Income Taxes

9 Months Ended

Sep. 30, 2020

Income Taxes

INCOME TAXES

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

Federal Legislation

In March 2020, the CARES Act was signed into law.  The CARES Act includes tax relief provisions such as: (a) an Alternative Minimum Tax (AMT) Credit Refund, (b) a 5-year net operating losses (NOL) carryback from years 2018-2020 and (c) delayed payment of employer payroll taxes. In May 2020, the House passed the "Health and Economic Recovery Omnibus Emergency Solutions Act" (HEROES Act) pending decision by the Senate. If enacted, the HEROES Act would disallow NOL carrybacks to any tax year beginning before January 1, 2018.  Pursuant to the CARES Act, AEP, APCo and OPCo requested and in July received a $20 million, $7 million and $9 million, respectively, refund of AMT credit. In the third quarter of 2020, AEP also requested a $95 million refund of taxes paid in 2014 under the 5-year NOL carryback provision of the CARES Act. AEP carried back an NOL generated on the 2019 Federal income tax return at a 21% federal corporate income tax rate to the 2014 Federal income tax return at a 35% corporate income tax rate. As a result of the change in the corporate income tax rates between the two periods, AEP realized a tax benefit of $52 million, recorded discretely, primarily at the Generation & Marketing segment. On October 1, 2020, after AEP filed its request with the IRS, the House passed a revised version of the HEROES Act; which similar to the original legislation would disallow NOL carryback to years prior to 2018. Management will continue to monitor the potential impact of this legislation. The Registrants are currently deferring payments of the employer share of payroll taxes for the period March 27, 2020 through December 31, 2020 and will pay 50% of the obligation by December 31, 2021 and the remaining 50% by December 31, 2022.

Effective Tax Rates (ETR)

The Registrants’ interim ETR reflect the estimated annual ETR for 2020 and 2019, adjusted for tax expense associated with certain discrete items.

The Registrants include the amortization of Excess ADIT not subject to normalization requirements in the annual estimated ETR when regulatory proceedings instruct the Registrants to provide the benefits of Tax Reform to customers over multiple interim periods.  Certain regulatory proceedings instruct the Registrants to provide the benefits of Tax Reform to customers in a single period (e.g. by applying the Excess ADIT not subject to normalization requirements against an existing regulatory asset balance) and in these circumstances, the Registrants recognize the tax benefit discretely in the period recorded. The annual amount of Excess ADIT approved by the Registrant’s regulatory commissions may not impact the ETR ratably during each interim period due to the variability of pretax book income between interim periods and the application of an annual estimated ETR.

The ETR for each of the Registrants are included in the following tables:

	Three Months Ended September 30, 2020
	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
U.S. Federal Statutory Rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) due to:
State Income Tax, net of Federal Benefit	2.7	%	2.0	%	2.9	%	3.1	%	3.4	%	0.8	%	4.6	%	2.4	%
Tax Reform Excess ADIT Reversal	(11.0)	%	(14.6)	%	0.4	%	(22.0)	%	(16.7)	%	(6.7)	%	(20.3)	%	(7.3)	%
Production and Investment Tax Credits	(4.6)	%	(0.5)	%	—	%	—	%	(1.6)	%	—	%	(1.1)	%	(0.5)	%
Flow Through	0.5	%	0.2	%	0.5	%	1.6	%	0.2	%	0.9	%	0.2	%	(1.2)	%
AFUDC Equity	(1.5)	%	(3.5)	%	(2.6)	%	(1.1)	%	(0.9)	%	(0.9)	%	(0.6)	%	(0.3)	%
Parent Company Loss Benefit	—	%	—	%	(0.9)	%	(3.1)	%	(3.7)	%	(0.3)	%	(1.7)	%	(2.0)	%
Discrete Tax Adjustments	(7.4)	%	(3.6)	%	(0.2)	%	(6.6)	%	2.3	%	8.4	%	(0.6)	%	(0.6)	%
Other	0.1	%	0.3	%	0.1	%	—	%	—	%	0.3	%	0.1	%	(0.6)	%
Effective Income Tax Rate	(0.2)	%	1.3	%	21.2	%	(7.1)	%	4.0	%	23.5	%	1.6	%	10.9	%

	Three Months Ended September 30, 2019
	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
U.S. Federal Statutory Rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) due to:
State Income Tax, net of Federal Benefit	2.6	%	1.4	%	3.1	%	3.0	%	(0.1)	%	0.4	%	4.8	%	2.4	%
Tax Reform Excess ADIT Reversal	(11.9)	%	(6.1)	%	1.4	%	(26.6)	%	(17.3)	%	(6.9)	%	(16.5)	%	(19.5)	%
Production and Investment Tax Credits	(3.7)	%	(0.2)	%	—	%	—	%	(2.0)	%	—	%	(1.4)	%	(0.9)	%
Flow Through	0.4	%	—	%	0.1	%	3.8	%	(0.7)	%	1.0	%	0.7	%	(0.5)	%
AFUDC Equity	(1.5)	%	(1.1)	%	(2.6)	%	(1.3)	%	(1.7)	%	(1.7)	%	(0.3)	%	(0.9)	%
Parent Company Loss Benefit	—	%	(0.1)	%	(1.3)	%	(1.1)	%	(1.0)	%	0.4	%	(1.8)	%	(1.8)	%
Discrete Tax Adjustments	(1.7)	%	—	%	(0.1)	%	(2.4)	%	(1.3)	%	1.7	%	—	%	—	%
Other	—	%	0.2	%	0.3	%	(0.3)	%	0.4	%	(2.0)	%	(0.1)	%	(0.4)	%
Effective Income Tax Rate	5.2	%	15.1	%	21.9	%	(3.9)	%	(2.7)	%	13.9	%	6.4	%	(0.6)	%
	Nine Months Ended September 30, 2020
	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
U.S. Federal Statutory Rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) due to:
State Income Tax, net of Federal Benefit	2.6	%	1.8	%	2.9	%	3.1	%	3.4	%	0.7	%	4.6	%	2.3	%
Tax Reform Excess ADIT Reversal	(12.1)	%	(23.4)	%	0.4	%	(20.8)	%	(16.7)	%	(8.8)	%	(20.3)	%	(11.5)	%
Production and Investment Tax Credits	(4.5)	%	(0.5)	%	—	%	—	%	(1.6)	%	—	%	(1.1)	%	(0.5)	%
Flow Through	0.5	%	0.1	%	0.5	%	1.6	%	0.2	%	0.9	%	0.2	%	(1.2)	%
AFUDC Equity	(1.5)	%	(3.2)	%	(2.6)	%	(1.1)	%	(0.9)	%	(0.9)	%	(0.6)	%	(0.3)	%
Parent Company Loss Benefit	—	%	—	%	(0.9)	%	(3.1)	%	(3.7)	%	(0.3)	%	(1.7)	%	(1.9)	%
Discrete Tax Adjustments	(3.0)	%	(1.6)	%	(0.1)	%	(2.3)	%	1.8	%	2.6	%	(0.4)	%	(0.3)	%
Other	0.2	%	0.4	%	(0.1)	%	(0.1)	%	(0.1)	%	0.2	%	0.1	%	(0.4)	%
Effective Income Tax Rate	3.2	%	(5.4)	%	21.1	%	(1.7)	%	3.4	%	15.4	%	1.8	%	7.2	%

	Nine Months Ended September 30, 2019
	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
U.S. Federal Statutory Rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) due to:
State Income Tax, net of Federal Benefit	2.1	%	1.5	%	3.0	%	3.3	%	1.2	%	0.7	%	4.7	%	1.8	%
Tax Reform Excess ADIT Reversal	(16.7)	%	(43.9)	%	0.7	%	(40.2)	%	(17.3)	%	(7.4)	%	(18.2)	%	(18.7)	%
Production and Investment Tax Credits	(3.6)	%	(0.5)	%	—	%	—	%	(2.0)	%	—	%	(1.5)	%	(0.8)	%
Flow Through	0.1	%	0.1	%	0.2	%	0.7	%	(1.8)	%	0.7	%	0.6	%	(0.6)	%
AFUDC Equity	(1.5)	%	(1.3)	%	(2.5)	%	(1.1)	%	(1.9)	%	(1.0)	%	(0.3)	%	(0.9)	%
Parent Company Loss Benefit	—	%	(1.0)	%	(1.1)	%	(1.9)	%	(1.5)	%	(0.7)	%	(1.8)	%	(1.5)	%
Discrete Tax Adjustments	—	%	(1.3)	%	(0.6)	%	(0.8)	%	0.2	%	0.5	%	—	%	(0.2)	%
Other	0.3	%	0.1	%	—	%	(0.1)	%	—	%	0.4	%	0.1	%	(0.1)	%
Effective Income Tax Rate	1.7	%	(25.3)	%	20.7	%	(19.1)	%	(2.1)	%	14.2	%	4.6	%	—	%

Federal and State Income Tax Audit Status

AEP and subsidiaries are no longer subject to U.S. federal examination by the IRS for all years through 2015. During the third quarter of 2019, AEP and subsidiaries elected to amend the 2014 and 2015 federal returns. In the first quarter of 2020, the IRS notified AEP that it was beginning an examination of these amended returns, including the net operating loss carryback to 2015 that originated in the 2017 return. The IRS may examine only the amended items on the 2014 and 2015 federal returns.