INCOME TAXES

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

Federal Tax Reform

In December 2017, legislation referred to as Tax Reform was signed into law. Tax Reform includes significant changes to the Internal Revenue Code of 1986, as amended, (the Code) and had a material impact on the Registrants’ financial statements in the reporting period of its enactment. Tax Reform lowered the corporate federal income tax rate from 35% to 21%. Tax Reform provisions related to regulated public utilities generally allow for the continued deductibility of interest expense, eliminate bonus depreciation for certain property acquired after September 27, 2017 and continue certain rate normalization requirements for accelerated depreciation benefits.

Provisional Amounts

The Registrants applied Staff Accounting Bulletin 118 (SAB 118), issued by the SEC staff in December 2017, and made reasonable estimates for the measurement and accounting of the effects of Tax Reform which are reflected in the financial statements as provisional amounts based on the best information available. SAB 118 provides for up to a one year period to complete the required analysis and accounting for Tax Reform referred to as the measurement period. While the Registrants were able to make reasonable estimates of the impact of Tax Reform in 2017, the final impact may differ from the recorded provisional amounts to the extent refinements are made to the estimated cumulative differences or as a result of additional guidance or technical corrections that may be issued by the IRS that may impact management’s interpretation and assumptions utilized. The measurement period adjustments recorded during the second quarter of 2018 to the provisional amounts were immaterial. The Registrants expect to complete the analysis of the provisional items during the second half of 2018.

Status of Tax Reform Regulatory Proceedings

The table below summarizes the current status of Tax Reform in AEP’s various regulatory jurisdictions. For additional details on regulatory filings in these jurisdictions, see Note 4 - Rate Matters.



Registrant (Jurisdiction)	Change in Tax Rate	Excess ADIT Subject to Normalization Requirements	Excess ADIT Not Subject to Normalization Requirements
AEP Texas (Texas-Distribution)	Case Pending	Case Pending	Case Pending
AEP Texas (Texas-Transmission)	Order Issued	To be addressed in a later filing	To be addressed in a later filing
APCo (Virginia)	Legislation Enacted	Legislation Enacted	To be addressed in a later filing
APCo (West Virginia)	Case Pending	Case Pending	Case Pending
I&M (Indiana)	Order Issued	Order Issued	Order Issued
I&M (Michigan)	Case Pending	To be addressed in a later filing	To be addressed in a later filing
AEP (Tennessee)	Case Pending	Case Pending	Case Pending
AEP (Kentucky)	Order Issued	Order Issued	Order Issued
OPCo (Ohio)	Case Pending	Case Pending	Case Pending
PSO (Oklahoma)	Order Issued	Case Pending	Case Pending
SWEPCo (Arkansas)	Case Pending	Case Pending	Case Pending
SWEPCo (Louisiana)	Case Pending	To be addressed in a later filing	To be addressed in a later filing
SWEPCo (Texas)	Order Issued	To be addressed in a later filing	To be addressed in a later filing
PJM FERC Transmission	Settlement Approved	Settlement Approved	Settlement Approved
SPP FERC Transmission	To be addressed in a later filing	To be addressed in a later filing	To be addressed in a later filing

Reduction in the Corporate Federal Income Tax Rate - Pending Rate Reductions

State utility commissions have issued orders or instructions requiring public utilities, including the Registrants, to record liabilities to reflect the impact of the reduction in the corporate federal income tax rate in excess of the enacted corporate federal income tax rate of 21% beginning in 2018. The table below provides a summary of the estimated provisions for revenue refund recorded by the Registrants related to the reduction in the corporate federal tax rate as of June 30, 2018:



	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
	(in millions)
Increase in Current Liabilities	$	—	$	—	$	—	$	—	$	4.0	$	—	$	—	$	—
Increase in Deferred Credits and Other Noncurrent Liabilities	143.6		18.0		5.7		48.8		10.3		27.8		4.7		24.2

Excess ADIT - Pending Rate Reductions

As of June 30, 2018, the Registrants have approximately $4.4 billion of Excess ADIT, as well as an incremental liability of $1.2 billion to reflect the $4.4 billion Excess ADIT on a pretax basis, presented in Regulatory Liabilities and Deferred Investment Tax Credits on the balance sheets. The Excess ADIT is reflected on a pretax basis to appropriately contemplate future tax consequences in the periods when the regulatory liability is settled. As of June 30, 2018, approximately $3.4 billion of the Excess ADIT relates to temporary differences associated with certain depreciable property subject to rate normalization requirements.

As reflected in the Registrants’ respective estimated annual ETR for 2018, AEP’s regulated public utilities began amortizing the Excess ADIT associated with certain depreciable property subject to rate normalization requirements using the ARAM during the first quarter of 2018. The amortization resulted in a reduction in the Excess ADIT balance recorded in Regulatory Liabilities and Deferred Investment Tax Credits and a reduction in Income Tax Expense. As a result of state utility commission orders or instructions, in the second quarter of 2018 the Registrants recorded estimated provisions for revenue refund offsetting the amortization of the Excess ADIT as shown in the table below:



	AEP			AEP Texas			AEPTCo			APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)
Decrease in Total Revenues	$	(33.3	)	$	(4.9	)	$	(0.2	)	$	(9.6	)	$	(1.2	)	$	(2.5	)	$	(4.6	)	$	(7.0	)
Increase in Current Liabilities	1.2			—			—			0.4			0.3			0.3			—			—
Increase in Deferred Credits and Other Noncurrent Liabilities	32.1			4.9			0.2			9.2			0.9			2.2			4.6			7.0

In addition, with respect to the remaining $1 billion of Excess ADIT recorded in Regulatory Liabilities and Deferred Investment Tax Credits that are not subject to rate normalization requirements, the Registrants continue to work with the various state utility commissions to determine the appropriate mechanism and time period to provide these benefits of Tax Reform to customers. As a result of certain state utility commission orders or instructions received and a filed FERC settlement agreement, AEP, AEPTCo, APCo, I&M, and OPCo began amortizing Excess ADIT not subject to rate normalization requirements.

Effective Tax Rates (ETR)

The Registrants’ interim ETR reflect the estimated annual ETR for 2018 and 2017, adjusted for tax expense associated with certain discrete items. As previously mentioned, effective January 1, 2018, Tax Reform lowered the corporate tax rate from 35% to 21%. The interim ETR differ from the federal statutory tax rate of 21% and 35% in 2018 and 2017, respectively, primarily due to state income taxes, the amortization of the Excess ADIT, tax credits and other book/tax differences which are accounted for on a flow-through basis.

The ETR for each of the Registrants is included in the following table. Significant variances in the ETR are described below.



	Three Months Ended June 30,				Six Months Ended June 30,
Company	2018		2017		2018		2017
AEP	12.0	%	34.6	%	15.0	%	36.5	%
AEP Texas	16.2	%	34.6	%	16.2	%	34.6	%
AEPTCo	22.1	%	34.2	%	21.4	%	33.9	%
APCo	17.0	%	36.5	%	17.8	%	36.5	%
I&M	0.7	%	27.6	%	7.6	%	29.6	%
OPCo	21.6	%	34.9	%	21.0	%	34.9	%
PSO	14.9	%	37.6	%	14.5	%	37.6	%
SWEPCo	12.4	%	29.7	%	14.0	%	32.4	%

AEP