Financing Activities

6 Months Ended

Jun. 30, 2020

Financing Activities

FINANCING ACTIVITIES

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

Long-term Debt Outstanding (Applies to AEP)

The following table details long-term debt outstanding, net of issuance costs and premiums or discounts:

Type of Debt	June 30, 2020		December 31, 2019
	(in millions)
Senior Unsecured Notes	$	23,530.3	$	21,180.7
Pollution Control Bonds	1,936.2		1,998.8
Notes Payable	186.0		234.3
Securitization Bonds	866.7		1,025.1
Spent Nuclear Fuel Obligation (a)	281.0		279.8
Junior Subordinated Notes (b)	789.7		787.8
Other Long-term Debt	1,185.5		1,219.0
Total Long-term Debt Outstanding	28,775.4		26,725.5
Long-term Debt Due Within One Year	2,137.7		1,598.7
Long-term Debt	$	26,637.7	$	25,126.8

(a)Pursuant to the Nuclear Waste Policy Act of 1982, I&M, a nuclear licensee, has an obligation to the United States Department of Energy for SNF disposal.  The obligation includes a one-time fee for nuclear fuel consumed prior to April 7, 1983.  Trust fund assets related to this obligation were $326 million and $323 million as of June 30, 2020 and December 31, 2019, respectively, and are included in Spent Nuclear Fuel and Decommissioning Trusts on the balance sheets.

(b)See “Equity Units” section below for additional information.

Long-term Debt Activity

Long-term debt and other securities issued, retired and principal payments made during the first six months of 2020 are shown in the following tables:

		Principal		Interest
Company	Type of Debt	Amount (a)		Rate	Due Date
Issuances:		(in millions)		(%)
AEP	Senior Unsecured Notes	$	400.0	2.30	2030
AEP	Senior Unsecured Notes	400.0		3.25	2050
AEPTCo	Senior Unsecured Notes	525.0		3.65	2050
APCo	Senior Unsecured Notes	500.0		3.70	2050
OPCo	Senior Unsecured Notes	350.0		2.60	2030
Non-Registrant:
KPCo	Other Long-term Debt	125.0		Variable	2022
Transource Energy	Other Long-term Debt	7.1		Variable	2023
Transource Energy	Senior Unsecured Notes	150.0		2.75	2050
Total Issuances		$	2,457.1

(a)Amounts indicated on the statements of cash flows are net of issuance costs and premium or discount and will not tie to the issuance amounts.

		Principal		Interest
Company	Type of Debt	Amount Paid		Rate	Due Date
Retirements and Principal Payments:		(in millions)		(%)
AEP Texas	Pollution Control Bonds	$	50.6	4.45	2020
AEP Texas	Securitization Bonds	28.7		1.98	2020
AEP Texas	Securitization Bonds	111.0		5.31	2020
AEP Texas	Securitization Bonds	0.2		2.85	2024
AEP Texas	Securitization Bonds	3.3		2.06	2025
APCo	Securitization Bonds	12.2		2.01	2023
I&M	Notes Payable	1.3		Variable	2020
I&M	Notes Payable	3.1		Variable	2021
I&M	Notes Payable	10.2		Variable	2022
I&M	Notes Payable	7.5		Variable	2022
I&M	Notes Payable	12.5		Variable	2023
I&M	Notes Payable	12.1		Variable	2024
I&M	Other Long-term Debt	0.9		6.00	2025
PSO	Pollution Control Bonds	12.7		4.45	2020
PSO	Other Long-term Debt	0.2		3.00	2027
SWEPCo	Other Long-term Debt	15.0		Variable	2020
SWEPCo	Other Long-term Debt	1.5		4.68	2028
SWEPCo	Notes Payable	1.6		4.58	2032
Non-Registrant:
Transource Energy	Other Long-term Debt	148.6		Variable	2023
Total Retirements and Principal Payments		$	433.2

Long-term Debt Subsequent Events

In July 2020, AEP Texas issued $600 million of Senior Unsecured Notes due in 2030.

In July and August 2020, AEP Texas retired $92 million and $11 million, respectively, of Securitization Bonds, the Transition Funding II bonds are now fully matured.

In July and August 2020, I&M retired $8 million and $1 million, respectively, of Notes Payable related to DCC Fuel.

In July 2020, Transource Energy issued $3 million of variable rate Other Long-term Debt due in 2023.

In August 2020, APCo retired $13 million of Securitization Bonds.

Equity Units (Applies to AEP)

In March 2019, AEP issued 16.1 million Equity Units initially in the form of corporate units, at a stated amount of $50 per unit, for a total stated amount of $805 million. Net proceeds from the issuance were approximately $785 million. The proceeds were used to support AEP’s overall capital expenditure plans including the acquisition of Sempra Renewables LLC.

Each corporate unit represents a 1/20 undivided beneficial ownership interest in $1,000 principal amount of AEP’s 3.40% Junior Subordinated Notes (notes) due in 2024 and a forward equity purchase contract which settles after three years in 2022. The notes are expected to be remarketed in 2022, at which time the interest rate will reset at the then current market rate. Investors may choose to remarket their notes to receive the remarketing proceeds and use those funds to settle the forward equity purchase contract, or accept the remarketed debt and use other funds for the equity purchase. If the remarketing is unsuccessful, investors have the right to put their notes to AEP at a price equal to the principal. The Equity Units carry an annual distribution rate of 6.125%, which is comprised of a quarterly coupon rate of interest of 3.40% and a quarterly forward equity purchase contract payment of 2.725%.

Each forward equity purchase contract obligates the holder to purchase, and AEP to sell, for $50 a number of shares in common stock in accordance with the conversion ratios set forth below (subject to an anti-dilution adjustment):

•If the AEP common stock market price is equal to or greater than $99.58: 0.5021 shares per contract.

•If the AEP common stock market price is less than $99.58 but greater than $82.98: a number of shares per contract equal to $50 divided by the applicable market price. The holder receives a variable number of shares at $50.

•If the AEP common stock market price is less than or equal to $82.98: 0.6026 shares per contract.

A holder’s ownership interest in the notes is pledged to AEP to secure the holder’s obligation under the related forward equity purchase contract. If a holder of the forward equity purchase contract chooses at any time to no longer be a holder of the notes, such holder’s obligation under the forward equity purchase contract must be secured by a U.S. Treasury security which must be equal to the aggregate principal amount of the notes.

At the time of issuance, the $805 million of notes were recorded within Long-term Debt on the balance sheets. The present value of the purchase contract payments of $62 million were recorded in Deferred Credits and Other Noncurrent Liabilities with a current portion in Other Current Liabilities at the time of issuance, representing the obligation to make forward equity contract payments, with an offsetting reduction to Paid-in Capital. The difference between the face value and present value of the purchase contract payments will be accreted to Interest Expense on the statements of income over the three year period ending in 2022. The liability recorded for the contract payments is considered non-cash and excluded from the statements of cash flows. Until settlement of the forward equity purchase contract, earnings per share dilution resulting from the equity unit issuance will be determined under the treasury stock method. The maximum amount of shares AEP will be required to issue to settle the purchase contract is 9,701,860 shares (subject to an anti-dilution adjustment).

Debt Covenants (Applies to AEP and AEPTCo)

Covenants in AEPTCo’s note purchase agreements and indenture limit the amount of contractually-defined priority debt (which includes a further sub-limit of $50 million of secured debt) to 10% of consolidated tangible net assets. AEPTCo’s contractually-defined priority debt was immaterial as of June 30, 2020. The method for calculating the consolidated tangible net assets is contractually-defined in the note purchase agreements.

Dividend Restrictions

Utility Subsidiaries’ Restrictions

Parent depends on its utility subsidiaries to pay dividends to shareholders. AEP utility subsidiaries pay dividends to Parent provided funds are legally available. Various financing arrangements and regulatory requirements may impose certain restrictions on the ability of the subsidiaries to transfer funds to Parent in the form of dividends.

All of the dividends declared by AEP’s utility subsidiaries that provide transmission or local distribution services are subject to a Federal Power Act restriction that prohibits the payment of dividends out of capital accounts without regulatory approval; payment of dividends is allowed out of retained earnings only. The Federal Power Act also creates a reserve on earnings attributable to hydroelectric generation plants. Because of their ownership of such plants, this reserve applies to AGR, APCo and I&M.

Certain AEP subsidiaries have credit agreements that contain covenants that limit their debt to capitalization ratio to 67.5%. The method for calculating outstanding debt and capitalization is contractually-defined in the credit agreements.

The Federal Power Act restriction does not limit the ability of the AEP subsidiaries to pay dividends out of retained earnings.

Parent Restrictions (Applies to AEP)

The holders of AEP’s common stock are entitled to receive the dividends declared by the Board of Directors provided funds are legally available for such dividends.  Parent’s income primarily derives from common stock equity in the earnings of its utility subsidiaries.

Pursuant to the leverage restrictions in credit agreements, AEP must maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%.  The method for calculating outstanding debt and capitalization is contractually-defined in the credit agreements.

Corporate Borrowing Program - AEP System (Applies to Registrant Subsidiaries)

The AEP System uses a corporate borrowing program to meet the short-term borrowing needs of AEP’s subsidiaries.  The corporate borrowing program includes a Utility Money Pool, which funds AEP’s utility subsidiaries; a Nonutility Money Pool, which funds certain AEP nonutility subsidiaries; and direct borrowing from AEP.  The AEP System Utility Money Pool operates in accordance with the terms and conditions of its agreement filed with the FERC.  The amounts of outstanding loans to (borrowings from) the Utility Money Pool as of June 30, 2020 and December 31, 2019 are included in Advances to Affiliates and Advances from Affiliates, respectively, on the Registrant Subsidiaries’ balance sheets.  The Utility Money Pool participants’ activity and corresponding authorized borrowing limits for the six months ended June 30, 2020 are described in the following table:

	Maximum				Average				Net Loans to
	Borrowings		Maximum		Borrowings		Average		(Borrowings) from		Authorized
	from the		Loans to the		from the		Loans to the		the Utility Money		Short-term
	Utility		Utility		Utility		Utility		Pool as of		Borrowing
Company	Money Pool		Money Pool		Money Pool		Money Pool		June 30, 2020		Limit
	(in millions)
AEP Texas	$	320.4	$	199.7	$	154.7	$	90.3	$	(320.4)	$	500.0
AEPTCo	358.4		259.7		130.9		85.6		28.0		820.0		(a)
APCo	434.3		174.8		331.3		45.3		82.3		500.0
I&M	194.1		13.4		102.5		13.3		(180.8)		500.0
OPCo	353.9		32.8		145.6		25.2		(143.1)		500.0
PSO	125.4		57.1		66.8		28.4		(106.9)		300.0
SWEPCo	178.9		—		129.3		—		(130.4)		350.0

(a) Amount represents the combined authorized short-term borrowing limit the State Transcos have from FERC or state regulatory commissions.

The activity in the above table does not include short-term lending activity of certain AEP nonutility subsidiaries. AEP Texas’ wholly-owned subsidiary, AEP Texas North Generation Company, LLC and SWEPCo’s wholly-owned subsidiary, Mutual Energy SWEPCo, LLC participate in the Nonutility Money Pool. The amounts of outstanding loans to the Nonutility Money Pool as of June 30, 2020 and December 31, 2019 are included in Advances to Affiliates on the subsidiaries’ balance sheets. The Nonutility Money Pool participants’ activity for the six months ended June 30, 2020 is described in the following table:

		Maximum Loans		Average Loans		Loans to the Nonutility
		to the Nonutility		to the Nonutility		Money Pool as of
Company		Money Pool		Money Pool		June 30, 2020
	(in millions)
AEP Texas		$	7.5	$	7.2	$	7.2
SWEPCo		2.1		2.1		2.1

AEP has a direct financing relationship with AEPTCo to meet its short-term borrowing needs. The amounts of outstanding loans to and borrowings from AEP as of June 30, 2020 and December 31, 2019 are included in Advances to Affiliates and Advances from Affiliates, respectively, on AEPTCo’s balance sheets. AEPTCo’s direct borrowing and lending activity with AEP and corresponding authorized borrowing limit for the six months ended June 30, 2020 are described in the following table:

Maximum

Maximum

Average

Average

Borrowings from

Loans to

Authorized

Borrowings

Loans

Borrowings

Loans

AEP as of

AEP as of

Short-term

from AEP

to AEP

from AEP

to AEP

June 30, 2020

June 30, 2020

Borrowing Limit

(in millions)

$

1.4

$

190.3

$

1.3

$

124.7

$

1.2

$

90.5

$

50.0

(a)

(a) Amount represents the combined authorized short-term borrowing limit the State Transcos have from FERC or state regulatory commissions.

The maximum and minimum interest rates for funds either borrowed from or loaned to the Utility Money Pool are summarized in the following table:

	Six Months Ended June 30,
	2020		2019
Maximum Interest Rate	2.70	%	3.02	%
Minimum Interest Rate	0.33	%	2.68	%

The average interest rates for funds borrowed from and loaned to the Utility Money Pool are summarized for all Registrant Subsidiaries in the following table:

	Average Interest Rate for Funds				Average Interest Rate for Funds
	Borrowed from the Utility Money Pool				Loaned to the Utility Money Pool
	for Six Months Ended June 30,				for Six Months Ended June 30,
Company	2020		2019		2020		2019
AEP Texas	1.55	%	2.81	%	1.97	%	—	%
AEPTCo	1.94	%	2.78	%	2.06	%	2.83	%
APCo	2.14	%	2.91	%	1.62	%	2.77	%
I&M	1.80	%	2.74	%	1.87	%	2.82	%
OPCo	1.80	%	2.81	%	2.06	%	2.73	%
PSO	1.71	%	2.85	%	1.95	%	2.74	%
SWEPCo	1.87	%	2.77	%	—	%	2.97	%

Maximum, minimum and average interest rates for funds loaned to the Nonutility Money Pool are summarized in the following table:

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Maximum

Minimum

Average

Maximum

Minimum

Average

Interest Rate

Interest Rate

Interest Rate

Interest Rate

Interest Rate

Interest Rate

for Funds

for Funds

for Funds

for Funds

for Funds

for Funds

Loaned to

Loaned to

Loaned to

Loaned to

Loaned to

Loaned to

the Nonutility

the Nonutility

the Nonutility

the Nonutility

the Nonutility

the Nonutility

Company

Money Pool

Money Pool

Money Pool

Money Pool

Money Pool

Money Pool

AEP Texas

2.70

%

0.33

%

1.87

%

3.02

%

2.68

%

2.81

%

SWEPCo

2.70

%

0.33

%

1.87

%

3.02

%

2.68

%

2.81

%

AEPTCo’s maximum, minimum and average interest rates for funds either borrowed from or loaned to AEP are summarized in the following table:

	Maximum		Minimum		Maximum		Minimum		Average		Average
	Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate		Interest Rate
Six Months	for Funds		for Funds		for Funds		for Funds		for Funds		for Funds
Ended	Borrowed		Borrowed		Loaned		Loaned		Borrowed		Loaned
June 30,	from AEP		from AEP		to AEP		to AEP		from AEP		to AEP
2020	2.70	%	0.50	%	2.70	%	0.50	%	1.88	%	1.86	%
2019	3.02	%	2.68	%	3.02	%	2.68	%	2.81	%	2.80	%

Short-term Debt (Applies to AEP, AEP Texas and SWEPCo)

Outstanding short-term debt was as follows:

		June 30, 2020				December 31, 2019
		Outstanding		Interest		Outstanding		Interest
Company	Type of Debt	Amount		Rate (a)		Amount		Rate (a)
		(dollars in millions)
AEP	Securitized Debt for Receivables (b)	$	634.0	1.40	%	$	710.0	2.42	%
AEP	Commercial Paper	1,403.5		0.34	%	2,110.0		2.10	%
AEP	364-Day Term Loan	1,000.0		0.78	%	—		—	%
AEP Texas	COVID-19 Electricity Relief Program Loan (c)	2.0		—	%	—		—	%
SWEPCo	Notes Payable	37.1		2.35	%	18.3		3.29	%
	Total Short-term Debt	$	3,076.6			$	2,838.3

(a)Weighted-average rate.

(b)Amount of securitized debt for receivables as accounted for under the “Transfers and Servicing” accounting guidance.

(c)Principal amount of loan shall not bear interest if paid in full by the maturity date. Unpaid principal after the maturity date will accrue interest of 2% per annum beginning the first day after the maturity date until all outstanding principal is paid.

Credit Facilities

For a discussion of credit facilities, see “Letters of Credit” section of Note 5.

Securitized Accounts Receivables – AEP Credit (Applies to AEP)

AEP Credit has a receivables securitization agreement that provides a commitment of $750 million from bank conduits to purchase receivables and expires in July 2021. Under the securitization agreement, AEP Credit receives financing from the bank conduits for the interest in the receivables AEP Credit acquires from affiliated utility subsidiaries.  These securitized transactions allow AEP Credit to repay its outstanding debt obligations, continue to purchase the operating companies’ receivables and accelerate AEP Credit’s cash collections.

In May 2020, AEP Credit amended its receivables securitization agreement to increase the eligibility criteria related to aged receivable requirements for the participating affiliated utility subsidiaries in response to the COVID-19 pandemic. As of June 30, 2020, the affiliated utility subsidiaries are in compliance with all requirements under the agreement. To the extent that an affiliated utility subsidiary is deemed ineligible under the agreement, receivables would no longer be purchased by the bank conduits and the Registrants would need to rely on additional sources of funding for operation and working capital, which may adversely impact liquidity.

Accounts receivable information for AEP Credit was as follows:

	Three Months Ended  June 30,						Six Months Ended  June 30,
	2020			2019			2020			2019
	(dollars in millions)
Effective Interest Rates on Securitization of Accounts Receivable	1.06		%	2.60		%	1.40		%	2.66		%
Net Uncollectible Accounts Receivable Written-Off	$	3.4		$	4.6		$	7.6		$	11.0

	June 30, 2020		December 31, 2019
	(in millions)
Accounts Receivable Retained Interest and Pledged as Collateral Less Uncollectible Accounts	$	937.6	$	841.8
Short-term – Securitized Debt of Receivables	634.0		710.0
Delinquent Securitized Accounts Receivable	93.6		39.6
Bad Debt Reserves Related to Securitization	38.7		32.1
Unbilled Receivables Related to Securitization	293.2		266.8

AEP Credit’s delinquent customer accounts receivable represent accounts greater than 30 days past due.

Securitized Accounts Receivables – AEP Credit (Applies to Registrant Subsidiaries, except AEP Texas and AEPTCo)

Under this sale of receivables arrangement, the Registrant Subsidiaries sell, without recourse, certain of their customer accounts receivable and accrued unbilled revenue balances to AEP Credit and are charged a fee based on AEP Credit’s financing costs, administrative costs and uncollectible accounts experience for each Registrant Subsidiary’s receivables.  APCo does not have regulatory authority to sell its West Virginia accounts receivable.  The costs of customer accounts receivable sold are reported in Other Operation expense on the Registrant Subsidiaries’ statements of income.  The Registrant Subsidiaries manage and service their customer accounts receivable, which are sold to AEP Credit. AEP Credit securitizes the eligible receivables for the operating companies and retains the remainder.

The amount of accounts receivable and accrued unbilled revenues under the sale of receivables agreements were:

Company	June 30, 2020		December 31, 2019
	(in millions)
APCo	$	116.3	$	120.9
I&M	172.2		141.8
OPCo	366.7		330.3
PSO	115.6		101.1
SWEPCo	152.8		125.2

The fees paid to AEP Credit for customer accounts receivable sold were:

	Three Months Ended June 30,				Six Months Ended June 30,
Company	2020		2019		2020		2019
	(in millions)
APCo	$	1.3	$	2.4	$	3.0	$	4.6
I&M	2.6		3.2		5.4		6.0
OPCo	5.0		7.9		9.8		15.7
PSO	1.0		2.1		2.3		4.2
SWEPCo	1.9		3.4		4.0		6.0

The proceeds on the sale of receivables to AEP Credit were:

	Three Months Ended June 30,				Six Months Ended June 30,
Company	2020		2019		2020		2019
	(in millions)
APCo	$	285.7	$	300.8	$	638.3	$	675.2
I&M	439.9		415.0		911.3		893.6
OPCo	556.7		506.7		1,127.0		1,143.5
PSO	297.3		342.6		592.2		667.1
SWEPCo	381.4		394.5		747.0		766.4