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Derivatives and Hedging
 6 Months Ended
Jun. 30, 2011
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

8. DERIVATIVES AND HEDGING

 

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

 

We are exposed to certain market risks as a major power producer and marketer of wholesale electricity, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact us due to changes in the underlying market prices or rates. We manage these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

 

Trading Strategies

 

Our strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which we transact.

 

Risk Management Strategies

 

Our strategy surrounding the use of derivative instruments focuses on managing our risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish our objectives, we primarily employ risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

 

We enter into power, coal, natural gas, interest rate and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with our energy business. We enter into interest rate derivative contracts in order to manage the interest rate exposure associated with our commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as they are related to energy risk management activities. We also engage in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with our established risk management policies as approved by the Finance Committee of our Board of Directors.

 

The following table represents the gross notional volume of our outstanding derivative contracts as of June 30, 2011 and December 31, 2010:

 Notional Volume of Derivative Instruments
           
    Volume  
    June 30, December 31, Unit of
   2011 2010 Measure
    (in millions) 
 Commodity:        
  Power   875   652 MWHs
  Coal   48   63 Tons
  Natural Gas   91   94 MMBtus
  Heating Oil and Gasoline   7   6 Gallons
  Interest Rate $ 267 $ 171 USD
           
 Interest Rate and Foreign Currency $ 597 $ 907 USD

Fair Value Hedging Strategies

 

We enter into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify our exposure to interest rate risk by converting a portion of our fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

 

We enter into and designate as cash flow hedges certain derivative transactions for the purchase and sale of power, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. We monitor the potential impacts of commodity price changes and, where appropriate, enter into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. We do not hedge all commodity price risk.

 

Our vehicle fleet and barge operations are exposed to gasoline and diesel fuel price volatility. We enter into financial heating oil and gasoline derivative contracts in order to mitigate price risk of our future fuel purchases. For disclosure purposes, these contracts are included with other hedging activity as “Commodity.” We do not hedge all fuel price risk.

 

We enter into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify our exposure to interest rate risk by converting a portion of our floating-rate debt to a fixed rate. We also enter into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. Our anticipated fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. We do not hedge all interest rate exposure.

 

At times, we are exposed to foreign currency exchange rate risks primarily when we purchase certain fixed assets from foreign suppliers. In accordance with our risk management policy, we may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency's appreciation against the dollar. We do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON OUR FINANCIAL STATEMENTS

 

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities in the balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of our derivative instruments, we also apply valuation adjustments for discounting, liquidity and credit quality.

 

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract's term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with our estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of our risk management contracts.

 

According to the accounting guidance for “Derivatives and Hedging,” we reflect the fair values of our derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, we are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2011 and December 31, 2010 balance sheets, we netted $16 million and $8 million, respectively, of cash collateral received from third parties against short-term and long-term risk management assets and $55 million and $109 million, respectively, of cash collateral paid to third parties against short-term and long-term risk management liabilities.

 

The following tables represent the gross fair value impact of our derivative activity on our Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010:

 Fair Value of Derivative Instruments
 June 30, 2011
   
    Risk Management        
    Contracts Hedging Contracts    
        Interest Rate    
        and Foreign    
 Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a)(b) Total
    (in millions)
 Current Risk Management Assets $ 669 $ 26 $ 6 $ (528) $ 173
 Long-term Risk Management Assets   482   13   3   (155)   343
 Total Assets   1,151   39   9   (683)   516
                  
 Current Risk Management Liabilities   636   14   2   (558)   94
 Long-term Risk Management Liabilities    317   6   1   (200)   124
 Total Liabilities   953   20   3   (758)   218
                  
 Total MTM Derivative Contract Net Assets               
  (Liabilities) $ 198 $ 19 $ 6 $ 75 $ 298
                  
 Fair Value of Derivative Instruments
 December 31, 2010
   
    Risk Management        
    Contracts Hedging Contracts    
        Interest Rate    
        and Foreign    
 Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a)(b) Total
    (in millions)
 Current Risk Management Assets $ 1,023 $ 18 $ 30 $ (839) $ 232
 Long-term Risk Management Assets   546   12   2   (150)   410
 Total Assets   1,569   30   32   (989)   642
                  
 Current Risk Management Liabilities   995   13   2   (881)   129
 Long-term Risk Management Liabilities    387   6   3   (255)   141
 Total Liabilities   1,382   19   5   (1,136)   270
                  
 Total MTM Derivative Contract Net Assets               
  (Liabilities) $ 187 $ 11 $ 27 $ 147 $ 372

(a)       Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the Condensed Consolidated Balance Sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

(b)       Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging." Amounts also include dedesignated risk management contracts.

The tables below present our activity of derivative risk management contracts for the three and six months ended June 30, 2011 and 2010:

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2011 and 2010
      
 Location of Gain (Loss) 2011 2010
   (in millions)
 Utility Operations Revenue $ 18 $ 7
 Other Revenue   13   8
 Regulatory Assets (a)   (5)   (14)
 Regulatory Liabilities (a)   5   (4)
 Total Gain (Loss) on Risk Management Contracts $ 31 $ (3)
        
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2011 and 2010
      
 Location of Gain (Loss) 2011 2010
   (in millions)
 Utility Operations Revenue $ 38 $ 45
 Other Revenue   15   9
 Regulatory Assets (a)   (1)   (3)
 Regulatory Liabilities (a)   11   27
 Total Gain (Loss) on Risk Management Contracts $ 63 $ 78

(a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment

recorded as either current or noncurrent on the balance sheet.

 

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the Condensed Consolidated Statements of Income on an accrual basis.

 

Our accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, we designate a hedging instrument as a fair value hedge or a cash flow hedge.

 

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in Revenues on a net basis on the Condensed Consolidated Statements of Income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in Revenues or Expenses on the Condensed Consolidated Statements of Income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

 

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

 

We record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on our Condensed Consolidated Statements of Income. During the three and six months ended June 30, 2011, we recognized gains of $4 million and $8 million, respectively, on our outstanding hedging instruments and offsetting losses of $5 million and $9 million, respectively, on our long-term debt. Hedge ineffectiveness was immaterial. During the three and six months ended June 30, 2010, we recognized gains of $4 million and $4 million, respectively, on our outstanding hedging instruments and offsetting losses of $4 million and $4 million, respectively, on our long-term debt. No hedge ineffectiveness was recognized.

Accounting for Cash Flow Hedging Strategies

 

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows attributable to a particular risk), we initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on our Condensed Consolidated Balance Sheets until the period the hedged item affects Net Income. We recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

 

Realized gains and losses on derivative contracts for the purchase and sale of power, coal, natural gas and heating oil and gasoline designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on our Condensed Consolidated Statements of Income, or in Regulatory Assets or Regulatory Liabilities on our Condensed Consolidated Balance Sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2011 and 2010, we designated commodity derivatives as cash flow hedges.

 

We reclassify gains and losses on financial fuel derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on our Condensed Consolidated Balance Sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on our Condensed Consolidated Statements of Income. During the three and six months ended June 30, 2011 and 2010, we designated heating oil and gasoline derivatives as cash flow hedges.

 

We reclassify gains and losses on interest rate derivative hedges related to our debt financings from Accumulated Other Comprehensive Income (Loss) into Interest Expense in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2011 and 2010, we designated interest rate derivatives as cash flow hedges.

 

The accumulated gains or losses related to our foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on our Condensed Consolidated Balance Sheets into Depreciation and Amortization expense on our Condensed Consolidated Statements of Income over the depreciable lives of the fixed assets designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2011 and 2010, we designated foreign currency derivatives as cash flow hedges.

 

During the three and six months ended June 30, 2011 and 2010, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

 

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on our Condensed Consolidated Balance Sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2011 and 2010. All amounts in the following tables are presented net of related income taxes.

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2011
        Interest Rate   
        and Foreign    
     Commodity Currency Total
     (in millions)
 Balance in AOCI as of March 31, 2011 $ 8 $ 4 $ 12
 Changes in Fair Value Recognized in AOCI   3   -   3
 Amount of (Gain) or Loss Reclassified from AOCI         
  to Income Statement/within Balance Sheet:         
   Utility Operations Revenue   2   -   2
   Other Revenue   (1)   -   (1)
   Purchased Electricity for Resale   (1)   -   (1)
   Interest Expense   -   1   1
   Regulatory Assets (a)   1   -   1
   Regulatory Liabilities (a)   -   -   -
 Balance in AOCI as of June 30, 2011 $ 12 $ 5 $ 17
             
 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2010
        Interest Rate   
        and Foreign    
     Commodity Currency Total
     (in millions)
 Balance in AOCI as of March 31, 2010 $ 2 $ (13) $ (11)
 Changes in Fair Value Recognized in AOCI   1   (3)   (2)
 Amount of (Gain) or Loss Reclassified from AOCI         
  to Income Statement/within Balance Sheet:         
   Utility Operations Revenue   -   -   -
   Other Revenue   (2)   -   (2)
   Purchased Electricity for Resale   1   -   1
   Interest Expense   -   1   1
   Regulatory Assets (a)   -   -   -
   Regulatory Liabilities (a)   -   -   -
 Balance in AOCI as of June 30, 2010 $ 2 $ (15) $ (13)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2011
        Interest Rate   
        and Foreign    
     Commodity Currency Total
     (in millions)
 Balance in AOCI as of December 31, 2010 $ 7 $ 4 $ 11
 Changes in Fair Value Recognized in AOCI   5   (1)   4
 Amount of (Gain) or Loss Reclassified from AOCI         
  to Income Statement/within Balance Sheet:         
   Utility Operations Revenue   2   -   2
   Other Revenue   (2)   -   (2)
   Purchased Electricity for Resale   (1)   -   (1)
   Interest Expense   -   2   2
   Regulatory Assets (a)   1   -   1
   Regulatory Liabilities (a)   -   -   -
 Balance in AOCI as of June 30, 2011 $ 12 $ 5 $ 17
             
 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2010
        Interest Rate   
        and Foreign    
     Commodity Currency Total
     (in millions)
 Balance in AOCI as of December 31, 2009 $ (2) $ (13) $ (15)
 Changes in Fair Value Recognized in AOCI   4   (4)   -
 Amount of (Gain) or Loss Reclassified from AOCI         
  to Income Statement/within Balance Sheet:         
   Utility Operations Revenue   -   -   -
   Other Revenue   (3)   -   (3)
   Purchased Electricity for Resale   2   -   2
   Interest Expense   -   2   2
   Regulatory Assets (a)   1   -   1
   Regulatory Liabilities (a)   -   -   -
 Balance in AOCI as of June 30, 2010 $ 2 $ (15) $ (13)
             
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either
    current or noncurrent on the balance sheet.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on our Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010 were:

 Impact of Cash Flow Hedges on our Condensed Consolidated Balance Sheet
 June 30, 2011
             
        Interest Rate   
        and Foreign    
     Commodity Currency Total
     (in millions)
 Hedging Assets (a) $ 21 $ 1 $ 22
 Hedging Liabilities (a)   2   3   5
 AOCI Gain (Loss) Net of Tax   12   5   17
 Portion Expected to be Reclassified to Net         
  Income During the Next Twelve Months   7   (2)   5
             
 Impact of Cash Flow Hedges on our Condensed Consolidated Balance Sheet
 December 31, 2010
             
        Interest Rate   
        and Foreign    
     Commodity Currency Total
     (in millions)
 Hedging Assets (a) $ 13 $ 25 $ 38
 Hedging Liabilities (a)   2   4   6
 AOCI Gain (Loss) Net of Tax   7   4   11
 Portion Expected to be Reclassified to Net         
  Income During the Next Twelve Months   3   (2)   1

(a)       Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on our Condensed Consolidated Balance Sheets.

The actual amounts that we reclassify from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes. As of June 30, 2011, the maximum length of time that we are hedging (with contracts subject to the accounting guidance for “Derivatives and Hedging”) our exposure to variability in future cash flows related to forecasted transactions is 36 months.

Credit Risk

 

We limit credit risk in our wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. We use Moody's, Standard and Poor's and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

 

We use standardized master agreements which may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds our established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with our credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

 

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to our competitive retail auction loads, we are obligated to post an additional amount of collateral if our credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and our total exposure. On an ongoing basis, our risk management organization assesses the appropriateness of these collateral triggering items in contracts. We do not anticipate a downgrade below investment grade. The following table represents: (a) our aggregate fair value of such derivative contracts, (b) the amount of collateral we would have been required to post for all derivative and non-derivative contracts if our credit ratings had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2011 and December 31, 2010:

    June 30, December 31,
    2011 2010
    (in millions)
 Liabilities for Derivative Contracts with Credit Downgrade Triggers $ 29 $ 20
 Amount of Collateral AEP Subsidiaries Would Have Been      
  Required to Post   34   45
 Amount Attributable to RTO and ISO Activities   34   44

In addition, a majority of our non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, our risk management organization assesses the appropriateness of these cross-default provisions in our contracts. We do not anticipate a non-performance event under these provisions. The following table represents: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral we have posted and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering our contractual netting arrangements as of June 30, 2011 and December 31, 2010:

   June 30, December 31,
   2011 2010
   (in millions)
 Liabilities for Contracts with Cross Default Provisions Prior to Contractual      
  Netting Arrangements $ 344 $ 401
 Amount of Cash Collateral Posted   35   81
 Additional Settlement Liability if Cross Default Provision is Triggered   179   213
Appalachian Power Co [Member]
  
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

8. DERIVATIVES AND HEDGING

 

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

 

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates. AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

 

Trading Strategies

 

The strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries.

 

Risk Management Strategies

 

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into power, coal, natural gas, interest rate and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with the energy business. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts in order to manage the interest rate exposure associated with the Registrant Subsidiaries' commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. AEPSC, on behalf of the Registrant Subsidiaries, also engages in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors.

 

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of June 30, 2011 and December 31, 2010:

Notional Volume of Derivative Instruments
June 30, 2011
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   265,492   153,624   158,358   184,179   14   17
 Coal Tons   8,572   4,602   4,071   16,841   6,473   5,204
 Natural Gas MMBtus   2,736   1,583   1,623   1,898   24   28
 Heating Oil and                    
  Gasoline Gallons   1,248   556   620   926   731   673
 Interest Rate USD $ 41,997 $ 24,295 $ 24,896 $ 29,320 $ 283 $ 322
                       
Interest Rate and                    
 Foreign Currency USD $ - $ - $ - $ - $ - $ 100,069
                       
Notional Volume of Derivative Instruments
December 31, 2010
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   194,217   111,959   117,862   136,657   21   34
 Coal Tons   11,195   5,550   6,571   23,033   4,936   8,777
 Natural Gas MMBtus   2,166   1,248   1,302   1,524   15   19
 Heating Oil and                    
  Gasoline Gallons   1,054   467   521   776   616   564
 Interest Rate USD $ 9,541 $ 5,471 $ 5,732 $ 7,185 $ 609 $ 793
                       
Interest Rate and                    
 Foreign Currency USD $ 200,000 $ - $ - $ - $ 200,000 $ 189

Fair Value Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify an exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

 

The Registrant Subsidiaries' vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. For disclosure purposes, these contracts are included with other hedging activity as “Commodity.” The Registrant Subsidiaries do not hedge all fuel price risk.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of floating-rate debt to a fixed rate. AEPSC, on behalf of the Registrant Subsidiaries, also enters into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. The anticipated fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. The Registrant Subsidiaries do not hedge all interest rate exposure.

 

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP's risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency's appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

 

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

 

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract's term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management's estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

 

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2011 and December 31, 2010 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

    June 30, 2011 December 31, 2010
    Cash Collateral Cash Collateral Cash Collateral Cash Collateral
    Received Paid Received Paid
    Netted Against Netted Against Netted Against Netted Against
    Risk Management Risk Management Risk Management Risk Management
 Company Assets Liabilities Assets Liabilities
    (in thousands)
 APCo $ 2,825 $ 10,214 $ 1,809 $ 16,229
 CSPCo   1,635   5,906   1,042   9,347
 I&M   1,676   6,050   1,087   9,757
 OPCo   1,960   7,180   1,272   11,561
 PSO   1   45   -   44
 SWEPCo   1   44   -   72

The following tables represent the gross fair value of the Registrant Subsidiaries' derivative activity on the Condensed Balance Sheets as of June 30, 2011 and December 31, 2010:

Fair Value of Derivative Instruments
June 30, 2011
                 
APCo               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $178,531 $3,663 $- $(150,380) $31,814
Long-term Risk Management Assets  73,791  672  -  (42,317)  32,146
Total Assets  252,322  4,335  -  (192,697)  63,960
                 
Current Risk Management Liabilities  173,214  2,724  -  (157,436)  18,502
Long-term Risk Management Liabilities   55,201  439  -  (45,312)  10,328
Total Liabilities  228,415  3,163  -  (202,748)  28,830
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $23,907 $1,172 $- $10,051 $35,130
                 
Fair Value of Derivative Instruments
December 31, 2010
                 
APCo               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $267,702 $1,956 $11,888 $(228,304) $53,242
Long-term Risk Management Assets  79,560  714  -  (41,854)  38,420
Total Assets  347,262  2,670  11,888  (270,158)  91,662
                 
Current Risk Management Liabilities  262,027  2,363  -  (236,397)  27,993
Long-term Risk Management Liabilities   61,724  701  -  (51,552)  10,873
Total Liabilities  323,751  3,064  -  (287,949)  38,866
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $23,511 $(394) $11,888 $17,791 $52,796

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the Condensed Balance Sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

(b) Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging." Amounts also include dedesignated risk management contracts.

The tables below present the Registrant Subsidiaries' activity of derivative risk management contracts for the three and six months ended June 30, 2011 and 2010:

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 883 $ 5,134 $ 3,702 $ 6,430 $ 539 $ 403
 Sales to AEP Affiliates   13   6   6   7   (1)   (1)
 Regulatory Assets (a)   (150)   (2,183)   (1,018)   (2,420)   644   404
 Regulatory Liabilities (a)   4,142   -   (1,077)   -   461   692
 Total Gain (Loss) on Risk Management                  
  Contracts $ 4,888 $ 2,957 $ 1,613 $ 4,017 $ 1,643 $ 1,498
                      
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ (1,693) $ 3,469 $ 2,503 $ 2,010 $ 347 $ 613
 Sales to AEP Affiliates   786   113   102   2,156   (121)   (229)
 Regulatory Assets (a)   (1,046)   (5,225)   (2,238)   (5,754)   (25)   120
 Regulatory Liabilities (a)   (834)   -   (4,393)   -   126   1,524
 Total Gain (Loss) on Risk Management                  
  Contracts $ (2,787) $ (1,643) $ (4,026) $ (1,588) $ 327 $ 2,028

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,699 $ 9,924 $ 9,117 $ 12,230 $ 658 $ 526
 Sales to AEP Affiliates   33   19   23   26   -   -
 Regulatory Assets (a)   223   (2,095)   115   (2,113)   276   2,046
 Regulatory Liabilities (a)   10,896   -   (1,664)   (105)   853   1,032
 Total Gain (Loss) on Risk Management                  
  Contracts $ 13,851 $ 7,848 $ 7,591 $ 10,038 $ 1,787 $ 3,604
                     
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,480 $ 13,076 $ 9,388 $ 12,231 $ 1,030 $ 1,402
 Sales to AEP Affiliates   (1,575)   (1,449)   (1,341)   2,409   (297)   (538)
 Regulatory Assets (a)   -   (1,544)   -   (1,690)   306   73
 Regulatory Liabilities (a)   15,147   -   8,461   29   2,764   513
 Total Gain (Loss) on Risk Management                  
  Contracts $ 16,052 $ 10,083 $ 16,508 $ 12,979 $ 3,803 $ 1,450
                     
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current
   or noncurrent on the balance sheet.                  

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the Condensed Statements of Income on an accrual basis.

 

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

 

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the Condensed Statements of Income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the Condensed Statements of Income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions (APCo, I&M, PSO and SWEPCo) for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

 

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

 

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries did not employ any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

 

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrant Subsidiaries initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets until the period the hedged item affects Net Income. The Registrant Subsidiaries recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

 

Realized gains and losses on derivative contracts for the purchase and sale of power, coal, natural gas and heating oil and gasoline designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the Condensed Statements of Income, or in Regulatory Assets or Regulatory Liabilities on the Condensed Balance Sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2011 and 2010, APCo, CSPCo, I&M and OPCo designated commodity derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on financial fuel derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) into Interest Expense in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2011, SWEPCo designated interest rate derivatives as cash flow hedges. During the six months ended June 30, 2011, APCo and PSO designated interest rate derivatives as cash flow hedges. During the three and six months ended June 30, 2010, APCo designated interest rate derivatives as cash flow hedges.

 

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Depreciation and Amortization expense on the Condensed Statements of Income over the depreciable lives of the fixed assets that were designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2011 and 2010, SWEPCo designated foreign currency derivatives as cash flow hedges.

 

During the three and six months ended June 30, 2011 and 2010, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

 

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2011 and 2010. All amounts in the following tables are presented net of related income taxes.

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2011 $ 238 $ 79 $ 101 $ 190 $ 264 $ 244
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   (26)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 217 $ - $ (8,255) $ 10,473 $ 7,787 $ (4,058)
 Changes in Fair Value Recognized in AOCI   -   -   -   -   -   794
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   269   -   251   (341)   (189)   207
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 455 $ 79 $ (8,154) $ 10,663 $ 8,051 $ (3,814)
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   768
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   269   -   251   (341)   (189)   207
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2010 $ (2,451) $ (1,407) $ (1,418) $ (1,543) $ (8) $ 100
 Changes in Fair Value Recognized in AOCI   642   380   388   370   (191)   (99)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   (16)
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (6,488) $ - $ (9,262) $ 11,832 $ (475) $ (4,947)
 Changes in Fair Value Recognized in AOCI   (2,229)   -   -   -   -   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   419   -   251   (341)   32   207
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (8,939) $ (1,407) $ (10,680) $ 10,289 $ (483) $ (4,847)
 Changes in Fair Value Recognized in AOCI   (1,587)   380   388   370   (191)   (195)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   8
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   419   -   251   (341)   32   207
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2010 $ (273) $ (134) $ (178) $ (230) $ 88 $ 82
 Changes in Fair Value Recognized in AOCI   123   (12)   53   155   180   168
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ 217 $ - $ (8,507) $ 10,813 $ 8,406 $ (4,272)
 Changes in Fair Value Recognized in AOCI   (373)   -   -   -   (476)   801
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   642   -   503   (682)   (332)   414
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ (56) $ (134) $ (8,685) $ 10,583 $ 8,494 $ (4,190)
 Changes in Fair Value Recognized in AOCI   (250)   (12)   53   155   (296)   969
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   642   -   503   (682)   (332)   414
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2009 $ (743) $ (376) $ (382) $ (366) $ (78) $ 112
 Changes in Fair Value Recognized in AOCI   (1,857)   (1,077)   (1,083)   (1,300)   (105)   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   (23)
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (6,450) $ - $ (9,514) $ 12,172 $ (521) $ (5,047)
 Changes in Fair Value Recognized in AOCI   (2,685)   -   -   -   -   (203)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   837   -   503   (682)   78   414
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (7,193) $ (376) $ (9,896) $ 11,806 $ (599) $ (4,935)
 Changes in Fair Value Recognized in AOCI   (4,542)   (1,077)   (1,083)   (1,300)   (105)   (299)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   1
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   837   -   503   (682)   78   414
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)
                       
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the Condensed Balance Sheets.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets at June 30, 2011 and December 31, 2010 were:

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 June 30, 2011
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 1,693 $ - $ 521 $ - $ 669 $ 486
 CSPCo   938   -   297   -   358   -
 I&M   974   -   307   -   378   (8,004)
 OPCo   1,192   -   362   -   479   10,133
 PSO   195   -   12   -   140   7,598
 SWEPCo   181   1,227   11   -   132   (3,057)

    Expected to be Reclassified to   
    Net Income During the Next   
    Twelve Months   
        Maximum Term for
      Interest Rate Exposure to
      and Foreign  Variability of Future
 Company Commodity Currency Cash Flows
    (in thousands) (in months)
 APCo $ 507 $ (1,076)   35
 CSPCo   264   -   35
 I&M   280   (750)   35
 OPCo   365   1,359   35
 PSO   140   759   18
 SWEPCo   129   (766)   18

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 December 31, 2010
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 333 $ 11,888 $ 727 $ - $ (273) $ 217
 CSPCo   229   -   419   -   (134)   -
 I&M   175   -   437   -   (178)   (8,507)
 OPCo   174   -   511   -   (230)   10,813
 PSO   134   13,558   -   -   88   8,406
 SWEPCo   123   5   -   -   82   (4,272)

    Expected to be Reclassified to 
    Net Income During the Next 
    Twelve Months 
      Interest Rate 
      and Foreign  
 Company Commodity Currency 
    (in thousands) 
 APCo $ (280) $ (1,173) 
 CSPCo   (137)   - 
 I&M   (184)   (955) 
 OPCo   (236)   1,359 
 PSO   88   735 
 SWEPCo   82   (829) 

(a)       Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the Condensed Balance Sheets.

 

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

 

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. AEPSC, on behalf of the Registrant Subsidiaries, uses Moody's, Standard and Poor's and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

 

AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements which may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP's credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

 

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these collateral triggering items in contracts. Management does not anticipate a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries' aggregate fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 9,515 $ 7,366 $ 7,366
 CSPCo   5,506   4,262   4,262
 I&M   5,644   4,370   4,370
 OPCo   6,601   5,110   5,110
 PSO   -   3,196   2,913
 SWEPCo   -   3,830   3,490

    December 31, 2010
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit  Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 6,594 $ 12,607 $ 12,574
 CSPCo   3,801   7,267   7,248
 I&M   3,965   7,581   7,561
 OPCo   4,640   8,871   8,847
 PSO   16   1,785   1,385
 SWEPCo   19   2,139   1,659

As of June 30, 2011 and December 31, 2010, the Registrant Subsidiaries were not required to post any collateral.

 

In addition, a majority of the Registrant Subsidiaries' non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these cross-default provisions in the contracts. Management does not anticipate a non-performance event under these provisions. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries' contractual netting arrangements as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 63,340 $ 3,006 $ 18,543
 CSPCo   36,650   1,739   10,729
 I&M   37,574   1,783   10,999
 OPCo   43,952   2,085   12,875
 PSO   31   -   19
 SWEPCo   36   -   21
            
    December 31, 2010
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 76,810 $ 6,637 $ 23,748
 CSPCo   44,277   3,826   13,689
 I&M   46,188   3,991   14,280
 OPCo   54,066   4,670   16,731
 PSO   60   -   28
 SWEPCo   75   -   37
Columbus Southern Power Co [Member]
  
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

8. DERIVATIVES AND HEDGING

 

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

 

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates. AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

 

Trading Strategies

 

The strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries.

 

Risk Management Strategies

 

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into power, coal, natural gas, interest rate and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with the energy business. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts in order to manage the interest rate exposure associated with the Registrant Subsidiaries' commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. AEPSC, on behalf of the Registrant Subsidiaries, also engages in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors.

 

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of June 30, 2011 and December 31, 2010:

Notional Volume of Derivative Instruments
June 30, 2011
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   265,492   153,624   158,358   184,179   14   17
 Coal Tons   8,572   4,602   4,071   16,841   6,473   5,204
 Natural Gas MMBtus   2,736   1,583   1,623   1,898   24   28
 Heating Oil and                    
  Gasoline Gallons   1,248   556   620   926   731   673
 Interest Rate USD $ 41,997 $ 24,295 $ 24,896 $ 29,320 $ 283 $ 322
                       
Interest Rate and                    
 Foreign Currency USD $ - $ - $ - $ - $ - $ 100,069
                       
Notional Volume of Derivative Instruments
December 31, 2010
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   194,217   111,959   117,862   136,657   21   34
 Coal Tons   11,195   5,550   6,571   23,033   4,936   8,777
 Natural Gas MMBtus   2,166   1,248   1,302   1,524   15   19
 Heating Oil and                    
  Gasoline Gallons   1,054   467   521   776   616   564
 Interest Rate USD $ 9,541 $ 5,471 $ 5,732 $ 7,185 $ 609 $ 793
                       
Interest Rate and                    
 Foreign Currency USD $ 200,000 $ - $ - $ - $ 200,000 $ 189

Fair Value Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify an exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

 

The Registrant Subsidiaries' vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. For disclosure purposes, these contracts are included with other hedging activity as “Commodity.” The Registrant Subsidiaries do not hedge all fuel price risk.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of floating-rate debt to a fixed rate. AEPSC, on behalf of the Registrant Subsidiaries, also enters into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. The anticipated fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. The Registrant Subsidiaries do not hedge all interest rate exposure.

 

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP's risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency's appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

 

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

 

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract's term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management's estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

 

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2011 and December 31, 2010 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

    June 30, 2011 December 31, 2010
    Cash Collateral Cash Collateral Cash Collateral Cash Collateral
    Received Paid Received Paid
    Netted Against Netted Against Netted Against Netted Against
    Risk Management Risk Management Risk Management Risk Management
 Company Assets Liabilities Assets Liabilities
    (in thousands)
 APCo $ 2,825 $ 10,214 $ 1,809 $ 16,229
 CSPCo   1,635   5,906   1,042   9,347
 I&M   1,676   6,050   1,087   9,757
 OPCo   1,960   7,180   1,272   11,561
 PSO   1   45   -   44
 SWEPCo   1   44   -   72

The following tables represent the gross fair value of the Registrant Subsidiaries' derivative activity on the Condensed Balance Sheets as of June 30, 2011 and December 31, 2010:

Fair Value of Derivative Instruments
June 30, 2011
                 
CSPCo               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $102,340 $2,076 $- $(86,065) $18,351
Long-term Risk Management Assets  42,560  388  -  (24,370)  18,578
Total Assets  144,900  2,464  -  (110,435)  36,929
                 
Current Risk Management Liabilities  99,241  1,572  -  (90,145)  10,668
Long-term Risk Management Liabilities   31,814  251  -  (26,101)  5,964
Total Liabilities  131,055  1,823  -  (116,246)  16,632
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $13,845 $641 $- $5,811 $20,297
                 
Fair Value of Derivative Instruments
December 31, 2010
                 
CSPCo               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $149,886 $1,164 $- $(127,276) $23,774
Long-term Risk Management Assets  45,413  412  -  (23,736)  22,089
Total Assets  195,299  1,576  -  (151,012)  45,863
                 
Current Risk Management Liabilities  146,540  1,362  -  (131,935)  15,967
Long-term Risk Management Liabilities   35,144  404  -  (29,325)  6,223
Total Liabilities  181,684  1,766  -  (161,260)  22,190
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $13,615 $(190) $- $10,248 $23,673

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the Condensed Balance Sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

(b) Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging." Amounts also include dedesignated risk management contracts.

The tables below present the Registrant Subsidiaries' activity of derivative risk management contracts for the three and six months ended June 30, 2011 and 2010:

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 883 $ 5,134 $ 3,702 $ 6,430 $ 539 $ 403
 Sales to AEP Affiliates   13   6   6   7   (1)   (1)
 Regulatory Assets (a)   (150)   (2,183)   (1,018)   (2,420)   644   404
 Regulatory Liabilities (a)   4,142   -   (1,077)   -   461   692
 Total Gain (Loss) on Risk Management                  
  Contracts $ 4,888 $ 2,957 $ 1,613 $ 4,017 $ 1,643 $ 1,498
                      
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ (1,693) $ 3,469 $ 2,503 $ 2,010 $ 347 $ 613
 Sales to AEP Affiliates   786   113   102   2,156   (121)   (229)
 Regulatory Assets (a)   (1,046)   (5,225)   (2,238)   (5,754)   (25)   120
 Regulatory Liabilities (a)   (834)   -   (4,393)   -   126   1,524
 Total Gain (Loss) on Risk Management                  
  Contracts $ (2,787) $ (1,643) $ (4,026) $ (1,588) $ 327 $ 2,028

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,699 $ 9,924 $ 9,117 $ 12,230 $ 658 $ 526
 Sales to AEP Affiliates   33   19   23   26   -   -
 Regulatory Assets (a)   223   (2,095)   115   (2,113)   276   2,046
 Regulatory Liabilities (a)   10,896   -   (1,664)   (105)   853   1,032
 Total Gain (Loss) on Risk Management                  
  Contracts $ 13,851 $ 7,848 $ 7,591 $ 10,038 $ 1,787 $ 3,604
                     
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,480 $ 13,076 $ 9,388 $ 12,231 $ 1,030 $ 1,402
 Sales to AEP Affiliates   (1,575)   (1,449)   (1,341)   2,409   (297)   (538)
 Regulatory Assets (a)   -   (1,544)   -   (1,690)   306   73
 Regulatory Liabilities (a)   15,147   -   8,461   29   2,764   513
 Total Gain (Loss) on Risk Management                  
  Contracts $ 16,052 $ 10,083 $ 16,508 $ 12,979 $ 3,803 $ 1,450
                     
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current
   or noncurrent on the balance sheet.                  

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the Condensed Statements of Income on an accrual basis.

 

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

 

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the Condensed Statements of Income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the Condensed Statements of Income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions (APCo, I&M, PSO and SWEPCo) for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

 

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

 

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries did not employ any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

 

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrant Subsidiaries initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets until the period the hedged item affects Net Income. The Registrant Subsidiaries recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

 

Realized gains and losses on derivative contracts for the purchase and sale of power, coal, natural gas and heating oil and gasoline designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the Condensed Statements of Income, or in Regulatory Assets or Regulatory Liabilities on the Condensed Balance Sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2011 and 2010, APCo, CSPCo, I&M and OPCo designated commodity derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on financial fuel derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) into Interest Expense in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2011, SWEPCo designated interest rate derivatives as cash flow hedges. During the six months ended June 30, 2011, APCo and PSO designated interest rate derivatives as cash flow hedges. During the three and six months ended June 30, 2010, APCo designated interest rate derivatives as cash flow hedges.

 

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Depreciation and Amortization expense on the Condensed Statements of Income over the depreciable lives of the fixed assets that were designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2011 and 2010, SWEPCo designated foreign currency derivatives as cash flow hedges.

 

During the three and six months ended June 30, 2011 and 2010, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

 

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2011 and 2010. All amounts in the following tables are presented net of related income taxes.

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2011 $ 238 $ 79 $ 101 $ 190 $ 264 $ 244
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   (26)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 217 $ - $ (8,255) $ 10,473 $ 7,787 $ (4,058)
 Changes in Fair Value Recognized in AOCI   -   -   -   -   -   794
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   269   -   251   (341)   (189)   207
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 455 $ 79 $ (8,154) $ 10,663 $ 8,051 $ (3,814)
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   768
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   269   -   251   (341)   (189)   207
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2010 $ (2,451) $ (1,407) $ (1,418) $ (1,543) $ (8) $ 100
 Changes in Fair Value Recognized in AOCI   642   380   388   370   (191)   (99)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   (16)
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (6,488) $ - $ (9,262) $ 11,832 $ (475) $ (4,947)
 Changes in Fair Value Recognized in AOCI   (2,229)   -   -   -   -   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   419   -   251   (341)   32   207
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (8,939) $ (1,407) $ (10,680) $ 10,289 $ (483) $ (4,847)
 Changes in Fair Value Recognized in AOCI   (1,587)   380   388   370   (191)   (195)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   8
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   419   -   251   (341)   32   207
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2010 $ (273) $ (134) $ (178) $ (230) $ 88 $ 82
 Changes in Fair Value Recognized in AOCI   123   (12)   53   155   180   168
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ 217 $ - $ (8,507) $ 10,813 $ 8,406 $ (4,272)
 Changes in Fair Value Recognized in AOCI   (373)   -   -   -   (476)   801
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   642   -   503   (682)   (332)   414
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ (56) $ (134) $ (8,685) $ 10,583 $ 8,494 $ (4,190)
 Changes in Fair Value Recognized in AOCI   (250)   (12)   53   155   (296)   969
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   642   -   503   (682)   (332)   414
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2009 $ (743) $ (376) $ (382) $ (366) $ (78) $ 112
 Changes in Fair Value Recognized in AOCI   (1,857)   (1,077)   (1,083)   (1,300)   (105)   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   (23)
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (6,450) $ - $ (9,514) $ 12,172 $ (521) $ (5,047)
 Changes in Fair Value Recognized in AOCI   (2,685)   -   -   -   -   (203)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   837   -   503   (682)   78   414
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (7,193) $ (376) $ (9,896) $ 11,806 $ (599) $ (4,935)
 Changes in Fair Value Recognized in AOCI   (4,542)   (1,077)   (1,083)   (1,300)   (105)   (299)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   1
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   837   -   503   (682)   78   414
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)
                       
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the Condensed Balance Sheets.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets at June 30, 2011 and December 31, 2010 were:

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 June 30, 2011
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 1,693 $ - $ 521 $ - $ 669 $ 486
 CSPCo   938   -   297   -   358   -
 I&M   974   -   307   -   378   (8,004)
 OPCo   1,192   -   362   -   479   10,133
 PSO   195   -   12   -   140   7,598
 SWEPCo   181   1,227   11   -   132   (3,057)

    Expected to be Reclassified to   
    Net Income During the Next   
    Twelve Months   
        Maximum Term for
      Interest Rate Exposure to
      and Foreign  Variability of Future
 Company Commodity Currency Cash Flows
    (in thousands) (in months)
 APCo $ 507 $ (1,076)   35
 CSPCo   264   -   35
 I&M   280   (750)   35
 OPCo   365   1,359   35
 PSO   140   759   18
 SWEPCo   129   (766)   18

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 December 31, 2010
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 333 $ 11,888 $ 727 $ - $ (273) $ 217
 CSPCo   229   -   419   -   (134)   -
 I&M   175   -   437   -   (178)   (8,507)
 OPCo   174   -   511   -   (230)   10,813
 PSO   134   13,558   -   -   88   8,406
 SWEPCo   123   5   -   -   82   (4,272)

    Expected to be Reclassified to 
    Net Income During the Next 
    Twelve Months 
      Interest Rate 
      and Foreign  
 Company Commodity Currency 
    (in thousands) 
 APCo $ (280) $ (1,173) 
 CSPCo   (137)   - 
 I&M   (184)   (955) 
 OPCo   (236)   1,359 
 PSO   88   735 
 SWEPCo   82   (829) 

(a)       Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the Condensed Balance Sheets.

 

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

 

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. AEPSC, on behalf of the Registrant Subsidiaries, uses Moody's, Standard and Poor's and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

 

AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements which may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP's credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

 

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these collateral triggering items in contracts. Management does not anticipate a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries' aggregate fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 9,515 $ 7,366 $ 7,366
 CSPCo   5,506   4,262   4,262
 I&M   5,644   4,370   4,370
 OPCo   6,601   5,110   5,110
 PSO   -   3,196   2,913
 SWEPCo   -   3,830   3,490

    December 31, 2010
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit  Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 6,594 $ 12,607 $ 12,574
 CSPCo   3,801   7,267   7,248
 I&M   3,965   7,581   7,561
 OPCo   4,640   8,871   8,847
 PSO   16   1,785   1,385
 SWEPCo   19   2,139   1,659

As of June 30, 2011 and December 31, 2010, the Registrant Subsidiaries were not required to post any collateral.

 

In addition, a majority of the Registrant Subsidiaries' non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these cross-default provisions in the contracts. Management does not anticipate a non-performance event under these provisions. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries' contractual netting arrangements as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 63,340 $ 3,006 $ 18,543
 CSPCo   36,650   1,739   10,729
 I&M   37,574   1,783   10,999
 OPCo   43,952   2,085   12,875
 PSO   31   -   19
 SWEPCo   36   -   21
            
    December 31, 2010
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 76,810 $ 6,637 $ 23,748
 CSPCo   44,277   3,826   13,689
 I&M   46,188   3,991   14,280
 OPCo   54,066   4,670   16,731
 PSO   60   -   28
 SWEPCo   75   -   37
Indiana Michigan Power Co [Member]
  
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

8. DERIVATIVES AND HEDGING

 

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

 

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates. AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

 

Trading Strategies

 

The strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries.

 

Risk Management Strategies

 

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into power, coal, natural gas, interest rate and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with the energy business. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts in order to manage the interest rate exposure associated with the Registrant Subsidiaries' commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. AEPSC, on behalf of the Registrant Subsidiaries, also engages in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors.

 

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of June 30, 2011 and December 31, 2010:

Notional Volume of Derivative Instruments
June 30, 2011
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   265,492   153,624   158,358   184,179   14   17
 Coal Tons   8,572   4,602   4,071   16,841   6,473   5,204
 Natural Gas MMBtus   2,736   1,583   1,623   1,898   24   28
 Heating Oil and                    
  Gasoline Gallons   1,248   556   620   926   731   673
 Interest Rate USD $ 41,997 $ 24,295 $ 24,896 $ 29,320 $ 283 $ 322
                       
Interest Rate and                    
 Foreign Currency USD $ - $ - $ - $ - $ - $ 100,069
                       
Notional Volume of Derivative Instruments
December 31, 2010
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   194,217   111,959   117,862   136,657   21   34
 Coal Tons   11,195   5,550   6,571   23,033   4,936   8,777
 Natural Gas MMBtus   2,166   1,248   1,302   1,524   15   19
 Heating Oil and                    
  Gasoline Gallons   1,054   467   521   776   616   564
 Interest Rate USD $ 9,541 $ 5,471 $ 5,732 $ 7,185 $ 609 $ 793
                       
Interest Rate and                    
 Foreign Currency USD $ 200,000 $ - $ - $ - $ 200,000 $ 189

Fair Value Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify an exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

 

The Registrant Subsidiaries' vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. For disclosure purposes, these contracts are included with other hedging activity as “Commodity.” The Registrant Subsidiaries do not hedge all fuel price risk.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of floating-rate debt to a fixed rate. AEPSC, on behalf of the Registrant Subsidiaries, also enters into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. The anticipated fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. The Registrant Subsidiaries do not hedge all interest rate exposure.

 

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP's risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency's appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

 

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

 

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract's term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management's estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

 

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2011 and December 31, 2010 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

    June 30, 2011 December 31, 2010
    Cash Collateral Cash Collateral Cash Collateral Cash Collateral
    Received Paid Received Paid
    Netted Against Netted Against Netted Against Netted Against
    Risk Management Risk Management Risk Management Risk Management
 Company Assets Liabilities Assets Liabilities
    (in thousands)
 APCo $ 2,825 $ 10,214 $ 1,809 $ 16,229
 CSPCo   1,635   5,906   1,042   9,347
 I&M   1,676   6,050   1,087   9,757
 OPCo   1,960   7,180   1,272   11,561
 PSO   1   45   -   44
 SWEPCo   1   44   -   72

The following tables represent the gross fair value of the Registrant Subsidiaries' derivative activity on the Condensed Balance Sheets as of June 30, 2011 and December 31, 2010:

Fair Value of Derivative Instruments
June 30, 2011
                 
I&M               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $106,718 $2,142 $- $(86,519) $22,341
Long-term Risk Management Assets  49,448  398  -  (24,777)  25,069
Total Assets  156,166  2,540  -  (111,296)  47,410
                 
Current Risk Management Liabilities  99,960  1,614  -  (90,697)  10,877
Long-term Risk Management Liabilities   32,385  259  -  (26,552)  6,092
Total Liabilities  132,345  1,873  -  (117,249)  16,969
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $23,821 $667 $- $5,953 $30,441
                 
Fair Value of Derivative Instruments
December 31, 2010
                 
I&M               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $162,896 $1,151 $- $(136,521) $27,526
Long-term Risk Management Assets  56,154  429  -  (25,098)  31,485
Total Assets  219,050  1,580  -  (161,619)  59,011
                 
Current Risk Management Liabilities  156,750  1,421  -  (141,386)  16,785
Long-term Risk Management Liabilities   37,039  421  -  (30,930)  6,530
Total Liabilities  193,789  1,842  -  (172,316)  23,315
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $25,261 $(262) $- $10,697 $35,696

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the Condensed Balance Sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

(b) Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging." Amounts also include dedesignated risk management contracts.

The tables below present the Registrant Subsidiaries' activity of derivative risk management contracts for the three and six months ended June 30, 2011 and 2010:

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 883 $ 5,134 $ 3,702 $ 6,430 $ 539 $ 403
 Sales to AEP Affiliates   13   6   6   7   (1)   (1)
 Regulatory Assets (a)   (150)   (2,183)   (1,018)   (2,420)   644   404
 Regulatory Liabilities (a)   4,142   -   (1,077)   -   461   692
 Total Gain (Loss) on Risk Management                  
  Contracts $ 4,888 $ 2,957 $ 1,613 $ 4,017 $ 1,643 $ 1,498
                      
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ (1,693) $ 3,469 $ 2,503 $ 2,010 $ 347 $ 613
 Sales to AEP Affiliates   786   113   102   2,156   (121)   (229)
 Regulatory Assets (a)   (1,046)   (5,225)   (2,238)   (5,754)   (25)   120
 Regulatory Liabilities (a)   (834)   -   (4,393)   -   126   1,524
 Total Gain (Loss) on Risk Management                  
  Contracts $ (2,787) $ (1,643) $ (4,026) $ (1,588) $ 327 $ 2,028

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,699 $ 9,924 $ 9,117 $ 12,230 $ 658 $ 526
 Sales to AEP Affiliates   33   19   23   26   -   -
 Regulatory Assets (a)   223   (2,095)   115   (2,113)   276   2,046
 Regulatory Liabilities (a)   10,896   -   (1,664)   (105)   853   1,032
 Total Gain (Loss) on Risk Management                  
  Contracts $ 13,851 $ 7,848 $ 7,591 $ 10,038 $ 1,787 $ 3,604
                     
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,480 $ 13,076 $ 9,388 $ 12,231 $ 1,030 $ 1,402
 Sales to AEP Affiliates   (1,575)   (1,449)   (1,341)   2,409   (297)   (538)
 Regulatory Assets (a)   -   (1,544)   -   (1,690)   306   73
 Regulatory Liabilities (a)   15,147   -   8,461   29   2,764   513
 Total Gain (Loss) on Risk Management                  
  Contracts $ 16,052 $ 10,083 $ 16,508 $ 12,979 $ 3,803 $ 1,450
                     
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current
   or noncurrent on the balance sheet.                  

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the Condensed Statements of Income on an accrual basis.

 

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

 

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the Condensed Statements of Income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the Condensed Statements of Income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions (APCo, I&M, PSO and SWEPCo) for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

 

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

 

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries did not employ any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

 

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrant Subsidiaries initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets until the period the hedged item affects Net Income. The Registrant Subsidiaries recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

 

Realized gains and losses on derivative contracts for the purchase and sale of power, coal, natural gas and heating oil and gasoline designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the Condensed Statements of Income, or in Regulatory Assets or Regulatory Liabilities on the Condensed Balance Sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2011 and 2010, APCo, CSPCo, I&M and OPCo designated commodity derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on financial fuel derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) into Interest Expense in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2011, SWEPCo designated interest rate derivatives as cash flow hedges. During the six months ended June 30, 2011, APCo and PSO designated interest rate derivatives as cash flow hedges. During the three and six months ended June 30, 2010, APCo designated interest rate derivatives as cash flow hedges.

 

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Depreciation and Amortization expense on the Condensed Statements of Income over the depreciable lives of the fixed assets that were designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2011 and 2010, SWEPCo designated foreign currency derivatives as cash flow hedges.

 

During the three and six months ended June 30, 2011 and 2010, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

 

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2011 and 2010. All amounts in the following tables are presented net of related income taxes.

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2011 $ 238 $ 79 $ 101 $ 190 $ 264 $ 244
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   (26)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 217 $ - $ (8,255) $ 10,473 $ 7,787 $ (4,058)
 Changes in Fair Value Recognized in AOCI   -   -   -   -   -   794
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   269   -   251   (341)   (189)   207
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 455 $ 79 $ (8,154) $ 10,663 $ 8,051 $ (3,814)
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   768
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   269   -   251   (341)   (189)   207
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2010 $ (2,451) $ (1,407) $ (1,418) $ (1,543) $ (8) $ 100
 Changes in Fair Value Recognized in AOCI   642   380   388   370   (191)   (99)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   (16)
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (6,488) $ - $ (9,262) $ 11,832 $ (475) $ (4,947)
 Changes in Fair Value Recognized in AOCI   (2,229)   -   -   -   -   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   419   -   251   (341)   32   207
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (8,939) $ (1,407) $ (10,680) $ 10,289 $ (483) $ (4,847)
 Changes in Fair Value Recognized in AOCI   (1,587)   380   388   370   (191)   (195)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   8
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   419   -   251   (341)   32   207
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2010 $ (273) $ (134) $ (178) $ (230) $ 88 $ 82
 Changes in Fair Value Recognized in AOCI   123   (12)   53   155   180   168
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ 217 $ - $ (8,507) $ 10,813 $ 8,406 $ (4,272)
 Changes in Fair Value Recognized in AOCI   (373)   -   -   -   (476)   801
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   642   -   503   (682)   (332)   414
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ (56) $ (134) $ (8,685) $ 10,583 $ 8,494 $ (4,190)
 Changes in Fair Value Recognized in AOCI   (250)   (12)   53   155   (296)   969
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   642   -   503   (682)   (332)   414
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2009 $ (743) $ (376) $ (382) $ (366) $ (78) $ 112
 Changes in Fair Value Recognized in AOCI   (1,857)   (1,077)   (1,083)   (1,300)   (105)   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   (23)
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (6,450) $ - $ (9,514) $ 12,172 $ (521) $ (5,047)
 Changes in Fair Value Recognized in AOCI   (2,685)   -   -   -   -   (203)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   837   -   503   (682)   78   414
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (7,193) $ (376) $ (9,896) $ 11,806 $ (599) $ (4,935)
 Changes in Fair Value Recognized in AOCI   (4,542)   (1,077)   (1,083)   (1,300)   (105)   (299)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   1
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   837   -   503   (682)   78   414
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)
                       
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the Condensed Balance Sheets.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets at June 30, 2011 and December 31, 2010 were:

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 June 30, 2011
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 1,693 $ - $ 521 $ - $ 669 $ 486
 CSPCo   938   -   297   -   358   -
 I&M   974   -   307   -   378   (8,004)
 OPCo   1,192   -   362   -   479   10,133
 PSO   195   -   12   -   140   7,598
 SWEPCo   181   1,227   11   -   132   (3,057)

    Expected to be Reclassified to   
    Net Income During the Next   
    Twelve Months   
        Maximum Term for
      Interest Rate Exposure to
      and Foreign  Variability of Future
 Company Commodity Currency Cash Flows
    (in thousands) (in months)
 APCo $ 507 $ (1,076)   35
 CSPCo   264   -   35
 I&M   280   (750)   35
 OPCo   365   1,359   35
 PSO   140   759   18
 SWEPCo   129   (766)   18

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 December 31, 2010
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 333 $ 11,888 $ 727 $ - $ (273) $ 217
 CSPCo   229   -   419   -   (134)   -
 I&M   175   -   437   -   (178)   (8,507)
 OPCo   174   -   511   -   (230)   10,813
 PSO   134   13,558   -   -   88   8,406
 SWEPCo   123   5   -   -   82   (4,272)

    Expected to be Reclassified to 
    Net Income During the Next 
    Twelve Months 
      Interest Rate 
      and Foreign  
 Company Commodity Currency 
    (in thousands) 
 APCo $ (280) $ (1,173) 
 CSPCo   (137)   - 
 I&M   (184)   (955) 
 OPCo   (236)   1,359 
 PSO   88   735 
 SWEPCo   82   (829) 

(a)       Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the Condensed Balance Sheets.

 

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

 

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. AEPSC, on behalf of the Registrant Subsidiaries, uses Moody's, Standard and Poor's and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

 

AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements which may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP's credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

 

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these collateral triggering items in contracts. Management does not anticipate a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries' aggregate fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 9,515 $ 7,366 $ 7,366
 CSPCo   5,506   4,262   4,262
 I&M   5,644   4,370   4,370
 OPCo   6,601   5,110   5,110
 PSO   -   3,196   2,913
 SWEPCo   -   3,830   3,490

    December 31, 2010
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit  Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 6,594 $ 12,607 $ 12,574
 CSPCo   3,801   7,267   7,248
 I&M   3,965   7,581   7,561
 OPCo   4,640   8,871   8,847
 PSO   16   1,785   1,385
 SWEPCo   19   2,139   1,659

As of June 30, 2011 and December 31, 2010, the Registrant Subsidiaries were not required to post any collateral.

 

In addition, a majority of the Registrant Subsidiaries' non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these cross-default provisions in the contracts. Management does not anticipate a non-performance event under these provisions. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries' contractual netting arrangements as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 63,340 $ 3,006 $ 18,543
 CSPCo   36,650   1,739   10,729
 I&M   37,574   1,783   10,999
 OPCo   43,952   2,085   12,875
 PSO   31   -   19
 SWEPCo   36   -   21
            
    December 31, 2010
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 76,810 $ 6,637 $ 23,748
 CSPCo   44,277   3,826   13,689
 I&M   46,188   3,991   14,280
 OPCo   54,066   4,670   16,731
 PSO   60   -   28
 SWEPCo   75   -   37
Ohio Power Co [Member]
  
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

8. DERIVATIVES AND HEDGING

 

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

 

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates. AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

 

Trading Strategies

 

The strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries.

 

Risk Management Strategies

 

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into power, coal, natural gas, interest rate and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with the energy business. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts in order to manage the interest rate exposure associated with the Registrant Subsidiaries' commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. AEPSC, on behalf of the Registrant Subsidiaries, also engages in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors.

 

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of June 30, 2011 and December 31, 2010:

Notional Volume of Derivative Instruments
June 30, 2011
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   265,492   153,624   158,358   184,179   14   17
 Coal Tons   8,572   4,602   4,071   16,841   6,473   5,204
 Natural Gas MMBtus   2,736   1,583   1,623   1,898   24   28
 Heating Oil and                    
  Gasoline Gallons   1,248   556   620   926   731   673
 Interest Rate USD $ 41,997 $ 24,295 $ 24,896 $ 29,320 $ 283 $ 322
                       
Interest Rate and                    
 Foreign Currency USD $ - $ - $ - $ - $ - $ 100,069
                       
Notional Volume of Derivative Instruments
December 31, 2010
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   194,217   111,959   117,862   136,657   21   34
 Coal Tons   11,195   5,550   6,571   23,033   4,936   8,777
 Natural Gas MMBtus   2,166   1,248   1,302   1,524   15   19
 Heating Oil and                    
  Gasoline Gallons   1,054   467   521   776   616   564
 Interest Rate USD $ 9,541 $ 5,471 $ 5,732 $ 7,185 $ 609 $ 793
                       
Interest Rate and                    
 Foreign Currency USD $ 200,000 $ - $ - $ - $ 200,000 $ 189

Fair Value Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify an exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

 

The Registrant Subsidiaries' vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. For disclosure purposes, these contracts are included with other hedging activity as “Commodity.” The Registrant Subsidiaries do not hedge all fuel price risk.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of floating-rate debt to a fixed rate. AEPSC, on behalf of the Registrant Subsidiaries, also enters into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. The anticipated fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. The Registrant Subsidiaries do not hedge all interest rate exposure.

 

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP's risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency's appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

 

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

 

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract's term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management's estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

 

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2011 and December 31, 2010 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

    June 30, 2011 December 31, 2010
    Cash Collateral Cash Collateral Cash Collateral Cash Collateral
    Received Paid Received Paid
    Netted Against Netted Against Netted Against Netted Against
    Risk Management Risk Management Risk Management Risk Management
 Company Assets Liabilities Assets Liabilities
    (in thousands)
 APCo $ 2,825 $ 10,214 $ 1,809 $ 16,229
 CSPCo   1,635   5,906   1,042   9,347
 I&M   1,676   6,050   1,087   9,757
 OPCo   1,960   7,180   1,272   11,561
 PSO   1   45   -   44
 SWEPCo   1   44   -   72

The following tables represent the gross fair value of the Registrant Subsidiaries' derivative activity on the Condensed Balance Sheets as of June 30, 2011 and December 31, 2010:

Fair Value of Derivative Instruments
June 30, 2011
                 
OPCo               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $153,202 $2,558 $- $(133,245) $22,515
Long-term Risk Management Assets  55,377  467  -  (32,864)  22,980
Total Assets  208,579  3,025  -  (166,109)  45,495
                 
Current Risk Management Liabilities  150,203  1,890  -  (138,234)  13,859
Long-term Risk Management Liabilities   42,177  305  -  (34,942)  7,540
Total Liabilities  192,380  2,195  -  (173,176)  21,399
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $16,199 $830 $- $7,067 $24,096
                 
Fair Value of Derivative Instruments
December 31, 2010
                 
OPCo               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $262,751 $1,316 $- $(233,294) $30,773
Long-term Risk Management Assets  63,533  503  -  (36,024)  28,012
Total Assets  326,284  1,819  -  (269,318)  58,785
                 
Current Risk Management Liabilities  259,635  1,663  -  (239,132)  22,166
Long-term Risk Management Liabilities   50,757  493  -  (42,847)  8,403
Total Liabilities  310,392  2,156  -  (281,979)  30,569
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $15,892 $(337) $- $12,661 $28,216

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the Condensed Balance Sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

(b) Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging." Amounts also include dedesignated risk management contracts.

The tables below present the Registrant Subsidiaries' activity of derivative risk management contracts for the three and six months ended June 30, 2011 and 2010:

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 883 $ 5,134 $ 3,702 $ 6,430 $ 539 $ 403
 Sales to AEP Affiliates   13   6   6   7   (1)   (1)
 Regulatory Assets (a)   (150)   (2,183)   (1,018)   (2,420)   644   404
 Regulatory Liabilities (a)   4,142   -   (1,077)   -   461   692
 Total Gain (Loss) on Risk Management                  
  Contracts $ 4,888 $ 2,957 $ 1,613 $ 4,017 $ 1,643 $ 1,498
                      
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ (1,693) $ 3,469 $ 2,503 $ 2,010 $ 347 $ 613
 Sales to AEP Affiliates   786   113   102   2,156   (121)   (229)
 Regulatory Assets (a)   (1,046)   (5,225)   (2,238)   (5,754)   (25)   120
 Regulatory Liabilities (a)   (834)   -   (4,393)   -   126   1,524
 Total Gain (Loss) on Risk Management                  
  Contracts $ (2,787) $ (1,643) $ (4,026) $ (1,588) $ 327 $ 2,028

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,699 $ 9,924 $ 9,117 $ 12,230 $ 658 $ 526
 Sales to AEP Affiliates   33   19   23   26   -   -
 Regulatory Assets (a)   223   (2,095)   115   (2,113)   276   2,046
 Regulatory Liabilities (a)   10,896   -   (1,664)   (105)   853   1,032
 Total Gain (Loss) on Risk Management                  
  Contracts $ 13,851 $ 7,848 $ 7,591 $ 10,038 $ 1,787 $ 3,604
                     
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,480 $ 13,076 $ 9,388 $ 12,231 $ 1,030 $ 1,402
 Sales to AEP Affiliates   (1,575)   (1,449)   (1,341)   2,409   (297)   (538)
 Regulatory Assets (a)   -   (1,544)   -   (1,690)   306   73
 Regulatory Liabilities (a)   15,147   -   8,461   29   2,764   513
 Total Gain (Loss) on Risk Management                  
  Contracts $ 16,052 $ 10,083 $ 16,508 $ 12,979 $ 3,803 $ 1,450
                     
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current
   or noncurrent on the balance sheet.                  

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the Condensed Statements of Income on an accrual basis.

 

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

 

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the Condensed Statements of Income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the Condensed Statements of Income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions (APCo, I&M, PSO and SWEPCo) for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

 

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

 

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries did not employ any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

 

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrant Subsidiaries initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets until the period the hedged item affects Net Income. The Registrant Subsidiaries recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

 

Realized gains and losses on derivative contracts for the purchase and sale of power, coal, natural gas and heating oil and gasoline designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the Condensed Statements of Income, or in Regulatory Assets or Regulatory Liabilities on the Condensed Balance Sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2011 and 2010, APCo, CSPCo, I&M and OPCo designated commodity derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on financial fuel derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) into Interest Expense in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2011, SWEPCo designated interest rate derivatives as cash flow hedges. During the six months ended June 30, 2011, APCo and PSO designated interest rate derivatives as cash flow hedges. During the three and six months ended June 30, 2010, APCo designated interest rate derivatives as cash flow hedges.

 

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Depreciation and Amortization expense on the Condensed Statements of Income over the depreciable lives of the fixed assets that were designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2011 and 2010, SWEPCo designated foreign currency derivatives as cash flow hedges.

 

During the three and six months ended June 30, 2011 and 2010, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

 

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2011 and 2010. All amounts in the following tables are presented net of related income taxes.

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2011 $ 238 $ 79 $ 101 $ 190 $ 264 $ 244
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   (26)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 217 $ - $ (8,255) $ 10,473 $ 7,787 $ (4,058)
 Changes in Fair Value Recognized in AOCI   -   -   -   -   -   794
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   269   -   251   (341)   (189)   207
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 455 $ 79 $ (8,154) $ 10,663 $ 8,051 $ (3,814)
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   768
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   269   -   251   (341)   (189)   207
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2010 $ (2,451) $ (1,407) $ (1,418) $ (1,543) $ (8) $ 100
 Changes in Fair Value Recognized in AOCI   642   380   388   370   (191)   (99)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   (16)
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (6,488) $ - $ (9,262) $ 11,832 $ (475) $ (4,947)
 Changes in Fair Value Recognized in AOCI   (2,229)   -   -   -   -   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   419   -   251   (341)   32   207
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (8,939) $ (1,407) $ (10,680) $ 10,289 $ (483) $ (4,847)
 Changes in Fair Value Recognized in AOCI   (1,587)   380   388   370   (191)   (195)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   8
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   419   -   251   (341)   32   207
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2010 $ (273) $ (134) $ (178) $ (230) $ 88 $ 82
 Changes in Fair Value Recognized in AOCI   123   (12)   53   155   180   168
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ 217 $ - $ (8,507) $ 10,813 $ 8,406 $ (4,272)
 Changes in Fair Value Recognized in AOCI   (373)   -   -   -   (476)   801
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   642   -   503   (682)   (332)   414
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ (56) $ (134) $ (8,685) $ 10,583 $ 8,494 $ (4,190)
 Changes in Fair Value Recognized in AOCI   (250)   (12)   53   155   (296)   969
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   642   -   503   (682)   (332)   414
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2009 $ (743) $ (376) $ (382) $ (366) $ (78) $ 112
 Changes in Fair Value Recognized in AOCI   (1,857)   (1,077)   (1,083)   (1,300)   (105)   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   (23)
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (6,450) $ - $ (9,514) $ 12,172 $ (521) $ (5,047)
 Changes in Fair Value Recognized in AOCI   (2,685)   -   -   -   -   (203)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   837   -   503   (682)   78   414
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (7,193) $ (376) $ (9,896) $ 11,806 $ (599) $ (4,935)
 Changes in Fair Value Recognized in AOCI   (4,542)   (1,077)   (1,083)   (1,300)   (105)   (299)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   1
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   837   -   503   (682)   78   414
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)
                       
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the Condensed Balance Sheets.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets at June 30, 2011 and December 31, 2010 were:

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 June 30, 2011
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 1,693 $ - $ 521 $ - $ 669 $ 486
 CSPCo   938   -   297   -   358   -
 I&M   974   -   307   -   378   (8,004)
 OPCo   1,192   -   362   -   479   10,133
 PSO   195   -   12   -   140   7,598
 SWEPCo   181   1,227   11   -   132   (3,057)

    Expected to be Reclassified to   
    Net Income During the Next   
    Twelve Months   
        Maximum Term for
      Interest Rate Exposure to
      and Foreign  Variability of Future
 Company Commodity Currency Cash Flows
    (in thousands) (in months)
 APCo $ 507 $ (1,076)   35
 CSPCo   264   -   35
 I&M   280   (750)   35
 OPCo   365   1,359   35
 PSO   140   759   18
 SWEPCo   129   (766)   18

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 December 31, 2010
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 333 $ 11,888 $ 727 $ - $ (273) $ 217
 CSPCo   229   -   419   -   (134)   -
 I&M   175   -   437   -   (178)   (8,507)
 OPCo   174   -   511   -   (230)   10,813
 PSO   134   13,558   -   -   88   8,406
 SWEPCo   123   5   -   -   82   (4,272)

    Expected to be Reclassified to 
    Net Income During the Next 
    Twelve Months 
      Interest Rate 
      and Foreign  
 Company Commodity Currency 
    (in thousands) 
 APCo $ (280) $ (1,173) 
 CSPCo   (137)   - 
 I&M   (184)   (955) 
 OPCo   (236)   1,359 
 PSO   88   735 
 SWEPCo   82   (829) 

(a)       Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the Condensed Balance Sheets.

 

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

 

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. AEPSC, on behalf of the Registrant Subsidiaries, uses Moody's, Standard and Poor's and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

 

AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements which may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP's credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

 

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these collateral triggering items in contracts. Management does not anticipate a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries' aggregate fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 9,515 $ 7,366 $ 7,366
 CSPCo   5,506   4,262   4,262
 I&M   5,644   4,370   4,370
 OPCo   6,601   5,110   5,110
 PSO   -   3,196   2,913
 SWEPCo   -   3,830   3,490

    December 31, 2010
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit  Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 6,594 $ 12,607 $ 12,574
 CSPCo   3,801   7,267   7,248
 I&M   3,965   7,581   7,561
 OPCo   4,640   8,871   8,847
 PSO   16   1,785   1,385
 SWEPCo   19   2,139   1,659

As of June 30, 2011 and December 31, 2010, the Registrant Subsidiaries were not required to post any collateral.

 

In addition, a majority of the Registrant Subsidiaries' non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these cross-default provisions in the contracts. Management does not anticipate a non-performance event under these provisions. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries' contractual netting arrangements as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 63,340 $ 3,006 $ 18,543
 CSPCo   36,650   1,739   10,729
 I&M   37,574   1,783   10,999
 OPCo   43,952   2,085   12,875
 PSO   31   -   19
 SWEPCo   36   -   21
            
    December 31, 2010
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 76,810 $ 6,637 $ 23,748
 CSPCo   44,277   3,826   13,689
 I&M   46,188   3,991   14,280
 OPCo   54,066   4,670   16,731
 PSO   60   -   28
 SWEPCo   75   -   37
Public Service Co Of Oklahoma [Member]
  
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

8. DERIVATIVES AND HEDGING

 

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

 

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates. AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

 

Trading Strategies

 

The strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries.

 

Risk Management Strategies

 

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into power, coal, natural gas, interest rate and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with the energy business. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts in order to manage the interest rate exposure associated with the Registrant Subsidiaries' commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. AEPSC, on behalf of the Registrant Subsidiaries, also engages in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors.

 

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of June 30, 2011 and December 31, 2010:

Notional Volume of Derivative Instruments
June 30, 2011
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   265,492   153,624   158,358   184,179   14   17
 Coal Tons   8,572   4,602   4,071   16,841   6,473   5,204
 Natural Gas MMBtus   2,736   1,583   1,623   1,898   24   28
 Heating Oil and                    
  Gasoline Gallons   1,248   556   620   926   731   673
 Interest Rate USD $ 41,997 $ 24,295 $ 24,896 $ 29,320 $ 283 $ 322
                       
Interest Rate and                    
 Foreign Currency USD $ - $ - $ - $ - $ - $ 100,069
                       
Notional Volume of Derivative Instruments
December 31, 2010
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   194,217   111,959   117,862   136,657   21   34
 Coal Tons   11,195   5,550   6,571   23,033   4,936   8,777
 Natural Gas MMBtus   2,166   1,248   1,302   1,524   15   19
 Heating Oil and                    
  Gasoline Gallons   1,054   467   521   776   616   564
 Interest Rate USD $ 9,541 $ 5,471 $ 5,732 $ 7,185 $ 609 $ 793
                       
Interest Rate and                    
 Foreign Currency USD $ 200,000 $ - $ - $ - $ 200,000 $ 189

Fair Value Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify an exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

 

The Registrant Subsidiaries' vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. For disclosure purposes, these contracts are included with other hedging activity as “Commodity.” The Registrant Subsidiaries do not hedge all fuel price risk.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of floating-rate debt to a fixed rate. AEPSC, on behalf of the Registrant Subsidiaries, also enters into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. The anticipated fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. The Registrant Subsidiaries do not hedge all interest rate exposure.

 

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP's risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency's appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

 

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

 

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract's term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management's estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

 

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2011 and December 31, 2010 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

    June 30, 2011 December 31, 2010
    Cash Collateral Cash Collateral Cash Collateral Cash Collateral
    Received Paid Received Paid
    Netted Against Netted Against Netted Against Netted Against
    Risk Management Risk Management Risk Management Risk Management
 Company Assets Liabilities Assets Liabilities
    (in thousands)
 APCo $ 2,825 $ 10,214 $ 1,809 $ 16,229
 CSPCo   1,635   5,906   1,042   9,347
 I&M   1,676   6,050   1,087   9,757
 OPCo   1,960   7,180   1,272   11,561
 PSO   1   45   -   44
 SWEPCo   1   44   -   72

The following tables represent the gross fair value of the Registrant Subsidiaries' derivative activity on the Condensed Balance Sheets as of June 30, 2011 and December 31, 2010:

Fair Value of Derivative Instruments
June 30, 2011
                 
PSO               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $12,380 $193 $- $(12,083) $490
Long-term Risk Management Assets  2,155  9  -  (1,479)  685
Total Assets  14,535  202  -  (13,562)  1,175
                 
Current Risk Management Liabilities  12,989  11  -  (12,124)  876
Long-term Risk Management Liabilities   1,633  8  -  (1,482)  159
Total Liabilities  14,622  19  -  (13,606)  1,035
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $(87) $183 $- $44 $140
                 
Fair Value of Derivative Instruments
December 31, 2010
                 
PSO               
   Risk        
   Management        
   Contracts Hedging Contracts    
        Interest Rate    
       and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
   (in thousands)
Current Risk Management Assets $19,174 $134 $13,558 $(18,641) $14,225
Long-term Risk Management Assets  1,944  -  -  (1,692)  252
Total Assets  21,118  134  13,558  (20,333)  14,477
                 
Current Risk Management Liabilities  19,607  -  -  (18,685)  922
Long-term Risk Management Liabilities   1,889  -  -  (1,692)  197
Total Liabilities  21,496  -  -  (20,377)  1,119
                 
Total MTM Derivative Contract Net               
 Assets (Liabilities) $(378) $134 $13,558 $44 $13,358

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the Condensed Balance Sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

(b) Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging." Amounts also include dedesignated risk management contracts.

The tables below present the Registrant Subsidiaries' activity of derivative risk management contracts for the three and six months ended June 30, 2011 and 2010:

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 883 $ 5,134 $ 3,702 $ 6,430 $ 539 $ 403
 Sales to AEP Affiliates   13   6   6   7   (1)   (1)
 Regulatory Assets (a)   (150)   (2,183)   (1,018)   (2,420)   644   404
 Regulatory Liabilities (a)   4,142   -   (1,077)   -   461   692
 Total Gain (Loss) on Risk Management                  
  Contracts $ 4,888 $ 2,957 $ 1,613 $ 4,017 $ 1,643 $ 1,498
                      
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ (1,693) $ 3,469 $ 2,503 $ 2,010 $ 347 $ 613
 Sales to AEP Affiliates   786   113   102   2,156   (121)   (229)
 Regulatory Assets (a)   (1,046)   (5,225)   (2,238)   (5,754)   (25)   120
 Regulatory Liabilities (a)   (834)   -   (4,393)   -   126   1,524
 Total Gain (Loss) on Risk Management                  
  Contracts $ (2,787) $ (1,643) $ (4,026) $ (1,588) $ 327 $ 2,028

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,699 $ 9,924 $ 9,117 $ 12,230 $ 658 $ 526
 Sales to AEP Affiliates   33   19   23   26   -   -
 Regulatory Assets (a)   223   (2,095)   115   (2,113)   276   2,046
 Regulatory Liabilities (a)   10,896   -   (1,664)   (105)   853   1,032
 Total Gain (Loss) on Risk Management                  
  Contracts $ 13,851 $ 7,848 $ 7,591 $ 10,038 $ 1,787 $ 3,604
                     
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,480 $ 13,076 $ 9,388 $ 12,231 $ 1,030 $ 1,402
 Sales to AEP Affiliates   (1,575)   (1,449)   (1,341)   2,409   (297)   (538)
 Regulatory Assets (a)   -   (1,544)   -   (1,690)   306   73
 Regulatory Liabilities (a)   15,147   -   8,461   29   2,764   513
 Total Gain (Loss) on Risk Management                  
  Contracts $ 16,052 $ 10,083 $ 16,508 $ 12,979 $ 3,803 $ 1,450
                     
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current
   or noncurrent on the balance sheet.                  

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the Condensed Statements of Income on an accrual basis.

 

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

 

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the Condensed Statements of Income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the Condensed Statements of Income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions (APCo, I&M, PSO and SWEPCo) for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

 

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

 

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries did not employ any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

 

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrant Subsidiaries initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets until the period the hedged item affects Net Income. The Registrant Subsidiaries recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

 

Realized gains and losses on derivative contracts for the purchase and sale of power, coal, natural gas and heating oil and gasoline designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the Condensed Statements of Income, or in Regulatory Assets or Regulatory Liabilities on the Condensed Balance Sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2011 and 2010, APCo, CSPCo, I&M and OPCo designated commodity derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on financial fuel derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) into Interest Expense in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2011, SWEPCo designated interest rate derivatives as cash flow hedges. During the six months ended June 30, 2011, APCo and PSO designated interest rate derivatives as cash flow hedges. During the three and six months ended June 30, 2010, APCo designated interest rate derivatives as cash flow hedges.

 

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Depreciation and Amortization expense on the Condensed Statements of Income over the depreciable lives of the fixed assets that were designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2011 and 2010, SWEPCo designated foreign currency derivatives as cash flow hedges.

 

During the three and six months ended June 30, 2011 and 2010, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

 

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2011 and 2010. All amounts in the following tables are presented net of related income taxes.

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2011 $ 238 $ 79 $ 101 $ 190 $ 264 $ 244
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   (26)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 217 $ - $ (8,255) $ 10,473 $ 7,787 $ (4,058)
 Changes in Fair Value Recognized in AOCI   -   -   -   -   -   794
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   269   -   251   (341)   (189)   207
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 455 $ 79 $ (8,154) $ 10,663 $ 8,051 $ (3,814)
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   768
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   269   -   251   (341)   (189)   207
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2010 $ (2,451) $ (1,407) $ (1,418) $ (1,543) $ (8) $ 100
 Changes in Fair Value Recognized in AOCI   642   380   388   370   (191)   (99)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   (16)
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (6,488) $ - $ (9,262) $ 11,832 $ (475) $ (4,947)
 Changes in Fair Value Recognized in AOCI   (2,229)   -   -   -   -   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   419   -   251   (341)   32   207
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (8,939) $ (1,407) $ (10,680) $ 10,289 $ (483) $ (4,847)
 Changes in Fair Value Recognized in AOCI   (1,587)   380   388   370   (191)   (195)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   8
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   419   -   251   (341)   32   207
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2010 $ (273) $ (134) $ (178) $ (230) $ 88 $ 82
 Changes in Fair Value Recognized in AOCI   123   (12)   53   155   180   168
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ 217 $ - $ (8,507) $ 10,813 $ 8,406 $ (4,272)
 Changes in Fair Value Recognized in AOCI   (373)   -   -   -   (476)   801
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   642   -   503   (682)   (332)   414
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ (56) $ (134) $ (8,685) $ 10,583 $ 8,494 $ (4,190)
 Changes in Fair Value Recognized in AOCI   (250)   (12)   53   155   (296)   969
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   642   -   503   (682)   (332)   414
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2009 $ (743) $ (376) $ (382) $ (366) $ (78) $ 112
 Changes in Fair Value Recognized in AOCI   (1,857)   (1,077)   (1,083)   (1,300)   (105)   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   (23)
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (6,450) $ - $ (9,514) $ 12,172 $ (521) $ (5,047)
 Changes in Fair Value Recognized in AOCI   (2,685)   -   -   -   -   (203)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   837   -   503   (682)   78   414
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (7,193) $ (376) $ (9,896) $ 11,806 $ (599) $ (4,935)
 Changes in Fair Value Recognized in AOCI   (4,542)   (1,077)   (1,083)   (1,300)   (105)   (299)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   1
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   837   -   503   (682)   78   414
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)
                       
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the Condensed Balance Sheets.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets at June 30, 2011 and December 31, 2010 were:

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 June 30, 2011
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 1,693 $ - $ 521 $ - $ 669 $ 486
 CSPCo   938   -   297   -   358   -
 I&M   974   -   307   -   378   (8,004)
 OPCo   1,192   -   362   -   479   10,133
 PSO   195   -   12   -   140   7,598
 SWEPCo   181   1,227   11   -   132   (3,057)

    Expected to be Reclassified to   
    Net Income During the Next   
    Twelve Months   
        Maximum Term for
      Interest Rate Exposure to
      and Foreign  Variability of Future
 Company Commodity Currency Cash Flows
    (in thousands) (in months)
 APCo $ 507 $ (1,076)   35
 CSPCo   264   -   35
 I&M   280   (750)   35
 OPCo   365   1,359   35
 PSO   140   759   18
 SWEPCo   129   (766)   18

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 December 31, 2010
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 333 $ 11,888 $ 727 $ - $ (273) $ 217
 CSPCo   229   -   419   -   (134)   -
 I&M   175   -   437   -   (178)   (8,507)
 OPCo   174   -   511   -   (230)   10,813
 PSO   134   13,558   -   -   88   8,406
 SWEPCo   123   5   -   -   82   (4,272)

    Expected to be Reclassified to 
    Net Income During the Next 
    Twelve Months 
      Interest Rate 
      and Foreign  
 Company Commodity Currency 
    (in thousands) 
 APCo $ (280) $ (1,173) 
 CSPCo   (137)   - 
 I&M   (184)   (955) 
 OPCo   (236)   1,359 
 PSO   88   735 
 SWEPCo   82   (829) 

(a)       Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the Condensed Balance Sheets.

 

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

 

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. AEPSC, on behalf of the Registrant Subsidiaries, uses Moody's, Standard and Poor's and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

 

AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements which may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP's credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

 

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these collateral triggering items in contracts. Management does not anticipate a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries' aggregate fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 9,515 $ 7,366 $ 7,366
 CSPCo   5,506   4,262   4,262
 I&M   5,644   4,370   4,370
 OPCo   6,601   5,110   5,110
 PSO   -   3,196   2,913
 SWEPCo   -   3,830   3,490

    December 31, 2010
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit  Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 6,594 $ 12,607 $ 12,574
 CSPCo   3,801   7,267   7,248
 I&M   3,965   7,581   7,561
 OPCo   4,640   8,871   8,847
 PSO   16   1,785   1,385
 SWEPCo   19   2,139   1,659

As of June 30, 2011 and December 31, 2010, the Registrant Subsidiaries were not required to post any collateral.

 

In addition, a majority of the Registrant Subsidiaries' non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these cross-default provisions in the contracts. Management does not anticipate a non-performance event under these provisions. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries' contractual netting arrangements as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 63,340 $ 3,006 $ 18,543
 CSPCo   36,650   1,739   10,729
 I&M   37,574   1,783   10,999
 OPCo   43,952   2,085   12,875
 PSO   31   -   19
 SWEPCo   36   -   21
            
    December 31, 2010
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 76,810 $ 6,637 $ 23,748
 CSPCo   44,277   3,826   13,689
 I&M   46,188   3,991   14,280
 OPCo   54,066   4,670   16,731
 PSO   60   -   28
 SWEPCo   75   -   37
Southwestern Electric Power Co [Member]
  
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

8. DERIVATIVES AND HEDGING

 

OBJECTIVES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS

 

The Registrant Subsidiaries are exposed to certain market risks as major power producers and marketers of wholesale electricity, coal and emission allowances. These risks include commodity price risk, interest rate risk, credit risk and, to a lesser extent, foreign currency exchange risk. These risks represent the risk of loss that may impact the Registrant Subsidiaries due to changes in the underlying market prices or rates. AEPSC, on behalf of the Registrant Subsidiaries, manages these risks using derivative instruments.

STRATEGIES FOR UTILIZATION OF DERIVATIVE INSTRUMENTS TO ACHIEVE OBJECTIVES

 

Trading Strategies

 

The strategy surrounding the use of derivative instruments for trading purposes focuses on seizing market opportunities to create value driven by expected changes in the market prices of the commodities in which AEPSC transacts on behalf of the Registrant Subsidiaries.

 

Risk Management Strategies

 

The strategy surrounding the use of derivative instruments focuses on managing risk exposures, future cash flows and creating value utilizing both economic and formal hedging strategies. To accomplish these objectives, AEPSC, on behalf of the Registrant Subsidiaries, primarily employs risk management contracts including physical forward purchase and sale contracts, financial forward purchase and sale contracts and financial swap instruments. Not all risk management contracts meet the definition of a derivative under the accounting guidance for “Derivatives and Hedging.” Derivative risk management contracts elected normal under the normal purchases and normal sales scope exception are not subject to the requirements of this accounting guidance.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into power, coal, natural gas, interest rate and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with the energy business. AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative contracts in order to manage the interest rate exposure associated with the Registrant Subsidiaries' commodity portfolio. For disclosure purposes, such risks are grouped as “Commodity,” as these risks are related to energy risk management activities. AEPSC, on behalf of the Registrant Subsidiaries, also engages in risk management of interest rate risk associated with debt financing and foreign currency risk associated with future purchase obligations denominated in foreign currencies. For disclosure purposes, these risks are grouped as “Interest Rate and Foreign Currency.” The amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors.

 

The following tables represent the gross notional volume of the Registrant Subsidiaries' outstanding derivative contracts as of June 30, 2011 and December 31, 2010:

Notional Volume of Derivative Instruments
June 30, 2011
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   265,492   153,624   158,358   184,179   14   17
 Coal Tons   8,572   4,602   4,071   16,841   6,473   5,204
 Natural Gas MMBtus   2,736   1,583   1,623   1,898   24   28
 Heating Oil and                    
  Gasoline Gallons   1,248   556   620   926   731   673
 Interest Rate USD $ 41,997 $ 24,295 $ 24,896 $ 29,320 $ 283 $ 322
                       
Interest Rate and                    
 Foreign Currency USD $ - $ - $ - $ - $ - $ 100,069
                       
Notional Volume of Derivative Instruments
December 31, 2010
                       
Primary Risk Unit of                  
Exposure Measure APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
Commodity:                    
 Power MWHs   194,217   111,959   117,862   136,657   21   34
 Coal Tons   11,195   5,550   6,571   23,033   4,936   8,777
 Natural Gas MMBtus   2,166   1,248   1,302   1,524   15   19
 Heating Oil and                    
  Gasoline Gallons   1,054   467   521   776   616   564
 Interest Rate USD $ 9,541 $ 5,471 $ 5,732 $ 7,185 $ 609 $ 793
                       
Interest Rate and                    
 Foreign Currency USD $ 200,000 $ - $ - $ - $ 200,000 $ 189

Fair Value Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into interest rate derivative transactions as part of an overall strategy to manage the mix of fixed-rate and floating-rate debt. Certain interest rate derivative transactions effectively modify an exposure to interest rate risk by converting a portion of fixed-rate debt to a floating rate. Provided specific criteria are met, these interest rate derivatives are designated as fair value hedges.

Cash Flow Hedging Strategies

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into and designates as cash flow hedges certain derivative transactions for the purchase and sale of power, coal, natural gas and heating oil and gasoline (“Commodity”) in order to manage the variable price risk related to the forecasted purchase and sale of these commodities. Management monitors the potential impacts of commodity price changes and, where appropriate, enters into derivative transactions to protect profit margins for a portion of future electricity sales and fuel or energy purchases. The Registrant Subsidiaries do not hedge all commodity price risk.

 

The Registrant Subsidiaries' vehicle fleet is exposed to gasoline and diesel fuel price volatility. AEPSC, on behalf of the Registrant Subsidiaries, enters into financial heating oil and gasoline derivative contracts in order to mitigate price risk of future fuel purchases. For disclosure purposes, these contracts are included with other hedging activity as “Commodity.” The Registrant Subsidiaries do not hedge all fuel price risk.

 

AEPSC, on behalf of the Registrant Subsidiaries, enters into a variety of interest rate derivative transactions in order to manage interest rate risk exposure. Some interest rate derivative transactions effectively modify exposure to interest rate risk by converting a portion of floating-rate debt to a fixed rate. AEPSC, on behalf of the Registrant Subsidiaries, also enters into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. The anticipated fixed-rate debt offerings have a high probability of occurrence as the proceeds will be used to fund existing debt maturities and projected capital expenditures. The Registrant Subsidiaries do not hedge all interest rate exposure.

 

At times, the Registrant Subsidiaries are exposed to foreign currency exchange rate risks primarily when some fixed assets are purchased from foreign suppliers. In accordance with AEP's risk management policy, AEPSC, on behalf of the Registrant Subsidiaries, may enter into foreign currency derivative transactions to protect against the risk of increased cash outflows resulting from a foreign currency's appreciation against the dollar. The Registrant Subsidiaries do not hedge all foreign currency exposure.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND THE IMPACT ON THE FINANCIAL STATEMENTS

 

The accounting guidance for “Derivatives and Hedging” requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheet at fair value. The fair values of derivative instruments accounted for using MTM accounting or hedge accounting are based on exchange prices and broker quotes. If a quoted market price is not available, the estimate of fair value is based on the best information available including valuation models that estimate future energy prices based on existing market and broker quotes, supply and demand market data and assumptions. In order to determine the relevant fair values of the derivative instruments, the Registrant Subsidiaries also apply valuation adjustments for discounting, liquidity and credit quality.

 

Credit risk is the risk that a counterparty will fail to perform on the contract or fail to pay amounts due. Liquidity risk represents the risk that imperfections in the market will cause the price to vary from estimated fair value based upon prevailing market supply and demand conditions. Since energy markets are imperfect and volatile, there are inherent risks related to the underlying assumptions in models used to fair value risk management contracts. Unforeseen events may cause reasonable price curves to differ from actual price curves throughout a contract's term and at the time a contract settles. Consequently, there could be significant adverse or favorable effects on future net income and cash flows if market prices are not consistent with management's estimates of current market consensus for forward prices in the current period. This is particularly true for longer term contracts. Cash flows may vary based on market conditions, margin requirements and the timing of settlement of risk management contracts.

 

According to the accounting guidance for “Derivatives and Hedging,” the Registrant Subsidiaries reflect the fair values of derivative instruments subject to netting agreements with the same counterparty net of related cash collateral. For certain risk management contracts, the Registrant Subsidiaries are required to post or receive cash collateral based on third party contractual agreements and risk profiles. For the June 30, 2011 and December 31, 2010 balance sheets, the Registrant Subsidiaries netted cash collateral received from third parties against short-term and long-term risk management assets and cash collateral paid to third parties against short-term and long-term risk management liabilities as follows:

    June 30, 2011 December 31, 2010
    Cash Collateral Cash Collateral Cash Collateral Cash Collateral
    Received Paid Received Paid
    Netted Against Netted Against Netted Against Netted Against
    Risk Management Risk Management Risk Management Risk Management
 Company Assets Liabilities Assets Liabilities
    (in thousands)
 APCo $ 2,825 $ 10,214 $ 1,809 $ 16,229
 CSPCo   1,635   5,906   1,042   9,347
 I&M   1,676   6,050   1,087   9,757
 OPCo   1,960   7,180   1,272   11,561
 PSO   1   45   -   44
 SWEPCo   1   44   -   72

The following tables represent the gross fair value of the Registrant Subsidiaries' derivative activity on the Condensed Balance Sheets as of June 30, 2011 and December 31, 2010:

Fair Value of Derivative Instruments
June 30, 2011
                  
SWEPCo               
  Risk        
  Management        
  Contracts Hedging Contracts    
       Interest Rate    
      and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
  (in thousands)
Current Risk Management Assets $12,172 $178 $1,217 $(11,954) $1,613
Long-term Risk Management Assets  1,730  8  10  (1,452)  296
Total Assets  13,902  186  1,227  (13,406)  1,909
                
Current Risk Management Liabilities  13,362  9  -  (11,993)  1,378
Long-term Risk Management Liabilities   1,605  7  -  (1,456)  156
Total Liabilities  14,967  16  -  (13,449)  1,534
                
Total MTM Derivative Contract Net               
 Assets (Liabilities) $(1,065) $170 $1,227 $43 $375
                
Fair Value of Derivative Instruments
December 31, 2010
                
SWEPCo               
  Risk        
  Management        
  Contracts Hedging Contracts    
       Interest Rate    
      and Foreign    
Balance Sheet Location Commodity (a) Commodity (a) Currency (a) Other (a) (b) Total
  (in thousands)
Current Risk Management Assets $33,284 $123 $- $(32,198) $1,209
Long-term Risk Management Assets  3,346  -  5  (2,913)  438
Total Assets  36,630  123  5  (35,111)  1,647
                
Current Risk Management Liabilities  36,338  -  -  (32,271)  4,067
Long-term Risk Management Liabilities   3,250  -  -  (2,912)  338
Total Liabilities  39,588  -  -  (35,183)  4,405
                
Total MTM Derivative Contract Net               
 Assets (Liabilities) $(2,958) $123 $5 $72 $(2,758)

(a) Derivative instruments within these categories are reported gross. These instruments are subject to master netting agreements and are presented on the Condensed Balance Sheets on a net basis in accordance with the accounting guidance for "Derivatives and Hedging."

(b) Amounts include counterparty netting of risk management and hedging contracts and associated cash collateral in accordance with the accounting guidance for "Derivatives and Hedging." Amounts also include dedesignated risk management contracts.

The tables below present the Registrant Subsidiaries' activity of derivative risk management contracts for the three and six months ended June 30, 2011 and 2010:

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 883 $ 5,134 $ 3,702 $ 6,430 $ 539 $ 403
 Sales to AEP Affiliates   13   6   6   7   (1)   (1)
 Regulatory Assets (a)   (150)   (2,183)   (1,018)   (2,420)   644   404
 Regulatory Liabilities (a)   4,142   -   (1,077)   -   461   692
 Total Gain (Loss) on Risk Management                  
  Contracts $ 4,888 $ 2,957 $ 1,613 $ 4,017 $ 1,643 $ 1,498
                      
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Three Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
     (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ (1,693) $ 3,469 $ 2,503 $ 2,010 $ 347 $ 613
 Sales to AEP Affiliates   786   113   102   2,156   (121)   (229)
 Regulatory Assets (a)   (1,046)   (5,225)   (2,238)   (5,754)   (25)   120
 Regulatory Liabilities (a)   (834)   -   (4,393)   -   126   1,524
 Total Gain (Loss) on Risk Management                  
  Contracts $ (2,787) $ (1,643) $ (4,026) $ (1,588) $ 327 $ 2,028

 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2011
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,699 $ 9,924 $ 9,117 $ 12,230 $ 658 $ 526
 Sales to AEP Affiliates   33   19   23   26   -   -
 Regulatory Assets (a)   223   (2,095)   115   (2,113)   276   2,046
 Regulatory Liabilities (a)   10,896   -   (1,664)   (105)   853   1,032
 Total Gain (Loss) on Risk Management                  
  Contracts $ 13,851 $ 7,848 $ 7,591 $ 10,038 $ 1,787 $ 3,604
                     
 Amount of Gain (Loss) Recognized on
 Risk Management Contracts
 For the Six Months Ended June 30, 2010
  
 Location of Gain (Loss) APCo CSPCo I&M OPCo PSO SWEPCo
    (in thousands)
 Electric Generation, Transmission and                  
  Distribution Revenues $ 2,480 $ 13,076 $ 9,388 $ 12,231 $ 1,030 $ 1,402
 Sales to AEP Affiliates   (1,575)   (1,449)   (1,341)   2,409   (297)   (538)
 Regulatory Assets (a)   -   (1,544)   -   (1,690)   306   73
 Regulatory Liabilities (a)   15,147   -   8,461   29   2,764   513
 Total Gain (Loss) on Risk Management                  
  Contracts $ 16,052 $ 10,083 $ 16,508 $ 12,979 $ 3,803 $ 1,450
                     
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current
   or noncurrent on the balance sheet.                  

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided in the accounting guidance for “Derivatives and Hedging.” Derivative contracts that have been designated as normal purchases or normal sales under that accounting guidance are not subject to MTM accounting treatment and are recognized on the Condensed Statements of Income on an accrual basis.

 

The accounting for the changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as part of a hedging relationship and further, on the type of hedging relationship. Depending on the exposure, management designates a hedging instrument as a fair value hedge or a cash flow hedge.

 

For contracts that have not been designated as part of a hedging relationship, the accounting for changes in fair value depends on whether the derivative instrument is held for trading purposes. Unrealized and realized gains and losses on derivative instruments held for trading purposes are included in revenues on a net basis on the Condensed Statements of Income. Unrealized and realized gains and losses on derivative instruments not held for trading purposes are included in revenues or expenses on the Condensed Statements of Income depending on the relevant facts and circumstances. However, unrealized and some realized gains and losses in regulated jurisdictions (APCo, I&M, PSO and SWEPCo) for both trading and non-trading derivative instruments are recorded as regulatory assets (for losses) or regulatory liabilities (for gains) in accordance with the accounting guidance for “Regulated Operations.”

Accounting for Fair Value Hedging Strategies

 

For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts Net Income during the period of change.

 

The Registrant Subsidiaries record realized and unrealized gains or losses on interest rate swaps that qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries did not employ any fair value hedging strategies.

Accounting for Cash Flow Hedging Strategies

 

For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrant Subsidiaries initially report the effective portion of the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets until the period the hedged item affects Net Income. The Registrant Subsidiaries recognize any hedge ineffectiveness in Net Income immediately during the period of change, except in regulated jurisdictions where hedge ineffectiveness is recorded as a regulatory asset (for losses) or a regulatory liability (for gains).

 

Realized gains and losses on derivative contracts for the purchase and sale of power, coal, natural gas and heating oil and gasoline designated as cash flow hedges are included in Revenues, Fuel and Other Consumables Used for Electric Generation or Purchased Electricity for Resale on the Condensed Statements of Income, or in Regulatory Assets or Regulatory Liabilities on the Condensed Balance Sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2011 and 2010, APCo, CSPCo, I&M and OPCo designated commodity derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on financial fuel derivative contracts designated as cash flow hedges from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Other Operation expense, Maintenance expense or Depreciation and Amortization expense, as it relates to capital projects, on the Condensed Statements of Income. During the three and six months ended June 30, 2011 and 2010, the Registrant Subsidiaries designated heating oil and gasoline derivatives as cash flow hedges.

 

The Registrant Subsidiaries reclassify gains and losses on interest rate derivative hedges related to debt financings from Accumulated Other Comprehensive Income (Loss) into Interest Expense in those periods in which hedged interest payments occur. During the three and six months ended June 30, 2011, SWEPCo designated interest rate derivatives as cash flow hedges. During the six months ended June 30, 2011, APCo and PSO designated interest rate derivatives as cash flow hedges. During the three and six months ended June 30, 2010, APCo designated interest rate derivatives as cash flow hedges.

 

The accumulated gains or losses related to foreign currency hedges are reclassified from Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets into Depreciation and Amortization expense on the Condensed Statements of Income over the depreciable lives of the fixed assets that were designated as the hedged items in qualifying foreign currency hedging relationships. During the three and six months ended June 30, 2011 and 2010, SWEPCo designated foreign currency derivatives as cash flow hedges.

 

During the three and six months ended June 30, 2011 and 2010, hedge ineffectiveness was immaterial or nonexistent for all of the hedge strategies disclosed above.

 

The following tables provide details on designated, effective cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets and the reasons for changes in cash flow hedges for the three and six months ended June 30, 2011 and 2010. All amounts in the following tables are presented net of related income taxes.

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2011 $ 238 $ 79 $ 101 $ 190 $ 264 $ 244
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   (26)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 217 $ - $ (8,255) $ 10,473 $ 7,787 $ (4,058)
 Changes in Fair Value Recognized in AOCI   -   -   -   -   -   794
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   269   -   251   (341)   (189)   207
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2011 $ 455 $ 79 $ (8,154) $ 10,663 $ 8,051 $ (3,814)
 Changes in Fair Value Recognized in AOCI   (55)   (24)   (25)   (40)   (32)   768
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   175   482   396   578   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   (41)   (112)   (92)   (134)   -   -
   Other Operation Expense   (31)   (26)   (28)   (34)   (34)   (33)
   Maintenance Expense   (65)   (18)   (22)   (33)   (22)   (24)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   269   -   251   (341)   (189)   207
   Property, Plant and Equipment   (57)   (23)   (28)   (48)   (36)   (29)
   Regulatory Assets (a)   505   -   76   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Three Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of March 31, 2010 $ (2,451) $ (1,407) $ (1,418) $ (1,543) $ (8) $ 100
 Changes in Fair Value Recognized in AOCI   642   380   388   370   (191)   (99)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   (16)
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (6,488) $ - $ (9,262) $ 11,832 $ (475) $ (4,947)
 Changes in Fair Value Recognized in AOCI   (2,229)   -   -   -   -   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   419   -   251   (341)   32   207
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of March 31, 2010 $ (8,939) $ (1,407) $ (10,680) $ 10,289 $ (483) $ (4,847)
 Changes in Fair Value Recognized in AOCI   (1,587)   380   388   370   (191)   (195)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   31   79   66   91   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (4)   150   -
   Purchased Electricity for Resale   65   168   139   193   -   -
   Other Operation Expense   (18)   (11)   (11)   (15)   (13)   8
   Maintenance Expense   (22)   (6)   (9)   (11)   (8)   (8)
   Depreciation and Amortization                  
    Expense   -   -   -   1   -   -
   Interest Expense   419   -   251   (341)   32   207
   Property, Plant and Equipment   (24)   (10)   (12)   (17)   (14)   (10)
   Regulatory Assets (a)   340   -   44   -   -   -
   Regulatory Liabilities (a)  -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2011
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2010 $ (273) $ (134) $ (178) $ (230) $ 88 $ 82
 Changes in Fair Value Recognized in AOCI   123   (12)   53   155   180   168
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 669 $ 358 $ 378 $ 479 $ 140 $ 132
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ 217 $ - $ (8,507) $ 10,813 $ 8,406 $ (4,272)
 Changes in Fair Value Recognized in AOCI   (373)   -   -   -   (476)   801
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   -
   Interest Expense   642   -   503   (682)   (332)   414
 Balance in AOCI as of June 30, 2011 $ 486 $ - $ (8,004) $ 10,133 $ 7,598 $ (3,057)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2010 $ (56) $ (134) $ (8,685) $ 10,583 $ 8,494 $ (4,190)
 Changes in Fair Value Recognized in AOCI   (250)   (12)   53   155   (296)   969
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   171   470   386   564   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   -   -   -
   Purchased Electricity for Resale   46   125   102   150   -   -
   Other Operation Expense   (44)   (35)   (37)   (48)   (47)   (46)
   Maintenance Expense   (90)   (24)   (32)   (46)   (29)   (32)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   642   -   503   (682)   (332)   414
   Property, Plant and Equipment   (80)   (32)   (39)   (66)   (52)   (40)
   Regulatory Assets (a)   816   -   123   -   -   -
   Regulatory Liabilities (a)   -   -   -   -   -   -
 Balance in AOCI as of June 30, 2011 $ 1,155 $ 358 $ (7,626) $ 10,612 $ 7,738 $ (2,925)

 Total Accumulated Other Comprehensive Income (Loss) Activity for Cash Flow Hedges
 For the Six Months Ended June 30, 2010
  
 Commodity Contracts APCo CSPCo I&M OPCo PSO SWEPCo
   (in thousands)
 Balance in AOCI as of December 31, 2009 $ (743) $ (376) $ (382) $ (366) $ (78) $ 112
 Changes in Fair Value Recognized in AOCI   (1,857)   (1,077)   (1,083)   (1,300)   (105)   (96)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   (23)
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (1,437) $ (807) $ (813) $ (941) $ (84) $ (33)
                       
 Interest Rate and Foreign Currency                  
 Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (6,450) $ - $ (9,514) $ 12,172 $ (521) $ (5,047)
 Changes in Fair Value Recognized in AOCI   (2,685)   -   -   -   -   (203)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Other Operation Expense   -   -   -   -   -   24
   Interest Expense   837   -   503   (682)   78   414
 Balance in AOCI as of June 30, 2010 $ (8,298) $ - $ (9,011) $ 11,492 $ (443) $ (4,812)
                       
 Total Contracts APCo CSPCo I&M OPCo PSO SWEPCo
      (in thousands)
 Balance in AOCI as of December 31, 2009 $ (7,193) $ (376) $ (9,896) $ 11,806 $ (599) $ (4,935)
 Changes in Fair Value Recognized in AOCI   (4,542)   (1,077)   (1,083)   (1,300)   (105)   (299)
 Amount of (Gain) or Loss Reclassified                  
  from AOCI to Income Statement/within                  
  Balance Sheet:                  
   Electric Generation, Transmission, and                  
    Distribution Revenues   57   144   120   167   -   -
   Fuel and Other Consumables Used for                  
    Electric Generation   -   -   -   (13)   150   -
   Purchased Electricity for Resale   211   550   455   633   -   -
   Other Operation Expense   (24)   (19)   (17)   (20)   (19)   1
   Maintenance Expense   (36)   (12)   (14)   (15)   (12)   (12)
   Depreciation and Amortization                  
    Expense   -   -   -   2   -   -
   Interest Expense   837   -   503   (682)   78   414
   Property, Plant and Equipment   (33)   (17)   (17)   (22)   (20)   (14)
   Regulatory Assets (a)   988   -   125   -   -   -
   Regulatory Liabilities (a)   -   -   -   (5)   -   -
 Balance in AOCI as of June 30, 2010 $ (9,735) $ (807) $ (9,824) $ 10,551 $ (527) $ (4,845)
                       
 (a) Represents realized and unrealized gains and losses subject to regulatory accounting treatment recorded as either current or noncurrent on the Condensed Balance Sheets.

Cash flow hedges included in Accumulated Other Comprehensive Income (Loss) on the Condensed Balance Sheets at June 30, 2011 and December 31, 2010 were:

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 June 30, 2011
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 1,693 $ - $ 521 $ - $ 669 $ 486
 CSPCo   938   -   297   -   358   -
 I&M   974   -   307   -   378   (8,004)
 OPCo   1,192   -   362   -   479   10,133
 PSO   195   -   12   -   140   7,598
 SWEPCo   181   1,227   11   -   132   (3,057)

    Expected to be Reclassified to   
    Net Income During the Next   
    Twelve Months   
        Maximum Term for
      Interest Rate Exposure to
      and Foreign  Variability of Future
 Company Commodity Currency Cash Flows
    (in thousands) (in months)
 APCo $ 507 $ (1,076)   35
 CSPCo   264   -   35
 I&M   280   (750)   35
 OPCo   365   1,359   35
 PSO   140   759   18
 SWEPCo   129   (766)   18

 Impact of Cash Flow Hedges on the Registrant Subsidiaries’
 Condensed Balance Sheets
 December 31, 2010
  
    Hedging Assets (a) Hedging Liabilities (a) AOCI Gain (Loss) Net of Tax
      Interest Rate   Interest Rate   Interest Rate
      and Foreign    and Foreign    and Foreign
 Company Commodity Currency Commodity Currency Commodity Currency
    (in thousands)
 APCo $ 333 $ 11,888 $ 727 $ - $ (273) $ 217
 CSPCo   229   -   419   -   (134)   -
 I&M   175   -   437   -   (178)   (8,507)
 OPCo   174   -   511   -   (230)   10,813
 PSO   134   13,558   -   -   88   8,406
 SWEPCo   123   5   -   -   82   (4,272)

    Expected to be Reclassified to 
    Net Income During the Next 
    Twelve Months 
      Interest Rate 
      and Foreign  
 Company Commodity Currency 
    (in thousands) 
 APCo $ (280) $ (1,173) 
 CSPCo   (137)   - 
 I&M   (184)   (955) 
 OPCo   (236)   1,359 
 PSO   88   735 
 SWEPCo   82   (829) 

(a)       Hedging Assets and Hedging Liabilities are included in Risk Management Assets and Liabilities on the Condensed Balance Sheets.

 

The actual amounts reclassified from Accumulated Other Comprehensive Income (Loss) to Net Income can differ from the estimate above due to market price changes.

Credit Risk

 

AEPSC, on behalf of the Registrant Subsidiaries, limits credit risk in their wholesale marketing and trading activities by assessing the creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness on an ongoing basis. AEPSC, on behalf of the Registrant Subsidiaries, uses Moody's, Standard and Poor's and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis.

 

AEPSC, on behalf of the Registrant Subsidiaries, uses standardized master agreements which may include collateral requirements. These master agreements facilitate the netting of cash flows associated with a single counterparty. Cash, letters of credit and parental/affiliate guarantees may be obtained as security from counterparties in order to mitigate credit risk. The collateral agreements require a counterparty to post cash or letters of credit in the event an exposure exceeds the established threshold. The threshold represents an unsecured credit limit which may be supported by a parental/affiliate guaranty, as determined in accordance with AEP's credit policy. In addition, collateral agreements allow for termination and liquidation of all positions in the event of a failure or inability to post collateral.

Collateral Triggering Events

 

Under the tariffs of the RTOs and Independent System Operators (ISOs) and a limited number of derivative and non-derivative contracts primarily related to competitive retail auction loads, the Registrant Subsidiaries are obligated to post an additional amount of collateral if certain credit ratings decline below investment grade. The amount of collateral required fluctuates based on market prices and total exposure. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these collateral triggering items in contracts. Management does not anticipate a downgrade below investment grade. The following tables represent: (a) the Registrant Subsidiaries' aggregate fair values of such derivative contracts, (b) the amount of collateral the Registrant Subsidiaries would have been required to post for all derivative and non-derivative contracts if credit ratings of the Registrant Subsidiaries had declined below investment grade and (c) how much was attributable to RTO and ISO activities as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 9,515 $ 7,366 $ 7,366
 CSPCo   5,506   4,262   4,262
 I&M   5,644   4,370   4,370
 OPCo   6,601   5,110   5,110
 PSO   -   3,196   2,913
 SWEPCo   -   3,830   3,490

    December 31, 2010
    Liabilities for Amount of Collateral the Amount
    Derivative Contracts Registrant Subsidiaries Attributable to
    with Credit  Would Have Been RTO and ISO
 Company Downgrade Triggers Required to Post Activities
    (in thousands)
 APCo $ 6,594 $ 12,607 $ 12,574
 CSPCo   3,801   7,267   7,248
 I&M   3,965   7,581   7,561
 OPCo   4,640   8,871   8,847
 PSO   16   1,785   1,385
 SWEPCo   19   2,139   1,659

As of June 30, 2011 and December 31, 2010, the Registrant Subsidiaries were not required to post any collateral.

 

In addition, a majority of the Registrant Subsidiaries' non-exchange traded commodity contracts contain cross-default provisions that, if triggered, would permit the counterparty to declare a default and require settlement of the outstanding payable. These cross-default provisions could be triggered if there was a non-performance event by Parent or the obligor under outstanding debt or a third party obligation in excess of $50 million. On an ongoing basis, AEP's risk management organization assesses the appropriateness of these cross-default provisions in the contracts. Management does not anticipate a non-performance event under these provisions. The following tables represent: (a) the fair value of these derivative liabilities subject to cross-default provisions prior to consideration of contractual netting arrangements, (b) the amount this exposure has been reduced by cash collateral posted by the Registrant Subsidiaries and (c) if a cross-default provision would have been triggered, the settlement amount that would be required after considering the Registrant Subsidiaries' contractual netting arrangements as of June 30, 2011 and December 31, 2010:

    June 30, 2011
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 63,340 $ 3,006 $ 18,543
 CSPCo   36,650   1,739   10,729
 I&M   37,574   1,783   10,999
 OPCo   43,952   2,085   12,875
 PSO   31   -   19
 SWEPCo   36   -   21
            
    December 31, 2010
    Liabilities for   Additional
    Contracts with Cross   Settlement
    Default Provisions   Liability if Cross
    Prior to Contractual Amount of Cash Default Provision
 Company Netting Arrangements Collateral Posted is Triggered
    (in thousands)
 APCo $ 76,810 $ 6,637 $ 23,748
 CSPCo   44,277   3,826   13,689
 I&M   46,188   3,991   14,280
 OPCo   54,066   4,670   16,731
 PSO   60   -   28
 SWEPCo   75   -   37