Income Taxes

3 Months Ended

Mar. 31, 2019

Income Taxes

INCOME TAXES

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

Status of Tax Reform Regulatory Proceedings

For AEP’s various regulatory jurisdictions where the regulatory effects of Tax Reform proceedings have not been fully resolved, the table below summarizes the current status. See Note 4 - Rate Matters for additional information.

Registrant (Jurisdiction)	Change in Tax Rate	Excess ADIT Subject to Normalization Requirements	Excess ADIT Not Subject to Normalization Requirements
AEP Texas (Texas-Distribution)	Order Issued	Order Issued	Order Issued – Partial (a)
AEP Texas (Texas-Transmission)	Order Issued	To be addressed in a later filing	To be addressed in a later filing
I&M (Michigan)	Order Issued	Case Pending	Case Pending
SWEPCo (Louisiana)	Case Pending – Rates Implemented (b)	Case Pending – Rates Implemented (b)	Case Pending – Rates Implemented (b)
SWEPCo (Texas)	Order Issued	To be addressed in a later filing	To be addressed in a later filing
PJM FERC Transmission	Settlement Approved (c)	Settlement Approved (c)	Settlement Approved (c)
SPP FERC Transmission	Settlement Pending	Settlement Pending	Settlement Pending

(a) A portion of the Excess ADIT that is not subject to rate normalization requirements is to be addressed in a later filing.

(b) Rates have been implemented through a filed formula rate plan that is subject to true-up and final commission approval.

(c) An ALJ has approved a settlement. The settlement is subject to final FERC ruling.

Effective Tax Rates (ETR)

The Registrants’ interim ETR reflect the estimated annual ETR for 2019 and 2018, adjusted for tax expense associated with certain discrete items. The interim ETR differ from the federal statutory tax rate of 21% primarily due to increased amortization of Excess ADIT, tax credits and other book/tax differences which are accounted for on a flow-through basis.

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 table. Significant variances in the ETR are described below.

	Three Months Ended  March 31,
Company	2019		2018
AEP	7.2	%	18.3	%
AEP Texas	10.4	%	16.3	%
AEPTCo	20.9	%	20.7	%
APCo	(22.0	)%	18.2	%
I&M	(2.8	)%	16.2	%
OPCo	13.4	%	20.5	%
PSO	0.6	%	16.3	%
SWEPCo	2.4	%	18.4	%

AEP

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The decrease in the ETR is primarily due to $66 million of increased amortization of Excess ADIT not subject to normalization requirements which impacted the ETR by (10.8)%.

AEP Texas

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The decrease in the ETR is primarily due to $1 million of increased amortization of Excess ADIT not subject to normalization requirements and an increase in parent company loss benefit which impacted the ETR by (3.9)% and (2.2)%, respectively. Amortization of Excess ADIT not subject to normalization requirements for the three months ended March 31, 2019 reflects Tax Reform elements of a Stipulation and Settlement agreement approved by the PUCT in August 2018.

AEPTCo

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The increase in the ETR is primarily due to the decrease in favorable book/tax differences accounted for on a flow-through basis.

APCo

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The decrease in the ETR is primarily due to $41 million of increased amortization of Excess ADIT not subject to normalization requirements which impacted the ETR by (37.9)%. Amortization of Excess ADIT not subject to normalization requirements for the three months ended March 31, 2019 reflects October 2018 and March 2019 Virginia SCC Tax Reform orders as well as August 2018 and February 2019 WVPSC orders.

I&M

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The decrease in the ETR is primarily due to $13 million of increased amortization of Excess ADIT not subject to normalization requirements and an increase in favorable book/tax differences accounted for on a flow-through basis which impacted the ETR by (13.7)% and (6.1)%, respectively. Amortization of Excess ADIT not subject to normalization requirements for the three months ended March 31, 2019 reflects the Tax Reform elements of the 2017 Indiana Base Rate Case approved by the IURC in May 2018.

OPCo

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The decrease in the ETR is primarily due to $9 million of increased amortization of Excess ADIT not subject to normalization requirements which impacted the ETR by (6)%. Amortization of Excess ADIT not subject to normalization requirements for the three months ended March 31, 2019 reflects the October 2018 PUCO Tax Reform order.

PSO

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The decrease in the ETR is primarily due to $1 million of increased amortization of Excess ADIT not subject to normalization requirements which impacted the ETR by (16.9)%. Amortization of Excess ADIT not subject to normalization requirements for the three months ended March 31, 2019 reflects the August 2018 OCC Tax Reform order as well as Tax Reform elements of the 2018 Oklahoma Base Rate Case approved by the OCC in March 2019.

SWEPCo

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The decrease in the ETR is primarily due to $3 million of increased amortization of Excess ADIT not subject to normalization requirements and a decrease in state tax expense which impacted the ETR by (11.3)% and (1.3)%, respectively. Amortization of Excess ADIT not subject to normalization requirements for the three months ended March 31, 2019 reflects Tax Reform elements incorporated into Louisiana’s 2018 Formula Rate Filing as well as an Arkansas Tax Reform order issued by the APSC in September 2018.

Federal and State Income Tax Audit Status

The IRS has completed its examination of AEP and subsidiaries for all years through 2016.

AEP and subsidiaries file income tax returns in various state and local jurisdictions.  These taxing authorities routinely examine the tax returns. AEP and subsidiaries are currently under examination in several state and local jurisdictions.  However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities.  Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income.  The Registrants are no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2007.