Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

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

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

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

Assets in the nuclear trusts, Cash and Cash Equivalents and Other Temporary Investments are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds.  Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data.  Pricing vendors calculate bond valuations using financial models and matrices.  The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation.  Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments.  Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

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

The book values and fair values of Long-term Debt as of September 30, 2015 and December 31, 2014 are summarized in the following table:

	September 30, 2015				December 31, 2014
	Book Value (a)		Fair Value		Book Value (a)		Fair Value
	(in millions)
Long-term Debt	$	19,507	$	21,257	$	18,684	$	21,075

(a) Amounts include debt related to AEPRO that have been classified as Liabilities Held for Sale on the condensed balance sheets. See "AEPRO (AEP River Operations Segment)" section of Note 6 for additional information.

Fair Value Measurements of Other Temporary Investments

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

The following is a summary of Other Temporary Investments:

	September 30, 2015
Other Temporary Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Restricted Cash (a)	$	201	$	—	$	—	$	201
Fixed Income Securities – Mutual Funds	90		—		—		90
Equity Securities – Mutual Funds	14		10		—		24
Total Other Temporary Investments	$	305	$	10	$	—	$	315
	December 31, 2014
Other Temporary Investments	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Restricted Cash (a)	$	280	$	—	$	—	$	280
Fixed Income Securities – Mutual Funds	81		—		—		81
Equity Securities – Mutual Funds	13		12		—		25
Total Other Temporary Investments	$	374	$	12	$	—	$	386

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

The following table provides the activity for our fixed income and equity securities within Other Temporary Investments for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in millions)
Proceeds from Investment Sales	$	—	$	—	$	—	$	—
Purchases of Investments	10		—		10		1
Gross Realized Gains on Investment Sales	—		—		—		—
Gross Realized Losses on Investment Sales	—		—		—		—

As of September 30, 2015 and December 31, 2014, we had no Other Temporary Investments with an unrealized loss position.  As of September 30, 2015, fixed income securities were primarily debt based mutual funds with short and intermediate maturities.  Mutual funds may be sold and do not contain maturity dates.

For details of the reasons for changes in Securities Available for Sale included in Accumulated Other Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014, see Note 3.

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

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

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

• Maximum percentage invested in a specific type of investment.

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

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

We maintain trust records for each regulatory jurisdiction.  These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities.  The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm.  The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy.  Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment.  I&M records unrealized gains and other-than-temporary impairments from securities in the trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates.  Consequently, changes in fair value of trust assets do not affect earnings or AOCI.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
	Fair Value		Gross Unrealized Gains		Other-Than- Temporary Impairments			Fair Value		Gross Unrealized Gains		Other-Than- Temporary Impairments
	(in millions)
Cash and Cash Equivalents	$	164	$	—	$	—		$	20	$	—	$	—
Fixed Income Securities:
United States Government	704		45		(2		)	697		45		(5		)
Corporate Debt	62		4		(1		)	48		4		(1		)
State and Local Government	50		1		—			208		1		—
Subtotal Fixed Income Securities	816		50		(3		)	953		50		(6		)
Equity Securities – Domestic	1,067		516		(80		)	1,123		599		(79		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,047	$	566	$	(83	)	$	2,096	$	649	$	(85	)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in millions)
Proceeds from Investment Sales	$	921	$	263	$	1,437	$	746
Purchases of Investments	938		281		1,479		790
Gross Realized Gains on Investment Sales	15		8		34		25
Gross Realized Losses on Investment Sales	13		1		23		10

The adjusted cost of fixed income securities was $766 million and $903 million as of September 30, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $551 million and $524 million as of September 30, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, 2015 was as follows:

	Fair Value of Fixed Income Securities
	(in millions)
Within 1 year	$	166
1 year – 5 years	336
5 years – 10 years	140
After 10 years	174
Total	$	816

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in our valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in millions)
Cash and Cash Equivalents (a)	$	12	$	4	$	—	$	162		$	178
Other Temporary Investments
Restricted Cash (a)	189		6		—		6			201
Fixed Income Securities - Mutual Funds	90		—		—		—			90
Equity Securities – Mutual Funds (b)	24		—		—		—			24
TotalOther Temporary Investments	303		6		—		6			315
Risk Management Assets
Risk Management Commodity Contracts (c) (d)	17		478		248		(256		)	487
Cash Flow Hedges:
Commodity Hedges (c)	—		10		1		(4		)	7
Fair Value Hedges	—		1		—		1			2
Total Risk Management Assets	17		489		249		(259		)	496
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (e)	157		—		—		7			164
Fixed Income Securities:
United States Government	—		704		—		—			704
Corporate Debt	—		62		—		—			62
State and Local Government	—		50		—		—			50
Subtotal Fixed Income Securities	—		816		—		—			816
Equity Securities – Domestic (b)	1,067		—		—		—			1,067
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,224		816		—		7			2,047
Total Assets	$	1,556	$	1,315	$	249	$	(84	)	$	3,036
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (c) (d)	$	33	$	440	$	76	$	(299	)	$	250
Cash Flow Hedges:
Commodity Hedges (c)	—		22		6		(4		)	24
Interest Rate/Foreign Currency Hedges	—		1		—		—			1
Fair Value Hedges	—		—		—		1			1
Total Risk Management Liabilities	$	33	$	463	$	82	$	(302	)	$	276

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

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

(a) Amounts in ''Other'' column primarily represent cash deposits in bank accounts with financial institutions or with third parties.  Level 1 and Level 2 amounts primarily represent investments in money market funds.

(b) Amounts represent publicly traded equity securities and equity-based mutual funds.

(c) Amounts in ''Other'' column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for ''Derivatives and Hedging.''

(d) The September 30, 2015 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows:  Level 1 matures ($4) million in 2015 and ($12) million in periods 2016-2018;  Level 2 matures $5 million in 2015, $28 million in periods 2016-2018, $3 million in periods 2019-2020 and $2 million in periods 2021-2032;  Level 3 matures $2 million in 2015, $63 million in periods 2016-2018, $25 million in periods 2019-2020 and $82 million in periods 2021-2032.  Risk management commodity contracts are substantially comprised of power contracts.

(e) Amounts in ''Other'' column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

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

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives and other investments classified as Level 3 in the fair value hierarchy:

Three Months Ended September 30, 2015	Net Risk Management Assets (Liabilities)
	(in millions)
Balance as of June 30, 2015	$	203
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	11
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	6
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(2		)
Purchases, Issuances and Settlements (c)	(29		)
Transfers into Level 3 (d) (e)	8
Transfers out of Level 3 (e) (f)	(5		)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	(25		)
Balance as of September 30, 2015	$	167

Three Months Ended September 30, 2014	Net Risk Management Assets (Liabilities)
	(in millions)
Balance as of June 30, 2014	$	132
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	(9		)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	10
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(3		)
Purchases, Issuances and Settlements (c)	(5		)
Transfers into Level 3 (d) (e)	(9		)
Transfers out of Level 3 (e) (f)	(1		)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	14
Balance as of September 30, 2014	$	129

Nine Months Ended September 30, 2015	Net Risk Management Assets (Liabilities)
	(in millions)
Balance as of December 31, 2014	$	151
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	14
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	54
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	(4		)
Purchases, Issuances and Settlements (c)	(60		)
Transfers into Level 3 (d) (e)	28
Transfers out of Level 3 (e) (f)	(17		)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	1
Balance as of September 30, 2015	$	167

Nine Months Ended September 30, 2014	Net Risk Management Assets (Liabilities)
	(in millions)
Balance as of December 31, 2013	$	117
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)	91
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets) Relating to Assets Still Held at the Reporting Date (a)	(3		)
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income	12
Purchases, Issuances and Settlements (c)	(103		)
Transfers into Level 3 (d) (e)	(9		)
Transfers out of Level 3 (e) (f)	(8		)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)	32
Balance as of September 30, 2014	$	129

(a) Included in revenues on the condensed statements of income.

(b) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(c) Represents the settlement of risk management commodity contracts for the reporting period.

(d) Represents existing assets or liabilities that were previously categorized as Level 2.

(e) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(f) Represents existing assets or liabilities that were previously categorized as Level 3.

(g) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.

The following tables quantify the significant unobservable inputs used in developing the fair value of our Level 3 positions as of September 30, 2015 and December 31, 2014:

Significant Unobservable Inputs

September 30, 2015

						Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input	Low			High		Average
	(in millions)
Energy Contracts	$	226	$	79	Discounted Cash Flow	Forward Market Price (a)	$	13.03		$	165.93	$	36.37
						Counterparty Credit Risk (b)	481
FTRs	23		3		Discounted Cash Flow	Forward Market Price (a)	(10.67		)	11.60		1.31
Total	$	249	$	82

Significant Unobservable Inputs

December 31, 2014

						Significant	Input/Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input	Low			High		Average
	(in millions)
Energy Contracts	$	157	$	37	Discounted Cash Flow	Forward Market Price (a)	$	11.37		$	159.92	$	57.18
						Counterparty Credit Risk (b)	303
FTRs	33		2		Discounted Cash Flow	Forward Market Price (a)	(14.63		)	20.02		0.96
Total	$	190	$	39

(a) Represents market prices in dollars per MWh.

(b) Represents average price of credit default swaps used to calculate counterparty credit risk, reported in basis points.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs as of September 30, 2015:

Sensitivity of Fair Value Measurements

September 30, 2015

Significant Unobservable Input	Position	Change in Input	Impact on Fair Value Measurement
Forward Market Price	Buy	Increase (Decrease)	Higher (Lower)
Forward Market Price	Sell	Increase (Decrease)	Lower (Higher)
Counterparty Credit Risk	Loss	Increase (Decrease)	Higher (Lower)
Counterparty Credit Risk	Gain	Increase (Decrease)	Lower (Higher)

Appalachian Power Co [Member]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

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

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

AEP utilizes its trustee’s external pricing service in its estimate of the fair value of the underlying investments held in the nuclear trusts.  AEP’s investment managers review and validate the prices utilized by the trustee to determine fair value.  AEP’s management performs its own valuation testing to verify the fair values of the securities.  AEP receives audit reports of the trustee’s operating controls and valuation processes.  The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, Restricted Cash for Securitized Funding and Cash and Cash Equivalents are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds.  Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data.  Pricing vendors calculate bond valuations using financial models and matrices.  The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation.  Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments.  Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

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

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014 are summarized in the following table:

	September 30, 2015				December 31, 2014
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,955,295	$	4,460,140	$	3,980,274	$	4,711,210
I&M	2,060,651		2,241,930		2,027,397		2,255,124
OPCo	2,166,050		2,502,105		2,297,123		2,709,452
PSO	1,290,973		1,424,300		1,041,036		1,216,205
SWEPCo	2,283,966		2,446,716		2,140,437		2,402,639

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

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

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

• Maximum percentage invested in a specific type of investment.

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

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

I&M maintains trust records for each regulatory jurisdiction.  These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities.  The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm.  The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy.  Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment.  I&M records unrealized gains and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates.  Consequently, changes in fair value of trust assets do not affect earnings or AOCI.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
			Gross		Other-Than-					Gross		Other-Than-
	Fair		Unrealized		Temporary			Fair		Unrealized		Temporary
	Value		Gains		Impairments			Value		Gains		Impairments
	(in thousands)
Cash and Cash Equivalents	$	164,353	$	—	$	—		$	19,966	$	—	$	—
Fixed Income Securities:
United States Government	704,344		45,005		(2,291		)	697,042		44,615		(5,016		)
Corporate Debt	62,118		3,682		(1,043		)	47,792		4,523		(1,018		)
State and Local Government	50,018		996		(324		)	208,553		1,206		(319		)
Subtotal Fixed Income Securities	816,480		49,683		(3,658		)	953,387		50,344		(6,353		)
Equity Securities - Domestic	1,066,427		516,206		(80,280		)	1,122,379		598,788		(79,142		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,047,260	$	565,889	$	(83,938	)	$	2,095,732	$	649,132	$	(85,495	)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Proceeds from Investment Sales	$	921,552	$	263,738	$	1,437,336	$	746,272
Purchases of Investments	938,438		280,626		1,479,149		789,461
Gross Realized Gains on Investment Sales	15,030		7,617		33,840		24,835
Gross Realized Losses on Investment Sales	13,167		1,739		22,823		10,447

The adjusted cost of fixed income securities was $766 million and $903 million as of September 30, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $551 million and $524 million as of September 30, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, 2015 was as follows:

	Fair Value of Fixed Income Securities
	(in thousands)
Within 1 year	$	166,336
1 year – 5 years	335,823
5 years – 10 years	140,129
After 10 years	174,192
Total	$	816,480

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in management’s valuation techniques.

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	7,436	$	—	$	—	$	57		$	7,493
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	185		12,785		23,743		(7,328		)	29,385
Total Assets:	$	7,621	$	12,785	$	23,743	$	(7,271	)	$	36,878
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	198	$	16,031	$	662	$	(9,016	)	$	7,875

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	15,599	$	—	$	—	$	33		$	15,632
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	206		20,197		17,654		(9,374		)	28,683
Total Assets:	$	15,805	$	20,197	$	17,654	$	(9,341	)	$	44,315
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	227	$	20,339	$	1,912	$	(9,404	)	$	13,074

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	$	126	$	10,347	$	7,795	$	(6,303	)	$	11,965
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	157,409		—		—		6,944			164,353
Fixed Income Securities:
United States Government	—		704,344		—		—			704,344
Corporate Debt	—		62,118		—		—			62,118
State and Local Government	—		50,018		—		—			50,018
Subtotal Fixed Income Securities	—		816,480		—		—			816,480
Equity Securities - Domestic (e)	1,066,427		—		—		—			1,066,427
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,223,836		816,480		—		6,944			2,047,260
Total Assets	$	1,223,962	$	826,827	$	7,795	$	641		$	2,059,225
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	135	$	10,945	$	1,419	$	(6,636	)	$	5,863

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	140	$	15,893	$	16,008	$	(6,396	)	$	25,645
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	9,418		—		—		10,548			19,966
Fixed Income Securities:
United States Government	—		697,042		—		—			697,042
Corporate Debt	—		47,792		—		—			47,792
State and Local Government	—		208,553		—		—			208,553
Subtotal Fixed Income Securities	—		953,387		—		—			953,387
Equity Securities - Domestic (e)	1,122,379		—		—		—			1,122,379
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,131,797		953,387		—		10,548			2,095,732
Total Assets	$	1,131,937	$	969,280	$	16,008	$	4,152		$	2,121,377
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	154	$	11,440	$	1,304	$	(6,280	)	$	6,618

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other		Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	16,195	$	—	$	—	$	9	$	16,204
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		20,719		2,546		23,265
Total Assets	$	16,195	$	—	$	20,719	$	2,555	$	39,469
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	639	$	5,009	$	2,046	$	7,694

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	408	$	—	$	—	$	28,288		$	28,696
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		52,343		1			52,344
Total Assets	$	408	$	—	$	52,343	$	28,289		$	81,040
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	1,116	$	3,941	$	(101	)	$	4,956

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	1,166	$	(131	)	$	1,035
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	358	$	131	$	(411	)	$	78

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	360	$	(360	)	$	—
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	595	$	737	$	(414	)	$	918

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	11,688	$	—	$	—	$	2,570		$	14,258
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		1,442		(162		)	1,280
Total Assets	$	11,688	$	—	$	1,442	$	2,408		$	15,538
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	2,378	$	162	$	(481	)	$	2,059

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	12,660	$	—	$	—	$	1,696		$	14,356
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		31		439		(439		)	31
Total Assets	$	12,660	$	31	$	439	$	1,257		$	14,387
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	684	$	899	$	(501	)	$	1,082

(a) Amounts in "Other" column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 amounts primarily represent investment in money market funds.

(b) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(c) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

(e) Amounts represent publicly traded equity securities and equity-based mutual funds.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy for the Registrant Subsidiaries:

Three Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2015	$	33,836		$	11,844		$	37,657		$	1,699		$	2,039
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	5,065			885			(28		)	(280		)	2,366
Purchases, Issuances and Settlements (d)	(13,965		)	(3,604		)	348			(176		)	(2,912		)
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	(1,855		)	(2,749		)	(22,267		)	(208		)	(213		)
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Three Months Ended September 30, 2014	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2014	$	18,394		$	12,923		$	9,300		$	(3	)	$	(3	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	(5,629		)	(3,832		)	(3,639		)	2			2
Purchases, Issuances and Settlements (d)	(1,560		)	(1,244		)	(637		)	—			—
Transfers into Level 3 (e) (f)	(6		)	(4		)	—			—			—
Transfers out of Level 3 (f) (g)	(30		)	(20		)	—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	4,843			4,319			2,865			335			409
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334		$	408

Nine Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of December 31, 2014	$	15,742		$	14,704		$	48,402		$	(377	)	$	(460	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	1,757			(193		)	1,182			(176		)	9,187
Purchases, Issuances and Settlements (d)	(16,124		)	(12,807		)	(7,906		)	553			(8,727		)
Transfers out of Level 3 (f) (g)	1,167			792			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	20,539			3,880			(25,968		)	1,035			1,280
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Nine Months Ended September 30, 2014	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Balance as of December 31, 2013	$	10,562		$	7,164		$	2,920		$	—	$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	29,467			18,438			30,768			—		—
Purchases, Issuances and Settlements (d)	(32,213		)	(20,301		)	(33,688		)	—		—
Transfers into Level 3 (e) (f)	(3,648		)	(2,475		)	—			—		—
Transfers out of Level 3 (f) (g)	(32		)	(22		)	—			—		—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	11,876			9,338			7,889			334		408
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334	$	408

(a) Includes both affiliated and nonaffiliated transactions.

(b) Included in revenues on the condensed statements of income.

(c) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(d) Represents the settlement of risk management commodity contracts for the reporting period.

(e) Represents existing assets or liabilities that were previously categorized as Level 2.

(f) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(g) Represents existing assets or liabilities that were previously categorized as Level 3.

(h) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014:

Significant Unobservable Inputs

September 30, 2015

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	8,724	$	451	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	15,019		211		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	23,743	$	662

Significant Unobservable Inputs

December 31, 2014

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	5,801	$	1,799	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	11,853		113		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	17,654	$	1,912

Significant Unobservable Inputs

September 30, 2015

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	7,147	$	295	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	648		1,124		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	7,795	$	1,419

Significant Unobservable Inputs

December 31, 2014

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	6,375	$	1,219	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	9,633		85		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	16,008	$	1,304

Significant Unobservable Inputs

September 30, 2015

OPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

Energy Contracts

$

20,719

$

5,009

Discounted Cash Flow

Forward Market Price

$

35.71

$

165.93

$

85.99

Significant Unobservable Inputs

December 31, 2014

OPCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	45,101	$	3,941	Discounted Cash Flow	Forward Market Price	$	48.25		$	159.92	$	84.04
FTRs	7,242		—		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	52,343	$	3,941

Significant Unobservable Inputs

September 30, 2015

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,166

$

131

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

360

$

737

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

Significant Unobservable Inputs

September 30, 2015

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,442

$

162

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

439

$

899

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

(a) Represents market prices in dollars per MWh.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs for the Registrant Subsidiaries as of September 30, 2015:

Sensitivity of Fair Value Measurements

September 30, 2015

Significant Unobservable Input	Position	Change in Input	Impact on Fair Value Measurement
Forward Market Price	Buy	Increase (Decrease)	Higher (Lower)
Forward Market Price	Sell	Increase (Decrease)	Lower (Higher)

Indiana Michigan Power Co [Member]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

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

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

AEP utilizes its trustee’s external pricing service in its estimate of the fair value of the underlying investments held in the nuclear trusts.  AEP’s investment managers review and validate the prices utilized by the trustee to determine fair value.  AEP’s management performs its own valuation testing to verify the fair values of the securities.  AEP receives audit reports of the trustee’s operating controls and valuation processes.  The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, Restricted Cash for Securitized Funding and Cash and Cash Equivalents are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds.  Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data.  Pricing vendors calculate bond valuations using financial models and matrices.  The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation.  Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments.  Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

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

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014 are summarized in the following table:

	September 30, 2015				December 31, 2014
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,955,295	$	4,460,140	$	3,980,274	$	4,711,210
I&M	2,060,651		2,241,930		2,027,397		2,255,124
OPCo	2,166,050		2,502,105		2,297,123		2,709,452
PSO	1,290,973		1,424,300		1,041,036		1,216,205
SWEPCo	2,283,966		2,446,716		2,140,437		2,402,639

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

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

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

• Maximum percentage invested in a specific type of investment.

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

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

I&M maintains trust records for each regulatory jurisdiction.  These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities.  The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm.  The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy.  Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment.  I&M records unrealized gains and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates.  Consequently, changes in fair value of trust assets do not affect earnings or AOCI.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
			Gross		Other-Than-					Gross		Other-Than-
	Fair		Unrealized		Temporary			Fair		Unrealized		Temporary
	Value		Gains		Impairments			Value		Gains		Impairments
	(in thousands)
Cash and Cash Equivalents	$	164,353	$	—	$	—		$	19,966	$	—	$	—
Fixed Income Securities:
United States Government	704,344		45,005		(2,291		)	697,042		44,615		(5,016		)
Corporate Debt	62,118		3,682		(1,043		)	47,792		4,523		(1,018		)
State and Local Government	50,018		996		(324		)	208,553		1,206		(319		)
Subtotal Fixed Income Securities	816,480		49,683		(3,658		)	953,387		50,344		(6,353		)
Equity Securities - Domestic	1,066,427		516,206		(80,280		)	1,122,379		598,788		(79,142		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,047,260	$	565,889	$	(83,938	)	$	2,095,732	$	649,132	$	(85,495	)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Proceeds from Investment Sales	$	921,552	$	263,738	$	1,437,336	$	746,272
Purchases of Investments	938,438		280,626		1,479,149		789,461
Gross Realized Gains on Investment Sales	15,030		7,617		33,840		24,835
Gross Realized Losses on Investment Sales	13,167		1,739		22,823		10,447

The adjusted cost of fixed income securities was $766 million and $903 million as of September 30, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $551 million and $524 million as of September 30, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, 2015 was as follows:

	Fair Value of Fixed Income Securities
	(in thousands)
Within 1 year	$	166,336
1 year – 5 years	335,823
5 years – 10 years	140,129
After 10 years	174,192
Total	$	816,480

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in management’s valuation techniques.

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	7,436	$	—	$	—	$	57		$	7,493
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	185		12,785		23,743		(7,328		)	29,385
Total Assets:	$	7,621	$	12,785	$	23,743	$	(7,271	)	$	36,878
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	198	$	16,031	$	662	$	(9,016	)	$	7,875

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	15,599	$	—	$	—	$	33		$	15,632
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	206		20,197		17,654		(9,374		)	28,683
Total Assets:	$	15,805	$	20,197	$	17,654	$	(9,341	)	$	44,315
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	227	$	20,339	$	1,912	$	(9,404	)	$	13,074

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	$	126	$	10,347	$	7,795	$	(6,303	)	$	11,965
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	157,409		—		—		6,944			164,353
Fixed Income Securities:
United States Government	—		704,344		—		—			704,344
Corporate Debt	—		62,118		—		—			62,118
State and Local Government	—		50,018		—		—			50,018
Subtotal Fixed Income Securities	—		816,480		—		—			816,480
Equity Securities - Domestic (e)	1,066,427		—		—		—			1,066,427
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,223,836		816,480		—		6,944			2,047,260
Total Assets	$	1,223,962	$	826,827	$	7,795	$	641		$	2,059,225
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	135	$	10,945	$	1,419	$	(6,636	)	$	5,863

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	140	$	15,893	$	16,008	$	(6,396	)	$	25,645
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	9,418		—		—		10,548			19,966
Fixed Income Securities:
United States Government	—		697,042		—		—			697,042
Corporate Debt	—		47,792		—		—			47,792
State and Local Government	—		208,553		—		—			208,553
Subtotal Fixed Income Securities	—		953,387		—		—			953,387
Equity Securities - Domestic (e)	1,122,379		—		—		—			1,122,379
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,131,797		953,387		—		10,548			2,095,732
Total Assets	$	1,131,937	$	969,280	$	16,008	$	4,152		$	2,121,377
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	154	$	11,440	$	1,304	$	(6,280	)	$	6,618

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other		Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	16,195	$	—	$	—	$	9	$	16,204
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		20,719		2,546		23,265
Total Assets	$	16,195	$	—	$	20,719	$	2,555	$	39,469
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	639	$	5,009	$	2,046	$	7,694

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	408	$	—	$	—	$	28,288		$	28,696
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		52,343		1			52,344
Total Assets	$	408	$	—	$	52,343	$	28,289		$	81,040
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	1,116	$	3,941	$	(101	)	$	4,956

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	1,166	$	(131	)	$	1,035
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	358	$	131	$	(411	)	$	78

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	360	$	(360	)	$	—
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	595	$	737	$	(414	)	$	918

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	11,688	$	—	$	—	$	2,570		$	14,258
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		1,442		(162		)	1,280
Total Assets	$	11,688	$	—	$	1,442	$	2,408		$	15,538
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	2,378	$	162	$	(481	)	$	2,059

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	12,660	$	—	$	—	$	1,696		$	14,356
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		31		439		(439		)	31
Total Assets	$	12,660	$	31	$	439	$	1,257		$	14,387
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	684	$	899	$	(501	)	$	1,082

(a) Amounts in "Other" column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 amounts primarily represent investment in money market funds.

(b) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(c) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

(e) Amounts represent publicly traded equity securities and equity-based mutual funds.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy for the Registrant Subsidiaries:

Three Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2015	$	33,836		$	11,844		$	37,657		$	1,699		$	2,039
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	5,065			885			(28		)	(280		)	2,366
Purchases, Issuances and Settlements (d)	(13,965		)	(3,604		)	348			(176		)	(2,912		)
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	(1,855		)	(2,749		)	(22,267		)	(208		)	(213		)
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Three Months Ended September 30, 2014	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2014	$	18,394		$	12,923		$	9,300		$	(3	)	$	(3	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	(5,629		)	(3,832		)	(3,639		)	2			2
Purchases, Issuances and Settlements (d)	(1,560		)	(1,244		)	(637		)	—			—
Transfers into Level 3 (e) (f)	(6		)	(4		)	—			—			—
Transfers out of Level 3 (f) (g)	(30		)	(20		)	—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	4,843			4,319			2,865			335			409
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334		$	408

Nine Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of December 31, 2014	$	15,742		$	14,704		$	48,402		$	(377	)	$	(460	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	1,757			(193		)	1,182			(176		)	9,187
Purchases, Issuances and Settlements (d)	(16,124		)	(12,807		)	(7,906		)	553			(8,727		)
Transfers out of Level 3 (f) (g)	1,167			792			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	20,539			3,880			(25,968		)	1,035			1,280
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Nine Months Ended September 30, 2014	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Balance as of December 31, 2013	$	10,562		$	7,164		$	2,920		$	—	$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	29,467			18,438			30,768			—		—
Purchases, Issuances and Settlements (d)	(32,213		)	(20,301		)	(33,688		)	—		—
Transfers into Level 3 (e) (f)	(3,648		)	(2,475		)	—			—		—
Transfers out of Level 3 (f) (g)	(32		)	(22		)	—			—		—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	11,876			9,338			7,889			334		408
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334	$	408

(a) Includes both affiliated and nonaffiliated transactions.

(b) Included in revenues on the condensed statements of income.

(c) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(d) Represents the settlement of risk management commodity contracts for the reporting period.

(e) Represents existing assets or liabilities that were previously categorized as Level 2.

(f) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(g) Represents existing assets or liabilities that were previously categorized as Level 3.

(h) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014:

Significant Unobservable Inputs

September 30, 2015

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	8,724	$	451	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	15,019		211		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	23,743	$	662

Significant Unobservable Inputs

December 31, 2014

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	5,801	$	1,799	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	11,853		113		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	17,654	$	1,912

Significant Unobservable Inputs

September 30, 2015

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	7,147	$	295	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	648		1,124		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	7,795	$	1,419

Significant Unobservable Inputs

December 31, 2014

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	6,375	$	1,219	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	9,633		85		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	16,008	$	1,304

Significant Unobservable Inputs

September 30, 2015

OPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

Energy Contracts

$

20,719

$

5,009

Discounted Cash Flow

Forward Market Price

$

35.71

$

165.93

$

85.99

Significant Unobservable Inputs

December 31, 2014

OPCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	45,101	$	3,941	Discounted Cash Flow	Forward Market Price	$	48.25		$	159.92	$	84.04
FTRs	7,242		—		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	52,343	$	3,941

Significant Unobservable Inputs

September 30, 2015

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,166

$

131

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

360

$

737

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

Significant Unobservable Inputs

September 30, 2015

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,442

$

162

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

439

$

899

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

(a) Represents market prices in dollars per MWh.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs for the Registrant Subsidiaries as of September 30, 2015:

Sensitivity of Fair Value Measurements

September 30, 2015

Significant Unobservable Input	Position	Change in Input	Impact on Fair Value Measurement
Forward Market Price	Buy	Increase (Decrease)	Higher (Lower)
Forward Market Price	Sell	Increase (Decrease)	Lower (Higher)

Ohio Power Co [Member]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

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

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

AEP utilizes its trustee’s external pricing service in its estimate of the fair value of the underlying investments held in the nuclear trusts.  AEP’s investment managers review and validate the prices utilized by the trustee to determine fair value.  AEP’s management performs its own valuation testing to verify the fair values of the securities.  AEP receives audit reports of the trustee’s operating controls and valuation processes.  The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, Restricted Cash for Securitized Funding and Cash and Cash Equivalents are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds.  Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data.  Pricing vendors calculate bond valuations using financial models and matrices.  The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation.  Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments.  Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

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

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014 are summarized in the following table:

	September 30, 2015				December 31, 2014
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,955,295	$	4,460,140	$	3,980,274	$	4,711,210
I&M	2,060,651		2,241,930		2,027,397		2,255,124
OPCo	2,166,050		2,502,105		2,297,123		2,709,452
PSO	1,290,973		1,424,300		1,041,036		1,216,205
SWEPCo	2,283,966		2,446,716		2,140,437		2,402,639

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

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

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

• Maximum percentage invested in a specific type of investment.

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

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

I&M maintains trust records for each regulatory jurisdiction.  These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities.  The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm.  The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy.  Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment.  I&M records unrealized gains and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates.  Consequently, changes in fair value of trust assets do not affect earnings or AOCI.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
			Gross		Other-Than-					Gross		Other-Than-
	Fair		Unrealized		Temporary			Fair		Unrealized		Temporary
	Value		Gains		Impairments			Value		Gains		Impairments
	(in thousands)
Cash and Cash Equivalents	$	164,353	$	—	$	—		$	19,966	$	—	$	—
Fixed Income Securities:
United States Government	704,344		45,005		(2,291		)	697,042		44,615		(5,016		)
Corporate Debt	62,118		3,682		(1,043		)	47,792		4,523		(1,018		)
State and Local Government	50,018		996		(324		)	208,553		1,206		(319		)
Subtotal Fixed Income Securities	816,480		49,683		(3,658		)	953,387		50,344		(6,353		)
Equity Securities - Domestic	1,066,427		516,206		(80,280		)	1,122,379		598,788		(79,142		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,047,260	$	565,889	$	(83,938	)	$	2,095,732	$	649,132	$	(85,495	)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Proceeds from Investment Sales	$	921,552	$	263,738	$	1,437,336	$	746,272
Purchases of Investments	938,438		280,626		1,479,149		789,461
Gross Realized Gains on Investment Sales	15,030		7,617		33,840		24,835
Gross Realized Losses on Investment Sales	13,167		1,739		22,823		10,447

The adjusted cost of fixed income securities was $766 million and $903 million as of September 30, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $551 million and $524 million as of September 30, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, 2015 was as follows:

	Fair Value of Fixed Income Securities
	(in thousands)
Within 1 year	$	166,336
1 year – 5 years	335,823
5 years – 10 years	140,129
After 10 years	174,192
Total	$	816,480

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in management’s valuation techniques.

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	7,436	$	—	$	—	$	57		$	7,493
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	185		12,785		23,743		(7,328		)	29,385
Total Assets:	$	7,621	$	12,785	$	23,743	$	(7,271	)	$	36,878
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	198	$	16,031	$	662	$	(9,016	)	$	7,875

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	15,599	$	—	$	—	$	33		$	15,632
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	206		20,197		17,654		(9,374		)	28,683
Total Assets:	$	15,805	$	20,197	$	17,654	$	(9,341	)	$	44,315
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	227	$	20,339	$	1,912	$	(9,404	)	$	13,074

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	$	126	$	10,347	$	7,795	$	(6,303	)	$	11,965
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	157,409		—		—		6,944			164,353
Fixed Income Securities:
United States Government	—		704,344		—		—			704,344
Corporate Debt	—		62,118		—		—			62,118
State and Local Government	—		50,018		—		—			50,018
Subtotal Fixed Income Securities	—		816,480		—		—			816,480
Equity Securities - Domestic (e)	1,066,427		—		—		—			1,066,427
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,223,836		816,480		—		6,944			2,047,260
Total Assets	$	1,223,962	$	826,827	$	7,795	$	641		$	2,059,225
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	135	$	10,945	$	1,419	$	(6,636	)	$	5,863

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	140	$	15,893	$	16,008	$	(6,396	)	$	25,645
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	9,418		—		—		10,548			19,966
Fixed Income Securities:
United States Government	—		697,042		—		—			697,042
Corporate Debt	—		47,792		—		—			47,792
State and Local Government	—		208,553		—		—			208,553
Subtotal Fixed Income Securities	—		953,387		—		—			953,387
Equity Securities - Domestic (e)	1,122,379		—		—		—			1,122,379
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,131,797		953,387		—		10,548			2,095,732
Total Assets	$	1,131,937	$	969,280	$	16,008	$	4,152		$	2,121,377
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	154	$	11,440	$	1,304	$	(6,280	)	$	6,618

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other		Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	16,195	$	—	$	—	$	9	$	16,204
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		20,719		2,546		23,265
Total Assets	$	16,195	$	—	$	20,719	$	2,555	$	39,469
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	639	$	5,009	$	2,046	$	7,694

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	408	$	—	$	—	$	28,288		$	28,696
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		52,343		1			52,344
Total Assets	$	408	$	—	$	52,343	$	28,289		$	81,040
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	1,116	$	3,941	$	(101	)	$	4,956

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	1,166	$	(131	)	$	1,035
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	358	$	131	$	(411	)	$	78

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	360	$	(360	)	$	—
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	595	$	737	$	(414	)	$	918

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	11,688	$	—	$	—	$	2,570		$	14,258
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		1,442		(162		)	1,280
Total Assets	$	11,688	$	—	$	1,442	$	2,408		$	15,538
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	2,378	$	162	$	(481	)	$	2,059

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	12,660	$	—	$	—	$	1,696		$	14,356
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		31		439		(439		)	31
Total Assets	$	12,660	$	31	$	439	$	1,257		$	14,387
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	684	$	899	$	(501	)	$	1,082

(a) Amounts in "Other" column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 amounts primarily represent investment in money market funds.

(b) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(c) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

(e) Amounts represent publicly traded equity securities and equity-based mutual funds.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy for the Registrant Subsidiaries:

Three Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2015	$	33,836		$	11,844		$	37,657		$	1,699		$	2,039
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	5,065			885			(28		)	(280		)	2,366
Purchases, Issuances and Settlements (d)	(13,965		)	(3,604		)	348			(176		)	(2,912		)
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	(1,855		)	(2,749		)	(22,267		)	(208		)	(213		)
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Three Months Ended September 30, 2014	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2014	$	18,394		$	12,923		$	9,300		$	(3	)	$	(3	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	(5,629		)	(3,832		)	(3,639		)	2			2
Purchases, Issuances and Settlements (d)	(1,560		)	(1,244		)	(637		)	—			—
Transfers into Level 3 (e) (f)	(6		)	(4		)	—			—			—
Transfers out of Level 3 (f) (g)	(30		)	(20		)	—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	4,843			4,319			2,865			335			409
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334		$	408

Nine Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of December 31, 2014	$	15,742		$	14,704		$	48,402		$	(377	)	$	(460	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	1,757			(193		)	1,182			(176		)	9,187
Purchases, Issuances and Settlements (d)	(16,124		)	(12,807		)	(7,906		)	553			(8,727		)
Transfers out of Level 3 (f) (g)	1,167			792			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	20,539			3,880			(25,968		)	1,035			1,280
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Nine Months Ended September 30, 2014	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Balance as of December 31, 2013	$	10,562		$	7,164		$	2,920		$	—	$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	29,467			18,438			30,768			—		—
Purchases, Issuances and Settlements (d)	(32,213		)	(20,301		)	(33,688		)	—		—
Transfers into Level 3 (e) (f)	(3,648		)	(2,475		)	—			—		—
Transfers out of Level 3 (f) (g)	(32		)	(22		)	—			—		—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	11,876			9,338			7,889			334		408
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334	$	408

(a) Includes both affiliated and nonaffiliated transactions.

(b) Included in revenues on the condensed statements of income.

(c) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(d) Represents the settlement of risk management commodity contracts for the reporting period.

(e) Represents existing assets or liabilities that were previously categorized as Level 2.

(f) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(g) Represents existing assets or liabilities that were previously categorized as Level 3.

(h) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014:

Significant Unobservable Inputs

September 30, 2015

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	8,724	$	451	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	15,019		211		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	23,743	$	662

Significant Unobservable Inputs

December 31, 2014

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	5,801	$	1,799	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	11,853		113		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	17,654	$	1,912

Significant Unobservable Inputs

September 30, 2015

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	7,147	$	295	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	648		1,124		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	7,795	$	1,419

Significant Unobservable Inputs

December 31, 2014

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	6,375	$	1,219	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	9,633		85		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	16,008	$	1,304

Significant Unobservable Inputs

September 30, 2015

OPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

Energy Contracts

$

20,719

$

5,009

Discounted Cash Flow

Forward Market Price

$

35.71

$

165.93

$

85.99

Significant Unobservable Inputs

December 31, 2014

OPCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	45,101	$	3,941	Discounted Cash Flow	Forward Market Price	$	48.25		$	159.92	$	84.04
FTRs	7,242		—		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	52,343	$	3,941

Significant Unobservable Inputs

September 30, 2015

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,166

$

131

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

360

$

737

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

Significant Unobservable Inputs

September 30, 2015

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,442

$

162

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

439

$

899

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

(a) Represents market prices in dollars per MWh.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs for the Registrant Subsidiaries as of September 30, 2015:

Sensitivity of Fair Value Measurements

September 30, 2015

Significant Unobservable Input	Position	Change in Input	Impact on Fair Value Measurement
Forward Market Price	Buy	Increase (Decrease)	Higher (Lower)
Forward Market Price	Sell	Increase (Decrease)	Lower (Higher)

Public Service Co Of Oklahoma [Member]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

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

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

AEP utilizes its trustee’s external pricing service in its estimate of the fair value of the underlying investments held in the nuclear trusts.  AEP’s investment managers review and validate the prices utilized by the trustee to determine fair value.  AEP’s management performs its own valuation testing to verify the fair values of the securities.  AEP receives audit reports of the trustee’s operating controls and valuation processes.  The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, Restricted Cash for Securitized Funding and Cash and Cash Equivalents are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds.  Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data.  Pricing vendors calculate bond valuations using financial models and matrices.  The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation.  Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments.  Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

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

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014 are summarized in the following table:

	September 30, 2015				December 31, 2014
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,955,295	$	4,460,140	$	3,980,274	$	4,711,210
I&M	2,060,651		2,241,930		2,027,397		2,255,124
OPCo	2,166,050		2,502,105		2,297,123		2,709,452
PSO	1,290,973		1,424,300		1,041,036		1,216,205
SWEPCo	2,283,966		2,446,716		2,140,437		2,402,639

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

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

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

• Maximum percentage invested in a specific type of investment.

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

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

I&M maintains trust records for each regulatory jurisdiction.  These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities.  The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm.  The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy.  Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment.  I&M records unrealized gains and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates.  Consequently, changes in fair value of trust assets do not affect earnings or AOCI.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
			Gross		Other-Than-					Gross		Other-Than-
	Fair		Unrealized		Temporary			Fair		Unrealized		Temporary
	Value		Gains		Impairments			Value		Gains		Impairments
	(in thousands)
Cash and Cash Equivalents	$	164,353	$	—	$	—		$	19,966	$	—	$	—
Fixed Income Securities:
United States Government	704,344		45,005		(2,291		)	697,042		44,615		(5,016		)
Corporate Debt	62,118		3,682		(1,043		)	47,792		4,523		(1,018		)
State and Local Government	50,018		996		(324		)	208,553		1,206		(319		)
Subtotal Fixed Income Securities	816,480		49,683		(3,658		)	953,387		50,344		(6,353		)
Equity Securities - Domestic	1,066,427		516,206		(80,280		)	1,122,379		598,788		(79,142		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,047,260	$	565,889	$	(83,938	)	$	2,095,732	$	649,132	$	(85,495	)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Proceeds from Investment Sales	$	921,552	$	263,738	$	1,437,336	$	746,272
Purchases of Investments	938,438		280,626		1,479,149		789,461
Gross Realized Gains on Investment Sales	15,030		7,617		33,840		24,835
Gross Realized Losses on Investment Sales	13,167		1,739		22,823		10,447

The adjusted cost of fixed income securities was $766 million and $903 million as of September 30, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $551 million and $524 million as of September 30, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, 2015 was as follows:

	Fair Value of Fixed Income Securities
	(in thousands)
Within 1 year	$	166,336
1 year – 5 years	335,823
5 years – 10 years	140,129
After 10 years	174,192
Total	$	816,480

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in management’s valuation techniques.

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	7,436	$	—	$	—	$	57		$	7,493
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	185		12,785		23,743		(7,328		)	29,385
Total Assets:	$	7,621	$	12,785	$	23,743	$	(7,271	)	$	36,878
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	198	$	16,031	$	662	$	(9,016	)	$	7,875

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	15,599	$	—	$	—	$	33		$	15,632
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	206		20,197		17,654		(9,374		)	28,683
Total Assets:	$	15,805	$	20,197	$	17,654	$	(9,341	)	$	44,315
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	227	$	20,339	$	1,912	$	(9,404	)	$	13,074

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	$	126	$	10,347	$	7,795	$	(6,303	)	$	11,965
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	157,409		—		—		6,944			164,353
Fixed Income Securities:
United States Government	—		704,344		—		—			704,344
Corporate Debt	—		62,118		—		—			62,118
State and Local Government	—		50,018		—		—			50,018
Subtotal Fixed Income Securities	—		816,480		—		—			816,480
Equity Securities - Domestic (e)	1,066,427		—		—		—			1,066,427
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,223,836		816,480		—		6,944			2,047,260
Total Assets	$	1,223,962	$	826,827	$	7,795	$	641		$	2,059,225
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	135	$	10,945	$	1,419	$	(6,636	)	$	5,863

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	140	$	15,893	$	16,008	$	(6,396	)	$	25,645
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	9,418		—		—		10,548			19,966
Fixed Income Securities:
United States Government	—		697,042		—		—			697,042
Corporate Debt	—		47,792		—		—			47,792
State and Local Government	—		208,553		—		—			208,553
Subtotal Fixed Income Securities	—		953,387		—		—			953,387
Equity Securities - Domestic (e)	1,122,379		—		—		—			1,122,379
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,131,797		953,387		—		10,548			2,095,732
Total Assets	$	1,131,937	$	969,280	$	16,008	$	4,152		$	2,121,377
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	154	$	11,440	$	1,304	$	(6,280	)	$	6,618

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other		Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	16,195	$	—	$	—	$	9	$	16,204
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		20,719		2,546		23,265
Total Assets	$	16,195	$	—	$	20,719	$	2,555	$	39,469
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	639	$	5,009	$	2,046	$	7,694

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	408	$	—	$	—	$	28,288		$	28,696
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		52,343		1			52,344
Total Assets	$	408	$	—	$	52,343	$	28,289		$	81,040
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	1,116	$	3,941	$	(101	)	$	4,956

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	1,166	$	(131	)	$	1,035
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	358	$	131	$	(411	)	$	78

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	360	$	(360	)	$	—
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	595	$	737	$	(414	)	$	918

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	11,688	$	—	$	—	$	2,570		$	14,258
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		1,442		(162		)	1,280
Total Assets	$	11,688	$	—	$	1,442	$	2,408		$	15,538
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	2,378	$	162	$	(481	)	$	2,059

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	12,660	$	—	$	—	$	1,696		$	14,356
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		31		439		(439		)	31
Total Assets	$	12,660	$	31	$	439	$	1,257		$	14,387
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	684	$	899	$	(501	)	$	1,082

(a) Amounts in "Other" column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 amounts primarily represent investment in money market funds.

(b) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(c) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

(e) Amounts represent publicly traded equity securities and equity-based mutual funds.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy for the Registrant Subsidiaries:

Three Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2015	$	33,836		$	11,844		$	37,657		$	1,699		$	2,039
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	5,065			885			(28		)	(280		)	2,366
Purchases, Issuances and Settlements (d)	(13,965		)	(3,604		)	348			(176		)	(2,912		)
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	(1,855		)	(2,749		)	(22,267		)	(208		)	(213		)
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Three Months Ended September 30, 2014	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2014	$	18,394		$	12,923		$	9,300		$	(3	)	$	(3	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	(5,629		)	(3,832		)	(3,639		)	2			2
Purchases, Issuances and Settlements (d)	(1,560		)	(1,244		)	(637		)	—			—
Transfers into Level 3 (e) (f)	(6		)	(4		)	—			—			—
Transfers out of Level 3 (f) (g)	(30		)	(20		)	—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	4,843			4,319			2,865			335			409
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334		$	408

Nine Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of December 31, 2014	$	15,742		$	14,704		$	48,402		$	(377	)	$	(460	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	1,757			(193		)	1,182			(176		)	9,187
Purchases, Issuances and Settlements (d)	(16,124		)	(12,807		)	(7,906		)	553			(8,727		)
Transfers out of Level 3 (f) (g)	1,167			792			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	20,539			3,880			(25,968		)	1,035			1,280
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Nine Months Ended September 30, 2014	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Balance as of December 31, 2013	$	10,562		$	7,164		$	2,920		$	—	$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	29,467			18,438			30,768			—		—
Purchases, Issuances and Settlements (d)	(32,213		)	(20,301		)	(33,688		)	—		—
Transfers into Level 3 (e) (f)	(3,648		)	(2,475		)	—			—		—
Transfers out of Level 3 (f) (g)	(32		)	(22		)	—			—		—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	11,876			9,338			7,889			334		408
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334	$	408

(a) Includes both affiliated and nonaffiliated transactions.

(b) Included in revenues on the condensed statements of income.

(c) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(d) Represents the settlement of risk management commodity contracts for the reporting period.

(e) Represents existing assets or liabilities that were previously categorized as Level 2.

(f) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(g) Represents existing assets or liabilities that were previously categorized as Level 3.

(h) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014:

Significant Unobservable Inputs

September 30, 2015

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	8,724	$	451	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	15,019		211		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	23,743	$	662

Significant Unobservable Inputs

December 31, 2014

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	5,801	$	1,799	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	11,853		113		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	17,654	$	1,912

Significant Unobservable Inputs

September 30, 2015

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	7,147	$	295	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	648		1,124		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	7,795	$	1,419

Significant Unobservable Inputs

December 31, 2014

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	6,375	$	1,219	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	9,633		85		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	16,008	$	1,304

Significant Unobservable Inputs

September 30, 2015

OPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

Energy Contracts

$

20,719

$

5,009

Discounted Cash Flow

Forward Market Price

$

35.71

$

165.93

$

85.99

Significant Unobservable Inputs

December 31, 2014

OPCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	45,101	$	3,941	Discounted Cash Flow	Forward Market Price	$	48.25		$	159.92	$	84.04
FTRs	7,242		—		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	52,343	$	3,941

Significant Unobservable Inputs

September 30, 2015

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,166

$

131

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

360

$

737

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

Significant Unobservable Inputs

September 30, 2015

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,442

$

162

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

439

$

899

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

(a) Represents market prices in dollars per MWh.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs for the Registrant Subsidiaries as of September 30, 2015:

Sensitivity of Fair Value Measurements

September 30, 2015

Significant Unobservable Input	Position	Change in Input	Impact on Fair Value Measurement
Forward Market Price	Buy	Increase (Decrease)	Higher (Lower)
Forward Market Price	Sell	Increase (Decrease)	Lower (Higher)

Southwestern Electric Power Co [Member]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

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

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

AEP utilizes its trustee’s external pricing service in its estimate of the fair value of the underlying investments held in the nuclear trusts.  AEP’s investment managers review and validate the prices utilized by the trustee to determine fair value.  AEP’s management performs its own valuation testing to verify the fair values of the securities.  AEP receives audit reports of the trustee’s operating controls and valuation processes.  The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, Restricted Cash for Securitized Funding and Cash and Cash Equivalents are classified using the following methods.  Equities are classified as Level 1 holdings if they are actively traded on exchanges.  Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities.  They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets.  Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds.  Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data.  Pricing vendors calculate bond valuations using financial models and matrices.  The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation.  Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments.  Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

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

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014 are summarized in the following table:

	September 30, 2015				December 31, 2014
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,955,295	$	4,460,140	$	3,980,274	$	4,711,210
I&M	2,060,651		2,241,930		2,027,397		2,255,124
OPCo	2,166,050		2,502,105		2,297,123		2,709,452
PSO	1,290,973		1,424,300		1,041,036		1,216,205
SWEPCo	2,283,966		2,446,716		2,140,437		2,402,639

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

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

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

• Maximum percentage invested in a specific type of investment.

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

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

I&M maintains trust records for each regulatory jurisdiction.  These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities.  The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value.  I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose.  Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm.  The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy.  Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment.  I&M records unrealized gains and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates.  Consequently, changes in fair value of trust assets do not affect earnings or AOCI.  The trust assets are recorded by jurisdiction and may not be used for another jurisdiction’s liabilities.  Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of September 30, 2015 and December 31, 2014:

	September 30, 2015							December 31, 2014
			Gross		Other-Than-					Gross		Other-Than-
	Fair		Unrealized		Temporary			Fair		Unrealized		Temporary
	Value		Gains		Impairments			Value		Gains		Impairments
	(in thousands)
Cash and Cash Equivalents	$	164,353	$	—	$	—		$	19,966	$	—	$	—
Fixed Income Securities:
United States Government	704,344		45,005		(2,291		)	697,042		44,615		(5,016		)
Corporate Debt	62,118		3,682		(1,043		)	47,792		4,523		(1,018		)
State and Local Government	50,018		996		(324		)	208,553		1,206		(319		)
Subtotal Fixed Income Securities	816,480		49,683		(3,658		)	953,387		50,344		(6,353		)
Equity Securities - Domestic	1,066,427		516,206		(80,280		)	1,122,379		598,788		(79,142		)
Spent Nuclear Fuel and Decommissioning Trusts	$	2,047,260	$	565,889	$	(83,938	)	$	2,095,732	$	649,132	$	(85,495	)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Proceeds from Investment Sales	$	921,552	$	263,738	$	1,437,336	$	746,272
Purchases of Investments	938,438		280,626		1,479,149		789,461
Gross Realized Gains on Investment Sales	15,030		7,617		33,840		24,835
Gross Realized Losses on Investment Sales	13,167		1,739		22,823		10,447

The adjusted cost of fixed income securities was $766 million and $903 million as of September 30, 2015 and December 31, 2014, respectively.  The adjusted cost of equity securities was $551 million and $524 million as of September 30, 2015 and December 31, 2014, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of September 30, 2015 was as follows:

	Fair Value of Fixed Income Securities
	(in thousands)
Within 1 year	$	166,336
1 year – 5 years	335,823
5 years – 10 years	140,129
After 10 years	174,192
Total	$	816,480

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.  As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.  There have not been any significant changes in management’s valuation techniques.

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	7,436	$	—	$	—	$	57		$	7,493
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	185		12,785		23,743		(7,328		)	29,385
Total Assets:	$	7,621	$	12,785	$	23,743	$	(7,271	)	$	36,878
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	198	$	16,031	$	662	$	(9,016	)	$	7,875

APCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	15,599	$	—	$	—	$	33		$	15,632
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	206		20,197		17,654		(9,374		)	28,683
Total Assets:	$	15,805	$	20,197	$	17,654	$	(9,341	)	$	44,315
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	227	$	20,339	$	1,912	$	(9,404	)	$	13,074

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated and Affiliated
Risk Management Commodity Contracts (b) (c)	$	126	$	10,347	$	7,795	$	(6,303	)	$	11,965
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	157,409		—		—		6,944			164,353
Fixed Income Securities:
United States Government	—		704,344		—		—			704,344
Corporate Debt	—		62,118		—		—			62,118
State and Local Government	—		50,018		—		—			50,018
Subtotal Fixed Income Securities	—		816,480		—		—			816,480
Equity Securities - Domestic (e)	1,066,427		—		—		—			1,066,427
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,223,836		816,480		—		6,944			2,047,260
Total Assets	$	1,223,962	$	826,827	$	7,795	$	641		$	2,059,225
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	135	$	10,945	$	1,419	$	(6,636	)	$	5,863

I&M

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	140	$	15,893	$	16,008	$	(6,396	)	$	25,645
Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)	9,418		—		—		10,548			19,966
Fixed Income Securities:
United States Government	—		697,042		—		—			697,042
Corporate Debt	—		47,792		—		—			47,792
State and Local Government	—		208,553		—		—			208,553
Subtotal Fixed Income Securities	—		953,387		—		—			953,387
Equity Securities - Domestic (e)	1,122,379		—		—		—			1,122,379
TotalSpent Nuclear Fuel and Decommissioning Trusts	1,131,797		953,387		—		10,548			2,095,732
Total Assets	$	1,131,937	$	969,280	$	16,008	$	4,152		$	2,121,377
Liabilities:
Risk Management Liabilities – Nonaffiliated
Risk Management Commodity Contracts (b) (c)	$	154	$	11,440	$	1,304	$	(6,280	)	$	6,618

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other		Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	16,195	$	—	$	—	$	9	$	16,204
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		20,719		2,546		23,265
Total Assets	$	16,195	$	—	$	20,719	$	2,555	$	39,469
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	639	$	5,009	$	2,046	$	7,694

OPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Restricted Cash for Securitized Funding (a)	$	408	$	—	$	—	$	28,288		$	28,696
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		52,343		1			52,344
Total Assets	$	408	$	—	$	52,343	$	28,289		$	81,040
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	1,116	$	3,941	$	(101	)	$	4,956

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	1,166	$	(131	)	$	1,035
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	358	$	131	$	(411	)	$	78

PSO

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	$	—	$	—	$	360	$	(360	)	$	—
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	595	$	737	$	(414	)	$	918

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

September 30, 2015

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	11,688	$	—	$	—	$	2,570		$	14,258
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		—		1,442		(162		)	1,280
Total Assets	$	11,688	$	—	$	1,442	$	2,408		$	15,538
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	2,378	$	162	$	(481	)	$	2,059

SWEPCo

Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2014

	Level 1		Level 2		Level 3		Other			Total
Assets:	(in thousands)
Cash and Cash Equivalents (a)	$	12,660	$	—	$	—	$	1,696		$	14,356
Risk Management Assets
Risk Management Commodity Contracts (b) (c)	—		31		439		(439		)	31
Total Assets	$	12,660	$	31	$	439	$	1,257		$	14,387
Liabilities:
Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)	$	—	$	684	$	899	$	(501	)	$	1,082

(a) Amounts in "Other" column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 amounts primarily represent investment in money market funds.

(b) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(c) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions.  Level 1 amounts primarily represent investments in money market funds.

(e) Amounts represent publicly traded equity securities and equity-based mutual funds.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy for the Registrant Subsidiaries:

Three Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2015	$	33,836		$	11,844		$	37,657		$	1,699		$	2,039
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	5,065			885			(28		)	(280		)	2,366
Purchases, Issuances and Settlements (d)	(13,965		)	(3,604		)	348			(176		)	(2,912		)
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	(1,855		)	(2,749		)	(22,267		)	(208		)	(213		)
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Three Months Ended September 30, 2014	APCo			I&M			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of June 30, 2014	$	18,394		$	12,923		$	9,300		$	(3	)	$	(3	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	(5,629		)	(3,832		)	(3,639		)	2			2
Purchases, Issuances and Settlements (d)	(1,560		)	(1,244		)	(637		)	—			—
Transfers into Level 3 (e) (f)	(6		)	(4		)	—			—			—
Transfers out of Level 3 (f) (g)	(30		)	(20		)	—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	4,843			4,319			2,865			335			409
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334		$	408

Nine Months Ended September 30, 2015	APCo (a)			I&M (a)			OPCo			PSO			SWEPCo
	(in thousands)
Balance as of December 31, 2014	$	15,742		$	14,704		$	48,402		$	(377	)	$	(460	)
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	1,757			(193		)	1,182			(176		)	9,187
Purchases, Issuances and Settlements (d)	(16,124		)	(12,807		)	(7,906		)	553			(8,727		)
Transfers out of Level 3 (f) (g)	1,167			792			—			—			—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	20,539			3,880			(25,968		)	1,035			1,280
Balance as of September 30, 2015	$	23,081		$	6,376		$	15,710		$	1,035		$	1,280

Nine Months Ended September 30, 2014	APCo			I&M			OPCo			PSO		SWEPCo
	(in thousands)
Balance as of December 31, 2013	$	10,562		$	7,164		$	2,920		$	—	$	—
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (b) (c)	29,467			18,438			30,768			—		—
Purchases, Issuances and Settlements (d)	(32,213		)	(20,301		)	(33,688		)	—		—
Transfers into Level 3 (e) (f)	(3,648		)	(2,475		)	—			—		—
Transfers out of Level 3 (f) (g)	(32		)	(22		)	—			—		—
Changes in Fair Value Allocated to Regulated Jurisdictions (h)	11,876			9,338			7,889			334		408
Balance as of September 30, 2014	$	16,012		$	12,142		$	7,889		$	334	$	408

(a) Includes both affiliated and nonaffiliated transactions.

(b) Included in revenues on the condensed statements of income.

(c) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(d) Represents the settlement of risk management commodity contracts for the reporting period.

(e) Represents existing assets or liabilities that were previously categorized as Level 2.

(f) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(g) Represents existing assets or liabilities that were previously categorized as Level 3.

(h) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income.  These net gains (losses) are recorded as regulatory liabilities/assets.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for the Registrant Subsidiaries as of September 30, 2015 and December 31, 2014:

Significant Unobservable Inputs

September 30, 2015

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	8,724	$	451	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	15,019		211		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	23,743	$	662

Significant Unobservable Inputs

December 31, 2014

APCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	5,801	$	1,799	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	11,853		113		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	17,654	$	1,912

Significant Unobservable Inputs

September 30, 2015

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	7,147	$	295	Discounted Cash Flow	Forward Market Price	$	13.03		$	48.17	$	34.76
FTRs	648		1,124		Discounted Cash Flow	Forward Market Price	(5.95		)	11.60		1.53
Total	$	7,795	$	1,419

Significant Unobservable Inputs

December 31, 2014

I&M

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	6,375	$	1,219	Discounted Cash Flow	Forward Market Price	$	13.43		$	123.02	$	52.47
FTRs	9,633		85		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	16,008	$	1,304

Significant Unobservable Inputs

September 30, 2015

OPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

Energy Contracts

$

20,719

$

5,009

Discounted Cash Flow

Forward Market Price

$

35.71

$

165.93

$

85.99

Significant Unobservable Inputs

December 31, 2014

OPCo

						Significant	Forward Price Range
	Fair Value				Valuation	Unobservable						Weighted
	Assets		Liabilities		Technique	Input (a)	Low			High		Average
	(in thousands)
Energy Contracts	$	45,101	$	3,941	Discounted Cash Flow	Forward Market Price	$	48.25		$	159.92	$	84.04
FTRs	7,242		—		Discounted Cash Flow	Forward Market Price	(14.63		)	20.02		1.01
Total	$	52,343	$	3,941

Significant Unobservable Inputs

September 30, 2015

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,166

$

131

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

PSO

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

360

$

737

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

Significant Unobservable Inputs

September 30, 2015

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

1,442

$

162

Discounted Cash Flow

Forward Market Price

$

(5.95

)

$

11.60

$

1.53

Significant Unobservable Inputs

December 31, 2014

SWEPCo

Significant

Forward Price Range

Fair Value

Valuation

Unobservable

Weighted

Assets

Liabilities

Technique

Input (a)

Low

High

Average

(in thousands)

FTRs

$

439

$

899

Discounted Cash Flow

Forward Market Price

$

(14.63

)

$

20.02

$

1.01

(a) Represents market prices in dollars per MWh.

The following table provides sensitivity of fair value measurements to increases (decreases) in significant unobservable inputs related to Energy Contracts and FTRs for the Registrant Subsidiaries as of September 30, 2015:

Sensitivity of Fair Value Measurements

September 30, 2015

Significant Unobservable Input	Position	Change in Input	Impact on Fair Value Measurement
Forward Market Price	Buy	Increase (Decrease)	Higher (Lower)
Forward Market Price	Sell	Increase (Decrease)	Lower (Higher)