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v3.24.3

Income Taxes | 9 Months Ended
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Sep. 30, 2024
Income Taxes | INCOME TAXES The disclosures in this note apply to all Registrants unless indicated otherwise. Effective Tax Rates (ETR) The Registrants’ interim ETR reflect the estimated annual ETR for 2024 and 2023, adjusted for tax expense associated with certain discrete items. In the first quarter of 2024, I&M, PSO, and SWEPCo recorded tax benefits of $61 million, $49 million and $114 million, respectively, related to the reduction of a regulatory liability associated with the PLRs received from the IRS. In the third quarter of 2024, I&M recorded a $61 million tax benefit related to Nuclear PTCs. The actual Nuclear PTC realized by AEP and I&M in 2024 could vary significantly based on annual generation, and/or the U.S. Treasury guidance, particularly computational guidance on gross receipts. These items are the primary drivers of the interim ETR resulting in AEP’s year to date tax rate of (4.4)% as shown below. The ETR for each of the Registrants are included in the following tables:
|  | Three Months Ended September 30, 2024
|  | AEP |  | AEP Texas |  | AEPTCo |  | APCo |  | I&M |  | OPCo |  | PSO |  | SWEPCo
U.S. Federal Statutory Rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Increase (decrease) due to: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and Local Income Taxes, Net |  | 0.6 | % |  | 0.3 | % |  | 2.5 | % |  | 1.4 | % |  | 0.7 | % |  | 1.1 | % |  | — | % |  | (2.6) | %
Tax Reform Excess ADIT Reversal |  | (2.8) | % |  | (1.0) | % |  | 0.2 | % |  | (2.3) | % |  | (7.9) | % |  | (7.3) | % |  | (5.0) | % |  | (3.2) | %
Production and Investment Tax Credits |  | (9.9) | % |  | — | % |  | — | % |  | (0.1) | % |  | (45.6) | % |  | — | % |  | (61.9) | % |  | (23.4) | %
Reversal of Origination Flow-Through |  | 0.1 | % |  | 0.1 | % |  | 0.3 | % |  | (1.1) | % |  | 0.3 | % |  | 0.7 | % |  | 0.3 | % |  | 0.6 | %
AFUDC Equity |  | (1.5) | % |  | (2.3) | % |  | (1.9) | % |  | (1.5) | % |  | (1.2) | % |  | (1.2) | % |  | (1.3) | % |  | (0.5) | %
Discrete Tax Adjustments |  | (3.7) | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | %
Other |  | — | % |  | 0.2 | % |  | (0.2) | % |  | (0.4) | % |  | — | % |  | 0.6 | % |  | 1.5 | % |  | — | %
Effective Income Tax Rate |  | 3.8 | % |  | 18.3 | % |  | 21.9 | % |  | 17.0 | % |  | (32.7) | % |  | 14.9 | % |  | (45.4) | % |  | (8.1) | %
|  | Three Months Ended September 30, 2023
|  | AEP |  | AEP Texas |  | AEPTCo |  | APCo |  | I&M |  | OPCo |  | PSO |  | SWEPCo
U.S. Federal Statutory Rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Increase (decrease) due to: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and Local Income Taxes, Net |  | 1.4 | % |  | 0.5 | % |  | 2.8 | % |  | 2.2 | % |  | 2.1 | % |  | 0.8 | % |  | 3.0 | % |  | (4.3) | %
Tax Reform Excess ADIT Reversal |  | (5.7) | % |  | (1.3) | % |  | (0.2) | % |  | (5.3) | % |  | (8.5) | % |  | (6.8) | % |  | (17.0) | % |  | (6.2) | %
Production and Investment Tax Credits |  | (5.1) | % |  | 0.1 | % |  | — | % |  | (0.1) | % |  | (0.7) | % |  | — | % |  | (46.9) | % |  | (25.5) | %
Reversal of Origination Flow-Through |  | 0.1 | % |  | 0.2 | % |  | 0.3 | % |  | 1.8 | % |  | 0.7 | % |  | 0.8 | % |  | 0.3 | % |  | (0.2) | %
AFUDC Equity |  | (1.4) | % |  | (1.4) | % |  | (2.4) | % |  | (1.5) | % |  | (0.5) | % |  | (0.8) | % |  | (1.6) | % |  | (0.8) | %
Discrete Tax Adjustments |  | (4.1) | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | %
Other |  | 0.1 | % |  | (0.5) | % |  | (1.0) | % |  | 0.7 | % |  | (3.5) | % |  | 1.3 | % |  | (0.2) | % |  | 0.2 | %
Effective Income Tax Rate |  | 6.3 | % |  | 18.6 | % |  | 20.5 | % |  | 18.8 | % |  | 10.6 | % |  | 16.3 | % |  | (41.4) | % |  | (15.8) | %
|  | Nine Months Ended September 30, 2024
|  | AEP |  | AEP Texas |  | AEPTCo |  | APCo |  | I&M |  | OPCo |  | PSO |  | SWEPCo
U.S. Federal Statutory Rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Increase (decrease) due to: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and Local Income Taxes, Net |  | 1.2 | % |  | 0.4 | % |  | 2.5 | % |  | 2.1 | % |  | 1.5 | % |  | 0.9 | % |  | — | % |  | (2.6) | %
Tax Reform Excess ADIT Reversal |  | (3.1) | % |  | (1.1) | % |  | 0.2 | % |  | (7.1) | % |  | (5.7) | % |  | (8.7) | % |  | (4.3) | % |  | (4.2) | %
Remeasurement of Excess ADIT |  | (11.9) | % |  | 1.5 | % |  | — | % |  | — | % |  | (27.5) | % |  | — | % |  | (40.5) | % |  | (181.8) | %
Production and Investment Tax Credits |  | (8.3) | % |  | (0.1) | % |  | — | % |  | (0.1) | % |  | (23.4) | % |  | — | % |  | (61.7) | % |  | (79.1) | %
Reversal of Origination Flow-Through |  | 0.2 | % |  | 0.1 | % |  | 0.3 | % |  | (0.8) | % |  | 0.3 | % |  | 0.8 | % |  | 0.3 | % |  | 2.1 | %
AFUDC Equity |  | (1.6) | % |  | (1.7) | % |  | (2.0) | % |  | (1.1) | % |  | (1.1) | % |  | (1.3) | % |  | (1.3) | % |  | (2.3) | %
Discrete Tax Adjustments |  | (2.1) | % |  | — | % |  | — | % |  | — | % |  | — | % |  | — | % |  | 1.2 | % |  | 1.1 | %
Other |  | 0.2 | % |  | — | % |  | (0.1) | % |  | (0.1) | % |  | — | % |  | 0.4 | % |  | — | % |  | (0.5) | %
Effective Income Tax Rate |  | (4.4) | % |  | 20.1 | % |  | 21.9 | % |  | 13.9 | % |  | (34.9) | % |  | 13.1 | % |  | (85.3) | % |  | (246.3) | %
|  | Nine Months Ended September 30, 2023
|  | AEP |  | AEP Texas |  | AEPTCo |  | APCo |  | I&M |  | OPCo |  | PSO |  | SWEPCo
U.S. Federal Statutory Rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Increase (decrease) due to: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and Local Income Taxes, Net |  | 1.7 | % |  | 0.5 | % |  | 2.7 | % |  | 2.4 | % |  | 2.3 | % |  | 0.9 | % |  | 2.8 | % |  | (2.9) | %
Tax Reform Excess ADIT Reversal |  | (6.0) | % |  | (1.3) | % |  | 0.1 | % |  | (4.8) | % |  | (7.6) | % |  | (7.3) | % |  | (17.1) | % |  | (5.3) | %
Production and Investment Tax Credits |  | (7.4) | % |  | — | % |  | — | % |  | (0.1) | % |  | (0.6) | % |  | — | % |  | (48.9) | % |  | (26.7) | %
Reversal of Origination Flow-Through |  | (0.2) | % |  | 0.2 | % |  | 0.3 | % |  | 0.1 | % |  | (1.7) | % |  | 0.8 | % |  | 0.3 | % |  | (0.3) | %
AFUDC Equity |  | (1.4) | % |  | (1.2) | % |  | (2.0) | % |  | (1.2) | % |  | (0.4) | % |  | (0.8) | % |  | (1.5) | % |  | (0.5) | %
Discrete Tax Adjustments |  | (2.8) | % |  | — | % |  | — | % |  | 1.5 | % |  | 0.7 | % |  | — | % |  | — | % |  | — | %
Other |  | 0.3 | % |  | (0.2) | % |  | (0.5) | % |  | 0.4 | % |  | (1.2) | % |  | 0.5 | % |  | (0.2) | % |  | 0.2 | %
Effective Income Tax Rate |  | 5.2 | % |  | 19.0 | % |  | 21.6 | % |  | 19.3 | % |  | 12.5 | % |  | 15.1 | % |  | (43.6) | % |  | (14.5) | %
Federal and State Income Tax Audit Status The statute of limitations (“SOL”) for the IRS to examine AEP and subsidiaries originally filed federal return has expired for tax years 2016 and earlier. In July 2024, the Congressional Joint Committee on Taxation (“JCT”) completed its review of the results of the 2017-2020 IRS Audit and agreed to them. AEP received the associated tax refund and interest payment in September 2024. This IRS audit and associated refund claim resulted from a net operating loss carryback to 2015 that originated in the 2017 return. AEP agreed to extend the SOL on the 2017-2020 tax returns to May 31, 2025, to allow the JCT adequate time to complete its review. However, AEP has IRS confirmation that tax years 2017-2020 are now effectively closed as they only remain open for changes to other non-consolidated entities that AEP holds an interest in. AEP and subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine the tax returns, and AEP and subsidiaries are currently under examination in several state and local jurisdictions. Generally, the SOL have expired for tax years prior to 2017. In addition, management is monitoring and continues to evaluate the potential impact of federal legislation and corresponding state conformity. Federal Legislation In August 2022, President Biden signed H.R. 5376 into law, commonly known as the Inflation Reduction Act of 2022, or IRA. Most notably this budget reconciliation legislation created a 15% minimum tax on adjusted financial statement income (CAMT), extended and increased the value of PTCs and ITCs, added a nuclear and clean hydrogen PTC, an energy storage ITC and allowed the sale or transfer of tax credits to third-parties for cash. As further significant guidance from Treasury and the IRS is expected on the tax provisions in the IRA, AEP will continue to monitor any issued guidance and evaluate the impact on future net income, cash flows and financial condition. In September 2024, Treasury and the IRS issued proposed regulations on the application of CAMT. AEP and subsidiaries are subject to the CAMT and are expected to incur a liability in 2024. However, any CAMT cash taxes incurred are expected to be partially offset by regulatory recovery, the utilization of tax credits and additionally the cash inflow generated by the sale of tax credits. The sale of tax credits are presented in the operating section of the statements of cash flows consistent with the presentation of cash taxes paid. AEP presents the loss on sale of tax credits through income tax expense. In April 2024, the IRS issued final regulations related to the transfer of tax credits. In 2023, AEP, on behalf of PSO, SWEPCo and AEP Energy Supply LLC, entered into transferability agreements with nonaffiliated parties to sell 2023 generated PTCs resulting in cash proceeds of approximately $174 million with $102 million received in 2023, $62 million received in the first quarter of 2024 and the remaining $10 million was received in the second quarter of 2024. In the third quarter of 2024, AEP, on behalf of PSO, SWEPCo and APCo, entered into transferability agreements with nonaffiliated parties to sell 2024 generated PTCs which will result in approximately $137 million of cash proceeds, of which approximately $91 million was received in the third quarter of 2024 and the remaining $46 million is expected to be received in the fourth quarter of 2024 and the first quarter of 2025. AEP expects to continue to explore the ability to efficiently monetize its tax credits through third-party transferability agreements. I&M’s Cook Plant qualifies for the transferable Nuclear PTC, which is available for tax years beginning in 2024 through 2032. The Nuclear PTC is calculated based on electricity generated and sold to third-parties and is subject to a “reduction amount” as the facility’s gross receipts increase above a certain threshold. In the third quarter of 2024, AEP and I&M have included $64 million of estimated Nuclear PTCs within their annualized ETR. Absent specific IRS guidance, AEP and I&M’s estimated 2024 Nuclear PTC was calculated using estimated 2024 gross receipts and forecasted annual generation for the Cook Plant. If, and when, IRS guidance is eventually issued, the value of the estimated Nuclear PTC will be updated to reflect such guidance, if necessary.

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