Opportunities & Risk

Transmission = Growth

Our transmission business continues to be an area of near-term and long-term growth. In 2012, a significant portion of our investment capital supported our transmission business. Investment in transmission will continue because it provides improved grid reliability and customer service, while also offering earnings growth and shareholder value.

We have a three-pronged plan: Invest within our service territory through our AEP transmission companies (Transcos); pursue competitive transmission projects inside and outside of our service territory through our Transource subsidiary; and continue to advance our project-based joint ventures with other utilities.

The Transcos develop, own and operate transmission assets that are physically connected to AEP’s existing system. They are regulated by the Federal Energy Regulatory Commission (FERC) and use a formula rate design similar to the operating companies’ FERC rates. The Transcos are independent of but overlay the service territories of AEP’s existing vertically integrated utility operating companies. They can separately raise capital and are able to build new transmission without affecting the balance sheet or credit ratings of the operating companies.

AEP Indiana Michigan Transmission Company (IMTCo), AEP Ohio Transmission Company (OHTCo), AEP Oklahoma Transmission Company (OKTCo), and AEP West Virginia Transmission Company (WVTCo) have been formed. IMTCo, OHTCo and OKTCo currently own and operate transmission assets. The Appalachian Power Transmission Company (APTCo) has received conditional approval from the Virginia State Corporation Commission, subject to project-by-project review and approval. Applications for regulatory approvals for additional Transcos are pending in Arkansas, Kentucky and Louisiana.

As of Dec. 31, 2012, the Transcos had almost $400 million of assets in service with plans to construct nearly $1.9 billion in additional transmission facilities through 2015. With FERC approved formula rates that adjust annually, these investments provide additional reliability and efficiency while delivering stable earnings and shareholder value.

In 2012, our transmission business secured $1.7 billion of new investment opportunities through the three regional transmission organizations (RTOs) within which we operate. Of that, $1.25 billion comes from PJM Interconnection. This is tied directly to the regional coal-fired power plant retirements that are planned within the PJM region. Many of our coal-fired plants play a critical role in maintaining regional transmission grid reliability, and without these resources, new transmission is needed to support regional reliability.

Based on approved projects, the infrastructure improvements our transmission business will make between 2013 and 2015 will result in approximately 480 new or enhanced stations; roughly 1,800 miles of new transmission lines; and approximately 3,900 miles of rebuilt transmission lines. These investments comprise our long-range plan, which includes transmission investments by our operating companies and those made by the subsidiaries of AEP Transmission Holding Company.

We will continue to focus on the joint ventures we formed to build new transmission assets within and outside of our service territory. These partnerships allow us to leverage both expertise and financial assets. We made equity contributions of approximately $99 million in 2012 to support construction and other expenditures of these projects. Many of them modernize the grid and improve reliability, alleviate congested power corridors and facilitate the development of renewable generation.

In April 2012, AEP became the first traditional regulated utility to form a competitive business for transmission with the launch of Transource Energy, a joint venture between AEP and Great Plains Energy. Expanding Transmission’s growth strategy portfolio, Transource is a subsidiary of AEP Transmission Holding Company, the holding company for the Transcos and joint venture projects. Transource proactively positions AEP to pursue projects that result from FERC Order 1000 within the PJM Interconnection, Southwest Power Pool (SPP) and Midwest Independent Transmission System Operator (MISO).

FERC Order 1000

FERC Order 1000, issued in 2011, fundamentally changes how transmission facilities will be developed, owned and operated as well as how costs will be supported. We are encouraged by and supportive of FERC’s decision to consider public policy in the transmission planning process, including economic and reliability considerations, the facilitation of the integration of renewable energy into the grid, and environmental regulations. The order mandates that the regional and inter-regional cost allocation methodologies follow six principles and requires RTOs and transmission providers to offer evidence of such in their compliance filings. The key principles require cost allocation methodologies to be closely tied to the benefits that are calculated as part of the transmission planning process.

One of the significant changes resulting from Order 1000 is the requirement to remove the Right of First Refusal (ROFR) from RTO tariffs. The ROFR language currently provides a right and an obligation of local utilities to build the transmission projects within their service territories. In the future, transmission owners from outside AEP’s service territory will be able to compete for certain new projects within our service area – and, through Transource, we will have more opportunities to develop projects outside of our own territory.

RTOs were created by FERC to manage the nation’s transmission system as an integrated, well-planned, modern grid that will deliver electricity reliably for generations. AEP’s service territory stretches over three of the nation’s seven RTOs. During October and November 2012, the PJM, MISO and SPP RTOs made their Order 1000 compliance filings and we expect FERC to issue orders on those filings in 2013. AEP remains committed to and has been active in ensuring that the company’s views and interests are represented in stakeholder discussions and at the FERC.

Project Highlights Across the United States:

Electric Transmission Texas (ETT)

Electric Transmission Texas (ETT) is a 50/50 joint venture between subsidiaries of AEP and MidAmerican Energy Holdings Co., which operates in Electric Reliability Council of Texas (ERCOT) and is an operating utility with a growing rate base. ETT has been assigned approximately $1.5 billion in Competitive Renewable Energy Zone (CREZ) projects in Texas that support the state’s commitment to renewable energy. The projects include seven double-circuit 345-kV transmission lines, nine company-owned substations and other equipment. The CREZ projects are expected to be in service by the end of 2013. As of Dec. 31, 2012, ETT has non-CREZ projects in service that include 559 miles of transmission lines and 19 company-owned substations. In addition, ETT is currently working on non-CREZ projects totaling more than 400 miles of transmission lines and 30 company-owned substations with various in-service dates through 2022. The total cost of the non-CREZ projects is $1.6 billion.

Electric Transmission America (ETA)

Electric Transmission America (ETA) is a 50/50 joint venture between AEP and a subsidiary of MidAmerican Energy. ETA has a 50 percent ownership interest in Prairie Wind.

Prairie Wind

Prairie Wind is a joint venture between ETA and Westar Energy. It was approved in April 2010. This project consists of 345-kV double-circuit transmission lines, running from a new substation in Wichita, Kan., to a new substation northeast of Medicine Lodge, Kan., and then south to the Kansas/Oklahoma border. The approximately $180 million line is needed to enhance the delivery of electricity in Kansas and to support the state’s expansion of renewable energy. In June 2011, the Kansas Corporation Commission approved the route and engineering, permitting and siting activities began shortly thereafter. Construction began in August 2012 and the project is scheduled to be in service by the end of 2014.

RITELine Transmission Development

RITELine Transmission Development (RITELine) is a joint venture between AEP and Exelon Corp. to develop a 420-mile, 765-kV extra-high voltage (EHV) transmission line that will extend from the Indiana/Ohio border west through Indiana to Henry County, Illinois. The estimated $1.6 billion project will be built in phases between 2015 and 2019, depending on the timing of regulatory approvals. The RITELine project is needed to strengthen the Midwest transmission system, improve overall system reliability and establish the infrastructure needed to provide access to renewable sources of energy.

Pioneer Transmission

Pioneer Transmission is a joint venture between AEP and Duke Energy. Reynolds-to-Greentown is part of a larger, 240-mile transmission project in Indiana originally proposed in 2008 that extends from Duke Energy’s Greentown substation to AEP’s Rockport substation, near Evansville, Ind. The total cost of the entire project (including the portion to be built by NIPSCo) is estimated at $950 million. In December 2011, the Reynolds-to-Greentown segment of Pioneer Transmission’s project was approved as a multi-value project (MVP) by MISO and included in the 2011 Transmission Expansion Plan. The MVPs will collectively enhance regional reliability, improve market efficiency, enable public policy mandates and facilitate the integration of new generating resources, such as renewable energy, with the electric transmission grid. In August 2012, Pioneer filed an Offer of Settlement with FERC in which Pioneer and Northern Indiana Public Service Company (NIPSCo) agreed to develop the Reynolds-to-Greentown segment of the Pioneer project jointly. The estimated cost of the Reynolds–to-Greentown segment is approximately $330 million.

Potomac-Appalachian Transmission Highline (PATH)

The Potomac-Appalachian Transmission Highline (PATH) project is a joint venture with FirstEnergy. In August 2012, the PJM Board of Managers removed the PATH project from its Regional Transmission Expansion Plan, based on recommendations made by the PJM staff. The PATH companies submitted an abandonment cost recovery filing to FERC in September 2012, requesting the recovery of prudently incurred costs associated with the PATH Project. In November 2012, the FERC issued an order accepting the PATH companies’ abandonment cost recovery filing and set the issue of return on equity and prudency of expenses for settlement proceedings. AEP’s equity investment in the PATH companies is approximately $31 million.

AEP’s Transmission Strategy

AEP’s transmission strategy is supporting economic development and job growth, while bringing us closer to our supply line.

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