INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The interim ETR for AEP’s operating companies reflect the estimated annual ETR for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The interim ETR differs from the federal statutory tax rate of 35% primarily due to tax adjustments, state income taxes and other book/tax differences which are accounted for on a flow-through basis.

The ETR from continuing operations for each of the Registrants are included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2017		2016		2017		2016
AEP	34.6	%	24.3	%	36.5	%	28.8	%
AEPTCo	34.2	%	33.1	%	33.9	%	32.1	%
APCo	36.5	%	35.9	%	36.5	%	36.3	%
I&M	27.6	%	32.9	%	29.6	%	28.1	%
OPCo	34.9	%	34.1	%	34.9	%	34.5	%
PSO	37.6	%	36.2	%	37.6	%	35.5	%
SWEPCo	29.7	%	23.6	%	32.4	%	23.7	%

AEP

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of a $56 million unrealized capital loss valuation allowance in the second quarter of 2016. The reversal of the unrealized capital loss valuation allowance was the result of AEP effectively settling a 2011 audit issue with the IRS. This increase in the ETR was partially offset by a decrease in pretax book income.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of the $56 million unrealized capital loss valuation allowance in the second quarter of 2016 described above and an increase in state income taxes resulting primarily from the sale of certain merchant generation assets in the first quarter of 2017 and an increase in pretax book income.

I&M

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The decrease in the ETR is primarily due to a decrease in pretax book income. This decrease in the ETR was partially offset by changes in other book/tax differences which are accounted for on a flow-through basis.

PSO

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of favorable federal and state income tax adjustments in 2016.

SWEPCo

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits are uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrants accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

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

State Tax Legislation (Applies to AEP, APCo and I&M)

Legislation was passed by the state of Illinois in July 2017 increasing the corporate income tax rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling on or after that date. With the inclusion of the 2.5% Illinois Replacement Tax, the total Illinois corporate income tax rate will increase from 7.75% to 9.5%, effective July 1, 2017. The legislation will not materially impact net income, cash flows or financial condition.

Income Taxes

INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The interim ETR for AEP’s operating companies reflect the estimated annual ETR for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The interim ETR differs from the federal statutory tax rate of 35% primarily due to tax adjustments, state income taxes and other book/tax differences which are accounted for on a flow-through basis.

The ETR from continuing operations for each of the Registrants are included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2017		2016		2017		2016
AEP	34.6	%	24.3	%	36.5	%	28.8	%
AEPTCo	34.2	%	33.1	%	33.9	%	32.1	%
APCo	36.5	%	35.9	%	36.5	%	36.3	%
I&M	27.6	%	32.9	%	29.6	%	28.1	%
OPCo	34.9	%	34.1	%	34.9	%	34.5	%
PSO	37.6	%	36.2	%	37.6	%	35.5	%
SWEPCo	29.7	%	23.6	%	32.4	%	23.7	%

AEP

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of a $56 million unrealized capital loss valuation allowance in the second quarter of 2016. The reversal of the unrealized capital loss valuation allowance was the result of AEP effectively settling a 2011 audit issue with the IRS. This increase in the ETR was partially offset by a decrease in pretax book income.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of the $56 million unrealized capital loss valuation allowance in the second quarter of 2016 described above and an increase in state income taxes resulting primarily from the sale of certain merchant generation assets in the first quarter of 2017 and an increase in pretax book income.

I&M

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The decrease in the ETR is primarily due to a decrease in pretax book income. This decrease in the ETR was partially offset by changes in other book/tax differences which are accounted for on a flow-through basis.

PSO

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of favorable federal and state income tax adjustments in 2016.

SWEPCo

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits are uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrants accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

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

State Tax Legislation (Applies to AEP, APCo and I&M)

Legislation was passed by the state of Illinois in July 2017 increasing the corporate income tax rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling on or after that date. With the inclusion of the 2.5% Illinois Replacement Tax, the total Illinois corporate income tax rate will increase from 7.75% to 9.5%, effective July 1, 2017. The legislation will not materially impact net income, cash flows or financial condition.

Income Taxes

INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The interim ETR for AEP’s operating companies reflect the estimated annual ETR for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The interim ETR differs from the federal statutory tax rate of 35% primarily due to tax adjustments, state income taxes and other book/tax differences which are accounted for on a flow-through basis.

The ETR from continuing operations for each of the Registrants are included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2017		2016		2017		2016
AEP	34.6	%	24.3	%	36.5	%	28.8	%
AEPTCo	34.2	%	33.1	%	33.9	%	32.1	%
APCo	36.5	%	35.9	%	36.5	%	36.3	%
I&M	27.6	%	32.9	%	29.6	%	28.1	%
OPCo	34.9	%	34.1	%	34.9	%	34.5	%
PSO	37.6	%	36.2	%	37.6	%	35.5	%
SWEPCo	29.7	%	23.6	%	32.4	%	23.7	%

AEP

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of a $56 million unrealized capital loss valuation allowance in the second quarter of 2016. The reversal of the unrealized capital loss valuation allowance was the result of AEP effectively settling a 2011 audit issue with the IRS. This increase in the ETR was partially offset by a decrease in pretax book income.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of the $56 million unrealized capital loss valuation allowance in the second quarter of 2016 described above and an increase in state income taxes resulting primarily from the sale of certain merchant generation assets in the first quarter of 2017 and an increase in pretax book income.

I&M

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The decrease in the ETR is primarily due to a decrease in pretax book income. This decrease in the ETR was partially offset by changes in other book/tax differences which are accounted for on a flow-through basis.

PSO

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of favorable federal and state income tax adjustments in 2016.

SWEPCo

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits are uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrants accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

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

State Tax Legislation (Applies to AEP, APCo and I&M)

Legislation was passed by the state of Illinois in July 2017 increasing the corporate income tax rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling on or after that date. With the inclusion of the 2.5% Illinois Replacement Tax, the total Illinois corporate income tax rate will increase from 7.75% to 9.5%, effective July 1, 2017. The legislation will not materially impact net income, cash flows or financial condition.

Income Taxes

INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The interim ETR for AEP’s operating companies reflect the estimated annual ETR for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The interim ETR differs from the federal statutory tax rate of 35% primarily due to tax adjustments, state income taxes and other book/tax differences which are accounted for on a flow-through basis.

The ETR from continuing operations for each of the Registrants are included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2017		2016		2017		2016
AEP	34.6	%	24.3	%	36.5	%	28.8	%
AEPTCo	34.2	%	33.1	%	33.9	%	32.1	%
APCo	36.5	%	35.9	%	36.5	%	36.3	%
I&M	27.6	%	32.9	%	29.6	%	28.1	%
OPCo	34.9	%	34.1	%	34.9	%	34.5	%
PSO	37.6	%	36.2	%	37.6	%	35.5	%
SWEPCo	29.7	%	23.6	%	32.4	%	23.7	%

AEP

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of a $56 million unrealized capital loss valuation allowance in the second quarter of 2016. The reversal of the unrealized capital loss valuation allowance was the result of AEP effectively settling a 2011 audit issue with the IRS. This increase in the ETR was partially offset by a decrease in pretax book income.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of the $56 million unrealized capital loss valuation allowance in the second quarter of 2016 described above and an increase in state income taxes resulting primarily from the sale of certain merchant generation assets in the first quarter of 2017 and an increase in pretax book income.

I&M

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The decrease in the ETR is primarily due to a decrease in pretax book income. This decrease in the ETR was partially offset by changes in other book/tax differences which are accounted for on a flow-through basis.

PSO

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of favorable federal and state income tax adjustments in 2016.

SWEPCo

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits are uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrants accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

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

State Tax Legislation (Applies to AEP, APCo and I&M)

Legislation was passed by the state of Illinois in July 2017 increasing the corporate income tax rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling on or after that date. With the inclusion of the 2.5% Illinois Replacement Tax, the total Illinois corporate income tax rate will increase from 7.75% to 9.5%, effective July 1, 2017. The legislation will not materially impact net income, cash flows or financial condition.

Income Taxes

INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The interim ETR for AEP’s operating companies reflect the estimated annual ETR for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The interim ETR differs from the federal statutory tax rate of 35% primarily due to tax adjustments, state income taxes and other book/tax differences which are accounted for on a flow-through basis.

The ETR from continuing operations for each of the Registrants are included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2017		2016		2017		2016
AEP	34.6	%	24.3	%	36.5	%	28.8	%
AEPTCo	34.2	%	33.1	%	33.9	%	32.1	%
APCo	36.5	%	35.9	%	36.5	%	36.3	%
I&M	27.6	%	32.9	%	29.6	%	28.1	%
OPCo	34.9	%	34.1	%	34.9	%	34.5	%
PSO	37.6	%	36.2	%	37.6	%	35.5	%
SWEPCo	29.7	%	23.6	%	32.4	%	23.7	%

AEP

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of a $56 million unrealized capital loss valuation allowance in the second quarter of 2016. The reversal of the unrealized capital loss valuation allowance was the result of AEP effectively settling a 2011 audit issue with the IRS. This increase in the ETR was partially offset by a decrease in pretax book income.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of the $56 million unrealized capital loss valuation allowance in the second quarter of 2016 described above and an increase in state income taxes resulting primarily from the sale of certain merchant generation assets in the first quarter of 2017 and an increase in pretax book income.

I&M

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The decrease in the ETR is primarily due to a decrease in pretax book income. This decrease in the ETR was partially offset by changes in other book/tax differences which are accounted for on a flow-through basis.

PSO

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of favorable federal and state income tax adjustments in 2016.

SWEPCo

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits are uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrants accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

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

State Tax Legislation (Applies to AEP, APCo and I&M)

Legislation was passed by the state of Illinois in July 2017 increasing the corporate income tax rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling on or after that date. With the inclusion of the 2.5% Illinois Replacement Tax, the total Illinois corporate income tax rate will increase from 7.75% to 9.5%, effective July 1, 2017. The legislation will not materially impact net income, cash flows or financial condition.

Income Taxes

INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The interim ETR for AEP’s operating companies reflect the estimated annual ETR for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The interim ETR differs from the federal statutory tax rate of 35% primarily due to tax adjustments, state income taxes and other book/tax differences which are accounted for on a flow-through basis.

The ETR from continuing operations for each of the Registrants are included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2017		2016		2017		2016
AEP	34.6	%	24.3	%	36.5	%	28.8	%
AEPTCo	34.2	%	33.1	%	33.9	%	32.1	%
APCo	36.5	%	35.9	%	36.5	%	36.3	%
I&M	27.6	%	32.9	%	29.6	%	28.1	%
OPCo	34.9	%	34.1	%	34.9	%	34.5	%
PSO	37.6	%	36.2	%	37.6	%	35.5	%
SWEPCo	29.7	%	23.6	%	32.4	%	23.7	%

AEP

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of a $56 million unrealized capital loss valuation allowance in the second quarter of 2016. The reversal of the unrealized capital loss valuation allowance was the result of AEP effectively settling a 2011 audit issue with the IRS. This increase in the ETR was partially offset by a decrease in pretax book income.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of the $56 million unrealized capital loss valuation allowance in the second quarter of 2016 described above and an increase in state income taxes resulting primarily from the sale of certain merchant generation assets in the first quarter of 2017 and an increase in pretax book income.

I&M

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The decrease in the ETR is primarily due to a decrease in pretax book income. This decrease in the ETR was partially offset by changes in other book/tax differences which are accounted for on a flow-through basis.

PSO

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of favorable federal and state income tax adjustments in 2016.

SWEPCo

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits are uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrants accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

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

State Tax Legislation (Applies to AEP, APCo and I&M)

Legislation was passed by the state of Illinois in July 2017 increasing the corporate income tax rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling on or after that date. With the inclusion of the 2.5% Illinois Replacement Tax, the total Illinois corporate income tax rate will increase from 7.75% to 9.5%, effective July 1, 2017. The legislation will not materially impact net income, cash flows or financial condition.

Income Taxes

INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The interim ETR for AEP’s operating companies reflect the estimated annual ETR for 2017 and 2016, adjusted for tax expense associated with certain discrete items. The interim ETR differs from the federal statutory tax rate of 35% primarily due to tax adjustments, state income taxes and other book/tax differences which are accounted for on a flow-through basis.

The ETR from continuing operations for each of the Registrants are included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2017		2016		2017		2016
AEP	34.6	%	24.3	%	36.5	%	28.8	%
AEPTCo	34.2	%	33.1	%	33.9	%	32.1	%
APCo	36.5	%	35.9	%	36.5	%	36.3	%
I&M	27.6	%	32.9	%	29.6	%	28.1	%
OPCo	34.9	%	34.1	%	34.9	%	34.5	%
PSO	37.6	%	36.2	%	37.6	%	35.5	%
SWEPCo	29.7	%	23.6	%	32.4	%	23.7	%

AEP

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of a $56 million unrealized capital loss valuation allowance in the second quarter of 2016. The reversal of the unrealized capital loss valuation allowance was the result of AEP effectively settling a 2011 audit issue with the IRS. This increase in the ETR was partially offset by a decrease in pretax book income.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the reversal of the $56 million unrealized capital loss valuation allowance in the second quarter of 2016 described above and an increase in state income taxes resulting primarily from the sale of certain merchant generation assets in the first quarter of 2017 and an increase in pretax book income.

I&M

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The decrease in the ETR is primarily due to a decrease in pretax book income. This decrease in the ETR was partially offset by changes in other book/tax differences which are accounted for on a flow-through basis.

PSO

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of favorable federal and state income tax adjustments in 2016.

SWEPCo

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

The increase in the ETR is primarily due to the recording of net favorable federal and state income tax adjustments in 2016 and changes in other book/tax differences which are accounted for on a flow-through basis.

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits are uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the Registrants accrue interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

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

State Tax Legislation (Applies to AEP, APCo and I&M)

Legislation was passed by the state of Illinois in July 2017 increasing the corporate income tax rate from 5.25% to 7% effective July 1, 2017, with the increased rate applied to the portion of the tax year falling on or after that date. With the inclusion of the 2.5% Illinois Replacement Tax, the total Illinois corporate income tax rate will increase from 7.75% to 9.5%, effective July 1, 2017. The legislation will not materially impact net income, cash flows or financial condition.