Derivatives and Hedging

9 Months Ended

Sep. 30, 2022

Derivatives and Hedging

DERIVATIVES AND HEDGING

The disclosures in this note apply to all Registrants unless indicated otherwise. For the periods presented, AEPTCo did not have any derivative and hedging activity.

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

AEPSC is agent for and transacts on behalf of certain AEP subsidiaries, including the Registrant Subsidiaries. AEPEP is agent for and transacts on behalf of other AEP subsidiaries.

The Registrants are exposed to certain market risks as major power producers and participants in the electricity, capacity, natural gas, coal and emission allowance markets.  These risks include commodity price risks which may be subject to capacity risk, interest rate risk and credit risk.  These risks represent the risk of loss that may impact the Registrants due to changes in the underlying market prices or rates.  Management utilizes derivative instruments to manage these risks.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

Risk Management Strategies

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

The Registrants utilize power, capacity, coal, natural gas, interest rate and, to a lesser extent, heating oil, gasoline and other commodity contracts to manage the risk associated with the energy business. The Registrants utilize interest rate derivative contracts in order to manage the interest rate exposure associated with the commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. The Registrants also utilize derivative contracts to manage interest rate risk associated with debt financing. For disclosure purposes, these risks are grouped as “Interest Rate.” The amount of risk taken is determined by the Commercial Operations, Energy Supply and Finance groups in accordance with established risk management policies as approved by the Finance Committee of the Board of Directors.

The following tables represent the gross notional volume of the Registrants’ outstanding derivative contracts:

Notional Volume of Derivative Instruments

September 30, 2022

Primary Risk Exposure	Unit of Measure	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
		(in millions)
Commodity:
Power	MWhs	260.6		—		29.0		6.2		2.6		5.7		4.3
Natural Gas	MMBtus	80.3		—		—		—		—		—		1.8
Heating Oil and Gasoline	Gallons	6.4		1.7		0.9		0.6		1.3		0.7		0.9
Interest Rate	USD	$	99.9	$	—	$	—	$	—	$	—	$	—	$	—
Interest Rate on Long-term Debt	USD	$	1,150.0	$	—	$	—	$	—	$	—	$	—	$	—

December 31, 2021

Primary Risk Exposure	Unit of Measure	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
		(in millions)
Commodity:
Power	MWhs	287.9		—		33.1		13.6		2.7		11.9		3.4
Natural Gas	MMBtus	34.1		—		—		—		—		1.3		5.1
Heating Oil and Gasoline	Gallons	7.4		1.9		1.1		0.7		1.5		0.8		1.0
Interest Rate	USD	$	116.5	$	—	$	—	$	—	$	—	$	—	$	—
Interest Rate on Long-term Debt	USD	$	950.0	$	—	$	—	$	—	$	—	$	—	$	—

Fair Value Hedging Strategies (Applies to AEP)

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

Cash Flow Hedging Strategies

The Registrants utilize cash flow hedges on certain derivative transactions for the purchase and sale of power (“Commodity”) in order to manage the variable price risk related to forecasted purchases and sales. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and purchases. The Registrants do not hedge all commodity price risk.

The Registrants utilize a variety of interest rate derivative transactions in order to manage interest rate risk exposure. The Registrants also utilize interest rate derivative contracts to manage interest rate exposure related to future borrowings of fixed-rate debt. The Registrants do not hedge all interest rate exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheets at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes and other assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrants apply valuation adjustments for discounting, liquidity and credit quality.

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

According to the accounting guidance for “Derivatives and Hedging,” the Registrants reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrants are required to post or receive cash collateral based on third-party contractual agreements and risk profiles. AEP netted cash collateral received from third-parties against short-term and long-term risk management assets in the amounts of $847 million and $263 million as of September 30, 2022 and December 31, 2021, respectively. AEP netted cash collateral paid to third-parties against short-term and long-term risk management liabilities in the amounts of $0 and $3 million as of September 30, 2022 and December 31, 2021, respectively. The netted cash collateral from third-parties against short-term and long-term risk management assets and netted cash collateral paid to third-parties against short-term and long-term risk management liabilities were immaterial for the Registrant Subsidiaries as of September 30, 2022 and December 31, 2021.

The following tables represent the gross fair value of the Registrants’ derivative activity on the balance sheets. Unless shown as a separate line on the balance sheets due to materiality, Current Risk Management Assets are included in Prepayments and Other Current Assets, Long-term Risk Management Assets are included in Deferred Charges and Other Noncurrent Assets, Current Risk Management Liabilities are included in Other Current Liabilities and Long-term Risk Management Liabilities are included in Deferred Credits and Other Noncurrent Liabilities on the balance sheets.

AEP

	September 30, 2022
	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)		Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate (a)
	(in millions)
Current Risk Management Assets (d)	$	1,482.1	$	411.1	$	8.8	$	1,902.0	$	(1,331.8)	$	570.2
Long-term Risk Management Assets	686.6		177.4		—		864.0		(598.2)		265.8
Total Assets	2,168.7		588.5		8.8		2,766.0		(1,930.0)		836.0
Current Risk Management Liabilities (e)	1,005.7		10.9		21.3		1,037.9		(850.6)		187.3
Long-term Risk Management Liabilities	501.6		4.9		114.1		620.6		(232.4)		388.2
Total Liabilities	1,507.3		15.8		135.4		1,658.5		(1,083.0)		575.5
Total MTM Derivative Contract Net Assets (Liabilities) (f)	$	661.4	$	572.7	$	(126.6)	$	1,107.5	$	(847.0)	$	260.5

	December 31, 2021
	Risk Management Contracts		Hedging Contracts				Gross Amounts of Risk Management Assets/ Liabilities Recognized		Gross Amounts Offset in the Statement of Financial Position (b)		Net Amounts of Assets/Liabilities Presented in the Statement of Financial Position (c)
Balance Sheet Location	Commodity (a)		Commodity (a)		Interest Rate (a)
	(in millions)
Current Risk Management Assets (d)	$	513.4	$	176.0	$	1.2	$	690.6	$	(496.2)	$	194.4
Long-term Risk Management Assets	370.5		89.1		—		459.6		(192.6)		267.0
Total Assets	883.9		265.1		1.2		1,150.2		(688.8)		461.4
Current Risk Management Liabilities (e)	395.7		40.9		—		436.6		(361.2)		75.4
Long-term Risk Management Liabilities	243.9		16.7		38.1		298.7		(68.4)		230.3
Total Liabilities	639.6		57.6		38.1		735.3		(429.6)		305.7
Total MTM Derivative Contract Net Assets (Liabilities)	$	244.3	$	207.5	$	(36.9)	$	414.9	$	(259.2)	$	155.7

AEP Texas

	September 30, 2022
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	0.1	$	0.1	$	0.2
Long-term Risk Management Assets	(0.1)		0.2		0.1
Total Assets	—		0.3		0.3
Current Risk Management Liabilities	—		—		—
Long-term Risk Management Liabilities	—		0.1		0.1
Total Liabilities	—		0.1		0.1
Total MTM Derivative Contract Net Assets	$	—	$	0.2	$	0.2

	December 31, 2021
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	0.6	$	(0.6)	$	—
Long-term Risk Management Assets	—		—		—
Total Assets	0.6		(0.6)		—
Current Risk Management Liabilities	—		—		—
Long-term Risk Management Liabilities	—		—		—
Total Liabilities	—		—		—
Total MTM Derivative Contract Net Assets (Liabilities)	$	0.6	$	(0.6)	$	—

APCo

	September 30, 2022
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	106.8	$	—	$	106.8
Long-term Risk Management Assets	0.7		(0.6)		0.1
Total Assets	107.5		(0.6)		106.9
Current Risk Management Liabilities	—		—		—
Long-term Risk Management Liabilities	0.7		(0.7)		—
Total Liabilities	0.7		(0.7)		—
Total MTM Derivative Contract Net Assets (f)	$	106.8	$	0.1	$	106.9

	December 31, 2021
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	47.5	$	(5.5)	$	42.0
Long-term Risk Management Assets	0.2		(0.2)		—
Total Assets	47.7		(5.7)		42.0
Current Risk Management Liabilities	7.2		(6.4)		0.8
Long-term Risk Management Liabilities	0.2		(0.2)		—
Total Liabilities	7.4		(6.6)		0.8
Total MTM Derivative Contract Net Assets	$	40.3	$	0.9	$	41.2

I&M

	September 30, 2022
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	12.3	$	(0.9)	$	11.4
Long-term Risk Management Assets	0.6		(0.4)		0.2
Total Assets	12.9		(1.3)		11.6
Current Risk Management Liabilities	0.9		(0.9)		—
Long-term Risk Management Liabilities	0.5		(0.5)		—
Total Liabilities	1.4		(1.4)		—
Total MTM Derivative Contract Net Assets (f)	$	11.5	$	0.1	$	11.6

	December 31, 2021
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	11.1	$	(7.8)	$	3.3
Long-term Risk Management Assets	0.2		(0.2)		—
Total Assets	11.3		(8.0)		3.3
Current Risk Management Liabilities	14.8		(9.8)		5.0
Long-term Risk Management Liabilities	0.2		(0.2)		—
Total Liabilities	15.0		(10.0)		5.0
Total MTM Derivative Contract Net Assets (Liabilities)	$	(3.7)	$	2.0	$	(1.7)

OPCo

	September 30, 2022
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	2.0	$	0.1	$	2.1
Long-term Risk Management Assets	(0.1)		0.1		—
Total Assets	1.9		0.2		2.1
Current Risk Management Liabilities	—		—		—
Long-term Risk Management Liabilities	45.1		—		45.1
Total Liabilities	45.1		—		45.1
Total MTM Derivative Contract Net Assets (Liabilities) (f)	$	(43.2)	$	0.2	$	(43.0)

	December 31, 2021
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	0.5	$	(0.5)	$	—
Long-term Risk Management Assets	—		—		—
Total Assets	0.5		(0.5)		—
Current Risk Management Liabilities	6.7		—		6.7
Long-term Risk Management Liabilities	85.8		—		85.8
Total Liabilities	92.5		—		92.5
Total MTM Derivative Contract Net Liabilities	$	(92.0)	$	(0.5)	$	(92.5)

PSO

	September 30, 2022
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	44.4	$	0.1	$	44.5
Long-term Risk Management Assets	—		—		—
Total Assets	44.4		0.1		44.5
Current Risk Management Liabilities	—		—		—
Long-term Risk Management Liabilities	—		—		—
Total Liabilities	—		—		—
Total MTM Derivative Contract Net Assets (f)	$	44.4	$	0.1	$	44.5

	December 31, 2021
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	12.4	$	(0.3)	$	12.1
Long-term Risk Management Assets	—		—		—
Total Assets	12.4		(0.3)		12.1
Current Risk Management Liabilities	3.7		—		3.7
Long-term Risk Management Liabilities	—		—		—
Total Liabilities	3.7		—		3.7
Total MTM Derivative Contract Net Assets (Liabilities)	$	8.7	$	(0.3)	$	8.4

SWEPCo

	September 30, 2022
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	37.2	$	(0.8)	$	36.4
Long-term Risk Management Assets	—		0.1		0.1
Total Assets	37.2		(0.7)		36.5
Current Risk Management Liabilities	0.8		(0.8)		—
Long-term Risk Management Liabilities	—		—		—
Total Liabilities	0.8		(0.8)		—
Total MTM Derivative Contract Net Assets (f)	$	36.4	$	0.1	$	36.5

	December 31, 2021
	Risk Management		Gross Amounts Offset		Net Amounts of Assets/Liabilities
	Contracts –		in the Statement of		Presented in the Statement of
Balance Sheet Location	Commodity (a)		Financial Position (b)		Financial Position (c)
	(in millions)
Current Risk Management Assets	$	10.1	$	(0.3)	$	9.8
Long-term Risk Management Assets	1.1		—		1.1
Total Assets	11.2		(0.3)		10.9
Current Risk Management Liabilities	2.1		—		2.1
Long-term Risk Management Liabilities	—		—		—
Total Liabilities	2.1		—		2.1
Total MTM Derivative Contract Net Assets (Liabilities)	$	9.1	$	(0.3)	$	8.8

(a)Derivative instruments within these categories are disclosed as gross.  These instruments are subject to master netting agreements and are presented on the balance sheets on a net basis in accordance with the accounting guidance for “Derivatives and Hedging.”

(b)Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for “Derivatives and Hedging.”

(c)All derivative contracts subject to a master netting arrangement or similar agreement are offset in the statement of financial position.

(d)Amount excludes Risk Management Assets of $14.4 million and $6 million as of September 30, 2022 and December 31, 2021, respectively, classified as Assets Held for Sale on the balance sheets. See “Disposition of KPCo and KTCo” section of Note 6 for additional information.

(e)Amount excludes Risk Management Liabilities of $0 and $0.1 million as of September 30, 2022 and December 31, 2021, respectively, classified as Liabilities Held for Sale on the balance sheets. See “Disposition of KPCo and KTCo” section of Note 6 for additional information.

(f)Increase in amounts as of September 30, 2022 are primarily due to increases in commodity prices for power and natural gas and an increase in value of FTRs.

The tables below present the Registrants’ amount of gain (loss) recognized on risk management contracts:

Amount of Gain (Loss) Recognized on

Risk Management Contracts

	Three Months Ended September 30, 2022
Location of Gain (Loss)	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Vertically Integrated Utilities Revenues	$	2.1	$	—	$	—	$	—	$	—	$	—	$	—
Generation & Marketing Revenues	116.7		—		—		—		—		—		—
Electric Generation, Transmission and Distribution Revenues	—		—		0.3		—		—		—		—
Other Revenues - Nonaffiliated	—		—		—		1.9		—		—		—
Purchased Electricity for Resale	0.9		—		0.9		0.1		—		—		—
Other Operation	1.4		0.4		0.1		0.1		0.2		0.2		0.2
Maintenance	2.0		0.5		0.2		0.2		0.4		0.2		0.3
Regulatory Assets (a)	4.3		—		—		0.1		4.1		—		0.1
Regulatory Liabilities (a)	103.2		(1.5)		59.7		3.8		0.9		19.7		7.0
Total Gain (Loss) on Risk Management Contracts (b)	$	230.6	$	(0.6)	$	61.2	$	6.2	$	5.6	$	20.1	$	7.6

	Three Months Ended September 30, 2021
Location of Gain (Loss)	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Vertically Integrated Utilities Revenues	$	(0.9)	$	—	$	—	$	—	$	—	$	—	$	—
Generation & Marketing Revenues	128.8		—		—		—		—		—		—
Electric Generation, Transmission and Distribution Revenues	—		—		(0.9)		—		—		—		—
Purchased Electricity for Resale	0.2		—		0.1		—		—		—		—
Other Operation	0.9		0.3		0.1		0.1		0.1		0.1		0.2
Maintenance	1.1		0.2		0.2		0.1		0.2		0.1		0.1
Regulatory Assets (a)	(7.2)		—		(2.9)		(16.9)		14.9		—		0.1
Regulatory Liabilities (a)	46.5		(0.1)		14.2		1.7		0.8		14.0		12.7
Total Gain (Loss) on Risk Management Contracts	$	169.4	$	0.4	$	10.8	$	(15.0)	$	16.0	$	14.2	$	13.1

	Nine Months Ended September 30, 2022
Location of Gain (Loss)	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Vertically Integrated Utilities Revenues	$	2.2	$	—	$	—	$	—	$	—	$	—	$	—
Generation & Marketing Revenues	390.0		—		—		—		—		—		—
Electric Generation, Transmission and Distribution Revenues	—		—		0.4		(0.1)		—		—		—
Other Revenues - Nonaffiliated	—		—		—		1.9		—		—		—
Purchased Electricity for Resale	3.3		—		3.0		0.1		—		0.1		—
Other Operation	3.7		1.1		0.3		0.4		0.6		0.5		0.6
Maintenance	5.2		1.4		0.7		0.5		0.9		0.6		0.8
Regulatory Assets (a)	49.3		0.1		—		(1.2)		49.0		3.6		(2.1)
Regulatory Liabilities (a)	250.1		(0.6)		79.9		7.0		2.5		71.4		64.8
Total Gain on Risk Management Contracts (b)	$	703.8	$	2.0	$	84.3	$	8.6	$	53.0	$	76.2	$	64.1

	Nine Months Ended September 30, 2021
Location of Gain (Loss)	AEP		AEP Texas		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Vertically Integrated Utilities Revenues	$	(0.6)	$	—	$	—	$	—	$	—	$	—	$	—
Generation & Marketing Revenues	144.9		—		—		—		—		—		—
Electric Generation, Transmission and Distribution Revenues	—		—		(0.6)		—		—		—		—
Purchased Electricity for Resale	1.2		—		1.0		0.1		—		—		—
Other Operation	1.9		0.6		0.2		0.2		0.3		0.2		0.3
Maintenance	2.4		0.6		0.4		0.2		0.4		0.2		0.3
Regulatory Assets (a)	(7.9)		—		(2.9)		(22.9)		20.3		—		1.4
Regulatory Liabilities (a)	123.6		0.5		28.9		1.9		5.9		40.2		38.5
Total Gain (Loss) on Risk Management Contracts	$	265.5	$	1.7	$	27.0	$	(20.5)	$	26.9	$	40.6	$	40.5

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

(b)Increase in amounts for the three and nine months ended September 30, 2022 are primarily due to increases in commodity prices for power and natural gas and an increase in value of FTRs.

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

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

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

Accounting for Fair Value Hedging Strategies (Applies to AEP)

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

AEP records realized and unrealized gains or losses on interest rate swaps that are designated and qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the statements of income.

The following table shows the impacts recognized on the balance sheets related to the hedged items in fair value hedging relationships:

	Carrying Amount of the Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
	(in millions)
Long-term Debt (a) (b)	$	(849.1)	$	(952.3)	$	95.7	$	(8.5)

(a)Amounts included on the Balance Sheet within Current and Noncurrent Liabilities line items Long-term Debt Due within One Year and Long-term Debt, respectively.

(b)Amounts include $(40) million and $(46) million as of September 30, 2022 and December 31, 2021, respectively, for the fair value hedge adjustment of hedged debt obligations for which hedge accounting has been discontinued.

The pretax effects of fair value hedge accounting on income were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in millions)
Gain (Loss) on Interest Rate Contracts:
Fair Value Hedging Instruments (a)	$	(36.0)	$	(0.1)	$	(98.4)	$	(23.8)
Fair Value Portion of Long-term Debt (a)	36.0		0.1		98.4		23.8

(a)Gain (Loss) is included in Interest Expense on the statements of income.

In June 2020, AEP terminated a $500 million notional amount interest rate swap resulting in the discontinuance of the hedging relationship. A gain of $57 million on the fair value of the hedging instrument was settled in cash and recorded within operating activities on the statements of cash flows. Subsequent to the discontinuation of hedge accounting, the remaining adjustment to the carrying amount of the hedged item of $57 million will be amortized on a straight line basis through November 2027 in Interest Expense on the statements of income.

Accounting for Cash Flow Hedging Strategies (Applies to AEP, AEP Texas, APCo, I&M and SWEPCo)

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrants initially report the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the balance sheets until the period the hedged item affects net income.

Realized gains and losses on derivative contracts for the purchase and sale of power designated as cash flow hedges are included in Total Revenues or Purchased Electricity for Resale on the statements of income or in Regulatory Assets or Regulatory Liabilities on the balance sheets, depending on the specific nature of the risk being hedged. During the three and nine months ended September 30, 2022 and 2021, AEP applied cash flow hedging to outstanding power derivatives and the Registrant Subsidiaries did not.

The Registrants reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) on the balance sheets into Interest Expense on the statements of income in those periods in which hedged interest payments occur. During the three and nine months ended September 30, 2022, AEP applied cash flow hedging to outstanding interest rate derivatives and the Registrant Subsidiaries did not. During the three months ended September 30, 2021, AEP applied cash flow hedging to outstanding interest rate derivatives and the Registrant Subsidiaries did not. During the nine months ended September 30, 2021, AEP and APCo applied cash flow hedging to outstanding interest rate derivatives and the other Registrant Subsidiaries did not.

For details on effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets and the reasons for changes in cash flow hedges, see Note 3 - Comprehensive Income.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the balance sheets were:

Impact of Cash Flow Hedges on AEP’s Balance Sheets

	September 30, 2022				December 31, 2021
	Commodity		Interest Rate		Commodity		Interest Rate
	(in millions)
AOCI Gain (Loss) Net of Tax	$	452.1	$	(2.6)	$	163.7	$	(21.3)
Portion Expected to be Reclassed to Net Income During the Next Twelve Months	316.2		(1.5)		106.7		(3.3)

As of September 30, 2022 the maximum length of time that AEP is hedging its exposure to variability in future cash flows related to forecasted transactions is 102 months and 99 months for commodity and interest rate hedges, respectively.

Impact of Cash Flow Hedges on the Registrant Subsidiaries’ Balance Sheets

	September 30, 2022				December 31, 2021
	Interest Rate
			Expected to be				Expected to be
			Reclassified to				Reclassified to
			Net Income During				Net Income During
	AOCI Gain (Loss)		the Next		AOCI Gain (Loss)		the Next
Company	Net of Tax		Twelve Months		Net of Tax		Twelve Months
	(in millions)
AEP Texas	$	(0.5)	$	(0.4)	$	(1.3)	$	(1.1)
APCo	6.9		0.8		7.5		0.8
I&M	(5.5)		(1.0)		(6.7)		(1.6)
SWEPCo	1.2		0.2		1.2		0.1

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

Credit Risk

Management mitigates credit risk in wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. Management uses credit agency ratings and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

Master agreements are typically used to facilitate the netting of cash flows associated with a single counterparty and may include collateral requirements. Collateral requirements in the form of cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. Some master agreements include margining, which requires a counterparty to post cash or letters of credit in the event exposure

exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP’s credit policy. In addition, master agreements allow for termination and liquidation of all positions in the event of a default including a failure or inability to post collateral when required.

Credit-Risk-Related Contingent Features

Credit Downgrade Triggers (Applies to AEP, APCo, I&M, PSO and SWEPCo)

A limited number of derivative contracts include collateral triggering events, which include a requirement to maintain certain credit ratings.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these collateral triggering events in contracts.  The Registrants have not experienced a downgrade below a specified credit rating threshold that would require the posting of additional collateral.  AEP had derivative contracts with collateral triggering events in a net liability position with a total exposure of $10 million and $9 million as of September 30, 2022 and December 31, 2021, respectively. The Registrant Subsidiaries had no derivative contracts with collateral triggering events in a net liability position as of September 30, 2022 and December 31, 2021.

Cross-Acceleration Triggers

Certain interest rate derivative contracts contain cross-acceleration provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-acceleration provisions could be triggered if there was a non-performance event by the Registrants under any of their outstanding debt of at least $50 million and the lender on that debt has accelerated the entire repayment obligation. On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-acceleration provisions in contracts. AEP had derivative contracts with cross-acceleration provisions in a net liability position of $135 million and $40 million as of September 30, 2022 and December 31, 2021, respectively. There was no cash collateral posted as of September 30, 2022 and December 31, 2021, respectively. If a cross-acceleration provision would have been triggered, settlement at fair value would have been required. The Registrant Subsidiaries had no derivative contracts with cross-acceleration provisions outstanding as of September 30, 2022 and December 31, 2021.

Cross-Default Triggers (Applies to AEP, APCo, I&M and SWEPCo)

In addition, a majority of non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third-party obligation that is $50 million or greater.  On an ongoing basis, AEP’s risk management organization assesses the appropriateness of these cross-default provisions in the contracts. AEP had derivative liabilities subject to cross-default provisions in a net liability position of $260 million and $76 million as of September 30, 2022 and December 31, 2021, respectively, after considering contractual netting arrangements. Cash collateral posted as of September 30, 2022 and December 31, 2021 was not material. If a cross-default provision would have been triggered, settlement at fair value would have been required. The Registrant Subsidiaries’ derivative contracts with cross-default provisions outstanding as of September 30, 2022 and December 31, 2021 were not material.