7. 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, 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

Trading Strategies

Our strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which we transact.

Risk Management Strategies

Our strategy surrounding the use of derivative instruments focuses on managing our risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish our objectives, we primarily employ risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. 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 degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with our energy business. We enter into interest rate derivative contracts in order to manage the interest rate exposure associated with our commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as they are related to energy risk management activities. We also engage in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with our established risk management policies as approved by the Finance Committee of our Board of Directors.

The following table represents the gross notional volume of our outstanding derivative contracts as of March 31, 2012 and December 31, 2011:

Notional Volume of Derivative Instruments

		Volume
		March 31,		December 31,		Unit of
		2012		2011		Measure
Primary Risk Exposure		(in millions)
Commodity:
	Power		524		609	MWHs
	Coal		19		21	Tons
	Natural Gas		113		100	MMBtus
	Heating Oil and Gasoline		4		6	Gallons
	Interest Rate	$	202	$	226	USD

Interest Rate and Foreign Currency		$	803	$	907	USD

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, coal, natural gas and heating oil and gasoline (“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 fuel or 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. For disclosure purposes, these contracts are included with other hedging activities as “Commodity.” We do not hedge all fuel price risk.

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

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

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON OUR FINANCIAL STATEMENTS

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

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

According to the accounting guidance for “Derivatives and Hedging,” we reflect the fair values of our derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, we are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the March 31, 2012 and December 31, 2011 balance sheets, we netted $24 million and $26 million, respectively, of cash collateral received from third parties against short-term and long-term risk management assets and $109 million and $133 million, respectively, of cash collateral paid to third parties against short-term and long-term risk management liabilities.

The following tables represent the gross fair value impact of our derivative activity on our condensed balance sheets as of March 31, 2012 and December 31, 2011:

Fair Value of Derivative Instruments
March 31, 2012

		Risk Management
		Contracts		Hedging Contracts
						Interest Rate
						and Foreign
Balance Sheet Location		Commodity (a)		Commodity (a)		Currency (a)		Other (b)		Total
		(in millions)
Current Risk Management Assets		$	1,298	$	41	$	1	$	(1,094)	$	246
Long-term Risk Management Assets			758		21		-		(354)		425
Total Assets			2,056		62		1		(1,448)		671

Current Risk Management Liabilities			1,275		63		13		(1,166)		185
Long-term Risk Management Liabilities			604		25		2		(392)		239
Total Liabilities			1,879		88		15		(1,558)		424

Total MTM Derivative Contract Net Assets
	(Liabilities)	$	177	$	(26)	$	(14)	$	110	$	247

Fair Value of Derivative Instruments
December 31, 2011

		Risk Management
		Contracts		Hedging Contracts
						Interest Rate
						and Foreign
Balance Sheet Location		Commodity (a)		Commodity (a)		Currency (a)		Other (b)		Total
		(in millions)
Current Risk Management Assets		$	852	$	24	$	-	$	(683)	$	193
Long-term Risk Management Assets			641		15		-		(253)		403
Total Assets			1,493		39		-		(936)		596

Current Risk Management Liabilities			847		29		20		(746)		150
Long-term Risk Management Liabilities			483		15		22		(325)		195
Total Liabilities			1,330		44		42		(1,071)		345

Total MTM Derivative Contract Net Assets
	(Liabilities)	$	163	$	(5)	$	(42)	$	135	$	251

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

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

The tables below present our activity of derivative risk management contracts for the three months ended March 31, 2012 and 2011:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended March 31, 2012 and 2011

Location of Gain (Loss)	2012			2011
	(in millions)
Utility Operations Revenues	$	10	$	20
Other Revenues		3		2
Regulatory Assets (a)		(21)		2
Regulatory Liabilities (a)		14		8
Total Gain on Risk Management Contracts	$	6	$	32

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

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the condensed statements of income on an accrual basis.

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

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the condensed statements of income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the condensed statements of income depending on the relevant facts and circumstances. 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 our condensed statements of income. During the three months ended March 31, 2012 and 2011, we recognized gains of $1 million and $4 million, respectively, on our hedging instruments and offsetting losses of $1 million and $4 million, respectively, on our long-term debt. During the three months ended March 31, 2012 and 2011, hedge ineffectiveness was immaterial.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on our condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on our condensed balance sheets, depending on the specific nature of the risk being hedged. During the three months ended March 31, 2012 and 2011, we designated power, coal and natural gas derivatives as cash flow hedges.

We reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on our condensed statements of income. During the three months ended March 31, 2012 and 2011, we designated heating oil and gasoline derivatives as cash flow hedges.

We reclassify gains and losses on interest rate derivative hedges related to our debt financings from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Interest Expense on our condensed statements of income in those periods in which hedged interest payments occur. During the three months ended March 31, 2012 and 2011, we designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to our foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Depreciation and Amortization expense on our condensed statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three months ended March 31, 2012 and 2011, we designated foreign currency derivatives as cash flow hedges.

During the three months ended March 31, 2012 and 2011, hedge ineffectiveness was immaterial or nonexistent for all cash flow hedge strategies disclosed above.

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets and the reasons for changes in cash flow hedges for the three months ended March 31, 2012 and 2011. All amounts in the following tables are presented net of related income taxes.

Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
For the Three Months Ended March 31, 2012
					Interest Rate
					and Foreign
			Commodity		Currency		Total
			(in millions)
Balance in AOCI as of December 31, 2011			$	(3)	$	(20)	$	(23)
Changes in Fair Value Recognized in AOCI				(20)		1		(19)
Amount of (Gain) or Loss Reclassified from AOCI
	to Statement of Income/within Balance Sheet:
		Utility Operations Revenues		-		-		-
		Other Revenues		(1)		-		(1)
		Purchased Electricity for Resale		7		-		7
		Interest Expense		-		1		1
		Regulatory Assets (a)		1		-		1
		Regulatory Liabilities (a)		-		-		-
Balance in AOCI as of March 31, 2012			$	(16)	$	(18)	$	(34)

Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
For the Three Months Ended March 31, 2011
					Interest Rate
					and Foreign
			Commodity		Currency		Total
			(in millions)
Balance in AOCI as of December 31, 2010			$	7	$	4	$	11
Changes in Fair Value Recognized in AOCI				2		(1)		1
Amount of (Gain) or Loss Reclassified from AOCI
	to Statement of Income/within Balance Sheet:
		Utility Operations Revenues		-		-		-
		Other Revenues		(1)		-		(1)
		Purchased Electricity for Resale		-		-		-
		Interest Expense		-		1		1
		Regulatory Assets (a)		-		-		-
		Regulatory Liabilities (a)		-		-		-
Balance in AOCI as of March 31, 2011			$	8	$	4	$	12

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

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets at March 31, 2012 and December 31, 2011 were:

Impact of Cash Flow Hedges on the Condensed Balance Sheet
March 31, 2012

				Interest Rate
				and Foreign
		Commodity		Currency		Total
		(in millions)
Hedging Assets (a)		$	29	$	-	$	29
Hedging Liabilities (a)			55		15		70
AOCI Gain (Loss) Net of Tax			(16)		(18)		(34)
Portion Expected to be Reclassified to Net
	Income During the Next Twelve Months		(14)		(3)		(17)

Impact of Cash Flow Hedges on the Condensed Balance Sheet
December 31, 2011

				Interest Rate
				and Foreign
		Commodity		Currency		Total
		(in millions)
Hedging Assets (a)		$	20	$	-	$	20
Hedging Liabilities (a)			25		42		67
AOCI Gain (Loss) Net of Tax			(3)		(20)		(23)
Portion Expected to be Reclassified to Net
	Income During the Next Twelve Months		(3)		(2)		(5)

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

The actual amounts that we reclassify from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes. As of March 31, 2012, 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 is 42 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.

We use standardized master agreements which 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.

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 our competitive retail auction loads, we are obligated to post an additional amount of collateral if our credit ratings decline below investment grade. 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 investment grade. The following table represents: (a) our aggregate fair value of such derivative contracts, (b) the amount of collateral we would have been required to post for all derivative and non-derivative contracts if our credit ratings had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of March 31, 2012 and December 31, 2011:

		March 31,		December 31,
		2012		2011
		(in millions)
Liabilities for Derivative Contracts with Credit Downgrade Triggers		$	21	$	32
Amount of Collateral AEP Subsidiaries Would Have Been
	Required to Post		50		39
Amount Attributable to RTO and ISO Activities			48		38

In addition, a majority of our non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, our risk management organization assesses the appropriateness of these cross-default provisions in our contracts. The following table represents: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral we have posted and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering our contractual netting arrangements as of March 31, 2012 and December 31, 2011:

	March 31,		December 31,
	2012		2011
	(in millions)
Liabilities for Contracts with Cross Default Provisions Prior to Contractual
Netting Arrangements	$	716	$	515
Amount of Cash Collateral Posted		2		56
Additional Settlement Liability if Cross Default Provision is Triggered		354		291

Derivatives and Hedging

6. 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, 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

Trading Strategies

The strategy surrounding the use of derivative instruments for trading purposes focuses 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.

Risk Management Strategies

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. 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 degree, heating oil and gasoline, emission allowance 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.

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of March 31, 2012 and December 31, 2011:

Notional Volume of Derivative Instruments
March 31, 2012

Primary Risk			Unit of
Exposure			Measure	APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Commodity:
	Power		MWHs		133,928		94,735		197,496		41		51
	Coal		Tons		3,196		2,251		6,623		2,686		3,449
	Natural Gas		MMBtus		12,247		8,613		18,058		102		129
	Heating Oil and
		Gasoline	Gallons		765		387		916		448		425
	Interest Rate		USD	$	22,555	$	15,865	$	33,261	$	-	$	-

Interest Rate and
	Foreign Currency		USD	$	-	$	200,000	$	-	$	-	$	69

Notional Volume of Derivative Instruments
December 31, 2011

Primary Risk			Unit of
Exposure			Measure	APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Commodity:
	Power		MWHs		169,459		109,326		229,468		39		49
	Coal		Tons		3,714		1,920		8,337		3,574		2,974
	Natural Gas		MMBtus		7,923		5,081		10,728		115		145
	Heating Oil and
		Gasoline	Gallons		1,057		525		1,254		618		569
	Interest Rate		USD	$	31,029	$	19,890	$	42,093	$	175	$	203

Interest Rate and
	Foreign Currency		USD	$	-	$	200,000	$	-	$	-	$	200,069

Fair Value Hedging Strategies

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

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, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. 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 fuel or energy 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. For disclosure purposes, these contracts are included with other hedging activities as “Commodity.” 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. Some interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of floating-rate debt to a fixed rate. AEPSC, on behalf of the Registrant Subsidiaries, also enters into interest rate derivative contracts to manage interest rate exposure related to future borrowings of fixed-rate debt. The 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. 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.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

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

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

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the March 31, 2012 and December 31, 2011 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

	March 31, 2012				December 31, 2011
	Cash Collateral		Cash Collateral		Cash Collateral		Cash Collateral
	Received		Paid		Received		Paid
	Netted Against		Netted Against		Netted Against		Netted Against
	Risk Management		Risk Management		Risk Management		Risk Management
Company	Assets		Liabilities		Assets		Liabilities
	(in thousands)
APCo	$	2,564	$	23,891	$	4,291	$	28,964
I&M		1,803		16,804		2,752		18,547
OPCo		3,781		35,231		5,810		39,183
PSO		56		15		53		130
SWEPCo		71		19		66		124

The following tables represent the gross fair value of the Registrant Subsidiaries' derivative activity on the condensed balance sheets as of March 31, 2012 and December 31, 2011:

Fair Value of Derivative Instruments
March 31, 2012

APCo
		Risk
		Management
		Contracts		Hedging Contracts
						Interest Rate
						and Foreign
Balance Sheet Location		Commodity (a)		Commodity (a)		Currency (a)		Other (b)		Total
		(in thousands)
Current Risk Management Assets		$	344,011	$	1,441	$	-	$	(295,932)	$	49,520
Long-term Risk Management Assets			125,333		257		-		(79,541)		46,049
Total Assets			469,344		1,698		-		(375,473)		95,569

Current Risk Management Liabilities			340,686		4,445		-		(312,084)		33,047
Long-term Risk Management Liabilities			107,485		456		-		(85,970)		21,971
Total Liabilities			448,171		4,901		-		(398,054)		55,018

Total MTM Derivative Contract Net
	Assets (Liabilities)	$	21,173	$	(3,203)	$	-	$	22,581	$	40,551

Fair Value of Derivative Instruments
December 31, 2011

APCo
		Risk
		Management
		Contracts		Hedging Contracts
						Interest Rate
						and Foreign
Balance Sheet Location		Commodity (a)		Commodity (a)		Currency (a)		Other (b)		Total
		(in thousands)
Current Risk Management Assets		$	232,784	$	1,040	$	-	$	(194,179)	$	39,645
Long-term Risk Management Assets			99,751		90		-		(60,615)		39,226
Total Assets			332,535		1,130		-		(254,794)		78,871

Current Risk Management Liabilities			235,354		2,767		-		(211,515)		26,606
Long-term Risk Management Liabilities			82,058		350		-		(69,485)		12,923
Total Liabilities			317,412		3,117		-		(281,000)		39,529

Total MTM Derivative Contract Net
	Assets (Liabilities)	$	15,123	$	(1,987)	$	-	$	26,206	$	39,342

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

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

The tables below present the Registrant Subsidiaries' activity of derivative risk management contracts for the three months ended March 31, 2012 and 2011:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended March 31, 2012

Location of Gain (Loss)			APCo		I&M		OPCo		PSO		SWEPCo
			(in thousands)
Electric Generation, Transmission and
	Distribution Revenues		$	(327)	$	2,813	$	8,493	$	(5)	$	(51)
Sales to AEP Affiliates				-		-		-		-		-
Fuel and Other Consumables Used for
	Electric Generation			-		-		-		-		-
Regulatory Assets (a)				(3,481)		(3,110)		(3,131)		(5,201)		(6,727)
Regulatory Liabilities (a)				6,409		6,726		-		27		21
Total Gain (Loss) on Risk Management
	Contracts		$	2,601	$	6,429	$	5,362	$	(5,179)	$	(6,757)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended March 31, 2011

Location of Gain (Loss)			APCo		I&M		OPCo		PSO		SWEPCo
			(in thousands)
Electric Generation, Transmission and
	Distribution Revenues		$	1,816	$	5,415	$	10,590	$	119	$	123
Sales to AEP Affiliates				20		17		32		1		1
Fuel and Other Consumables Used for
	Electric Generation			-		-		-		-		-
Regulatory Assets (a)				373		186		395		(368)		1,642
Regulatory Liabilities (a)				6,754		360		(105)		392		340
Total Gain (Loss) on Risk Management
	Contracts		$	8,963	$	5,978	$	10,912	$	144	$	2,106

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

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the condensed statements of income on an accrual basis.

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

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the condensed statements of income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the condensed statements of income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions (APCo, I&M, PSO and SWEPCo) 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.

The Registrant Subsidiaries 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 condensed statements of income. During the three months ended March 31, 2012 and 2011, the Registrant Subsidiaries did not employ any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets, depending on the specific nature of the risk being hedged. During the three months ended March 31, 2012 and 2011, APCo, I&M and OPCo designated power, coal and natural gas derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the condensed statements of income. During the three months ended March 31, 2012 and 2011, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Interest Expense on the condensed statements of income in those periods in which hedged interest payments occur. During the three months ended March 31, 2012, I&M and SWEPCo designated interest rate derivatives as cash flow hedges. During the three months ended March 31, 2011, APCo and PSO designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Depreciation and Amortization expense on the condensed statements of income over the depreciable lives of the fixed assets that were designated as the hedged items in qualifying foreign currency hedging relationships. During the three months ended March 31, 2012 and 2011, SWEPCo designated foreign currency derivatives as cash flow hedges.

During the three months ended March 31, 2012 and 2011, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets and the reasons for changes in cash flow hedges for the three months ended March 31, 2012 and 2011. All amounts in the following tables are presented net of related income taxes.

Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
For the Three Months Ended March 31, 2012

Commodity Contracts				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					(1,845)		(1,394)		(2,877)		139		132
Amount of (Gain) or Loss Reclassified
	from AOCI to Statement of Income/within
	Balance Sheet:
		Electric Generation, Transmission, and
			Distribution Revenues		-		-		-		-		-
		Fuel and Other Consumables Used for
			Electric Generation		-		-		-		-		-
		Purchased Electricity for Resale			219		567		1,486		-		-
		Other Operation Expense			(2)		(2)		(5)		(2)		(2)
		Maintenance Expense			(3)		(1)		(2)		-		(1)
		Property, Plant and Equipment			(2)		(1)		(3)		(1)		(1)
		Regulatory Assets (a)			825		142		-		-		-
		Regulatory Liabilities (a)			-		-		-		-		-
Balance in AOCI as of March 31, 2012				$	(2,117)	$	(1,508)	$	(3,149)	$	67	$	66

Interest Rate and
Foreign Currency Contracts				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					-		2,996		-		-		(2,776)
Amount of (Gain) or Loss Reclassified
	from AOCI to Statement of Income/within
	Balance Sheet:
		Depreciation and Amortization
			Expense		-		-		1		-		-
		Other Operation Expense			-		-		-		-		-
		Interest Expense			269		149		(341)		(189)		873
Balance in AOCI as of March 31, 2012				$	1,293	$	(11,320)	$	9,114	$	7,029	$	(17,365)

Total Contracts				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					(1,845)		1,602		(2,877)		139		(2,644)
Amount of (Gain) or Loss Reclassified
	from AOCI to Statement of Income/within
	Balance Sheet:
		Electric Generation, Transmission, and
			Distribution Revenues		-		-		-		-		-
		Fuel and Other Consumables Used for
			Electric Generation		-		-		-		-		-
		Purchased Electricity for Resale			219		567		1,486		-		-
		Other Operation Expense			(2)		(2)		(5)		(2)		(2)
		Maintenance Expense			(3)		(1)		(2)		-		(1)
		Depreciation and Amortization
			Expense		-		-		1		-		-
		Interest Expense			269		149		(341)		(189)		873
		Property, Plant and Equipment			(2)		(1)		(3)		(1)		(1)
		Regulatory Assets (a)			825		142		-		-		-
		Regulatory Liabilities (a)			-		-		-		-		-
Balance in AOCI as of March 31, 2012				$	(824)	$	(12,828)	$	5,965	$	7,096	$	(17,299)

Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
For the Three Months Ended March 31, 2011

Commodity Contracts				APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Balance in AOCI as of December 31, 2010				$	(273)	$	(178)	$	(364)	$	88	$	82
Changes in Fair Value Recognized in AOCI					178		78		207		212		194
Amount of (Gain) or Loss Reclassified
	from AOCI to Statement of Income/within
	Balance Sheet:
		Electric Generation, Transmission, and
			Distribution Revenues		(4)		(10)		(26)		-		-
		Fuel and Other Consumables Used for
			Electric Generation		-		-		-		-		-
		Purchased Electricity for Resale			87		194		521		-		-
		Other Operation Expense			(13)		(9)		(23)		(13)		(13)
		Maintenance Expense			(25)		(10)		(19)		(7)		(8)
		Property, Plant and Equipment			(23)		(11)		(27)		(16)		(11)
		Regulatory Assets (a)			311		47		-		-		-
		Regulatory Liabilities (a)			-		-		-		-		-
Balance in AOCI as of March 31, 2011				$	238	$	101	$	269	$	264	$	244

Interest Rate and
Foreign Currency Contracts				APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Balance in AOCI as of December 31, 2010				$	217	$	(8,507)	$	10,813	$	8,406	$	(4,272)
Changes in Fair Value Recognized in AOCI					(373)		-		-		(476)		7
Amount of (Gain) or Loss Reclassified
	from AOCI to Statement of Income/within
	Balance Sheet:
		Depreciation and Amortization
			Expense		-		-		1		-		-
		Other Operation Expense			-		-		-		-		-
		Interest Expense			373		252		(341)		(143)		207
Balance in AOCI as of March 31, 2011				$	217	$	(8,255)	$	10,473	$	7,787	$	(4,058)

Total Contracts				APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Balance in AOCI as of December 31, 2010				$	(56)	$	(8,685)	$	10,449	$	8,494	$	(4,190)
Changes in Fair Value Recognized in AOCI					(195)		78		207		(264)		201
Amount of (Gain) or Loss Reclassified
	from AOCI to Statement of Income/within
	Balance Sheet:
		Electric Generation, Transmission, and
			Distribution Revenues		(4)		(10)		(26)		-		-
		Fuel and Other Consumables Used for
			Electric Generation		-		-		-		-		-
		Purchased Electricity for Resale			87		194		521		-		-
		Other Operation Expense			(13)		(9)		(23)		(13)		(13)
		Maintenance Expense			(25)		(10)		(19)		(7)		(8)
		Depreciation and Amortization
			Expense		-		-		1		-		-
		Interest Expense			373		252		(341)		(143)		207
		Property, Plant and Equipment			(23)		(11)		(27)		(16)		(11)
		Regulatory Assets (a)			311		47		-		-		-
		Regulatory Liabilities (a)			-		-		-		-		-
Balance in AOCI as of March 31, 2011				$	455	$	(8,154)	$	10,742	$	8,051	$	(3,814)

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

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets at March 31, 2012 and December 31, 2011 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
March 31, 2012

	Hedging Assets (a)				Hedging Liabilities (a)				AOCI Gain (Loss) Net of Tax
			Interest Rate				Interest Rate				Interest Rate
			and Foreign				and Foreign				and Foreign
Company	Commodity		Currency		Commodity		Currency		Commodity		Currency
	(in thousands)
APCo	$	1,166	$	-	$	4,369	$	-	$	(2,117)	$	1,293
I&M		792		-		3,073		6,026		(1,508)		(11,320)
OPCo		1,683		-		6,443		-		(3,149)		9,114
PSO		89		-		-		-		67		7,029
SWEPCo		86		5		-		-		66		(17,365)

	Expected to be Reclassified to
	Net Income During the Next
	Twelve Months
					Maximum Term for
			Interest Rate		Exposure to
			and Foreign		Variability of Future
Company	Commodity		Currency		Cash Flows
	(in thousands)				(in months)
APCo	$	(1,986)	$	(1,037)		26
I&M		(1,419)		(612)		26
OPCo		(2,957)		1,359		26
PSO		67		759		9
SWEPCo		66		(2,410)		9

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
December 31, 2011

	Hedging Assets (a)				Hedging Liabilities (a)				AOCI Gain (Loss) Net of Tax
			Interest Rate				Interest Rate				Interest Rate
			and Foreign				and Foreign				and Foreign
Company	Commodity		Currency		Commodity		Currency		Commodity		Currency
	(in thousands)
APCo	$	431	$	-	$	2,418	$	-	$	(1,309)	$	1,024
I&M		277		-		1,523		10,637		(819)		(14,465)
OPCo		584		-		3,239		-		(1,748)		9,454
PSO		-		-		107		-		(69)		7,218
SWEPCo		-		3		97		19,143		(62)		(15,462)

	Expected to be Reclassified to
	Net Income During the Next
	Twelve Months
			Interest Rate
			and Foreign
Company	Commodity		Currency
	(in thousands)
APCo	$	(1,140)	$	(1,052)
I&M		(712)		(595)
OPCo		(1,518)		1,359
PSO		(70)		759
SWEPCo		(63)		(1,864)

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

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.

AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements which 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: (a) the Registrant Subsidiaries' aggregate fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of March 31, 2012 and December 31, 2011:

	March 31, 2012
	Liabilities for		Amount of Collateral the		Amount
	Derivative Contracts		Registrant Subsidiaries		Attributable to
	with Credit		Would Have Been		RTO and ISO
Company	Downgrade Triggers		Required to Post		Activities
	(in thousands)
APCo	$	6,219	$	7,611	$	7,611
I&M		4,374		5,353		5,353
OPCo		9,171		11,223		11,223
PSO		-		5,355		4,686
SWEPCo		-		6,975		5,906

	December 31, 2011
	Liabilities for		Amount of Collateral the		Amount
	Derivative Contracts		Registrant Subsidiaries		Attributable to
	with Credit		Would Have Been		RTO and ISO
Company	Downgrade Triggers		Required to Post		Activities
	(in thousands)
APCo	$	10,007	$	6,211	$	6,211
I&M		6,418		3,983		3,983
OPCo		13,550		8,410		8,410
PSO		-		856		414
SWEPCo		-		1,128		522

As of March 31, 2012 and December 31, 2011, the Registrant Subsidiaries were not required to post any collateral.

In addition, a majority of the Registrant Subsidiaries' non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries' contractual netting arrangements as of March 31, 2012 and December 31, 2011:

	March 31, 2012
	Liabilities for				Additional
	Contracts with Cross				Settlement
	Default Provisions				Liability if Cross
	Prior to Contractual		Amount of Cash		Default Provision
Company	Netting Arrangements		Collateral Posted		is Triggered
	(in thousands)
APCo	$	121,922	$	518	$	43,565
I&M		91,784		365		36,669
OPCo		179,790		764		64,242
PSO		181		-		86
SWEPCo		228		-		108

	December 31, 2011
	Liabilities for				Additional
	Contracts with Cross				Settlement
	Default Provisions				Liability if Cross
	Prior to Contractual		Amount of Cash		Default Provision
Company	Netting Arrangements		Collateral Posted		is Triggered
	(in thousands)
APCo	$	76,868	$	8,107	$	27,603
I&M		59,936		5,200		28,339
OPCo		104,091		10,978		37,380
PSO		142		-		61
SWEPCo		19,322		-		19,220

Derivatives and Hedging

6. 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, 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

Trading Strategies

The strategy surrounding the use of derivative instruments for trading purposes focuses 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.

Risk Management Strategies

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. 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 degree, heating oil and gasoline, emission allowance 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.

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of March 31, 2012 and December 31, 2011:

Notional Volume of Derivative Instruments
March 31, 2012

Primary Risk			Unit of
Exposure			Measure	APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Commodity:
	Power		MWHs		133,928		94,735		197,496		41		51
	Coal		Tons		3,196		2,251		6,623		2,686		3,449
	Natural Gas		MMBtus		12,247		8,613		18,058		102		129
	Heating Oil and
		Gasoline	Gallons		765		387		916		448		425
	Interest Rate		USD	$	22,555	$	15,865	$	33,261	$	-	$	-

Interest Rate and
	Foreign Currency		USD	$	-	$	200,000	$	-	$	-	$	69

Notional Volume of Derivative Instruments
December 31, 2011

Primary Risk			Unit of
Exposure			Measure	APCo		I&M		OPCo		PSO		SWEPCo
				(in thousands)
Commodity:
	Power		MWHs		169,459		109,326		229,468		39		49
	Coal		Tons		3,714		1,920		8,337		3,574		2,974
	Natural Gas		MMBtus		7,923		5,081		10,728		115		145
	Heating Oil and
		Gasoline	Gallons		1,057		525		1,254		618		569
	Interest Rate		USD	$	31,029	$	19,890	$	42,093	$	175	$	203

Interest Rate and
	Foreign Currency		USD	$	-	$	200,000	$	-	$	-	$	200,069