The Registrants lease property, plant and equipment including, but not limited to, fleet, information technology and real estate leases. These leases require payments of non-lease components, including related property taxes, operating and maintenance costs. As of the adoption date of ASU 2016-02, management elected not to separate non-lease components from associated lease components in accordance with the accounting guidance for “Leases.” Many of these leases have purchase or renewal options. Leases not renewed are often replaced by other leases. Options to renew or purchase a lease are included in the measurement of lease assets and liabilities if it is reasonably certain the Registrant will exercise the option.

Lease obligations are measured using the discount rate implicit in the lease when that rate is readily determinable. When the implicit rate is not readily determinable, the Registrants measure their lease obligation using their estimated secured incremental borrowing rate. Incremental borrowing rates are comprised of an underlying risk free rate and a secured credit spread relative to the lessee on a matched maturity basis.

Lease rentals for both operating and finance leases are generally charged to Other Operation and Maintenance expense in accordance with rate-making treatment for regulated operations. Additionally, for regulated operations with finance leases, a finance lease asset and offsetting liability are recorded at the present value of the remaining lease payments for each reporting period. Finance leases for nonregulated property are accounted for as if the assets were owned and financed. The components of rental costs were as follows:



Three Months Ended September 30, 2019	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Operating Lease Cost	$	64.4	$	4.0	$	0.6	$	4.9	$	23.7	$	4.9	$	1.5	$	1.8
Finance Lease Cost:
Amortization of Right-of-Use Assets	16.5		1.5		0.1		2.0		1.6		1.1		0.8		2.8
Interest on Lease Liabilities	4.1		0.3		—		0.8		0.8		0.2		0.1		0.7
Total Lease Rental Costs (a)	$	85.0	$	5.8	$	0.7	$	7.7	$	26.1	$	6.2	$	2.4	$	5.3



Nine Months Ended September 30, 2019	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Operating Lease Cost	$	200.3	$	12.2	$	1.7	$	14.5	$	70.0	$	13.8	$	5.0	$	5.7
Finance Lease Cost:
Amortization of Right-of-Use Assets	45.0		3.8		0.1		5.0		4.2		2.6		2.2		8.2
Interest on Lease Liabilities	12.2		1.0		—		2.2		2.3		0.5		0.4		2.2
Total Lease Rental Costs (a)	$	257.5	$	17.0	$	1.8	$	21.7	$	76.5	$	16.9	$	7.6	$	16.1



September 30, 2019	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
Weighted-Average Remaining Lease Term (years):
Operating Leases	5.31		7.05		2.43		6.25		4.05		8.10		7.06		6.63
Finance Leases	5.87		6.86		0.58		6.33		6.72		6.58		6.24		5.34
Weighted-Average Discount Rate:
Operating Leases	3.61	%	3.79	%	3.13	%	3.67	%	3.45	%	3.79	%	3.68	%	3.80	%
Finance Leases	6.02	%	4.71	%	9.33	%	8.19	%	8.61	%	4.66	%	4.73	%	5.03	%



Nine Months Ended September 30, 2019	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating Cash Flows Used for Operating Leases	$	163.6	$	11.4	$	1.7	$	14.1	$	52.5	$	13.8	$	4.9	$	5.3
Operating Cash Flows Used for Finance Leases	11.0		1.0		—		2.2		2.2		0.5		0.4		1.1
Financing Cash Flows Used for Finance Leases	44.5		3.8		—		5.0		4.0		2.6		2.2		8.1

Non-cash Acquisitions Under Operating Leases	$	108.9	$	12.7	$	—	$	8.6	$	16.6	$	34.6	$	7.3	$	10.6

The following tables show the property, plant and equipment under finance leases and noncurrent assets under operating leases and related obligations recorded on the Registrants’ balance sheets. Unless shown as a separate line on the balance sheets due to materiality, net operating lease assets are included in Deferred Charges and Other Noncurrent Assets, current finance lease obligations are included in Other Current Liabilities and long-term finance lease obligations are included in Deferred Credits and Other Noncurrent Liabilities on the Registrants’ balance sheets. Lease obligations are not recognized on the balance sheets for lease agreements with a lease term of less than twelve months.



September 30, 2019	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Property, Plant and Equipment Under Finance Leases:
Generation	$	134.9	$	—	$	—	$	41.3	$	28.5	$	—	$	2.6	$	34.2
Other Property, Plant and Equipment	335.9		41.9		0.2		18.4		37.1		24.7		20.7		50.0
Total Property, Plant and Equipment	470.8		41.9		0.2		59.7		65.6		24.7		23.3		84.2
Accumulated Amortization	162.7		10.9		0.2		17.8		22.8		6.6		9.1		26.2
Net Property, Plant and Equipment Under Finance Leases	$	308.1	$	31.0	$	—	$	41.9	$	42.8	$	18.1	$	14.2	$	58.0

Obligations Under Finance Leases:
Noncurrent Liability	$	254.0	$	25.8	$	—	$	35.2	$	37.1	$	14.5	$	11.0	$	50.5
Liability Due Within One Year	61.4		5.2		—		6.7		6.0		3.6		3.2		11.2
Total Obligations Under Finance Leases	$	315.4	$	31.0	$	—	$	41.9	$	43.1	$	18.1	$	14.2	$	61.7



September 30, 2019	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Operating Lease Assets	$	990.0	$	82.0	$	4.6	$	79.4	$	295.3	$	88.2	$	37.1	$	40.8

Obligations Under Operating Leases:
Noncurrent Liability	$	801.1	$	71.1	$	2.2	$	64.8	$	234.0	$	75.9	$	31.2	$	32.5
Liability Due Within One Year	228.8		11.7		2.3		15.3		82.0		12.8		6.0		5.9
Total Obligations Under Operating Leases	$	1,029.9	$	82.8	$	4.5	$	80.1	$	316.0	$	88.7	$	37.2	$	38.4



Finance Leases	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Year 1	$	76.8	$	6.6	$	—	$	9.6	$	9.0	$	4.3	$	3.8	$	13.0
Year 2	67.0		6.1		—		8.8		8.2		3.9		3.1		11.6
Year 3	58.0		5.3		—		8.1		7.6		3.2		2.3		10.6
Year 4	49.0		4.9		—		7.5		7.1		2.5		2.1		9.5
Year 5	50.0		4.1		—		7.0		6.7		2.1		1.7		14.8
Later Years	76.1		9.8		—		11.3		20.9		5.3		3.7		7.5
Total Future Minimum Lease Payments	376.9		36.8		—		52.3		59.5		21.3		16.7		67.0
Less Imputed Interest	61.5		5.8		—		10.4		16.4		3.2		2.5		5.3
Estimated Present Value of Future Minimum Lease Payments	$	315.4	$	31.0	$	—	$	41.9	$	43.1	$	18.1	$	14.2	$	61.7



Operating Leases	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Year 1	$	267.5	$	15.7	$	2.4	$	18.4	$	92.2	$	16.6	$	7.4	$	8.4
Year 2	252.4		15.2		1.5		16.4		88.4		13.9		6.6		8.2
Year 3	239.9		14.1		0.7		14.7		86.3		13.3		6.0		7.5
Year 4	154.2		13.0		0.3		12.5		48.0		12.4		5.5		7.2
Year 5	63.6		11.4		—		9.8		7.3		10.8		5.0		5.0
Later Years	184.1		27.8		—		20.1		22.0		38.3		12.7		12.4
Total Future Minimum Lease Payments	1,161.7		97.2		4.9		91.9		344.2		105.3		43.2		48.7
Less Imputed Interest	131.8		14.4		0.4		11.8		28.2		16.6		6.0		10.3
Estimated Present Value of Future Minimum Lease Payments	$	1,029.9	$	82.8	$	4.5	$	80.1	$	316.0	$	88.7	$	37.2	$	38.4



Finance Leases	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
2019	$	70.8	$	5.8	$	0.1	$	9.0	$	8.2	$	3.3	$	3.4	$	13.1
2020	60.2		5.3		—		8.0		7.2		2.7		2.6		11.5
2021	51.7		4.7		—		7.3		6.6		2.3		2.0		10.5
2022	43.8		4.2		—		6.8		6.1		1.7		1.6		9.4
2023	35.5		3.7		—		6.3		5.7		1.2		1.4		8.6
Later Years	90.2		10.1		—		13.3		21.7		2.8		3.3		18.7
Total Future Minimum Lease Payments	352.2		33.8		0.1		50.7		55.5		14.0		14.3		71.8
Less Imputed Interest	63.2		5.3		—		10.9		16.8		1.9		2.0		11.0
Estimated Present Value of Future Minimum Lease Payments	$	289.0	$	28.5	$	0.1	$	39.8	$	38.7	$	12.1	$	12.3	$	60.8



Operating Leases	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
2019	$	259.6	$	15.1	$	2.3	$	17.6	$	92.6	$	14.5	$	6.5	$	7.4
2020	250.1		14.1		1.8		16.5		89.3		13.2		6.0		7.2
2021	232.7		13.2		1.0		13.9		84.8		10.9		5.0		6.7
2022	222.5		12.2		0.5		12.8		83.8		10.0		4.6		6.1
2023	58.3		10.8		0.1		9.9		6.5		8.8		4.1		5.0
Later Years	165.2		28.4		—		20.5		19.5		31.7		10.7		11.7
Total Future Minimum Lease Payments	$	1,188.4	$	93.8	$	5.7	$	91.2	$	376.5	$	89.1	$	36.9	$	44.1

The Registrants lease certain equipment under master lease agreements. Under the lease agreements, the lessor is guaranteed a residual value up to a stated percentage of the equipment cost at the end of the lease term. If the actual fair value of the leased equipment is below the guaranteed residual value at the end of the lease term, the Registrants are committed to pay the difference between the actual fair value and the residual value guarantee. Historically, at the end of the lease term the fair value has been in excess of the amount guaranteed. As of September 30, 2019, the maximum potential loss by the Registrants for these lease agreements assuming the fair value of the equipment is zero at the end of the lease term was as follows:

AEGCo and I&M entered into a sale-and-leaseback transaction in 1989 with Wilmington Trust Company (Owner Trustee), an unrelated, unconsolidated trustee for Rockport Plant, Unit 2 (the Plant). The Owner Trustee was capitalized with equity from six owner participants with no relationship to AEP or any of its subsidiaries and debt from a syndicate of banks and securities in a private placement to certain institutional investors. In the first quarter of 2019, in accordance with ASU 2016-02, the $37 million unamortized gain ($15 million related to I&M) associated with the sale-and-leaseback of the Plant was recognized as an adjustment to equity. The adjustment to equity was then reclassified to regulatory liabilities in accordance with accounting guidance for “Regulated Operations” as AEGCo and I&M will continue to provide the benefit of the unamortized gain to customers in future periods.

The Owner Trustee owns the Plant and leases equal portions to AEGCo and I&M. The lease is accounted for as an operating lease with the payment obligations included in the future minimum lease payments schedule earlier in this note. The lease term is for 33 years and at the end of the lease term, AEGCo and I&M have the option to renew the lease at a rate that approximates fair value. The option to renew was not included in the measurement of the lease obligation as of September 30, 2019 as the execution of the option was not reasonably certain. AEP, AEGCo and I&M have no ownership interest in the Owner Trustee and do not guarantee its debt. The future minimum lease payments for this sale-and-leaseback transaction as of September 30, 2019 were as follows:



Future Minimum Lease Payments	AEP (a)		I&M
	(in millions)
2019	$	74.2	$	37.1
2020	147.8		73.9
2021	147.8		73.9
2022	147.2		73.6
Total Future Minimum Lease Payments	$	517.0	$	258.5

In 2015, AEP sold its commercial barge transportation subsidiary, AEPRO, to a nonaffiliated party. Certain boat and barge leases acquired by the nonaffiliated party are subject to an AEP guarantee in favor of the lessor, ensuring future payments under such leases with maturities up to 2027. As of September 30, 2019, the maximum potential amount of future payments required under the guaranteed leases was $56 million. In certain instances, AEP has no recourse against the nonaffiliated party if required to pay a lessor under a guarantee, but AEP would have access to sell the leased assets in order to recover payments made by AEP under the guarantee. As of September 30, 2019, AEP’s boat and barge lease guarantee liability was $4 million, of which $1 million was recorded in Other Current Liabilities and $3 million was recorded in Deferred Credits and Other Noncurrent Liabilities on AEP’s balance sheet.

In January 2018, S&P Global Inc. downgraded the ratings of the nonaffiliated party and set their outlook to negative. In April 2018, Moody’s Investors Service Inc. (Moody’s) also downgraded their rating and set their outlook to negative. Moody’s further downgraded their rating in April 2019 and maintained a negative outlook. It is reasonably possible that enforcement of AEP’s liability for future payments under these leases could be exercised, which could reduce future net income and cash flows and impact financial condition.