Edgar Filing: AMERICAN ELECTRIC POWER CO INC

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period from ____ to ____

Commission	Registrants; States of Incorporation;	I.R.S. Employer
File Number	Address and Telephone Number	Identification Nos.

1-3525	AMERICAN ELECTRIC POWER COMPANY, INC. (A New York Corporation)	13-4922640
1-3457	APPALACHIAN POWER COMPANY (A Virginia Corporation)	54-0124790
1-2680	COLUMBUS SOUTHERN POWER COMPANY (An Ohio Corporation)	31-4154203
1-3570	INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation)	35-0410455
1-6543	OHIO POWER COMPANY (An Ohio Corporation)	31-4271000
0-343	PUBLIC SERVICE COMPANY OF OKLAHOMA (An Oklahoma Corporation)	73-0410895
1-3146	SOUTHWESTERN ELECTRIC POWER COMPANY (A Delaware Corporation)	72-0323455
	1 Riverside Plaza, Columbus, Ohio 43215-2373
	Telephone (614) 716-1000

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Yes	X		No

Indicate by check mark whether American Electric Power Company, Inc. has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes	X		No

Indicate by check mark whether Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company have submitted electronically and posted on the AEP corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes	X		No

Indicate by check mark whether American Electric Power Company, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ‘large accelerated filer,’ ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act.

Large accelerated filer	X	Accelerated filer

Non-accelerated filer		Smaller reporting company

Indicate by check mark whether Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company are large accelerated filers, accelerated filers, non-accelerated filers or smaller reporting companies. See the definitions of ‘large accelerated filer,’ ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act.

Large accelerated filer		Accelerated filer

Non-accelerated filer	X	Smaller reporting company

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
Yes			No	X

Columbus Southern Power Company and Indiana Michigan Power Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.

			Number of shares of common stock outstanding of the registrants at July 28, 2011

American Electric Power Company, Inc.			482,273,829
			($6.50 par value)
Appalachian Power Company			13,499,500
			(no par value)
Columbus Southern Power Company			16,410,426
			(no par value)
Indiana Michigan Power Company			1,400,000
			(no par value)
Ohio Power Company			27,952,473
			(no par value)
Public Service Company of Oklahoma			9,013,000
			($15 par value)
Southwestern Electric Power Company			7,536,640
			($18 par value)

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

INDEX OF QUARTERLY REPORTS ON FORM 10-Q

June 30, 2011

			Page Number
Glossary of Terms			i

Forward-Looking Information			iv

Part I. FINANCIAL INFORMATION

		Items 1, 2 and 3 - Financial Statements, Management’s Discussion and Analysis and Quantitative and Qualitative Disclosures About Market Risk:
American Electric Power Company, Inc. and Subsidiary Companies:
	Management’s Discussion and Analysis		1
	Quantitative and Qualitative Disclosures About Market Risk		22
	Condensed Consolidated Financial Statements		26
	Index of Condensed Notes to Condensed Consolidated Financial Statements		31

Appalachian Power Company and Subsidiaries:
	Management’s Discussion and Analysis		81
	Quantitative and Qualitative Disclosures About Market Risk		89
	Condensed Consolidated Financial Statements		90
	Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries		95

Columbus Southern Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis		97
	Quantitative and Qualitative Disclosures About Market Risk		103
	Condensed Consolidated Financial Statements		104
	Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries		109

Indiana Michigan Power Company and Subsidiaries:
	Management’s Narrative Discussion and Analysis		111
	Quantitative and Qualitative Disclosures About Market Risk		115
	Condensed Consolidated Financial Statements		116
	Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries		121

Ohio Power Company Consolidated:
	Management’s Discussion and Analysis		123
	Quantitative and Qualitative Disclosures About Market Risk		130
	Condensed Consolidated Financial Statements		131
	Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries		136

Public Service Company of Oklahoma:
	Management’s Discussion and Analysis		138
	Quantitative and Qualitative Disclosures About Market Risk		142
	Condensed Financial Statements		143
	Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries		148

Southwestern Electric Power Company Consolidated:
	Management’s Discussion and Analysis		150
	Quantitative and Qualitative Disclosures About Market Risk		155
	Condensed Consolidated Financial Statements		156
	Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries		161


Index of Condensed Notes to Condensed Financial Statements of Registrant Subsidiaries				162

Combined Management’s Discussion and Analysis of Registrant Subsidiaries				227

Controls and Procedures				238

Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings		239
	Item 1A.	Risk Factors		239
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		242
	Item 5.	Other Information		243
	Item 6.	Exhibits:		243
			Exhibit 4(d)
			Exhibit 4(e)
			Exhibit 12
			Exhibit 31(a)
			Exhibit 31(b)
			Exhibit 32(a)
			Exhibit 32(b)

SIGNATURE				244

This combined Form 10-Q is separately filed by American Electric Power Company, Inc., Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

GLOSSARY OF TERMS

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.

Term

Meaning

AEGCo		AEP Generating Company, an AEP electric utility subsidiary.
AEP or Parent		American Electric Power Company, Inc., a holding company.
AEP Consolidated		AEP and its majority owned consolidated subsidiaries and consolidated affiliates.
AEP Credit		AEP Credit, Inc., a subsidiary of AEP which factors accounts receivable and accrued utility revenues for affiliated electric utility companies.
AEP East companies		APCo, CSPCo, I&M, KPCo and OPCo.
AEP Power Pool		Members are APCo, CSPCo, I&M, KPCo and OPCo. The AEP Power Pool shares the generation, cost of generation and resultant wholesale off-system sales of the member companies.
AEP System or the System		American Electric Power System, an integrated electric utility system, owned and operated by AEP’s electric utility subsidiaries.
AEPEP		AEP Energy Partners, Inc., a subsidiary of AEP dedicated to wholesale marketing and trading, asset management and commercial and industrial sales in the deregulated Texas market.
AEPSC		American Electric Power Service Corporation, a service subsidiary providing management and professional services to AEP and its subsidiaries.
AFUDC		Allowance for Funds Used During Construction.
AOCI		Accumulated Other Comprehensive Income.
APCo		Appalachian Power Company, an AEP electric utility subsidiary.
APSC		Arkansas Public Service Commission.
ASU		Accounting Standard Update.
BOA		Bank of America Corporation.
CAA		Clean Air Act.
CLECO		Central Louisiana Electric Company, a nonaffiliated utility company.
CO2		Carbon Dioxide and other greenhouse gases.
Cook Plant		Donald C. Cook Nuclear Plant, a two-unit, 2,191 MW nuclear plant owned by I&M.
CSPCo		Columbus Southern Power Company, an AEP electric utility subsidiary.
CTC		Competition Transition Charge, a transition charge applied to TCC’s transmission and distribution rates for stranded costs and other true-up amounts as required by the Texas Restructuring Legislation.
DCC Fuel		DCC Fuel LLC, DCC Fuel II LLC and DCC Fuel III LLC, variable interest entities formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M.
DHLC		Dolet Hills Lignite Company, LLC, a wholly-owned lignite mining subsidiary of SWEPCo.
E&R		Environmental compliance and transmission and distribution system reliability.
EIS		Energy Insurance Services, Inc., a nonaffiliated captive insurance company.
ERCOT		Electric Reliability Council of Texas, an intrastate RTO.
ESP		Electric Security Plans, filed with the PUCO, pursuant to the Ohio Amendments.
ETT		Electric Transmission Texas, LLC, an equity interest joint venture between AEP Utilities, Inc. and MidAmerican Energy Holdings Company Texas Transco, LLC formed to own and operate electric transmission facilities in ERCOT.
FAC		Fuel Adjustment Clause.
FASB		Financial Accounting Standards Board.
Federal EPA		United States Environmental Protection Agency.
FERC		Federal Energy Regulatory Commission.
FGD		Flue Gas Desulfurization or Scrubbers.
FTR		Financial Transmission Right, a financial instrument that entitles the holder to receive compensation for certain congestion-related transmission charges that arise when the power grid is congested resulting in differences in locational prices.

Term		Meaning

GAAP		Accounting Principles Generally Accepted in the United States of America.
I&M		Indiana Michigan Power Company, an AEP electric utility subsidiary.
IGCC		Integrated Gasification Combined Cycle, technology that turns coal into a cleaner-burning gas.
Interconnection Agreement		Agreement, dated July 6, 1951, as amended, by and among APCo, CSPCo, I&M, KPCo and OPCo, defining the sharing of costs and benefits associated with their respective generating plants.
IRS		Internal Revenue Service.
IURC		Indiana Utility Regulatory Commission.
KGPCo		Kingsport Power Company, an AEP electric utility subsidiary.
KPCo		Kentucky Power Company, an AEP electric utility subsidiary.
KWH		Kilowatthour.
LPSC		Louisiana Public Service Commission.
MISO		Midwest Independent Transmission System Operator.
MMBtu		Million British Thermal Units.
MPSC		Michigan Public Service Commission.
MTM		Mark-to-Market.
MW		Megawatt.
NEIL		Nuclear Electric Insurance Limited insures domestic and international nuclear utilities for the costs associated with interruptions, damages, decontaminations and related nuclear risks.
NOx		Nitrogen oxide.
Nonutility Money Pool		AEP’s Nonutility Money Pool is the centralized funding mechanism AEP uses to meet the short term cash requirements of pool participants.
NSR		New Source Review.
OCC		Corporation Commission of the State of Oklahoma.
OPCo		Ohio Power Company, an AEP electric utility subsidiary.
OPEB		Other Postretirement Benefit Plans.
OTC		Over the counter.
PJM		Pennsylvania – New Jersey – Maryland, a RTO.
PM		Particulate Matter.
PSO		Public Service Company of Oklahoma, an AEP electric utility subsidiary.
PUCO		Public Utilities Commission of Ohio.
PUCT		Public Utility Commission of Texas.
Registrant Subsidiaries		AEP subsidiaries which are SEC registrants; APCo, CSPCo, I&M, OPCo, PSO and SWEPCo.
Risk Management Contracts		Trading and nontrading derivatives, including those derivatives designated as cash flow and fair value hedges.
Rockport Plant		A generating plant, consisting of two 1,300 MW coal-fired generating units near Rockport, Indiana, owned by AEGCo and I&M.
RTO		Regional Transmission Organization, responsible for moving electricity over large interstate areas.
Sabine		Sabine Mining Company, a lignite mining company that is a consolidated variable interest entity.
SEET		Significantly Excessive Earnings Test.
SIA		System Integration Agreement, effective June 15, 2000, provides contractual basis for coordinated planning, operation and maintenance of the power supply sources of the combined AEP.
SNF		Spent Nuclear Fuel.
SO2		Sulfur Dioxide.
SPP		Southwest Power Pool, a RTO.

Term		Meaning

Stall Unit		J. Lamar Stall Unit at Arsenal Hill Plant.
SWEPCo		Southwestern Electric Power Company, an AEP electric utility subsidiary.
TCC		AEP Texas Central Company, an AEP electric utility subsidiary.
Texas Restructuring Legislation		Legislation enacted in 1999 to restructure the electric utility industry in Texas.
TNC		AEP Texas North Company, an AEP electric utility subsidiary.

Transition Funding		AEP Texas Central Transition Funding I LLC and AEP Texas Central Transition Funding II LLC, wholly-owned subsidiaries of TCC and consolidated variable interest entities formed for the purpose of issuing and servicing securitization bonds related to Texas restructuring law.
True-up Proceeding		A filing made under the Texas Restructuring Legislation to finalize the amount of stranded costs and other true-up items and the recovery of such amounts.
Turk Plant		John W. Turk, Jr. Plant.
Utility Money Pool		AEP System’s Utility Money Pool is the centralized funding mechanism AEP uses to meet the short term cash requirements of pool participants.
VIE		Variable Interest Entity.
Virginia SCC		Virginia State Corporation Commission.
WPCo		Wheeling Power Company, an AEP electric utility subsidiary.
WVPSC		Public Service Commission of West Virginia.

iii

FORWARD-LOOKING INFORMATION

This report made by AEP and its Registrant Subsidiaries contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Many forward-looking statements appear in “Item 7 – Management’s Financial Discussion and Analysis” of the 2010 Annual Report, but there are others throughout this document which may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “project,” “continue” and similar expressions, and include statements reflecting future results or guidance and statements of outlook. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements in this document are presented as of the date of this document. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement. Among the factors that could cause actual results to differ materially from those in the forward-looking statements are:

·	The economic climate and growth in, or contraction within, our service territory and changes in market demand and demographic patterns.
·	Inflationary or deflationary interest rate trends.
·	Volatility in the financial markets, particularly developments affecting the availability of capital on reasonable terms and developments impairing our ability to finance new capital projects and refinance existing debt at attractive rates.
·	The availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material.
·	Electric load, customer growth and the impact of retail competition, particularly in Ohio.
·	Weather conditions, including storms, and our ability to recover significant storm restoration costs through applicable rate mechanisms.
·	Available sources and costs of, and transportation for, fuels and the creditworthiness and performance of fuel suppliers and transporters.
·	Availability of necessary generating capacity and the performance of our generating plants.
·	Our ability to resolve I&M’s Donald C. Cook Nuclear Plant Unit 1 restoration and outage-related issues through warranty, insurance and the regulatory process.
·	Our ability to recover regulatory assets and stranded costs in connection with deregulation.
·	Our ability to recover increases in fuel and other energy costs through regulated or competitive electric rates.
·	Our ability to build or acquire generating capacity, including the Turk Plant, and transmission lines and facilities (including our ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms and to recover those costs (including the costs of projects that are cancelled) through applicable rate cases or competitive rates.
·	New legislation, litigation and government regulation, including oversight of nuclear generation, energy commodity trading and new or heightened requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances or additional regulation of fly ash and similar combustion products that could impact the continued operation and cost recovery of our plants.
·	Timing and resolution of pending and future rate cases, negotiations and other regulatory decisions, including rate or other recovery of new investments in generation, distribution and transmission service and environmental compliance.
·	Resolution of litigation.
·	Our ability to constrain operation and maintenance costs.
·	Our ability to develop and execute a strategy based on a view regarding prices of electricity, natural gas and other energy-related commodities.
·	Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading market.
·	Actions of rating agencies, including changes in the ratings of debt.
·	Volatility and changes in markets for electricity, natural gas, coal, nuclear fuel and other energy-related commodities.
·	Changes in utility regulation, including the implementation of ESPs and related regulation in Ohio and the allocation of costs within regional transmission organizations, including PJM and SPP.
·	Accounting pronouncements periodically issued by accounting standard-setting bodies.

·	The impact of volatility in the capital markets on the value of the investments held by our pension, other postretirement benefit plans, captive insurance entity and nuclear decommissioning trust and the impact on future funding requirements.
·	Prices and demand for power that we generate and sell at wholesale.
·	Changes in technology, particularly with respect to new, developing or alternative sources of generation.
·	Our ability to recover through rates or prices any remaining unrecovered investment in generating units that may be retired before the end of their previously projected useful lives.
·	Evolving public perception of the risks associated with fuels used before, during and after the generation of electricity, including nuclear fuel.
·	Other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes, cyber security threats and other catastrophic events.

AEP and its Registrant Subsidiaries expressly disclaim any obligation to update any forward-looking information.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

EXECUTIVE OVERVIEW

Financial Results

Gross margins increased during the first six months of 2011 primarily due to successful rate proceedings in our various jurisdictions. While our overall weather-related margins were slightly lower than 2010, cooling degree days and heating degree days were higher than normal throughout our service territories.

Regulatory Activity

Ohio 2009 – 2011 ESPs

In April 2011, the Supreme Court of Ohio issued an opinion addressing the aspects of the PUCO's 2009 decision that were challenged resulting in three reversals, two of which may have a prospective impact through a remand proceeding. Pursuant to a May 2011 PUCO order, CSPCo and OPCo implemented rates subject to refund. Certain intervenors proposed adjustments that included a reduction of deferred FAC and other regulatory assets for the period prior to June 2011 of up to $634 million, excluding carrying costs, which management believes is without merit and violates the Supreme Court of Ohio decision. The proposed adjustments also included refunds and rate reductions of related revenues beginning in June 2011 of up to $153 million. See “Ohio Electric Security Plan Filings” section of Note 3.

Ohio January 2012 – May 2014 ESP

In January 2011, CSPCo and OPCo filed an application with the PUCO to approve a new ESP that includes a standard service offer (SSO) pricing for generation effective with the first billing cycle of January 2012 through the last billing cycle of May 2014. The SSO presents redesigned generation rates by customer class. Customer class rates vary, but on average, customers will experience base generation increases of 1.4% in 2012 and 2.7% in 2013. Under the new ESP, management estimates CSPCo and OPCo will have base generation revenue increases, excluding riders, of $17 million and $48 million, respectively, for 2012 and $46 million and $60 million, respectively, for 2013. The April 2011 decision by the Supreme Court of Ohio referenced above in connection with the 2009-2011 ESPs could impact the outcome of the January 2012-May 2014 ESP, though the nature and extent of that impact is not presently known. See “Ohio Electric Security Plan Filings” section of Note 3.

Ohio Distribution Base Rate Case

In February 2011, CSPCo and OPCo filed with the PUCO for annual increases in distribution rates of $34 million and $60 million, respectively. The requested increase is based upon an 11.15% return on common equity to be effective January 2012. In addition to the annual increases, CSPCo and OPCo requested recovery of the projected December 31, 2012 balance of certain distribution regulatory assets of $216 million and $159 million, respectively, including carrying costs, to be recovered in a requested distribution asset recovery rider over seven years with additional carrying costs, beginning January 2013. See “2011 Ohio Distribution Base Rate Case” section of Note 3.

Virginia Regulatory Activity

In March 2011, APCo filed a generation and distribution base rate request with the Virginia SCC to increase annual base rates by $126 million based upon an 11.65% return on common equity to be effective no later than February 2012. The return on common equity includes a requested 0.5% renewable portfolio standards incentive as allowed by law. APCo proposed to mitigate the requested base rate increase by $51 million by maintaining current depreciation rates until the next biennial filing. If approved, APCo’s net base rate increase would be $75 million. In July 2011, an Attorney General witness recommended an $80 million reduction in APCo’s requested rate year capacity charges. See “2011 Virginia Biennial Base Rate Case” section of Note 3.

West Virginia Regulatory Activity

In March 2011, the WVPSC modified and approved a settlement agreement which increased annual base rates by approximately $51 million based upon a 10% return on common equity. The order also resulted in a pretax write-off of a portion of the Mountaineer Carbon Capture and Storage Product Validation Facility in the first quarter of 2011. See “Mountaineer Carbon Capture and Storage” section below. In addition, the WVPSC allowed APCo to defer and amortize $18 million of previously expensed 2009 incremental storm expenses and allowed APCo and WPCo to defer and amortize $15 million of previously expensed costs related to the 2010 cost reduction initiatives, each over a period of seven years. See “2010 West Virginia Base Rate Case” section of Note 3.

Michigan Base Rate Case

In July 2011, I&M filed a request with the MPSC for an annual increase in Michigan base rates of $25 million and a return on equity of 11.15%. The request includes an increase in depreciation rates that would result in a $6 million increase in depreciation expense. I&M plans to request an interim rate increase, subject to refund, for the portion of the $25 million that excludes the depreciation rate changes and other regulatory amortizations effective in January 2012. See “2011 Michigan Base Rate Case” section of Note 3.

Turk Plant

SWEPCo is currently constructing the Turk Plant, a new base load 600 MW coal generating unit in Arkansas, which is expected to be in service in 2012. SWEPCo owns 73% (440 MW) of the Turk Plant and will operate the completed facility. SWEPCo’s share of construction costs is currently estimated to be $1.3 billion, excluding AFUDC, plus an additional $124 million for transmission, excluding AFUDC. The APSC, LPSC and PUCT approved SWEPCo’s original application to build the Turk Plant. In June 2010, the APSC issued an order which reversed and set aside the previously granted Certificate of Environmental Compatibility and Public Need. Various proceedings are pending that challenge the Turk Plant’s construction and its approved wetlands and air permits. In 2010, the motions for preliminary injunction were partially granted. According to the preliminary injunction, all uncompleted construction work associated with wetlands, streams or rivers at the Turk Plant must immediately stop. Mitigation measures required by the permit are authorized and may be completed. The preliminary injunction affects portions of the water intake and portions of two transmission lines. In July 2011, the U.S. Eighth Circuit Court of Appeals affirmed the preliminary injunction. Management is unable to predict the timing or the outcome related to this remand proceeding.

Management expects that SWEPCo will ultimately be able to complete construction of the Turk Plant and related transmission facilities and place those facilities in service. However, if SWEPCo is unable to complete the Turk Plant construction, including the related transmission facilities, and place the Turk Plant in service or if SWEPCo cannot recover all of its investment in and expenses related to the Turk Plant, it would materially reduce future net income and cash flows and materially impact financial condition. See “Turk Plant” section of Note 3.

Ohio Customer Choice

In our Ohio service territory, various competitive retail electric service (CRES) providers are targeting retail customers by offering alternative generation service. As a result, in comparison to the second quarter of 2010 and the first six months of 2010, we lost approximately $24 million and $43 million, respectively, of generation related gross margin. We anticipate recovery of a portion of lost margins through off-system sales, including PJM capacity revenues, and our CRES provider. Our CRES provider targets retail customers in Ohio, both within and outside of our retail service territory.

Cook Plant

In September 2008, I&M shut down Cook Plant Unit 1 (Unit 1) due to turbine vibrations, caused by blade failure, which resulted in a fire on the electric generator. Repair of the property damage and replacement of the turbine rotors and other equipment could cost up to approximately $408 million. Management believes that I&M should recover a significant portion of repair and replacement costs through the turbine vendor’s warranty, insurance and the regulatory process. I&M repaired Unit 1 and it resumed operations in December 2009 at slightly reduced power. The Unit 1 rotors were repaired and reinstalled due to the extensive lead time required to manufacture and install

new turbine rotors. The replacement of the repaired turbine rotors and other equipment is scheduled for the Unit 1 planned outage in the fall of 2011. If the ultimate costs of the incident are not covered by warranty, insurance or through the related regulatory process or if any future regulatory proceedings are adverse, it could reduce future net income and cash flows and impact financial condition. See “Michigan 2009 and 2010 Power Supply Cost Recovery Reconciliations” section of Note 3 and “Cook Plant Unit 1 Fire and Shutdown” section of Note 4.

As a result of the nuclear plant situation in Japan following the March 2011 earthquake, we expect the Nuclear Regulatory Commission and possibly Congress to review safety procedures and requirements for nuclear generating facilities. This review could increase procedures and testing requirements, require physical modifications to the plant and increase future operating costs at the Cook Plant. We are unable to predict the impact of potential future regulation of nuclear facilities.

Texas Restructuring Appeals

Pursuant to PUCT restructuring orders, TCC securitized net recoverable stranded generation costs of $2.5 billion and is recovering the principal and interest on the securitization bonds through the end of 2020. TCC also refunded other net true-up regulatory liabilities of $375 million during the period October 2006 through June 2008 via a CTC credit rate rider under PUCT restructuring orders. TCC and intervenors appealed the PUCT’s true-up related orders. After rulings from the Texas District Court and the Texas Court of Appeals, TCC, the PUCT and intervenors filed petitions for review with the Supreme Court of Texas. In July 2011, the Supreme Court of Texas granted review and issued its opinion. The PUCT’s order denying recovery of approximately $420 million in capacity auction true-up amounts was reversed. We estimate that, in the remand to the PUCT, TCC will be entitled to recover approximately $420 million, plus interest from January 1, 2002. See “Texas Restructuring Appeals” section of Note 3.

Mountaineer Carbon Capture and Storage

Product Validation Facility (PVF)

APCo and ALSTOM Power, Inc., an unrelated third party, jointly constructed a CO2 capture validation facility, which was placed into service in September 2009. APCo also constructed and owns the necessary facilities to store the CO2. In May 2011, the PVF ended operations and decommissioning of the facility began.

In APCo’s and WPCo’s May 2010 West Virginia base rate filing, APCo and WPCo requested rate base treatment of the PVF, including recovery of the related asset retirement obligation regulatory asset amortization and accretion. In March 2011, a WVPSC order denied the request for rate base treatment of the PVF largely due to its experimental operation. The base rate order provided that should APCo construct a commercial scale carbon capture and sequestration (CCS) facility, only the West Virginia portion of the PVF costs, based on load sharing among certain AEP operating companies, may be considered used and useful plant in service and included in future rate base. As a result, APCo recorded a pretax write-off of $41 million ($26 million net of tax) in the first quarter of 2011. As of June 30, 2011, APCo has recorded a noncurrent regulatory asset of $19 million related to the PVF. If APCo cannot recover its remaining PVF investment and related accretion expenses, it would reduce future net income and cash flows. See “Mountaineer Carbon Capture and Storage Project” section of Note 3.

Carbon Capture and Sequestration Project with the Department of Energy (DOE) (Commercial Scale Project)

During 2010, AEPSC, on behalf of APCo, began the project definition stage for the potential construction of a new commercial scale CCS facility at the Mountaineer Plant. AEPSC, on behalf of APCo, applied for and was selected to receive funding from the DOE for the project. The DOE agreed to fund 50% of allowable costs incurred for the CCS facility up to a maximum of $334 million. In July 2011, management informed the DOE that it will complete a Front-End Engineering and Design study during the third quarter of 2011, but it is postponing any further CCS project activities because of the uncertainty about the regulation of CO2. As of June 30, 2011, the project has incurred $30 million in total costs and has received $10 million of DOE eligible funding resulting in a $20 million net balance recorded in the Condensed Consolidated Balance Sheets. Requests for recovery are in process in Michigan, Ohio and Virginia. If the costs of the CCS project cannot be recovered, it would reduce future net income and cash flows. See “Mountaineer Carbon Capture and Storage Project” section of Note 3.

LITIGATION

In the ordinary course of business, we are involved in employment, commercial, environmental and regulatory litigation. Since it is difficult to predict the outcome of these proceedings, we cannot predict the eventual resolution, timing or amount of any loss, fine or penalty. We assess the probability of loss for each contingency and accrue a liability for cases that have a probable likelihood of loss if the loss can be estimated. For details on our regulatory proceedings and pending litigation see Note 4 – Rate Matters, Note 6 – Commitments, Guarantees and Contingencies and the “Litigation” section of “Management’s Financial Discussion and Analysis” in the 2010 Annual Report. Additionally, see Note 3 – Rate Matters and Note 4 – Commitments, Guarantees and Contingencies included herein. Adverse results in these proceedings have the potential to materially affect our net income.

ENVIRONMENTAL ISSUES

We are implementing a substantial capital investment program and incurring additional operational costs to comply with new environmental control requirements. We will need to make additional investments and operational changes in response to existing and anticipated requirements such as CAA requirements to reduce emissions of SO2, NOx, PM and hazardous air pollutants from fossil fuel-fired power plants, new proposals governing the beneficial use and disposal of coal combustion products and proposed clean water rules.

We are engaged in litigation about environmental issues, have been notified of potential responsibility for the clean-up of contaminated sites and incur costs for disposal of SNF and future decommissioning of our nuclear units. We are also engaged in the development of possible future requirements including the items discussed below and reductions of CO2 emissions to address concerns about global climate change. See a complete discussion of these matters in the “Environmental Issues” section of “Management’s Financial Discussion and Analysis” in the 2010 Annual Report. We will seek recovery of expenditures for pollution control technologies and associated costs from customers through rates in regulated jurisdictions. We should be able to recover these expenditures through market prices in deregulated jurisdictions. If not, the costs of environmental compliance could adversely affect future net income, cash flows and possibly financial condition.

Update to Environmental Controls Impact on the Generating Fleet

The rules and proposed environmental controls discussed in the next several sections will have a material impact on the generating units in the AEP System. We continue to evaluate the impact of these rules, project scope and technology available to achieve compliance. As of June 30, 2011, the AEP System had a total generating capacity of nearly 38,000 MWs, of which 23,900 MWs are coal-fired. In the second quarter of 2011, we refined the cost estimates of complying with these rules and other impacts of the environmental proposals on our coal-fired generating facilities. Based upon the updated estimates, investment to meet these proposed requirements ranges from approximately $6 billion to $8 billion between 2012 and 2020. These amounts include investments to convert 1,070 MWs of coal generation to 932 MWs of natural gas capacity and build approximately 1,200 MWs of natural gas-fired generation.

The cost estimates will change depending on the timing of implementation and whether the Federal EPA provides flexibility in the final rules. The cost estimates will also change based on: (a) the states’ implementation of these regulatory programs, including the potential for state implementation plans or federal implementation plans that impose standards more stringent than the proposed rules, (b) additional rulemaking activities in response to court decisions, (c) the actual performance of the pollution control technologies installed on our units, (d) changes in costs for new pollution controls, (e) new generating technology developments, (f) total MWs of capacity retired and replaced, including the type and amount of such replacement capacity and (g) other factors.

Subject to the factors listed above and based upon our current evaluation, we may retire the following plants or units of plants before 2015:

	Generating
Plant Name and Unit	Capacity
	(in MWs)
Big Sandy Plant		1,078
Clinch River Plant, Unit 3		235
Conesville Plant, Unit 3		165
Glen Lyn Plant		335
Kammer Plant		630
Kanawha River Plant		400
Muskingum River Plant, Units 1-4		840
Philip Sporn Plant		1,050
Picway Plant		100
Tanners Creek Plant, Units 1-3		495
Welsh Plant, Unit 2		528
Total		5,856

Duke Energy Corporation, the operator of W. C. Beckjord Generating Station, has announced its intent to close the facility in 2015. CSPCo owns 12.5% (54 MWs) of one unit at that station.

We are also considering the conversion of some of our coal units to natural gas, installing emission control equipment on other units and completing construction of the Turk and Dresden Plants. Recovery of the remaining investments in facilities that may be closed will be subject to regulatory approval.

Cross State Air Pollution Rule (formerly the Clean Air Act Transport Rule)

In July 2010, the Federal EPA issued a proposed rule to replace the Clean Air Interstate Rule (CAIR) that would impose new and more stringent requirements to control SO2 and NOx emissions from fossil fuel-fired electric generating units in 31 states and the District of Columbia. Each state covered by the proposed Clean Air Act Transport Rule (Transport Rule) was assigned an allowance budget for SO2 and/or NOx. Limited interstate trading was allowed on a sub-regional basis and intrastate trading was allowed among generating units. Certain of our western states (Arkansas, Oklahoma and Texas) would have been subject to only the seasonal NOx program, with new limits that were proposed to take effect in 2012. The remainder of the states in which we operate would have been subject to seasonal and annual NOx programs and an annual SO2 emissions reduction program that takes effect in two phases. The first phase was effective in 2012 and more stringent SO2 emission reductions were proposed to take effect in 2014 in certain states. The SO2 and NOx programs rely on newly-created allowances rather than relying on the CAIR NOx allowances or the Title IV Acid Rain Program allowances used in CAIR.

In July 2011, the Federal EPA released the final rule, renamed the Cross State Air Pollution Rule (CSAP Rule). Like the proposed Transport Rule, the CSAP Rule relies on newly-created SO2 and NOx allowances and individual state budgets to compel further emission reductions from electric utility generating units in 28 states. Interstate trading of allowances is allowed on a restricted sub-regional basis beginning in 2012. Arkansas, Louisiana and Oklahoma are subject only to the seasonal NOx program in the final rule. However, Texas is now subject to the annual programs for SO2 and NOx in addition to the seasonal NOx program. The annual SO2 allowance budgets in Indiana, Ohio and West Virginia have been reduced significantly in the final rule.

The time frames and stringency of the required emission reductions, coupled with the lack of robust interstate trading and the elimination of historic allowance banks, pose significant concerns for the AEP System and our electric utility customers. The compliance plan described above was based on the requirements of the proposed Transport Rule. The more stringent requirements included in the final CSAP Rule could further accelerate unit retirements, increase capital requirements, constrain operations, decrease reliability and unfavorably impact financial condition if the increased costs are not recovered in rates or market prices.

Mercury and Other Hazardous Air Pollutants (HAPs) Regulation

The Federal EPA issued the Clean Air Mercury Rule (CAMR) in 2005, setting mercury emission standards for new coal-fired power plants and requiring all states to issue new state implementation plans including mercury requirements for existing coal-fired power plants. The CAMR was vacated by the D.C. Circuit Court of Appeals in 2008. In response, the Federal EPA has been developing a rule addressing a broad range of HAPs from coal and oil-fired power plants. The Federal EPA Administrator signed a proposed HAPs rule in March 2011, but the rule has not yet been published in the Federal Register. The rule establishes unit-specific emission rates for mercury, PM (as a surrogate for particles of nonmercury metal) and hydrochloric acid (as a surrogate for acid gases) for units burning coal and oil, on a site-wide 30-day rolling average basis. In addition, the rule proposes work practice standards, such as boiler tune-ups, for controlling emissions of organic HAPs and dioxin/furans. Compliance is required within three years of the effective date of the final rule, which is expected by November 2011 per the Federal EPA’s settlement agreement with several environmental groups. A one-year extension may be available if the extension is necessary for the installation of controls. We are developing comments to submit to the Federal EPA and collecting additional information regarding the performance of our coal-fired units. Comments will be accepted for 60 days after the rule is published in the Federal Register.

We will urge the Federal EPA to carefully consider all of the options available so that costly and inefficient control requirements are not imposed regardless of unit size, age or other operating characteristics. We have older coal units for which it may be economically inefficient to install scrubbers or other environmental controls. Several of these units are included in our current list of potential plant closures discussed above.

Regional Haze

In March 2011, the Federal EPA proposed to approve in part and disapprove in part the regional haze state implementation plan (SIP) submitted by the State of Oklahoma through the Department of Environmental Quality. The Federal EPA is proposing to approve all of the NOx control measures in the SIP and disapprove the SO2 control measures for six electric generating units, including two units owned by PSO. The Federal EPA is proposing a federal implementation plan (FIP) that would require these units to install technology capable of reducing SO2 emissions to 0.06 pounds per million British thermal units within three years of the effective date of the FIP. The proposal is open for public comment.

Coal Combustion Residual Rule

In June 2010, the Federal EPA published a proposed rule to regulate the disposal and beneficial re-use of coal combustion residuals, including fly ash and bottom ash generated at our coal-fired electric generating units. The rule contains two alternative proposals. One proposal would impose federal hazardous waste disposal and management standards on these materials and another would allow states to retain primary authority to regulate the beneficial re-use and disposal of these materials under state solid waste management standards, including minimum federal standards for disposal and management. Both proposals would impose stringent requirements for the construction of new coal ash landfills and would require existing unlined surface impoundments to upgrade to the new standards or stop receiving coal ash and initiate closure within five years of the issuance of a final rule.

Currently, approximately 40% of the coal ash and other residual products from our generating facilities are re-used in the production of cement and wallboard, as structural fill or soil amendments, as abrasives or road treatment materials and for other beneficial uses. Certain of these uses would no longer be available and others are likely to significantly decline if coal ash and related materials are classified as hazardous wastes. In addition, we currently use surface impoundments and landfills to manage these materials at our generating facilities and will incur significant costs to upgrade or close and replace these existing facilities. We estimate that the potential compliance costs associated with the proposed solid waste management alternative could be as high as $3.9 billion including AFUDC for units across the AEP System. Regulation of these materials as hazardous wastes would significantly increase these costs.

Clean Water Act Regulations

In April 2011, the Federal EPA issued a proposed rule setting forth standards for existing power plants that will reduce mortality of aquatic organisms pinned against a plant’s cooling water intake screen (impingement) or entrained in the cooling water. Entrainment is when small fish, eggs or larvae are drawn into the cooling water system and affected by heat, chemicals or physical stress. The proposed standards affect all plants withdrawing more than two million gallons of cooling water per day and establish specific intake design and intake velocity standards meant to allow fish to avoid or escape impingement. Compliance with this standard is required within eight years of the effective date of the final rule. The proposed standard for entrainment for existing facilities requires a site-specific evaluation of the available measures for reducing entrainment. The proposed entrainment standard for new units at existing facilities requires either intake flows commensurate with closed cycle cooling or achieving entrainment reductions equivalent to 90% or greater of the reductions that could be achieved with closed cycle cooling. Plants withdrawing more than 125 million gallons of cooling water per day must submit a detailed technology study to be reviewed by the state permitting authority. We are evaluating the proposal and engaged in the collection of additional information regarding the feasibility of implementing this proposal at our facilities. Comments on the proposal were due in July 2011.

Global Warming

While comprehensive economy-wide regulation of CO2 emissions might be mandated through new legislation, Congress has yet to enact such legislation. The Federal EPA continues to take action to regulate CO2 emissions under the existing requirements of the CAA. The Federal EPA issued a final endangerment finding for CO2 emissions from new motor vehicles in December 2009 and final rules for new motor vehicles in May 2010. The Federal EPA determined that CO2 emissions from stationary sources will be subject to regulation under the CAA and finalized its proposed scheme to streamline and phase in regulation of stationary source CO2 emissions through the NSR prevention of significant deterioration and Title V operating permit programs through the issuance of final federal rules, state implementation plan calls and federal implementation plans. The Federal EPA is reconsidering whether to include CO2 emissions in a number of stationary source standards, including standards that apply to new and modified electric utility units and announced a settlement agreement to issue proposed new source performance standards for utility boilers that would be applicable for both new and existing utility boilers. It is not possible at this time to estimate the costs of compliance with these new standards, but they may be material.

Our fossil fuel-fired generating units are very large sources of CO2 emissions. If substantial CO2 emission reductions are required, there will be significant increases in capital expenditures and operating costs which would impact the ultimate retirement of older, less-efficient, coal-fired units. To the extent we install additional controls on our generating plants to limit CO2 emissions and receive regulatory approvals to increase our rates, cost recovery could have a positive effect on future earnings. Prudently incurred capital investments made by our subsidiaries in rate-regulated jurisdictions to comply with legal requirements and benefit customers are generally included in rate base for recovery and earn a return on investment. We would expect these principles to apply to investments made to address new environmental requirements. However, requests for rate increases reflecting these costs can affect us adversely because our regulators could limit the amount or timing of increased costs that we would recover through higher rates. In addition, to the extent our costs are relatively higher than our competitors’ costs, such as operators of nuclear and natural gas based generation, it could reduce our off-system sales or cause us to lose customers in jurisdictions that permit customers to choose their supplier of generation service.

Several states have adopted programs that directly regulate CO2 emissions from power plants, but none of these programs are currently in effect in states where we have generating facilities. Certain states, including Ohio, Michigan, Texas and Virginia, passed legislation establishing renewable energy, alternative energy and/or energy efficiency requirements. We are taking steps to comply with these requirements.

Certain groups have filed lawsuits alleging that emissions of CO2 are a “public nuisance” and seeking injunctive relief and/or damages from small groups of coal-fired electricity generators, petroleum refiners and marketers, coal companies and others. We have been named in pending lawsuits, which we are vigorously defending. It is not possible to predict the outcome of these lawsuits or their impact on our operations or financial condition. See “Carbon Dioxide Public Nuisance Claims” and “Alaskan Villages’ Claims” sections of Note 4.

Future federal and state legislation or regulations that mandate limits on the emission of CO2 would result in significant increases in capital expenditures and operating costs, which in turn, could lead to increased liquidity needs and higher financing costs. Excessive costs to comply with future legislation or regulations might force our utility subsidiaries to close some coal-fired facilities and could lead to possible impairment of assets. As a result, mandatory limits could have a material adverse impact on our net income, cash flows and financial condition.

For detailed information on global warming and the actions we are taking to address potential impacts, see Part I of the 2010 Form 10-K under the headings entitled “Business – General – Environmental and Other Matters – Global Warming” and “Management’s Financial Discussion and Analysis.”

RESULTS OF OPERATIONS

SEGMENTS

Our reportable segments and their related business activities are as follows:

Utility Operations

	·	Generation of electricity for sale to U.S. retail and wholesale customers.
	·	Electricity transmission and distribution in the U.S.

AEP River Operations

Commercial barging operations that transport coal and dry bulk commodities primarily on the Ohio, Illinois and lower Mississippi Rivers.

Generation and Marketing

Wind farms and marketing and risk management activities primarily in ERCOT and, to a lesser extent, Ohio in PJM and MISO.

The table below presents our consolidated Net Income (Loss) by segment for the three and six months ended June 30, 2011 and 2010.

	Three Months Ended June 30,								Six Months Ended June 30,
	2011				2010				2011				2010
	(in millions)
Utility Operations		$	356			$	132			$	734			$	476
AEP River Operations			(1	)			(1	)			6				2
Generation and Marketing			11				7				12				17
All Other (a)			(13	)			(1	)			(44	)			(12	)
Net Income		$	353			$	137			$	708			$	483

(a)	While not considered a business segment, All Other includes:
	·	Parent’s guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.
	·	Forward natural gas contracts that were not sold with our natural gas pipeline and storage operations in 2004 and 2005. These contracts are financial derivatives which settle and expire in the fourth quarter of 2011.
	·	Revenue sharing related to the Plaquemine Cogeneration Facility which ends in the fourth quarter of 2011.

AEP CONSOLIDATED

Second Quarter of 2011 Compared to Second Quarter of 2010

Net Income increased from $137 million in 2010 to $353 million in 2011 primarily due to $185 million of expenses (net of tax) recorded in the second quarter of 2010 related to the cost reduction initiatives.

Average basic shares outstanding increased from 479 million in 2010 to 482 million in 2011.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net Income increased from $483 million in 2010 to $708 million in 2011 primarily due to $185 million of expenses (net of tax) recorded in the second quarter of 2010 related to the cost reduction initiatives.

Average basic shares outstanding increased from 479 million in 2010 to 482 million in 2011. Actual shares outstanding were 482 million as of June 30, 2011.

Our results of operations are discussed below by operating segment.

UTILITY OPERATIONS

We believe that a discussion of the results from our Utility Operations segment on a gross margin basis is most appropriate in order to further understand the key drivers of the segment. Gross margin represents total revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances and purchased power.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(in millions)
Revenues	$	3,389	$	3,211	$	6,913	$	6,637
Fuel and Purchased Power		1,230		1,110		2,527		2,357
Gross Margin		2,159		2,101		4,386		4,280
Depreciation and Amortization		398		394		791		792
Other Operating Expenses		1,053		1,314		2,113		2,354
Operating Income		708		393		1,482		1,134
Other Income, Net		48		42		91		85
Interest Expense		227		237		459		472
Income Tax Expense		173		66		380		271
Net Income	$	356	$	132	$	734	$	476

Summary of KWH Energy Sales for Utility Operations

	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2011	2010		2011	2010
	(in millions of KWH)
Retail:
Residential	13,503		12,659	30,452	30,433
Commercial	12,913		13,002	24,559	24,476
Industrial	15,153		14,662	29,482	28,044
Miscellaneous	777		783	1,500	1,495
Total Retail (a)	42,346		41,106	85,993	84,448

Wholesale	10,216		7,019	19,367	15,156

Total KWHs	52,562		48,125	105,360	99,604

(a) Includes energy delivered to customers served by AEP's Texas wires companies.

Cooling degree days and heating degree days are metrics commonly used in the utility industry as a measure of the impact of weather on net income. In general, degree day changes in our eastern region have a larger effect on net income than changes in our western region due to the relative size of the two regions and the number of customers within each region.

Summary of Heating and Cooling Degree Days for Utility Operations

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2011		2010		2011		2010
		(in degree days)
Eastern Region
Actual - Heating (a)			134		75		1,989		1,975
Normal - Heating (b)			168		170		1,907		1,911

Actual - Cooling (c)			368		434		371		434
Normal - Cooling (b)			295		289		299		293

Western Region
Actual - Heating (a)			10		5		702		764
Normal - Heating (b)			21		21		600		595

Actual - Cooling (d)			1,035		866		1,144		886
Normal - Cooling (b)			762		757		820		815

(a)	Eastern Region and Western Region heating degree days are calculated on a 55 degree temperature base.
(b)	Normal Heating/Cooling represents the thirty-year average of degree days.
(c)	Eastern Region cooling degree days are calculated on a 65 degree temperature base.
(d)	Western Region cooling degree days are calculated on a 65 degree temperature base for PSO/SWEPCo and a 70 degree temperature base for TCC/TNC.

Second Quarter of 2011 Compared to Second Quarter of 2010

Reconciliation of Second Quarter of 2010 to Second Quarter of 2011
Net Income from Utility Operations
(in millions)

Second Quarter of 2010	$	132

Changes in Gross Margin:
Retail Margins		-
Off-system Sales		37
Transmission Revenues		13
Other Revenues		8
Total Change in Gross Margin		58

Changes in Expenses and Other:
Other Operation and Maintenance		258
Depreciation and Amortization		(4	)
Taxes Other Than Income Taxes		3
Interest and Investment Income		(1	)
Carrying Costs Income		(2	)
Allowance for Equity Funds Used During Construction		4
Interest Expense		10
Equity Earnings of Unconsolidated Subsidiaries		5
Total Change in Expenses and Other		273

Income Tax Expense		(107	)

Second Quarter of 2011	$	356

The major components of the increase in Gross Margin, defined as revenues less the related direct cost of fuel, including consumption of chemicals and emissions allowances, and purchased power were as follows:

·	Retail Margins were unchanged primarily due to the following:
	·	Successful rate proceedings in our service territories which include:
		·	A $27 million rate increase for APCo.
		·	An $18 million rate increase for KPCo.
		·	A $7 million rate increase for SWEPCo.
		·	A $6 million rate increase in Ohio.
		·	A $6 million rate increase for I&M.
	·	An $18 million increase in weather-related usage in our western region primarily due to a 20% increase in cooling degree days.
	These increases were partially offset by:
	·	A $24 million decrease attributable to Ohio customers switching to alternative competitive retail electric service (CRES) providers.
	·	A $21 million decrease due to the expiration of E&R cost recovery in Virginia.
	·	A $20 million increase in other variable electric generation expenses.
	·	A $13 million decrease in weather-related usage in our eastern region primarily due to a 15% decrease in cooling degree days.
·	Margins from Off-system Sales increased $37 million primarily due to an increase in PJM capacity revenues and higher physical sales volumes.
·	Transmission Revenues increased $13 million primarily due to net rate increases in PJM.
·	Other Revenues increased $8 million primarily due to higher amortization of deferred gains.

Expenses and Other and Income Tax Expense changed between years as follows:

·	Other Operation and Maintenance expenses decreased $258 million primarily due to:
	·	A $278 million decrease due to expenses related to the cost reduction initiatives recorded in the second quarter of 2010.
	·	A $54 million decrease due to the second quarter 2010 write-off of APCo’s Virginia share of the Mountaineer Carbon Capture and Storage Product Validation Facility as denied for recovery by the Virginia SCC.
	·	A $6 million decrease in administrative and general expenses primarily due to a decrease in fringe benefit expenses.
	These decreases were partially offset by:
	·	A $27 million increase in storm-related expenses.
	·	A $25 million increase due to the second quarter 2010 deferral of 2009 storm costs as allowed by the Virginia SCC.
	·	A $17 million increase in demand side management expenses, energy efficiency program expenses and other expenses currently recovered dollar-for-dollar in rate recovery riders/trackers within Gross Margin.
	·	A $15 million increase in plant operating and maintenance expenses.
·	Depreciation and Amortization expenses increased $4 million primarily due to higher depreciable property balances partially offset by lower amortization due to the expiration of E&R amortization of deferred carrying costs in Virginia.
·	Taxes Other Than Income Taxes decreased $3 million primarily due to the employer portion of payroll taxes recorded in the second quarter of 2010 related to the cost reduction initiatives, partially offset by higher property taxes in 2011.
·	Allowance for Equity Funds Used During Construction increased $4 million primarily due to construction of the Dresden Plant and various environmental upgrades.
·	Interest Expense decreased $10 million primarily due to a decrease in long-term debt.
·	Equity Earnings of Unconsolidated Subsidiaries increased $5 million primarily due to an increase in transmission investments for ETT.
·	Income Tax Expense increased $107 million primarily due to an increase in pretax book income.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Reconciliation of Six Months Ended June 30, 2010 to Six Months Ended June 30, 2011
Net Income from Utility Operations
(in millions)

Six Months Ended June 30, 2010	$	476

Changes in Gross Margin:
Retail Margins		26
Off-system Sales		49
Transmission Revenues		21
Other Revenues		10
Total Change in Gross Margin		106

Changes in Expenses and Other:
Other Operation and Maintenance		244
Depreciation and Amortization		1
Taxes Other Than Income Taxes		(3)
Interest and Investment Income		(1)
Carrying Costs Income		(1)
Interest Expense		13
Equity Earnings of Unconsolidated Subsidiaries		8
Total Change in Expenses and Other		261

Income Tax Expense		(109)

Six Months Ended June 30, 2011	$	734

·	Retail Margins increased $26 million primarily due to the following:
	·	Successful rate proceedings in our service territories which include:
		·	A $41 million rate increase in Ohio.
		·	A $36 million rate increase for KPCo.
		·	A $27 million rate increase for APCo.
		·	A $20 million rate increase for SWEPCo.
		·	A $15 million rate increase for I&M.
		·	A $9 million net rate increase in our other jurisdictions.
	·	A $12 million increase in weather-related usage in our western region primarily due to a 29% increase in cooling degree days.
	These increases were partially offset by:
	·	A $43 million decrease attributable to Ohio customers switching to alternative CRES providers.
	·	A $37 million decrease in rate related margins for APCo due to the expiration of E&R cost recovery in Virginia.
	·	A $27 million decrease in weather-related usage in our eastern region primarily due to a 15% decrease in cooling degree days.
	·	An $8 million increase in other variable electric generation expenses.
·	Margins from Off-system Sales increased $49 million primarily due to an increase in PJM capacity revenues and higher physical sales volumes.
·	Transmission Revenues increased $21 million primarily due to net rate increases in PJM.
·	Other Revenues increased $10 million primarily due to higher amortization of deferred gains.

Expenses and Other and Income Tax Expense changed between years as follows:

·	Other Operation and Maintenance expenses decreased $244 million primarily due to the following:
	·	A $278 million decrease due to expenses related to the cost reduction initiatives recorded in the second quarter of 2010.
	·	A $54 million decrease due to the second quarter 2010 write-off of APCo’s Virginia share of the Mountaineer Carbon Capture and Storage Product Validation Facility as denied for recovery by the Virginia SCC.
	·	A $33 million decrease due to the first quarter 2011 deferral of 2010 costs related to storms and our cost reduction initiatives as allowed by the WVPSC.
	·	A $24 million decrease in administrative and general expenses primarily due to a decrease in fringe benefit expenses.
	·	An $11 million gain on the sale of land.
	These decreases were partially offset by:
	·	A $44 million increase in demand side management, energy efficiency programs and other expenses currently recovered dollar-for-dollar in rate recovery riders/trackers within Gross Margin.
	·	A $41 million increase due to the first quarter 2011 write-off of a portion of the Mountaineer Carbon Capture and Storage Product Validation Facility as denied for recovery by the WVPSC.
	·	A $29 million increase in storm-related expenses.
	·	A $26 million increase in plant outage and other plant operating and maintenance expenses.
	·	A $25 million increase due to the second quarter 2010 deferral of 2009 storm costs as allowed by the Virginia SCC.
·	Depreciation and Amortization expenses decreased $1 million due to the expiration of E&R amortization of deferred carrying costs in Virginia partially offset by higher depreciable property balances.
·	Taxes Other Than Income Taxes increased $3 million primarily due to higher property taxes in 2011 partially offset by the employer portion of payroll taxes recorded in the second quarter of 2010 related to the cost reduction initiatives.
·	Interest Expense decreased $13 million primarily due to a decrease in long-term debt.
·	Equity Earnings of Unconsolidated Subsidiaries increased $8 million primarily due to an increase in transmission investments for ETT.
·	Income Tax Expense increased $109 million primarily due to an increase in pretax book income, partially offset by the 2010 tax treatment associated with the future reimbursement of Medicare Part D retiree prescription drug benefits.

AEP RIVER OPERATIONS

Second Quarter of 2011 Compared to Second Quarter of 2010

Net Income from our AEP River Operations segment was unchanged from 2010 to 2011. AEP River had increases in revenues related to higher grain and coal exports and increased barge fleet size offset by increases in expenses related to higher fuel, maintenance and flood-related costs.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net Income from our AEP River Operations segment increased from $2 million in 2010 to $6 million in 2011 primarily due to higher grain and coal exports, increased barge fleet size and the cost reduction initiatives recorded in the second quarter of 2010 partially offset by higher fuel, maintenance and flood-related costs.

GENERATION AND MARKETING

Second Quarter of 2011 Compared to Second Quarter of 2010

Net Income from our Generation and Marketing segment increased from $7 million in 2010 to $11 million in 2011 primarily due to increased inception gains from ERCOT marketing activities and increased income from our wind farm operations partially offset by lower gross margins at the Oklaunion Plant.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net Income from our Generation and Marketing segment decreased from $17 million in 2010 to $12 million in 2011 primarily due to lower gross margins at the Oklaunion Plant partially offset by increased income from our wind farm operations.

ALL OTHER

Second Quarter of 2011 Compared to Second Quarter of 2010

Net Income from All Other decreased from a loss of $1 million in 2010 to a loss of $13 million in 2011 primarily due to $16 million in pretax gains ($10 million, net of tax) on the sale of our remaining 138,000 shares of Intercontinental Exchange, Inc. (ICE) in the second quarter of 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net Income from All Other decreased from a loss of $12 million in 2010 to a loss of $44 million in 2011 due to a $22 million net of tax loss incurred in the first quarter 2011 settlement of litigation with BOA and Enron and a $16 million pretax gain ($10 million, net of tax) on the sale of our remaining 138,000 shares of ICE in the second quarter of 2010.

AEP SYSTEM INCOME TAXES

Second Quarter of 2011 Compared to Second Quarter of 2010

Income Tax Expense increased $109 million in comparison to 2010 primarily due to an increase in pretax book income.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Income Tax Expense increased $180 million in comparison to 2010 primarily due to an increase in pretax book income and the unrealized capital loss valuation allowance related to a deferred tax asset associated with the settlement of litigation with BOA and Enron, offset in part by the 2010 tax treatment associated with the future reimbursement of Medicare Part D retiree prescription drug benefits.

FINANCIAL CONDITION

We measure our financial condition by the strength of our balance sheet and the liquidity provided by our cash flows. Target debt to equity ratios are included in our credit arrangements as covenants that must be met for borrowing to continue.

LIQUIDITY AND CAPITAL RESOURCES

Debt and Equity Capitalization

	June 30, 2011				December 31, 2010
	(dollars in millions)
Long-term Debt, including amounts due within one year	$	16,635	51.5	%	$	16,811	52.8	%
Short-term Debt		1,639	5.1			1,346	4.2
Total Debt		18,274	56.6			18,157	57.0
Preferred Stock of Subsidiaries		60	0.2			60	0.2
AEP Common Equity		13,939	43.2			13,622	42.8

Total Debt and Equity Capitalization	$	32,273	100.0	%	$	31,839	100.0	%

Our ratio of debt-to-total capital decreased from 57% at December 31, 2010 to 56.6% at June 30, 2011.

Liquidity

Liquidity, or access to cash, is an important factor in determining our financial stability. We believe we have adequate liquidity under our existing credit facilities. At June 30, 2011, we had $3 billion in aggregate credit facility commitments to support our operations. Additional liquidity is available from cash from operations and a receivables securitization agreement. We are committed to maintaining adequate liquidity. We generally use short-term borrowings to fund working capital needs, property acquisitions and construction until long-term funding is arranged. Sources of long-term funding include issuance of long-term debt, sale-leaseback or leasing agreements or common stock.

Credit Facilities

We manage our liquidity by maintaining adequate external financing commitments. At June 30, 2011, our available liquidity was approximately $2.3 billion as illustrated in the table below:

		Amount		Maturity
		(in millions)
Commercial Paper Backup:
	Revolving Credit Facility	$	1,454	April 2012
	Revolving Credit Facility		1,500	June 2013
Total			2,954
Cash and Cash Equivalents			417
Total Liquidity Sources			3,371
Less:	AEP Commercial Paper Outstanding		944
	Letters of Credit Issued		132

Net Available Liquidity		$	2,295

We have credit facilities totaling $3 billion to support our commercial paper program. The credit facilities allow us to issue letters of credit in an amount up to $1.35 billion. In July 2011, we replaced the $1.5 billion facility due in 2012 with a new $1.75 billion facility maturing in July 2016 and extended the $1.5 billion facility due in 2013 to expire in June 2015.

In March 2011, we terminated a $478 million credit facility, used for letters of credit to support variable rate debt, that was scheduled to mature in April 2011. In March 2011, we issued bilateral letters of credit to support the remarketing of $357 million of the variable rate debt and reacquired $115 million which are held by a trustee on our behalf.

We use our commercial paper program to meet the short-term borrowing needs of our subsidiaries. The program is used to fund both a Utility Money Pool, which funds the utility subsidiaries, and a Nonutility Money Pool, which funds the majority of the nonutility subsidiaries. In addition, the program also funds, as direct borrowers, the short-term debt requirements of other subsidiaries that are not participants in either money pool for regulatory or operational reasons. The maximum amount of commercial paper outstanding during the first six months of 2011 was $1.2 billion. The weighted-average interest rate for our commercial paper during 2011 was 0.38%.

Securitized Accounts Receivables

In July 2011, we renewed our receivables securitization agreement. The agreement provides a commitment of $750 million from bank conduits to purchase receivables with an increase to $800 million for the months of July, August and September to accommodate seasonal demand. A commitment of $375 million with the seasonal increase to $425 million for the months of July, August and September expires in June 2012 and the remaining commitment of $375 million expires in June 2014.

Debt Covenants and Borrowing Limitations

Our revolving credit agreements contain certain covenants and require us to maintain our percentage of debt to total capitalization at a level that does not exceed 67.5%. The method for calculating our outstanding debt and capitalization is contractually defined in our revolving credit agreements. Debt as defined in the revolving credit agreements excludes junior subordinated debentures, securitization bonds and debt of AEP Credit. At June 30, 2011, this contractually-defined percentage was 52.3%. Nonperformance under these covenants could result in an event of default under these credit agreements. At June 30, 2011, we complied with all of the covenants contained in these credit agreements. In addition, the acceleration of our payment obligations, or the obligations of certain of our major subsidiaries, prior to maturity under any other agreement or instrument relating to debt outstanding in excess of $50 million, would cause an event of default under these credit agreements and in a majority of our non-exchange traded commodity contracts which would permit the lenders and counterparties to declare the outstanding amounts payable. However, a default under our non-exchange traded commodity contracts does not cause an event of default under our revolving credit agreements.

The revolving credit facilities do not permit the lenders to refuse a draw on either facility if a material adverse change occurs.

Utility Money Pool borrowings and external borrowings may not exceed amounts authorized by regulatory orders. At June 30, 2011, we had not exceeded those authorized limits.

Dividend Policy and Restrictions

The Board of Directors declared a quarterly dividend of $0.46 per share in July 2011. Future dividends may vary depending upon our profit levels, operating cash flow levels and capital requirements, as well as financial and other business conditions existing at the time. AEP’s income derives from our common stock equity in the earnings of our utility subsidiaries. Various charter provisions and regulatory requirements may impose certain restrictions on the ability of our utility subsidiaries to transfer funds to us in the form of dividends.

We have the option to defer interest payments on the AEP Junior Subordinated Debentures for one or more periods of up to 10 consecutive years per period. During any period in which we defer interest payments, we may not declare or pay any dividends or distributions on, or redeem, repurchase or acquire, our common stock.

We do not believe restrictions related to our various charter provisions and regulatory requirements will have any significant impact on Parent’s ability to access cash to meet the payment of dividends on its common stock.

Credit Ratings

We do not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit downgrade, but our access to the commercial paper market may depend on our credit ratings. In addition, downgrades in our credit ratings by one of the rating agencies could increase our borrowing costs. Counterparty concerns about the credit quality of AEP or its utility subsidiaries could subject us to additional collateral demands under adequate assurance clauses under our derivative and non-derivative energy contracts.

CASH FLOW

Managing our cash flows is a major factor in maintaining our liquidity strength.

	Six Months Ended
	June 30,
	2011				2010
	(in millions)
Cash and Cash Equivalents at Beginning of Period		$	294			$	490
Net Cash Flows from Operating Activities			1,732				582
Net Cash Flows Used for Investing Activities			(1,280	)			(992	)
Net Cash Flows from (Used for) Financing Activities			(329	)			758
Net Increase in Cash and Cash Equivalents			123				348
Cash and Cash Equivalents at End of Period		$	417			$	838

Cash from operations and short-term borrowings provides working capital and allows us to meet other short-term cash needs.

Operating Activities

	Six Months Ended
	June 30,
	2011			2010
	(in millions)
Net Income		$	708		$	483
Depreciation and Amortization			813			813
Other			211			(714	)
Net Cash Flows from Operating Activities		$	1,732		$	582

Net Cash Flows from Operating Activities were $1.7 billion in 2011 consisting primarily of Net Income of $708 million and $813 million of noncash Depreciation and Amortization. Other changes represent items that had a current period cash flow impact, such as changes in working capital, as well as items that represent future rights or obligations to receive or pay cash, such as regulatory assets and liabilities. Significant changes in other items include the favorable impact of a decrease in fuel inventory and the unfavorable impact of reducing accounts payable and adjusting accrued taxes for a net operating loss and tax credit carryforward. Deferred Income Taxes increased primarily due to provisions in the Small Business Jobs Act and the Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act, the settlement with BOA and Enron and an increase in tax versus book temporary differences from operations. In February 2011, we paid $425 million to BOA of which $211 million was used to settle litigation with BOA and Enron. The remaining $214 million was used to acquire cushion gas as discussed in Investing Activities below.

Net Cash Flows from Operating Activities were $582 million in 2010 consisting primarily of Net Income of $483 million and $813 million of noncash Depreciation and Amortization. Other includes a $656 million increase in securitized receivables under the application of new accounting guidance for “Transfers and Servicing” related to our sale of receivables agreement. Other changes represent items that had a current period cash flow impact, such as changes in working capital, as well as items that represent future rights or obligations to receive or pay cash, such as regulatory assets and liabilities. Significant changes in other items include an increase in under-recovered fuel primarily due to the deferral of fuel under the FAC in Ohio and higher fuel costs in Oklahoma, accrued tax benefits and the favorable impact of a decrease in fuel inventory. Deferred Income Taxes increased primarily due to the American Recovery and Reinvestment Act of 2009 extending bonus depreciation provisions, a change in tax accounting method and an increase in tax versus book temporary differences from operations.

Investing Activities

	Six Months Ended
	June 30,
	2011				2010
	(in millions)
Construction Expenditures		$	(1,113	)		$	(1,104	)
Acquisitions of Nuclear Fuel			(93	)			(41	)
Acquisition of Cushion Gas from BOA			(214	)			-
Proceeds from Sales of Assets			94				147
Other			46				6
Net Cash Flows Used for Investing Activities		$	(1,280	)		$	(992	)

Net Cash Flows Used for Investing Activities were $1.3 billion in 2011 primarily due to Construction Expenditures for new generation, environmental, distribution and transmission investments. We paid $214 million to BOA for cushion gas as part of a litigation settlement.

Net Cash Flows Used for Investing Activities were $992 million in 2010 primarily due to Construction Expenditures for our new generation, environmental and distribution investments. Proceeds from Sales of Assets in 2010 include $135 million for sales of transmission assets in Texas to ETT.

Financing Activities

	Six Months Ended
	June 30,
	2011				2010
	(in millions)
Issuance of Common Stock, Net		$	49			$	42
Issuance/Retirement of Debt, Net			104				1,166
Dividends Paid on Common Stock			(446	)			(399	)
Other			(36	)			(51	)
Net Cash Flows from (Used for) Financing Activities		$	(329	)		$	758

Net Cash Flows Used for Financing Activities in 2011 were $329 million. Our net debt issuances were $104 million. The net issuances included issuances of $600 million of senior unsecured notes, $481 million of pollution control bonds and an increase in short-term borrowing of $293 million offset by retirements of $578 million of senior unsecured and debt notes, $591 million of pollution control bonds and $92 million of securitization bonds. We paid common stock dividends of $446 million. See Note 11 – Financing Activities for a complete discussion of long-term debt issuances and retirements.

Net Cash Flows from Financing Activities were $758 million in 2010. Our net debt issuances were $1.2 billion. The net issuances included issuances of $884 million of notes, $287 million of pollution control bonds and a $668 million increase in commercial paper outstanding partially offset by retirements of $1 billion of senior unsecured notes, $86 million of securitization bonds and $183 million of pollution control bonds. Our short-term debt securitized by receivables increased $656 million under the application of new accounting guidance for “Transfers and Servicing” related to our sale of receivables agreement. We paid common stock dividends of $399 million.

In July 2011, AEGCo remarketed $45 million of variable rate Pollution Control Bonds which may be tendered for purchase at the option of the holder. The Pollution Control Bonds are supported by letters of credit which expire in 2014.

In July 2011, I&M retired $2 million of Notes Payable related to DCC Fuel.

In July 2011, SWEPCo retired $41 million of 4.5% Pollution Control Bonds due in 2011.

OFF-BALANCE SHEET ARRANGEMENTS

In prior periods, under a limited set of circumstances, we entered into off-balance sheet arrangements for various reasons including reducing operational expenses and spreading risk of loss to third parties. Our current policy restricts the use of off-balance sheet financing entities or structures to traditional operating lease arrangements that we enter in the normal course of business. The following identifies significant off-balance sheet arrangements:

	June 30,		December 31,
	2011		2010
	(in millions)
Rockport Plant Unit 2 Future Minimum Lease Payments	$	1,700	$	1,774
Railcars Maximum Potential Loss From Lease Agreement		25		25

For complete information on each of these off-balance sheet arrangements see the “Off-balance Sheet Arrangements” section of “Management’s Financial Discussion and Analysis” in the 2010 Annual Report.

CONTRACTUAL OBLIGATION INFORMATION

A summary of our contractual obligations is included in our 2010 Annual Report and has not changed significantly from year-end other than the debt issuances and retirements discussed in the “Cash Flow” section above.

MINE SAFETY INFORMATION

The Federal Mine Safety and Health Act of 1977 (Mine Act) imposes stringent health and safety standards on various mining operations. The Mine Act and its related regulations affect numerous aspects of mining operations, including training of mine personnel, mining procedures, equipment used in mine emergency procedures, mine plans and other matters. SWEPCo, through its ownership of DHLC, CSPCo, through its ownership of Conesville Coal Preparation Company (CCPC), and OPCo, through its use of the Conner Run fly ash impoundment, are subject to the provisions of the Mine Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires companies that operate mines to include in their periodic reports filed with the SEC, certain mine safety information covered by the Mine Act. DHLC, CCPC and Conner Run received the following notices of violation and proposed assessments under the Mine Act for the quarter ended June 30, 2011:

		DHLC		CCPC		Conner Run
Number of Citations for Violations of Mandatory Health or
	Safety Standards under 104 *		-		-		-
Number of Orders Issued under 104(b) *			-		-		-
Number of Citations and Orders for Unwarrantable Failure
	to Comply with Mandatory Health or Safety Standards under 104(d) *		-		-		-
Number of Flagrant Violations under 110(b)(2) *			-		-		-
Number of Imminent Danger Orders Issued under 107(a) *			-		-		-
Total Dollar Value of Proposed Assessments		$	1,123	$	400	$	-
Number of Mining-related Fatalities			-		-		-

* References to sections under the Mine Act

DHLC currently has three legal actions pending before the Federal Mine Safety and Health Review Commission. Two are related to actions challenging four violations issued by Mine Safety and Health Administration following an employee fatality in March 2009 and the third legal action is challenging a citation issued in August 2010 related to a dragline boom issue.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES, NEW ACCOUNTING PRONOUNCEMENTS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See the “Critical Accounting Policies and Estimates” section of “Management’s Financial Discussion and Analysis” in the 2010 Annual Report for a discussion of the estimates and judgments required for regulatory accounting, revenue recognition, the valuation of long-lived assets, the accounting for pension and other postretirement benefits and the impact of new accounting pronouncements.

NEW ACCOUNTING PRONOUNCEMENTS

Pronouncements Effective in the Future

The FASB issued ASU 2011-05 “Presentation of Comprehensive Income” eliminating the option to present the components of other comprehensive income as a part of the statement of shareholders’ equity. The standard requires other comprehensive income be presented as part of a single continuous statement of comprehensive income or in a statement of other comprehensive income immediately following the statement of net income. This standard will change the presentation of our financial statements but will not affect the calculation of net income, comprehensive income or earnings per share. We will retrospectively adopt ASU 2011-05 effective January 1, 2012.

Future Accounting Changes

The FASB’s standard-setting process is ongoing and until new standards have been finalized and issued, we cannot determine the impact on the reporting of our operations and financial position that may result from any such future changes. The FASB is currently working on several projects including revenue recognition, financial statements, contingencies, financial instruments, emission allowances, leases, insurance, hedge accounting, consolidation policy and discontinued operations. We also expect to see more FASB projects as a result of its desire to converge International Accounting Standards with GAAP. The ultimate pronouncements resulting from these and future projects could have an impact on our future net income and financial position.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

Our Utility Operations segment is exposed to certain market risks as a major power producer and through its transactions in wholesale electricity, coal and emission allowance trading and marketing contracts. These risks include commodity price risk, interest rate risk and credit risk. In addition, we are exposed to foreign currency exchange risk because occasionally we procure various services and materials used in our energy business from foreign suppliers. These risks represent the risk of loss that may impact us due to changes in the underlying market prices or rates.

Our Generation and Marketing segment, operating primarily within ERCOT and, to a lesser extent, Ohio in PJM and MISO, primarily transacts in wholesale energy marketing contracts. This segment is exposed to certain market risks as a marketer of wholesale electricity. These risks include commodity price risk, interest rate risk and credit risk. These risks represent the risk of loss that may impact us due to changes in the underlying market prices or rates.

All Other includes natural gas operations which holds forward natural gas contracts that were not sold with the natural gas pipeline and storage assets. These contracts are financial derivatives, which settle and expire in the fourth quarter of 2011. Our risk objective is to keep these positions generally risk neutral through maturity.

We employ risk management contracts including physical forward purchase and sale contracts and financial forward purchase and sale contracts. We engage in risk management of power, coal and natural gas and, to a lesser degree, heating oil and gasoline, emission allowance and other commodity contracts to manage the risk associated with our energy business. As a result, we are subject to price risk. The amount of risk taken is determined by the commercial operations group in accordance with the market risk policy approved by the Finance Committee of our Board of Directors. Our market risk oversight staff independently monitors our risk policies, procedures and risk levels and provides members of the Commercial Operations Risk Committee (CORC) various daily, weekly and/or monthly reports regarding compliance with policies, limits and procedures. The CORC consists of our President, Chief Financial Officer, Senior Vice President of Commercial Operations and Chief Risk Officer. When commercial activities exceed predetermined limits, we modify the positions to reduce the risk to be within the limits unless specifically approved by the CORC.

The following table summarizes the reasons for changes in total mark-to-market (MTM) value as compared to December 31, 2010:

MTM Risk Management Contract Net Assets (Liabilities)
Six Months Ended June 30, 2011

				Generation
	Utility			and
	Operations			Marketing			All Other			Total
	(in millions)
Total MTM Risk Management Contract Net Assets
at December 31, 2010	$	91		$	140		$	2		$	233
(Gain) Loss from Contracts Realized/Settled During the Period and
Entered in a Prior Period		(11	)		(14	)		(1	)		(26	)
Fair Value of New Contracts at Inception When Entered During the
Period (a)		3			7			-			10
Net Option Premiums Received for Unexercised or Unexpired
Option Contracts Entered During the Period		-			-			-			-
Changes in Fair Value Due to Market Fluctuations During the
Period (b)		4			10			-			14
Changes in Fair Value Allocated to Regulated Jurisdictions (c)		3			-			-			3
Total MTM Risk Management Contract Net Assets
at June 30, 2011	$	90		$	143		$	1			234

Commodity Cash Flow Hedge Contracts											19
Interest Rate and Foreign Currency Cash Flow Hedge Contracts											(2	)
Fair Value Hedge Contracts											8
Collateral Deposits											39
Total MTM Derivative Contract Net Assets at June 30, 2011										$	298

(a)	Reflects fair value on primarily long-term structured contracts which are typically with customers that seek fixed pricing to limit their risk against fluctuating energy prices. The contract prices are valued against market curves associated with the delivery location and delivery term. A significant portion of the total volumetric position has been economically hedged.
(b)	Market fluctuations are attributable to various factors such as supply/demand, weather, etc.
(c)	Relates to the net gains (losses) of those contracts that are not reflected on the Condensed Consolidated Statements of Income. These net gains (losses) are recorded as regulatory liabilities/assets.

See Note 8 – Derivatives and Hedging and Note 9 – Fair Value Measurements for additional information related to our risk management contracts. The following tables and discussion provide information on our credit risk and market volatility risk.

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 Investors Service, Standard & 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 have risk management contracts with numerous counterparties. Since open risk management contracts are valued based on changes in market prices of the related commodities, our exposures change daily. As of June 30, 2011, our credit exposure net of collateral to sub investment grade counterparties was approximately 7.35%, expressed in terms of net MTM assets, net receivables and the net open positions for contracts not subject to MTM (representing economic risk even though there may not be risk of accounting loss). As of June 30, 2011, the following table approximates our counterparty credit quality and exposure based on netting across commodities, instruments and legal entities where applicable:

		Exposure						Number of		Net Exposure
		Before						Counterparties		of
		Credit		Credit		Net		>10% of		Counterparties
Counterparty Credit Quality		Collateral		Collateral		Exposure		Net Exposure		>10%

		(in millions, except number of counterparties)
Investment Grade		$	591	$	5	$	586		1	$	173
Split Rating			1		-		1		1		1
Noninvestment Grade			7		4		3		2		3
No External Ratings:
	Internal Investment Grade		207		1		206		2		90
	Internal Noninvestment Grade		72		12		60		1		31
Total as of June 30, 2011		$	878	$	22	$	856		7	$	298

Total as of December 31, 2010		$	946	$	33	$	913		7	$	347

Value at Risk (VaR) Associated with Risk Management Contracts

We use a risk measurement model, which calculates VaR, to measure our commodity price risk in the risk management portfolio. The VaR is based on the variance-covariance method using historical prices to estimate volatilities and correlations and assumes a 95% confidence level and a one-day holding period. Based on this VaR analysis, as of June 30, 2011, a near term typical change in commodity prices is not expected to have a material effect on our net income, cash flows or financial condition.

The following table shows the end, high, average and low market risk as measured by VaR for the trading portfolio for the periods indicated:

VaR Model

Six Months Ended								Twelve Months Ended
June 30, 2011								December 31, 2010
End		High		Average		Low		End		High		Average		Low
(in millions)								(in millions)
$	-	$	2	$	-	$	-	$	-	$	2	$	1	$	-

We back-test our VaR results against performance due to actual price movements. Based on the assumed 95% confidence interval, the performance due to actual price movements would be expected to exceed the VaR at least once every 20 trading days.

As our VaR calculation captures recent price movements, we also perform regular stress testing of the portfolio to understand our exposure to extreme price movements. We employ a historical-based method whereby the current portfolio is subjected to actual, observed price movements from the last four years in order to ascertain which historical price movements translated into the largest potential MTM loss. We then research the underlying positions, price movements and market events that created the most significant exposure and report the findings to the Risk Executive Committee or the CORC as appropriate.

Interest Rate Risk

We utilize an Earnings at Risk (EaR) model to measure interest rate market risk exposure. EaR statistically quantifies the extent to which our interest expense could vary over the next twelve months and gives a probabilistic estimate of different levels of interest expense. The resulting EaR is interpreted as the dollar amount by which actual interest expense for the next twelve months could exceed expected interest expense with a one-in-twenty chance of occurrence. The primary drivers of EaR are from the existing floating rate debt (including short-term debt) as well as long-term debt issuances in the next twelve months. As calculated on debt outstanding as of June 30, 2011 and December 31, 2010, the estimated EaR on our debt portfolio for the following twelve months was $27 million and $5 million, respectively.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2011 and 2010
(in millions, except per-share and share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	2011			2010			2011			2010
REVENUES
Utility Operations	$	3,360		$	3,186		$	6,857		$	6,592
Other Revenues		249			174			482			337
TOTAL REVENUES		3,609			3,360			7,339			6,929
EXPENSES
Fuel and Other Consumables Used for Electric Generation		980			895			2,036			1,909
Purchased Electricity for Resale		287			227			562			465
Other Operation		697			994			1,383			1,667
Maintenance		316			243			581			514
Depreciation and Amortization		410			405			813			813
Taxes Other Than Income Taxes		202			202			415			409
TOTAL EXPENSES		2,892			2,966			5,790			5,777

OPERATING INCOME		717			394			1,549			1,152

Other Income (Expense):
Interest and Investment Income		3			18			5			21
Carrying Costs Income		17			19			32			33
Allowance for Equity Funds Used During Construction		23			19			43			43
Interest Expense		(239	)		(249	)		(481	)		(499	)

INCOME BEFORE INCOME TAX EXPENSE AND EQUITY EARNINGS		521			201			1,148			750

Income Tax Expense		174			65			452			272
Equity Earnings of Unconsolidated Subsidiaries		6			1			12			5

NET INCOME		353			137			708			483

Less: Net Income Attributable to Noncontrolling Interests		1			1			2			2

NET INCOME ATTRIBUTABLE TO AEP SHAREHOLDERS		352			136			706			481

Less: Preferred Stock Dividend Requirements of Subsidiaries		-			-			1			1

EARNINGS ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	352		$	136		$	705		$	480

WEIGHTED AVERAGE NUMBER OF BASIC AEP COMMON SHARES OUTSTANDING		481,928,494			479,050,774			481,538,549			478,741,871

BASIC EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	0.73		$	0.28		$	1.46		$	1.00

WEIGHTED AVERAGE NUMBER OF DILUTED AEP COMMON SHARES OUTSTANDING		482,203,255			479,176,543			481,786,698			479,012,304

DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO AEP COMMON SHAREHOLDERS	$	0.73		$	0.28		$	1.46		$	1.00

CASH DIVIDENDS DECLARED PER SHARE	$	0.46		$	0.42		$	0.92		$	0.83

See Condensed Notes to Condensed Consolidated Financial Statements.

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND
COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2011 and 2010
(in millions)
(Unaudited)

	AEP Common Shareholders
	Common Stock								Accumulated
									Other
					Paid-in		Retained		Comprehensive		Noncontrolling
	Shares		Amount		Capital		Earnings		Income (Loss)		Interests		Total
TOTAL EQUITY – DECEMBER 31, 2009		498	$	3,239	$	5,824	$	4,451	$	(374)	$	-	$	13,140

Issuance of Common Stock		2		9		34								43
Common Stock Dividends								(398)