RAILROAD COMMISSION OF TEXAS David Porter, Chairman Christi Craddick, Commissioner Ryan Sitton, Commissioner Financial Services INTERNAL MEMORANDUM TO: John E. Caudle, Direct Surface Mining and cl lion Division (SMRD) THROUGH: Bob Hopper, Financial Reporting Manager% Financial Services FROM: Adriaan Kanaar Financial Services DATE: April 25, 2016 SUBJECT: The Sabine Mining Company (SMC) South Hallsville No. 1 Mine, Permit No. 33H Rusk Mine, Permit 55 2015 Financial Information for SMC and Southwestern Electric Power Company (SWEPCO) File Reference No. 1609106 and 1609107 As requested in your memorandum dated April 4th, 2016, Financial Services has reviewed the audited annual ?nancial statements for SMC and SWEPCO for the year ended December 31, 2015, to determine if SMC still meets the ?nancial requirements for its $75,000.00 (Permit and $40,000.00 (Permit #55) Self Bonds with a third-party Guarantee for a total of $115,000.00. audited ?nancial statements for the year ended December 31, 2015, show that SWEPCO meets the requirements of 16 TEX. ADMIN. CODE Therefore, SMC meets the ?nancial requirements for its $1 15,000.00 in self-bonds with a third-party guarantee. Attached is a worksheet showing that SWEPCO meets the ?nancial requirements of 16 TEX. ADMIN. CODE To meet the requirements of 16 TEX. ADMIN. CODE an applicant for a self?bond must meet the requirements of one of 16 TEX. ADMIN. CODE or audited ?nancial statements for the year ended December 31, 2015, show that SWEPCO meets the requirements of 16 TEX. ADMIN. CODE Please contact Adriaan Kanaar at (512) 463-8850 if you have any questions regarding this review. cc: Alex Schoch, Of?ce of General Counsel Self-Bond -- Annual Financial Review -- Permit Nos. 33H 55 Sabine Mining Company 3rd Party Guarantor Southwestern Electrical Power Company - Audited Financial Statements 12l31i15 Section Applicant must meet one or more of the following: Criterion #1 Current rating for its most recent bond issuance of or higher as issued by either Moody's Investor Service or Standard and Poor's Corporation Reference FAILS Current Ratin Moody Baa2 Tab 4 Standard and Poor Tab 4 DOES NOT 'IMeet the requirements of 16 TAC Criterion #2 Must meet all of the following requirements: MEETS Requirement 1 Reference Tangible net worth of at least $10 million *Owner's Equity Intangibles Goodwill total assets - total Iiabilities=net worth (owner's equily) Tangible net worth MEETS Requirement 2 Ratio of total liabilities to net worth of 2.5 times or less Total Liabilities 2,169,700,000 PG. 12? (A) PG. 128 (B) None mentioned for SWEOCC None mentioned for SWEOCC 2,169,700,000 Calculation 4,978,300,000 PG. 128 *Net Worth Ratio LiabilitiesiNet Worth FAILS Requirement 3 Ratio of current assets to current liabilities of 1.2 times or greater Current Assets 2,169,700,000 PG. 127 (A) - PG. 128 (B) Current Liabilities Ratio Current AssetiLiabilities DOES NOT [Meet the requirements of 16 TAC 2.29 Calculation 335.300.000 PG. 127 589,200,000 PG 128 0.57 Calculation Criterion #3 Must meet all of the following requirements: MEETS Requirement 1 Fixed assets in US total at least $20 million ?note - land and coal NOT deducted Fixed Assets 6,321,100,000 MEETS Requirement 2 Ratio of total liabilities to net worth of 2.5 times or less Total Liabilities 4,978,300,000 *Net Worth 2,169,700,000 Ratio LiabilitiesINet Worth 2.29 FAILS Requirement 3 Ratio of current assets to current liabilities of 1.2 times or greater Current Assets 335,300,000 Current Liabilities 589,200,000 Ratio Current AssetlLiabilities 0.57 DOES NOT Meet the requirements of 16 TAC Reference PG. 127E PG. 1288 PG. 127 123 (B) Calculation PG.1270 PG. 128 Calculation Criterion #4 MEETS MEETS MEETS MEETS FAILS MEETS MEETS MEETS Must meet ?rst requirement and either two or three: Requirement 1 Has investment-grade rating for its most recent bond issuance of "Baa3" or higher from Moody's Investor Service and or higher irom Standard and Poor's Corporation Investment-Grade Rating Moody Standard and Poor Requirement 2 Must meet all of the following requirements: #1 Tangible net worth of at least $10 million Tangible net worth #2 Fixed assets in US total at least $20 million "note - land and coal NOT deducted Fixed Assets #3 Ratio of total liabilities to net worth of 2.5 times or less 0R less then industry median reported by Dun and Bradstreet for applicant's primary SIC code Total Liabilities Baa2 6,321,100,000 4,978,300,000 *Net Worth 2,169,700,000 Ratio LiabilitiesiNet Worth 2.29 wr- Ratlo of current assets to current liabilities that is equal or greater than industry median reported by Dun and Bradstreet for applicant's primary SIC code OR current credit rating of or higher from industry median Current Assets 335.300.000 Current Liabilities 589,200,000 Ratio Current AssetILiabilities 0.57 Current Credit Rating OR Requirement 3 Must meet all of the following requirements: #1 *Net worth of at least $100 million Net worth #2 Fixed assets in US total at least $20 million Fixed Assets NIA 2,169,700,000 6,321,100,000 Reference Tab4M Tab4S Calculated Above PG. 127 PG. 123 PG. 123 (B) Calculation PG.127C PG 128 Calculation Calculated Above PG. 127 (A) - PG. 128 (B) Calculated Above Has outstanding securities pursuant to the provision of the Securities Act of 1933 and subject to periodic financial reporting requirements established by the Securities Act of 1934 YES Per 10-K #4 MEETS Applicant's present and proposed self-bonds and guaranteed self-bonds for surface mining and reclamations operations not exceed 16.67% of the guarantor's net worth in U.S. Bonds (permit No. 33H - $75m and permit No. 55 - $40m) 115,000,000 Memo *Net Worth 2,169,700,000 Calculated Above 16.67% Test 5.30% Calculation DOES IMeet the requirements of 16 TAC Section Limit on Amounts of Third-Party Guarantee Applicant's present and proposed self-bonds and guaranteed self-bonds for surface mining and reclamations operations not exceed 25% of the guarantor's tangible net worth in U.S. MEETS Bonds (permit No. 33H - $75m and permit No. 55 - $40m) 115,000,000 Memo Tangible Net Worth 2,169,700,000 Calculated Above 25% Test 5.30% Calculation DOES IMeet the requirements of 16 TAC SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED CONSOLIDATED BALANCE SHEETS ASSETS December 31, 2015 and 2014 (in millions) December 31, 2015 2014 CURRENT ASSETS Cash and Cash Equivalents (December 31, 2015 and 2014 Amounts Include $3.7 and $12.7, Respectively, Related to Sabine) 5.2 14.4 Advances to Af?liates 2.0 41.0 Accounts Receivable: Customers 40.2 46.7 Af?liated Companies 22.0 37.1 Miscellaneous 27.] 25.6 Allowance for Uncollectible Accounts (0.9) (0.5) Total Accounts Receivable 88.4 108.9 Fuel (December 31, 2015 and 2014 Amounts Include $40.4 and $38.9, Respectively, Related to Sabine) 142.1 117.0 Materials and Supplies 71.5 73.7 Risk Management Assets 0.8 Deferred Income Tax Bene?ts - 9.0 Accrued Tax Bene?ts 15.4 Regulatory Asset for Under-Recovered Fuel Costs 4.1 24.0 Prepayments and Other Current Assets 21.2 25.8 TOTAL CURRENT ASSETS 335.3 429.2 PROPERTY, PLANT AND EQUIPMENT Electric: Generation 3,943.5 3,864.5 Transmission 1,387.8 1,300.7 Distribution 1,957.3 1,894.6 Other Property, Plant and Equipment (Including Plant to be Retired) (December 31, 2015 and 2014 Amounts Include $297.7 and $288.2, Respectively, Related to Sabine) 883.5 878.8 Construction Work in Progress 751.3 472.0 Total Property, Plant and Equipment 8,923.4 8,410.6 Accumulated Depreciation and Amortization (December 31, 2015 and 2014 Amounts Include $157.3 and $143, Respectively, Related to Sabine) 2,602.3 2,503.3 TOTAL PROPERTY, PLANT AND EQUIPMENT NET 6,321.1 5,907.3 OTHER NONCURRENT ASSETS Regulatory Assets 415.8 393.6 Deferred Charges and Other Noncurrent Assets 75.8 78.7 TOTAL OTHER NONCURRENT ASSETS 491.6 472.3 TOTAL ASSETS 7,148.0 i 6,808.8 See Notes to Financial Statements of Registrants beginning on page 130. 127 SOUTHWESTERN ELECTRIC POWER COMPANY CONSOLIDATED CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITY December 31, 2015 and 2014 December 31, 2015 2014 (in millions) CURRENT LIABILITIES Advances from Affiliates 58.3 8 Accounts Payable: General 150.4 175.1 Af?liated Companies 78.8 67.4 Long-term Debt Due Within One Year Nonaf?liated 3.3 306.8 Risk Management Liabilities 3.1 1.1 Customer Deposits 61.4 59.9 Accrued Taxes 58.3 44.0 Accrued Interest 43.0 44.3 Obligations Under Capital Leases 21.9 17.6 Other Current Liabilities 110.7 104.5 TOTAL CURRENT LIABILITIES 589.2 820.7 NONCURRENT LIABILITIES Long-term Debt Nonaf?liated 2,270.2 1,825.6 Long-term Risk Management Liabilities 2.1 Deferred Income Taxes 1,399.8 1,351.1 Regulatory Liabilities and Deferred Investment Tax Credits 448.8 458.5 Asset Retirement Obligations 117.5 92.0 Employee Bene?ts and Pension Obligations 25.8 25.4 Obligations Under Capital Leases 75.6 91.0 Deferred Credits and Other Noncurrent Liabilities 49.3 47.3 TOTAL NONCURRENT LIABILITIES 4,389.1 3.8909 TOTAL LIABILITIES 4,978.3 4,711.6 Rate Matters (Note 4) Commitments and Contingencies (Note 6) EQUITY Common Stock Par Value $18 Per Share: Authorized 7,600,000 Shares Outstanding 7,536,640 Shares 135.7 135.7 Paid-in Capital 676.6 674.6 Retained Earnings 1,366.3 1,294.0 Accumulated Other Comprehensive Income (Loss) Q4) (7.5) TOTAL COMMON EQUITY 2,169.2 2,096.8 Noncontrolling Interest 0.5 0.4 TOTAL EQUITY 2,169.7 2,097.2 TOTAL LIABILITIES AND EQUITY 7,148.0 8 6.8088 See Notes to Financial Statements of Registrants beginning on page 130. 128 INVESTORS SERVICE Credit Opinion: Southwestern Electric Power Company Global Credit Research - 28 Sep 2015 Shreveport, Louisiana, United States Ratings Moody's Category Rating Outlook Stable Issuer Rating Baa2 Senior Unsecured Baa2 Parent: American Electric Power Company, Inc. Outlook Stable Senior Unsecured Baa1 Jr Subordinate Shelf Commercial Paper P-2 Contacts Analyst Phone 235m: Venkataraman, York1_212_553-1653 William L. Hess/New York City Key Indicators [1]Southwestern Electric Power Company 12/31/2014 12/31/2013 12/31/2012 12/31/2011 CFO pre-WC Interest Interest 4.2x 5.0x 42x 5.1x 3.7x CFO pre?WC Debt 15.8% 22.6% 18.4% 24.6% 16.9% CFO pre?WC - Dividends Debt 11.6% 18.3% 13.0% 24.5% 16.7% Debt/ Capitalization 43.7% 41.5% 41.3% 43.5% 45.8% All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For de?nitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers Diversi?ed and supportive regulatory jurisdictions Regulatory approvals granted for Turk plant investments in Louisiana and Texas, though Arkansas' portion exposed to competitive markets Environmental capex will remain high going forward, recovery is expected Research Update: American Electric Power Co. Inc. And Subsidiaries Outlook Revised To Positive From Stable; Credit Ratings Af?rmed Overview 0 We are affirming the issuer credit rating on American Electric Power Co. Inc. and all its subsidiaries. 0 We are revising the outlook on AEP and its subsidiaries to positive from stable to reflect the potential for higher ratings stemming from incremental moderation in business risk. I We are also revising our assessments of the stand?alone credit profiles (SACP) for AEP Texas Central Co. and Appalachian Power Co. to from and for Indiana Michigan Power Co. and Southwestern Electric Power Co. to from Rating Action On Sept. 29, 2014, Standard Poor's Ratings Services affirmed the issuer credit rating on American Electric Power Co. (AEP) and its subsidiaries. At the same time, we revised the outlook to positive from stable to reflect the potential for higher ratings stemming from anticipated incremental moderation in business risk. Rationale We are affirming the issuer credit rating on AEP, reflecting our current assessment of the company's business risk profile as "strong" and its financial risk profile as "significant." We are revising the rating outlook on AEP and its subsidiaries to positive from stable to reflect the potential for improvement in the company's business risk profile to "excellent" from "strong." The expected improvement in AEP's business risk profile incorporates the company's plan to reduce the size of the merchant generation fleet after mid?2015 as a result of scheduled plant retirements, with the benefits somewhat offset by full commodity price exposure for the remaining generation assets, combined with clarity as to how Ohio Power will operate post mid?2015 under the company's proposed rate plan that will govern rates for the next three years, including the recovery of deferred capacity costs. Moreover, the positive outlook reflects our base case Projections that AEP's credit protection measures will remain comfortably Within the middle of the "Significant" financial risk profile category. SEPTEMBER 29. 2014 2 1361629 300000483