3,100		)
Deferred Federal Income Taxes on Deferred State Income Taxes	43,918			40,362
Net Operating Loss Carryforward	6,365			4,314
Tax Credit Carryforward	681			565
All Other, Net	510			3,366
Net Deferred Tax Liabilities	$	(905,963	)	$	(829,224	)

SWEPCo	December 31,
	2014			2013
	(in thousands)
Deferred Tax Assets	$	186,176		$	359,529
Deferred Tax Liabilities	(1,528,246		)	(1,453,710		)
Net Deferred Tax Liabilities	$	(1,342,070	)	$	(1,094,181	)
Property Related Temporary Differences	$	(1,235,136	)	$	(1,172,431	)
Amounts Due from Customers for Future Federal Income Taxes	(44,119		)	(43,116		)
Deferred State Income Taxes	(124,147		)	(118,179		)
Regulatory Assets	(19,388		)	(5,290		)
Deferred Income Taxes on Other Comprehensive Loss	4,021			4,548
Impairment Loss - Turk Plant	21,052			21,295
Net Operating Loss Carryforward	21,925			189,128
All Other, Net	33,722			29,864
Net Deferred Tax Liabilities	$	(1,342,070	)	$	(1,094,181	)

366

AEP System Tax Allocation Agreement

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

Federal and State Income Tax Audit Status

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

The Registrant Subsidiaries file income tax returns in various state and local jurisdictions.  These taxing authorities routinely examine their tax returns and the Registrant Subsidiaries are currently under examination in several state and local jurisdictions.  However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities.  Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income.  The Registrant Subsidiaries are no longer subject to state or local income tax examinations by tax authorities for years before 2009.

Net Income Tax Operating Loss Carryforward

In 2011, APCo and I&M recognized federal net income tax operating losses of $313 million and $123 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book versus tax temporary differences.  In 2012, SWEPCo recognized a federal net income tax operating loss of $858 million driven primarily by bonus depreciation.  APCo, OPCo, PSO and SWEPCo also have state net income tax operating loss carryforwards as indicated in the table below:

Company	State	State Net Income Tax Operating Loss Carryforward		Year of Expiration
		(in thousands)
APCo	Tennessee	$	2,695	2026
APCo	West Virginia	235,341		2032
OPCo	West Virginia	50,228		2032
PSO	Oklahoma	163,212		2034
SWEPCo	Louisiana	419,384		2029
SWEPCo	Oklahoma	2,994		2034

As a result, APCo, OPCo, PSO and SWEPCo recognized deferred state and local income tax benefits in 2011, and/or 2012, and/or 2013 and/or 2014.  At the end of 2013, APCo, I&M and SWEPCo had $12 million, $13 million and $167 million, respectively, of unrealized federal net operating loss carryforward.  Federal taxable income was sufficient enough in 2014 that these remaining federal net income tax operating loss tax benefits were realized in full.  Management also anticipates future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

367

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2011 and 2009 along with lower federal and state taxable income in 2010 resulted in unused federal and state income tax credits.  As of December 31, 2014, the Registrant Subsidiaries have federal tax credit carryforwards and PSO has state tax credit carryforwards as indicated in the table below.  If these credits are not utilized, federal general business tax credits will expire in the years 2029 through 2033.

Company	Total Federal Tax Credit Carryforward		Federal Tax Credit Carryforward Subject to Expiration		Total State Tax Credit Carryforward		State Tax Credit Carryforward Subject to Expiration
	(in thousands)
APCo	$	45,654	$	4,046	$	—	$	—
I&M	3,418		2,877		—		—
OPCo	25,679		1,962		—		—
PSO	681		660		22,141		22,141
SWEPCo	3,254		899		—		—

The Registrant Subsidiaries anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused.  In November 2014, APCo received an order from the Virginia SCC for its 2014 Virginia Biennial Base Rate Case (see Note 4). As a result of the final determination pertaining to the ability to realize future tax benefits for certain state net income tax operating loss and credit carryforwards, management determined that APCo is subject to the Virginia Minimum Tax on electric suppliers and the Virginia State Income Tax is no longer applicable. As a result, management derecognized the related state income tax benefits, which had been subject to valuation allowances.

368

Uncertain Tax Positions

The Registrant Subsidiaries recognize interest accruals related to uncertain tax positions in interest income or expense as applicable and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following tables show amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2014						2013
Company	Interest Expense		Interest Income		Reversal of Prior Period Interest Expense		Interest Expense		Interest Income		Reversal of Prior Period Interest Expense
	(in thousands)
APCo	$	—	$	—	$	193	$	—	$	1,089	$	—
I&M	—		—		289		—		597		—
OPCo	129		—		245		—		1,892		—
PSO	88		—		137		—		135		—
SWEPCo	172		—		154		215		—		—

	Year Ended December 31, 2012
Company	Interest Expense		Interest Income		Reversal of Prior Period Interest Expense
	(in thousands)
APCo	$	62	$	—	$	183
I&M	1,355		—		—
OPCo	266		—		504
PSO	259		—		294
SWEPCo	286		—		271

The following table shows balances for amounts accrued for the receipt of interest:

	December 31,
Company	2014		2013
	(in thousands)
APCo	$	—	$	—
I&M	—		—
OPCo	—		—
PSO	—		209
SWEPCo	—		172

The following table shows balances for amounts accrued for the payment of interest and penalties:

	December 31,
Company	2014		2013
	(in thousands)
APCo	$	—	$	158
I&M	526		957
OPCo	382		407
PSO	310		562
SWEPCo	1,010		1,167

369

The reconciliations of the beginning and ending amounts of unrecognized tax benefits are as follows:

	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of January 1, 2014	$	1,164		$	3,164		$	2,086		$	2,184		$	7,602
Increase – Tax Positions Taken During a Prior Period	—			1,431			6,335			64			1,602
Decrease – Tax Positions Taken During a Prior Period	—			—			—			(18		)	(832		)
Increase – Tax Positions Taken During the Current Year	—			—			—			—			—
Decrease – Tax Positions Taken During the Current Year	—			—			—			—			—
Increase – Settlements with Taxing Authorities	1			—			70			37			—
Decrease – Settlements with Taxing Authorities	—			(660		)	—			—			(30		)
Decrease – Lapse of the Applicable Statute of Limitations	(1,165		)	(1,640		)	(1,566		)	(948		)	(845		)
Balance as of December 31, 2014	$	—		$	2,295		$	6,925		$	1,319		$	7,497

	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of January 1, 2013	$	5,253		$	15,085		$	11,052		$	2,273		$	9,553
Increase – Tax Positions Taken During a Prior Period	—			—			—			—			—
Decrease – Tax Positions Taken During a Prior Period	(4,089		)	(11,921		)	(8,966		)	(103		)	(3,158		)
Increase – Tax Positions Taken During the Current Year	—			—			—			14			1,301
Decrease – Tax Positions Taken During the Current Year	—			—			—			—			—
Decrease – Settlements with Taxing Authorities	—			—			—			—			(94		)
Decrease – Lapse of the Applicable Statute of Limitations	—			—			—			—			—
Balance as of December 31, 2013	$	1,164		$	3,164		$	2,086		$	2,184		$	7,602

	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of January 1, 2012	$	7,311		$	14,071		$	43,565		$	3,585		$	9,031
Increase – Tax Positions Taken During a Prior Period	—			2,266			1,360			421			2,806
Decrease – Tax Positions Taken During a Prior Period	(384		)	(1,252		)	(13,582		)	(92		)	(775		)
Increase – Tax Positions Taken During the Current Year	—			—			—			—			—
Decrease – Tax Positions Taken During the Current Year	—			—			—			—			—
Decrease – Settlements with Taxing Authorities	(1,674		)	—			(20,291		)	—			—
Decrease – Lapse of the Applicable Statute of Limitations	—			—			—			(1,641		)	(1,509		)
Balance as of December 31, 2012	$	5,253		$	15,085		$	11,052		$	2,273		$	9,553

370

Management believes that there will be no significant net increase or decrease in unrecognized benefits within 12 months of the reporting date.  The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for each Registrant Subsidiary was as follows:

Company	2014		2013		2012
	(in thousands)
APCo	$	—	$	—	$	—
I&M	1,591		1,220		1,220
OPCo	4,462		674		674
PSO	858		827		818
SWEPCo	4,873		4,357		3,512

Federal Tax Legislation – Affecting APCo, I&M, OPCo, PSO and SWEPCo

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013.  Included in the 2012 Act was a one-year extension of 50% bonus depreciation.  The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011.  The enacted provisions did not materially impact the Registrant Subsidiaries’ net income or financial condition but did have a favorable impact on cash flows in 2013.

The Tax Increase Prevention Act of 2014 (the 2014 Act) was enacted in December 2014. Included in the 2014 Act was a one-year extension of the 50% bonus depreciation. The 2014 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2013. The enacted provisions did not materially impact the Registrant Subsidiaries' net income or financial condition but will have a favorable impact on future cash flows.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014.  In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry.  These final regulations did not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition.

State Tax Legislation – Affecting APCo, I&M and OPCo

Legislation was passed by the state of Indiana in May 2011 enacting a phased reduction in corporate income tax rate from 8.5% to 6.5%.  The 8.5% Indiana corporate income tax rate will be reduced 0.5% each year beginning after June 30, 2012 with the final reduction occurring in years beginning after June 30, 2015.

In May 2011, Michigan repealed its Business Tax regime and replaced it with a traditional corporate net income tax rate of 6%, effective January 1, 2012.

During the third quarter of 2013, it was determined that the state of West Virginia had achieved certain minimum levels of shortfall reserve funds.  As a result, the West Virginia corporate income tax rate was reduced from 7% to 6.5% in 2014.  

The enacted provisions did not materially impact the Registrant Subsidiaries’ net income, cash flows or financial condition.

371

13.  LEASES

Leases of property, plant and equipment are for remaining periods up to 35 years and require payments of related property taxes, maintenance and operating costs.  The majority of the leases have purchase or renewal options and will be renewed or replaced by other leases.

Lease rentals for both operating and capital leases are generally charged to Other Operation and Maintenance expense in accordance with rate-making treatment for regulated operations.  Additionally, for regulated operations with capital leases, a capital lease asset and offsetting liability are recorded at the present value of the remaining lease payments for each reporting period.  Capital leases for nonregulated property are accounted for as if the assets were owned and financed.  The components of rental costs are as follows:

Year Ended December 31, 2014	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Net Lease Expense on Operating Leases	$	18,348	$	93,440	$	6,610	$	3,171	$	5,465
Amortization of Capital Leases	5,525		44,369		5,714		4,227		14,960
Interest on Capital Leases	1,012		2,834		1,189		747		7,369
Total Lease Rental Costs	$	24,885	$	140,643	$	13,513	$	8,145	$	27,794

Year Ended December 31, 2013	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Net Lease Expense on Operating Leases	$	17,500	$	95,606	$	57,814	$	4,131	$	6,328
Amortization of Capital Leases	6,293		11,307		7,800		4,099		15,456
Interest on Capital Leases	1,410		1,870		4,125		782		8,153
Total Lease Rental Costs	$	25,203	$	108,783	$	69,739	$	9,012	$	29,937

Year Ended December 31, 2012	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Net Lease Expense on Operating Leases	$	15,633	$	95,509	$	59,836	$	5,283	$	5,797
Amortization of Capital Leases	7,429		8,429		10,906		3,839		14,793
Interest on Capital Leases	1,782		1,738		3,307		815		9,041
Total Lease Rental Costs	$	24,844	$	105,676	$	74,049	$	9,937	$	29,631

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The following table shows the property, plant and equipment under capital leases and related obligations recorded on the Registrant Subsidiaries’ balance sheets.  Unless shown as a separate line on the balance sheet due to materiality, current capital lease obligations are included in Other Current Liabilities and long-term capital lease obligations are included in Deferred Credits and Other Noncurrent Liabilities on the Registrant Subsidiaries’ balance sheets.

December 31, 2014	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Property, Plant and Equipment Under Capital Leases:
Generation	$	14,166	$	18,681	$	—	$	9,625	$	35,442
Other Property, Plant and Equipment	19,414		100,419		22,569		16,472		159,472
Total Property, Plant and Equipment	33,580		119,100		22,569		26,097		194,914
Accumulated Amortization	14,040		15,956		8,003		11,796		80,155
Net Property, Plant and Equipment Under Capital Leases	$	19,540	$	103,144	$	14,566	$	14,301	$	114,759
Obligations Under Capital Leases:
Noncurrent Liability	$	14,435	$	61,094	$	10,996	$	10,929	$	91,044
Liability Due Within One Year	5,105		42,050		3,570		3,372		17,557
Total Obligations Under Capital Leases	$	19,540	$	103,144	$	14,566	$	14,301	$	108,601

December 31, 2013	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Property, Plant and Equipment Under Capital Leases:
Generation	$	13,531	$	18,324	$	—	$	9,675	$	34,476
Other Property, Plant and Equipment	18,720		130,249		26,532		15,413		157,853
Total Property, Plant and Equipment	32,251		148,573		26,532		25,088		192,329
Accumulated Amortization	11,379		15,356		9,800		10,957		66,637
Net Property, Plant and Equipment Under Capital Leases	$	20,872	$	133,217	$	16,732	$	14,131	$	125,692
Obligations Under Capital Leases:
Noncurrent Liability	$	15,718	$	87,000	$	11,212	$	10,222	$	105,086
Liability Due Within One Year	5,154		46,210		5,520		3,909		17,899
Total Obligations Under Capital Leases	$	20,872	$	133,210	$	16,732	$	14,131	$	122,985

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Future minimum lease payments consisted of the following as of December 31, 2014:

Capital Leases	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
2015	$	5,668	$	42,724	$	4,140	$	4,001	$	23,721
2016	5,063		35,817		3,634		3,575		20,700
2017	4,171		11,419		3,381		3,425		21,863
2018	3,166		6,025		2,854		2,391		11,751
2019	1,146		2,718		747		1,173		10,463
Later Years	1,815		22,467		1,489		1,925		46,016
Total Future Minimum Lease Payments	21,029		121,170		16,245		16,490		134,514
Less Estimated Interest Element	1,489		18,026		1,679		2,189		25,913
Estimated Present Value of Future Minimum Lease Payments	$	19,540	$	103,144	$	14,566	$	14,301	$	108,601
Noncancelable Operating Leases	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
2015	$	15,817	$	95,357	$	13,471	$	3,031	$	5,392
2016	15,101		89,448		9,575		2,922		4,679
2017	14,669		87,031		9,036		2,760		4,225
2018	13,886		85,858		7,906		2,391		3,754
2019	11,818		85,130		6,765		1,800		3,457
Later Years	42,866		262,263		24,743		5,094		14,819
Total Future Minimum Lease Payments	$	114,157	$	705,087	$	71,496	$	17,998	$	36,326

Master Lease Agreements

The Registrant Subsidiaries lease certain equipment under master lease agreements.  Under the lease agreements, the lessor is guaranteed a residual value up to a stated percentage of either the unamortized balance or the equipment cost at the end of the lease term.  If the actual fair value of the leased equipment is below the guaranteed residual value at the end of the lease term, the Registrant Subsidiaries are committed to pay the difference between the actual fair value and the residual value guarantee.  Historically, at the end of the lease term the fair value has been in excess of the unamortized balance.  As of December 31, 2014, the maximum potential loss by Registrant Subsidiary for these lease agreements assuming the fair value of the equipment is zero at the end of the lease term is as follows:

Company	Maximum Potential Loss
	(in thousands)
APCo	$	4,026
I&M	2,861
OPCo	4,829
PSO	2,214
SWEPCo	2,774

374

Rockport Lease

AEGCo and I&M entered into a sale-and-leaseback transaction in 1989 with Wilmington Trust Company (Owner Trustee), an unrelated, unconsolidated trustee for Rockport Plant, Unit 2 (the Plant).  The Owner Trustee was capitalized with equity from six owner participants with no relationship to AEP or any of its subsidiaries and debt from a syndicate of banks and securities in a private placement to certain institutional investors.

The gain from the sale was deferred and is being amortized over the term of the lease, which expires in 2022.  The Owner Trustee owns the Plant and leases it equally to AEGCo and I&M.  The lease is accounted for as an operating lease with the payment obligations included in the future minimum lease payments schedule earlier in this note.  The lease term is for 33 years with potential renewal options.  At the end of the lease term, AEGCo and I&M have the option to renew the lease or the Owner Trustee can sell the Plant.  AEP, AEGCo and I&M have no ownership interest in the Owner Trustee and do not guarantee its debt.  I&M’s future minimum lease payments for this sale-and-leaseback transaction as of December 31, 2014 are as follows:

Future Minimum Lease Payments	I&M
	(in thousands)
2015	$	73,854
2016	73,854
2017	73,854
2018	73,854
2019	73,854
Later Years	221,562
Total Future Minimum Lease Payments	$	590,832

Railcar Lease

In June 2003, AEP Transportation LLC (AEP Transportation), a subsidiary of AEP, entered into an agreement with BTM Capital Corporation, as lessor, to lease 875 coal-transporting aluminum railcars.  The lease is accounted for as an operating lease.  In January 2008, AEP Transportation assigned the remaining 848 railcars under the original lease agreement to I&M (390 railcars) and SWEPCo (458 railcars).  The assignment is accounted for as operating leases for I&M and SWEPCo.  The initial lease term was five years with three consecutive five-year renewal periods for a maximum lease term of twenty years.  I&M and SWEPCo intend to renew these leases for the full lease term of twenty years via the renewal options.  The future minimum lease obligations are $11 million and $13 million for I&M and SWEPCo, respectively, for the remaining railcars as of December 31, 2014.  These obligations are included in the future minimum lease payments schedule earlier in this note.

Under the lease agreement, the lessor is guaranteed that the sale proceeds under a return-and-sale option will equal at least a lessee obligation amount specified in the lease, which declines from approximately 83% of the projected fair value of the equipment under the current five-year lease term to 77% at the end of the 20-year term.  I&M and SWEPCo have assumed the guarantee under the return-and-sale option.  The maximum potential losses related to the guarantee are approximately $9 million and $10 million for I&M and SWEPCo, respectively, assuming the fair value of the equipment is zero at the end of the current five-year lease term.  However, management believes that the fair value would produce a sufficient sales price to avoid any loss.

375

Sabine Dragline Lease

During 2009, Sabine entered into capital lease arrangements with a nonaffiliated company to finance the purchase of two electric draglines to be used for Sabine’s mining operations totaling $47 million.  The amounts included in the lease represented the aggregate fair value of the existing equipment and a sale-and-leaseback transaction for additional dragline rebuild costs required to keep the dragline operational.  These capital lease assets are included in Other Property, Plant and Equipment on SWEPCo’s December 31, 2014 and 2013 balance sheets.  The short-term and long-term capital lease obligations are included in Obligations Under Capital Leases on SWEPCo’s December 31, 2014 and 2013 balance sheets.  The future payment obligations are included in SWEPCo’s future minimum lease payments schedule earlier in this note.

I&M Nuclear Fuel Lease

In November 2013, I&M entered into a sale-and-leaseback transaction with IMP 11-2013, a nonaffiliated Ohio trust, to lease nuclear fuel for I&M’s Cook Plant.  In November 2013, I&M sold a portion of its unamortized nuclear fuel inventory to the trust for $110 million.  The lease has a variable rate based on one month LIBOR and is accounted for as a capital lease with lease terms up to 54 months.  The future payment obligations of $67 million are included in I&M’s future minimum lease payments schedule earlier in this note.  The net capital lease asset is included in Other Property, Plant and Equipment and the short-term and long-term capital lease obligations are included in Other Current Liabilities and Deferred Credits and Other Noncurrent Liabilities, respectively, on I&M’s December 31, 2014 balance sheet.  The future minimum lease payments for the sale-and-leaseback transaction as of December 31, 2014 are as follows, based on estimated fuel burn:

Future Minimum Lease Payments	I&M
	(in thousands)
2015	$	32,173
2016	26,879
2017	5,760
2018	2,397
Total Future Minimum Lease Payments	$	67,209

376

14.  FINANCING ACTIVITIES

Long-term Debt

The following details long-term debt outstanding as of December 31, 2014 and 2013:

		Weighted
		Average
		Interest
		Rate as of	Interest Rate Ranges as of		Outstanding as of
		December 31,	December 31,		December 31,
Company	Maturity	2014	2014	2013	2014		2013
Senior Unsecured Notes					(in thousands)
APCo	2015-2044	5.80%	3.40%-7.95%	3.40%-7.95%	$	2,991,846	$	2,893,220
I&M	2015-2037	5.80%	3.20%-7.00%	3.20%-7.00%	1,246,683		1,246,235
OPCo	2014-2035	5.98%	5.375%-6.60%	4.85%-6.60%	1,945,036		2,169,487
PSO	2016-2037	5.52%	4.40%-6.625%	4.40%-6.625%	897,046		896,705
SWEPCo	2015-2040	5.56%	3.55%-6.45%	3.55%-6.45%	1,823,362		1,823,007
Pollution Control Bonds (a)
APCo	2014-2038 (b)	1.68%	0.04%-5.375%	0.05%-5.375%	532,500		532,500
I&M	2014-2025 (b)	1.80%	0.04%-4.625%	0.04%-6.25%	226,607		226,569
OPCo	2014-2038 (b)	3.85%	3.125%-5.80%	2.875%-5.80%	118,245		296,825
PSO	2014-2020	4.45%	4.45%	4.45%-5.25%	12,660		46,360
SWEPCo	2015-2018 (b)	4.28%	3.25%-4.95%	3.25%-4.95%	135,200		135,200
Notes Payable – Affiliated
APCo	2015	3.125%	3.125%	3.125%	86,000		86,000
Notes Payable – Nonaffiliated
I&M	2014-2019	1.14%	0.983%-2.12%	1.164%-4.00%	176,697		177,540
SWEPCo	2024-2032	5.13%	4.58%-6.37%	4.58%-6.37%	81,875		85,125
Securitization Bonds
APCo	2024-2031	2.80%	2.008%-3.772%	2.008%-3.772%	367,606		380,282
OPCo	2018-2020	1.44%	0.958%-2.049%	0.958%-2.049%	232,467		267,403
Spent Nuclear Fuel Obligation (c)
I&M					265,502		265,391
Other Long-term Debt
APCo (d)	2015-2026	13.718%	13.718%	1.188%-13.718%	2,322		302,355
I&M	2015-2025	2.28%	1.55%-6.00%	1.67%-6.00%	111,908		123,281
OPCo	2028	1.15%	1.15%	1.15%	1,375		1,460
PSO (e)	2016-2027	1.57%	1.482%-3.00%	1.491%-3.00%	131,330		56,745
SWEPCo (f)	2017	1.73%	1.73%		100,000		—

(a) For certain series of pollution control bonds, interest rates are subject to periodic adjustment.  Certain series may be purchased on demand at periodic interest adjustment dates.  Letters of credit from banks and insurance policies support certain series.

(b) Certain pollution control bonds are subject to redemption earlier than the maturity date.  Consequently, these bonds have been classified for maturity purposes as Long-term Debt Due Within One Year - Nonaffiliated on the balance sheets.

(c) Spent nuclear fuel obligation consists of a liability along with accrued interest for disposal of spent nuclear fuel (see "SNF Disposal" section of Note 6).

(d) In 2014, APCo retired a $300 million credit facility due in 2015.

(e) In 2014, PSO drew the remaining $75 million on an existing $125 million three-year credit facility.

(f) In 2014, SWEPCo issued a $100 million three-year credit facility.

377

Long-term debt outstanding as of December 31, 2014 is payable as follows:

	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
2015	$	638,212		$	382,187		$	131,497		$	427		$	306,750
2016	88,372			49,189			395,946			275,440			3,250
2017	273,492			37,131			46,387			454			353,250
2018	123,972			106,444			397,045			467			384,950
2019	94,463			479,353			48,016			250,482			403,250
After 2019	2,769,933			976,803			1,283,200			516,720			690,625
Principal Amount	3,988,444			2,031,107			2,302,091			1,043,990			2,142,075
Unamortized Discount, Net	(8,170		)	(3,710		)	(4,968		)	(2,954		)	(1,638		)
Total Long-term Debt Outstanding	$	3,980,274		$	2,027,397		$	2,297,123		$	1,041,036		$	2,140,437

In January 2015 and February 2015, I&M retired $15 million and $8 million, respectively, of Notes Payable related to DCC Fuel.

In January 2015, OPCo retired $22 million of Securitization Bonds.

In January 2015, PSO issued $87.5 million of 3.17% and $87.5 million of 4.09% Senior Unsecured Notes due in 2025 and 2045, respectively.

In January 2015, SWEPCo remarketed $54 million of 1.6% Pollution Control Bonds due in 2019.

In February 2015, APCo retired $11 million of Securitization Bonds.

As of December 31, 2014, trustees held, on behalf of I&M and OPCo, $40 million and $345 million, respectively, of their reacquired Pollution Control Bonds.

Dividend Restrictions

The Registrant Subsidiaries pay dividends to Parent provided funds are legally available.  Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of the Registrant Subsidiaries to transfer funds to Parent in the form of dividends.

Federal Power Act

The Federal Power Act prohibits each of the Registrant Subsidiaries from participating “in the making or paying of any dividends of such public utility from any funds properly included in capital account.”  The term “capital account” is not defined in the Federal Power Act or its regulations.  Management understands “capital account” to mean the book value of the common stock.

Additionally, the Federal Power Act creates a reserve on earnings attributable to hydroelectric generation plants.  Because of their respective ownership of such plants, this reserve applies to APCo and I&M.

None of these restrictions limit the ability of the Registrant Subsidiaries to pay dividends out of retained earnings.

Leverage Restrictions

Pursuant to the credit agreement leverage restrictions, APCo, I&M, PSO and SWEPCo must maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%.  As of December 31, 2014, $50 million, $61 million and $277 million of I&M, PSO and SWEPCo's retained earnings, respectively, have restrictions related to the payment of dividends to Parent. None of APCo’s retained earnings have restrictions related to the payment of dividends to Parent.

378

Utility Money Pool – AEP System

The AEP System uses a corporate borrowing program to meet the short-term borrowing needs of AEP’s subsidiaries.  The corporate borrowing program includes a Utility Money Pool, which funds AEP’s utility subsidiaries, and a Nonutility Money Pool, which funds a majority of AEP’s nonutility subsidiaries.  The AEP System Utility Money Pool operates in accordance with the terms and conditions of the AEP System Utility Money Pool agreement filed with the FERC.   The amounts of outstanding loans to (borrowings from) the Utility Money Pool as of December 31, 2014 and 2013 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 years ended December 31, 2014 and 2013 are described in the following tables:

Year Ended December 31, 2014:

	Maximum				Average				Net Loans to
	Borrowings		Maximum		Borrowings		Average		(Borrowings from)			Authorized
	from the		Loans to the		from the		Loans to the		the Utility Money			Short-term
	Utility		Utility		Utility		Utility		Pool as of			Borrowing
Company	Money Pool		Money Pool		Money Pool		Money Pool		December 31, 2014			Limit
	(in thousands)
APCo	$	44,215	$	542,186	$	12,566	$	104,469	$	48,519		$	600,000
I&M	150,714		158,857		73,192		39,118		(129,020		)	500,000
OPCo	120,264		405,350		34,841		107,275		312,473			400,000
PSO	176,950		—		93,732		—		(154,249		)	300,000
SWEPCo	153,503		51,319		71,009		24,392		41,033			350,000

Year Ended December 31, 2013:

	Maximum				Average				Net Loans to
	Borrowings		Maximum		Borrowings		Average		(Borrowings from)			Authorized
	from the		Loans to the		from the		Loans to the		the Utility Money			Short-term
	Utility		Utility		Utility		Utility		Pool as of			Borrowing
Company	Money Pool		Money Pool		Money Pool		Money Pool		December 31, 2013			Limit
	(in thousands)
APCo	$	331,771	$	202,377	$	141,128	$	28,659	$	92,485		$	600,000
I&M	23,135		403,905		8,308		256,730		55,863			500,000
OPCo	410,456		415,605		190,384		50,230		339,070			600,000
PSO	46,806		109,607		18,754		28,771		(36,772		)	300,000
SWEPCo	24,553		153,830		6,020		33,546		(9,180		)	350,000

The activity in the above table does not include short-term lending activity of OPCo’s former wholly-owned subsidiary, AGR.  In January 2013, AGR became a participant in the Nonutility Money Pool.  In November 2013, AGR’s participation in the Nonutility Money Pool ended as AGR became a direct borrower from Parent.  On December 31, 2013, OPCo contributed the assets and liabilities of AGR to Parent as part of corporate separation.  For the year ended December 31, 2013, AGR had the following activity in the Nonutility Money Pool or from Parent:

									Borrowings
Year Ended	Maximum		Maximum		Average		Average		From as of
December 31, 2013	Borrowings From		Loans To		Borrowings From		Loans To		December 31, 2013
	(in thousands)
Nonutility Money Pool	$	1,047	$	1,027	$	316	$	208	$	—
Parent	1,178		—		1,078		—		—		(a)

(a) The borrowings of AGR from Parent as of December 31, 2013 are no longer associated with OPCo.

379

The maximum and minimum interest rates for funds either borrowed from or loaned to the Utility Money Pool were as follows:

	Years Ended December 31,
	2014		2013		2012
Maximum Interest Rate	0.59	%	0.43	%	0.56	%
Minimum Interest Rate	0.24	%	0.24	%	0.39	%

The average interest rates for funds borrowed from and loaned to the Utility Money Pool for the years ended December 31, 2014, 2013 and 2012 are summarized for all Registrant Subsidiaries in the following table:

	Average Interest Rate  for Funds Borrowed from the Utility Money Pool for Years Ended December 31,						Average Interest Rate  for Funds Loaned to the Utility Money Pool for Years Ended December 31,
Company	2014		2013		2012		2014		2013		2012
APCo	0.29	%	0.33	%	0.47	%	0.29	%	0.33	%	0.47	%
I&M	0.31	%	0.36	%	—	%	0.30	%	0.32	%	0.46	%
OPCo	0.27	%	0.33	%	0.47	%	0.34	%	0.32	%	0.47	%
PSO	0.29	%	0.34	%	—	%	—	%	0.33	%	0.46	%
SWEPCo	0.29	%	0.34	%	0.53	%	0.32	%	0.36	%	0.45	%

AGR’s maximum, minimum and average interest rates for funds either borrowed from or loaned to the Nonutility Money Pool or Parent for the year ended December 31, 2013 are summarized in the following table:

Year Ended December 31, 2013	Maximum Interest Rate for Funds Borrowed		Minimum Interest Rate for Funds Borrowed		Maximum Interest Rate for Funds Loaned		Minimum Interest Rate for Funds Loaned		Average Interest Rate for Funds Borrowed		Average Interest Rate for Funds Loaned
Nonutility Money Pool	0.66	%	0.53	%	0.35	%	0.32	%	0.58	%	0.34	%
Parent	0.34	%	0.24	%	—	%	—	%	0.28	%	—	%

Interest expense related to short-term borrowing activities with the Utility Money Pool, the Nonutility Money Pool and Parent is included in Interest Expense on each of the Registrant Subsidiaries’ statements of income.  The Registrant Subsidiaries incurred interest expense for all short-term borrowing activities as follows:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	6	$	414	$	772
I&M	135		70		—
OPCo	43		503		555
PSO	275		25		11
SWEPCo	168		5		977

Interest income related to short-term lending activities with the Utility Money Pool, the Nonutility Money Pool and Parent is included in Interest Income on each of the Registrant Subsidiaries’ statements of income.  The Registrant Subsidiaries earned interest income for all short-term lending activities as follows:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	317	$	109	$	123
I&M	127		924		963
OPCo	202		233		1,038
PSO	—		58		435
SWEPCo	14		113		320

380

Credit Facilities

For a discussion of credit facilities, see “Letters of Credit” section of Note 6.

Sale of Receivables – AEP Credit

Under a sale of receivables arrangement, the Registrant Subsidiaries sell, without recourse, certain of their customer accounts receivable and accrued unbilled revenue balances to AEP Credit and are charged a fee based on AEP Credit’s financing costs, administrative costs and uncollectible accounts experience for each Registrant Subsidiary’s receivables.  APCo does not have regulatory authority to sell its West Virginia accounts receivable.  The costs of customer accounts receivable sold are reported in Other Operation expense on the Registrant Subsidiaries’ statements of income.  The Registrant Subsidiaries manage and service their customer accounts receivable sold.

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

The amount of accounts receivable and accrued unbilled revenues under the sale of receivables agreement for each Registrant Subsidiary as of December 31, 2014 and 2013 was as follows:

	December 31,
Company	2014		2013
	(in thousands)
APCo	$	159,823	$	156,599
I&M	137,459		139,257
OPCo	365,834		324,287
PSO	112,905		115,260
SWEPCo	148,668		149,337

The fees paid by the Registrant Subsidiaries to AEP Credit for customer accounts receivable sold were:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	8,896	$	6,471	$	6,883
I&M	7,900		6,510		6,121
OPCo	28,809		21,573		20,312
PSO	5,926		5,604		7,054
SWEPCo	6,750		5,917		6,140

The Registrant Subsidiaries’ proceeds on the sale of receivables to AEP Credit were:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	1,519,266	$	1,442,983	$	1,353,920
I&M	1,488,561		1,458,803		1,344,260
OPCo	2,647,643		2,620,483		2,952,723
PSO	1,321,068		1,232,363		1,157,174
SWEPCo	1,655,753		1,533,840		1,481,925

381

15.  RELATED PARTY TRANSACTIONS

For other related party transactions, also see “AEP System Tax Allocation Agreement” section of Note 12 in addition to “Utility Money Pool – AEP System” and “Sale of Receivables – AEP Credit” sections of Note 14.

Interconnection Agreement

In accordance with management’s December 2010 announcement and October 2012 filing with the FERC, the Interconnection Agreement was terminated effective January 1, 2014.  The AEP System Interim Allowance Agreement which provided for, among other things, the transfer of SO₂ emission allowances associated with transactions under the Interconnection Agreement was also terminated.

APCo, I&M, KPCo, OPCo and AEPSC were parties to the Interconnection Agreement which defined the sharing of costs and benefits associated with the respective generation plants.  This sharing was based upon each AEP utility subsidiary’s MLR and was calculated monthly on the basis of each AEP utility subsidiary’s maximum peak demand in relation to the sum of the maximum peak demands of all four AEP utility subsidiaries during the preceding 12 months.

Effective January 1, 2014, the FERC approved the following agreements. See "Corporate Separation" section of Note 1.

• A Power Coordination Agreement among APCo, I&M and KPCo with AEPSC as the agent to coordinate the participants’ respective power supply resources.

• A Bridge Agreement among AGR, APCo, I&M, KPCo and OPCo with AEPSC as the agent to address open commitments related to the termination of the Interconnection Agreement and responsibilities to PJM.

• A Power Supply Agreement between AGR and OPCo for AGR to supply capacity and the energy needs of OPCo's retail load.

AEPSC conducts power, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other risk management activities on behalf of APCo, I&M, KPCo, PSO and SWEPCo. Effective January 1, 2014, power and natural gas risk management activities for APCo, I&M and KPCo are allocated based on the three member companies’ respective equity positions, while power and natural gas risk management activities for PSO and SWEPCo are allocated based on the Operating Agreement. Prior to January 1, 2014, power and natural gas risk management activities were allocated under the SIA to former members of the Interconnection Agreement, PSO and SWEPCo. Risk management activities primarily include power and natural gas physical transactions, financially-settled swaps and exchange-traded futures.  AEPSC settles the majority of the physical forward contracts by entering into offsetting contracts. Effective January 1, 2014 and with the transfer of OPCo’s generation assets to AGR, AEPSC conducts only gasoline, diesel fuel, energy procurement and FTR price risk management activities on OPCo’s behalf.

Operating Agreement

PSO, SWEPCo and AEPSC are parties to the Operating Agreement which was approved by the FERC.  The Operating Agreement requires PSO and SWEPCo to maintain adequate annual planning reserve margins and requires that capacity in excess of the required margins be made available for sale to other operating companies as capacity commitments. In January 2014, the FERC approved a modification of the Operating Agreement to address changes resulting from an anticipated March 2014 SPP power market change. Subsequently and in March 2014, SPP changed from an energy imbalance service market to a fully integrated power market. In alignment with the new SPP integrated power market and according to the modified Operating Agreement, PSO and SWEPCo operate as standalone entities and offer their respective generation into the SPP power market. SPP then economically dispatches resources. By offering their resources separately, PSO and SWEPCo no longer purchase or sell energy to each other to serve their respective internal load or off-system sales.

382

System Integration Agreement (SIA)

Under the SIA, AEPSC allocates physical and financial revenues and expenses from transactions with neighboring utilities, power marketers and other power and natural gas risk management activities based upon the location of such activity. Margins resulting from trading and marketing activities originating in PJM and MISO generally accrue to the benefit of APCo, I&M and KPCo, while trading and marketing activities originating in SPP generally accrue to the benefit of PSO and SWEPCo.  Margins resulting from other transactions are allocated among APCo, I&M, KPCo, PSO and SWEPCo based upon the equity positions of these companies.

The SIA was designed to function as an umbrella agreement in addition to the Interconnection Agreement (prior to January 1, 2014) and the Operating Agreement, each of which controlled the distribution of revenues and expenses.

Affiliated Revenues and Purchases

The following tables show the revenues derived from sales under the Interconnection Agreement, direct sales to affiliates, net transmission agreement sales and other revenues for the years ended December 31, 2014, 2013 and 2012:

Related Party Revenues	APCo			I&M		OPCo		PSO		SWEPCo
	(in thousands)
Year Ended December 31, 2014
Sales under Interconnection Agreement (a)	$	184		$	503	$	1,121	$	—	$	—
Direct Sales to East Affiliates	141,721			—		—		3,765		10,048
Direct Sales to West Affiliates	614			363		—		—		328
Direct Sales to AEPEP	—			—		44,121		—		—
Transmission Agreement and Transmission Coordination Agreement Sales	(1,665		)	1,675		104,052		8		14,119
Other Revenues	3,583			1,657		15,922		3,281		1,783
Total Affiliated Revenues	$	144,437		$	4,198	$	165,216	$	7,054	$	26,278

Related Party Revenues	APCo		I&M			OPCo		PSO		SWEPCo
	(in thousands)
Year Ended December 31, 2013
Sales under Interconnection Agreement	$	193,651	$	218,164		$	924,313	$	—	$	—
Direct Sales to East Affiliates	129,014		—			152,689		14		1
Direct Sales to West Affiliates	578		391			804		10,761		35,410
Direct Sales to AEPEP	—		—			—		—		(136		)
Transmission Agreement and Transmission Coordination Agreement Sales	461		(681		)	53,405		—		14,715
Other Revenues	23,780		1,525			35,643		3,471		1,822
Total Affiliated Revenues	$	347,484	$	219,399		$	1,166,854	$	14,246	$	51,812

Related Party Revenues	APCo			I&M		OPCo		PSO		SWEPCo
	(in thousands)
Year Ended December 31, 2012
Sales under Interconnection Agreement	$	166,733		$	265,923	$	643,486	$	—	$	—
Direct Sales to East Affiliates	124,519			—		136,142		34		142
Direct Sales to West Affiliates	314			218		454		18,861		23,695
Direct Sales to AEPEP	—			—		—		—		(583		)
Transmission Agreement and Transmission Coordination Agreement Sales	(1,289		)	758		26,295		8		12,338
Other Revenues	27,922			1,509		40,917		3,700		1,849
Total Affiliated Revenues	$	318,199		$	268,408	$	847,294	$	22,603	$	37,441

(a)    Includes December 2013 true-up activity subsequent to agreement termination.

383

The following tables show the purchased power expenses incurred for purchases under the Interconnection Agreement and from affiliates for the years ended December 31, 2014, 2013 and 2012:

Related Party Purchases	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Year Ended December 31, 2014
Purchases under Interconnection Agreement (a)	$	4,661	$	1,635	$	140	$	—	$	—
Direct Purchases from East Affiliates	—		—		—		976		1
Direct Purchases from West Affiliates	—		—		—		10,048		3,765
Direct Purchases from AGR	—		—		1,148,216		—		—
Direct Purchases from AEPEP	—		—		44,344		—		—
Direct Purchases from AEGCo	—		268,337		—		—		—
Total Affiliated Purchases	$	4,661	$	269,972	$	1,192,700	$	11,024	$	3,766

Related Party Purchases	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Year Ended December 31, 2013
Purchases under Interconnection Agreement	$	830,954	$	181,688	$	199,283	$	—	$	—
Direct Purchases from East Affiliates	—		—		—		1,481		411
Direct Purchases from West Affiliates	5		3		6		35,410		10,761
Direct Purchases from AEGCo	—		251,518		148,459		—		—
Natural Gas Purchases from AEPES	—		—		1,984		—		—
Total Affiliated Purchases	$	830,959	$	433,209	$	349,732	$	36,891	$	11,172

Related Party Purchases	APCo		I&M		OPCo		PSO		SWEPCo
	(in thousands)
Year Ended December 31, 2012
Purchases under Interconnection Agreement	$	661,185	$	147,502	$	174,240	$	—	$	—
Direct Purchases from East Affiliates	—		—		—		683		368
Direct Purchases from West Affiliates	53		36		75		23,695		18,861
Direct Purchases from AEGCo	—		238,866		203,583		—		—
Natural Gas Purchases from AEPES	—		—		2,808		—		—
Total Affiliated Purchases	$	661,238	$	386,404	$	380,706	$	24,378	$	19,229

(a)    Includes December 2013 true-up activity subsequent to agreement termination.

The above summarized related party revenues and expenses are reported in Sales to AEP Affiliates and Purchased Electricity from AEP Affiliates on the Registrant Subsidiaries’ statements of income.  Since the Registrant Subsidiaries are included in AEP’s consolidated results, the above summarized related party transactions are eliminated in total in AEP’s consolidated revenues and expenses.

System Transmission Integration Agreement (STIA)

AEP’s STIA provided for the integration and coordination of the planning, operation and maintenance of transmission facilities. Since the FERC approved the cancellation of the STIA effective June 1, 2014, the coordinated planning, operation and maintenance of transmission facilities are the responsibility of the RTOs and the STIA is no longer necessary. Similar to the SIA, the STIA functioned as an umbrella agreement in addition to the Transmission Agreement (TA) and the Transmission Coordination Agreement (TCA). The TA and TCA are both still active. The STIA contained two service schedules that governed:

• The allocation of transmission costs and revenues.

• The allocation of third-party transmission costs and revenues and AEP System dispatch costs.

384

APCo, I&M, KGPCo, KPCo, OPCo and WPCo are parties to the TA, effective November 2010, which defines how transmission costs through PJM OATT are allocated among the AEP East Companies, KGPCo and WPCo on a 12-month average coincident peak basis.

The following table shows the net charges recorded by the Registrant Subsidiaries for the years ended December 31, 2014, 2013 and 2012 related to the TA:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	84,667	$	40,609	$	20,264
I&M	39,707		19,947		5,689
OPCo	16,989		8,946		6,090

The charges shown above are recorded in Other Operation expenses on the statements of income.

PSO, SWEPCo and AEPSC are parties to the TCA, dated January 1, 1997, by and among PSO, SWEPCo and AEPSC, in connection with the operation of the transmission assets of the two AEP utility subsidiaries.  The TCA has been approved by the FERC and establishes a coordinating committee, which is charged with overseeing the coordinated planning of the transmission facilities of the parties to the agreement.  This includes the performance of transmission planning studies, the interaction of such companies with independent system operators (ISO) and other regional bodies interested in transmission planning and compliance with the terms of the OATT filed with the FERC and the rules of the FERC relating to such a tariff.

Under the TCA, the parties to the agreement delegated to AEPSC the responsibility of monitoring the reliability of their transmission systems and administering the OATT on their behalf.  The allocations have been governed by the FERC-approved OATT for the SPP.

The following table shows the net (revenues) expenses allocated among parties to the TCA pursuant to the SPP OATT protocols as described above for the years ended December 31, 2014, 2013 and 2012:

	Years Ended December 31,
Company	2014			2013			2012
	(in thousands)
PSO	$	14,100		$	14,700		$	12,300
SWEPCo	(14,100		)	(14,700		)	(12,300		)

The net (revenues) expenses shown above are recorded in Sales to AEP Affiliates on SWEPCo’s statements of income and Other Operation expenses on PSO’s statements of income.

Unit Power Agreements (UPA)

Lawrenceburg UPA

In March 2007, OPCo and AEGCo entered into a 10-year UPA for the entire output from the Lawrenceburg Generating Station effective with AEGCo’s purchase of the plant in May 2007.  Effective January 1, 2014, the Lawrenceburg UPA was assigned by OPCo to AGR. The UPA has an option for an additional two-year period.  I&M operates the plant under an agreement with AEGCo.  Under the UPA, AGR pays AEGCo for the capacity, depreciation, fuel, operation and maintenance and tax expenses.  These payments are due regardless of whether the plant is operating.  The fuel and operation and maintenance payments are based on actual costs incurred.  All expenses are trued up periodically.

385

UPA between AEGCo and I&M

A UPA between AEGCo and I&M (the I&M Power Agreement) provides for the sale by AEGCo to I&M of all the power (and the energy associated therewith) available to AEGCo at the Rockport Plant unless it is sold to another utility.  Subsequently, I&M assigns 30% of the power to KPCo.  See the "UPA between AEGCo and KPCo" section below.  I&M is obligated, whether or not power is available from AEGCo, to pay as a demand charge for the right to receive such power (and as an energy charge for any associated energy taken by I&M) net of amounts received by AEGCo from any other sources, sufficient to enable AEGCo to pay all its operating and other expenses, including a rate of return on the common equity of AEGCo as approved by the FERC.  The I&M Power Agreement will continue in effect until the expiration of the lease term of Unit 2 of the Rockport Plant unless extended in specified circumstances.

UPA between AEGCo and KPCo

Pursuant to an assignment between I&M and KPCo and a UPA between KPCo and AEGCo, AEGCo sells KPCo 30% of the power (and the energy associated therewith) available to AEGCo from both units of the Rockport Plant.  KPCo pays to AEGCo in consideration for the right to receive such power the same amounts which I&M would have paid AEGCo under the terms of the I&M Power Agreement for such entitlement.  The KPCo UPA ends in December 2022.

Cook Coal Terminal

On August 1, 2013, OPCo transferred ownership of Cook Coal Terminal to AEGCo.  Cook Coal Terminal performs coal transloading and storage services at cost for APCo, I&M and OPCo.  OPCo included revenues for these services in Other Revenues – Affiliated and expenses in Other Operation expenses on the statements of income.  The coal transloading expenses in 2014, 2013 and 2012 were as follows:

AEGCo

	Years Ended December 31,
Company	2014		2013
	(in thousands)
APCo	$	1	$	—
I&M	16,186		6,820
OPCo	—		322

OPCo

	Years Ended December 31,
Company	2013				2012
	(in thousands)
APCo	$	(11	)	(a)	$	942
I&M	15,596			(b)	32,639		(b)

(a) Includes annual true-up of 2012 estimated revenues.

(b) Includes $7.3 million and $14.5 million in 2013 and 2012, respectively, of amounts purchased by I&M on behalf of AEGCo for Rockport Plant through July 31, 2013.

APCo, I&M and OPCo recorded the cost of transloading services in Fuel on the balance sheet.

386

Cook Coal Terminal also performs railcar maintenance services at cost for APCo, I&M, PSO and SWEPCo.  Beginning on August 1, 2013, Cook Coal Terminal also performs railcar maintenance services at cost for OPCo.  OPCo included revenues for these services in Sales to AEP Affiliates and expenses in Other Operation expenses on the statements of income.  The railcar maintenance revenues in 2014, 2013 and 2012 were as follows:

AEGCo

	Years Ended December 31,
Company	2014		2013
	(in thousands)
I&M	$	2,497	$	1,073
OPCo	—		41
PSO	310		106
SWEPCo	3,275		1,237

OPCo

	Years Ended December 31,
Company	2013			2012
	(in thousands)
APCo	$	3		$	88
I&M	1,285		(a)	3,343		(a)
PSO	59			281
SWEPCo	1,204			2,102

(a) Includes $608 thousand and $1.5 million in 2013 and 2012, respectively, of amounts purchased by I&M on behalf of AEGCo for Rockport Plant through July 31, 2013.

APCo, I&M, OPCo, PSO and SWEPCo recorded the cost of the railcar maintenance services in Fuel on the balance sheets.

SWEPCo Railcar Facility

SWEPCo operates a railcar maintenance facility in Alliance, Nebraska.  The facility performs maintenance on its own railcars as well as railcars belonging to I&M, PSO and third parties.  SWEPCo billed I&M $508 thousand and $873 thousand for railcar services provided in 2014 and 2013, respectively, and billed PSO $496 thousand and $279 thousand in 2014 and 2013, respectively.  These billings for SWEPCo, and costs for I&M and PSO, are recorded in Fuel on the balance sheets.

387

I&M Barging, Urea Transloading and Other Services

I&M provides barging, urea transloading and other transportation services to affiliates.  Urea is a chemical used to control NO_x emissions at certain generation plants in the AEP System.  I&M recorded revenues from barging, transloading and other services in Other Revenues – Affiliated on the statements of income.  The affiliated companies recorded these costs paid to I&M as fuel expenses or other operation expenses.  The amounts of affiliated expenses were:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
AEGCo	$	22,746	$	19,719	$	19,961
AGR	5,195		—		—
APCo	36,064		30,876		34,725
KPCo	5,031		50		74
OPCo	—		40,562		39,956
AEP River Operations LLC – (Nonutility Subsidiary of AEP)	25,253		22,648		20,917

Services Provided by AEP River Operations LLC

AEP River Operations LLC provides services for barge towing, chartering and general and administrative expenses to I&M.  The costs are recorded by I&M as Other Operation expenses.  For the years ended December 31, 2014, 2013 and 2012, I&M recorded expenses of $24 million, $24 million and $24 million, respectively, for these activities.

Central Machine Shop

APCo operates a facility which repairs and rebuilds specialized components for the generation plants across the AEP System.  APCo defers the cost of performing these services on the balance sheet, then transfers the cost to the affiliate for reimbursement.  The AEP subsidiaries recorded these billings as capital or maintenance expenses depending on the nature of the services received.  These billings are recoverable from customers.  The following table provides the amounts billed by APCo to the following affiliates:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
AEGCo	$	70	$	26	$	80
AGR	2,842		—		—
I&M	1,704		2,451		1,280
KPCo	1,180		687		277
OPCo	—		4,679		3,838
PSO	321		606		1,198
SWEPCo	72		168		145

388

Affiliate Railcar Agreement

Certain AEP subsidiaries have an agreement providing for the use of each other’s leased or owned railcars when available.  The agreement specifies that the company using the railcar will be billed, at cost, by the company furnishing the railcar.  The AEP subsidiaries recorded these costs or reimbursements as costs or reduction of costs, respectively, in Fuel on the balance sheets and such costs are recoverable from customers.  The following tables show the net effect of the railcar agreement on the balance sheets:

December 31, 2014
Billing Company
Billed Company		APCo			I&M		PSO		SWEPCo
	(in thousands)
AGR		$	(27	)	$	—	$	—	$	—
I&M		331			—		133		1,078
PSO		56			1,275		—		652
SWEPCo		96			2,159		183		—

December 31, 2013
Billing Company
Billed Company	AGR			APCo		I&M		PSO		SWEPCo
	(in thousands)
AGR	$	—		$	698	$	33	$	2	$	19
APCo	775			—		—		—		—
I&M	(391		)	507		—		195		854
PSO	(90		)	20		595		—		329
SWEPCo	(245		)	140		1,395		43		—

OVEC

AEP, OPCo and several nonaffiliated utility companies jointly own OVEC.  As of December 31, 2014, AEP’s and OPCo’s ownership and investment in OVEC were as follows:

	December 31, 2014
Company	Ownership		Investment
			(in thousands)
AEP	39.17	%	$	3,978
OPCo	4.30	%	430
Total	43.47	%	$	4,408

OVEC’s owners, along with APCo and I&M, are members to an intercompany power agreement.  Participants of this agreement are entitled to receive and obligated to pay for all OVEC generating capacity, approximately 2,200 MWs, in proportion to their respective power participation ratios.  The aggregate power participation ratio of certain AEP utility subsidiaries, including APCo, I&M and OPCo, is 43.47%.  The proceeds from the sale of power by OVEC are designed to be sufficient for OVEC to meet its operating expenses and fixed costs and provide a return on capital.  The intercompany power agreement ends in June 2040.

AEP, OPCo and other nonaffiliated owners authorized environmental investments related to their ownership interests. OVEC financed capital expenditures totaling $1.3 billion in connection with the engineering and construction of FGD projects and the associated waste disposal landfills at its two generation plants.  These environmental projects were funded through debt issuances.  As of December 31, 2014, both generation plants were operating with environmental controls.

389

Purchased Power from OVEC

The amounts of power purchased by the Registrant Subsidiaries from OVEC for the years ended December 31, 2014, 2013 and 2012 were:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	96,905	$	104,396	$	98,417
I&M	48,487		52,230		49,239
OPCo	123,101		132,607		125,013

The amounts shown above are recoverable from customers and are included in Purchased Electricity for Resale on the statements of income.

Sales and Purchases of Property

Certain AEP subsidiaries had affiliated sales and purchases of electric property individually amounting to $100 thousand or more, sales and purchases of meters and transformers, and sales and purchases of transmission property.  There were no gains or losses recorded on the transactions.  The following tables show the sales and purchases, recorded at net book value, for the years ended December 31, 2014, 2013 and 2012:

Sales

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	3,031	$	3,212	$	6,643
I&M	1,256		5,031		3,296
OPCo	532		59,818		4,163
PSO	510		5,651		1,782
SWEPCo	1,216		1,617		1,731

Purchases

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	860	$	5,199	$	2,522
I&M	1,352		964		285
OPCo	1,902		5,311		10,608
PSO	2,079		1,710		1,867
SWEPCo	4,023		8,440		7,266

The amounts above are recorded in Property, Plant and Equipment on the balance sheets.

Intercompany Billings

The Registrant Subsidiaries and other AEP subsidiaries perform certain utility services for each other when necessary or practical.  The costs of these services are billed on a direct-charge basis, whenever possible, or on reasonable basis of proration for services that benefit multiple companies.  The billings for services are made at cost and include no compensation for the use of equity capital.

390

16.  VARIABLE INTEREST ENTITIES

The accounting guidance for “Variable Interest Entities” is a consolidation model that considers if a company has a controlling financial interest in a VIE.  A controlling financial interest will have both (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  Entities are required to consolidate a VIE when it is determined that they have a controlling financial interest in a VIE and therefore, are the primary beneficiary of that VIE, as defined by the accounting guidance for “Variable Interest Entities.”  In determining whether they are the primary beneficiary of a VIE, management considers for each Registrant Subsidiary factors such as equity at risk, the amount of the VIE’s variability the Registrant Subsidiary absorbs, guarantees of indebtedness, voting rights including kick-out rights, the power to direct the VIE, variable interests held by related parties and other factors.  Management believes that significant assumptions and judgments were applied consistently.  In addition, the Registrant Subsidiaries have not provided financial or other support to any VIE that was not previously contractually required.

SWEPCo is the primary beneficiary of Sabine.  I&M is the primary beneficiary of DCC Fuel.  OPCo is the primary beneficiary of Ohio Phase-in-Recovery Funding.  APCo is the primary beneficiary of Appalachian Consumer Rate Relief Funding.  SWEPCo holds a significant variable interest in DHLC.  Each of the Registrant Subsidiaries hold a significant variable interest in AEPSC.  In 2013, I&M and OPCo each held a significant variable interest in AEGCo.

Sabine is a mining operator providing mining services to SWEPCo.  SWEPCo has no equity investment in Sabine but is Sabine’s only customer.  SWEPCo guarantees the debt obligations and lease obligations of Sabine.  Under the terms of the note agreements, substantially all assets are pledged and all rights under the lignite mining agreement are assigned to SWEPCo.  The creditors of Sabine have no recourse to any AEP entity other than SWEPCo.  Under the provisions of the mining agreement, SWEPCo is required to pay, as a part of the cost of lignite delivered, an amount equal to mining costs plus a management fee.  In addition, SWEPCo determines how much coal will be mined each year.  Based on these facts, management concluded that SWEPCo is the primary beneficiary and is required to consolidate Sabine.  SWEPCo’s total billings from Sabine for the years ended December 31, 2014, 2013 and 2012 were $151 million, $155 million and $147 million, respectively.  See the table below for the classification of Sabine’s assets and liabilities on SWEPCo’s balance sheets.

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

SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED
VARIABLE INTEREST ENTITIES
December 31, 2014 and 2013
(in thousands)
	Sabine
	2014		2013
ASSETS
Current Assets	$	67,981	$	66,478
Net Property, Plant and Equipment	145,491		157,274
Other Noncurrent Assets	51,578		51,211
Total Assets	$	265,050	$	274,963
LIABILITIES AND EQUITY
Current Liabilities	$	36,286	$	32,812
Noncurrent Liabilities	228,349		241,673
Equity	415		478
Total Liabilities and Equity	$	265,050	$	274,963

391

I&M has nuclear fuel lease agreements with DCC Fuel IV LLC, DCC Fuel V LLC, DCC Fuel VI LLC and DCC Fuel VII (collectively DCC Fuel).  DCC Fuel was formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.  DCC Fuel purchased the nuclear fuel from I&M with funds received from the issuance of notes to financial institutions.  Each entity is a single-lessee leasing arrangement with only one asset and is capitalized with all debt.  Each is a separate legal entity from I&M, the assets of which are not available to satisfy the debts of I&M.  Payments on the leases for the years ended December 31, 2014, 2013 and 2012 were $109 million, $153 million and $127 million, respectively.  The leases were recorded as capital leases on I&M’s balance sheet as title to the nuclear fuel transfers to I&M at the end of the respective lease terms, which do not exceed 54 months.  Based on I&M’s control of DCC Fuel, management concluded that I&M is the primary beneficiary and is required to consolidate DCC Fuel.  The capital leases are eliminated upon consolidation.  The lease agreements ended for DCC Fuel LLC and DCC Fuel III LLC in October 2013 and for DCC Fuel II LLC in October 2014.  See the table below for the classification of DCC Fuel’s assets and liabilities on I&M’s balance sheets.

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

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
VARIABLE INTEREST ENTITIES
December 31, 2014 and 2013
(in thousands)
	DCC Fuel
ASSETS	2014		2013
Current Assets	$	97,361	$	117,762
Net Property, Plant and Equipment	158,121		156,820
Other Noncurrent Assets	79,705		60,450
Total Assets	$	335,187	$	335,032
LIABILITIES AND EQUITY
Current Liabilities	$	86,026	$	107,815
Noncurrent Liabilities	249,161		227,217
Equity	—		—
Total Liabilities and Equity	$	335,187	$	335,032

Ohio Phase-in-Recovery Funding was formed for the sole purpose of issuing and servicing securitization bonds related to phase-in recovery property.  Management has concluded that OPCo is the primary beneficiary of Ohio Phase-in-Recovery Funding because OPCo has the power to direct the most significant activities of the VIE and OPCo's equity interest could potentially be significant.  Therefore, OPCo is required to consolidate Ohio Phase-in-Recovery Funding.  The securitized bonds totaled $232 million and $267 million as of December 31, 2014 and 2013, respectively, and are included in current and long-term debt on the balance sheet.  Ohio Phase-in-Recovery Funding has securitized assets of $110 million and $132 million as of December 31, 2014 and 2013, respectively, which is presented separately on the face of the balance sheet.  The phase-in recovery property represents the right to impose and collect Ohio deferred distribution charges from customers receiving electric transmission and distribution service from OPCo under a recovery mechanism approved by the PUCO.  In August 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to OPCo or any other AEP entity.  OPCo acts as the servicer for Ohio Phase-in-Recovery Funding's securitized assets and remits all related amounts collected from customers to Ohio Phase-in-Recovery Funding for interest and principal payments on the securitization bonds and related costs.

392

The balances below represent the assets and liabilities of Ohio Phase-in-Recovery Funding that are consolidated.  These balances include intercompany transactions that are eliminated upon consolidation.

OHIO POWER COMPANY AND SUBSIDIARIES
VARIABLE INTEREST ENTITIES
December 31, 2014 and 2013
(in thousands)
	Ohio Phase-in-Recovery Funding
ASSETS	2014		2013
Current Assets	$	32,676	$	23,198
Other Noncurrent Assets (a)	209,922		251,409
Total Assets	$	242,598	$	274,607
LIABILITIES AND EQUITY
Current Liabilities	$	47,099	$	36,470
Noncurrent Liabilities	194,162		236,800
Equity	1,337		1,337
Total Liabilities and Equity	$	242,598	$	274,607

(a) Includes an intercompany item eliminated in consolidation as of December 31, 2014 and 2013 of $97 million and $116 million, respectively. 

Appalachian Consumer Rate Relief Funding was formed for the sole purpose of issuing and servicing securitization bonds related to APCo's under-recovered ENEC deferral balance.  Management has concluded that APCo is the primary beneficiary of Appalachian Consumer Rate Relief Funding because APCo has the power to direct the most significant activities of the VIE and APCo's equity interest could potentially be significant.  Therefore, APCo is required to consolidate Appalachian Consumer Rate Relief Funding.  The securitized bonds totaled $368 million and $380 million as of December 31, 2014 and 2013, respectively, and are included in current and long-term debt on the balance sheet.   Appalachian Consumer Rate Relief Funding has securitized assets of $350 million and $369 million as of December 31, 2014 and 2013, respectively, which is presented separately on the face of the balance sheet.  The phase-in recovery property represents the right to impose and collect WV deferred generation charges from customers receiving electric transmission, distribution and generation service from APCo under a recovery mechanism approved by the WVPSC.  In November 2013, securitization bonds were issued.  The securitization bonds are payable only from and secured by the securitized assets.  The bondholders have no recourse to APCo or any other AEP entity.  APCo acts as the servicer for Appalachian Consumer Rate Relief Funding's securitized assets and remits all related amounts collected from customers to Appalachian Consumer Rate Relief Funding for interest and principal payments on the securitization bonds and related costs.

393

The balances below represent the assets and liabilities of Appalachian Consumer Rate Relief Funding that are consolidated.  These balances include intercompany transactions that are eliminated upon consolidation.

APPALACHIAN POWER COMPANY AND SUBSIDIARIES
VARIABLE INTEREST ENTITIES
December 31, 2014 and 2013
(in thousands)
	Appalachian Consumer Rate Relief Funding
ASSETS	2014		2013
Current Assets	$	18,099	$	5,891
Other Noncurrent Assets (a)	358,264		378,029
Total Assets	$	376,363	$	383,920
LIABILITIES AND EQUITY
Current Liabilities	$	26,809	$	14,000
Noncurrent Liabilities	347,652		368,018
Equity	1,902		1,902
Total Liabilities and Equity	$	376,363	$	383,920

(a) Includes an intercompany item eliminated in consolidation as of December 31, 2014 and 2013 of $4 million and $4 million, respectively.

DHLC is a mining operator which sells 50% of the lignite produced to SWEPCo and 50% to CLECO.  SWEPCo and CLECO share the executive board seats and voting rights equally.  Each entity guarantees 50% of DHLC’s debt.  SWEPCo and CLECO equally approve DHLC’s annual budget.  The creditors of DHLC have no recourse to any AEP entity other than SWEPCo.  As SWEPCo is the sole equity owner of DHLC, it receives 100% of the management fee.  SWEPCo’s total billings from DHLC for the years ended December 31, 2014, 2013 and 2012 were $56 million, $60 million and $77 million, respectively.  SWEPCo is not required to consolidate DHLC as it is not the primary beneficiary, although SWEPCo holds a significant variable interest in DHLC.  SWEPCo’s equity investment in DHLC is included in Deferred Charges and Other Noncurrent Assets on SWEPCo’s balance sheets.

SWEPCo’s investment in DHLC was:

	December 31,
	2014					2013
	As Reported on the Balance Sheet		Maximum Exposure			As Reported on the Balance Sheet		Maximum Exposure
	(in thousands)
Capital Contribution from SWEPCo	$	7,643	$	7,643		$	7,643	$	7,643
Retained Earnings	3,819		3,819			1,600		1,600
SWEPCo's Guarantee of Debt	—		104,334		(a)	—		61,348
Total Investment in DHLC	$	11,462	$	115,796		$	9,243	$	70,591

(a) Includes affiliate advances due to Parent related to participation in the Utility Money Pool of $56 million in 2014.

394

AEPSC provides certain managerial and professional services to AEP’s subsidiaries.  AEP is the sole equity owner of AEPSC.  AEP management controls the activities of AEPSC.  The costs of the services are based on a direct charge or on a prorated basis and billed to the AEP subsidiary companies at AEPSC’s cost.  AEP subsidiaries have not provided financial or other support outside of the reimbursement of costs for services rendered.  AEPSC finances its operations through cost reimbursement from other AEP subsidiaries.  There are no other terms or arrangements between AEPSC and any of the AEP subsidiaries that could require additional financial support from an AEP subsidiary or expose them to losses outside of the normal course of business.  AEPSC and its billings are subject to regulation by the FERC.  AEP subsidiaries are exposed to losses to the extent they cannot recover the costs of AEPSC through their normal business operations.  AEP subsidiaries are considered to have a significant interest in AEPSC due to their activity in AEPSC’s cost reimbursement structure.  However, AEP subsidiaries do not have control over AEPSC.  AEPSC is consolidated by AEP.  In the event AEPSC would require financing or other support outside the cost reimbursement billings, this financing would be provided by AEP.

Total AEPSC billings to the Registrant Subsidiaries were as follows:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	216,470	$	174,393	$	195,176
I&M	133,194		119,343		127,232
OPCo	168,956		255,485		277,232
PSO	101,421		85,974		89,199
SWEPCo	140,286		125,441		136,642

The carrying amount and classification of variable interest in AEPSC's accounts payable are as follows:

	December 31,
	2014				2013
Company	As Reported on the Balance Sheet		Maximum Exposure		As Reported on the Balance Sheet		Maximum Exposure
	(in thousands)
APCo	$	30,692	$	30,692	$	20,191	$	20,191
I&M	22,480		22,480		12,864		12,864
OPCo	24,695		24,695		31,425		31,425
PSO	15,338		15,338		10,596		10,596
SWEPCo	20,772		20,772		13,520		13,520

AEGCo, a wholly-owned subsidiary of AEP, is consolidated by AEP.  AEGCo owns a 50% ownership interest in Rockport Plant, Unit 1, leases a 50% interest in Rockport Plant, Unit 2 and owns 100% of the Lawrenceburg Generating Station.  AEGCo sells all the output from the Rockport Plant to I&M and KPCo.   AEGCo has a UPA associated with the Lawrenceburg Generating Station which was assigned by OPCo to AGR effective January 1, 2014.  AEP has agreed to provide AEGCo with the funds necessary to satisfy all of the debt obligations of AEGCo.  I&M is considered to have a significant interest in AEGCo due to these transactions.  I&M is exposed to losses to the extent it cannot recover the costs of AEGCo through its normal business operations.  In the event AEGCo would require financing or other support outside the billings to I&M and KPCo, this financing would be provided by AEP.  For additional information regarding AEGCo’s lease, see “Rockport Lease” section of Note 13.

395

Total billings from AEGCo were as follows:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
I&M	$	268,337	$	251,518	$	238,865
OPCo	—		148,459		203,582

The carrying amount and classification of variable interest in AEGCo's accounts payable are as follows:

	December 31,
	2014				2013
Company	As Reported on the Balance Sheet		Maximum Exposure		As Reported on the Balance Sheet		Maximum Exposure
	(in thousands)
I&M	$	20,031	$	20,031	$	23,916	$	23,916
OPCo	—		—		12,810		12,810

396

17.  PROPERTY, PLANT AND EQUIPMENT

Depreciation, Depletion and Amortization

The Registrant Subsidiaries provide for depreciation of Property, Plant and Equipment, excluding coal-mining properties, on a straight-line basis over the estimated useful lives of property, generally using composite rates by functional class.  The following tables provide annual property information for the Registrant Subsidiaries:

APCo
2014	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Generation	$	6,824,029	$	2,433,231		3.1%	40	-	121	$	—	$	���	NA	NA
Transmission	2,228,029		507,542			1.7%	15	-	87	—		—		NA	NA
Distribution	3,258,306		722,665			3.5%	13	-	57	—		—		NA	NA
CWIP	321,495		(19,405		)	NM	NM			—		—		NA	NA
Other	339,175		167,171			6.9%	24	-	55	34,345		12,460		NM	NM
Total	$	12,971,034	$	3,811,204						$	34,345	$	12,460

2013	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Generation	$	6,745,172	$	2,306,545		3.0%	40	-	121	$	—	$	—	NA	NA
Transmission	2,160,660		490,143			1.6%	25	-	87	—		—		NA	NA
Distribution	3,139,150		674,351			3.5%	11	-	52	—		—		NA	NA
CWIP	184,701		(19,297		)	NM	NM			—		—		NA	NA
Other	323,758		153,797			7.3%	24	-	55	33,759		12,451		NM	NM
Total	$	12,553,441	$	3,605,539						$	33,759	$	12,451

2012	Regulated				Nonregulated
Functional Class of Property	Annual Composite Depreciation Rate	Depreciable Life Ranges			Annual Composite Depreciation Rate	Depreciable Life Ranges
		(in years)				(in years)
Generation	3.0%	40	-	121	NA	NA
Transmission	1.6%	25	-	87	NA	NA
Distribution	3.4%	13	-	57	NA	NA
CWIP	NM	NM			NA	NA
Other	6.8%	24	-	55	NM	NM

NA Not applicable.

NM Not meaningful.

397

I&M
2014	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Generation	$	3,741,831	$	1,855,162		2.0%	59	-	132	$	—	$	—	NA	NA
Transmission	1,358,419		432,927			1.7%	50	-	75	—		—		NA	NA
Distribution	1,698,409		413,040			2.8%	15	-	70	—		—		NA	NA
CWIP	537,237		(27,858		)	NM	NM			—		—		NA	NA
Other	1,342,813		628,991			6.1%	14	-	45	148,007		108,079		NM	NM
Total	$	8,678,709	$	3,302,262						$	148,007	$	108,079

2013	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Generation	$	3,577,906	$	1,887,333		1.9%	59	-	132	$	—	$	—	NA	NA
Transmission	1,304,225		420,295			1.5%	50	-	75	—		—		NA	NA
Distribution	1,625,057		390,014			2.8%	15	-	70	—		—		NA	NA
CWIP	427,164		(18,824		)	NM	NM			—		—		NA	NA
Other	1,268,597		509,426			4.9%	14	-	45	152,764		111,105		NM	NM
Total	$	8,202,949	$	3,188,244						$	152,764	$	111,105

2012	Regulated				Nonregulated
Functional Class of Property	Annual Composite Depreciation Rate	Depreciable Life Ranges			Annual Composite Depreciation Rate	Depreciable Life Ranges
		(in years)				(in years)
Generation	1.7%	59	-	132	NA	NA
Transmission	1.5%	46	-	75	NA	NA
Distribution	2.5%	14	-	70	NA	NA
CWIP	NM	NM			NA	NA
Other	9.6%	14	-	40	NM	NM

NA Not applicable.

NM Not meaningful. 

398

OPCo
2014	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Transmission	$	2,104,613	$	844,353		2.3%	39	-	60	$	—	$	—	NA	NA
Distribution	4,087,601		1,050,888			2.7%	7	-	57	—		—		NA	NA
CWIP	218,667		(39,218		)	NM	NM			—		—		NA	NA
Other	380,453		181,258			7.0%	7	-	50	10,395		839		NM	NM
Total	$	6,791,334	$	2,037,281						$	10,395	$	839

2013	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Transmission	$	2,011,289	$	814,849		2.3%	39	-	60	$	—	$	—	NA	NA
Distribution	3,877,532		1,023,313			2.7%	12	-	60	—		—		NA	NA
CWIP	185,428		(29,825		)	NM	NM			—		—		NA	NA
Other	354,195		163,894			7.5%	25	-	50	10,378		811		NM	NM
Total	$	6,428,444	$	1,972,231						$	10,378	$	811

2012	Regulated				Nonregulated
Functional Class of Property	Annual Composite Depreciation Rate	Depreciable Life Ranges			Annual Composite Depreciation Rate	Depreciable Life Ranges
		(in years)				(in years)
Generation	NA	NA			3.0%	35	-	66
Transmission	2.3%	39	-	60	NA	NA
Distribution	2.7%	12	-	60	NA	NA
CWIP	NM	NM			NM	NM
Other	7.3%	25	-	50	NM	NM

NA Not applicable.

NM Not meaningful.

399

PSO
2014	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)						(in years)
Generation	$	1,264,724	$	585,653		1.7%	35	-	70	$	—	$	—		NA	NA
Transmission	788,911		161,056			1.9%	40	-	75	—		—			NA	NA
Distribution	2,080,221		366,325			2.4%	30	-	65	—		—			NA	NA
CWIP	204,753		(11,055		)	NM	NM			—		—			NA	NA
Other	416,398		217,583			4.1%	5	-	40	5,170		(8		)	NM	NM
Total	$	4,755,007	$	1,319,562						$	5,170	$	(8	)

2013	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)						(in years)
Generation	$	1,203,221	$	583,486		1.7%	35	-	70	$	—	$	—		NA	NA
Transmission	731,312		186,040			1.9%	40	-	75	—		—			NA	NA
Distribution	1,986,032		365,299			2.3%	30	-	65	—		—			NA	NA
CWIP	175,890		(15,138		)	NM	NM			—		—			NA	NA
Other	387,856		203,841			4.1%	5	-	40	5,170		(6		)	NM	NM
Total	$	4,484,311	$	1,323,528						$	5,170	$	(6	)

2012	Regulated				Nonregulated
Functional Class of Property	Annual Composite Depreciation Rate	Depreciable Life Ranges			Annual Composite Depreciation Rate	Depreciable Life Ranges
		(in years)				(in years)
Generation	1.7%	35	-	70	NA	NA
Transmission	1.9%	40	-	75	NA	NA
Distribution	2.4%	30	-	65	NA	NA
CWIP	NM	NM			NA	NA
Other	6.6%	5	-	40	NM	NM

NA Not applicable.

NM Not meaningful.

400

SWEPCo
2014	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Generation (a)	$	3,864,543	$	1,101,244		2.2%	40	-	70	$	—	$	—	NA	NA
Transmission	1,300,729		328,783			2.2%	50	-	70	—		—		NA	NA
Distribution	1,894,572		576,808			2.7%	25	-	65	—		—		NA	NA
CWIP (a)	471,689		(8,454		)	NM	NM			291		—		NA	NA
Other	587,027		361,892			4.8%	7	-	51	291,726		143,017		NM	NM
Total	$	8,118,560	$	2,360,273						$	292,017	$	143,017

2013	Regulated									Nonregulated
Functional Class of Property	Property, Plant and Equipment		Accumulated Depreciation			Annual Composite Depreciation Rate	Depreciable Life Ranges			Property, Plant and Equipment		Accumulated Depreciation		Annual Composite Depreciation Rate	Depreciable Life Ranges
	(in thousands)						(in years)			(in thousands)					(in years)
Generation (a)	$	3,764,429	$	1,062,166		2.2%	40	-	70	$	—	$	—	NA	NA
Transmission	1,165,167		312,567			2.3%	50	-	70	—		—		NA	NA
Distribution	1,843,912		563,087			2.6%	25	-	65	—		—		NA	NA
CWIP (a)	281,849		(7,355		)	NM	NM			—		—		NA	NA
Other	574,131		326,871			5.0%	7	-	51	295,099		134,316		NM	NM
Total	$	7,629,488	$	2,257,336						$	295,099	$	134,316

2012	Regulated				Nonregulated
Functional Class of Property	Annual Composite Depreciation Rate	Depreciable Life Ranges			Annual Composite Depreciation Rate	Depreciable Life Ranges
		(in years)				(in years)
Generation (a)	2.2%	35	-	65	NA	NA
Transmission	2.3%	50	-	70	NA	NA
Distribution	2.6%	25	-	65	NA	NA
CWIP (a)	NM	NM			NA	NA
Other	6.6%	7	-	47	NM	NM

(a) SWEPCo's regulated section includes amounts related to SWEPCo's Arkansas jurisdictional share of the Turk Plant.

NA Not applicable.

NM Not meaningful.

SWEPCo provides for depreciation, depletion and amortization of coal-mining assets over each asset's estimated useful life or the estimated life of each mine, whichever is shorter, using the straight-line method for mining structures and equipment.  SWEPCo uses either the straight-line method or the units-of-production method to amortize mine development costs and deplete coal rights based on estimated recoverable tonnages.  SWEPCo includes these costs in fuel expense.

For regulated operations, the composite depreciation rate generally includes a component for nonasset retirement obligation (non-ARO) removal costs, which is credited to Accumulated Depreciation and Amortization.  Actual removal costs incurred are charged to Accumulated Depreciation and Amortization.  Any excess of accrued non-ARO removal costs over actual removal costs incurred is reclassified from Accumulated Depreciation and Amortization and reflected as a regulatory liability.  For nonregulated operations, non-ARO removal costs are expensed as incurred. 

Asset Retirement Obligations (ARO)

The Registrant Subsidiaries record ARO in accordance with the accounting guidance for “Asset Retirement and Environmental Obligations” for the retirement of certain ash disposal facilities, closure and monitoring of underground carbon storage facilities at Mountaineer Plant and coal mining facilities as well as asbestos removal.  I&M records ARO for the decommissioning of the Cook Plant.  The Registrant Subsidiaries have identified, but not recognized, ARO liabilities related to electric transmission and distribution assets as a result of certain easements on property on which assets are owned.  Generally, such easements are perpetual and require only the retirement and removal of assets upon the cessation of the property’s use.  The retirement obligation is not estimable for such easements since the Registrant Subsidiaries plan to use their facilities indefinitely.  The retirement obligation would only be recognized if and when the Registrant Subsidiaries abandon or cease the use of specific easements, which is not expected.

401

As of December 31, 2014 and 2013, I&M’s ARO liability for nuclear decommissioning of the Cook Plant was $1.3 billion and $1.2 billion, respectively.  These liabilities are reflected in Asset Retirement Obligations on I&M’s balance sheets.  As of December 31, 2014 and 2013, the fair value of I&M’s assets that are legally restricted for purposes of settling decommissioning liabilities totaled $1.8 billion and $1.6 billion, respectively.  These assets are included in Spent Nuclear Fuel and Decommissioning Trusts on I&M’s balance sheets.

The following is a reconciliation of the 2014 and 2013 aggregate carrying amounts of ARO by Registrant Subsidiary:

Company	ARO as of December 31, 2013		Accretion Expense		Liabilities Incurred		Liabilities Settled			Revisions in Cash Flow Estimates		Contribution/ (Distribution) of OPCo Generation Assets		ARO as of December 31, 2014
(in thousands)
APCo (a)(d)	$	152,607	$	9,081	$	—	$	(23,992	)	$	10,681	$	—	$	148,377
I&M (a)(b)(d)	1,255,184		60,005		—		(1,380		)	28,740		—		1,342,549
OPCo (a)(d)	1,297		80		—		(26		)	10		—		1,361
PSO (a)(d)	22,928		1,786		—		(749		)	14,055		—		38,020
SWEPCo (a)(c)(d)	87,630		5,156		—		(1,102		)	2,710		—		94,394

Company	ARO as of December 31, 2012		Accretion Expense		Liabilities Incurred		Liabilities Settled			Revisions in Cash Flow Estimates			Contribution/ (Distribution) of OPCo Generation Assets			ARO as of December 31, 2013
(in thousands)
APCo (a)(d)	$	115,168	$	7,343	$	—	$	(7,298	)	$	7,083		$	30,311		$	152,607
I&M (a)(b)(d)	1,192,313		72,658		—		(635		)	(9,152		)	—			1,255,184
OPCo (a)(d)	269,940		14,957		158		(9,788		)	53,208			(327,178		)	1,297
PSO (a)(d)	21,999		1,703		—		(755		)	(19		)	—			22,928
SWEPCo (a)(c)(d)	78,017		4,912		4,191		(2,699		)	3,209			—			87,630

(a) Includes ARO related to ash disposal facilities.

(b) Includes ARO related to nuclear decommissioning costs for the Cook Plant of $1.3 billion and $1.2 billion as of December 31, 2014 and 2013.

(c) Includes ARO related to Sabine and DHLC.

(d) Includes ARO related to asbestos removal.

Allowance for Funds Used During Construction (AFUDC) and Interest Capitalization

The Registrant Subsidiaries’ amounts of allowance for equity funds used during construction are summarized in the following table:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	7,053	$	2,353	$	1,684
I&M	18,873		19,943		9,724
OPCo	6,913		4,961		3,492
PSO	3,071		4,187		2,007
SWEPCo	11,947		7,338		57,054

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The Registrant Subsidiaries’ amounts of allowance for borrowed funds used during construction, including capitalized interest, are summarized in the following table:

	Years Ended December 31,
Company	2014		2013		2012
	(in thousands)
APCo	$	3,810	$	1,522	$	1,347
I&M	8,015		9,752		4,717
OPCo	4,436		10,102		9,046
PSO	1,792		2,272		1,098
SWEPCo	6,949		4,262		48,499

Jointly-owned Electric Facilities

The Registrant Subsidiaries have electric facilities that are jointly-owned with affiliated and nonaffiliated companies.  Using its own financing, each participating company is obligated to pay its share of the costs of any such jointly-owned facilities in the same proportion as its ownership interest.  Each Registrant Subsidiary’s proportionate share of the operating costs associated with such facilities is included in its statements of income and the investments and accumulated depreciation are reflected in its balance sheets under Property, Plant and Equipment as follows:

				Company’s Share as of December 31, 2014
Company	Fuel Type	Percent of Ownership		Utility Plant in Service		Construction Work in Progress		Accumulated Depreciation
				(in thousands)
I&M
Rockport Generating Plant (a)(e)	Coal	50.0	%	$	801,536	$	119,921	$	492,184
PSO
Oklaunion Generating Station, Unit 1 (b)	Coal	15.6	%	$	94,678	$	2,558	$	57,490
SWEPCo
Dolet Hills Generating Station, Unit 1 (c)	Lignite	40.2	%	$	329,706	$	3,739	$	201,321
Flint Creek Generating Station, Unit 1 (d)	Coal	50.0	%	125,114		119,629		67,948
Pirkey Generating Station, Unit 1 (d)	Lignite	85.9	%	531,064		36,490		381,058
Turk Generating Plant (d)	Coal	73.33	%	1,647,005		889		69,820
Total				$	2,632,889	$	160,747	$	720,147

				Company’s Share as of December 31, 2013
Company	Fuel Type	Percent of Ownership		Utility Plant  in Service		Construction Work in Progress		Accumulated Depreciation
				(in thousands)
I&M
Rockport Generating Plant (a)(e)	Coal	50	%	$	797,485	$	54,577	$	471,787
PSO
Oklaunion Generating Station, Unit 1 (b)	Coal	15.6	%	$	93,555	$	1,844	$	57,576
SWEPCo
Dolet Hills Generating Station, Unit 1 (c)	Lignite	40.2	%	$	261,685	$	47,131	$	197,720
Flint Creek Generating Station, Unit 1 (d)	Coal	50	%	122,566		54,281		65,546
Pirkey Generating Station, Unit 1 (d)	Lignite	85.9	%	519,158		28,833		375,718
Turk Generating Plant (d)	Coal	73.33	%	1,638,044		13,081		35,455
Total				2,541,453		143,326		674,439

(a) Operated by I&M.

(b) Operated by PSO and also jointly-owned (54.7%) by TNC.

(c) Operated by CLECO, a nonaffiliated company.

(d) Operated by SWEPCo.

(e) Amounts include I&M's 50% ownership of both Unit 1 and capital additions for Unit 2. Unit 2 is subject to an operating lease with a nonaffiliated company. See the "Rockport Lease" section of Note 13.

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18.  COST REDUCTION PROGRAMS

2014 Disposition Plant Severance

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

The Registrant Subsidiaries recorded charges to Other Operation expense in December 2014 primarily related to employees at the disposition plants.

	Expense Allocation from		Incurred by Registrant								Remaining Balance as of
Company	AEPSC		Subsidiaries		Settled				Adjustments		December 31, 2014
(in thousands)
APCo	$	292	$	6,820	$	2,192		(a)	$	—	$	9,304
I&M	162		8,023		(162		)		—		8,023
OPCo	80		—		(80		)		—		—
PSO	154		134		(154		)		—		134
SWEPCo	205		84		(205		)		—		84

(a) Settled includes amounts received from affiliates for expenses related to joint plant.

These expenses, net of adjustments, relate primarily to severance benefits and are included primarily in Other Operation expense on the statements of income.  The remaining liability is included in Other Current Liabilities on the balance sheets.  Management does not expect additional severance costs to be incurred related to this initiative.

2012 Sustainable Cost Reductions

In April 2012, management initiated a process to identify strategic repositioning opportunities and efficiencies that will result in sustainable cost savings.  Management selected a consulting firm to facilitate an organizational and process evaluation and a second firm to evaluate current employee benefit programs.  The process resulted in involuntary severances and was completed by the end of the first quarter of 2013.  The severance program provides two weeks of base pay for every year of service along with other severance benefits.

The Registrant Subsidiaries recorded charges to Other Operation expense for the years ended December 31, 2013 and 2012 primarily related to severance benefits as a result of the sustainable cost reductions initiative. The amounts incurred by Registrant Subsidiary were as follows:

	Cost Incurred
	Years Ended December 31,
Company	2013			2012
	(in thousands)
APCo	$	275		$	8,472
I&M	355			5,678
OPCo	5,831			13,498
PSO	(147		)	3,675
SWEPCo	1,017			5,709

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19.  UNAUDITED QUARTERLY FINANCIAL INFORMATION

In management’s opinion, the unaudited quarterly information reflects all normal and recurring accruals and adjustments necessary for a fair presentation of the results of operations for interim periods.  Quarterly results are not necessarily indicative of a full year’s operations because of various factors.  The unaudited quarterly financial information for each Registrant Subsidiary is as follows:

Quarterly Periods Ended:	APCo			I&M		OPCo (a)			PSO		SWEPCo
	(in thousands)
March 31, 2014
Total Revenues	$	913,391		$	641,854	$	880,192		$	301,385	$	440,590
Operating Income	220,010			146,024		115,719			25,326		64,726
Net Income	101,851			87,089		60,774			8,448		22,962
June 30, 2014
Total Revenues	$	694,668		$	533,876	$	786,161		$	318,815	$	449,283
Operating Income	110,677			57,133		114,021			48,878		78,787
Net Income	36,247			27,334		56,535			22,449		32,823
September 30, 2014
Total Revenues	$	709,884		$	542,863	$	839,197		$	416,991	$	531,771
Operating Income	130,236			62,851		104,679			87,414		133,131
Net Income	48,758			26,626		54,060			45,086		74,547
December 31, 2014
Total Revenues	$	735,135		$	531,141	$	871,370		$	314,385	$	424,753
Operating Income	107,263			39,234		99,086			27,214		45,998
Net Income	28,559			14,598		45,053			10,946		14,227
Quarterly Periods Ended:	APCo			I&M		OPCo			PSO		SWEPCo
	(in thousands)
March 31, 2013
Total Revenues	$	951,494		$	583,393	$	1,233,790		$	262,289	$	394,317
Operating Income	164,560			81,230		244,813			33,552		50,639
Net Income	70,548			43,457		129,774			13,693		11,548
June 30, 2013
Total Revenues	$	746,504		$	549,501	$	1,102,994		$	324,687	$	420,173
Operating Income	92,072			77,533		73,072		(b)	58,471		77,032
Net Income	29,862			40,754		21,056		(b)	28,432		30,227
September 30, 2013
Total Revenues	$	849,733		$	638,865	$	1,279,176		$	411,083	$	552,933
Operating Income	147,692			102,364		312,795			95,832		52,359		(c)
Net Income	62,625			57,880		178,901			51,096		7,920		(c)
December 31, 2013
Total Revenues	$	869,675		$	595,100	$	1,146,655		$	297,463	$	428,380
Operating Income	101,954		(d)	60,734		162,418			23,380		163,813		(e)
Net Income	30,176		(d)	35,413		80,249			4,575		104,124		(e)

(a) Prior to January 1, 2014, OPCo engaged in the generation of electric power and the subsequent sale of that power

to customers.

(b) Includes an impairment for Muskingum River Plant, Unit 5 (see Note 7).

(c) Includes a regulatory disallowance for the Turk Plant (see Note 4).

(d) Includes a regulatory disallowance for Amos Plant, Unit 3 (see Note 7).

(e) Includes the reversal of regulatory disallowance for the Turk Plant (see Note 4).

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COMBINED MANAGEMENT’S NARRATIVE DISCUSSION

AND ANALYSIS OF REGISTRANT SUBSIDIARIES

The following is a combined presentation of certain components of the Registrant Subsidiaries’ management’s discussion and analysis.  The information in this section completes the information necessary for management’s discussion and analysis of financial condition and net income and is meant to be read with (a) Management’s Narrative Discussion and Analysis of Results of Operations, (b) financial statements, (c) footnotes and (d) the schedules of each individual registrant.

EXECUTIVE OVERVIEW

Customer Demand

In comparison to 2013, AEP's weather-normalized retail sales increased 1% for the year ended December 31, 2014. AEP's 2014 industrial sales increased 0.4% compared to 2013, despite the closure of Ormet, a large aluminum company in October 2013. Excluding Ormet, AEP's industrial sales volumes increased by 3.9%. AEP's 2014 residential and commercial sales increased 1.1% and 1.7%, respectively, compared to 2013.

In 2015, AEP anticipates weather-normalized retail sales will increase by 0.6%. The industrial class is expected to grow by 2% in 2015, primarily related to a number of new oil and natural gas expansions, especially around the major shale gas areas within AEP’s footprint. Weather-normalized residential sales are projected to increase by 0.2%, primarily related to projected customer growth. Commercial class energy sales are projected to decrease by 0.4%.

LITIGATION

Potential Uninsured Losses

Some potential losses or liabilities may not be insurable or the amount of insurance carried may not be sufficient to meet potential losses and liabilities, including, but not limited to, liabilities relating to a cyber security incident or damage to the Cook Plant and costs of replacement power in the event of a nuclear incident at the Cook Plant.  Future losses or liabilities, which are not completely insured, unless recovered from customers, could reduce future net income and cash flows and impact financial condition.

ENVIRONMENTAL ISSUES

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

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

406

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

Environmental Controls Impact on the Generating Fleet

The rules and proposed environmental controls discussed in the next several sections will have a material impact on the generating units in the AEP System.  Management continues to evaluate the impact of these rules, project scope and technology available to achieve compliance.  As of December 31, 2014, the AEP System had a total generating capacity of nearly 37,600 MWs, of which over 23,700 MWs are coal-fired.  Management continues to refine the cost estimates of complying with these rules and other impacts of the environmental proposals on the coal-fired generating facilities.  For the Registrant Subsidiaries, management’s current ranges of estimates of environmental investments to comply with these proposed requirements are listed below:

Through 2020 Estimated Environmental Investment
Company	Low		High
	(in millions)
APCo	$	310	$	360
I&M	370		430
PSO	270		310
SWEPCo	900		1,000

For APCo, the projected environmental investments above include the conversions of 470 MWs of coal generation to natural gas.  If natural gas conversion is not completed, the units could be retired sooner than planned.

The cost estimates will change depending on the timing of implementation and whether the Federal EPA provides flexibility in the final rules.  The cost estimates for each Registrant Subsidiary will also change based on: (a) the states’ implementation of these regulatory programs, including the potential for state implementation plans (SIPs) or federal implementation plans (FIPs) that impose standards more stringent than the proposed rules, (b) additional rulemaking activities in response to court decisions, (c) the actual performance of the pollution control technologies installed on the units, (d) changes in costs for new pollution controls, (e) new generating technology developments, (f) total MWs of capacity retired and replaced, including the type and amount of such replacement capacity and (g) other factors.

Subject to the factors listed above and based upon management’s continuing evaluation, management intends to retire the following plants or units of plants before or during 2016:

Company	Plant Name and Unit	Generating Capacity
		(in MWs)
APCo	Clinch River Plant, Unit 3	235
APCo	Glen Lyn Plant	335
APCo	Kanawha River Plant	400
APCo/AGR	Sporn Plant	600
I&M	Tanners Creek Plant	995
PSO	Northeastern Station, Unit 4	470
SWEPCo	Welsh Plant, Unit 2	528

As of December 31, 2014, the net book value, before cost of removal, including related material and supplies inventory and CWIP balances, of the plants in the table above was $727 million. See Note 5 for further discussion.

407

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

Clean Air Act Requirements

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions.  The states implement and administer many of these programs and could impose additional or more stringent requirements.

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

All of the states in which the Registrant Subsidiaries’ power plants are located are covered by CSAPR. See "Cross-State Air Pollution Rule (CSAPR)" section below.

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

The Federal EPA issued a Clean Air Visibility Rule (CAVR), detailing how the CAA’s requirement that certain facilities install best available retrofit technology (BART) to address regional haze in federal parks and other protected areas.  BART requirements apply to facilities built between 1962 and 1977 that emit more than 250 tons per year of certain pollutants in specific industrial categories, including power plants.  CAVR will be implemented through SIPs or, if SIPs are not adequate or are not developed on schedule, through FIPs.  The Federal EPA proposed disapproval of SIPs in a few states, including Arkansas.  Arkansas is developing a revised submittal.  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 rule is being challenged in the U.S. Court of Appeals for the District of Columbia Circuit.

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

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

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

408

Cross-State Air Pollution Rule (CSAPR)

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

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

Mercury and Other Hazardous Air Pollutants Regulation

In 2012, the Federal EPA issued a rule addressing a broad range of HAPs from coal and oil-fired power plants.  The rule establishes unit-specific emission rates for mercury, PM (as a surrogate for particles of nonmercury metal) and hydrogen chloride (as a surrogate for acid gases) for units burning coal on a site-wide 30-day rolling average basis.  In addition, the rule proposes work practice standards, such as boiler tune-ups, for controlling emissions of organic HAPs and dioxin/furans.  The effective date of the final rule was April 16, 2012 and compliance is required within three years.  Petitions for administrative reconsideration and judicial review were filed.  In 2012, the Federal EPA published a notice announcing that it would accept comments on its reconsideration of certain issues related to the new source standards, including clarification of the requirements that apply during periods of start-up and shut down, measurement issues and the application of variability factors that may have an impact on the level of the standards.  The Federal EPA issued revisions to the new source standards consistent with the proposed rule, except the start-up and shut down provisions in March 2013.  The Federal EPA is still considering additional changes to the start-up and shut down provisions. In April 2014, the U.S. Court of Appeals for the District of Columbia Circuit denied all of the petitions for review of the April 2012 final rule. Industry trade groups and several states filed petitions for further review in the U.S. Supreme Court and the court granted those petitions in November 2014.

The final rule contains a slightly less stringent PM limit for existing sources than the original proposal and allows operators to exclude periods of start-up and shut down from the emissions averaging periods.  The AEP System has obtained a one-year administrative extension at several units to facilitate the installation of controls or to avoid a serious reliability problem.  In addition, the Federal EPA issued an enforcement policy describing the circumstances under which an administrative consent order might be issued to provide a fifth year for the installation of controls or completion of reliability upgrades.  Management remains concerned about the availability of compliance extensions, the inability to foreclose citizen suits being filed under the CAA for failure to achieve compliance by the required deadlines and the lack of coordination among the Mercury and Air Toxics Standards schedule and other environmental requirements.  

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Climate Change, CO₂ Regulation and Energy Policy

National public policy makers and regulators in the 10 states the Registrant Subsidiaries serve have diverse views on climate change, carbon regulation and energy policy.  Management is currently focused on responding to these emerging views with prudent actions across a range of plausible scenarios and outcomes.  Management is an active participant in both state and federal policy development to assure that any proposed new requirements are feasible and the economies of the states served are not placed at a competitive disadvantage.

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

Management estimates that 2014 emissions were approximately 120 million metric tons.  This represents a reduction of 18% compared to 2005 CO₂ emissions of approximately 146 million metric tons.

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

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

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

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Federal and state legislation or regulations that mandate limits on the emission of CO₂ could result in significant increases in capital expenditures and operating costs, which in turn, could lead to increased liquidity needs and higher financing costs.  Excessive costs to comply with future legislation or regulations might force the Registrant Subsidiaries to close some coal-fired facilities and could lead to possible impairment of assets.  Public perception may ultimately have a significant impact on future legislation and regulation.

To the extent climate change impacts a region's economic health, it could also affect revenues.  The Registrant Subsidiaries’ financial performance is tied to the health of the regional economies served.  The price of energy, as a factor in a region's cost of living as well as an important input into the cost of goods, has an impact on the economic health of communities served.  The cost of additional regulatory requirements would normally be borne by consumers through higher prices for energy and purchased goods.

Coal Combustion Residual Rule

In 2010, the Federal EPA published a proposed rule to regulate the disposal and beneficial re-use of coal combustion residuals (CCR), including fly ash and bottom ash generated at coal-fired electric generating units and also FGD gypsum generated at some coal-fired plants.  The proposed rule contained two alternative proposals.  One proposal would impose federal hazardous waste disposal and management standards on these materials and another would allow states to retain primary authority to regulate the beneficial re-use and disposal of these materials under state solid waste management standards, including minimum federal standards for disposal and management.  Both proposals would impose stringent requirements for the construction of new coal ash landfills and existing unlined surface impoundments.

Various environmental organizations and industry groups filed a petition seeking to establish deadlines for a final rule. To comply with a court-ordered deadline, the Federal EPA issued a prepublication copy of its final rule in December 2014. The rule is expected to be published in the Federal Register during the first quarter of 2015 and become effective six months following publication.

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

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

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Clean Water Act (CWA) Regulations

In 2014, the Federal EPA issued a final rule setting forth standards for existing power plants that is intended to reduce mortality of aquatic organisms pinned against a plant’s cooling water intake screen (impingement) or entrained in the cooling water.  Entrainment is when small fish, eggs or larvae are drawn into the cooling water system and affected by heat, chemicals or physical stress.  The final rule affects all plants withdrawing more than two million gallons of cooling water per day. The rule offers seven technology options to comply with the impingement standard and requires site-specific studies to determine appropriate entrainment compliance measures at facilities withdrawing more than 125 million gallons per day. Additional requirements may be imposed as a result of consultation with other federal agencies to protect threatened and endangered species and their habitats. Facilities with existing closed cycle recirculating cooling systems, as defined in the rule, are not expected to require any technology changes. Facilities subject to both the impingement standard and site-specific entrainment studies will typically be given at least three years to conduct and submit the results of those studies to the permit agency. Compliance timeframes will then be established by the permit agency through each facility’s National Pollutant Discharge Elimination System (NPDES) permit for installation of any required technology changes, as those permits are renewed over the next five to eight years. Petitions for review of the final rule have been filed by industry and environmental groups and are currently pending in the U.S. Court of Appeals for the Second Circuit.

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

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

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FINANCIAL CONDITION

BUDGETED CONSTRUCTION EXPENDITURES

The 2015 estimated construction expenditures by Registrant Subsidiary include distribution, transmission and generation related investments, as well as expenditures for compliance with environmental regulations as follows:

	2015 Budgeted Construction Expenditures
Company	Environmental		Generation		Transmission		Distribution		Other		Total
	(in millions)
APCo	$	70	$	72	$	255	$	197	$	30	$	624
I&M	40		259		63		122		33		517
OPCo	—		—		94		268		36		398
PSO	85		88		24		185		17		399
SWEPCo	316		47		109		98		20		590

For 2015, 2016 and 2017, management forecasts annual construction expenditures for the AEP System of $4.5 billion, $3.8 billion and $3.9 billion, respectively.  The budgeted amounts for 2015 include debt AFUDC.  The expenditures are generally for distribution, transmission, generation and required environmental investment to comply with Federal EPA rules.  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.  These construction expenditures will be funded 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.

SIGNIFICANT TAX LEGISLATION

The Small Business Jobs Act extended the time for claiming bonus depreciation and increased the deduction to 100% for 2011 and decreased the deduction to 50% for 2012.  The American Taxpayer Relief Act of 2012 provided for the extension of several business and energy industry tax deductions and credits, including the one-year extension of 50% bonus depreciation to 2013.  The Tax Increase Prevention Act of 2014 also included a one-year extension of the 50% bonus depreciation and provided for the extension of research and development, employment and several energy tax credits for 2014. These enacted provisions had no material impact on the Registrant Subsidiaries’ net income or financial condition but did have a favorable impact on cash flows in 2013 and 2014 and are expected to have a favorable impact on cash flows in 2015.

CYBER SECURITY

Cyber security presents a growing risk for electric utility systems because a cyber-attack could affect critical energy infrastructure.  Breaches to the cyber security of the grid or to the AEP System are potentially disruptive to people, property and commerce and create risk for business, investors and customers.  In February 2013, President Obama signed an executive order that addresses how government agencies will operate and support the functions in cyber security as well as redefines how the government interfaces with critical infrastructure, such as the electric grid.  The AEP System already operates under regulatory cyber security standards to protect critical infrastructure.  The cyber security framework that is being developed through this executive order will be reviewed by FERC and the U.S. Department of Energy (DOE).  In 2014, the DOE developed 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 is actively engaged in the framework adoption process.

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The electric utility industry is one of the few critical infrastructure functions with mandatory cyber security requirements under the authority of FERC. The Energy Policy Act of 2005 gave FERC the authority to oversee reliability of the bulk power system, including the authority to approve mandatory cyber security reliability standards. North American Electric Reliability Corporation (NERC), which FERC certified as the nation's Electric Reliability Organization, developed critical infrastructure protection cyber security reliability standards. In 2013, as part of the industry’s continuing program to advance threat sharing and coordination, AEP participated in the NERC GridEx II exercise.  This effort, led by NERC, tested and developed the coordination and interaction between utilities and various government agencies relative to potential cyber and physical threats against the nation’s electric grid.

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.  The AEP System is constantly scanned for risks or threats. Cyber hackers have been able to breach a number of very secure facilities, from federal agencies, banks and retailers to social media sites.  As these events become known and develop, AEP continually assesses its cyber security tools and processes to determine where to strengthen its defenses. Management continually reviews the business continuity plan to develop an effective recovery effort that decreases response times, limits financial impacts and maintains customer confidence following any business interruption. Management works closely with a broad range of departments, including Legal, Regulatory, Corporate Communications and Information Technology Security, to ensure the corporate response to consequences of any breach or potential breach is appropriate both for internal and external audiences based on the specific circumstances surrounding the event.

Management continues to take steps to enhance the AEP System’s capabilities for identifying risks or threats and has shared that knowledge threats with utility peers, industry and federal agencies.  The AEP System operates a Cyber Security Operations Center.  Funding for this included a grant from the American Recovery and Reinvestment Act – U.S. Department of Energy Smart Grid Demonstration Program.  This facility was initially designed as a pilot cyber threat and information-sharing center specifically for the electric sector and is fully operational.

AEP has partnered with a major defense contractor who has significant cyber security experience and technical capabilities developed through their work with the U.S. Department of Defense.  AEP works with a consortium of other utilities across the country, learning how best to share information about potential threats and collaborating with each other.  AEP continues to work with a nonaffiliated entity to conduct several seminars each year about recognizing and investigating cyber vulnerabilities.  Through these types of efforts, AEP is working to protect itself while helping its industry advance its cyber security capabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND ACCOUNTING PRONOUNCEMENTS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures, including amounts related to legal matters and contingencies.  Management considers an accounting estimate to be critical if:

• It requires assumptions to be made that were uncertain at the time the estimate was made; and

• Changes in the estimate or different estimates that could have been selected could have a material effect on net income or financial condition.

Management discusses the development and selection of critical accounting estimates as presented below with the Audit Committee of AEP’s Board of Directors and the Audit Committee reviews the disclosures relating to them.

Management believes that the current assumptions and other considerations used to estimate amounts reflected in the financial statements are appropriate.  However, actual results can differ significantly from those estimates.

The sections that follow present information about the Registrant Subsidiaries’ critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate.

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Regulatory Accounting

Nature of Estimates Required

The financial statements of the Registrant Subsidiaries reflect the actions of regulators that can result in the recognition of revenues and expenses in different time periods than enterprises that are not rate-regulated.

The Registrant Subsidiaries recognize regulatory assets (deferred expenses to be recovered in the future) and regulatory liabilities (deferred future revenue reductions or refunds) for the economic effects of regulation.  Specifically, the Registrant Subsidiaries match the timing of expense and income recognition with regulated revenues.  Liabilities are also recorded for refunds, or probable refunds, to customers that have not been made.

Assumptions and Approach Used

When incurred costs are probable of recovery through regulated rates, the Registrant Subsidiaries record them as regulatory assets on the balance sheet.  Management reviews the probability of recovery at each balance sheet date and whenever new events occur.  Similarly, the Registrant Subsidiaries record regulatory liabilities when a determination is made that a refund is probable or when ordered by a commission.   Examples of new events that affect probability include changes in the regulatory environment, issuance of a regulatory commission order or passage of new legislation.  The assumptions and judgments used by regulatory authorities continue to have an impact on the recovery of costs as well as the return of revenues, rate of return earned on invested capital and timing and amount of assets to be recovered through regulated rates.  If recovery of a regulatory asset is no longer probable, that regulatory asset is written-off as a charge against earnings.  A write-off of regulatory assets or establishment of a regulatory liability may also reduce future cash flows since there will be no recovery through regulated rates.

Effect if Different Assumptions Used

A change in the above assumptions may result in a material impact on net income.  Refer to Note 5 for further detail related to regulatory assets and liabilities.

Revenue Recognition – Unbilled Revenues

Nature of Estimates Required

The Registrant Subsidiaries record revenues when energy is delivered to the customer.  The determination of sales to individual customers is based on the reading of their meters, which is performed on a systematic basis throughout the month.  At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue accrual is recorded.  This estimate is reversed in the following month and actual revenue is recorded based on meter readings.  In accordance with the applicable state commission regulatory treatment in Arkansas, Louisiana, Oklahoma and Texas, PSO and SWEPCo do not record the fuel portion of unbilled revenue.

The changes in unbilled electricity utility revenues for the years ended December 31, 2014, 2013 and 2012 were as follows:

	Years Ended December 31,
Company	2014			2013			2012
	(in thousands)
APCo	$	4,540		$	(11,600	)	$	8,047
I&M	(22,506		)	6,077			(1,233		)
OPCo	5,055			(17,375		)	(14,721		)
PSO	(3,149		)	(3,842		)	5,213
SWEPCo	(3,602		)	3,225			2,302

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Assumptions and Approach Used

For each Registrant Subsidiary, the monthly estimate for unbilled revenues is computed as net generation (generation plus purchases less sales) less the current month’s billed KWh plus the prior month’s unbilled KWh.  However, due to meter reading issues, meter drift and other anomalies, a separate monthly calculation limits the unbilled estimate within a range of values.  This limiter calculation is derived from an allocation of billed KWh to the current month and previous month, on a cycle-by-cycle basis, and dividing the current month aggregated result by the billed KWh.  The limits are statistically set at one standard deviation from this percentage to determine the upper and lower limits of the range.  The unbilled estimate is compared to the limiter calculation and adjusted for variances exceeding the upper and lower limits.

Effect if Different Assumptions Used

Significant fluctuations in energy demand for the unbilled period, weather, line losses or changes in the composition of customer classes could impact the accuracy of the unbilled revenue estimate.  A 1% change in the limiter calculation when it is outside the range would increase or decrease unbilled revenues by 1% of the accrued unbilled revenues.

Accounting for Derivative Instruments

Nature of Estimates Required

Management considers fair value techniques, valuation adjustments related to credit and liquidity and judgments related to the probability of forecasted transactions occurring within the specified time period to be critical accounting estimates.  These estimates are considered significant because they are highly susceptible to change from period to period and are dependent on many subjective factors.

Assumptions and Approach Used

The Registrant Subsidiaries measure the fair values of derivative instruments and hedge instruments accounted for using MTM accounting based primarily on exchange prices and broker quotes.  If a quoted market price is not available, the fair value is estimated based on the best market information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and other assumptions.  Fair value estimates, based upon the best market information available, involve uncertainties and matters of significant judgment.  These uncertainties include projections of macroeconomic trends and future commodity prices, including supply and demand levels and future price volatility.

The Registrant Subsidiaries reduce fair values by estimated valuation adjustments for items such as discounting, liquidity and credit quality.  Liquidity adjustments are calculated by utilizing bid/ask spreads to estimate the potential fair value impact of liquidating open positions over a reasonable period of time.  Credit adjustments on risk management contracts are calculated using estimated default probabilities and recovery rates relative to the  counterparties or counterparties with similar credit profiles and contractual netting agreements.  

With respect to hedge accounting, management assesses hedge effectiveness and evaluates a forecasted transaction’s probability of occurrence within the specified time period as provided in the original hedge documentation.

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Effect if Different Assumptions Used

There is inherent risk in valuation modeling given the complexity and volatility of energy markets.  Therefore, it is possible that results in future periods may be materially different as contracts settle.

The probability that hedged forecasted transactions will not occur by the end of the specified time period could change operating results by requiring amounts currently classified in Accumulated Other Comprehensive Income (Loss) to be classified into operating income.

For additional information regarding derivatives, hedging and fair value measurements, see Notes 10 and 11.  See “Fair Value Measurements of Assets and Liabilities” section of Note 1 for fair value calculation policy.

Long-Lived Assets

Nature of Estimates Required

In accordance with the requirements of “Property, Plant and Equipment” accounting guidance, the Registrant Subsidiaries evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any such assets may not be recoverable including planned abandonments and a probable disallowance for rate-making on a plant under construction or the assets meet the held-for-sale criteria.  The Registrant Subsidiaries utilize a group composite method of depreciation to estimate the useful lives of long-lived assets.  The evaluations of long-lived, held-and-used assets may result from abandonments, significant decreases in the market price of an asset, a significant adverse change in the extent or manner in which an asset is being used or in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of an asset, as well as other economic or operations analyses.  If the carrying amount is not recoverable, the Registrant Subsidiary records an impairment to the extent that the fair value of the asset is less than its book value.  Performing an impairment evaluation involves a significant degree of estimation and judgment in areas such as identifying circumstances that indicate an impairment may exist, identifying and grouping affected assets and developing the undiscounted and discounted future cash flows (used to estimate fair value in the absence of market-based value, in some instances) associated with the asset.  For assets held for sale, an impairment is recognized if the expected net sales price is less than its book value.  For regulated assets, the earnings impact of an impairment charge could be offset by the establishment of a regulatory asset, if rate recovery is probable.

Assumptions and Approach Used

The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties other than in a forced or liquidation sale.  Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available.  In the absence of quoted prices for identical or similar assets in active markets, management estimates fair value using various internal and external valuation methods including cash flow projections or other market indicators of fair value such as bids received, comparable sales or independent appraisals.  Cash flow estimates are based on relevant information available at the time the estimates are made.  Estimates of future cash flows are, by nature, highly uncertain and may vary significantly from actual results.  Also, when measuring fair value, management evaluates the characteristics of the asset or liability to determine if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.  Such characteristics include, for example, the condition and location of the asset or restrictions of the use of the asset.  Management performs depreciation studies that include a review of any external factors that may affect the useful life to determine composite depreciation rates and related lives which are subject to periodic review by state regulatory commissions for cost-based regulated assets.  The fair value of the asset could be different using different estimates and assumptions in these valuation techniques.

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Effect if Different Assumptions Used

In connection with the evaluation of long-lived assets in accordance with the requirements of “Property, Plant and Equipment” accounting guidance, the fair value of the asset can vary if different estimates and assumptions would have been used in the applied valuation techniques.  The estimate for depreciation rates takes into account the history of interim capital replacements and the amount of salvage expected.  In cases of impairment, the best estimate of fair value was made using valuation methods based on the most current information at that time.  Fluctuations in realized sales proceeds versus the estimated fair value of the asset are generally due to a variety of factors including, but not limited to, differences in subsequent market conditions, the level of bidder interest, timing and terms of the transactions and management’s analysis of the benefits of the transaction.

Pension and Other Postretirement Benefits

AEP maintains a qualified, defined benefit pension plan (Qualified Plan), which covers substantially all nonunion and certain union employees, and unfunded, nonqualified supplemental plans (Nonqualified Plans) to provide benefits in excess of amounts permitted under the provisions of the tax law for participants in the Qualified Plan (collectively the Pension Plans).  Additionally, AEP entered into individual employment contracts with certain current and retired executives that provide additional retirement benefits as a part of the Nonqualified Plans.  AEP also sponsors other postretirement benefit plans to provide health and life insurance benefits for retired employees (Postretirement Plans).  The Pension Plans and Postretirement Plans are collectively referred to as the Plans.  The Registrant Subsidiaries participate in the Plans.

For a discussion of investment strategy, investment limitations, target asset allocations and the classification of investments within the fair value hierarchy, see “Investments Held in Trust for Future Liabilities” and “Fair Value Measurements of Assets and Liabilities” sections of Note 1.  See Note 8 for information regarding costs and assumptions for employee retirement and postretirement benefits.

The following table shows the net periodic cost (credit) by Registrant Subsidiary for the Plans:

	Pension Plans						Other Postretirement Benefit Plans
	Years Ended December 31,
Net Periodic Cost (Credit)	2014		2013		2012		2014			2013			2012
	(in thousands)
APCo	$	19,523	$	22,015	$	16,646	$	(9,765	)	$	72		$	15,540
I&M	20,148		21,893		16,563		(10,922		)	(3,638		)	11,358
OPCo	13,397		17,295		18,978		(9,436		)	579			20,282
PSO	9,709		11,022		7,495		(5,068		)	(1,737		)	4,821
SWEPCo	11,237		12,519		8,307		(5,933		)	(2,115		)	5,928

The net periodic benefit cost is calculated based upon a number of actuarial assumptions, including expected long-term rates of return on the Plans’ assets.  In developing the expected long-term rate of return assumption for 2015, management evaluated input from actuaries and investment consultants, including their reviews of asset class return expectations as well as long-term inflation assumptions.  Management also considered historical returns of the investment markets and changes in tax rates which affect a portion of the Postretirement Plans’ assets.  Management anticipates that the investment managers employed for the Plans will invest the assets to generate future returns averaging 6% for the Qualified Plan and 6.75% for the Postretirement Plans.

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The expected long-term rate of return on the Plans’ assets is based on AEP’s targeted asset allocation and expected investment returns for each investment category.  Assumptions for the Plans are summarized in the following table:

	Pension Plans				Other Postretirement Benefit Plans
	2015 Target Asset Allocation		Assumed/ Expected Long-Term Rate of Return		2015 Target Asset Allocation		Assumed/ Expected Long-Term Rate of Return
Equity	30	%	8.50	%	65	%	8.50	%
Fixed Income	55	%	4.10	%	33	%	4.10	%
Other Investments	15	%	7.30	%	—	%	—	%
Cash and Cash Equivalents	—	%	—	%	2	%	2.80	%
Total	100	%			100	%

Management regularly reviews the actual asset allocation and periodically rebalances the investments to the targeted allocation.  Management believes that 6% and 6.75% are reasonable estimates of the long-term rate of return on the Plans’ assets.  The Pension Plans’ assets had an actual gain of 10.6% and 8.1% for the years ended December 31, 2014 and 2013, respectively.  The Postretirement Plans’ assets had an actual gain of 7.2% and 14.3% for the years ended December 31, 2014 and 2013, respectively.  Management will continue to evaluate the actuarial assumptions, including the expected rate of return, at least annually, and will adjust the assumptions as necessary.

AEP bases the determination of pension expense or income on a market-related valuation of assets, which reduces year-to-year volatility.  This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur.  Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets.  Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded.  As of December 31, 2014, AEP had cumulative gains of approximately $270 million that remain to be recognized in the calculation of the market-related value of assets.  These unrecognized net actuarial gains may result in decreases in the future pension costs depending on several factors, including whether such gains at each measurement date exceed the corridor in accordance with “Compensation – Retirement Benefits” accounting guidance.  See the table below for the amount of cumulative gains by Registrant Subsidiary.

Cumulative Gains – Deferred Asset Gain	December 31, 2014
	(in thousands)
APCo	$	34,949
I&M	32,198
OPCo	27,123
PSO	14,990
SWEPCo	15,788

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The method used to determine the discount rate that AEP utilizes for determining future obligations is a duration-based method in which a hypothetical portfolio of high quality corporate bonds is constructed with cash flows matching the benefit plan liability.  The composite yield on the hypothetical bond portfolio is used as the discount rate for the plan.  The discount rate as of December 31, 2014 under this method was 4% for the Qualified Plan, 3.9% for the Nonqualified Plans and 4% for the Postretirement Plans.  Due to the effect of the unrecognized actuarial gains and based on an expected rate of return on the Pension Plans’ assets of 6%, discount rates of 4% and 3.9% and various other assumptions including adoption of updated mortality tables that the Society of Actuaries issued in October 2014, management estimates that the pension costs by Registrant Subsidiary for all pension plans will approximate the amounts in the following table.  Based on an expected rate of return on the OPEB plans’ assets of 6.75%, a discount rate of 4% and various other assumptions including adoption of updated mortality tables that the Society of Actuaries issued in October 2014, management estimates Postretirement Plan credits by Registrant Subsidiary will approximate the amounts in the following table.

	Pension Plans						Other Postretirement Benefit Plans
Estimated Postretirement Plan Costs (Credits)	Years Ended December 31,
	2015		2016		2017		2015			2016			2017
	(in thousands)
APCo	$	15,260	$	10,934	$	6,273	$	(13,464	)	$	(14,259	)	$	(15,064	)
I&M	16,962		12,599		9,104		(12,782		)	(13,291		)	(13,818		)
OPCo	10,213		7,216		4,299		(11,292		)	(11,724		)	(12,164		)
PSO	8,531		6,648		5,312		(5,974		)	(6,212		)	(6,458		)
SWEPCo	10,343		8,274		6,727		(6,943		)	(7,221		)	(7,517		)

Future actual costs will depend on future investment performance, changes in future discount rates and various other factors related to each Registrant Subsidiary’s populations participating in the Plans.  The actuarial assumptions used may differ materially from actual results.  The effects of a 50 basis point change to selective actuarial assumptions are included in the “Effect if Different Assumptions Used” section below.

The value of AEP’s Pension Plans’ assets increased to $5 billion as of December 31, 2014 from $4.7 billion as of December 31, 2013 primarily due to investment returns and contributions from AEP System companies in excess of benefit payments.  During 2014, the Qualified Plan paid $289 million and the Nonqualified Plans paid $7 million in benefits to plan participants.  The value of AEP’s Postretirement Plans’ assets remained unchanged at $1.7 billion as of December 31, 2014 and 2013 primarily due to investment returns and contributions from AEP System companies and the participants offsetting benefit payments.  The Postretirement Plans paid $134 million in benefits to plan participants during 2014.  See Note 8 for complete details by Registrant Subsidiary.

Nature of Estimates Required

The Registrant Subsidiaries participate in AEP sponsored pension and other retirement and postretirement benefit plans in various forms covering all employees who meet eligibility requirements.  These benefits are accounted for under “Compensation” and “Plan Accounting” accounting guidance.  The measurement of pension and postretirement benefit obligations, costs and liabilities is dependent on a variety of assumptions.

Assumptions and Approach Used

The critical assumptions used in developing the required estimates include the following key factors:

• Discount rate

• Compensation increase rate

• Cash balance crediting rate

• Health care cost trend rate

• Expected return on plan assets

Other assumptions, such as retirement, mortality and turnover, are evaluated periodically and updated to reflect actual experience.

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Effect if Different Assumptions Used

The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, longer or shorter life spans of participants or higher or lower lump sum versus annuity payout elections by plan participants.  These differences may result in a significant impact to the amount of pension and postretirement benefit expense recorded.  If a 50 basis point change were to occur for the following assumptions, the approximate effect on the financial statements would be as follows:

APCo							Other Postretirement
	Pension Plans						Benefit Plans
	+0.5%			-0.5%			+0.5%			-0.5%
	(in thousands)
Effect on December 31, 2014 Benefit Obligations
Discount Rate	$	(37,985	)	$	41,855		$	(13,735	)	$	15,081
Compensation Increase Rate	1,696			(1,522		)	NA			NA
Cash Balance Crediting Rate	7,823			(6,818		)	NA			NA
Health Care Cost Trend Rate	NA			NA			7,093			(6,433		)
Effect on 2014 Periodic Cost
Discount Rate	(2,360		)	2,561			(978		)	1,078
Compensation Increase Rate	650			(591		)	NA			NA
Cash Balance Crediting Rate	1,902			(1,779		)	NA			NA
Health Care Cost Trend Rate	NA			NA			1,086			(948		)
Expected Return on Plan Assets	(2,916		)	2,916			(1,378		)	1,378

I&M							Other Postretirement
	Pension Plans						Benefit Plans
	+0.5%			-0.5%			+0.5%			-0.5%
	(in thousands)
Effect on December 31, 2014 Benefit Obligations
Discount Rate	$	(36,018	)	$	39,913		$	(8,443	)	$	9,301
Compensation Increase Rate	2,627			(2,375		)	NA			NA
Cash Balance Crediting Rate	9,530			(8,381		)	NA			NA
Health Care Cost Trend Rate	NA			NA			2,979			(2,624		)
Effect on 2014 Periodic Cost
Discount Rate	(2,075		)	2,251			(506		)	551
Compensation Increase Rate	571			(520		)	NA			NA
Cash Balance Crediting Rate	1,672			(1,563		)	NA			NA
Health Care Cost Trend Rate	NA			NA			415			(361		)
Expected Return on Plan Assets	(2,563		)	2,563			(983		)	983

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OPCo							Other Postretirement
	Pension Plans						Benefit Plans
	+0.5%			-0.5%			+0.5%			-0.5%
	(in thousands)
Effect on December 31, 2014 Benefit Obligations
Discount Rate	$	(26,978	)	$	29,695		$	(8,242	)	$	9,031
Compensation Increase Rate	1,652			(1,484		)	NA			NA
Cash Balance Crediting Rate	5,257			(4,603		)	NA			NA
Health Care Cost Trend Rate	NA			NA			3,632			(3,293		)
Effect on 2014 Periodic Cost
Discount Rate	(1,768		)	1,918			(522		)	568
Compensation Increase Rate	486			(443		)	NA			NA
Cash Balance Crediting Rate	1,424			(1,332		)	NA			NA
Health Care Cost Trend Rate	NA			NA			428			(372		)
Expected Return on Plan Assets	(2,184		)	2,184			(1,013		)	1,013

PSO							Other Postretirement
	Pension Plans						Benefit Plans
	+0.5%			-0.5%			+0.5%			-0.5%
	(in thousands)
Effect on December 31, 2014 Benefit Obligations
Discount Rate	$	(14,011	)	$	15,348		$	(3,998	)	$	4,402
Compensation Increase Rate	1,556			(1,453		)	NA			NA
Cash Balance Crediting Rate	5,139			(4,835		)	NA			NA
Health Care Cost Trend Rate	NA			NA			1,418			(1,254		)
Effect on 2014 Periodic Cost
Discount Rate	(954		)	1,035			(240		)	262
Compensation Increase Rate	265			(241		)	NA			NA
Cash Balance Crediting Rate	767			(718		)	NA			NA
Health Care Cost Trend Rate	NA			NA			197			(171		)
Expected Return on Plan Assets	(1,174		)	1,174			(467		)	467

SWEPCo							Other Postretirement
	Pension Plans						Benefit Plans
	+0.5%			-0.5%			+0.5%			-0.5%
				(in thousands)
Effect on December 31, 2014 Benefit Obligations
Discount Rate	$	(15,113	)	$	16,576		$	(4,551	)	$	5,019
Compensation Increase Rate	1,849			(1,721		)	NA			NA
Cash Balance Crediting Rate	6,416			(6,043		)	NA			NA
Health Care Cost Trend Rate	NA			NA			1,388			(1,206		)
Effect on 2014 Periodic Cost
Discount Rate	(999		)	1,084			(265		)	289
Compensation Increase Rate	277			(251		)	NA			NA
Cash Balance Crediting Rate	804			(752		)	NA			NA
Health Care Cost Trend Rate	NA			NA			218			(189		)
Expected Return on Plan Assets	(1,231		)	1,231			(515		)	515

NA Not applicable.

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ACCOUNTING PRONOUNCEMENTS

Pronouncements Adopted in 2015

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

Pronouncements Effective in the Future

The FASB issued ASU 2014-09 "Revenue from Contracts with Customers" clarifying the method used to determine the timing and requirements for revenue recognition on the statements of income. Under the new standard, an entity must identify the performance obligations in a contract, the transaction price and allocate the price to specific performance obligations to recognize the revenue when the obligation is completed. The amendments in this update also require disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on revenue or net income. Management plans to adopt ASU 2014-09 effective January 1, 2017.

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

Future Accounting Changes

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

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