12. INCOME TAXES

The details of our consolidated income taxes before extraordinary item as reported are as follows:

		Years Ended December 31,
		2013		2012		2011
		(in millions)
Federal:
	Current	$	(45)	$	(52)	$	20
	Deferred		676		698		786
Total Federal			631		646		806

State and Local:
	Current		29		35		37
	Deferred		24		(77)		(25)
Total State and Local			53		(42)		12

Income Tax Expense		$	684	$	604	$	818

The following is a reconciliation of our consolidated difference between the amount of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

		Years Ended December 31,
		2013			2012			2011
		(in millions)
Net Income		$	1,484		$	1,262		$	1,949
Extraordinary Item, Net of Tax of $112 million in 2011			-			-			(373)
Income Before Extraordinary Item			1,484			1,262			1,576
Income Tax Expense			684			604			818
Pretax Income		$	2,168		$	1,866		$	2,394

Income Taxes on Pretax Income at Statutory Rate (35%)		$	759		$	653		$	838
Increase (Decrease) in Income Taxes resulting from the following items:
	Depreciation		47			39			41
	Investment Tax Credits, Net		(14)			(14)			(15)
	Energy Production Credits		-			-			(18)
	State and Local Income Taxes, Net		29			(33)			(22)
	Removal Costs		(21)			(18)			(20)
	AFUDC		(31)			(39)			(42)
	Valuation Allowance		5			6			86
	U.K. Windfall Tax		(80)			15			-
	Other		(10)			(5)			(30)
Income Tax Expense		$	684		$	604		$	818

Effective Income Tax Rate			31.5	%		32.4	%		34.2	%

The following table shows elements of the net deferred tax liability and significant temporary differences:

	December 31,
	2013		2012
	(in millions)
Deferred Tax Assets	$	2,900	$	2,900
Deferred Tax Liabilities		(13,088)		(12,098)
Net Deferred Tax Liabilities	$	(10,188)	$	(9,198)

Property Related Temporary Differences	$	(7,508)	$	(6,752)
Amounts Due from Customers for Future Federal Income Taxes		(273)		(289)
Deferred State Income Taxes		(765)		(683)
Securitized Assets		(870)		(780)
Regulatory Assets		(609)		(781)
Deferred Income Taxes on Other Comprehensive Loss		66		184
Accrued Nuclear Decommissioning		(554)		(475)
Net Operating Loss Carryforward		233		194
Tax Credit Carryforward		109		104
Valuation Allowance		(97)		(92)
All Other, Net		80		172
Net Deferred Tax Liabilities	$	(10,188)	$	(9,198)

AEP System Tax Allocation Agreement

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

Federal and State Income Tax Audit Status

We are no longer subject to U.S. federal examination for years before 2011. We completed the examination of the years 2007 and 2008 in April 2011 and settled all outstanding issues on appeal for the years 2001 through 2006 in October 2011. The settlements did not materially impact net income, cash flows or financial condition. The IRS examination of years 2009 and 2010 started in October 2011 and was completed in the second quarter of 2013. Although the outcome of tax audits is uncertain, in management's opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, we accrue interest on these uncertain tax positions. We are not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

We, along with our subsidiaries, file income tax returns in various state, local and foreign jurisdictions. These taxing authorities routinely examine our tax returns and we are currently under examination in several state and local jurisdictions. However, it is possible that we have filed tax returns with positions that may be challenged by these tax authorities. We believe that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and the ultimate resolution of these audits will not materially impact net income. We are no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2009.

Net Income Tax Operating Loss Carryforward

In 2012 and 2011, we recognized federal net income tax operating losses of $366 million and $226 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book-versus-tax temporary differences. We also had state net income tax operating loss carryforwards as indicated in the table below.

	State Net Income
	Tax Operating
	Loss		Year of
State	Carryforward		Expiration
	(in millions)
Indiana	$	50	2033
Louisiana		428	2028
Oklahoma		241	2033
Tennessee		9	2026
Virginia		301	2031
West Virginia		725	2032

As a result, we recognized deferred federal, state and local income tax benefits in 2012 and 2011. As of December 31, 2013, we have $156 million of unrealized federal net operating loss carryforward tax benefits. We anticipate future taxable income will be sufficient to realize the remaining net income tax operating loss tax benefits before the federal carryforward expires after 2032. We also anticipate future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

At the end of 2013 and 2012, we had $121 million of uncertain tax positions netted against the federal net operating loss carryforward tax benefits.

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2012, 2011 and 2009, along with lower federal and state taxable income in 2010, resulted in unused federal and state income tax credits. As of December 31, 2013, we have total federal tax credit carryforwards of $108 million and total state tax credit carryforwards of $98 million, not all of which are subject to an expiration date. If these credits are not utilized, the federal general business tax credits of $74 million will expire in the years 2028 through 2032 and the state coal tax credits of $29 million will expire in the years 2014 through 2022.

We anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused. We do not anticipate state taxable income will be sufficient in future periods to realize the tax benefits of all state income tax credits before they expire and we have provided a valuation allowance accordingly.

Valuation Allowance

We assess past results and future operations to estimate and evaluate available positive and negative evidence to determine whether sufficient future taxable income will be generated to use existing deferred tax assets. A significant piece of objective negative information evaluated was the net income tax operating losses sustained in 2012, 2011 and 2009. The positive evidence we considered is the history of positive pretax income and the fact that the tax losses resulted from temporary differences that will reverse in future periods. On the basis of the evaluation of all available positive and negative evidence, as of December 31, 2013, a valuation allowance of $41 million for state tax credits, net of federal tax, and $56 million for an unrealized capital loss has been recorded in order to recognize only the portion of the deferred tax assets that, more likely than not, will be realized. The amount of the deferred tax assets realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are materially impacted.

For a discussion of the tax implications of the unrealized capital loss resulting from our settlement with BOA and Enron, see “Enron Bankruptcy” section of Note 7.

Uncertain Tax Positions

In May 2013, the U.S. Supreme Court decided that the U.K. Windfall Tax imposed upon U.K. electric companies privatized between 1984 and 1996 is a creditable tax for U.S. federal income tax purposes. We filed protective claims asserting the creditability of the tax, dependent upon the outcome of the case. As a result of the favorable U.S. Supreme Court decision, we recognized a tax benefit of $80 million, plus $43 million of pretax interest income in the second quarter of 2013. The tax benefit and interest income resulted in an increase in net income of $108 million, but did not result in the receipt of cash in 2013.

We recognize interest accruals related to uncertain tax positions in interest income or expense, as applicable, and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following table shows amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2013		2012		2011
	(in millions)
Interest Expense	$	1	$	11	$	8
Interest Income		51		-		22
Reversal of Prior Period Interest Expense		-		1		13

The following table shows balances for amounts accrued for the receipt of interest and the payment of interest and penalties:

The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2013		2012		2011
	(in millions)
Balance as of January 1,	$	267	$	168	$	219
Increase - Tax Positions Taken During a Prior Period		-		23		51
Decrease - Tax Positions Taken During a Prior Period		(94)		(16)		(43)
Increase - Tax Positions Taken During the Current Year		2		121		10
Decrease - Tax Positions Taken During the Current Year		-		-		-
Decrease - Settlements with Taxing Authorities		-		(25)		(31)
Decrease - Lapse of the Applicable Statute of Limitations		-		(4)		(38)
Balance as of December 31,	$	175	$	267	$	168

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $87 million, $149 million and $111 million for 2013, 2012 and 2011, respectively. We believe there will be no significant net increase or decrease in unrecognized tax benefits within 12 months of the reporting date.

Federal Tax Legislation

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013. Included in the 2012 Act was a one-year extension of 50% bonus depreciation. The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011. The enacted provisions will not materially impact net income or financial condition but did have a favorable impact on cash flows in 2013.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014. In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry. The impact of these final regulations is not material to net income, cash flows or financial condition.

State Tax Legislation

Legislation was passed by the state of Indiana in May 2011 enacting a phased reduction in corporate income tax rate from 8.5% to 6.5%. The 8.5% Indiana corporate income tax rate will be reduced 0.5% each year beginning after June 30, 2012 with the final reduction occurring in years beginning after June 30, 2015.

In May 2011, Michigan repealed its Business Tax regime and replaced it with a traditional corporate net income tax rate of 6%, effective January 1, 2012.

During the third quarter of 2013, it was determined that the state of West Virginia had achieved certain minimum levels of shortfall reserve funds. As a result, the West Virginia corporate income tax rate will be reduced from 7.0% to 6.5% in 2014. The enacted provisions will not materially impact net income, cash flows or financial condition.

Income Taxes

11. INCOME TAXES

The details of the Registrant Subsidiaries' income taxes as reported are as follows:

Year Ended December 31, 2013		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	58,441	$	(49,067)	$	92,625	$	7,689	$	(10,866)
	Deferred		75,714		129,109		134,463		53,788		81,888
	Deferred Investment Tax Credits		(1,220)		(4,931)		(1,418)		4,408		(1,561)
Income Tax Expense		$	132,935	$	75,111	$	225,670	$	65,885	$	69,461

Year Ended December 31, 2012		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	28,307	$	(9,221)	$	100,447	$	18,634	$	(214,353)
	Deferred		138,460		53,067		45,685		48,916		260,761
	Deferred Investment Tax Credits		(1,240)		(4,502)		(1,849)		(856)		(550)
Income Tax Expense		$	165,527	$	39,344	$	144,283	$	66,694	$	45,858

Year Ended December 31, 2011		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	(15,136)	$	(86,471)	$	96,893	$	6,904	$	40,727
	Deferred		107,565		141,014		119,184		61,581		16,726
	Deferred Investment Tax Credits		(2,569)		(2,783)		(2,380)		(856)		(550)
Income Tax Expense		$	89,860	$	51,760	$	213,697	$	67,629	$	56,903

Shown below for each Registrant Subsidiary is a reconciliation of the difference between the amounts of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

APCo		Years Ended December 31,
		2013			2012			2011
		(in thousands)
Net Income		$	193,211		$	257,503		$	162,758
Income Tax Expense			132,935			165,527			89,860
Pretax Income		$	326,146		$	423,030		$	252,618

Income Taxes on Pretax Income at Statutory Rate (35%)		$	114,151		$	148,061		$	88,416
Increase (Decrease) in Income Taxes Resulting from the Following Items:
	Depreciation		20,286			20,424			17,923
	Investment Tax Credits, Net		(1,220)			(1,240)			(2,569)
	State and Local Income Taxes, Net		2,707			3,175			(35,532)
	Removal Costs		(6,454)			(6,641)			(4,447)
	AFUDC		(1,420)			(1,145)			(5,314)
	Medicare Subsidy		-			382			4,908
	Valuation Allowance		5,062			5,674			30,541
	Other		(177)			(3,163)			(4,066)
Income Tax Expense		$	132,935		$	165,527		$	89,860

Effective Income Tax Rate			40.8	%		39.1	%		35.6	%

The following tables show elements of the net deferred tax liability and significant temporary differences for each Registrant Subsidiary:

APCo	December 31,
	2013		2012
	(in thousands)
Deferred Tax Assets	$	548,966	$	526,665
Deferred Tax Liabilities		(2,788,306)		(2,467,063)
Net Deferred Tax Liabilities	$	(2,239,340)	$	(1,940,398)

Property Related Temporary Differences	$	(1,725,853)	$	(1,416,426)
Amounts Due from Customers for Future Federal Income Taxes		(94,775)		(100,520)
Deferred State Income Taxes		(246,247)		(230,490)
Regulatory Assets		(104,824)		(161,274)
Securitized Assets		(130,834)		-
Deferred Income Taxes on Other Comprehensive Loss		(1,589)		16,099
Deferred Fuel and Purchased Power		24,646		(115,900)
Net Operating Loss Carryforward		45,177		69,580
Tax Credit Carryforward		21,940		13,199
Valuation Allowance		(41,277)		(36,215)
All Other, Net		14,296		21,549
Net Deferred Tax Liabilities	$	(2,239,340)	$	(1,940,398)

AEP System Tax Allocation Agreement

The Registrant Subsidiaries join in the filing of a consolidated federal income tax return with their affiliates in the AEP System. The allocation of the AEP System's current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense. The tax benefit of the Parent is allocated to its subsidiaries with taxable income. With the exception of the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

The Registrant Subsidiaries are no longer subject to U.S. federal examination for years before 2011. The Registrant Subsidiaries completed the examination of the years 2007 and 2008 in April 2011 and settled all outstanding issues on appeal for the years 2001 through 2006 in October 2011. The settlements did not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition. The IRS examination of years 2009 and 2010 started in October 2011 and was completed in the second quarter of 2013. Although the outcome of tax audits is uncertain, in management's opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrant Subsidiaries accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

The Registrant Subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine their tax returns and the Registrant Subsidiaries are currently under examination in several state and local jurisdictions. However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities. Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income. The Registrant Subsidiaries are no longer subject to state or local income tax examinations by tax authorities for years before 2009.

Net Income Tax Operating Loss Carryforward

In 2011, APCo and I&M recognized federal net income tax operating losses of $313 million and $123 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book versus tax temporary differences. In 2012, SWEPCo recognized a federal net income tax operating loss of $858 million driven primarily by bonus depreciation. APCo, I&M, OPCo, PSO and SWEPCo also had state net income tax operating loss carryforwards as indicated in the table below.

		State Net Income
		Tax Operating
		Loss		Year of
Company	State	Carryforward		Expiration
		(in thousands)
APCo	Tennessee	$	8,810		2026
APCo	Virginia		300,637		2031
APCo	West Virginia		489,860		2032
I&M	Indiana		50,425		2033
OPCo	West Virginia		235,636		2032
PSO	Oklahoma		110,615		2033
SWEPCo	Louisiana		422,946		2028
SWEPCo	Oklahoma		2,835		2033

As a result, APCo, I&M, OPCo, PSO and SWEPCo recognized deferred federal and/or state and local income tax benefits in 2011 and/or 2012 and/or 2013. At the end of 2013, APCo, I&M and SWEPCo have $12 million, $13 million and $167 million, respectively, of unrealized federal net operating loss carryforward. Management anticipates future taxable income will be sufficient to realize the remaining net income tax operating loss tax benefits before the federal carryforward expires after 2032. Management also anticipates future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2011 and 2009 along with lower federal and state taxable income in 2010 resulted in unused federal and state income tax credits. As of December 31, 2013, the Registrant Subsidiaries have federal tax credit carryforwards and APCo and PSO have state tax credit carryforwards as indicated in the table below. If these credits are not utilized, federal general business tax credits will expire in the years 2029 through 2032 and state coal tax credits will expire in the years 2014 through 2022.

			Federal Tax				State Tax
			Credit				Credit
	Total Federal		Carryforward		Total State		Carryforward
	Tax Credit		Subject to		Tax Credit		Subject to
Company	Carryforward		Expiration		Carryforward		Expiration
	(in thousands)
APCo	$	21,432	$	8,504	$	76,481	$	28,255
I&M		2,587		2,587		-		-
OPCo		20,000		1,714		-		-
PSO		565		543		21,114		21,114
SWEPCo		884		759		-		-

The Registrant Subsidiaries anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused. APCo does not anticipate that state taxable income will be sufficient in future periods to realize the tax benefits of all state tax credits before they expire unused and a valuation allowance has been provided accordingly.

Valuation Allowance

Management assesses past results and future operations to estimate and evaluate available positive and negative evidence to determine whether sufficient future taxable income will be generated to use existing deferred tax assets. A significant piece of objective negative information evaluated was the net income tax operating losses sustained in 2012, 2011 and 2009. The positive evidence considered by management includes the history of positive pretax income and the fact that the tax losses resulted from temporary differences that will reverse in future periods. On the basis of the evaluation of all available positive and negative evidence, as of December 31, 2013, a valuation allowance of $41.3 million for state tax credits, net of federal tax, has been recorded by APCo in order to recognize only the portion of the deferred tax assets that, more likely than not, will be realized. The amount of the deferred tax assets realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are materially impacted.

Uncertain Tax Positions

The Registrant Subsidiaries recognize interest accruals related to uncertain tax positions in interest income or expense as applicable and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following tables show amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2013						2012
					Reversal of						Reversal of
					Prior Period						Prior Period
	Interest		Interest		Interest		Interest		Interest		Interest
Company	Expense		Income		Expense		Expense		Income		Expense
	(in thousands)
APCo	$	-	$	1,089	$	-	$	62	$	-	$	183
I&M		-		597		-		1,355		-		-
OPCo		-		1,892		-		266		-		504
PSO		-		135		-		259		-		294
SWEPCo		215		-		-		286		-		271

	Year Ended December 31, 2011
					Reversal of
					Prior Period
	Interest		Interest		Interest
Company	Expense		Income		Expense

	(in thousands)
APCo	$	737	$	3,229	$	2,416
I&M		-		2,681		638
OPCo		1,213		5,173		4,019
PSO		239		344		3,123
SWEPCo		1,382		1,991		2,255

The following table shows balances for amounts accrued for the receipt of interest:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	-	$	-
I&M		-		-
OPCo		-		-
PSO		209		15
SWEPCo		172		-

The following table shows balances for amounts accrued for the payment of interest and penalties:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	158	$	271
I&M		957		1,337
OPCo		407		451
PSO		562		424
SWEPCo		1,167		1,061

The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2013		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553
Increase - Tax Positions Taken During
	a Prior Period		-		-		-		-		-
Decrease - Tax Positions Taken During
	a Prior Period		(4,089)		(11,921)		(8,966)		(103)		(3,158)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		14		1,301
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		-		-		-		-		(94)
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		-		-
Balance as of December 31, 2013		$	1,164	$	3,164	$	2,086	$	2,184	$	7,602

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2012		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031
Increase - Tax Positions Taken During
	a Prior Period		-		2,266		1,360		421		2,806
Decrease - Tax Positions Taken During
	a Prior Period		(384)		(1,252)		(13,582)		(92)		(775)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(1,674)		-		(20,291)		-		-
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		(1,641)		(1,509)
Balance as of December 31, 2012		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2011		$	13,267	$	17,871	$	68,655	$	9,845	$	14,410
Increase - Tax Positions Taken During
	a Prior Period		5,990		9,256		11,330		1,339		14,355
Decrease - Tax Positions Taken During
	a Prior Period		(2,100)		(8,622)		(20,299)		(1,171)		(2,706)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(2,587)		(1,424)		(6,935)		(1,178)		(12,997)
Decrease - Lapse of the Applicable
	Statute of Limitations		(7,259)		(3,010)		(9,186)		(5,250)		(4,031)
Balance as of December 31, 2011		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031

Management believes that there will be no significant net increase or decrease in unrecognized benefits within 12 months of the reporting date. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for each Registrant Subsidiary was as follows:

Company	2013		2012		2011
	(in thousands)
APCo	$	-	$	-	$	806
I&M		1,220		1,220		654
OPCo		674		674		21,177
PSO		827		818		1,882
SWEPCo		4,357		3,512		3,717

Federal Tax Legislation – Affecting APCo, I&M, OPCo, PSO and SWEPCo

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013. Included in the 2012 Act was a one-year extension of 50% bonus depreciation. The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011. The enacted provisions will not materially impact the Registrant Subsidiaries' net income or financial condition but did have a favorable impact on cash flows in 2013.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014. In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry. The impact of these final regulations is not material to net income, cash flows or financial condition except for an approximate $10 million reduction to I&M's cash flows in 2014.

State Tax Legislation – Affecting APCo, I&M and OPCo

Legislation was passed by the state of Indiana in May 2011 enacting a phased reduction in corporate income tax rate from 8.5% to 6.5%. The 8.5% Indiana corporate income tax rate will be reduced 0.5% each year beginning after June 30, 2012 with the final reduction occurring in years beginning after June 30, 2015.

In May 2011, Michigan repealed its Business Tax regime and replaced it with a traditional corporate net income tax rate of 6%, effective January 1, 2012.

During the third quarter of 2013, it was determined that the state of West Virginia had achieved certain minimum levels of shortfall reserve funds. As a result, the West Virginia corporate income tax rate will be reduced from 7.0% to 6.5% in 2014. The enacted provisions will not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition.

Income Taxes

11. INCOME TAXES

The details of the Registrant Subsidiaries' income taxes as reported are as follows:

Year Ended December 31, 2013		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	58,441	$	(49,067)	$	92,625	$	7,689	$	(10,866)
	Deferred		75,714		129,109		134,463		53,788		81,888
	Deferred Investment Tax Credits		(1,220)		(4,931)		(1,418)		4,408		(1,561)
Income Tax Expense		$	132,935	$	75,111	$	225,670	$	65,885	$	69,461

Year Ended December 31, 2012		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	28,307	$	(9,221)	$	100,447	$	18,634	$	(214,353)
	Deferred		138,460		53,067		45,685		48,916		260,761
	Deferred Investment Tax Credits		(1,240)		(4,502)		(1,849)		(856)		(550)
Income Tax Expense		$	165,527	$	39,344	$	144,283	$	66,694	$	45,858

Year Ended December 31, 2011		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	(15,136)	$	(86,471)	$	96,893	$	6,904	$	40,727
	Deferred		107,565		141,014		119,184		61,581		16,726
	Deferred Investment Tax Credits		(2,569)		(2,783)		(2,380)		(856)		(550)
Income Tax Expense		$	89,860	$	51,760	$	213,697	$	67,629	$	56,903

Shown below for each Registrant Subsidiary is a reconciliation of the difference between the amounts of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

I&M		Years Ended December 31,
		2013			2012			2011
		(in thousands)
Net Income		$	177,504		$	118,457		$	149,674
Income Tax Expense			75,111			39,344			51,760
Pretax Income		$	252,615		$	157,801		$	201,434

Income Taxes on Pretax Income at Statutory Rate (35%)		$	88,415		$	55,230		$	70,502
Increase (Decrease) in Income Taxes Resulting from the Following Items:
	Depreciation		10,057			8,659			7,895
	Investment Tax Credits, Net		(4,931)			(4,502)			(2,783)
	State and Local Income Taxes, Net		(882)			(1,559)			(1,376)
	Removal Costs		(9,432)			(5,490)			(5,566)
	AFUDC		(10,555)			(7,218)			(9,223)
	Other		2,439			(5,776)			(7,689)
Income Tax Expense		$	75,111		$	39,344		$	51,760

Effective Income Tax Rate			29.7	%		24.9	%		25.7	%

The following tables show elements of the net deferred tax liability and significant temporary differences for each Registrant Subsidiary:

I&M	December 31,
	2013		2012
	(in thousands)
Deferred Tax Assets	$	843,630	$	831,724
Deferred Tax Liabilities		(2,043,810)		(1,842,791)
Net Deferred Tax Liabilities	$	(1,200,180)	$	(1,011,067)

Property Related Temporary Differences	$	(390,829)	$	(351,682)
Amounts Due from Customers for Future Federal Income Taxes		(39,137)		(37,633)
Deferred State Income Taxes		(137,162)		(112,388)
Deferred Income Taxes on Other Comprehensive Loss		8,351		15,553
Accrued Nuclear Decommissioning		(553,794)		(475,223)
Net Operating Loss Carryforward		15,690		31,233
Regulatory Assets		(59,008)		(88,696)
All Other, Net		(44,291)		7,769
Net Deferred Tax Liabilities	$	(1,200,180)	$	(1,011,067)

AEP System Tax Allocation Agreement

The Registrant Subsidiaries join in the filing of a consolidated federal income tax return with their affiliates in the AEP System. The allocation of the AEP System's current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense. The tax benefit of the Parent is allocated to its subsidiaries with taxable income. With the exception of the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

The Registrant Subsidiaries are no longer subject to U.S. federal examination for years before 2011. The Registrant Subsidiaries completed the examination of the years 2007 and 2008 in April 2011 and settled all outstanding issues on appeal for the years 2001 through 2006 in October 2011. The settlements did not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition. The IRS examination of years 2009 and 2010 started in October 2011 and was completed in the second quarter of 2013. Although the outcome of tax audits is uncertain, in management's opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrant Subsidiaries accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

The Registrant Subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine their tax returns and the Registrant Subsidiaries are currently under examination in several state and local jurisdictions. However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities. Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income. The Registrant Subsidiaries are no longer subject to state or local income tax examinations by tax authorities for years before 2009.

Net Income Tax Operating Loss Carryforward

In 2011, APCo and I&M recognized federal net income tax operating losses of $313 million and $123 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book versus tax temporary differences. In 2012, SWEPCo recognized a federal net income tax operating loss of $858 million driven primarily by bonus depreciation. APCo, I&M, OPCo, PSO and SWEPCo also had state net income tax operating loss carryforwards as indicated in the table below.

		State Net Income
		Tax Operating
		Loss		Year of
Company	State	Carryforward		Expiration
		(in thousands)
APCo	Tennessee	$	8,810		2026
APCo	Virginia		300,637		2031
APCo	West Virginia		489,860		2032
I&M	Indiana		50,425		2033
OPCo	West Virginia		235,636		2032
PSO	Oklahoma		110,615		2033
SWEPCo	Louisiana		422,946		2028
SWEPCo	Oklahoma		2,835		2033

As a result, APCo, I&M, OPCo, PSO and SWEPCo recognized deferred federal and/or state and local income tax benefits in 2011 and/or 2012 and/or 2013. At the end of 2013, APCo, I&M and SWEPCo have $12 million, $13 million and $167 million, respectively, of unrealized federal net operating loss carryforward. Management anticipates future taxable income will be sufficient to realize the remaining net income tax operating loss tax benefits before the federal carryforward expires after 2032. Management also anticipates future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2011 and 2009 along with lower federal and state taxable income in 2010 resulted in unused federal and state income tax credits. As of December 31, 2013, the Registrant Subsidiaries have federal tax credit carryforwards and APCo and PSO have state tax credit carryforwards as indicated in the table below. If these credits are not utilized, federal general business tax credits will expire in the years 2029 through 2032 and state coal tax credits will expire in the years 2014 through 2022.

			Federal Tax				State Tax
			Credit				Credit
	Total Federal		Carryforward		Total State		Carryforward
	Tax Credit		Subject to		Tax Credit		Subject to
Company	Carryforward		Expiration		Carryforward		Expiration
	(in thousands)
APCo	$	21,432	$	8,504	$	76,481	$	28,255
I&M		2,587		2,587		-		-
OPCo		20,000		1,714		-		-
PSO		565		543		21,114		21,114
SWEPCo		884		759		-		-

The Registrant Subsidiaries anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused. APCo does not anticipate that state taxable income will be sufficient in future periods to realize the tax benefits of all state tax credits before they expire unused and a valuation allowance has been provided accordingly.

Valuation Allowance

Management assesses past results and future operations to estimate and evaluate available positive and negative evidence to determine whether sufficient future taxable income will be generated to use existing deferred tax assets. A significant piece of objective negative information evaluated was the net income tax operating losses sustained in 2012, 2011 and 2009. The positive evidence considered by management includes the history of positive pretax income and the fact that the tax losses resulted from temporary differences that will reverse in future periods. On the basis of the evaluation of all available positive and negative evidence, as of December 31, 2013, a valuation allowance of $41.3 million for state tax credits, net of federal tax, has been recorded by APCo in order to recognize only the portion of the deferred tax assets that, more likely than not, will be realized. The amount of the deferred tax assets realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are materially impacted.

Uncertain Tax Positions

The Registrant Subsidiaries recognize interest accruals related to uncertain tax positions in interest income or expense as applicable and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following tables show amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2013						2012
					Reversal of						Reversal of
					Prior Period						Prior Period
	Interest		Interest		Interest		Interest		Interest		Interest
Company	Expense		Income		Expense		Expense		Income		Expense
	(in thousands)
APCo	$	-	$	1,089	$	-	$	62	$	-	$	183
I&M		-		597		-		1,355		-		-
OPCo		-		1,892		-		266		-		504
PSO		-		135		-		259		-		294
SWEPCo		215		-		-		286		-		271

	Year Ended December 31, 2011
					Reversal of
					Prior Period
	Interest		Interest		Interest
Company	Expense		Income		Expense

	(in thousands)
APCo	$	737	$	3,229	$	2,416
I&M		-		2,681		638
OPCo		1,213		5,173		4,019
PSO		239		344		3,123
SWEPCo		1,382		1,991		2,255

The following table shows balances for amounts accrued for the receipt of interest:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	-	$	-
I&M		-		-
OPCo		-		-
PSO		209		15
SWEPCo		172		-

The following table shows balances for amounts accrued for the payment of interest and penalties:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	158	$	271
I&M		957		1,337
OPCo		407		451
PSO		562		424
SWEPCo		1,167		1,061

The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2013		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553
Increase - Tax Positions Taken During
	a Prior Period		-		-		-		-		-
Decrease - Tax Positions Taken During
	a Prior Period		(4,089)		(11,921)		(8,966)		(103)		(3,158)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		14		1,301
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		-		-		-		-		(94)
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		-		-
Balance as of December 31, 2013		$	1,164	$	3,164	$	2,086	$	2,184	$	7,602

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2012		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031
Increase - Tax Positions Taken During
	a Prior Period		-		2,266		1,360		421		2,806
Decrease - Tax Positions Taken During
	a Prior Period		(384)		(1,252)		(13,582)		(92)		(775)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(1,674)		-		(20,291)		-		-
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		(1,641)		(1,509)
Balance as of December 31, 2012		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2011		$	13,267	$	17,871	$	68,655	$	9,845	$	14,410
Increase - Tax Positions Taken During
	a Prior Period		5,990		9,256		11,330		1,339		14,355
Decrease - Tax Positions Taken During
	a Prior Period		(2,100)		(8,622)		(20,299)		(1,171)		(2,706)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(2,587)		(1,424)		(6,935)		(1,178)		(12,997)
Decrease - Lapse of the Applicable
	Statute of Limitations		(7,259)		(3,010)		(9,186)		(5,250)		(4,031)
Balance as of December 31, 2011		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031

Management believes that there will be no significant net increase or decrease in unrecognized benefits within 12 months of the reporting date. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for each Registrant Subsidiary was as follows:

Company	2013		2012		2011
	(in thousands)
APCo	$	-	$	-	$	806
I&M		1,220		1,220		654
OPCo		674		674		21,177
PSO		827		818		1,882
SWEPCo		4,357		3,512		3,717

Federal Tax Legislation – Affecting APCo, I&M, OPCo, PSO and SWEPCo

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013. Included in the 2012 Act was a one-year extension of 50% bonus depreciation. The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011. The enacted provisions will not materially impact the Registrant Subsidiaries' net income or financial condition but did have a favorable impact on cash flows in 2013.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014. In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry. The impact of these final regulations is not material to net income, cash flows or financial condition except for an approximate $10 million reduction to I&M's cash flows in 2014.

State Tax Legislation – Affecting APCo, I&M and OPCo

Legislation was passed by the state of Indiana in May 2011 enacting a phased reduction in corporate income tax rate from 8.5% to 6.5%. The 8.5% Indiana corporate income tax rate will be reduced 0.5% each year beginning after June 30, 2012 with the final reduction occurring in years beginning after June 30, 2015.

In May 2011, Michigan repealed its Business Tax regime and replaced it with a traditional corporate net income tax rate of 6%, effective January 1, 2012.

During the third quarter of 2013, it was determined that the state of West Virginia had achieved certain minimum levels of shortfall reserve funds. As a result, the West Virginia corporate income tax rate will be reduced from 7.0% to 6.5% in 2014. The enacted provisions will not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition.

Income Taxes

11. INCOME TAXES

The details of the Registrant Subsidiaries' income taxes as reported are as follows:

Year Ended December 31, 2013		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	58,441	$	(49,067)	$	92,625	$	7,689	$	(10,866)
	Deferred		75,714		129,109		134,463		53,788		81,888
	Deferred Investment Tax Credits		(1,220)		(4,931)		(1,418)		4,408		(1,561)
Income Tax Expense		$	132,935	$	75,111	$	225,670	$	65,885	$	69,461

Year Ended December 31, 2012		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	28,307	$	(9,221)	$	100,447	$	18,634	$	(214,353)
	Deferred		138,460		53,067		45,685		48,916		260,761
	Deferred Investment Tax Credits		(1,240)		(4,502)		(1,849)		(856)		(550)
Income Tax Expense		$	165,527	$	39,344	$	144,283	$	66,694	$	45,858

Year Ended December 31, 2011		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	(15,136)	$	(86,471)	$	96,893	$	6,904	$	40,727
	Deferred		107,565		141,014		119,184		61,581		16,726
	Deferred Investment Tax Credits		(2,569)		(2,783)		(2,380)		(856)		(550)
Income Tax Expense		$	89,860	$	51,760	$	213,697	$	67,629	$	56,903

Shown below for each Registrant Subsidiary is a reconciliation of the difference between the amounts of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

OPCo		Years Ended December 31,
		2013			2012			2011
		(in thousands)
Net Income		$	409,980		$	343,534		$	464,993
Income Tax Expense			225,670			144,283			213,697
Pretax Income		$	635,650		$	487,817		$	678,690

Income Taxes on Pretax Income at Statutory Rate (35%)		$	222,478		$	170,736		$	237,542
Increase (Decrease) in Income Taxes Resulting from the Following Items:
	Depreciation		6,759			5,239			6,368
	Investment Tax Credits, Net		(1,418)			(1,849)			(2,380)
	State and Local Income Taxes, Net		3,327			(18,291)			(3,222)
	Parent Company Loss Benefit		(2,154)			(11,915)			(7,117)
	Other		(3,322)			363			(17,494)
Income Tax Expense		$	225,670		$	144,283		$	213,697

Effective Income Tax Rate			35.5	%		29.6	%		31.5	%

The following tables show elements of the net deferred tax liability and significant temporary differences for each Registrant Subsidiary:

OPCo	December 31,
	2013		2012
	(in thousands)
Deferred Tax Assets	$	183,085	$	505,003
Deferred Tax Liabilities		(1,477,691)		(2,851,068)
Net Deferred Tax Liabilities	$	(1,294,606)	$	(2,346,065)

Property Related Temporary Differences	$	(841,607)	$	(2,061,841)
Amounts Due from Customers for Future Federal Income Taxes		(51,946)		(59,291)
Deferred State Income Taxes		(28,569)		(90,001)
Regulatory Assets		(215,535)		(190,273)
Deferred Income Taxes on Other Comprehensive Loss		(3,812)		89,236
Impairment Loss		-		100,459
Deferred Fuel and Purchased Power		(176,192)		(199,997)
All Other, Net		23,055		65,643
Net Deferred Tax Liabilities	$	(1,294,606)	$	(2,346,065)

AEP System Tax Allocation Agreement

The Registrant Subsidiaries join in the filing of a consolidated federal income tax return with their affiliates in the AEP System. The allocation of the AEP System's current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense. The tax benefit of the Parent is allocated to its subsidiaries with taxable income. With the exception of the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

The Registrant Subsidiaries are no longer subject to U.S. federal examination for years before 2011. The Registrant Subsidiaries completed the examination of the years 2007 and 2008 in April 2011 and settled all outstanding issues on appeal for the years 2001 through 2006 in October 2011. The settlements did not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition. The IRS examination of years 2009 and 2010 started in October 2011 and was completed in the second quarter of 2013. Although the outcome of tax audits is uncertain, in management's opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrant Subsidiaries accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

The Registrant Subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine their tax returns and the Registrant Subsidiaries are currently under examination in several state and local jurisdictions. However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities. Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income. The Registrant Subsidiaries are no longer subject to state or local income tax examinations by tax authorities for years before 2009.

Net Income Tax Operating Loss Carryforward

In 2011, APCo and I&M recognized federal net income tax operating losses of $313 million and $123 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book versus tax temporary differences. In 2012, SWEPCo recognized a federal net income tax operating loss of $858 million driven primarily by bonus depreciation. APCo, I&M, OPCo, PSO and SWEPCo also had state net income tax operating loss carryforwards as indicated in the table below.

		State Net Income
		Tax Operating
		Loss		Year of
Company	State	Carryforward		Expiration
		(in thousands)
APCo	Tennessee	$	8,810		2026
APCo	Virginia		300,637		2031
APCo	West Virginia		489,860		2032
I&M	Indiana		50,425		2033
OPCo	West Virginia		235,636		2032
PSO	Oklahoma		110,615		2033
SWEPCo	Louisiana		422,946		2028
SWEPCo	Oklahoma		2,835		2033

As a result, APCo, I&M, OPCo, PSO and SWEPCo recognized deferred federal and/or state and local income tax benefits in 2011 and/or 2012 and/or 2013. At the end of 2013, APCo, I&M and SWEPCo have $12 million, $13 million and $167 million, respectively, of unrealized federal net operating loss carryforward. Management anticipates future taxable income will be sufficient to realize the remaining net income tax operating loss tax benefits before the federal carryforward expires after 2032. Management also anticipates future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2011 and 2009 along with lower federal and state taxable income in 2010 resulted in unused federal and state income tax credits. As of December 31, 2013, the Registrant Subsidiaries have federal tax credit carryforwards and APCo and PSO have state tax credit carryforwards as indicated in the table below. If these credits are not utilized, federal general business tax credits will expire in the years 2029 through 2032 and state coal tax credits will expire in the years 2014 through 2022.

			Federal Tax				State Tax
			Credit				Credit
	Total Federal		Carryforward		Total State		Carryforward
	Tax Credit		Subject to		Tax Credit		Subject to
Company	Carryforward		Expiration		Carryforward		Expiration
	(in thousands)
APCo	$	21,432	$	8,504	$	76,481	$	28,255
I&M		2,587		2,587		-		-
OPCo		20,000		1,714		-		-
PSO		565		543		21,114		21,114
SWEPCo		884		759		-		-

The Registrant Subsidiaries anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused. APCo does not anticipate that state taxable income will be sufficient in future periods to realize the tax benefits of all state tax credits before they expire unused and a valuation allowance has been provided accordingly.

Valuation Allowance

Management assesses past results and future operations to estimate and evaluate available positive and negative evidence to determine whether sufficient future taxable income will be generated to use existing deferred tax assets. A significant piece of objective negative information evaluated was the net income tax operating losses sustained in 2012, 2011 and 2009. The positive evidence considered by management includes the history of positive pretax income and the fact that the tax losses resulted from temporary differences that will reverse in future periods. On the basis of the evaluation of all available positive and negative evidence, as of December 31, 2013, a valuation allowance of $41.3 million for state tax credits, net of federal tax, has been recorded by APCo in order to recognize only the portion of the deferred tax assets that, more likely than not, will be realized. The amount of the deferred tax assets realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are materially impacted.

Uncertain Tax Positions

The Registrant Subsidiaries recognize interest accruals related to uncertain tax positions in interest income or expense as applicable and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following tables show amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2013						2012
					Reversal of						Reversal of
					Prior Period						Prior Period
	Interest		Interest		Interest		Interest		Interest		Interest
Company	Expense		Income		Expense		Expense		Income		Expense
	(in thousands)
APCo	$	-	$	1,089	$	-	$	62	$	-	$	183
I&M		-		597		-		1,355		-		-
OPCo		-		1,892		-		266		-		504
PSO		-		135		-		259		-		294
SWEPCo		215		-		-		286		-		271

	Year Ended December 31, 2011
					Reversal of
					Prior Period
	Interest		Interest		Interest
Company	Expense		Income		Expense

	(in thousands)
APCo	$	737	$	3,229	$	2,416
I&M		-		2,681		638
OPCo		1,213		5,173		4,019
PSO		239		344		3,123
SWEPCo		1,382		1,991		2,255

The following table shows balances for amounts accrued for the receipt of interest:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	-	$	-
I&M		-		-
OPCo		-		-
PSO		209		15
SWEPCo		172		-

The following table shows balances for amounts accrued for the payment of interest and penalties:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	158	$	271
I&M		957		1,337
OPCo		407		451
PSO		562		424
SWEPCo		1,167		1,061

The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2013		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553
Increase - Tax Positions Taken During
	a Prior Period		-		-		-		-		-
Decrease - Tax Positions Taken During
	a Prior Period		(4,089)		(11,921)		(8,966)		(103)		(3,158)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		14		1,301
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		-		-		-		-		(94)
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		-		-
Balance as of December 31, 2013		$	1,164	$	3,164	$	2,086	$	2,184	$	7,602

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2012		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031
Increase - Tax Positions Taken During
	a Prior Period		-		2,266		1,360		421		2,806
Decrease - Tax Positions Taken During
	a Prior Period		(384)		(1,252)		(13,582)		(92)		(775)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(1,674)		-		(20,291)		-		-
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		(1,641)		(1,509)
Balance as of December 31, 2012		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2011		$	13,267	$	17,871	$	68,655	$	9,845	$	14,410
Increase - Tax Positions Taken During
	a Prior Period		5,990		9,256		11,330		1,339		14,355
Decrease - Tax Positions Taken During
	a Prior Period		(2,100)		(8,622)		(20,299)		(1,171)		(2,706)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(2,587)		(1,424)		(6,935)		(1,178)		(12,997)
Decrease - Lapse of the Applicable
	Statute of Limitations		(7,259)		(3,010)		(9,186)		(5,250)		(4,031)
Balance as of December 31, 2011		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031

Management believes that there will be no significant net increase or decrease in unrecognized benefits within 12 months of the reporting date. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for each Registrant Subsidiary was as follows:

Company	2013		2012		2011
	(in thousands)
APCo	$	-	$	-	$	806
I&M		1,220		1,220		654
OPCo		674		674		21,177
PSO		827		818		1,882
SWEPCo		4,357		3,512		3,717

Federal Tax Legislation – Affecting APCo, I&M, OPCo, PSO and SWEPCo

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013. Included in the 2012 Act was a one-year extension of 50% bonus depreciation. The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011. The enacted provisions will not materially impact the Registrant Subsidiaries' net income or financial condition but did have a favorable impact on cash flows in 2013.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014. In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry. The impact of these final regulations is not material to net income, cash flows or financial condition except for an approximate $10 million reduction to I&M's cash flows in 2014.

State Tax Legislation – Affecting APCo, I&M and OPCo

Legislation was passed by the state of Indiana in May 2011 enacting a phased reduction in corporate income tax rate from 8.5% to 6.5%. The 8.5% Indiana corporate income tax rate will be reduced 0.5% each year beginning after June 30, 2012 with the final reduction occurring in years beginning after June 30, 2015.

In May 2011, Michigan repealed its Business Tax regime and replaced it with a traditional corporate net income tax rate of 6%, effective January 1, 2012.

During the third quarter of 2013, it was determined that the state of West Virginia had achieved certain minimum levels of shortfall reserve funds. As a result, the West Virginia corporate income tax rate will be reduced from 7.0% to 6.5% in 2014. The enacted provisions will not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition.

Income Taxes

11. INCOME TAXES

The details of the Registrant Subsidiaries' income taxes as reported are as follows:

Year Ended December 31, 2013		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	58,441	$	(49,067)	$	92,625	$	7,689	$	(10,866)
	Deferred		75,714		129,109		134,463		53,788		81,888
	Deferred Investment Tax Credits		(1,220)		(4,931)		(1,418)		4,408		(1,561)
Income Tax Expense		$	132,935	$	75,111	$	225,670	$	65,885	$	69,461

Year Ended December 31, 2012		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	28,307	$	(9,221)	$	100,447	$	18,634	$	(214,353)
	Deferred		138,460		53,067		45,685		48,916		260,761
	Deferred Investment Tax Credits		(1,240)		(4,502)		(1,849)		(856)		(550)
Income Tax Expense		$	165,527	$	39,344	$	144,283	$	66,694	$	45,858

Year Ended December 31, 2011		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	(15,136)	$	(86,471)	$	96,893	$	6,904	$	40,727
	Deferred		107,565		141,014		119,184		61,581		16,726
	Deferred Investment Tax Credits		(2,569)		(2,783)		(2,380)		(856)		(550)
Income Tax Expense		$	89,860	$	51,760	$	213,697	$	67,629	$	56,903

Shown below for each Registrant Subsidiary is a reconciliation of the difference between the amounts of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

PSO		Years Ended December 31,
		2013			2012			2011
		(in thousands)
Net Income		$	97,796		$	114,141		$	124,628
Income Tax Expense			65,885			66,694			67,629
Pretax Income		$	163,681		$	180,835		$	192,257

Income Taxes on Pretax Income at Statutory Rate (35%)		$	57,288		$	63,292		$	67,290
Increase (Decrease) in Income Taxes Resulting from the Following Items:
	Depreciation		164			(10)			(165)
	Investment Tax Credits, Net		(776)			(781)			(781)
	State and Local Income Taxes, Net		5,423			6,953			4,744
	Tax Adjustments		5,268			201			(1,827)
	Other		(1,482)			(2,961)			(1,632)
Income Tax Expense		$	65,885		$	66,694		$	67,629

Effective Income Tax Rate			40.3	%		36.9	%		35.2	%

The following tables show elements of the net deferred tax liability and significant temporary differences for each Registrant Subsidiary:

PSO	December 31,
	2013		2012
	(in thousands)
Deferred Tax Assets	$	107,567	$	101,561
Deferred Tax Liabilities		(936,791)		(835,054)
Net Deferred Tax Liabilities	$	(829,224)	$	(733,493)

Property Related Temporary Differences	$	(736,160)	$	(640,859)
Amounts Due from Customers for Future Federal Income Taxes		(31)		(1,325)
Deferred State Income Taxes		(99,126)		(95,378)
Regulatory Assets		(39,414)		(57,367)
Deferred Income Taxes on Other Comprehensive Loss		(3,100)		(3,489)
Deferred Federal Income Taxes on Deferred State Income Taxes		40,362		39,050
Net Operating Loss Carryforward		4,314		3,892
Tax Credit Carryforward		565		401
All Other, Net		3,366		21,582
Net Deferred Tax Liabilities	$	(829,224)	$	(733,493)

AEP System Tax Allocation Agreement

The Registrant Subsidiaries join in the filing of a consolidated federal income tax return with their affiliates in the AEP System. The allocation of the AEP System's current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense. The tax benefit of the Parent is allocated to its subsidiaries with taxable income. With the exception of the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

The Registrant Subsidiaries are no longer subject to U.S. federal examination for years before 2011. The Registrant Subsidiaries completed the examination of the years 2007 and 2008 in April 2011 and settled all outstanding issues on appeal for the years 2001 through 2006 in October 2011. The settlements did not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition. The IRS examination of years 2009 and 2010 started in October 2011 and was completed in the second quarter of 2013. Although the outcome of tax audits is uncertain, in management's opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrant Subsidiaries accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

The Registrant Subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine their tax returns and the Registrant Subsidiaries are currently under examination in several state and local jurisdictions. However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities. Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income. The Registrant Subsidiaries are no longer subject to state or local income tax examinations by tax authorities for years before 2009.

Net Income Tax Operating Loss Carryforward

In 2011, APCo and I&M recognized federal net income tax operating losses of $313 million and $123 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book versus tax temporary differences. In 2012, SWEPCo recognized a federal net income tax operating loss of $858 million driven primarily by bonus depreciation. APCo, I&M, OPCo, PSO and SWEPCo also had state net income tax operating loss carryforwards as indicated in the table below.

		State Net Income
		Tax Operating
		Loss		Year of
Company	State	Carryforward		Expiration
		(in thousands)
APCo	Tennessee	$	8,810		2026
APCo	Virginia		300,637		2031
APCo	West Virginia		489,860		2032
I&M	Indiana		50,425		2033
OPCo	West Virginia		235,636		2032
PSO	Oklahoma		110,615		2033
SWEPCo	Louisiana		422,946		2028
SWEPCo	Oklahoma		2,835		2033

As a result, APCo, I&M, OPCo, PSO and SWEPCo recognized deferred federal and/or state and local income tax benefits in 2011 and/or 2012 and/or 2013. At the end of 2013, APCo, I&M and SWEPCo have $12 million, $13 million and $167 million, respectively, of unrealized federal net operating loss carryforward. Management anticipates future taxable income will be sufficient to realize the remaining net income tax operating loss tax benefits before the federal carryforward expires after 2032. Management also anticipates future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2011 and 2009 along with lower federal and state taxable income in 2010 resulted in unused federal and state income tax credits. As of December 31, 2013, the Registrant Subsidiaries have federal tax credit carryforwards and APCo and PSO have state tax credit carryforwards as indicated in the table below. If these credits are not utilized, federal general business tax credits will expire in the years 2029 through 2032 and state coal tax credits will expire in the years 2014 through 2022.

			Federal Tax				State Tax
			Credit				Credit
	Total Federal		Carryforward		Total State		Carryforward
	Tax Credit		Subject to		Tax Credit		Subject to
Company	Carryforward		Expiration		Carryforward		Expiration
	(in thousands)
APCo	$	21,432	$	8,504	$	76,481	$	28,255
I&M		2,587		2,587		-		-
OPCo		20,000		1,714		-		-
PSO		565		543		21,114		21,114
SWEPCo		884		759		-		-

The Registrant Subsidiaries anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused. APCo does not anticipate that state taxable income will be sufficient in future periods to realize the tax benefits of all state tax credits before they expire unused and a valuation allowance has been provided accordingly.

Valuation Allowance

Management assesses past results and future operations to estimate and evaluate available positive and negative evidence to determine whether sufficient future taxable income will be generated to use existing deferred tax assets. A significant piece of objective negative information evaluated was the net income tax operating losses sustained in 2012, 2011 and 2009. The positive evidence considered by management includes the history of positive pretax income and the fact that the tax losses resulted from temporary differences that will reverse in future periods. On the basis of the evaluation of all available positive and negative evidence, as of December 31, 2013, a valuation allowance of $41.3 million for state tax credits, net of federal tax, has been recorded by APCo in order to recognize only the portion of the deferred tax assets that, more likely than not, will be realized. The amount of the deferred tax assets realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are materially impacted.

Uncertain Tax Positions

The Registrant Subsidiaries recognize interest accruals related to uncertain tax positions in interest income or expense as applicable and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following tables show amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2013						2012
					Reversal of						Reversal of
					Prior Period						Prior Period
	Interest		Interest		Interest		Interest		Interest		Interest
Company	Expense		Income		Expense		Expense		Income		Expense
	(in thousands)
APCo	$	-	$	1,089	$	-	$	62	$	-	$	183
I&M		-		597		-		1,355		-		-
OPCo		-		1,892		-		266		-		504
PSO		-		135		-		259		-		294
SWEPCo		215		-		-		286		-		271

	Year Ended December 31, 2011
					Reversal of
					Prior Period
	Interest		Interest		Interest
Company	Expense		Income		Expense

	(in thousands)
APCo	$	737	$	3,229	$	2,416
I&M		-		2,681		638
OPCo		1,213		5,173		4,019
PSO		239		344		3,123
SWEPCo		1,382		1,991		2,255

The following table shows balances for amounts accrued for the receipt of interest:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	-	$	-
I&M		-		-
OPCo		-		-
PSO		209		15
SWEPCo		172		-

The following table shows balances for amounts accrued for the payment of interest and penalties:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	158	$	271
I&M		957		1,337
OPCo		407		451
PSO		562		424
SWEPCo		1,167		1,061

The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2013		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553
Increase - Tax Positions Taken During
	a Prior Period		-		-		-		-		-
Decrease - Tax Positions Taken During
	a Prior Period		(4,089)		(11,921)		(8,966)		(103)		(3,158)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		14		1,301
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		-		-		-		-		(94)
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		-		-
Balance as of December 31, 2013		$	1,164	$	3,164	$	2,086	$	2,184	$	7,602

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2012		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031
Increase - Tax Positions Taken During
	a Prior Period		-		2,266		1,360		421		2,806
Decrease - Tax Positions Taken During
	a Prior Period		(384)		(1,252)		(13,582)		(92)		(775)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(1,674)		-		(20,291)		-		-
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		(1,641)		(1,509)
Balance as of December 31, 2012		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2011		$	13,267	$	17,871	$	68,655	$	9,845	$	14,410
Increase - Tax Positions Taken During
	a Prior Period		5,990		9,256		11,330		1,339		14,355
Decrease - Tax Positions Taken During
	a Prior Period		(2,100)		(8,622)		(20,299)		(1,171)		(2,706)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(2,587)		(1,424)		(6,935)		(1,178)		(12,997)
Decrease - Lapse of the Applicable
	Statute of Limitations		(7,259)		(3,010)		(9,186)		(5,250)		(4,031)
Balance as of December 31, 2011		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031

Management believes that there will be no significant net increase or decrease in unrecognized benefits within 12 months of the reporting date. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for each Registrant Subsidiary was as follows:

Company	2013		2012		2011
	(in thousands)
APCo	$	-	$	-	$	806
I&M		1,220		1,220		654
OPCo		674		674		21,177
PSO		827		818		1,882
SWEPCo		4,357		3,512		3,717

Federal Tax Legislation – Affecting APCo, I&M, OPCo, PSO and SWEPCo

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013. Included in the 2012 Act was a one-year extension of 50% bonus depreciation. The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011. The enacted provisions will not materially impact the Registrant Subsidiaries' net income or financial condition but did have a favorable impact on cash flows in 2013.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014. In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry. The impact of these final regulations is not material to net income, cash flows or financial condition except for an approximate $10 million reduction to I&M's cash flows in 2014.

Income Taxes

11. INCOME TAXES

The details of the Registrant Subsidiaries' income taxes as reported are as follows:

Year Ended December 31, 2013		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	58,441	$	(49,067)	$	92,625	$	7,689	$	(10,866)
	Deferred		75,714		129,109		134,463		53,788		81,888
	Deferred Investment Tax Credits		(1,220)		(4,931)		(1,418)		4,408		(1,561)
Income Tax Expense		$	132,935	$	75,111	$	225,670	$	65,885	$	69,461

Year Ended December 31, 2012		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	28,307	$	(9,221)	$	100,447	$	18,634	$	(214,353)
	Deferred		138,460		53,067		45,685		48,916		260,761
	Deferred Investment Tax Credits		(1,240)		(4,502)		(1,849)		(856)		(550)
Income Tax Expense		$	165,527	$	39,344	$	144,283	$	66,694	$	45,858

Year Ended December 31, 2011		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Income Tax Expense (Credit):
	Current	$	(15,136)	$	(86,471)	$	96,893	$	6,904	$	40,727
	Deferred		107,565		141,014		119,184		61,581		16,726
	Deferred Investment Tax Credits		(2,569)		(2,783)		(2,380)		(856)		(550)
Income Tax Expense		$	89,860	$	51,760	$	213,697	$	67,629	$	56,903

Shown below for each Registrant Subsidiary is a reconciliation of the difference between the amounts of federal income taxes computed by multiplying book income before income taxes by the federal statutory tax rate and the amount of income taxes reported:

SWEPCo		Years Ended December 31,
		2013			2012			2011
		(in thousands)
Net Income		$	153,819		$	202,513		$	165,126
Income Tax Expense			69,461			45,858			56,903
Pretax Income		$	223,280		$	248,371		$	222,029

Income Taxes on Pretax Income at Statutory Rate (35%)		$	78,148		$	86,930		$	77,710
Increase (Decrease) in Income Taxes Resulting from the Following Items:
	Depreciation		3,086			2,105			(7)
	Depletion		(3,472)			(3,276)			(1,506)
	Investment Tax Credits, Net		(1,561)			(550)			(550)
	State and Local Income Taxes, Net		(1,453)			(18,010)			4,004
	AFUDC		(2,381)			(19,879)			(16,962)
	Other		(2,906)			(1,462)			(5,786)
Income Tax Expense		$	69,461		$	45,858		$	56,903

Effective Income Tax Rate			31.1	%		18.5	%		25.6	%

The following tables show elements of the net deferred tax liability and significant temporary differences for each Registrant Subsidiary:

SWEPCo	December 31,
	2013		2012
	(in thousands)
Deferred Tax Assets	$	359,529	$	286,133
Deferred Tax Liabilities		(1,453,710)		(1,260,281)
Net Deferred Tax Liabilities	$	(1,094,181)	$	(974,148)

Property Related Temporary Differences	$	(1,172,431)	$	(997,337)
Amounts Due from Customers for Future Federal Income Taxes		(43,116)		(43,090)
Deferred State Income Taxes		(118,179)		(98,630)
Regulatory Assets		(5,290)		(12,922)
Deferred Income Taxes on Other Comprehensive Loss		4,548		9,618
Impairment Loss - Turk Plant		21,295		21,700
Net Operating Loss Carryforward		189,128		104,738
All Other, Net		29,864		41,775
Net Deferred Tax Liabilities	$	(1,094,181)	$	(974,148)

AEP System Tax Allocation Agreement

The Registrant Subsidiaries join in the filing of a consolidated federal income tax return with their affiliates in the AEP System. The allocation of the AEP System's current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense. The tax benefit of the Parent is allocated to its subsidiaries with taxable income. With the exception of the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

The Registrant Subsidiaries are no longer subject to U.S. federal examination for years before 2011. The Registrant Subsidiaries completed the examination of the years 2007 and 2008 in April 2011 and settled all outstanding issues on appeal for the years 2001 through 2006 in October 2011. The settlements did not materially impact the Registrant Subsidiaries' net income, cash flows or financial condition. The IRS examination of years 2009 and 2010 started in October 2011 and was completed in the second quarter of 2013. Although the outcome of tax audits is uncertain, in management's opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrant Subsidiaries accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

The Registrant Subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine their tax returns and the Registrant Subsidiaries are currently under examination in several state and local jurisdictions. However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities. Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income. The Registrant Subsidiaries are no longer subject to state or local income tax examinations by tax authorities for years before 2009.

Net Income Tax Operating Loss Carryforward

In 2011, APCo and I&M recognized federal net income tax operating losses of $313 million and $123 million, respectively, driven primarily by bonus depreciation, pension plan contributions and other book versus tax temporary differences. In 2012, SWEPCo recognized a federal net income tax operating loss of $858 million driven primarily by bonus depreciation. APCo, I&M, OPCo, PSO and SWEPCo also had state net income tax operating loss carryforwards as indicated in the table below.

		State Net Income
		Tax Operating
		Loss		Year of
Company	State	Carryforward		Expiration
		(in thousands)
APCo	Tennessee	$	8,810		2026
APCo	Virginia		300,637		2031
APCo	West Virginia		489,860		2032
I&M	Indiana		50,425		2033
OPCo	West Virginia		235,636		2032
PSO	Oklahoma		110,615		2033
SWEPCo	Louisiana		422,946		2028
SWEPCo	Oklahoma		2,835		2033

As a result, APCo, I&M, OPCo, PSO and SWEPCo recognized deferred federal and/or state and local income tax benefits in 2011 and/or 2012 and/or 2013. At the end of 2013, APCo, I&M and SWEPCo have $12 million, $13 million and $167 million, respectively, of unrealized federal net operating loss carryforward. Management anticipates future taxable income will be sufficient to realize the remaining net income tax operating loss tax benefits before the federal carryforward expires after 2032. Management also anticipates future taxable income will be sufficient to realize the remaining state net income tax operating loss tax benefits before the state carryforward expires for each state.

Tax Credit Carryforward

Federal and state net income tax operating losses sustained in 2011 and 2009 along with lower federal and state taxable income in 2010 resulted in unused federal and state income tax credits. As of December 31, 2013, the Registrant Subsidiaries have federal tax credit carryforwards and APCo and PSO have state tax credit carryforwards as indicated in the table below. If these credits are not utilized, federal general business tax credits will expire in the years 2029 through 2032 and state coal tax credits will expire in the years 2014 through 2022.

			Federal Tax				State Tax
			Credit				Credit
	Total Federal		Carryforward		Total State		Carryforward
	Tax Credit		Subject to		Tax Credit		Subject to
Company	Carryforward		Expiration		Carryforward		Expiration
	(in thousands)
APCo	$	21,432	$	8,504	$	76,481	$	28,255
I&M		2,587		2,587		-		-
OPCo		20,000		1,714		-		-
PSO		565		543		21,114		21,114
SWEPCo		884		759		-		-

The Registrant Subsidiaries anticipate future federal taxable income will be sufficient to realize the tax benefits of the federal tax credits before they expire unused. APCo does not anticipate that state taxable income will be sufficient in future periods to realize the tax benefits of all state tax credits before they expire unused and a valuation allowance has been provided accordingly.

Valuation Allowance

Management assesses past results and future operations to estimate and evaluate available positive and negative evidence to determine whether sufficient future taxable income will be generated to use existing deferred tax assets. A significant piece of objective negative information evaluated was the net income tax operating losses sustained in 2012, 2011 and 2009. The positive evidence considered by management includes the history of positive pretax income and the fact that the tax losses resulted from temporary differences that will reverse in future periods. On the basis of the evaluation of all available positive and negative evidence, as of December 31, 2013, a valuation allowance of $41.3 million for state tax credits, net of federal tax, has been recorded by APCo in order to recognize only the portion of the deferred tax assets that, more likely than not, will be realized. The amount of the deferred tax assets realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are materially impacted.

Uncertain Tax Positions

The Registrant Subsidiaries recognize interest accruals related to uncertain tax positions in interest income or expense as applicable and penalties in Other Operation expense in accordance with the accounting guidance for “Income Taxes.”

The following tables show amounts reported for interest expense, interest income and reversal of prior period interest expense:

	Years Ended December 31,
	2013						2012
					Reversal of						Reversal of
					Prior Period						Prior Period
	Interest		Interest		Interest		Interest		Interest		Interest
Company	Expense		Income		Expense		Expense		Income		Expense
	(in thousands)
APCo	$	-	$	1,089	$	-	$	62	$	-	$	183
I&M		-		597		-		1,355		-		-
OPCo		-		1,892		-		266		-		504
PSO		-		135		-		259		-		294
SWEPCo		215		-		-		286		-		271

	Year Ended December 31, 2011
					Reversal of
					Prior Period
	Interest		Interest		Interest
Company	Expense		Income		Expense

	(in thousands)
APCo	$	737	$	3,229	$	2,416
I&M		-		2,681		638
OPCo		1,213		5,173		4,019
PSO		239		344		3,123
SWEPCo		1,382		1,991		2,255

The following table shows balances for amounts accrued for the receipt of interest:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	-	$	-
I&M		-		-
OPCo		-		-
PSO		209		15
SWEPCo		172		-

The following table shows balances for amounts accrued for the payment of interest and penalties:

	December 31,
Company	2013		2012
	(in thousands)
APCo	$	158	$	271
I&M		957		1,337
OPCo		407		451
PSO		562		424
SWEPCo		1,167		1,061

The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2013		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553
Increase - Tax Positions Taken During
	a Prior Period		-		-		-		-		-
Decrease - Tax Positions Taken During
	a Prior Period		(4,089)		(11,921)		(8,966)		(103)		(3,158)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		14		1,301
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		-		-		-		-		(94)
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		-		-
Balance as of December 31, 2013		$	1,164	$	3,164	$	2,086	$	2,184	$	7,602

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2012		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031
Increase - Tax Positions Taken During
	a Prior Period		-		2,266		1,360		421		2,806
Decrease - Tax Positions Taken During
	a Prior Period		(384)		(1,252)		(13,582)		(92)		(775)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(1,674)		-		(20,291)		-		-
Decrease - Lapse of the Applicable
	Statute of Limitations		-		-		-		(1,641)		(1,509)
Balance as of December 31, 2012		$	5,253	$	15,085	$	11,052	$	2,273	$	9,553

		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of January 1, 2011		$	13,267	$	17,871	$	68,655	$	9,845	$	14,410
Increase - Tax Positions Taken During
	a Prior Period		5,990		9,256		11,330		1,339		14,355
Decrease - Tax Positions Taken During
	a Prior Period		(2,100)		(8,622)		(20,299)		(1,171)		(2,706)
Increase - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Tax Positions Taken During
	the Current Year		-		-		-		-		-
Decrease - Settlements with Taxing
	Authorities		(2,587)		(1,424)		(6,935)		(1,178)		(12,997)
Decrease - Lapse of the Applicable
	Statute of Limitations		(7,259)		(3,010)		(9,186)		(5,250)		(4,031)
Balance as of December 31, 2011		$	7,311	$	14,071	$	43,565	$	3,585	$	9,031

Management believes that there will be no significant net increase or decrease in unrecognized benefits within 12 months of the reporting date. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for each Registrant Subsidiary was as follows:

Company	2013		2012		2011
	(in thousands)
APCo	$	-	$	-	$	806
I&M		1,220		1,220		654
OPCo		674		674		21,177
PSO		827		818		1,882
SWEPCo		4,357		3,512		3,717

Federal Tax Legislation – Affecting APCo, I&M, OPCo, PSO and SWEPCo

The American Taxpayer Relief Act of 2012 (the 2012 Act) was enacted in January 2013. Included in the 2012 Act was a one-year extension of 50% bonus depreciation. The 2012 Act also retroactively extended the life of research and development, employment and several energy tax credits, which expired at the end of 2011. The enacted provisions will not materially impact the Registrant Subsidiaries' net income or financial condition but did have a favorable impact on cash flows in 2013.

Federal Tax Regulations

In 2013, the U.S. Treasury Department issued final and re-proposed regulations regarding the deduction and capitalization of expenditures related to tangible property, effective for the tax years beginning in 2014. In addition, the IRS issued Revenue Procedures under the Industry Issue Resolutions program that provides specific guidance for the implementation of the regulations for the electric utility industry. The impact of these final regulations is not material to net income, cash flows or financial condition except for an approximate $10 million reduction to I&M's cash flows in 2014.

December 31,

(in millions)

Accrual for Receipt of Interest

Accrual for Payment of Interest and Penalties