INCOME TAXES

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

Federal Tax Reform

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

Provisional Amounts

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

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

State utility commissions have issued orders or instructions requiring public utilities, including the Registrants, to record liabilities to reflect the impact of the reduction in the corporate federal income tax rate in excess of the enacted corporate federal income tax rate of 21% beginning in 2018. The following table provides a summary of the estimated provisions for revenue refund recorded by the Registrants related to the reduction in the corporate federal tax rate as of and for the three months ended March 31, 2018:



	AEP			AEP Texas			AEPTCo			APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)
Decrease in Total Revenues	$	(119.5	)	$	(7.6	)	$	(19.0	)	$	(35.4	)	$	(17.8	)	$	(21.3	)	$	(3.8	)	$	(11.0	)
Increase in Current Liabilities	33.9			—			16.2			7.8			3.0			6.2			—			—
Increase in Deferred Credits and Other Noncurrent Liabilities	85.6			7.6			2.8			27.6			14.8			15.1			3.8			11.0

Excess Accumulated Deferred Income Taxes - Pending Rate Reductions

As of March 31, 2018, the Registrants have approximately $4.4 billion of Excess ADIT, as well as an incremental liability of $1.2 billion to reflect the $4.4 billion Excess ADIT on a pre-tax basis, presented in Regulatory Liabilities and Deferred Investment Tax Credits on the balance sheets. The Excess ADIT is reflected on a pretax basis to appropriately contemplate future tax consequences in the periods when the regulatory liability is settled. As of March 31, 2018, approximately $3.4 billion of the Excess ADIT relates to temporary differences associated with depreciable property subject to rate normalization requirements.

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



	AEP			AEP Texas			AEPTCo			APCo			I&M			OPCo			PSO			SWEPCo
	(in millions)
Decrease in Total Revenues	$	(17.2	)	$	(2.1	)	$	(0.1	)	$	(4.6	)	$	(1.7	)	$	(1.4	)	$	(2.2	)	$	(3.5	)
Increase in Deferred Credits and Other Noncurrent Liabilities	17.2			2.1			0.1			4.6			1.7			1.4			2.2			3.5

In addition, with respect to the remaining $1 billion of Excess ADIT recorded in Regulatory Liabilities and Deferred Investment Tax Credits that are not subject to rate normalization requirements, the Registrants continue to work with the various state utility commissions to determine the appropriate mechanism and time period to provide these benefits of Tax Reform to customers. The corresponding reduction in Income Tax Expense will be reported in the interim period in which these benefits of Tax Reform are provided to customers.

Effective Tax Rates (ETR)

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

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



	Three Months Ended March 31,
Company	2018		2017
AEP	18.3	%	36.7	%
AEP Texas	16.3	%	34.7	%
AEPTCo	20.8	%	33.3	%
APCo	18.2	%	36.5	%
I&M	16.2	%	29.9	%
OPCo	20.5	%	34.9	%
PSO	16.3	%	37.7	%
SWEPCo	18.4	%	37.3	%

AEP