XML 71 R17.htm IDEA: XBRL DOCUMENT v2.4.0.8
Derivatives and Hedging
 6 Months Ended
Jun. 30, 2014
Derivatives and Hedging
 DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

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

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

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

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

The following table represents the gross notional volume of our outstanding derivative contracts as of June 30, 2014 and December 31, 2013:

Notional Volume of Derivative Instruments
 
 
Volume
 
 
 
 
June 30,
2014
 
December 31,
2013
 
Unit of
Measure
Primary Risk Exposure
 
(in millions)
 
 
Commodity:
 
 
 
 

 
 
Power
 
430

 
406

 
MWhs
Coal
 
3

 
4

 
Tons
Natural Gas
 
116

 
127

 
MMBtus
Heating Oil and Gasoline
 
5

 
6

 
Gallons
Interest Rate
 
$
176

 
$
191

 
USD
 
 
 
 
 
 
 
Interest Rate and Foreign Currency
 
$
819

 
$
820

 
USD



Fair Value Hedging Strategies

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

Cash Flow Hedging Strategies

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

Our vehicle fleet and barge operations are exposed to gasoline and diesel fuel price volatility. We enter into financial heating oil and gasoline derivative contracts in order to mitigate price risk of our future fuel purchases. We discontinued cash flow hedge accounting for these derivative contracts effective March 31, 2014. During the three and six months ended June 30, 2013, we designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. We do not hedge all fuel price risk.

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

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

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

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

According to the accounting guidance for “Derivatives and Hedging,” we reflect the fair values of our derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, we are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2014 and December 31, 2013 condensed balance sheets, we netted $26 million and $4 million, respectively, of cash collateral received from third parties against short-term and long-term risk management assets and $1 million and $13 million, respectively, of cash collateral paid to third parties against short-term and long-term risk management liabilities.

The following tables represent the gross fair value impact of our derivative activity on our condensed balance sheets as of June 30, 2014 and December 31, 2013:

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in millions)
Current Risk Management Assets
 
$
454

 
$
28

 
$
4

 
$
486

 
$
(340
)
 
$
146

Long-term Risk Management Assets
 
314

 
5

 
—

 
319

 
(95
)
 
224

Total Assets
 
768

 
33

 
4

 
805

 
(435
)
 
370

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
372

 
20

 
1

 
393

 
(333
)
 
60

Long-term Risk Management Liabilities
 
182

 
2

 
10

 
194

 
(79
)
 
115

Total Liabilities
 
554

 
22

 
11

 
587

 
(412
)
 
175

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
214

 
$
11

 
$
(7
)
 
$
218

 
$
(23
)
 
$
195

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Derivative Instruments
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in millions)
Current Risk Management Assets
 
$
347

 
$
12

 
$
4

 
$
363

 
$
(203
)
 
$
160

Long-term Risk Management Assets
 
368

 
3

 
—

 
371

 
(74
)
 
297

Total Assets
 
715

 
15

 
4

 
734

 
(277
)
 
457

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
292

 
11

 
1

 
304

 
(214
)
 
90

Long-term Risk Management Liabilities
 
237

 
3

 
15

 
255

 
(78
)
 
177

Total Liabilities
 
529

 
14

 
16

 
559

 
(292
)
 
267

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
186

 
$
1

 
$
(12
)
 
$
175

 
$
15

 
$
190


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts primarily include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."  Amounts also include de-designated risk management contracts.
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

The table below presents our activity of derivative risk management contracts for the three and six months ended June 30, 2014 and 2013:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three and Six Months Ended June 30, 2014 and 2013
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Location of Gain (Loss)
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Vertically Integrated Utilities Revenues
 
$
4

 
$
4

 
$
22

 
$
10

Generation & Marketing Revenues
 
16

 
17

 
48

 
33

Regulatory Assets (a)
 
—

 
(8
)
 
—

 
(6
)
Regulatory Liabilities (a)
 
29

 
4

 
118

 
(2
)
Total Gain on Risk Management Contracts
 
$
49

 
$
17

 
$
188

 
$
35


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

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

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

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

Accounting for Fair Value Hedging Strategies

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

We record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on our condensed statements of income. During the three and six months ended June 30, 2014, we recognized gains of $2 million and $4 million, respectively, on our hedging instruments and offsetting losses of $2 million and $4 million, respectively, on our long-term debt.  During the three and six months ended June 30, 2013, we recognized losses of $11 million and $12 million, respectively, on our hedging instruments and offsetting gains of $11 million and $12 million, respectively, on our long-term debt.  During the three and six months ended June 30, 2014 and 2013, hedge ineffectiveness was immaterial.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on our condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on our condensed balance sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2014 and 2013, we designated power, coal and natural gas derivatives as cash flow hedges.

We reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on our condensed statements of income. During the three and six months ended June 30, 2013, we designated heating oil and gasoline derivatives as cash flow hedges. We discontinued cash flow hedge accounting for these derivative contracts effective March 31, 2014.

We reclassify gains and losses on interest rate derivative hedges related to our debt financings from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Interest Expense on our condensed statements of income in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2014 and 2013, we designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to our foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets into Depreciation and Amortization expense on our condensed statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2014 and 2013, we did not designate any foreign currency derivatives as cash flow hedges. 

During the three and six months ended June 30, 2014 and 2013, hedge ineffectiveness was immaterial or nonexistent for all cash flow hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on our condensed balance sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2014 and 2013, see Note 3.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of June 30, 2014 and December 31, 2013 were:

Impact of Cash Flow Hedges on the Condensed Balance Sheet
June 30, 2014
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Total
 
(in millions)
Hedging Assets (a)
$
15

 
$
—

 
$
15

Hedging Liabilities (a)
4

 
2

 
6

AOCI Gain (Loss) Net of Tax
6

 
(21
)
 
(15
)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months
4

 
(3
)
 
1

 
 
 
 
 
 
Impact of Cash Flow Hedges on the Condensed Balance Sheet
December 31, 2013
 
 
 
 
 
 
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Total
 
(in millions)
Hedging Assets (a)
$
7

 
$
—

 
$
7

Hedging Liabilities (a)
6

 
2

 
8

AOCI Loss Net of Tax
—

 
(23
)
 
(23
)
Portion Expected to be Reclassified to Net Income During the Next Twelve Months
—

 
(4
)
 
(4
)

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

The actual amounts that we reclassify from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.  As of June 30, 2014, the maximum length of time that we are hedging (with contracts subject to the accounting guidance for “Derivatives and Hedging”) our exposure to variability in future cash flows related to forecasted transactions was 42 months.

Credit Risk

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

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

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs), a limited number of derivative and non-derivative contracts primarily related to our competitive retail auction loads, and guaranties for contractual obligations, we are obligated to post an additional amount of collateral if our credit ratings decline below a specified rating threshold. The amount of collateral required fluctuates based on market prices and our total exposure. On an ongoing basis, our risk management organization assesses the appropriateness of these collateral triggering items in contracts. AEP and its subsidiaries have not experienced a downgrade below a specified rating threshold that would require the posting of additional collateral. The following table represents: (a) our fair value of such derivative contracts, (b) the amount of collateral we would have been required to post for all derivative and non-derivative contracts and guaranties for contractual obligations if our credit ratings had declined below a specified rating threshold and (c) how much was attributable to RTO and ISO activities as of June 30, 2014 and December 31, 2013:
 
June 30,
2014
 
December 31,
2013
 
(in millions)
Liabilities for Derivative Contracts with Credit Downgrade Triggers
$
1

 
$
3

Amount of Collateral AEP Subsidiaries Would Have Been Required to Post
167

 
33

Amount Attributable to RTO and ISO Activities
54

 
28



In addition, a majority of our non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, our risk management organization assesses the appropriateness of these cross-default provisions in our contracts. The following table represents: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral we have posted and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering our contractual netting arrangements as of June 30, 2014 and December 31, 2013:
 
June 30,
2014
 
December 31,
2013
 
(in millions)
Liabilities for Contracts with Cross Default Provisions Prior to Contractual Netting Arrangements
$
201

 
$
293

Amount of Cash Collateral Posted
—

 
1

Additional Settlement Liability if Cross Default Provision is Triggered
141

 
235
Appalachian Power Co [Member]
  
Derivatives and Hedging
DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, natural gas, coal and emission allowances.  These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates.  AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

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

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

The following tables represent the gross notional volume of the Registrant Subsidiaries’ outstanding derivative contracts as of June 30, 2014 and December 31, 2013:

Notional Volume of Derivative Instruments
June 30, 2014
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
67,059

 
48,352

 
32,686

 
14,744

 
18,668

Coal
 
Tons
 
465

 
1,778

 
—

 
500

 
917

Natural Gas
 
MMBtus
 
1,540

 
1,030

 
—

 
68

 
87

Heating Oil and Gasoline
 
Gallons
 
891

 
427

 
907

 
502

 
572

Interest Rate
 
USD
 
$
8,041

 
$
5,454

 
$
—

 
$
—

 
$
—


Notional Volume of Derivative Instruments
December 31, 2013
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
48,995

 
33,231

 
34,843

 
13,469

 
17,057

Coal
 
Tons
 
31

 
3,389

 
—

 
1,013

 
1,692

Natural Gas
 
MMBtus
 
2,477

 
1,680

 
—

 
—

 
—

Heating Oil and Gasoline
 
Gallons
 
1,089

 
521

 
1,108

 
614

 
699

Interest Rate
 
USD
 
$
12,720

 
$
8,627

 
$
—

 
$
—

 
$
—



Fair Value Hedging Strategies

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

Cash Flow Hedging Strategies

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power and natural gas (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

The Registrant Subsidiaries’ vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. The Registrant Subsidiaries do not hedge all fuel price risk.

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

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP’s risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.
 
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS
 
The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the condensed balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

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

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2014 and December 31, 2013 condensed balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:
 
 
June 30, 2014
 
December 31, 2013
Company
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
 
(in thousands)
APCo
 
$
1,356

 
$
137

 
$
—

 
$
2,993

I&M
 
894

 
333

 
—

 
2,030

OPCo
 
145

 
—

 
—

 
—

PSO
 
72

 
—

 
—

 
1

SWEPCo
 
83

 
—

 
—

 
3


The following tables represent the gross fair value of the Registrant Subsidiaries’ derivative activity on the condensed balance sheets as of June 30, 2014 and December 31, 2013:
 
APCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
38,369

 
$
—

 
$
—

 
$
38,369

 
$
(13,550
)
 
$
24,819

Long-term Risk Management Assets
 
10,305

 
—

 
—

 
10,305

 
(2,195
)
 
8,110

Total Assets
 
48,674

 
—

 
—

 
48,674

 
(15,745
)
 
32,929

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
16,948

 
—

 
—

 
16,948

 
(12,722
)
 
4,226

Long-term Risk Management Liabilities
 
5,570

 
—

 
—

 
5,570

 
(1,804
)
 
3,766

Total Liabilities
 
22,518

 
—

 
—

 
22,518

 
(14,526
)
 
7,992

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
26,156

 
$
—

 
$
—

 
$
26,156

 
$
(1,219
)
 
$
24,937


APCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
46,431

 
$
389

 
$
—

 
$
46,820

 
$
(25,649
)
 
$
21,171

Long-term Risk Management Assets
 
20,948

 
—

 
—

 
20,948

 
(4,000
)
 
16,948

Total Assets
 
67,379

 
389

 
—

 
67,768

 
(29,649
)
 
38,119

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
37,010

 
313

 
—

 
37,323

 
(28,431
)
 
8,892

Long-term Risk Management Liabilities
 
14,452

 
—

 
—

 
14,452

 
(4,211
)
 
10,241

Total Liabilities
 
51,462

 
313

 
—

 
51,775

 
(32,642
)
 
19,133

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
15,917

 
$
76

 
$
—

 
$
15,993

 
$
2,993

 
$
18,986


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

I&M

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
27,932

 
$
—

 
$
—

 
$
27,932

 
$
(10,043
)
 
$
17,889

Long-term Risk Management Assets
 
6,894

 
—

 
—

 
6,894

 
(1,487
)
 
5,407

Total Assets
 
34,826

 
—

 
—

 
34,826

 
(11,530
)
 
23,296

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
13,222

 
—

 
—

 
13,222

 
(9,745
)
 
3,477

Long-term Risk Management Liabilities
 
3,778

 
—

 
—

 
3,778

 
(1,224
)
 
2,554

Total Liabilities
 
17,000

 
—

 
—

 
17,000

 
(10,969
)
 
6,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
17,826

 
$
—

 
$
—

 
$
17,826

 
$
(561
)
 
$
17,265


I&M

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
33,229

 
$
234

 
$
—

 
$
33,463

 
$
(18,075
)
 
$
15,388

Long-term Risk Management Assets
 
14,208

 
—

 
—

 
14,208

 
(2,713
)
 
11,495

Total Assets
 
47,437

 
234

 
—

 
47,671

 
(20,788
)
 
26,883

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
26,779

 
212

 
—

 
26,991

 
(19,962
)
 
7,029

Long-term Risk Management Liabilities
 
9,802

 
—

 
—

 
9,802

 
(2,856
)
 
6,946

Total Liabilities
 
36,581

 
212

 
—

 
36,793

 
(22,818
)
 
13,975

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
10,856

 
$
22

 
$
—

 
$
10,878

 
$
2,030

 
$
12,908


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

OPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
9,430

 
$
—

 
$
—

 
$
9,430

 
$
(131
)
 
$
9,299

Long-term Risk Management Assets
 
14

 
—

 
—

 
14

 
(14
)
 
—

Total Assets
 
9,444

 
—

 
—

 
9,444

 
(145
)
 
9,299

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
9,444

 
$
—

 
$
—

 
$
9,444

 
$
(145
)
 
$
9,299


OPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
3,269

 
$
162

 
$
—

 
$
3,431

 
$
(349
)
 
$
3,082

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
3,269

 
162

 
—

 
3,431

 
(349
)
 
3,082

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
2,920

 
$
162

 
$
—

 
$
3,082

 
$
—

 
$
3,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

PSO

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
509

 
$
—

 
$
—

 
$
509

 
$
13

 
$
522

Long-term Risk Management Assets
 
8

 
—

 
—

 
8

 
(8
)
 
—

Total Assets
 
517

 
—

 
—

 
517

 
5

 
522

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
492

 
$
—

 
$
—

 
$
492

 
$
(72
)
 
$
420


PSO

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,078

 
$
84

 
$
—

 
$
1,162

 
$
5

 
$
1,167

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,078

 
84

 
—

 
1,162

 
5

 
1,167

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
997

 
$
84

 
$
—

 
$
1,081

 
$
1

 
$
1,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

SWEPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
596

 
$
—

 
$
—

 
$
596

 
$
(90
)
 
$
506

Long-term Risk Management Assets
 
9

 
—

 
—

 
9

 
(9
)
 
—

Total Assets
 
605

 
—

 
—

 
605

 
(99
)
 
506

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
572

 
$
—

 
$
—

 
$
572

 
$
(83
)
 
$
489


SWEPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,233

 
$
97

 
$
—

 
$
1,330

 
$
(151
)
 
$
1,179

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,233

 
97

 
—

 
1,330

 
(151
)
 
1,179

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
1,079

 
$
97

 
$
—

 
$
1,176

 
$
3

 
$
1,179


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

The tables below present the Registrant Subsidiaries’ activity of derivative risk management contracts for the three and six months ended June 30, 2014 and 2013:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
1,184

 
$
1,323

 
$
56

 
$
63

 
$
(79
)
Sales to AEP Affiliates
 
—

 
(300
)
 
—

 
300

 
—

Regulatory Assets (a)
 
—

 
—

 
—

 
(12
)
 
(16
)
Regulatory Liabilities (a)
 
13,718

 
8,793

 
6,404

 
(669
)
 
(1,019
)
Total Gain (Loss) on Risk Management Contracts
 
$
14,902

 
$
9,816

 
$
6,460

 
$
(318
)
 
$
(1,114
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
194

 
$
2,897

 
$
1,819

 
$
169

 
$
302

Regulatory Assets (a)
 
(974
)
 
(1,585
)
 
(4,492
)
 
192

 
(373
)
Regulatory Liabilities (a)
 
1,230

 
(880
)
 
3,360

 
(1
)
 
39

Total Gain (Loss) on Risk Management Contracts
 
$
450

 
$
432

 
$
687

 
$
360

 
$
(32
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
6,031

 
$
7,479

 
$
56

 
$
127

 
$
(56
)
Sales to AEP Affiliates
 
—

 
(521
)
 
—

 
521

 
—

Regulatory Assets (a)
 
4

 
—

 
—

 
(10
)
 
(13
)
Regulatory Liabilities (a)
 
46,050

 
27,110

 
41,503

 
(189
)
 
311

Total Gain on Risk Management Contracts
 
$
52,085

 
$
34,068

 
$
41,559

 
$
449

 
$
242


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
873

 
$
7,844

 
$
3,533

 
$
216

 
$
330

Regulatory Assets (a)
 
—

 
(1,099
)
 
(5,697
)
 
2,202

 
(102
)
Regulatory Liabilities (a)
 
(210
)
 
(6,062
)
 
3,360

 
—

 
135

Total Gain on Risk Management Contracts
 
$
663

 
$
683

 
$
1,196

 
$
2,418

 
$
363

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

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

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

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

Accounting for Fair Value Hedging Strategies

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

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the condensed statements of income. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2014, APCo and I&M designated power, coal and natural gas derivatives as cash flow hedges. During the three and six months ended June 30, 2013, APCo, I&M and OPCo designated power, coal and natural gas derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the condensed statements of income. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Interest Expense on the condensed statements of income in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2014 and 2013, I&M designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Depreciation and Amortization expense on the condensed statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any foreign currency derivatives as cash flow hedges.

During the three and six months ended June 30, 2014 and 2013, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2014 and 2013, see Note 3.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of June 30, 2014 and December 31, 2013 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
June 30, 2014
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3,596

I&M
 
—

 
—

 
—

 
—

 
—

 
(15,155
)
OPCo
 
—

 
—

 
—

 
—

 
—

 
6,288

PSO
 
—

 
—

 
—

 
—

 
—

 
5,322

SWEPCo
 
—

 
—

 
—

 
—

 
—

 
(12,169
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
 
 
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Maximum Term for
Exposure to
Variability of Future
Cash Flows
 
 
(in thousands)
 
(in months)
APCo
 
$
—

 
$
(431
)
 
0
I&M
 
—

 
(1,283
)
 
0
OPCo
 
—

 
1,372

 
0
PSO
 
—

 
759

 
0
SWEPCo
 
—

 
(2,267
)
 
0

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
December 31, 2013
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
363

 
$
—

 
$
287

 
$
—

 
$
94

 
$
3,090

I&M
 
216

 
—

 
194

 
—

 
46

 
(15,976
)
OPCo
 
162

 
—

 
—

 
—

 
105

 
6,974

PSO
 
84

 
—

 
—

 
—

 
57

 
5,701

SWEPCo
 
97

 
—

 
—

 
—

 
66

 
(13,304
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
94

 
$
(806
)
I&M
 
46

 
(1,568
)
OPCo
 
105

 
1,363

PSO
 
57

 
759

SWEPCo
 
66

 
(2,267
)

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

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

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

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

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering items in contracts. The Registrant Subsidiaries have not experienced a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries’ fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
140

 
$
3,096

 
$
3,023

I&M
 
95

 
2,096

 
2,051

OPCo
 
—

 
—

 
—

PSO
 
3

 
10,137

 
5,989

SWEPCo
 
3

 
7,729

 
7,585

 
 
December 31, 2013
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
575

 
$
2,747

 
$
2,539

I&M
 
390

 
1,863

 
1,722

OPCo
 
349

 
—

 
—

PSO
 
—

 
2,930

 
410

SWEPCo
 
—

 
713

 
519


In addition, a majority of the Registrant Subsidiaries’ non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries’ contractual netting arrangements as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
10,809

 
$
—

 
$
7,909

I&M
 
7,328

 
—

 
5,362

OPCo
 
—

 
—

 
—

PSO
 
14

 
—

 
14

SWEPCo
 
18

 
—

 
18

 
 
December 31, 2013
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
19,648

 
$
—

 
$
18,568

I&M
 
13,326

 
—

 
12,594

OPCo
 
—

 
—

 
—

PSO
 
3

 
—

 
3

SWEPCo
 
3

 
—

 
3
Indiana Michigan Power Co [Member]
  
Derivatives and Hedging
DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, natural gas, coal and emission allowances.  These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates.  AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

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

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

The following tables represent the gross notional volume of the Registrant Subsidiaries’ outstanding derivative contracts as of June 30, 2014 and December 31, 2013:

Notional Volume of Derivative Instruments
June 30, 2014
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
67,059

 
48,352

 
32,686

 
14,744

 
18,668

Coal
 
Tons
 
465

 
1,778

 
—

 
500

 
917

Natural Gas
 
MMBtus
 
1,540

 
1,030

 
—

 
68

 
87

Heating Oil and Gasoline
 
Gallons
 
891

 
427

 
907

 
502

 
572

Interest Rate
 
USD
 
$
8,041

 
$
5,454

 
$
—

 
$
—

 
$
—


Notional Volume of Derivative Instruments
December 31, 2013
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
48,995

 
33,231

 
34,843

 
13,469

 
17,057

Coal
 
Tons
 
31

 
3,389

 
—

 
1,013

 
1,692

Natural Gas
 
MMBtus
 
2,477

 
1,680

 
—

 
—

 
—

Heating Oil and Gasoline
 
Gallons
 
1,089

 
521

 
1,108

 
614

 
699

Interest Rate
 
USD
 
$
12,720

 
$
8,627

 
$
—

 
$
—

 
$
—



Fair Value Hedging Strategies

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

Cash Flow Hedging Strategies

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power and natural gas (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

The Registrant Subsidiaries’ vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. The Registrant Subsidiaries do not hedge all fuel price risk.

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

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP’s risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.
 
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS
 
The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the condensed balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

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

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2014 and December 31, 2013 condensed balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:
 
 
June 30, 2014
 
December 31, 2013
Company
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
 
(in thousands)
APCo
 
$
1,356

 
$
137

 
$
—

 
$
2,993

I&M
 
894

 
333

 
—

 
2,030

OPCo
 
145

 
—

 
—

 
—

PSO
 
72

 
—

 
—

 
1

SWEPCo
 
83

 
—

 
—

 
3


The following tables represent the gross fair value of the Registrant Subsidiaries’ derivative activity on the condensed balance sheets as of June 30, 2014 and December 31, 2013:
 
APCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
38,369

 
$
—

 
$
—

 
$
38,369

 
$
(13,550
)
 
$
24,819

Long-term Risk Management Assets
 
10,305

 
—

 
—

 
10,305

 
(2,195
)
 
8,110

Total Assets
 
48,674

 
—

 
—

 
48,674

 
(15,745
)
 
32,929

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
16,948

 
—

 
—

 
16,948

 
(12,722
)
 
4,226

Long-term Risk Management Liabilities
 
5,570

 
—

 
—

 
5,570

 
(1,804
)
 
3,766

Total Liabilities
 
22,518

 
—

 
—

 
22,518

 
(14,526
)
 
7,992

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
26,156

 
$
—

 
$
—

 
$
26,156

 
$
(1,219
)
 
$
24,937


APCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
46,431

 
$
389

 
$
—

 
$
46,820

 
$
(25,649
)
 
$
21,171

Long-term Risk Management Assets
 
20,948

 
—

 
—

 
20,948

 
(4,000
)
 
16,948

Total Assets
 
67,379

 
389

 
—

 
67,768

 
(29,649
)
 
38,119

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
37,010

 
313

 
—

 
37,323

 
(28,431
)
 
8,892

Long-term Risk Management Liabilities
 
14,452

 
—

 
—

 
14,452

 
(4,211
)
 
10,241

Total Liabilities
 
51,462

 
313

 
—

 
51,775

 
(32,642
)
 
19,133

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
15,917

 
$
76

 
$
—

 
$
15,993

 
$
2,993

 
$
18,986


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

I&M

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
27,932

 
$
—

 
$
—

 
$
27,932

 
$
(10,043
)
 
$
17,889

Long-term Risk Management Assets
 
6,894

 
—

 
—

 
6,894

 
(1,487
)
 
5,407

Total Assets
 
34,826

 
—

 
—

 
34,826

 
(11,530
)
 
23,296

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
13,222

 
—

 
—

 
13,222

 
(9,745
)
 
3,477

Long-term Risk Management Liabilities
 
3,778

 
—

 
—

 
3,778

 
(1,224
)
 
2,554

Total Liabilities
 
17,000

 
—

 
—

 
17,000

 
(10,969
)
 
6,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
17,826

 
$
—

 
$
—

 
$
17,826

 
$
(561
)
 
$
17,265


I&M

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
33,229

 
$
234

 
$
—

 
$
33,463

 
$
(18,075
)
 
$
15,388

Long-term Risk Management Assets
 
14,208

 
—

 
—

 
14,208

 
(2,713
)
 
11,495

Total Assets
 
47,437

 
234

 
—

 
47,671

 
(20,788
)
 
26,883

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
26,779

 
212

 
—

 
26,991

 
(19,962
)
 
7,029

Long-term Risk Management Liabilities
 
9,802

 
—

 
—

 
9,802

 
(2,856
)
 
6,946

Total Liabilities
 
36,581

 
212

 
—

 
36,793

 
(22,818
)
 
13,975

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
10,856

 
$
22

 
$
—

 
$
10,878

 
$
2,030

 
$
12,908


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

OPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
9,430

 
$
—

 
$
—

 
$
9,430

 
$
(131
)
 
$
9,299

Long-term Risk Management Assets
 
14

 
—

 
—

 
14

 
(14
)
 
—

Total Assets
 
9,444

 
—

 
—

 
9,444

 
(145
)
 
9,299

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
9,444

 
$
—

 
$
—

 
$
9,444

 
$
(145
)
 
$
9,299


OPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
3,269

 
$
162

 
$
—

 
$
3,431

 
$
(349
)
 
$
3,082

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
3,269

 
162

 
—

 
3,431

 
(349
)
 
3,082

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
2,920

 
$
162

 
$
—

 
$
3,082

 
$
—

 
$
3,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

PSO

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
509

 
$
—

 
$
—

 
$
509

 
$
13

 
$
522

Long-term Risk Management Assets
 
8

 
—

 
—

 
8

 
(8
)
 
—

Total Assets
 
517

 
—

 
—

 
517

 
5

 
522

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
492

 
$
—

 
$
—

 
$
492

 
$
(72
)
 
$
420


PSO

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,078

 
$
84

 
$
—

 
$
1,162

 
$
5

 
$
1,167

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,078

 
84

 
—

 
1,162

 
5

 
1,167

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
997

 
$
84

 
$
—

 
$
1,081

 
$
1

 
$
1,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

SWEPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
596

 
$
—

 
$
—

 
$
596

 
$
(90
)
 
$
506

Long-term Risk Management Assets
 
9

 
—

 
—

 
9

 
(9
)
 
—

Total Assets
 
605

 
—

 
—

 
605

 
(99
)
 
506

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
572

 
$
—

 
$
—

 
$
572

 
$
(83
)
 
$
489


SWEPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,233

 
$
97

 
$
—

 
$
1,330

 
$
(151
)
 
$
1,179

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,233

 
97

 
—

 
1,330

 
(151
)
 
1,179

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
1,079

 
$
97

 
$
—

 
$
1,176

 
$
3

 
$
1,179


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

The tables below present the Registrant Subsidiaries’ activity of derivative risk management contracts for the three and six months ended June 30, 2014 and 2013:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
1,184

 
$
1,323

 
$
56

 
$
63

 
$
(79
)
Sales to AEP Affiliates
 
—

 
(300
)
 
—

 
300

 
—

Regulatory Assets (a)
 
—

 
—

 
—

 
(12
)
 
(16
)
Regulatory Liabilities (a)
 
13,718

 
8,793

 
6,404

 
(669
)
 
(1,019
)
Total Gain (Loss) on Risk Management Contracts
 
$
14,902

 
$
9,816

 
$
6,460

 
$
(318
)
 
$
(1,114
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
194

 
$
2,897

 
$
1,819

 
$
169

 
$
302

Regulatory Assets (a)
 
(974
)
 
(1,585
)
 
(4,492
)
 
192

 
(373
)
Regulatory Liabilities (a)
 
1,230

 
(880
)
 
3,360

 
(1
)
 
39

Total Gain (Loss) on Risk Management Contracts
 
$
450

 
$
432

 
$
687

 
$
360

 
$
(32
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
6,031

 
$
7,479

 
$
56

 
$
127

 
$
(56
)
Sales to AEP Affiliates
 
—

 
(521
)
 
—

 
521

 
—

Regulatory Assets (a)
 
4

 
—

 
—

 
(10
)
 
(13
)
Regulatory Liabilities (a)
 
46,050

 
27,110

 
41,503

 
(189
)
 
311

Total Gain on Risk Management Contracts
 
$
52,085

 
$
34,068

 
$
41,559

 
$
449

 
$
242


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
873

 
$
7,844

 
$
3,533

 
$
216

 
$
330

Regulatory Assets (a)
 
—

 
(1,099
)
 
(5,697
)
 
2,202

 
(102
)
Regulatory Liabilities (a)
 
(210
)
 
(6,062
)
 
3,360

 
—

 
135

Total Gain on Risk Management Contracts
 
$
663

 
$
683

 
$
1,196

 
$
2,418

 
$
363

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

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

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

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

Accounting for Fair Value Hedging Strategies

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

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the condensed statements of income. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2014, APCo and I&M designated power, coal and natural gas derivatives as cash flow hedges. During the three and six months ended June 30, 2013, APCo, I&M and OPCo designated power, coal and natural gas derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the condensed statements of income. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Interest Expense on the condensed statements of income in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2014 and 2013, I&M designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Depreciation and Amortization expense on the condensed statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any foreign currency derivatives as cash flow hedges.

During the three and six months ended June 30, 2014 and 2013, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2014 and 2013, see Note 3.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of June 30, 2014 and December 31, 2013 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
June 30, 2014
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3,596

I&M
 
—

 
—

 
—

 
—

 
—

 
(15,155
)
OPCo
 
—

 
—

 
—

 
—

 
—

 
6,288

PSO
 
—

 
—

 
—

 
—

 
—

 
5,322

SWEPCo
 
—

 
—

 
—

 
—

 
—

 
(12,169
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
 
 
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Maximum Term for
Exposure to
Variability of Future
Cash Flows
 
 
(in thousands)
 
(in months)
APCo
 
$
—

 
$
(431
)
 
0
I&M
 
—

 
(1,283
)
 
0
OPCo
 
—

 
1,372

 
0
PSO
 
—

 
759

 
0
SWEPCo
 
—

 
(2,267
)
 
0

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
December 31, 2013
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
363

 
$
—

 
$
287

 
$
—

 
$
94

 
$
3,090

I&M
 
216

 
—

 
194

 
—

 
46

 
(15,976
)
OPCo
 
162

 
—

 
—

 
—

 
105

 
6,974

PSO
 
84

 
—

 
—

 
—

 
57

 
5,701

SWEPCo
 
97

 
—

 
—

 
—

 
66

 
(13,304
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
94

 
$
(806
)
I&M
 
46

 
(1,568
)
OPCo
 
105

 
1,363

PSO
 
57

 
759

SWEPCo
 
66

 
(2,267
)

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

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

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

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

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering items in contracts. The Registrant Subsidiaries have not experienced a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries’ fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
140

 
$
3,096

 
$
3,023

I&M
 
95

 
2,096

 
2,051

OPCo
 
—

 
—

 
—

PSO
 
3

 
10,137

 
5,989

SWEPCo
 
3

 
7,729

 
7,585

 
 
December 31, 2013
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
575

 
$
2,747

 
$
2,539

I&M
 
390

 
1,863

 
1,722

OPCo
 
349

 
—

 
—

PSO
 
—

 
2,930

 
410

SWEPCo
 
—

 
713

 
519


In addition, a majority of the Registrant Subsidiaries’ non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries’ contractual netting arrangements as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
10,809

 
$
—

 
$
7,909

I&M
 
7,328

 
—

 
5,362

OPCo
 
—

 
—

 
—

PSO
 
14

 
—

 
14

SWEPCo
 
18

 
—

 
18

 
 
December 31, 2013
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
19,648

 
$
—

 
$
18,568

I&M
 
13,326

 
—

 
12,594

OPCo
 
—

 
—

 
—

PSO
 
3

 
—

 
3

SWEPCo
 
3

 
—

 
3
Ohio Power Co [Member]
  
Derivatives and Hedging
DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, natural gas, coal and emission allowances.  These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates.  AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

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

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

The following tables represent the gross notional volume of the Registrant Subsidiaries’ outstanding derivative contracts as of June 30, 2014 and December 31, 2013:

Notional Volume of Derivative Instruments
June 30, 2014
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
67,059

 
48,352

 
32,686

 
14,744

 
18,668

Coal
 
Tons
 
465

 
1,778

 
—

 
500

 
917

Natural Gas
 
MMBtus
 
1,540

 
1,030

 
—

 
68

 
87

Heating Oil and Gasoline
 
Gallons
 
891

 
427

 
907

 
502

 
572

Interest Rate
 
USD
 
$
8,041

 
$
5,454

 
$
—

 
$
—

 
$
—


Notional Volume of Derivative Instruments
December 31, 2013
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
48,995

 
33,231

 
34,843

 
13,469

 
17,057

Coal
 
Tons
 
31

 
3,389

 
—

 
1,013

 
1,692

Natural Gas
 
MMBtus
 
2,477

 
1,680

 
—

 
—

 
—

Heating Oil and Gasoline
 
Gallons
 
1,089

 
521

 
1,108

 
614

 
699

Interest Rate
 
USD
 
$
12,720

 
$
8,627

 
$
—

 
$
—

 
$
—



Fair Value Hedging Strategies

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

Cash Flow Hedging Strategies

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power and natural gas (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

The Registrant Subsidiaries’ vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. The Registrant Subsidiaries do not hedge all fuel price risk.

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

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP’s risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.
 
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS
 
The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the condensed balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

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

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2014 and December 31, 2013 condensed balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:
 
 
June 30, 2014
 
December 31, 2013
Company
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
 
(in thousands)
APCo
 
$
1,356

 
$
137

 
$
—

 
$
2,993

I&M
 
894

 
333

 
—

 
2,030

OPCo
 
145

 
—

 
—

 
—

PSO
 
72

 
—

 
—

 
1

SWEPCo
 
83

 
—

 
—

 
3


The following tables represent the gross fair value of the Registrant Subsidiaries’ derivative activity on the condensed balance sheets as of June 30, 2014 and December 31, 2013:
 
APCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
38,369

 
$
—

 
$
—

 
$
38,369

 
$
(13,550
)
 
$
24,819

Long-term Risk Management Assets
 
10,305

 
—

 
—

 
10,305

 
(2,195
)
 
8,110

Total Assets
 
48,674

 
—

 
—

 
48,674

 
(15,745
)
 
32,929

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
16,948

 
—

 
—

 
16,948

 
(12,722
)
 
4,226

Long-term Risk Management Liabilities
 
5,570

 
—

 
—

 
5,570

 
(1,804
)
 
3,766

Total Liabilities
 
22,518

 
—

 
—

 
22,518

 
(14,526
)
 
7,992

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
26,156

 
$
—

 
$
—

 
$
26,156

 
$
(1,219
)
 
$
24,937


APCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
46,431

 
$
389

 
$
—

 
$
46,820

 
$
(25,649
)
 
$
21,171

Long-term Risk Management Assets
 
20,948

 
—

 
—

 
20,948

 
(4,000
)
 
16,948

Total Assets
 
67,379

 
389

 
—

 
67,768

 
(29,649
)
 
38,119

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
37,010

 
313

 
—

 
37,323

 
(28,431
)
 
8,892

Long-term Risk Management Liabilities
 
14,452

 
—

 
—

 
14,452

 
(4,211
)
 
10,241

Total Liabilities
 
51,462

 
313

 
—

 
51,775

 
(32,642
)
 
19,133

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
15,917

 
$
76

 
$
—

 
$
15,993

 
$
2,993

 
$
18,986


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

I&M

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
27,932

 
$
—

 
$
—

 
$
27,932

 
$
(10,043
)
 
$
17,889

Long-term Risk Management Assets
 
6,894

 
—

 
—

 
6,894

 
(1,487
)
 
5,407

Total Assets
 
34,826

 
—

 
—

 
34,826

 
(11,530
)
 
23,296

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
13,222

 
—

 
—

 
13,222

 
(9,745
)
 
3,477

Long-term Risk Management Liabilities
 
3,778

 
—

 
—

 
3,778

 
(1,224
)
 
2,554

Total Liabilities
 
17,000

 
—

 
—

 
17,000

 
(10,969
)
 
6,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
17,826

 
$
—

 
$
—

 
$
17,826

 
$
(561
)
 
$
17,265


I&M

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
33,229

 
$
234

 
$
—

 
$
33,463

 
$
(18,075
)
 
$
15,388

Long-term Risk Management Assets
 
14,208

 
—

 
—

 
14,208

 
(2,713
)
 
11,495

Total Assets
 
47,437

 
234

 
—

 
47,671

 
(20,788
)
 
26,883

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
26,779

 
212

 
—

 
26,991

 
(19,962
)
 
7,029

Long-term Risk Management Liabilities
 
9,802

 
—

 
—

 
9,802

 
(2,856
)
 
6,946

Total Liabilities
 
36,581

 
212

 
—

 
36,793

 
(22,818
)
 
13,975

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
10,856

 
$
22

 
$
—

 
$
10,878

 
$
2,030

 
$
12,908


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

OPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
9,430

 
$
—

 
$
—

 
$
9,430

 
$
(131
)
 
$
9,299

Long-term Risk Management Assets
 
14

 
—

 
—

 
14

 
(14
)
 
—

Total Assets
 
9,444

 
—

 
—

 
9,444

 
(145
)
 
9,299

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
9,444

 
$
—

 
$
—

 
$
9,444

 
$
(145
)
 
$
9,299


OPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
3,269

 
$
162

 
$
—

 
$
3,431

 
$
(349
)
 
$
3,082

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
3,269

 
162

 
—

 
3,431

 
(349
)
 
3,082

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
2,920

 
$
162

 
$
—

 
$
3,082

 
$
—

 
$
3,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

PSO

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
509

 
$
—

 
$
—

 
$
509

 
$
13

 
$
522

Long-term Risk Management Assets
 
8

 
—

 
—

 
8

 
(8
)
 
—

Total Assets
 
517

 
—

 
—

 
517

 
5

 
522

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
492

 
$
—

 
$
—

 
$
492

 
$
(72
)
 
$
420


PSO

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,078

 
$
84

 
$
—

 
$
1,162

 
$
5

 
$
1,167

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,078

 
84

 
—

 
1,162

 
5

 
1,167

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
997

 
$
84

 
$
—

 
$
1,081

 
$
1

 
$
1,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

SWEPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
596

 
$
—

 
$
—

 
$
596

 
$
(90
)
 
$
506

Long-term Risk Management Assets
 
9

 
—

 
—

 
9

 
(9
)
 
—

Total Assets
 
605

 
—

 
—

 
605

 
(99
)
 
506

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
572

 
$
—

 
$
—

 
$
572

 
$
(83
)
 
$
489


SWEPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,233

 
$
97

 
$
—

 
$
1,330

 
$
(151
)
 
$
1,179

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,233

 
97

 
—

 
1,330

 
(151
)
 
1,179

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
1,079

 
$
97

 
$
—

 
$
1,176

 
$
3

 
$
1,179


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

The tables below present the Registrant Subsidiaries’ activity of derivative risk management contracts for the three and six months ended June 30, 2014 and 2013:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
1,184

 
$
1,323

 
$
56

 
$
63

 
$
(79
)
Sales to AEP Affiliates
 
—

 
(300
)
 
—

 
300

 
—

Regulatory Assets (a)
 
—

 
—

 
—

 
(12
)
 
(16
)
Regulatory Liabilities (a)
 
13,718

 
8,793

 
6,404

 
(669
)
 
(1,019
)
Total Gain (Loss) on Risk Management Contracts
 
$
14,902

 
$
9,816

 
$
6,460

 
$
(318
)
 
$
(1,114
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
194

 
$
2,897

 
$
1,819

 
$
169

 
$
302

Regulatory Assets (a)
 
(974
)
 
(1,585
)
 
(4,492
)
 
192

 
(373
)
Regulatory Liabilities (a)
 
1,230

 
(880
)
 
3,360

 
(1
)
 
39

Total Gain (Loss) on Risk Management Contracts
 
$
450

 
$
432

 
$
687

 
$
360

 
$
(32
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
6,031

 
$
7,479

 
$
56

 
$
127

 
$
(56
)
Sales to AEP Affiliates
 
—

 
(521
)
 
—

 
521

 
—

Regulatory Assets (a)
 
4

 
—

 
—

 
(10
)
 
(13
)
Regulatory Liabilities (a)
 
46,050

 
27,110

 
41,503

 
(189
)
 
311

Total Gain on Risk Management Contracts
 
$
52,085

 
$
34,068

 
$
41,559

 
$
449

 
$
242


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
873

 
$
7,844

 
$
3,533

 
$
216

 
$
330

Regulatory Assets (a)
 
—

 
(1,099
)
 
(5,697
)
 
2,202

 
(102
)
Regulatory Liabilities (a)
 
(210
)
 
(6,062
)
 
3,360

 
—

 
135

Total Gain on Risk Management Contracts
 
$
663

 
$
683

 
$
1,196

 
$
2,418

 
$
363

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

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

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

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

Accounting for Fair Value Hedging Strategies

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

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the condensed statements of income. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2014, APCo and I&M designated power, coal and natural gas derivatives as cash flow hedges. During the three and six months ended June 30, 2013, APCo, I&M and OPCo designated power, coal and natural gas derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the condensed statements of income. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Interest Expense on the condensed statements of income in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2014 and 2013, I&M designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Depreciation and Amortization expense on the condensed statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any foreign currency derivatives as cash flow hedges.

During the three and six months ended June 30, 2014 and 2013, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2014 and 2013, see Note 3.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of June 30, 2014 and December 31, 2013 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
June 30, 2014
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3,596

I&M
 
—

 
—

 
—

 
—

 
—

 
(15,155
)
OPCo
 
—

 
—

 
—

 
—

 
—

 
6,288

PSO
 
—

 
—

 
—

 
—

 
—

 
5,322

SWEPCo
 
—

 
—

 
—

 
—

 
—

 
(12,169
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
 
 
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Maximum Term for
Exposure to
Variability of Future
Cash Flows
 
 
(in thousands)
 
(in months)
APCo
 
$
—

 
$
(431
)
 
0
I&M
 
—

 
(1,283
)
 
0
OPCo
 
—

 
1,372

 
0
PSO
 
—

 
759

 
0
SWEPCo
 
—

 
(2,267
)
 
0

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
December 31, 2013
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
363

 
$
—

 
$
287

 
$
—

 
$
94

 
$
3,090

I&M
 
216

 
—

 
194

 
—

 
46

 
(15,976
)
OPCo
 
162

 
—

 
—

 
—

 
105

 
6,974

PSO
 
84

 
—

 
—

 
—

 
57

 
5,701

SWEPCo
 
97

 
—

 
—

 
—

 
66

 
(13,304
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
94

 
$
(806
)
I&M
 
46

 
(1,568
)
OPCo
 
105

 
1,363

PSO
 
57

 
759

SWEPCo
 
66

 
(2,267
)

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

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

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

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

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering items in contracts. The Registrant Subsidiaries have not experienced a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries’ fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
140

 
$
3,096

 
$
3,023

I&M
 
95

 
2,096

 
2,051

OPCo
 
—

 
—

 
—

PSO
 
3

 
10,137

 
5,989

SWEPCo
 
3

 
7,729

 
7,585

 
 
December 31, 2013
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
575

 
$
2,747

 
$
2,539

I&M
 
390

 
1,863

 
1,722

OPCo
 
349

 
—

 
—

PSO
 
—

 
2,930

 
410

SWEPCo
 
—

 
713

 
519


In addition, a majority of the Registrant Subsidiaries’ non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries’ contractual netting arrangements as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
10,809

 
$
—

 
$
7,909

I&M
 
7,328

 
—

 
5,362

OPCo
 
—

 
—

 
—

PSO
 
14

 
—

 
14

SWEPCo
 
18

 
—

 
18

 
 
December 31, 2013
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
19,648

 
$
—

 
$
18,568

I&M
 
13,326

 
—

 
12,594

OPCo
 
—

 
—

 
—

PSO
 
3

 
—

 
3

SWEPCo
 
3

 
—

 
3
Public Service Co Of Oklahoma [Member]
  
Derivatives and Hedging
DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, natural gas, coal and emission allowances.  These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates.  AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

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

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

The following tables represent the gross notional volume of the Registrant Subsidiaries’ outstanding derivative contracts as of June 30, 2014 and December 31, 2013:

Notional Volume of Derivative Instruments
June 30, 2014
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
67,059

 
48,352

 
32,686

 
14,744

 
18,668

Coal
 
Tons
 
465

 
1,778

 
—

 
500

 
917

Natural Gas
 
MMBtus
 
1,540

 
1,030

 
—

 
68

 
87

Heating Oil and Gasoline
 
Gallons
 
891

 
427

 
907

 
502

 
572

Interest Rate
 
USD
 
$
8,041

 
$
5,454

 
$
—

 
$
—

 
$
—


Notional Volume of Derivative Instruments
December 31, 2013
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
48,995

 
33,231

 
34,843

 
13,469

 
17,057

Coal
 
Tons
 
31

 
3,389

 
—

 
1,013

 
1,692

Natural Gas
 
MMBtus
 
2,477

 
1,680

 
—

 
—

 
—

Heating Oil and Gasoline
 
Gallons
 
1,089

 
521

 
1,108

 
614

 
699

Interest Rate
 
USD
 
$
12,720

 
$
8,627

 
$
—

 
$
—

 
$
—



Fair Value Hedging Strategies

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

Cash Flow Hedging Strategies

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power and natural gas (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

The Registrant Subsidiaries’ vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. The Registrant Subsidiaries do not hedge all fuel price risk.

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

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP’s risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.
 
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS
 
The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the condensed balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

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

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2014 and December 31, 2013 condensed balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:
 
 
June 30, 2014
 
December 31, 2013
Company
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
 
(in thousands)
APCo
 
$
1,356

 
$
137

 
$
—

 
$
2,993

I&M
 
894

 
333

 
—

 
2,030

OPCo
 
145

 
—

 
—

 
—

PSO
 
72

 
—

 
—

 
1

SWEPCo
 
83

 
—

 
—

 
3


The following tables represent the gross fair value of the Registrant Subsidiaries’ derivative activity on the condensed balance sheets as of June 30, 2014 and December 31, 2013:
 
APCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
38,369

 
$
—

 
$
—

 
$
38,369

 
$
(13,550
)
 
$
24,819

Long-term Risk Management Assets
 
10,305

 
—

 
—

 
10,305

 
(2,195
)
 
8,110

Total Assets
 
48,674

 
—

 
—

 
48,674

 
(15,745
)
 
32,929

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
16,948

 
—

 
—

 
16,948

 
(12,722
)
 
4,226

Long-term Risk Management Liabilities
 
5,570

 
—

 
—

 
5,570

 
(1,804
)
 
3,766

Total Liabilities
 
22,518

 
—

 
—

 
22,518

 
(14,526
)
 
7,992

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
26,156

 
$
—

 
$
—

 
$
26,156

 
$
(1,219
)
 
$
24,937


APCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
46,431

 
$
389

 
$
—

 
$
46,820

 
$
(25,649
)
 
$
21,171

Long-term Risk Management Assets
 
20,948

 
—

 
—

 
20,948

 
(4,000
)
 
16,948

Total Assets
 
67,379

 
389

 
—

 
67,768

 
(29,649
)
 
38,119

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
37,010

 
313

 
—

 
37,323

 
(28,431
)
 
8,892

Long-term Risk Management Liabilities
 
14,452

 
—

 
—

 
14,452

 
(4,211
)
 
10,241

Total Liabilities
 
51,462

 
313

 
—

 
51,775

 
(32,642
)
 
19,133

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
15,917

 
$
76

 
$
—

 
$
15,993

 
$
2,993

 
$
18,986


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

I&M

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
27,932

 
$
—

 
$
—

 
$
27,932

 
$
(10,043
)
 
$
17,889

Long-term Risk Management Assets
 
6,894

 
—

 
—

 
6,894

 
(1,487
)
 
5,407

Total Assets
 
34,826

 
—

 
—

 
34,826

 
(11,530
)
 
23,296

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
13,222

 
—

 
—

 
13,222

 
(9,745
)
 
3,477

Long-term Risk Management Liabilities
 
3,778

 
—

 
—

 
3,778

 
(1,224
)
 
2,554

Total Liabilities
 
17,000

 
—

 
—

 
17,000

 
(10,969
)
 
6,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
17,826

 
$
—

 
$
—

 
$
17,826

 
$
(561
)
 
$
17,265


I&M

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
33,229

 
$
234

 
$
—

 
$
33,463

 
$
(18,075
)
 
$
15,388

Long-term Risk Management Assets
 
14,208

 
—

 
—

 
14,208

 
(2,713
)
 
11,495

Total Assets
 
47,437

 
234

 
—

 
47,671

 
(20,788
)
 
26,883

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
26,779

 
212

 
—

 
26,991

 
(19,962
)
 
7,029

Long-term Risk Management Liabilities
 
9,802

 
—

 
—

 
9,802

 
(2,856
)
 
6,946

Total Liabilities
 
36,581

 
212

 
—

 
36,793

 
(22,818
)
 
13,975

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
10,856

 
$
22

 
$
—

 
$
10,878

 
$
2,030

 
$
12,908


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

OPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
9,430

 
$
—

 
$
—

 
$
9,430

 
$
(131
)
 
$
9,299

Long-term Risk Management Assets
 
14

 
—

 
—

 
14

 
(14
)
 
—

Total Assets
 
9,444

 
—

 
—

 
9,444

 
(145
)
 
9,299

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
9,444

 
$
—

 
$
—

 
$
9,444

 
$
(145
)
 
$
9,299


OPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
3,269

 
$
162

 
$
—

 
$
3,431

 
$
(349
)
 
$
3,082

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
3,269

 
162

 
—

 
3,431

 
(349
)
 
3,082

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
2,920

 
$
162

 
$
—

 
$
3,082

 
$
—

 
$
3,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

PSO

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
509

 
$
—

 
$
—

 
$
509

 
$
13

 
$
522

Long-term Risk Management Assets
 
8

 
—

 
—

 
8

 
(8
)
 
—

Total Assets
 
517

 
—

 
—

 
517

 
5

 
522

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
492

 
$
—

 
$
—

 
$
492

 
$
(72
)
 
$
420


PSO

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,078

 
$
84

 
$
—

 
$
1,162

 
$
5

 
$
1,167

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,078

 
84

 
—

 
1,162

 
5

 
1,167

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
997

 
$
84

 
$
—

 
$
1,081

 
$
1

 
$
1,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

SWEPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
596

 
$
—

 
$
—

 
$
596

 
$
(90
)
 
$
506

Long-term Risk Management Assets
 
9

 
—

 
—

 
9

 
(9
)
 
—

Total Assets
 
605

 
—

 
—

 
605

 
(99
)
 
506

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
572

 
$
—

 
$
—

 
$
572

 
$
(83
)
 
$
489


SWEPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,233

 
$
97

 
$
—

 
$
1,330

 
$
(151
)
 
$
1,179

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,233

 
97

 
—

 
1,330

 
(151
)
 
1,179

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
1,079

 
$
97

 
$
—

 
$
1,176

 
$
3

 
$
1,179


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

The tables below present the Registrant Subsidiaries’ activity of derivative risk management contracts for the three and six months ended June 30, 2014 and 2013:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
1,184

 
$
1,323

 
$
56

 
$
63

 
$
(79
)
Sales to AEP Affiliates
 
—

 
(300
)
 
—

 
300

 
—

Regulatory Assets (a)
 
—

 
—

 
—

 
(12
)
 
(16
)
Regulatory Liabilities (a)
 
13,718

 
8,793

 
6,404

 
(669
)
 
(1,019
)
Total Gain (Loss) on Risk Management Contracts
 
$
14,902

 
$
9,816

 
$
6,460

 
$
(318
)
 
$
(1,114
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
194

 
$
2,897

 
$
1,819

 
$
169

 
$
302

Regulatory Assets (a)
 
(974
)
 
(1,585
)
 
(4,492
)
 
192

 
(373
)
Regulatory Liabilities (a)
 
1,230

 
(880
)
 
3,360

 
(1
)
 
39

Total Gain (Loss) on Risk Management Contracts
 
$
450

 
$
432

 
$
687

 
$
360

 
$
(32
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
6,031

 
$
7,479

 
$
56

 
$
127

 
$
(56
)
Sales to AEP Affiliates
 
—

 
(521
)
 
—

 
521

 
—

Regulatory Assets (a)
 
4

 
—

 
—

 
(10
)
 
(13
)
Regulatory Liabilities (a)
 
46,050

 
27,110

 
41,503

 
(189
)
 
311

Total Gain on Risk Management Contracts
 
$
52,085

 
$
34,068

 
$
41,559

 
$
449

 
$
242


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
873

 
$
7,844

 
$
3,533

 
$
216

 
$
330

Regulatory Assets (a)
 
—

 
(1,099
)
 
(5,697
)
 
2,202

 
(102
)
Regulatory Liabilities (a)
 
(210
)
 
(6,062
)
 
3,360

 
—

 
135

Total Gain on Risk Management Contracts
 
$
663

 
$
683

 
$
1,196

 
$
2,418

 
$
363

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

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

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

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

Accounting for Fair Value Hedging Strategies

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

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the condensed statements of income. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2014, APCo and I&M designated power, coal and natural gas derivatives as cash flow hedges. During the three and six months ended June 30, 2013, APCo, I&M and OPCo designated power, coal and natural gas derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the condensed statements of income. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Interest Expense on the condensed statements of income in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2014 and 2013, I&M designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Depreciation and Amortization expense on the condensed statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any foreign currency derivatives as cash flow hedges.

During the three and six months ended June 30, 2014 and 2013, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2014 and 2013, see Note 3.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of June 30, 2014 and December 31, 2013 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
June 30, 2014
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3,596

I&M
 
—

 
—

 
—

 
—

 
—

 
(15,155
)
OPCo
 
—

 
—

 
—

 
—

 
—

 
6,288

PSO
 
—

 
—

 
—

 
—

 
—

 
5,322

SWEPCo
 
—

 
—

 
—

 
—

 
—

 
(12,169
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
 
 
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Maximum Term for
Exposure to
Variability of Future
Cash Flows
 
 
(in thousands)
 
(in months)
APCo
 
$
—

 
$
(431
)
 
0
I&M
 
—

 
(1,283
)
 
0
OPCo
 
—

 
1,372

 
0
PSO
 
—

 
759

 
0
SWEPCo
 
—

 
(2,267
)
 
0

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
December 31, 2013
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
363

 
$
—

 
$
287

 
$
—

 
$
94

 
$
3,090

I&M
 
216

 
—

 
194

 
—

 
46

 
(15,976
)
OPCo
 
162

 
—

 
—

 
—

 
105

 
6,974

PSO
 
84

 
—

 
—

 
—

 
57

 
5,701

SWEPCo
 
97

 
—

 
—

 
—

 
66

 
(13,304
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
94

 
$
(806
)
I&M
 
46

 
(1,568
)
OPCo
 
105

 
1,363

PSO
 
57

 
759

SWEPCo
 
66

 
(2,267
)

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

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

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

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

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering items in contracts. The Registrant Subsidiaries have not experienced a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries’ fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
140

 
$
3,096

 
$
3,023

I&M
 
95

 
2,096

 
2,051

OPCo
 
—

 
—

 
—

PSO
 
3

 
10,137

 
5,989

SWEPCo
 
3

 
7,729

 
7,585

 
 
December 31, 2013
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
575

 
$
2,747

 
$
2,539

I&M
 
390

 
1,863

 
1,722

OPCo
 
349

 
—

 
—

PSO
 
—

 
2,930

 
410

SWEPCo
 
—

 
713

 
519


In addition, a majority of the Registrant Subsidiaries’ non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries’ contractual netting arrangements as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
10,809

 
$
—

 
$
7,909

I&M
 
7,328

 
—

 
5,362

OPCo
 
—

 
—

 
—

PSO
 
14

 
—

 
14

SWEPCo
 
18

 
—

 
18

 
 
December 31, 2013
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
19,648

 
$
—

 
$
18,568

I&M
 
13,326

 
—

 
12,594

OPCo
 
—

 
—

 
—

PSO
 
3

 
—

 
3

SWEPCo
 
3

 
—

 
3
Southwestern Electric Power Co [Member]
  
Derivatives and Hedging
DERIVATIVES AND HEDGING

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, natural gas, coal and emission allowances.  These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk.  These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates.  AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

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

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

The following tables represent the gross notional volume of the Registrant Subsidiaries’ outstanding derivative contracts as of June 30, 2014 and December 31, 2013:

Notional Volume of Derivative Instruments
June 30, 2014
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
67,059

 
48,352

 
32,686

 
14,744

 
18,668

Coal
 
Tons
 
465

 
1,778

 
—

 
500

 
917

Natural Gas
 
MMBtus
 
1,540

 
1,030

 
—

 
68

 
87

Heating Oil and Gasoline
 
Gallons
 
891

 
427

 
907

 
502

 
572

Interest Rate
 
USD
 
$
8,041

 
$
5,454

 
$
—

 
$
—

 
$
—


Notional Volume of Derivative Instruments
December 31, 2013
Primary Risk
Exposure
 
Unit of
Measure
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
 
 
(in thousands)
Commodity:
 
 
 
 
 
 

 
 

 
 

 
 

Power
 
MWhs
 
48,995

 
33,231

 
34,843

 
13,469

 
17,057

Coal
 
Tons
 
31

 
3,389

 
—

 
1,013

 
1,692

Natural Gas
 
MMBtus
 
2,477

 
1,680

 
—

 
—

 
—

Heating Oil and Gasoline
 
Gallons
 
1,089

 
521

 
1,108

 
614

 
699

Interest Rate
 
USD
 
$
12,720

 
$
8,627

 
$
—

 
$
—

 
$
—



Fair Value Hedging Strategies

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

Cash Flow Hedging Strategies

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power and natural gas (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

The Registrant Subsidiaries’ vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated financial heating oil and gasoline derivatives as cash flow hedges. For disclosure purposes, these contracts were included with other hedging activities as “Commodity” as of December 31, 2013. In March 2014, these contracts were grouped as "Commodity" with other risk management activities. The Registrant Subsidiaries do not hedge all fuel price risk.

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

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP’s risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency’s appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.
 
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS
 
The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the condensed balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

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

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2014 and December 31, 2013 condensed balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:
 
 
June 30, 2014
 
December 31, 2013
Company
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
Cash Collateral
Received
Netted Against
Risk Management
Assets
 
Cash Collateral
Paid
Netted Against
Risk Management
Liabilities
 
 
(in thousands)
APCo
 
$
1,356

 
$
137

 
$
—

 
$
2,993

I&M
 
894

 
333

 
—

 
2,030

OPCo
 
145

 
—

 
—

 
—

PSO
 
72

 
—

 
—

 
1

SWEPCo
 
83

 
—

 
—

 
3


The following tables represent the gross fair value of the Registrant Subsidiaries’ derivative activity on the condensed balance sheets as of June 30, 2014 and December 31, 2013:
 
APCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
38,369

 
$
—

 
$
—

 
$
38,369

 
$
(13,550
)
 
$
24,819

Long-term Risk Management Assets
 
10,305

 
—

 
—

 
10,305

 
(2,195
)
 
8,110

Total Assets
 
48,674

 
—

 
—

 
48,674

 
(15,745
)
 
32,929

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
16,948

 
—

 
—

 
16,948

 
(12,722
)
 
4,226

Long-term Risk Management Liabilities
 
5,570

 
—

 
—

 
5,570

 
(1,804
)
 
3,766

Total Liabilities
 
22,518

 
—

 
—

 
22,518

 
(14,526
)
 
7,992

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
26,156

 
$
—

 
$
—

 
$
26,156

 
$
(1,219
)
 
$
24,937


APCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
46,431

 
$
389

 
$
—

 
$
46,820

 
$
(25,649
)
 
$
21,171

Long-term Risk Management Assets
 
20,948

 
—

 
—

 
20,948

 
(4,000
)
 
16,948

Total Assets
 
67,379

 
389

 
—

 
67,768

 
(29,649
)
 
38,119

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
37,010

 
313

 
—

 
37,323

 
(28,431
)
 
8,892

Long-term Risk Management Liabilities
 
14,452

 
—

 
—

 
14,452

 
(4,211
)
 
10,241

Total Liabilities
 
51,462

 
313

 
—

 
51,775

 
(32,642
)
 
19,133

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
15,917

 
$
76

 
$
—

 
$
15,993

 
$
2,993

 
$
18,986


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

I&M

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
27,932

 
$
—

 
$
—

 
$
27,932

 
$
(10,043
)
 
$
17,889

Long-term Risk Management Assets
 
6,894

 
—

 
—

 
6,894

 
(1,487
)
 
5,407

Total Assets
 
34,826

 
—

 
—

 
34,826

 
(11,530
)
 
23,296

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
13,222

 
—

 
—

 
13,222

 
(9,745
)
 
3,477

Long-term Risk Management Liabilities
 
3,778

 
—

 
—

 
3,778

 
(1,224
)
 
2,554

Total Liabilities
 
17,000

 
—

 
—

 
17,000

 
(10,969
)
 
6,031

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
17,826

 
$
—

 
$
—

 
$
17,826

 
$
(561
)
 
$
17,265


I&M

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
33,229

 
$
234

 
$
—

 
$
33,463

 
$
(18,075
)
 
$
15,388

Long-term Risk Management Assets
 
14,208

 
—

 
—

 
14,208

 
(2,713
)
 
11,495

Total Assets
 
47,437

 
234

 
—

 
47,671

 
(20,788
)
 
26,883

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
26,779

 
212

 
—

 
26,991

 
(19,962
)
 
7,029

Long-term Risk Management Liabilities
 
9,802

 
—

 
—

 
9,802

 
(2,856
)
 
6,946

Total Liabilities
 
36,581

 
212

 
—

 
36,793

 
(22,818
)
 
13,975

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
10,856

 
$
22

 
$
—

 
$
10,878

 
$
2,030

 
$
12,908


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

OPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
9,430

 
$
—

 
$
—

 
$
9,430

 
$
(131
)
 
$
9,299

Long-term Risk Management Assets
 
14

 
—

 
—

 
14

 
(14
)
 
—

Total Assets
 
9,444

 
—

 
—

 
9,444

 
(145
)
 
9,299

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
9,444

 
$
—

 
$
—

 
$
9,444

 
$
(145
)
 
$
9,299


OPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
3,269

 
$
162

 
$
—

 
$
3,431

 
$
(349
)
 
$
3,082

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
3,269

 
162

 
—

 
3,431

 
(349
)
 
3,082

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
349

 
—

 
—

 
349

 
(349
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
2,920

 
$
162

 
$
—

 
$
3,082

 
$
—

 
$
3,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

PSO

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
509

 
$
—

 
$
—

 
$
509

 
$
13

 
$
522

Long-term Risk Management Assets
 
8

 
—

 
—

 
8

 
(8
)
 
—

Total Assets
 
517

 
—

 
—

 
517

 
5

 
522

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
25

 
—

 
—

 
25

 
77

 
102

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
492

 
$
—

 
$
—

 
$
492

 
$
(72
)
 
$
420


PSO

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,078

 
$
84

 
$
—

 
$
1,162

 
$
5

 
$
1,167

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,078

 
84

 
—

 
1,162

 
5

 
1,167

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
81

 
—

 
—

 
81

 
4

 
85

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
997

 
$
84

 
$
—

 
$
1,081

 
$
1

 
$
1,082


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

SWEPCo

Fair Value of Derivative Instruments
June 30, 2014
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
596

 
$
—

 
$
—

 
$
596

 
$
(90
)
 
$
506

Long-term Risk Management Assets
 
9

 
—

 
—

 
9

 
(9
)
 
—

Total Assets
 
605

 
—

 
—

 
605

 
(99
)
 
506

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
33

 
—

 
—

 
33

 
(16
)
 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
572

 
$
—

 
$
—

 
$
572

 
$
(83
)
 
$
489


SWEPCo

Fair Value of Derivative Instruments
December 31, 2013
 
 
Risk
Management
Contracts
 
Hedging Contracts
 
Gross Amounts
of Risk
Management
Assets/
Liabilities
Recognized
 
Gross
Amounts
Offset in the
Statement of
Financial
Position (b)
 
Net Amounts of
Assets/Liabilities
Presented in the
Statement of
Financial
Position (c)
Balance Sheet Location
 
Commodity (a)
 
Commodity (a)
 
Interest Rate
and Foreign
Currency (a)
 
 
 
 
 
(in thousands)
Current Risk Management Assets
 
$
1,233

 
$
97

 
$
—

 
$
1,330

 
$
(151
)
 
$
1,179

Long-term Risk Management Assets
 
—

 
—

 
—

 
—

 
—

 
—

Total Assets
 
1,233

 
97

 
—

 
1,330

 
(151
)
 
1,179

 
 
 
 
 
 
 
 
 
 
 
 
 
Current Risk Management Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

Long-term Risk Management Liabilities
 
—

 
—

 
—

 
—

 
—

 
—

Total Liabilities
 
154

 
—

 
—

 
154

 
(154
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total MTM Derivative Contract Net Assets (Liabilities)
 
$
1,079

 
$
97

 
$
—

 
$
1,176

 
$
3

 
$
1,179


(a)
Derivative instruments within these categories are reported gross.  These instruments are subject to master netting agreements and are presented on the condensed balance sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."
(b)
Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging."
(c)
There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the statement of financial position.

The tables below present the Registrant Subsidiaries’ activity of derivative risk management contracts for the three and six months ended June 30, 2014 and 2013:

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
1,184

 
$
1,323

 
$
56

 
$
63

 
$
(79
)
Sales to AEP Affiliates
 
—

 
(300
)
 
—

 
300

 
—

Regulatory Assets (a)
 
—

 
—

 
—

 
(12
)
 
(16
)
Regulatory Liabilities (a)
 
13,718

 
8,793

 
6,404

 
(669
)
 
(1,019
)
Total Gain (Loss) on Risk Management Contracts
 
$
14,902

 
$
9,816

 
$
6,460

 
$
(318
)
 
$
(1,114
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Three Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
194

 
$
2,897

 
$
1,819

 
$
169

 
$
302

Regulatory Assets (a)
 
(974
)
 
(1,585
)
 
(4,492
)
 
192

 
(373
)
Regulatory Liabilities (a)
 
1,230

 
(880
)
 
3,360

 
(1
)
 
39

Total Gain (Loss) on Risk Management Contracts
 
$
450

 
$
432

 
$
687

 
$
360

 
$
(32
)

Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2014
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
6,031

 
$
7,479

 
$
56

 
$
127

 
$
(56
)
Sales to AEP Affiliates
 
—

 
(521
)
 
—

 
521

 
—

Regulatory Assets (a)
 
4

 
—

 
—

 
(10
)
 
(13
)
Regulatory Liabilities (a)
 
46,050

 
27,110

 
41,503

 
(189
)
 
311

Total Gain on Risk Management Contracts
 
$
52,085

 
$
34,068

 
$
41,559

 
$
449

 
$
242


Amount of Gain (Loss) Recognized on
Risk Management Contracts
For the Six Months Ended June 30, 2013
Location of Gain (Loss)
 
APCo
 
I&M
 
OPCo
 
PSO
 
SWEPCo
 
 
(in thousands)
Electric Generation, Transmission and Distribution Revenues
 
$
873

 
$
7,844

 
$
3,533

 
$
216

 
$
330

Regulatory Assets (a)
 
—

 
(1,099
)
 
(5,697
)
 
2,202

 
(102
)
Regulatory Liabilities (a)
 
(210
)
 
(6,062
)
 
3,360

 
—

 
135

Total Gain on Risk Management Contracts
 
$
663

 
$
683

 
$
1,196

 
$
2,418

 
$
363

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

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

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

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

Accounting for Fair Value Hedging Strategies

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

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the condensed statements of income. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

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

Realized gains and losses on derivative contracts for the purchase and sale of power, coal and natural gas designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the condensed statements of income, or in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2014, APCo and I&M designated power, coal and natural gas derivatives as cash flow hedges. During the three and six months ended June 30, 2013, APCo, I&M and OPCo designated power, coal and natural gas derivatives as cash flow hedges.

The Registrant Subsidiaries reclassify gains and losses on heating oil and gasoline derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the condensed statements of income. During the three and six months ended June 30, 2013, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges. Cash flow hedge accounting for these derivative contracts was discontinued effective March 31, 2014.

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Interest Expense on the condensed statements of income in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2014 and 2013, I&M designated interest rate derivatives as cash flow hedges.

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets into Depreciation and Amortization expense on the condensed statements of income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2014 and 2013, the Registrant Subsidiaries did not designate any foreign currency derivatives as cash flow hedges.

During the three and six months ended June 30, 2014 and 2013, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

For details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2014 and 2013, see Note 3.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the condensed balance sheets as of June 30, 2014 and December 31, 2013 were:

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
June 30, 2014
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
3,596

I&M
 
—

 
—

 
—

 
—

 
—

 
(15,155
)
OPCo
 
—

 
—

 
—

 
—

 
—

 
6,288

PSO
 
—

 
—

 
—

 
—

 
—

 
5,322

SWEPCo
 
—

 
—

 
—

 
—

 
—

 
(12,169
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
 
 
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Maximum Term for
Exposure to
Variability of Future
Cash Flows
 
 
(in thousands)
 
(in months)
APCo
 
$
—

 
$
(431
)
 
0
I&M
 
—

 
(1,283
)
 
0
OPCo
 
—

 
1,372

 
0
PSO
 
—

 
759

 
0
SWEPCo
 
—

 
(2,267
)
 
0

Impact of Cash Flow Hedges on the Registrant Subsidiaries’
Condensed Balance Sheets
December 31, 2013
 
 
Hedging Assets (a)
 
Hedging Liabilities (a)
 
AOCI Gain (Loss) Net of Tax
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
363

 
$
—

 
$
287

 
$
—

 
$
94

 
$
3,090

I&M
 
216

 
—

 
194

 
—

 
46

 
(15,976
)
OPCo
 
162

 
—

 
—

 
—

 
105

 
6,974

PSO
 
84

 
—

 
—

 
—

 
57

 
5,701

SWEPCo
 
97

 
—

 
—

 
—

 
66

 
(13,304
)
 
 
Expected to be Reclassified to
Net Income During the Next
Twelve Months
Company
 
Commodity
 
Interest Rate
and Foreign
Currency
 
 
(in thousands)
APCo
 
$
94

 
$
(806
)
I&M
 
46

 
(1,568
)
OPCo
 
105

 
1,363

PSO
 
57

 
759

SWEPCo
 
66

 
(2,267
)

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

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

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

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

Collateral Triggering Events

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering items in contracts. The Registrant Subsidiaries have not experienced a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries’ fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
140

 
$
3,096

 
$
3,023

I&M
 
95

 
2,096

 
2,051

OPCo
 
—

 
—

 
—

PSO
 
3

 
10,137

 
5,989

SWEPCo
 
3

 
7,729

 
7,585

 
 
December 31, 2013
Company
 
Liabilities for
Derivative Contracts
with Credit
Downgrade Triggers
 
Amount of Collateral the
Registrant Subsidiaries
Would Have Been
Required to Post
 
Amount
Attributable to
RTO and ISO
Activities
 
 
(in thousands)
APCo
 
$
575

 
$
2,747

 
$
2,539

I&M
 
390

 
1,863

 
1,722

OPCo
 
349

 
—

 
—

PSO
 
—

 
2,930

 
410

SWEPCo
 
—

 
713

 
519


In addition, a majority of the Registrant Subsidiaries’ non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries’ contractual netting arrangements as of June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
10,809

 
$
—

 
$
7,909

I&M
 
7,328

 
—

 
5,362

OPCo
 
—

 
—

 
—

PSO
 
14

 
—

 
14

SWEPCo
 
18

 
—

 
18

 
 
December 31, 2013
Company
 
Liabilities for
Contracts with Cross
Default Provisions
Prior to Contractual
Netting Arrangements
 
Amount of Cash
Collateral Posted
 
Additional
Settlement
Liability if Cross
Default Provision
is Triggered
 
 
(in thousands)
APCo
 
$
19,648

 
$
—

 
$
18,568

I&M
 
13,326

 
—

 
12,594

OPCo
 
—

 
—

 
—

PSO
 
3

 
—

 
3

SWEPCo
 
3

 
—

 
3