Credit Risk Value at Risk (VaR) Associated with Risk Management Contracts All exposure in the table above relates to AEPSC and AEPEP as AEPSC is agent for and transacts on behalf of AEP subsidiaries, including the Registrant Subsidiaries and AEPEP is agent for and transacts on behalf of other AEP subsidiaries. In addition, AEP is exposed to credit risk related to participation in RTOs. For each of the RTOs in which AEP participates, this risk is generally determined based on the proportionate share of member gross activity over a specified period of time. Management uses a risk measurement model, which calculates VaR, to measure AEP’s 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 December 31, 2020, a near term typical change in commodity prices is not expected to materially impact net income, cash flows or financial condition. Management calculates the VaR for both a trading and non-trading portfolio. The trading portfolio consists primarily of contracts related to energy trading and marketing activities. The non-trading portfolio consists primarily of economic hedges of generation and retail supply activities. Credit risk is mitigated in 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. Management uses credit agency ratings and current market-based qualitative and quantitative data as well as financial statements to assess the financial health of counterparties on an ongoing basis. AEP has risk management contracts (includes non-derivative contracts) with numerous counterparties. Since open risk management contracts are valued based on changes in market prices of the related commodities, exposures change daily. As of December 31, 2020, credit exposure net of collateral to sub investment grade counterparties was approximately 6.6%, 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 December 31, 2020, the following table approximates AEP’s counterparty credit quality and exposure based on netting across commodities, instruments and legal entities where applicable: 119 Counterparty Credit Quality Exposure Before Credit Collateral Credit Collateral Net Exposure Number of Counterparties >10% of  Net Exposure Net Exposure of Counterparties >10% (in millions, except number of counterparties) Investment Grade $ 412.2  $ —  $ 412.2  2  $ 198.2  Split Rating 1.1  —  1.1  1  1.1  No External Ratings: Internal Investment Grade 133.8  —  133.8  3  91.8  Internal Noninvestment Grade 49.4  10.5  38.9  2  25.6  Total as of December 31, 2020 $ 596.5  $ 10.5  $ 586.0 