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 September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%

AEP

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

The decrease in the ETR is due to the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The increase in the ETR is primarily due to the increase in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in the ETR is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

APCo

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

The decrease in the ETR is primarily due to the recording of favorable federal income tax adjustments and a decrease in pretax book income.

OPCo

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

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

SWEPCo

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

The decrease in the ETR is primarily due to a $10 million decrease in Income Tax Expense related to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.

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 is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the 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, I&M and OPCo)

Legislation was enacted in 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 increased from 7.75% to 9.5%, effective July 1, 2017. The legislation is not expected to 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 September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%

AEP

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

The decrease in the ETR is due to the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The increase in the ETR is primarily due to the increase in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in the ETR is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

APCo

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

The decrease in the ETR is primarily due to the recording of favorable federal income tax adjustments and a decrease in pretax book income.

OPCo

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

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

SWEPCo

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

The decrease in the ETR is primarily due to a $10 million decrease in Income Tax Expense related to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.

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 is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the 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, I&M and OPCo)

Legislation was enacted in 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 increased from 7.75% to 9.5%, effective July 1, 2017. The legislation is not expected to 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 September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%

AEP

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

The decrease in the ETR is due to the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The increase in the ETR is primarily due to the increase in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in the ETR is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

APCo

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

The decrease in the ETR is primarily due to the recording of favorable federal income tax adjustments and a decrease in pretax book income.

OPCo

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

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

SWEPCo

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

The decrease in the ETR is primarily due to a $10 million decrease in Income Tax Expense related to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.

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 is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the 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, I&M and OPCo)

Legislation was enacted in 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 increased from 7.75% to 9.5%, effective July 1, 2017. The legislation is not expected to 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 September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%

AEP

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

The decrease in the ETR is due to the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The increase in the ETR is primarily due to the increase in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in the ETR is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

APCo

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

The decrease in the ETR is primarily due to the recording of favorable federal income tax adjustments and a decrease in pretax book income.

OPCo

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

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

SWEPCo

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

The decrease in the ETR is primarily due to a $10 million decrease in Income Tax Expense related to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.

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 is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the 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, I&M and OPCo)

Legislation was enacted in 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 increased from 7.75% to 9.5%, effective July 1, 2017. The legislation is not expected to 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 September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%

AEP

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

The decrease in the ETR is due to the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The increase in the ETR is primarily due to the increase in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in the ETR is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

APCo

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

The decrease in the ETR is primarily due to the recording of favorable federal income tax adjustments and a decrease in pretax book income.

OPCo

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

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

SWEPCo

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

The decrease in the ETR is primarily due to a $10 million decrease in Income Tax Expense related to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.

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 is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the 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, I&M and OPCo)

Legislation was enacted in 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 increased from 7.75% to 9.5%, effective July 1, 2017. The legislation is not expected to 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 September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%

AEP

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

The decrease in the ETR is due to the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The increase in the ETR is primarily due to the increase in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in the ETR is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

APCo

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

The decrease in the ETR is primarily due to the recording of favorable federal income tax adjustments and a decrease in pretax book income.

OPCo

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

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

SWEPCo

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

The decrease in the ETR is primarily due to a $10 million decrease in Income Tax Expense related to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.

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 is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the 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, I&M and OPCo)

Legislation was enacted in 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 increased from 7.75% to 9.5%, effective July 1, 2017. The legislation is not expected to 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 September 30,				Nine Months Ended September 30,
Company	2017		2016		2017		2016
AEP	33.0	%	40.4	%	35.3	%	(195.6	)%
AEPTCo	33.5	%	33.5	%	33.8	%	32.6	%
APCo	33.4	%	36.1	%	35.5	%	36.2	%
I&M	30.6	%	31.8	%	30.1	%	29.5	%
OPCo	36.9	%	31.7	%	35.6	%	33.4	%
PSO	37.2	%	37.7	%	37.4	%	36.8	%
SWEPCo	21.2	%	28.9	%	25.7	%	26.7	%

AEP

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

The decrease in the ETR is due to the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The increase in the ETR is primarily due to the increase in pretax book income driven by the impairment of certain merchant generation assets in the third quarter of 2016. The increase in the ETR is also due to the prior year reversal of a $56 million unrealized capital loss valuation allowance where AEP effectively settled a 2011 audit issue with the IRS, the prior year reversal of a $66 million capital loss valuation allowance related to the pending sale of certain merchant generation assets and prior year tax return adjustments related to the disposition of AEP’s commercial barging operations.

APCo

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

The decrease in the ETR is primarily due to the recording of favorable federal income tax adjustments and a decrease in pretax book income.

OPCo

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

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

SWEPCo

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

The decrease in the ETR is primarily due to a $10 million decrease in Income Tax Expense related to income tax benefits attributable to SWEPCo’s noncontrolling interest in Sabine.

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 is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, the 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, I&M and OPCo)

Legislation was enacted in 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 increased from 7.75% to 9.5%, effective July 1, 2017. The legislation is not expected to materially impact net income, cash flows or financial condition.