Deferred (Gain) Loss on Discontinuation of Fair Value Hedge

  
  
Accounting for Fair Value Hedging Strategies (Applies to AEP)  
For fair value hedges (i.e. hedging the exposure to changes in the fair value of an asset, liability or an identified portion thereof attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk impacts net income during the period of change.  
AEP records realized and unrealized gains or losses on interest rate swaps that are designated and qualify for fair value hedge accounting treatment and any offsetting changes in the fair value of the debt being hedged in Interest Expense on the statements of income.  
The following table shows the impacts recognized on the balance sheets related to the hedged items in fair value hedging relationships:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Carrying Amount of the Hedged Liabilities |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities |
|  |  | June 30, 2022 |  | December 31, 2021 |  | June 30, 2022 |  | December 31, 2021 |
|  |  | (in millions) |
| Long-term Debt (a) (b) |  | $ | (886.8) |  |  | $ | (952.3) |  |  | $ | 57.7  |  |  | $ | (8.5) |  |

  
(a)Amounts included on the balance sheets within Long-term Debt Due within One Year and Long-term Debt, respectively.(b)Amounts include $(42) million and $(46) million as of June 30, 2022 and December 31, 2021, respectively, for the fair value hedge adjustment of hedged debt obligations for which hedge accounting has been discontinued.   
The pretax effects of fair value hedge accounting on income were as follows:  


|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Three Months Ended June 30, |  | Six Months Ended June 30, |
|  | 2022 |  | 2021 |  | 2022 |  | 2021 |
|  | (in millions) |
| Gain (Loss) on Interest Rate Contracts: |  |  |  |  |  |  |  |
| Fair Value Hedging Instruments (a) | $ | (17.6) |  |  | $ | 9.5  |  |  | $ | (62.4) |  |  | $ | (23.7) |  |
| Fair Value Portion of Long-term Debt (a) | 17.6  |  |  | (9.5) |  |  | 62.4  |  |  | 23.7  |  |

  
(a)Gain (Loss) is included in Interest Expense on the statements of income.  
In June 2020, AEP terminated a $500 million notional amount interest rate swap resulting in the discontinuance of the hedging relationship. A gain of $57 million on the fair value of the hedging instrument was settled in cash and recorded within operating activities on the statements of cash flows. Subsequent to the discontinuation of hedge accounting, the remaining adjustment to the carrying amount of the hedged item of $57 million will be amortized on a straight line basis through November 2027 in Interest Expense on the statements of income.  
Accounting for Cash Flow Hedging Strategies (Applies to AEP, APCo, I&M, PSO and SWEPCo)  
For cash flow hedges (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the Registrants initially report the gain or loss on the derivative instrument as a component of Accumulated Other Comprehensive Income (Loss) on the balance sheets until the period the hedged item affects net income.  
Realized gains and losses on derivative contracts for the purchase and sale of power designated as cash flow hedges are included in Total Revenues or Purchased Electricity for Resale on the statements of income or in Regulatory Assets or Regulatory Liabilities on the balance sheets, depending on the specific nature of the risk being hedged. During the three and six months ended June 30, 2022 and 2021, AEP applied cash flow hedging to outstanding power derivatives and the Registrant Subsidiaries did not.   
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