Financing Activities

3 Months Ended

Mar. 31, 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	March 31, 2020		December 31, 2019
	(in millions)
Senior Unsecured Notes	$	22,515.8	$	21,180.7
Pollution Control Bonds	1,999.2		1,998.8
Notes Payable	209.4		234.3
Securitization Bonds	899.1		1,025.1
Spent Nuclear Fuel Obligation (a)	280.9		279.8
Junior Subordinated Notes (b)	788.6		787.8
Other Long-term Debt	1,199.7		1,219.0
Total Long-term Debt Outstanding	27,892.7		26,725.5
Long-term Debt Due Within One Year	2,109.7		1,598.7
Long-term Debt	$	25,783.0	$	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 $324 million and $323 million as of March 31, 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 three 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
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	5.0		Variable	2023
Transource Energy	Senior Unsecured Notes	150.0		2.75	2050
Total Issuances		$	1,430.0

(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	Securitization Bonds	$	111.0	5.31	2020
AEP Texas	Securitization Bonds	3.3		2.06	2025
APCo	Securitization Bonds	12.2		2.01	2023
I&M	Notes Payable	0.7		Variable	2020
I&M	Notes Payable	1.5		Variable	2021
I&M	Notes Payable	5.1		Variable	2022
I&M	Notes Payable	3.8		Variable	2022
I&M	Notes Payable	6.2		Variable	2023
I&M	Notes Payable	6.0		Variable	2024
I&M	Other Long-term Debt	0.4		6.00	2025
PSO	Other Long-term Debt	0.1		3.00	2027
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		$	300.5

Long-term Debt Subsequent Events

In April 2020, AEPTCo issued $525 million of 3.65% Senior Unsecured Notes due in 2050.

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

In April 2020, Transource Energy issued $1 million of variable rate Other Long-term Debt due in 2023.

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 3.3% of consolidated tangible net assets as of March 31, 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 March 31, 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 three months ended March 31, 2020 are described in the following table:

	Maximum				Average				Net
	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		March 31, 2020			Limit
	(in millions)
AEP Texas	$	63.9	$	199.7	$	39.0	$	90.3	$	(63.9	)	$	500.0
AEPTCo	358.4		69.8		257.6		32.6		(261.0		)	820.0		(a)
APCo	373.5		22.2		303.1		22.0		(333.5		)	500.0
I&M	147.5		13.3		108.4		13.3		(90.4		)	500.0
OPCo	353.9		32.8		191.5		25.2		(29.4		)	500.0
PSO	70.9		57.1		25.3		28.4		(70.9		)	300.0
SWEPCo	152.8		—		105.5		—		(148.1		)	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 March 31, 2020 and December 31, 2019 are included in Advances to Affiliates on the subsidiaries’ balance sheets. The Nonutility Money Pool participants’ activity for the three months ended March 31, 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		March 31, 2020
	(in millions)
AEP Texas		$	7.5	$	7.2	$	7.1
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 March 31, 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 three months ended March 31, 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

March 31, 2020

March 31, 2020

Borrowing Limit

(in millions)

$

1.4

$

190.3

$

1.4

$

125.1

$

1.3

$

93.3

$

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:

	Three Months Ended March 31,
	2020		2019
Maximum Interest Rate	2.24	%	3.02	%
Minimum Interest Rate	1.76	%	2.73	%

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 Three Months Ended March 31,				for Three Months Ended March 31,
Company	2020		2019		2020		2019
AEP Texas	2.05	%	2.86	%	1.97	%	—	%
AEPTCo	1.95	%	2.83	%	1.91	%	2.90	%
APCo	1.95	%	2.92	%	1.94	%	2.79	%
I&M	1.95	%	2.80	%	1.94	%	2.87	%
OPCo	1.90	%	2.85	%	2.06	%	—	%
PSO	2.00	%	2.89	%	1.95	%	—	%
SWEPCo	1.95	%	2.81	%	—	%	2.97	%

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

Three Months Ended March 31, 2020

Three Months Ended March 31, 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

2.24

%

1.76

%

1.94

%

3.02

%

2.73

%

2.87

%

SWEPCo

2.24

%

1.76

%

1.94

%

3.02

%

2.73

%

2.87

%

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
Three Months	for Funds		for Funds		for Funds		for Funds		for Funds		for Funds
Ended	Borrowed		Borrowed		Loaned		Loaned		Borrowed		Loaned
March 31,	from AEP		from AEP		to AEP		to AEP		from AEP		to AEP
2020	2.24	%	1.76	%	2.24	%	1.76	%	1.94	%	1.94	%
2019	3.02	%	2.73	%	3.02	%	2.73	%	2.87	%	2.86	%

Short-term Debt (Applies to AEP and SWEPCo)

Outstanding short-term debt was as follows:

		March 31, 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)	$	724.0	1.75	%	$	710.0	2.42	%
AEP	Commercial Paper	2,709.6		2.24	%	2,110.0		2.10	%
AEP	364-Day Term Loan	1,000.0		1.53	%	—		—	%
SWEPCo	Notes Payable	30.5		2.98	%	18.3		3.29	%
	Total Short-term Debt	$	4,464.1			$	2,838.3

(a) Weighted-average rate.

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

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. Accounts receivable information for AEP Credit was as follows:

	Three Months Ended  March 31,
	2020			2019
	(dollars in millions)
Effective Interest Rates on Securitization of Accounts Receivable	1.75		%	2.71		%
Net Uncollectible Accounts Receivable Written-Off	$	4.2		$	6.4

	March 31, 2020		December 31, 2019
	(in millions)
Accounts Receivable Retained Interest and Pledged as Collateral Less Uncollectible Accounts	$	850.7	$	841.8
Short-term – Securitized Debt of Receivables	724.0		710.0
Delinquent Securitized Accounts Receivable	43.4		39.6
Bad Debt Reserves Related to Securitization	34.5		32.1
Unbilled Receivables Related to Securitization	219.8		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	March 31, 2020		December 31, 2019
	(in millions)
APCo	$	121.8	$	120.9
I&M	155.2		141.8
OPCo	338.3		330.3
PSO	93.3		101.1
SWEPCo	121.2		125.2

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

	Three Months Ended March 31,
Company	2020		2019
	(in millions)
APCo	$	1.7	$	2.2
I&M	2.8		2.8
OPCo	4.8		7.8
PSO	1.3		2.1
SWEPCo	2.1		2.6

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

	Three Months Ended March 31,
Company	2020		2019
	(in millions)
APCo	$	352.6	$	374.4
I&M	471.4		478.6
OPCo	570.3		636.8
PSO	294.9		324.5
SWEPCo	365.6		371.9