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Benefit Plans
 12 Months Ended
Dec. 31, 2013
Benefit Plans

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:

 

      Other Postretirement
   Pension Plans  Benefit Plans
 Assumptions 2013  2012  2013 2012
 Discount Rate  4.70%   3.95%   4.70%  3.95%
 Rate of Compensation Increase  4.85%(a)  4.95%(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 2013, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 11.5% per year, with an average increase of 4.85%.

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:

 

      Other Postretirement
    Pension Plans Benefit Plans
   2013 2012 2011 2013 2012 2011
 Discount Rate  3.95%  4.55%  5.05%  3.95%  4.75%  5.25%
 Expected Return on Plan Assets  6.50%  7.25%  7.75%  7.00%  7.25%  7.50%
 Rate of Compensation Increase  4.95%  4.85%  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 2013 2012
 Initial  6.75%  7.00%
 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$ 6 $ (4)
       
 Effect on the Health Care Component of the     
  Accumulated Postretirement Benefit Obligation  74   (59)

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, 2013, 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, 2013 and 2012

 

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.

    Other Postretirement
  Pension Plans Benefit Plans
  2013 2012 2013 2012
Change in Benefit Obligation (in millions)
Benefit Obligation as of January 1, $ 5,205 $ 4,991 $ 1,849 $ 2,227
Service Cost   69   76   23   47
Interest Cost   203   223   71   103
Actuarial (Gain) Loss   (305)   299   (395)   148
Plan Amendment Prior Service Credit   -   -   -   (570)
Curtailment and Settlements   -   (1)   -   -
Benefit Payments   (331)   (383)   (140)   (151)
Participant Contributions   -   -   39   35
Medicare Subsidy   -   -   9   10
Benefit Obligation as of December 31, $ 4,841 $ 5,205 $ 1,456 $ 1,849
             
Change in Fair Value of Plan Assets            
Fair Value of Plan Assets as of January 1, $ 4,696 $ 4,303 $ 1,568 $ 1,410
Actual Gain on Plan Assets   340   560   208   178
Company Contributions   6   216   24   96
Participant Contributions   -   -   39   35
Benefit Payments   (331)   (383)   (140)   (151)
Fair Value of Plan Assets as of December 31, $ 4,711 $ 4,696 $ 1,699 $ 1,568
             
Funded (Underfunded) Status as of December 31, $ (130) $ (509) $ 243 $ (281)

Amounts Recognized on the Balance Sheets as of December 31, 2013 and 2012
               
      Other Postretirement
    Pension Plans Benefit Plans
               
    December 31,
   2013 2012 2013 2012
    (in millions)
 Deferred Charges and Other Noncurrent Assets -             
  Prepaid Benefit Costs $ - $ - $ 264 $ -
 Other Current Liabilities - Accrued Short-term            
  Benefit Liability   (7)   (7)   (4)   (4)
 Employee Benefits and Pension Obligations -            
  Accrued Long-term Benefit Liability   (123)   (502)   (17)   (277)
 Funded (Underfunded) Status $ (130) $ (509) $ 243 $ (281)

Amounts Included in AOCI and Regulatory Assets as of December 31, 2013 and 2012
  
     Other Postretirement
  Pension Plans Benefit Plans
   December 31,
   2013 2012 2013 2012 
Components (in millions)
Net Actuarial Loss $ 1,561 $ 2,111 $ 428 $ 989 
Prior Service Cost (Credit)   8   11   (693)   (762) 
               
Recorded as             
Regulatory Assets $ 1,343 $ 1,774 $ (191) $ 108 
Deferred Income Taxes   79   122   (26)   42 
Net of Tax AOCI   147   226   (48)   77 

Components of the change in amounts included in AOCI and Regulatory Assets during the years ended December 31, 2013 and 2012 are as follows:

 

    Other Postretirement
  Pension Plans Benefit Plans
  Years Ended December 31,
  2013 2012 2013 2012
Components (in millions)
Actuarial (Gain) Loss During the Year $ (367) $ 58 $ (496) $ 67
Prior Service Credit   -   -   -   (570)
Amortization of Actuarial Loss   (183)   (155)   (65)   (57)
Amortization of Prior Service Credit (Cost)   (3)   1   69   18
Amortization of Transition Obligation   -   -   -   (1)
Change for the Year $ (553) $ (96) $ (492) $ (543)

Pension and Other Postretirement Plans' Assets

 

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

                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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 cash 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 Alternative Total 
    Estate Investments Level 3 
      
 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 

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

                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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%
                    
 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.

The following table presents the classification of pension plan assets within the fair value hierarchy as of December 31, 2012:

                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in millions)   
 Equities:                  
  Domestic $ 1,308 $ - $ - $ - $ 1,308  27.9%
  International   497   -   -   -   497  10.5%
  Real Estate Investment Trusts   91   -   -   -   91  1.9%
  Common Collective Trust -                  
   International   -   4   -   -   4  0.1%
 Subtotal - Equities   1,896   4   -   -   1,900  40.4%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   32   -   -   32  0.7%
  United States Government and                  
   Agency Securities   -   715   -   -   715  15.2%
  Corporate Debt   -   1,235   -   -   1,235  26.3%
  Foreign Debt   -   199   -   -   199  4.2%
  State and Local Government   -   44   -   -   44  0.9%
  Other - Asset Backed   -   36   -   -   36  0.8%
 Subtotal - Fixed Income   -   2,261   -   -   2,261  48.1%
                    
 Real Estate   -   -   220   -   220  4.7%
                    
 Alternative Investments   -   -   195   -   195  4.2%
 Securities Lending   -   80   -   -   80  1.7%
 Securities Lending Collateral (a)   -   -   -   (91)   (91)  (1.9)%
                    
 Cash and Cash Equivalents   -   126   -   -   126  2.7%
 Other - Pending Transactions and                  
  Accrued Income (b)   -   -   -   5   5  0.1%
                    
 Total $ 1,896 $ 2,471 $ 415 $ (86) $ 4,696  100.0%

(a)       Amounts in "Other" column primarily represent an obligation to repay cash 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:

    Corporate Real Alternative Total
    Debt Estate Investments Level 3
     (in millions)
 Balance as of January 1, 2012 $ 6 $ 163 $ 161 $ 330
 Actual Return on Plan Assets            
  Relating to Assets Still Held as of the Reporting Date   -   30   10   40
  Relating to Assets Sold During the Period   (2)   -   4   2
 Purchases and Sales   (4)   27   20   43
 Transfers into Level 3   -   -   -   -
 Transfers out of Level 3   -   -   -   -
 Balance as of December 31, 2012 $ - $ 220 $ 195 $ 415

The following table presents the classification of OPEB plan assets within the fair value hierarchy as of December 31, 2012:

                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in millions)
 Equities:                  
  Domestic $ 422 $ - $ - $ - $ 422  26.9%
  International   505   -   -   -   505  32.2%
 Subtotal - Equities   927   -   -   -   927  59.1%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   72   -   -   72  4.6%
  United States Government and                  
   Agency Securities   -   82   -   -   82  5.2%
  Corporate Debt   -   155   -   -   155  9.9%
  Foreign Debt   -   26   -   -   26  1.7%
  State and Local Government   -   7   -   -   7  0.5%
  Other - Asset Backed   -   10   -   -   10  0.6%
 Subtotal - Fixed Income   -   352   -   -   352  22.5%
                    
 Trust Owned Life Insurance:                  
  International Equities   -   52   -   -   52  3.3%
  United States Bonds   -   163   -   -   163  10.3%
                    
 Cash and Cash Equivalents   62   11   -   -   73  4.7%
 Other - Pending Transactions and                  
  Accrued Income (a)   -   -   -   1   1  0.1%
                    
 Total $ 989 $ 578 $ - $ 1 $ 1,568  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 2013 2012
   (in millions)
 Qualified Pension Plan $ 4,638 $ 5,001
 Nonqualified Pension Plans   77   82
 Total $ 4,715 $ 5,083

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, 2013 and 2012 were as follows:

   Underfunded Pension Plans
   December 31,
   2013 2012
   (in millions)
 Projected Benefit Obligation $ 4,841 $ 5,205
        
 Accumulated Benefit Obligation $ 4,715 $ 5,083
 Fair Value of Plan Assets   4,711   4,696
 Underfunded Accumulated Benefit Obligation $ (4) $ (387)

Estimated Future Benefit Payments and Contributions

 

We expect contributions and payments for the pension plans of $80 million and the OPEB plans of $6 million during 2014. 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. In November 2012, we announced changes to our retiree medical coverage. Effective for retirements after December 2012, our contribution to retiree medical coverage was capped reducing our exposure to future medical cost inflation. Effective for employees hired after December 2013, we will not provide retiree medical coverage. The impact of the changes is reflected in the Benefit Plan Obligation table as plan amendments. 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 Benefit Medicare Subsidy
   Payments Payments Receipts
   (in millions)
 2014 $ 355 $ 140 $ -
 2015   363   145   -
 2016   368   149   -
 2017   372   152   -
 2018   377   156   -
 Years 2019 to 2023, in Total   1,857   809   2

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, 2013, 2012 and 2011:

 

      Other Postretirement
   Pension Plans Benefit Plans
    Years Ended December 31,
    2013 2012 2011 2013 2012 2011
    (in millions)
 Service Cost $ 69 $ 76 $ 72 $ 23 $ 47 $ 42
 Interest Cost   203   223   237   71   103   109
 Expected Return on Plan Assets   (278)   (319)   (314)   (107)   (101)   (109)
 Curtailment   -   -   -   -   -   1
 Amortization of Transition Obligation   -   -   -   -   1   2
 Amortization of Prior Service Cost (Credit)   3   (1)   1   (69)   (18)   (1)
 Amortization of Net Actuarial Loss   183   155   122   65   57   29
 Net Periodic Benefit Cost (Credit)   180   134   118   (17)   89   73
 Capitalized Portion   (56)   (42)   (37)   5   (28)   (22)
 Net Periodic Benefit Cost (Credit)                   
  Recognized in Expense $ 124 $ 92 $ 81 $ (12) $ 61 $ 51

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on the balance sheet during 2014 are shown in the following table:

 

     Other
      Postretirement
    Pension Plans Benefit Plans
 Components (in millions)
 Net Actuarial Loss $ 125 $ 21
 Prior Service Cost (Credit)   2   (69)
 Total Estimated 2014 Amortization $ 127 $ (48)
        
 Expected to be Recorded as      
 Regulatory Asset $ 107 $ (34)
 Deferred Income Taxes   7   (5)
 Net of Tax AOCI   13   (9)
 Total $ 127 $ (48)

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 members 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 $67 million in 2013, $66 million in 2012 and $64 million in 2011.

 

UMWA Benefits

 

We provide UMWA pension, health and welfare benefits for certain unionized mining 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.

 

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 002), which under the Pension Protection Act of 2006 (PPA) was in Seriously Endangered Status for the plan years ending June 30, 2013 and 2012, 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 2013, 2012 and 2011 were made under a collective bargaining agreement that is scheduled to expire December 31, 2017. We contributed immaterial amounts in 2013, 2012 and 2011 that represent less than 5% of the total contributions in the plan's latest annual report for the years ended June 30, 2013, 2012 and 2011. The contributions we made did not include a surcharge. 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, the timing of the closure of Cook Coal Terminal is expected to be in or after 2025. Due to the estimated closure date and the ability to estimate the amount of the withdrawal liability, we recorded a liability of $39 million during 2013 and a related regulatory asset of $30 million. The regulatory asset should be recovered in future billings for transloading services before the planned closure.

 
Appalachian Power Co [Member]
  
Benefit Plans

7. 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:

     Other Postretirement
  Pension Plans  Benefit Plans
Assumption 2013 2012  2013 2012
Discount Rate  4.70%  3.95%   4.70%  3.95%

   Pension Plans
 Assumption - Rate of Compensation Increase (a) 2013 2012
 APCo  4.60%  4.70%
 I&M  4.90%  5.00%
 OPCo  5.00%  5.00%
 PSO  4.90%  4.90%
 SWEPCo  4.85%  4.75%

(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.

 

For 2013, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 11.5% per year, with the average increase shown in the table above. The compensation increase rates reflect variations in each Registrant Subsidiary's population participating in the pension plan.

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 Subsidiary's benefit costs are shown in the following tables:

      Other Postretirement
    Pension Plans Benefit Plans
 Assumptions 2013 2012 2011 2013 2012 2011
 Discount Rate  3.95%  4.55%  5.05%  3.95%  4.75%  5.25%
 Expected Return on Plan Assets  6.50%  7.25%  7.75%  7.00%  7.25%  7.50%

   Pension Plans
 Assumption - Rate of Compensation Increase 2013 2012 2011
 APCo  4.70%  4.70%  4.65%
 I&M  5.00%  5.00%  4.90%
 OPCo  5.00%  5.00%  4.95%
 PSO  4.90%  4.90%  4.85%
 SWEPCo  4.75%  4.75%  4.70%

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 2013 2012
 Initial  6.75%  7.00%
 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:

 

  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 $ 1,267 $ 579 $ 1,060 $ 262 $ 304
  1% Decrease   (877)   (382)   (738)   (172)   (200)
                 
Effect on the Health Care Component of the                
 Accumulated Postretirement Benefit               
 Obligation:               
  1% Increase $ 18,179 $ 6,884 $ 7,077 $ 3,216 $ 3,597
  1% Decrease   (14,552)   (5,603)   (5,760)   (2,617)   (2,927)

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, 2013, 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, 2013 and 2012

 

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   Other Postretirement
  Pension Plans Benefit Plans
  2013 2012 2013 2012
Change in Benefit Obligation (in thousands)
Benefit Obligation as of January 1, $ 718,460 $ 681,450 $ 348,990 $ 395,482
Service Cost   6,171   7,565   2,566   5,387
Interest Cost   27,662   30,211   13,454   18,462
Actuarial (Gain) Loss   (45,619)   43,341   (66,056)   31,776
Plan Amendment Prior Service Credit   -   -   -   (80,528)
Benefit Payments   (43,443)   (44,107)   (27,220)   (29,228)
Participant Contributions   -   -   6,600   5,826
Medicare Subsidy   -   -   1,550   1,813
Benefit Obligation as of December 31, $ 663,231 $ 718,460 $ 279,884 $ 348,990
             
Change in Fair Value of Plan Assets            
Fair Value of Plan Assets as of January 1, $ 621,570 $ 570,756 $ 267,758 $ 229,735
Actual Gain on Plan Assets   49,832   69,686   34,289   44,919
Company Contributions   36   25,235   3,413   16,506
Participant Contributions   -   -   6,600   5,826
Benefit Payments   (43,443)   (44,107)   (27,220)   (29,228)
Fair Value of Plan Assets as of December 31, $ 627,995 $ 621,570 $ 284,840 $ 267,758
             
Funded (Underfunded) Status as of December 31, $ (35,236) $ (96,890) $ 4,956 $ (81,232)

Amounts Recognized on the Registrant Subsidiaries' Balance Sheets as of December 31, 2013 and 2012

      Other Postretirement
    Pension Plans Benefit Plans
    December 31,
 APCo 2013 2012 2013 2012
    (in thousands)
 Deferred Charges and Other Noncurrent Assets -             
  Prepaid Benefit Costs $ - $ - $ 27,945 $ -
 Other Current Liabilities - Accrued Short-term            
  Benefit Liability   (34)   (34)   (2,970)   (2,836)
 Employee Benefits and Pension Obligations -            
  Accrued Long-term Benefit Liability   (35,202)   (96,856)   (20,019)   (78,396)
 Funded (Underfunded) Status $ (35,236) $ (96,890) $ 4,956 $ (81,232)

Amounts Included in AOCI and Regulatory Assets as of December 31, 2013 and 2012

 

     Other Postretirement
APCo Pension Plans Benefit Plans
   December 31,
   2013 2012 2013 2012
Components (in thousands)
Net Actuarial Loss $ 220,047 $ 303,483 $ 72,732 $ 167,173
Prior Service Cost (Credit)   720   918   (100,676)   (110,726)
              
Recorded as            
Regulatory Assets $ 217,937 $ 299,456 $ (25,473) $ 13,189
Deferred Income Taxes   991   1,732   (865)   15,140
Net of Tax AOCI   1,839   3,213   (1,606)   28,118

Components of the change in amounts included in AOCI and Regulatory Assets by Registrant Subsidiary during the years ended December 31, 2013 and 2012 are as follows:

 

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)
                 
Pension Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 15,599 $ 12,905 $ 13,577 $ (4,718) $ (3,373)
Amortization of Actuarial Loss   (20,339)   (17,569)   (30,439)   (8,206)   (8,330)
Amortization of Prior Service Credit (Cost)   (475)   (407)   (743)   948   793
Change for the Year Ended               
 December 31, 2012$ (5,215) $ (5,071) $ (17,605) $ (11,976) $ (10,910)
                 
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)
                 
Other Postretirement Benefit Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 3,084 $ 11,747 $ (1,170) $ 5,166 $ 11,341
Amortization of Actuarial Loss   (10,526)   (7,050)   (13,669)   (3,189)   (3,659)
Prior Service Credit  (80,528)   (78,851)   (101,384)   (35,971)   (47,309)
Amortization of Prior Service Credit   2,862   2,383   3,873   1,079   933
Amortization of Transition Obligation   (780)   (132)   (104)   -   -
Change for the Year Ended               
 December 31, 2012$ (85,888) $ (71,903) $ (112,454) $ (32,915) $ (38,694)

Pension and Other Postretirement Plans' Assets

 

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 APCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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 cash 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:

    Real Alternative Total
 APCo Estate Investments 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

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 APCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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%
                    
 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.

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 APCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 173,149 $ - $ - $ - $ 173,149  27.9%
  International   65,757   -   -   -   65,757  10.5%
  Real Estate Investment Trusts   11,986   -   -   -   11,986  1.9%
  Common Collective Trust -                  
   International   -   574   -   -   574  0.1%
 Subtotal - Equities   250,892   574   -   -   251,466  40.4%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   4,200   -   -   4,200  0.7%
  United States Government and                  
   Agency Securities   -   94,682   -   -   94,682  15.2%
  Corporate Debt   -   163,484   -   -   163,484  26.3%
  Foreign Debt   -   26,292   -   -   26,292  4.2%
  State and Local Government   -   5,821   -   -   5,821  0.9%
  Other - Asset Backed   -   4,714   -   -   4,714  0.8%
 Subtotal - Fixed Income   -   299,193   -   -   299,193  48.1%
                    
 Real Estate   -   -   29,063   -   29,063  4.7%
                    
 Alternative Investments   -   -   25,888   -   25,888  4.2%
 Securities Lending   -   10,633   -   -   10,633  1.7%
 Securities Lending Collateral (a)   -   -   -   (12,025)   (12,025)  (1.9)%
                    
 Cash and Cash Equivalents   -   16,646   -   -   16,646  2.7%
 Other - Pending Transactions and                  
  Accrued Income (b)   -   -   -   706   706  0.1%
                    
 Total $ 250,892 $ 327,046 $ 54,951 $ (11,319) $ 621,570  100.0%

(a)       Amounts in "Other" column primarily represent an obligation to repay cash 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:

 

    Corporate Real Alternative Total
 APCo Debt Estate Investments Level 3
    (in thousands)
 Balance as of January 1, 2012 $ 846 $ 21,666 $ 21,269 $ 43,781
 Actual Return on Plan Assets            
  Relating to Assets Still Held as of the Reporting Date   -   3,913   1,319   5,232
  Relating to Assets Sold During the Period   (298)   -   640   342
 Purchases and Sales   (548)   3,484   2,660   5,596
 Transfers into Level 3   -   -   -   -
 Transfers out of Level 3   -   -   -   -
 Balance as of December 31, 2012 $ - $ 29,063 $ 25,888 $ 54,951

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 APCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 72,063 $ - $ - $ - $ 72,063  26.9%
  International   86,158   -   -   -   86,158  32.2%
 Subtotal - Equities   158,221   -   -   -   158,221  59.1%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   12,388   -   -   12,388  4.6%
  United States Government and                  
   Agency Securities   -   14,036   -   -   14,036  5.2%
  Corporate Debt   -   26,437   -   -   26,437  9.9%
  Foreign Debt   -   4,469   -   -   4,469  1.7%
  State and Local Government   -   1,242   -   -   1,242  0.5%
  Other - Asset Backed   -   1,678   -   -   1,678  0.6%
 Subtotal - Fixed Income   -   60,250   -   -   60,250  22.5%
                    
 Trust Owned Life Insurance:                  
  International Equities   -   8,800   -   -   8,800  3.3%
  United States Bonds   -   27,762   -   -   27,762  10.3%
                    
 Cash and Cash Equivalents   10,598   1,947   -   -   12,545  4.7%
 Other - Pending Transactions and                  
  Accrued Income (a)   -   -   -   180   180  0.1%
                    
 Total $ 168,819 $ 98,759 $ - $ 180 $ 267,758  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 $ 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
                
Accumulated Benefit Obligation APCo I&M OPCo PSO SWEPCo
  (in thousands)
Qualified Pension Plan $ 708,476 $ 603,448 $ 1,048,796 $ 269,738 $ 273,860
Nonqualified Pension Plans   191   200   796   1,287   1,098
Total as of December 31, 2012 $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 274,958

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, 2013 and 2012 were as follows:

  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)
                 
  APCo I&M OPCo PSO SWEPCo
   (in thousands)
Projected Benefit Obligation$ 718,460 $ 618,973 $ 1,068,186 $ 279,685 $ 1,098
                 
Accumulated Benefit Obligation $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 1,098
Fair Value of Plan Assets   621,570   552,026   1,015,115   264,823   -
Underfunded Accumulated Benefit              
 Obligation as of December 31, 2012 $ (87,097) $ (51,622) $ (34,477) $ (6,202) $ (1,098)

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 2014:

     Other Postretirement
 Company Pension Plans Benefit Plans
   (in thousands)
 APCo $ 12,231 $ 3,222
 I&M   7,339   -
 OPCo   8,717   -
 PSO   3,530   -
 SWEPCo   1,296   -

The tables below reflect the total benefits expected to be paid from the plan or from the Registrant Subsidiary's assets. The payments include the participants' contributions to the plan for their share of the cost. In November 2012, changes to the retiree medical coverage were announced. Effective for retirements after December 2012, contributions to retiree medical coverage were capped reducing exposure to future medical cost inflation. Effective for employees hired after December 2013, retiree medical coverage will not be provided. The impact of the changes is reflected in the Benefit Plan Obligation tables as plan amendments. 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)
2014 $ 48,130 $ 37,708 $ 40,701 $ 22,353 $ 23,013
2015   48,537   38,835   40,772   22,786   23,830
2016   49,024   39,293   40,857   23,234   23,751
2017   49,432   40,929   40,655   22,859   23,929
2018   50,990   41,453   40,225   23,705   24,658
Years 2019 to 2023, in Total   248,890   218,392   196,692   108,884   116,545
                
Other Postretirement Benefit Plans:               
Benefit Payments APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 26,823 $ 16,665 $ 18,026 $ 7,737 $ 8,343
2015   27,438   17,533   18,368   8,114   8,709
2016   27,976   18,350   18,622   8,380   9,098
2017   28,234   18,794   18,708   8,522   9,417
2018   28,884   19,124   18,957   8,609   9,718
Years 2019 to 2023, in Total   144,245   101,425   95,926   45,916   52,406
                
Other Postretirement Benefit Plans:               
Medicare Subsidy Receipts APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 252 $ - $ - $ - $ -
2015   260   -   -   -   -
2016   268   -   -   -   -
2017   271   -   -   -   -
2018   272   -   -   -   -
Years 2019 to 2023, in Total   1,378   -   -   -   -

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, 2013, 2012 and 2011:

      Other Postretirement
 APCo Pension Plans Benefit Plans
    Years Ended December 31,
    2013 2012 2011 2013 2012 2011
    (in thousands)
 Service Cost $ 6,171 $ 7,565 $ 7,199 $ 2,566 $ 5,387 $ 4,983
 Interest Cost   27,662   30,211   32,293   13,454   18,462   19,468
 Expected Return on Plan Assets   (37,041)   (41,944)   (41,833)   (18,147)   (16,753)   (17,985)
 Amortization of Transition Obligation   -   -   -   -   780   1,167
 Amortization of Prior Service Cost (Credit)   198   475   917   (10,050)   (2,862)   (171)
 Amortization of Net Actuarial Loss   25,025   20,339   16,570   12,249   10,526   5,839
 Net Periodic Benefit Cost   22,015   16,646   15,146   72   15,540   13,301
 Capitalized Portion   (7,529)   (6,525)   (5,604)   (25)   (6,092)   (4,921)
 Net Periodic Benefit Cost Recognized in                  
  Expense $ 14,486 $ 10,121 $ 9,542 $ 47 $ 9,448 $ 8,380

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on each Registrant Subsidiary's balance sheet during 2014 are shown in the following tables:

 

   APCo I&M OPCo PSO SWEPCo
Pension Plan - Components (in thousands)
Net Actuarial Loss $ 16,971 $ 14,708 $ 13,398 $ 6,682 $ 6,932
Prior Service Cost   198   195   157   296   349
Total Estimated 2014 Amortization$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
Pension Plans -                
Expected to be Recorded as          
Regulatory Asset $ 17,075 $ 14,010 $ 13,555 $ 6,978 $ 7,281
Deferred Income Taxes   33   313   -   -   -
Net of Tax AOCI   61   580   -   -   -
Total$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
  APCo I&M OPCo PSO SWEPCo
Other Postretirement Benefit Plans -  (in thousands)
Components               
Net Actuarial Loss $ 4,339 $ 2,341 $ 2,406 $ 1,094 $ 1,223
Prior Service Credit   (10,050)   (9,421)   (6,922)   (4,290)   (5,156)
Total Estimated 2014 Amortization$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)
                 
Other Postretirement Benefit Plans - Expected to be Recorded as          
Regulatory Asset $ (3,344) $ (6,446) $ (4,516) $ (3,196) $ (2,485)
Deferred Income Taxes   (828)   (222)   -   -   (507)
Net of Tax AOCI   (1,539)   (412)   -   -   (941)
Total$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)

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 members 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, 2013, 2012 and 2011:

    Years Ended December 31,
 Company 2013 2012 2011
    (in thousands)
 APCo $ 7,366 $ 7,579 $ 7,432
 I&M   10,010   9,706   9,541
 OPCo   6,502   10,798   10,166
 PSO   3,784   3,732   3,626
 SWEPCo   4,970   4,890   4,438

UMWA Benefits

 

APCo and I&M provide UMWA pension, health and welfare benefits for certain unionized mining 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. APCo and I&M administer the health and welfare benefits and pay them from their 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 Seriously Endangered Status for the plan years ending June 30, 2013 and 2012, 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 2013, 2012 and 2011 were immaterial and represent less than 5% of the total contributions in the plan's latest annual report for the years ended June 30, 2013, 2012 and 2011. The contributions did not include a surcharge. There are no minimum contributions for future years.

 
Indiana Michigan Power Co [Member]
  
Benefit Plans

7. 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:

     Other Postretirement
  Pension Plans  Benefit Plans
Assumption 2013 2012  2013 2012
Discount Rate  4.70%  3.95%   4.70%  3.95%

   Pension Plans
 Assumption - Rate of Compensation Increase (a) 2013 2012
 APCo  4.60%  4.70%
 I&M  4.90%  5.00%
 OPCo  5.00%  5.00%
 PSO  4.90%  4.90%
 SWEPCo  4.85%  4.75%

(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.

 

For 2013, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 11.5% per year, with the average increase shown in the table above. The compensation increase rates reflect variations in each Registrant Subsidiary's population participating in the pension plan.

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 Subsidiary's benefit costs are shown in the following tables:

      Other Postretirement
    Pension Plans Benefit Plans
 Assumptions 2013 2012 2011 2013 2012 2011
 Discount Rate  3.95%  4.55%  5.05%  3.95%  4.75%  5.25%
 Expected Return on Plan Assets  6.50%  7.25%  7.75%  7.00%  7.25%  7.50%

   Pension Plans
 Assumption - Rate of Compensation Increase 2013 2012 2011
 APCo  4.70%  4.70%  4.65%
 I&M  5.00%  5.00%  4.90%
 OPCo  5.00%  5.00%  4.95%
 PSO  4.90%  4.90%  4.85%
 SWEPCo  4.75%  4.75%  4.70%

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 2013 2012
 Initial  6.75%  7.00%
 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:

 

  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 $ 1,267 $ 579 $ 1,060 $ 262 $ 304
  1% Decrease   (877)   (382)   (738)   (172)   (200)
                 
Effect on the Health Care Component of the                
 Accumulated Postretirement Benefit               
 Obligation:               
  1% Increase $ 18,179 $ 6,884 $ 7,077 $ 3,216 $ 3,597
  1% Decrease   (14,552)   (5,603)   (5,760)   (2,617)   (2,927)

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, 2013, 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, 2013 and 2012

 

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.

I&M   Other Postretirement
  Pension Plans Benefit Plans
  2013 2012 2013 2012
Change in Benefit Obligation (in thousands)
Benefit Obligation as of January 1, $ 618,973 $ 581,677 $ 218,553 $ 277,353
Service Cost   8,736   9,908   3,219   6,621
Interest Cost   24,100   26,245   8,221   12,785
Actuarial (Gain) Loss   (41,631)   44,475   (52,800)   13,638
Plan Amendment Prior Service Credit   -   -   -   (78,851)
Benefit Payments   (35,479)   (43,332)   (16,613)   (18,394)
Participant Contributions   -   -   4,745   4,226
Medicare Subsidy   -   -   1,172   1,175
Benefit Obligation as of December 31, $ 574,699 $ 618,973 $ 166,497 $ 218,553
             
Change in Fair Value of Plan Assets            
Fair Value of Plan Assets as of January 1, $ 552,026 $ 503,926 $ 194,128 $ 181,237
Actual Gain on Plan Assets   42,584   69,136   23,844   14,357
Company Contributions   12   22,296   110   12,702
Participant Contributions   -   -   4,745   4,226
Benefit Payments   (35,479)   (43,332)   (16,613)   (18,394)
Fair Value of Plan Assets as of December 31, $ 559,143 $ 552,026 $ 206,214 $ 194,128
             
Funded (Underfunded) Status as of December 31, $ (15,556) $ (66,947) $ 39,717 $ (24,425)

Amounts Recognized on the Registrant Subsidiaries' Balance Sheets as of December 31, 2013 and 2012

      Other Postretirement
    Pension Plans Benefit Plans
    December 31,
 I&M 2013 2012 2013 2012
    (in thousands)
 Deferred Charges and Other Noncurrent Assets -            
  Prepaid Benefit Costs $ - $ - $ 39,590 $ -
 Other Current Liabilities - Accrued Short-term            
  Benefit Liability   (43)   (15)   -   (290)
 Deferred Credits and Other Noncurrent Liabilities -            
  Accrued Long-term Benefit Liability   (15,513)   (66,932)   127   (24,135)
 Funded (Underfunded) Status $ (15,556) $ (66,947) $ 39,717 $ (24,425)

Amounts Included in AOCI and Regulatory Assets as of December 31, 2013 and 2012

 

     Other Postretirement
I&M Pension Plans Benefit Plans
   December 31,
   2013 2012 2013 2012
Components (in thousands)
Net Actuarial Loss $ 138,367 $ 211,443 $ 54,949 $ 125,935
Prior Service Cost (Credit)   705   900   (94,538)   (103,959)
              
Recorded as            
Regulatory Assets $ 134,560 $ 202,821 $ (34,428) $ 17,976
Deferred Income Taxes   1,579   3,332   (1,807)   1,400
Net of Tax AOCI   2,933   6,190   (3,354)   2,600

Components of the change in amounts included in AOCI and Regulatory Assets by Registrant Subsidiary during the years ended December 31, 2013 and 2012 are as follows:

 

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)
                 
Pension Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 15,599 $ 12,905 $ 13,577 $ (4,718) $ (3,373)
Amortization of Actuarial Loss   (20,339)   (17,569)   (30,439)   (8,206)   (8,330)
Amortization of Prior Service Credit (Cost)   (475)   (407)   (743)   948   793
Change for the Year Ended               
 December 31, 2012$ (5,215) $ (5,071) $ (17,605) $ (11,976) $ (10,910)
                 
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)
                 
Other Postretirement Benefit Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 3,084 $ 11,747 $ (1,170) $ 5,166 $ 11,341
Amortization of Actuarial Loss   (10,526)   (7,050)   (13,669)   (3,189)   (3,659)
Prior Service Credit  (80,528)   (78,851)   (101,384)   (35,971)   (47,309)
Amortization of Prior Service Credit   2,862   2,383   3,873   1,079   933
Amortization of Transition Obligation   (780)   (132)   (104)   -   -
Change for the Year Ended               
 December 31, 2012$ (85,888) $ (71,903) $ (112,454) $ (32,915) $ (38,694)

Pension and Other Postretirement Plans' Assets

 

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 I&M                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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 cash 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:

    Real Alternative Total
 I&M Estate Investments 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

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 I&M                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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%
                    
 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.

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 I&M                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 153,776 $ - $ - $ - $ 153,776  27.9%
  International   58,400   -   -   -   58,400  10.5%
  Real Estate Investment Trusts   10,645   -   -   -   10,645  1.9%
  Common Collective Trust -                  
   International   -   510   -   -   510  0.1%
 Subtotal - Equities   222,821   510   -   -   223,331  40.4%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   3,730   -   -   3,730  0.7%
  United States Government and                  
   Agency Securities   -   84,089   -   -   84,089  15.2%
  Corporate Debt   -   145,193   -   -   145,193  26.3%
  Foreign Debt   -   23,350   -   -   23,350  4.2%
  State and Local Government   -   5,170   -   -   5,170  0.9%
  Other - Asset Backed   -   4,187   -   -   4,187  0.8%
 Subtotal - Fixed Income   -   265,719   -   -   265,719  48.1%
                    
 Real Estate   -   -   25,811   -   25,811  4.7%
                    
 Alternative Investments   -   -   22,992   -   22,992  4.2%
 Securities Lending   -   9,443   -   -   9,443  1.7%
 Securities Lending Collateral (a)   -   -   -   (10,680)   (10,680)  (1.9)%
                    
 Cash and Cash Equivalents   -   14,783   -   -   14,783  2.7%
 Other - Pending Transactions and                  
  Accrued Income (b)   -   -   -   627   627  0.1%
                    
 Total $ 222,821 $ 290,455 $ 48,803 $ (10,053) $ 552,026  100.0%

(a)       Amounts in "Other" column primarily represent an obligation to repay cash 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:

 

    Corporate Real Alternative Total
 I&M Debt Estate Investments Level 3
    (in thousands)
 Balance as of January 1, 2012 $ 747 $ 19,129 $ 18,779 $ 38,655
 Actual Return on Plan Assets            
  Relating to Assets Still Held as of the Reporting Date   -   3,535   1,203   4,738
  Relating to Assets Sold During the Period   (263)   -   584   321
 Purchases and Sales   (484)   3,147   2,426   5,089
 Transfers into Level 3   -   -   -   -
 Transfers out of Level 3   -   -   -   -
 Balance as of December 31, 2012 $ - $ 25,811 $ 22,992 $ 48,803

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 I&M                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 52,245 $ - $ - $ - $ 52,245  26.9%
  International   62,466   -   -   -   62,466  32.2%
 Subtotal - Equities   114,711   -   -   -   114,711  59.1%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   8,982   -   -   8,982  4.6%
  United States Government and                  
   Agency Securities   -   10,176   -   -   10,176  5.2%
  Corporate Debt   -   19,167   -   -   19,167  9.9%
  Foreign Debt   -   3,240   -   -   3,240  1.7%
  State and Local Government   -   901   -   -   901  0.5%
  Other - Asset Backed   -   1,217   -   -   1,217  0.6%
 Subtotal - Fixed Income   -   43,683   -   -   43,683  22.5%
                    
 Trust Owned Life Insurance:                  
  International Equities   -   6,380   -   -   6,380  3.3%
  United States Bonds   -   20,128   -   -   20,128  10.3%
                    
 Cash and Cash Equivalents   7,684   1,412   -   -   9,096  4.7%
 Other - Pending Transactions and                  
  Accrued Income (a)   -   -   -   130   130  0.1%
                    
 Total $ 122,395 $ 71,603 $ - $ 130 $ 194,128  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 $ 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
                
Accumulated Benefit Obligation APCo I&M OPCo PSO SWEPCo
  (in thousands)
Qualified Pension Plan $ 708,476 $ 603,448 $ 1,048,796 $ 269,738 $ 273,860
Nonqualified Pension Plans   191   200   796   1,287   1,098
Total as of December 31, 2012 $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 274,958

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, 2013 and 2012 were as follows:

  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)
                 
  APCo I&M OPCo PSO SWEPCo
   (in thousands)
Projected Benefit Obligation$ 718,460 $ 618,973 $ 1,068,186 $ 279,685 $ 1,098
                 
Accumulated Benefit Obligation $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 1,098
Fair Value of Plan Assets   621,570   552,026   1,015,115   264,823   -
Underfunded Accumulated Benefit              
 Obligation as of December 31, 2012 $ (87,097) $ (51,622) $ (34,477) $ (6,202) $ (1,098)

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 2014:

     Other Postretirement
 Company Pension Plans Benefit Plans
   (in thousands)
 APCo $ 12,231 $ 3,222
 I&M   7,339   -
 OPCo   8,717   -
 PSO   3,530   -
 SWEPCo   1,296   -

The tables below reflect the total benefits expected to be paid from the plan or from the Registrant Subsidiary's assets. The payments include the participants' contributions to the plan for their share of the cost. In November 2012, changes to the retiree medical coverage were announced. Effective for retirements after December 2012, contributions to retiree medical coverage were capped reducing exposure to future medical cost inflation. Effective for employees hired after December 2013, retiree medical coverage will not be provided. The impact of the changes is reflected in the Benefit Plan Obligation tables as plan amendments. 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)
2014 $ 48,130 $ 37,708 $ 40,701 $ 22,353 $ 23,013
2015   48,537   38,835   40,772   22,786   23,830
2016   49,024   39,293   40,857   23,234   23,751
2017   49,432   40,929   40,655   22,859   23,929
2018   50,990   41,453   40,225   23,705   24,658
Years 2019 to 2023, in Total   248,890   218,392   196,692   108,884   116,545
                
Other Postretirement Benefit Plans:               
Benefit Payments APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 26,823 $ 16,665 $ 18,026 $ 7,737 $ 8,343
2015   27,438   17,533   18,368   8,114   8,709
2016   27,976   18,350   18,622   8,380   9,098
2017   28,234   18,794   18,708   8,522   9,417
2018   28,884   19,124   18,957   8,609   9,718
Years 2019 to 2023, in Total   144,245   101,425   95,926   45,916   52,406
                
Other Postretirement Benefit Plans:               
Medicare Subsidy Receipts APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 252 $ - $ - $ - $ -
2015   260   -   -   -   -
2016   268   -   -   -   -
2017   271   -   -   -   -
2018   272   -   -   -   -
Years 2019 to 2023, in Total   1,378   -   -   -   -

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, 2013, 2012 and 2011:

      Other Postretirement
 I&M Pension Plans Benefit Plans
    Years Ended December 31,
    2013 2012 2011 2013 2012 2011
    (in thousands)
 Service Cost $ 8,736 $ 9,908 $ 9,447 $ 3,219 $ 6,621 $ 6,119
 Interest Cost   24,100   26,245   27,726   8,221   12,785   13,610
 Expected Return on Plan Assets   (32,826)   (37,566)   (36,856)   (13,183)   (12,847)   (13,886)
 Amortization of Transition Obligation   -   -   -   -   132   188
 Amortization of Prior Service Cost (Credit)   195   407   744   (9,421)   (2,383)   (237)
 Amortization of Net Actuarial Loss   21,688   17,569   14,144   7,526   7,050   3,566
 Net Periodic Benefit Cost (Credit)   21,893   16,563   15,205   (3,638)   11,358   9,360
 Capitalized Portion   (4,576)   (3,114)   (3,163)   760   (2,135)   (1,947)
 Net Periodic Benefit Cost (Credit)                   
  Recognized in Expense $ 17,317 $ 13,449 $ 12,042 $ (2,878) $ 9,223 $ 7,413

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on each Registrant Subsidiary's balance sheet during 2014 are shown in the following tables:

 

   APCo I&M OPCo PSO SWEPCo
Pension Plan - Components (in thousands)
Net Actuarial Loss $ 16,971 $ 14,708 $ 13,398 $ 6,682 $ 6,932
Prior Service Cost   198   195   157   296   349
Total Estimated 2014 Amortization$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
Pension Plans -                
Expected to be Recorded as          
Regulatory Asset $ 17,075 $ 14,010 $ 13,555 $ 6,978 $ 7,281
Deferred Income Taxes   33   313   -   -   -
Net of Tax AOCI   61   580   -   -   -
Total$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
  APCo I&M OPCo PSO SWEPCo
Other Postretirement Benefit Plans -  (in thousands)
Components               
Net Actuarial Loss $ 4,339 $ 2,341 $ 2,406 $ 1,094 $ 1,223
Prior Service Credit   (10,050)   (9,421)   (6,922)   (4,290)   (5,156)
Total Estimated 2014 Amortization$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)
                 
Other Postretirement Benefit Plans - Expected to be Recorded as          
Regulatory Asset $ (3,344) $ (6,446) $ (4,516) $ (3,196) $ (2,485)
Deferred Income Taxes   (828)   (222)   -   -   (507)
Net of Tax AOCI   (1,539)   (412)   -   -   (941)
Total$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)

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 members 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, 2013, 2012 and 2011:

    Years Ended December 31,
 Company 2013 2012 2011
    (in thousands)
 APCo $ 7,366 $ 7,579 $ 7,432
 I&M   10,010   9,706   9,541
 OPCo   6,502   10,798   10,166
 PSO   3,784   3,732   3,626
 SWEPCo   4,970   4,890   4,438

UMWA Benefits

 

APCo and I&M provide UMWA pension, health and welfare benefits for certain unionized mining 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. APCo and I&M administer the health and welfare benefits and pay them from their 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 Seriously Endangered Status for the plan years ending June 30, 2013 and 2012, 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 2013, 2012 and 2011 were immaterial and represent less than 5% of the total contributions in the plan's latest annual report for the years ended June 30, 2013, 2012 and 2011. The contributions did not include a surcharge. There are no minimum contributions for future years.

 
Ohio Power Co [Member]
  
Benefit Plans

7. 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:

     Other Postretirement
  Pension Plans  Benefit Plans
Assumption 2013 2012  2013 2012
Discount Rate  4.70%  3.95%   4.70%  3.95%

   Pension Plans
 Assumption - Rate of Compensation Increase (a) 2013 2012
 APCo  4.60%  4.70%
 I&M  4.90%  5.00%
 OPCo  5.00%  5.00%
 PSO  4.90%  4.90%
 SWEPCo  4.85%  4.75%

(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.

 

For 2013, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 11.5% per year, with the average increase shown in the table above. The compensation increase rates reflect variations in each Registrant Subsidiary's population participating in the pension plan.

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 Subsidiary's benefit costs are shown in the following tables:

      Other Postretirement
    Pension Plans Benefit Plans
 Assumptions 2013 2012 2011 2013 2012 2011
 Discount Rate  3.95%  4.55%  5.05%  3.95%  4.75%  5.25%
 Expected Return on Plan Assets  6.50%  7.25%  7.75%  7.00%  7.25%  7.50%

   Pension Plans
 Assumption - Rate of Compensation Increase 2013 2012 2011
 APCo  4.70%  4.70%  4.65%
 I&M  5.00%  5.00%  4.90%
 OPCo  5.00%  5.00%  4.95%
 PSO  4.90%  4.90%  4.85%
 SWEPCo  4.75%  4.75%  4.70%

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 2013 2012
 Initial  6.75%  7.00%
 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:

 

  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 $ 1,267 $ 579 $ 1,060 $ 262 $ 304
  1% Decrease   (877)   (382)   (738)   (172)   (200)
                 
Effect on the Health Care Component of the                
 Accumulated Postretirement Benefit               
 Obligation:               
  1% Increase $ 18,179 $ 6,884 $ 7,077 $ 3,216 $ 3,597
  1% Decrease   (14,552)   (5,603)   (5,760)   (2,617)   (2,927)

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, 2013, 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, 2013 and 2012

 

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.

OPCo   Other Postretirement
  Pension Plans Benefit Plans
  2013 2012 2013 2012
Change in Benefit Obligation (in thousands)
Benefit Obligation as of January 1, $ 1,068,186 $ 1,020,890 $ 466,290 $ 519,892
Transfer of OPCo Generation Benefit Obligation   (499,725)   -   (250,843)   -
Service Cost   5,285   11,003   2,882   8,748
Interest Cost   21,939   45,194   9,494   24,189
Actuarial (Gain) Loss   (34,373)   63,571   (44,149)   42,013
Plan Amendment Prior Service Credit   -   -   -   (101,384)
Benefit Payments   (37,669)   (72,472)   (18,844)   (38,269)
Participant Contributions   -   -   5,199   8,545
Medicare Subsidy   -   -   1,135   2,556
Benefit Obligation as of December 31, $ 523,643 $ 1,068,186 $ 171,164 $ 466,290
             
Change in Fair Value of Plan Assets            
Fair Value of Plan Assets as of January 1, $ 1,015,115 $ 925,939 $ 366,301 $ 311,836
Transfer of OPCo Generation Plan Assets   (506,076)   -   (170,650)   -
Actual Gain on Plan Assets   30,264   118,395   29,576   65,125
Company Contributions   -   43,253   412   19,064
Participant Contributions   -   -   5,199   8,545
Benefit Payments   (37,669)   (72,472)   (18,844)   (38,269)
Fair Value of Plan Assets as of December 31, $ 501,634 $ 1,015,115 $ 211,994 $ 366,301
             
Funded (Underfunded) Status as of December 31, $ (22,009) $ (53,071) $ 40,830 $ (99,989)

Amounts Recognized on the Registrant Subsidiaries' Balance Sheets as of December 31, 2013 and 2012

      Other Postretirement
    Pension Plans Benefit Plans
    December 31,
 OPCo 2013 2012 2013 2012
    (in thousands)
 Deferred Charges and Other Noncurrent Assets -            
  Prepaid Benefit Costs $ - $ - $ 39,496 $ -
 Other Current Liabilities - Accrued Short-term            
  Benefit Liability   (1)   (64)   -   (986)
 Employee Benefits and Pension Obligations -            
  Accrued Long-term Benefit Liability   (22,008)   (53,007)   1,334   (99,003)
 Funded (Underfunded) Status $ (22,009) $ (53,071) $ 40,830 $ (99,989)

Amounts Included in AOCI and Regulatory Assets as of December 31, 2013 and 2012

 

     Other Postretirement
OPCo Pension Plans Benefit Plans
   December 31,
   2013 2012 2013 2012
Components (in thousands)
Net Actuarial Loss $ 227,668 $ 500,318 $ 29,804 $ 216,350
Prior Service Cost (Credit)   550   1,282   (69,300)   (142,253)
              
Recorded as            
Regulatory Assets $ 228,218 $ 289,931 $ (39,496) $ 19,754
Deferred Income Taxes   -   74,084   -   19,020
Net of Tax AOCI   -   137,585   -   35,323

Components of the change in amounts included in AOCI and Regulatory Assets by Registrant Subsidiary during the years ended December 31, 2013 and 2012 are as follows:

 

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)
                 
Pension Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 15,599 $ 12,905 $ 13,577 $ (4,718) $ (3,373)
Amortization of Actuarial Loss   (20,339)   (17,569)   (30,439)   (8,206)   (8,330)
Amortization of Prior Service Credit (Cost)   (475)   (407)   (743)   948   793
Change for the Year Ended               
 December 31, 2012$ (5,215) $ (5,071) $ (17,605) $ (11,976) $ (10,910)
                 
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)
                 
Other Postretirement Benefit Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 3,084 $ 11,747 $ (1,170) $ 5,166 $ 11,341
Amortization of Actuarial Loss   (10,526)   (7,050)   (13,669)   (3,189)   (3,659)
Prior Service Credit  (80,528)   (78,851)   (101,384)   (35,971)   (47,309)
Amortization of Prior Service Credit   2,862   2,383   3,873   1,079   933
Amortization of Transition Obligation   (780)   (132)   (104)   -   -
Change for the Year Ended               
 December 31, 2012$ (85,888) $ (71,903) $ (112,454) $ (32,915) $ (38,694)

Pension and Other Postretirement Plans' Assets

 

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 OPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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 cash 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:

    Real Alternative Total
 OPCo Estate Investments 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

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 OPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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%
                    
 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.

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 OPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 282,777 $ - $ - $ - $ 282,777  27.9%
  International   107,391   -   -   -   107,391  10.5%
  Real Estate Investment Trusts   19,576   -   -   -   19,576  1.9%
  Common Collective Trust -                  
   International   -   938   -   -   938  0.1%
 Subtotal - Equities   409,744   938   -   -   410,682  40.4%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   6,858   -   -   6,858  0.7%
  United States Government and                  
   Agency Securities   -   154,630   -   -   154,630  15.2%
  Corporate Debt   -   266,994   -   -   266,994  26.3%
  Foreign Debt   -   42,938   -   -   42,938  4.2%
  State and Local Government   -   9,506   -   -   9,506  0.9%
  Other - Asset Backed   -   7,699   -   -   7,699  0.8%
 Subtotal - Fixed Income   -   488,625   -   -   488,625  48.1%
                    
 Real Estate   -   -   47,464   -   47,464  4.7%
                    
 Alternative Investments   -   -   42,279   -   42,279  4.2%
 Securities Lending   -   17,365   -   -   17,365  1.7%
 Securities Lending Collateral (a)   -   -   -   (19,639)   (19,639)  (1.9)%
                    
 Cash and Cash Equivalents   -   27,185   -   -   27,185  2.7%
 Other - Pending Transactions and                  
  Accrued Income (b)   -   -   -   1,154   1,154  0.1%
                    
 Total $ 409,744 $ 534,113 $ 89,743 $ (18,485) $ 1,015,115  100.0%

(a)       Amounts in "Other" column primarily represent an obligation to repay cash 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:

 

    Corporate Real Alternative Total
 OPCo Debt Estate Investments Level 3
    (in thousands)
 Balance as of January 1, 2012 $ 1,372 $ 35,148 $ 34,505 $ 71,025
 Actual Return on Plan Assets            
  Relating to Assets Still Held as of the Reporting Date   -   6,515   2,220   8,735
  Relating to Assets Sold During the Period   (483)   -   1,077   594
 Purchases and Sales   (889)   5,801   4,477   9,389
 Transfers into Level 3   -   -   -   -
 Transfers out of Level 3   -   -   -   -
 Balance as of December 31, 2012 $ - $ 47,464 $ 42,279 $ 89,743

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 OPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 98,583 $ - $ - $ - $ 98,583  26.9%
  International   117,867   -   -   -   117,867  32.2%
 Subtotal - Equities   216,450   -   -   -   216,450  59.1%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   16,947   -   -   16,947  4.6%
  United States Government and                  
   Agency Securities   -   19,202   -   -   19,202  5.2%
  Corporate Debt   -   36,166   -   -   36,166  9.9%
  Foreign Debt   -   6,113   -   -   6,113  1.7%
  State and Local Government   -   1,700   -   -   1,700  0.5%
  Other - Asset Backed   -   2,296   -   -   2,296  0.6%
 Subtotal - Fixed Income   -   82,424   -   -   82,424  22.5%
                    
 Trust Owned Life Insurance:                  
  International Equities   -   12,038   -   -   12,038  3.3%
  United States Bonds   -   37,980   -   -   37,980  10.3%
                    
 Cash and Cash Equivalents   14,499   2,664   -   -   17,163  4.7%
 Other - Pending Transactions and                  
  Accrued Income (a)   -   -   -   246   246  0.1%
                    
 Total $ 230,949 $ 135,106 $ - $ 246 $ 366,301  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 $ 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
                
Accumulated Benefit Obligation APCo I&M OPCo PSO SWEPCo
  (in thousands)
Qualified Pension Plan $ 708,476 $ 603,448 $ 1,048,796 $ 269,738 $ 273,860
Nonqualified Pension Plans   191   200   796   1,287   1,098
Total as of December 31, 2012 $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 274,958

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, 2013 and 2012 were as follows:

  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)
                 
  APCo I&M OPCo PSO SWEPCo
   (in thousands)
Projected Benefit Obligation$ 718,460 $ 618,973 $ 1,068,186 $ 279,685 $ 1,098
                 
Accumulated Benefit Obligation $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 1,098
Fair Value of Plan Assets   621,570   552,026   1,015,115   264,823   -
Underfunded Accumulated Benefit              
 Obligation as of December 31, 2012 $ (87,097) $ (51,622) $ (34,477) $ (6,202) $ (1,098)

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 2014:

     Other Postretirement
 Company Pension Plans Benefit Plans
   (in thousands)
 APCo $ 12,231 $ 3,222
 I&M   7,339   -
 OPCo   8,717   -
 PSO   3,530   -
 SWEPCo   1,296   -

The tables below reflect the total benefits expected to be paid from the plan or from the Registrant Subsidiary's assets. The payments include the participants' contributions to the plan for their share of the cost. In November 2012, changes to the retiree medical coverage were announced. Effective for retirements after December 2012, contributions to retiree medical coverage were capped reducing exposure to future medical cost inflation. Effective for employees hired after December 2013, retiree medical coverage will not be provided. The impact of the changes is reflected in the Benefit Plan Obligation tables as plan amendments. 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)
2014 $ 48,130 $ 37,708 $ 40,701 $ 22,353 $ 23,013
2015   48,537   38,835   40,772   22,786   23,830
2016   49,024   39,293   40,857   23,234   23,751
2017   49,432   40,929   40,655   22,859   23,929
2018   50,990   41,453   40,225   23,705   24,658
Years 2019 to 2023, in Total   248,890   218,392   196,692   108,884   116,545
                
Other Postretirement Benefit Plans:               
Benefit Payments APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 26,823 $ 16,665 $ 18,026 $ 7,737 $ 8,343
2015   27,438   17,533   18,368   8,114   8,709
2016   27,976   18,350   18,622   8,380   9,098
2017   28,234   18,794   18,708   8,522   9,417
2018   28,884   19,124   18,957   8,609   9,718
Years 2019 to 2023, in Total   144,245   101,425   95,926   45,916   52,406
                
Other Postretirement Benefit Plans:               
Medicare Subsidy Receipts APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 252 $ - $ - $ - $ -
2015   260   -   -   -   -
2016   268   -   -   -   -
2017   271   -   -   -   -
2018   272   -   -   -   -
Years 2019 to 2023, in Total   1,378   -   -   -   -

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, 2013, 2012 and 2011:

      Other Postretirement
 OPCo Pension Plans Benefit Plans
    Years Ended December 31,
    2013 2012 2011 2013 2012 2011
    (in thousands)
 Service Cost $ 5,285 $ 11,003 $ 10,230 $ 2,882 $ 8,748 $ 7,827
 Interest Cost   21,939   45,194   48,350   9,494   24,189   25,497
 Expected Return on Plan Assets   (29,919)   (68,401)   (65,464)   (13,468)   (22,555)   (24,514)
 Curtailment   -   -   -   -   -   605
 Amortization of Transition Obligation   -   -   -   -   104   150
 Amortization of Prior Service Cost (Credit)   157   743   1,474   (6,962)   (3,873)   (212)
 Amortization of Net Actuarial Loss   19,833   30,439   24,828   8,633   13,669   7,298
 Net Periodic Benefit Cost   17,295   18,978   19,418   579   20,282   16,651
 Capitalized Portion   (6,192)   (7,060)   (6,932)   (207)   (7,545)   (5,944)
 Net Periodic Benefit Cost Recognized in                  
  Expense $ 11,103 $ 11,918 $ 12,486 $ 372 $ 12,737 $ 10,707

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on each Registrant Subsidiary's balance sheet during 2014 are shown in the following tables:

 

   APCo I&M OPCo PSO SWEPCo
Pension Plan - Components (in thousands)
Net Actuarial Loss $ 16,971 $ 14,708 $ 13,398 $ 6,682 $ 6,932
Prior Service Cost   198   195   157   296   349
Total Estimated 2014 Amortization$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
Pension Plans -                
Expected to be Recorded as          
Regulatory Asset $ 17,075 $ 14,010 $ 13,555 $ 6,978 $ 7,281
Deferred Income Taxes   33   313   -   -   -
Net of Tax AOCI   61   580   -   -   -
Total$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
  APCo I&M OPCo PSO SWEPCo
Other Postretirement Benefit Plans -  (in thousands)
Components               
Net Actuarial Loss $ 4,339 $ 2,341 $ 2,406 $ 1,094 $ 1,223
Prior Service Credit   (10,050)   (9,421)   (6,922)   (4,290)   (5,156)
Total Estimated 2014 Amortization$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)
                 
Other Postretirement Benefit Plans - Expected to be Recorded as          
Regulatory Asset $ (3,344) $ (6,446) $ (4,516) $ (3,196) $ (2,485)
Deferred Income Taxes   (828)   (222)   -   -   (507)
Net of Tax AOCI   (1,539)   (412)   -   -   (941)
Total$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)

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 members 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, 2013, 2012 and 2011:

    Years Ended December 31,
 Company 2013 2012 2011
    (in thousands)
 APCo $ 7,366 $ 7,579 $ 7,432
 I&M   10,010   9,706   9,541
 OPCo   6,502   10,798   10,166
 PSO   3,784   3,732   3,626
 SWEPCo   4,970   4,890   4,438
Public Service Co of Oklahoma [Member]
  
Benefit Plans

7. 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:

     Other Postretirement
  Pension Plans  Benefit Plans
Assumption 2013 2012  2013 2012
Discount Rate  4.70%  3.95%   4.70%  3.95%

   Pension Plans
 Assumption - Rate of Compensation Increase (a) 2013 2012
 APCo  4.60%  4.70%
 I&M  4.90%  5.00%
 OPCo  5.00%  5.00%
 PSO  4.90%  4.90%
 SWEPCo  4.85%  4.75%

(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.

 

For 2013, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 11.5% per year, with the average increase shown in the table above. The compensation increase rates reflect variations in each Registrant Subsidiary's population participating in the pension plan.

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 Subsidiary's benefit costs are shown in the following tables:

      Other Postretirement
    Pension Plans Benefit Plans
 Assumptions 2013 2012 2011 2013 2012 2011
 Discount Rate  3.95%  4.55%  5.05%  3.95%  4.75%  5.25%
 Expected Return on Plan Assets  6.50%  7.25%  7.75%  7.00%  7.25%  7.50%

   Pension Plans
 Assumption - Rate of Compensation Increase 2013 2012 2011
 APCo  4.70%  4.70%  4.65%
 I&M  5.00%  5.00%  4.90%
 OPCo  5.00%  5.00%  4.95%
 PSO  4.90%  4.90%  4.85%
 SWEPCo  4.75%  4.75%  4.70%

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 2013 2012
 Initial  6.75%  7.00%
 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:

 

  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 $ 1,267 $ 579 $ 1,060 $ 262 $ 304
  1% Decrease   (877)   (382)   (738)   (172)   (200)
                 
Effect on the Health Care Component of the                
 Accumulated Postretirement Benefit               
 Obligation:               
  1% Increase $ 18,179 $ 6,884 $ 7,077 $ 3,216 $ 3,597
  1% Decrease   (14,552)   (5,603)   (5,760)   (2,617)   (2,927)

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, 2013, 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, 2013 and 2012

 

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.

PSO   Other Postretirement
  Pension Plans Benefit Plans
  2013 2012 2013 2012
Change in Benefit Obligation (in thousands)
Benefit Obligation as of January 1, $ 279,685 $ 277,448 $ 99,680 $ 125,164
Service Cost   5,562   5,951   1,372   2,836
Interest Cost   10,993   12,301   3,793   5,797
Actuarial (Gain) Loss   (15,381)   6,128   (22,070)   7,511
Plan Amendment Prior Service Credit   -   -   -   (35,971)
Benefit Payments   (20,149)   (22,143)   (7,741)   (8,363)
Participant Contributions   -   -   2,229   2,024
Medicare Subsidy   -   -   516   682
Benefit Obligation as of December 31, $ 260,710 $ 279,685 $ 77,779 $ 99,680
             
Change in Fair Value of Plan Assets            
Fair Value of Plan Assets as of January 1, $ 264,823 $ 245,769 $ 90,521 $ 83,090
Actual Gain on Plan Assets   19,892   28,861   11,324   8,089
Company Contributions   31   12,336   -   5,681
Participant Contributions   -   -   2,229   2,024
Benefit Payments   (20,149)   (22,143)   (7,741)   (8,363)
Fair Value of Plan Assets as of December 31, $ 264,597 $ 264,823 $ 96,333 $ 90,521
             
Funded (Underfunded) Status as of December 31, $ 3,887 $ (14,862) $ 18,554 $ (9,159)

Amounts Recognized on the Registrant Subsidiaries' Balance Sheets as of December 31, 2013 and 2012

      Other Postretirement
    Pension Plans Benefit Plans
    December 31,
 PSO 2013 2012 2013 2012
    (in thousands)
 Employee Benefits and Pension Assets -             
  Prepaid Benefit Costs $ 5,280 $ - $ 17,349 $ -
 Other Current Liabilities - Accrued Short-term            
  Benefit Liability   (107)   (89)   -   -
 Employee Benefits and Pension Obligations -            
  Accrued Long-term Benefit Liability   (1,286)   (14,773)   1,205   (9,159)
 Funded (Underfunded) Status $ 3,887 $ (14,862) $ 18,554 $ (9,159)

Amounts Included in AOCI and Regulatory Assets as of December 31, 2013 and 2012

 

     Other Postretirement
PSO Pension Plans Benefit Plans
   December 31,
   2013 2012 2013 2012
Components (in thousands)
Net Actuarial Loss $ 93,688 $ 123,132 $ 25,712 $ 56,493
Prior Service Cost (Credit)   832   1,129   (43,061)   (47,350)
              
Recorded as            
Regulatory Assets $ 94,520 $ 124,261 $ (17,349) $ 9,143

Components of the change in amounts included in AOCI and Regulatory Assets by Registrant Subsidiary during the years ended December 31, 2013 and 2012 are as follows:

 

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)
                 
Pension Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 15,599 $ 12,905 $ 13,577 $ (4,718) $ (3,373)
Amortization of Actuarial Loss   (20,339)   (17,569)   (30,439)   (8,206)   (8,330)
Amortization of Prior Service Credit (Cost)   (475)   (407)   (743)   948   793
Change for the Year Ended               
 December 31, 2012$ (5,215) $ (5,071) $ (17,605) $ (11,976) $ (10,910)
                 
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)
                 
Other Postretirement Benefit Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 3,084 $ 11,747 $ (1,170) $ 5,166 $ 11,341
Amortization of Actuarial Loss   (10,526)   (7,050)   (13,669)   (3,189)   (3,659)
Prior Service Credit  (80,528)   (78,851)   (101,384)   (35,971)   (47,309)
Amortization of Prior Service Credit   2,862   2,383   3,873   1,079   933
Amortization of Transition Obligation   (780)   (132)   (104)   -   -
Change for the Year Ended               
 December 31, 2012$ (85,888) $ (71,903) $ (112,454) $ (32,915) $ (38,694)

Pension and Other Postretirement Plans' Assets

 

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 PSO                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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 cash 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:

    Real Alternative Total
 PSO Estate Investments 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

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 PSO                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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%
                    
 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.

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 PSO                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 73,770 $ - $ - $ - $ 73,770  27.9%
  International   28,016   -   -   -   28,016  10.5%
  Real Estate Investment Trusts   5,107   -   -   -   5,107  1.9%
  Common Collective Trust -                  
   International   -   245   -   -   245  0.1%
 Subtotal - Equities   106,893   245   -   -   107,138  40.4%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   1,789   -   -   1,789  0.7%
  United States Government and                  
   Agency Securities   -   40,340   -   -   40,340  15.2%
  Corporate Debt   -   69,653   -   -   69,653  26.3%
  Foreign Debt   -   11,202   -   -   11,202  4.2%
  State and Local Government   -   2,480   -   -   2,480  0.9%
  Other - Asset Backed   -   2,009   -   -   2,009  0.8%
 Subtotal - Fixed Income   -   127,473   -   -   127,473  48.1%
                    
 Real Estate   -   -   12,382   -   12,382  4.7%
                    
 Alternative Investments   -   -   11,030   -   11,030  4.2%
 Securities Lending   -   4,530   -   -   4,530  1.7%
 Securities Lending Collateral (a)   -   -   -   (5,123)   (5,123)  (1.9)%
                    
 Cash and Cash Equivalents   -   7,092   -   -   7,092  2.7%
 Other - Pending Transactions and                  
  Accrued Income (b)   -   -   -   301   301  0.1%
                    
 Total $ 106,893 $ 139,340 $ 23,412 $ (4,822) $ 264,823  100.0%

(a)       Amounts in "Other" column primarily represent an obligation to repay cash 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:

 

    Corporate Real Alternative Total
 PSO Debt Estate Investments Level 3
    (in thousands)
 Balance as of January 1, 2012 $ 364 $ 9,329 $ 9,159 $ 18,852
 Actual Return on Plan Assets            
  Relating to Assets Still Held as of the Reporting Date   -   1,615   534   2,149
  Relating to Assets Sold During the Period   (128)   -   259   131
 Purchases and Sales   (236)   1,438   1,078   2,280
 Transfers into Level 3   -   -   -   -
 Transfers out of Level 3   -   -   -   -
 Balance as of December 31, 2012 $ - $ 12,382 $ 11,030 $ 23,412

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 PSO                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 24,362 $ - $ - $ - $ 24,362  26.9%
  International   29,128   -   -   -   29,128  32.2%
 Subtotal - Equities   53,490   -   -   -   53,490  59.1%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   4,188   -   -   4,188  4.6%
  United States Government and                  
   Agency Securities   -   4,745   -   -   4,745  5.2%
  Corporate Debt   -   8,937   -   -   8,937  9.9%
  Foreign Debt   -   1,511   -   -   1,511  1.7%
  State and Local Government   -   420   -   -   420  0.5%
  Other - Asset Backed   -   567   -   -   567  0.6%
 Subtotal - Fixed Income   -   20,368   -   -   20,368  22.5%
                    
 Trust Owned Life Insurance:                  
  International Equities   -   2,975   -   -   2,975  3.3%
  United States Bonds   -   9,386   -   -   9,386  10.3%
                    
 Cash and Cash Equivalents   3,583   658   -   -   4,241  4.7%
 Other - Pending Transactions and                  
  Accrued Income (a)   -   -   -   61   61  0.1%
                    
 Total $ 57,073 $ 33,387 $ - $ 61 $ 90,521  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 $ 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
                
Accumulated Benefit Obligation APCo I&M OPCo PSO SWEPCo
  (in thousands)
Qualified Pension Plan $ 708,476 $ 603,448 $ 1,048,796 $ 269,738 $ 273,860
Nonqualified Pension Plans   191   200   796   1,287   1,098
Total as of December 31, 2012 $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 274,958

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, 2013 and 2012 were as follows:

  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)
                 
  APCo I&M OPCo PSO SWEPCo
   (in thousands)
Projected Benefit Obligation$ 718,460 $ 618,973 $ 1,068,186 $ 279,685 $ 1,098
                 
Accumulated Benefit Obligation $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 1,098
Fair Value of Plan Assets   621,570   552,026   1,015,115   264,823   -
Underfunded Accumulated Benefit              
 Obligation as of December 31, 2012 $ (87,097) $ (51,622) $ (34,477) $ (6,202) $ (1,098)

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 2014:

     Other Postretirement
 Company Pension Plans Benefit Plans
   (in thousands)
 APCo $ 12,231 $ 3,222
 I&M   7,339   -
 OPCo   8,717   -
 PSO   3,530   -
 SWEPCo   1,296   -

The tables below reflect the total benefits expected to be paid from the plan or from the Registrant Subsidiary's assets. The payments include the participants' contributions to the plan for their share of the cost. In November 2012, changes to the retiree medical coverage were announced. Effective for retirements after December 2012, contributions to retiree medical coverage were capped reducing exposure to future medical cost inflation. Effective for employees hired after December 2013, retiree medical coverage will not be provided. The impact of the changes is reflected in the Benefit Plan Obligation tables as plan amendments. 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)
2014 $ 48,130 $ 37,708 $ 40,701 $ 22,353 $ 23,013
2015   48,537   38,835   40,772   22,786   23,830
2016   49,024   39,293   40,857   23,234   23,751
2017   49,432   40,929   40,655   22,859   23,929
2018   50,990   41,453   40,225   23,705   24,658
Years 2019 to 2023, in Total   248,890   218,392   196,692   108,884   116,545
                
Other Postretirement Benefit Plans:               
Benefit Payments APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 26,823 $ 16,665 $ 18,026 $ 7,737 $ 8,343
2015   27,438   17,533   18,368   8,114   8,709
2016   27,976   18,350   18,622   8,380   9,098
2017   28,234   18,794   18,708   8,522   9,417
2018   28,884   19,124   18,957   8,609   9,718
Years 2019 to 2023, in Total   144,245   101,425   95,926   45,916   52,406
                
Other Postretirement Benefit Plans:               
Medicare Subsidy Receipts APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 252 $ - $ - $ - $ -
2015   260   -   -   -   -
2016   268   -   -   -   -
2017   271   -   -   -   -
2018   272   -   -   -   -
Years 2019 to 2023, in Total   1,378   -   -   -   -

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, 2013, 2012 and 2011:

      Other Postretirement
 PSO Pension Plans Benefit Plans
    Years Ended December 31,
    2013 2012 2011 2013 2012 2011
    (in thousands)
 Service Cost $ 5,562 $ 5,951 $ 5,760 $ 1,372 $ 2,836 $ 2,621
 Interest Cost   10,993   12,301   13,285   3,793   5,797   6,046
 Expected Return on Plan Assets   (15,675)   (18,015)   (17,464)   (6,089)   (5,922)   (6,264)
 Amortization of Prior Service Cost (Credit)   297   (948)   (950)   (4,289)   (1,079)   (75)
 Amortization of Net Actuarial Loss   9,845   8,206   6,757   3,476   3,189   1,553
 Net Periodic Benefit Cost (Credit)   11,022   7,495   7,388   (1,737)   4,821   3,881
 Capitalized Portion   (3,384)   (2,533)   (2,379)   533   (1,629)   (1,249)
 Net Periodic Benefit Cost (Credit)                   
  Recognized in Expense $ 7,638 $ 4,962 $ 5,009 $ (1,204) $ 3,192 $ 2,632

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on each Registrant Subsidiary's balance sheet during 2014 are shown in the following tables:

 

   APCo I&M OPCo PSO SWEPCo
Pension Plan - Components (in thousands)
Net Actuarial Loss $ 16,971 $ 14,708 $ 13,398 $ 6,682 $ 6,932
Prior Service Cost   198   195   157   296   349
Total Estimated 2014 Amortization$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
Pension Plans -                
Expected to be Recorded as          
Regulatory Asset $ 17,075 $ 14,010 $ 13,555 $ 6,978 $ 7,281
Deferred Income Taxes   33   313   -   -   -
Net of Tax AOCI   61   580   -   -   -
Total$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
  APCo I&M OPCo PSO SWEPCo
Other Postretirement Benefit Plans -  (in thousands)
Components               
Net Actuarial Loss $ 4,339 $ 2,341 $ 2,406 $ 1,094 $ 1,223
Prior Service Credit   (10,050)   (9,421)   (6,922)   (4,290)   (5,156)
Total Estimated 2014 Amortization$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)
                 
Other Postretirement Benefit Plans - Expected to be Recorded as          
Regulatory Asset $ (3,344) $ (6,446) $ (4,516) $ (3,196) $ (2,485)
Deferred Income Taxes   (828)   (222)   -   -   (507)
Net of Tax AOCI   (1,539)   (412)   -   -   (941)
Total$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)

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 members 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, 2013, 2012 and 2011:

    Years Ended December 31,
 Company 2013 2012 2011
    (in thousands)
 APCo $ 7,366 $ 7,579 $ 7,432
 I&M   10,010   9,706   9,541
 OPCo   6,502   10,798   10,166
 PSO   3,784   3,732   3,626
 SWEPCo   4,970   4,890   4,438
Southwestern Electric Power Co [Member]
  
Benefit Plans

7. 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:

     Other Postretirement
  Pension Plans  Benefit Plans
Assumption 2013 2012  2013 2012
Discount Rate  4.70%  3.95%   4.70%  3.95%

   Pension Plans
 Assumption - Rate of Compensation Increase (a) 2013 2012
 APCo  4.60%  4.70%
 I&M  4.90%  5.00%
 OPCo  5.00%  5.00%
 PSO  4.90%  4.90%
 SWEPCo  4.85%  4.75%

(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.

 

For 2013, the rate of compensation increase assumed varies with the age of the employee, ranging from 3.5% per year to 11.5% per year, with the average increase shown in the table above. The compensation increase rates reflect variations in each Registrant Subsidiary's population participating in the pension plan.

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 Subsidiary's benefit costs are shown in the following tables:

      Other Postretirement
    Pension Plans Benefit Plans
 Assumptions 2013 2012 2011 2013 2012 2011
 Discount Rate  3.95%  4.55%  5.05%  3.95%  4.75%  5.25%
 Expected Return on Plan Assets  6.50%  7.25%  7.75%  7.00%  7.25%  7.50%

   Pension Plans
 Assumption - Rate of Compensation Increase 2013 2012 2011
 APCo  4.70%  4.70%  4.65%
 I&M  5.00%  5.00%  4.90%
 OPCo  5.00%  5.00%  4.95%
 PSO  4.90%  4.90%  4.85%
 SWEPCo  4.75%  4.75%  4.70%

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 2013 2012
 Initial  6.75%  7.00%
 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:

 

  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 $ 1,267 $ 579 $ 1,060 $ 262 $ 304
  1% Decrease   (877)   (382)   (738)   (172)   (200)
                 
Effect on the Health Care Component of the                
 Accumulated Postretirement Benefit               
 Obligation:               
  1% Increase $ 18,179 $ 6,884 $ 7,077 $ 3,216 $ 3,597
  1% Decrease   (14,552)   (5,603)   (5,760)   (2,617)   (2,927)

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, 2013, 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, 2013 and 2012

 

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.

SWEPCo   Other Postretirement
  Pension Plans Benefit Plans
  2013 2012 2013 2012
Change in Benefit Obligation (in thousands)
Benefit Obligation as of January 1, $ 285,560 $ 277,594 $ 109,948 $ 145,160
Service Cost   7,011   7,099   1,693   3,324
Interest Cost   11,454   12,537   4,301   6,673
Actuarial (Gain) Loss   (12,818)   9,752   (23,852)   7,885
Plan Amendment Prior Service Credit   -   -   -   (47,309)
Benefit Payments   (20,643)   (21,422)   (8,057)   (8,610)
Participant Contributions   -   -   2,410   2,189
Medicare Subsidy   -   -   554   636
Benefit Obligation as of December 31, $ 270,564 $ 285,560 $ 86,997 $ 109,948
             
Change in Fair Value of Plan Assets            
Fair Value of Plan Assets as of January 1, $ 279,699 $ 255,861 $ 99,846 $ 96,364
Actual Gain on Plan Assets   19,823   31,992   13,551   3,143
Company Contributions   67   13,268   -   6,760
Participant Contributions   -   -   2,410   2,189
Benefit Payments   (20,643)   (21,422)   (8,057)   (8,610)
Fair Value of Plan Assets as of December 31, $ 278,946 $ 279,699 $ 107,750 $ 99,846
             
Funded (Underfunded) Status as of December 31, $ 8,382 $ (5,861) $ 20,753 $ (10,102)

Amounts Recognized on the Registrant Subsidiaries' Balance Sheets as of December 31, 2013 and 2012

      Other Postretirement
    Pension Plans Benefit Plans
    December 31,
 SWEPCo 2013 2012 2013 2012
    (in thousands)
 Deferred Charges and Other Noncurrent Assets -            
  Prepaid Benefit Costs $ 9,506 $ - $ 19,210 $ -
 Other Current Liabilities - Accrued Short-term            
  Benefit Liability   (79)   (80)   -   -
 Employee Benefits and Pension Obligations -            
  Accrued Long-term Benefit Liability   (1,045)   (5,781)   1,543   (10,102)
 Funded (Underfunded) Status $ 8,382 $ (5,861) $ 20,753 $ (10,102)

Amounts Included in AOCI and Regulatory Assets as of December 31, 2013 and 2012

 

     Other Postretirement
SWEPCo Pension Plans Benefit Plans
   December 31,
   2013 2012 2013 2012
Components (in thousands)
Net Actuarial Loss $ 95,492 $ 121,839 $ 32,772 $ 67,223
Prior Service Cost (Credit)   1,004   1,353   (51,982)   (57,138)
              
Recorded as            
Regulatory Assets $ 96,496 $ 123,192 $ (11,836) $ 6,528
Deferred Income Taxes   -   -   (2,580)   1,246
Net of Tax AOCI   -   -   (4,794)   2,311

Components of the change in amounts included in AOCI and Regulatory Assets by Registrant Subsidiary during the years ended December 31, 2013 and 2012 are as follows:

 

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)
                 
Pension Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 15,599 $ 12,905 $ 13,577 $ (4,718) $ (3,373)
Amortization of Actuarial Loss   (20,339)   (17,569)   (30,439)   (8,206)   (8,330)
Amortization of Prior Service Credit (Cost)   (475)   (407)   (743)   948   793
Change for the Year Ended               
 December 31, 2012$ (5,215) $ (5,071) $ (17,605) $ (11,976) $ (10,910)
                 
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)
                 
Other Postretirement Benefit Plans - Components APCo I&M OPCo PSO SWEPCo
   (in thousands)
Actuarial (Gain) Loss During the Year $ 3,084 $ 11,747 $ (1,170) $ 5,166 $ 11,341
Amortization of Actuarial Loss   (10,526)   (7,050)   (13,669)   (3,189)   (3,659)
Prior Service Credit  (80,528)   (78,851)   (101,384)   (35,971)   (47,309)
Amortization of Prior Service Credit   2,862   2,383   3,873   1,079   933
Amortization of Transition Obligation   (780)   (132)   (104)   -   -
Change for the Year Ended               
 December 31, 2012$ (85,888) $ (71,903) $ (112,454) $ (32,915) $ (38,694)

Pension and Other Postretirement Plans' Assets

 

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 SWEPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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 cash 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:

    Real Alternative Total
 SWEPCo Estate Investments 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

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2013:

 SWEPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total 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%
                    
 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.

The following tables present the classification of pension plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 SWEPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 77,915 $ - $ - $ - $ 77,915  27.9%
  International   29,590   -   -   -   29,590  10.5%
  Real Estate Investment Trusts   5,394   -   -   -   5,394  1.9%
  Common Collective Trust -                  
   International   -   258   -   -   258  0.1%
 Subtotal - Equities   112,899   258   -   -   113,157  40.4%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   1,890   -   -   1,890  0.7%
  United States Government and                  
   Agency Securities   -   42,606   -   -   42,606  15.2%
  Corporate Debt   -   73,566   -   -   73,566  26.3%
  Foreign Debt   -   11,831   -   -   11,831  4.2%
  State and Local Government   -   2,619   -   -   2,619  0.9%
  Other - Asset Backed   -   2,121   -   -   2,121  0.8%
 Subtotal - Fixed Income   -   134,633   -   -   134,633  48.1%
                    
 Real Estate   -   -   13,078   -   13,078  4.7%
                    
 Alternative Investments   -   -   11,649   -   11,649  4.2%
 Securities Lending   -   4,785   -   -   4,785  1.7%
 Securities Lending Collateral (a)   -   -   -   (5,411)   (5,411)  (1.9)%
                    
 Cash and Cash Equivalents   -   7,490   -   -   7,490  2.7%
 Other - Pending Transactions and                  
  Accrued Income (b)   -   -   -   318   318  0.1%
                    
 Total $ 112,899 $ 147,166 $ 24,727 $ (5,093) $ 279,699  100.0%
                       

(a)       Amounts in "Other" column primarily represent an obligation to repay cash 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:

 

    Corporate Real Alternative Total
 SWEPCo Debt Estate Investments Level 3
    (in thousands)
 Balance as of January 1, 2012 $ 379 $ 9,712 $ 9,535 $ 19,626
 Actual Return on Plan Assets            
  Relating to Assets Still Held as of the Reporting Date   -   1,780   603   2,383
  Relating to Assets Sold During the Period   (134)   -   293   159
 Purchases and Sales   (245)   1,586   1,218   2,559
 Transfers into Level 3   -   -   -   -
 Transfers out of Level 3   -   -   -   -
 Balance as of December 31, 2012 $ - $ 13,078 $ 11,649 $ 24,727

The following tables present the classification of OPEB plan assets within the fair value hierarchy by Registrant Subsidiary as of December 31, 2012:

 SWEPCo                  
                     Year End
 Asset Class Level 1 Level 2 Level 3 Other Total Allocation
   (in thousands)
 Equities:                  
  Domestic $ 26,874 $ - $ - $ - $ 26,874  26.9%
  International   32,128   -   -   -   32,128  32.2%
 Subtotal - Equities   59,002   -   -   -   59,002  59.1%
                    
 Fixed Income:                  
  Common Collective Trust - Debt   -   4,619   -   -   4,619  4.6%
  United States Government and                  
   Agency Securities   -   5,234   -   -   5,234  5.2%
  Corporate Debt   -   9,858   -   -   9,858  9.9%
  Foreign Debt   -   1,666   -   -   1,666  1.7%
  State and Local Government   -   463   -   -   463  0.5%
  Other - Asset Backed   -   626   -   -   626  0.6%
 Subtotal - Fixed Income   -   22,466   -   -   22,466  22.5%
                    
 Trust Owned Life Insurance:                  
  International Equities   -   3,281   -   -   3,281  3.3%
  United States Bonds   -   10,352   -   -   10,352  10.3%
                    
 Cash and Cash Equivalents   3,952   726   -   -   4,678  4.7%
 Other - Pending Transactions and                  
  Accrued Income (a)   -   -   -   67   67  0.1%
                    
 Total $ 62,954 $ 36,825 $ - $ 67 $ 99,846  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 $ 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
                
Accumulated Benefit Obligation APCo I&M OPCo PSO SWEPCo
  (in thousands)
Qualified Pension Plan $ 708,476 $ 603,448 $ 1,048,796 $ 269,738 $ 273,860
Nonqualified Pension Plans   191   200   796   1,287   1,098
Total as of December 31, 2012 $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 274,958

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, 2013 and 2012 were as follows:

  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)
                 
  APCo I&M OPCo PSO SWEPCo
   (in thousands)
Projected Benefit Obligation$ 718,460 $ 618,973 $ 1,068,186 $ 279,685 $ 1,098
                 
Accumulated Benefit Obligation $ 708,667 $ 603,648 $ 1,049,592 $ 271,025 $ 1,098
Fair Value of Plan Assets   621,570   552,026   1,015,115   264,823   -
Underfunded Accumulated Benefit              
 Obligation as of December 31, 2012 $ (87,097) $ (51,622) $ (34,477) $ (6,202) $ (1,098)

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 2014:

     Other Postretirement
 Company Pension Plans Benefit Plans
   (in thousands)
 APCo $ 12,231 $ 3,222
 I&M   7,339   -
 OPCo   8,717   -
 PSO   3,530   -
 SWEPCo   1,296   -

The tables below reflect the total benefits expected to be paid from the plan or from the Registrant Subsidiary's assets. The payments include the participants' contributions to the plan for their share of the cost. In November 2012, changes to the retiree medical coverage were announced. Effective for retirements after December 2012, contributions to retiree medical coverage were capped reducing exposure to future medical cost inflation. Effective for employees hired after December 2013, retiree medical coverage will not be provided. The impact of the changes is reflected in the Benefit Plan Obligation tables as plan amendments. 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)
2014 $ 48,130 $ 37,708 $ 40,701 $ 22,353 $ 23,013
2015   48,537   38,835   40,772   22,786   23,830
2016   49,024   39,293   40,857   23,234   23,751
2017   49,432   40,929   40,655   22,859   23,929
2018   50,990   41,453   40,225   23,705   24,658
Years 2019 to 2023, in Total   248,890   218,392   196,692   108,884   116,545
                
Other Postretirement Benefit Plans:               
Benefit Payments APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 26,823 $ 16,665 $ 18,026 $ 7,737 $ 8,343
2015   27,438   17,533   18,368   8,114   8,709
2016   27,976   18,350   18,622   8,380   9,098
2017   28,234   18,794   18,708   8,522   9,417
2018   28,884   19,124   18,957   8,609   9,718
Years 2019 to 2023, in Total   144,245   101,425   95,926   45,916   52,406
                
Other Postretirement Benefit Plans:               
Medicare Subsidy Receipts APCo I&M OPCo PSO SWEPCo
                
  (in thousands)
2014 $ 252 $ - $ - $ - $ -
2015   260   -   -   -   -
2016   268   -   -   -   -
2017   271   -   -   -   -
2018   272   -   -   -   -
Years 2019 to 2023, in Total   1,378   -   -   -   -

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, 2013, 2012 and 2011:

      Other Postretirement
 SWEPCo Pension Plans Benefit Plans
    Years Ended December 31,
    2013 2012 2011 2013 2012 2011
    (in thousands)
 Service Cost $ 7,011 $ 7,099 $ 6,573 $ 1,693 $ 3,324 $ 3,029
 Interest Cost   11,454   12,537   13,331   4,301   6,673   6,969
 Expected Return on Plan Assets   (16,509)   (18,866)   (18,380)   (6,881)   (6,795)   (7,200)
 Amortization of Prior Service Cost (Credit)   349   (793)   (795)   (5,156)   (933)   258
 Amortization of Net Actuarial Loss   10,214   8,330   6,759   3,928   3,659   1,785
 Net Periodic Benefit Cost (Credit)   12,519   8,307   7,488   (2,115)   5,928   4,841
 Capitalized Portion   (3,518)   (2,924)   (2,636)   594   (2,087)   (1,704)
 Net Periodic Benefit Cost (Credit)                  
   Recognized in Expense $ 9,001 $ 5,383 $ 4,852 $ (1,521) $ 3,841 $ 3,137

Estimated amounts expected to be amortized to net periodic benefit costs (credits) and the impact on each Registrant Subsidiary's balance sheet during 2014 are shown in the following tables:

 

   APCo I&M OPCo PSO SWEPCo
Pension Plan - Components (in thousands)
Net Actuarial Loss $ 16,971 $ 14,708 $ 13,398 $ 6,682 $ 6,932
Prior Service Cost   198   195   157   296   349
Total Estimated 2014 Amortization$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
Pension Plans -                
Expected to be Recorded as          
Regulatory Asset $ 17,075 $ 14,010 $ 13,555 $ 6,978 $ 7,281
Deferred Income Taxes   33   313   -   -   -
Net of Tax AOCI   61   580   -   -   -
Total$ 17,169 $ 14,903 $ 13,555 $ 6,978 $ 7,281
                 
  APCo I&M OPCo PSO SWEPCo
Other Postretirement Benefit Plans -  (in thousands)
Components               
Net Actuarial Loss $ 4,339 $ 2,341 $ 2,406 $ 1,094 $ 1,223
Prior Service Credit   (10,050)   (9,421)   (6,922)   (4,290)   (5,156)
Total Estimated 2014 Amortization$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)
                 
Other Postretirement Benefit Plans - Expected to be Recorded as          
Regulatory Asset $ (3,344) $ (6,446) $ (4,516) $ (3,196) $ (2,485)
Deferred Income Taxes   (828)   (222)   -   -   (507)
Net of Tax AOCI   (1,539)   (412)   -   -   (941)
Total$ (5,711) $ (7,080) $ (4,516) $ (3,196) $ (3,933)

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 members 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, 2013, 2012 and 2011:

    Years Ended December 31,
 Company 2013 2012 2011
    (in thousands)
 APCo $ 7,366 $ 7,579 $ 7,432
 I&M   10,010   9,706   9,541
 OPCo   6,502   10,798   10,166
 PSO   3,784   3,732   3,626
 SWEPCo   4,970   4,890   4,438