Significant Accounting Matters

6 Months Ended

Jun. 30, 2020

SIGNIFICANT ACCOUNTING MATTERS

The disclosures in this note apply to all Registrants unless indicated otherwise.

General

The unaudited condensed financial statements and footnotes were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements.

In the opinion of management, the unaudited condensed interim financial statements reflect all normal and recurring accruals and adjustments necessary for a fair statement of the net income, financial position and cash flows for the interim periods for each Registrant. Net income for the three and six months ended June 30, 2020 is not necessarily indicative of results that may be expected for the year ending December 31, 2020. The condensed financial statements are unaudited and should be read in conjunction with the audited 2019 financial statements and notes thereto, which are included in the Registrants’ Annual Reports on Form 10-K as filed with the SEC on February 20, 2020.

COVID-19

In March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention. Its rapid spread around the world and throughout the United States prompted many countries, including the United States, to institute restrictions on travel, public gatherings and certain business operations. These restrictions continue to significantly disrupt economic activity in AEP’s service territory and could reduce future demand for energy, particularly from commercial and industrial customers. The Registrants are taking steps to mitigate the potential risks to customers, suppliers and employees posed by the spread of COVID-19.

As of June 30, 2020 and through the date of this report, the Registrants assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, the allowance for credit losses and the carrying value of long-lived assets. While there were not any impairments or significant increases in credit allowances resulting from these assessments for the three and six months ended June 30, 2020, the ultimate impact of COVID-19 also depends on factors beyond management’s knowledge or control, including the duration and severity of this outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. Therefore, management cannot estimate the potential future impact to financial position, results of operations and cash flows, but the impacts could be material.

Voluntary Retirement Incentive Program

In June 2020, AEP announced a voluntary retirement incentive program. Eligible employees may volunteer for retirement from the date of the announcement through July 6, 2020, with most having an effective retirement date of August 1, 2020. Participating employees will receive up to six months base pay and a medical premium subsidy. Certain participating employees will also receive a long-term incentive plan grant, with immediate vesting, of AEP common shares. A total of 200 employees participated in the voluntary retirement program. In August 2020, AEP will record a charge to expense of $13 million primarily related to lump sum salary payments and cash subsidies. AEP also will record a charge to expense of $5 million related to the incremental Long-Term Incentive Plan grants issued related to this initiative. Approximately 92% of the expense was within the AEPSC and will be allocated among affiliated entities including Registrant Subsidiaries.

Earnings Per Share (EPS) (Applies to AEP)

Basic EPS is calculated by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted-average outstanding common shares, assuming conversion of all potentially dilutive stock awards.

The following table presents AEP’s basic and diluted EPS calculations included on the statements of income:


	Three Months Ended June 30,
	2020						2019
	(in millions, except per share data)
			$/share				$/share


Earnings Attributable to AEP Common Shareholders	$	520.8			$	461.3

Weighted Average Number of Basic Shares Outstanding	495.7		$	1.05	493.6		$	0.93
Weighted Average Dilutive Effect of Stock-Based Awards	1.6		—		1.8		—
Weighted Average Number of Diluted Shares Outstanding	497.3		$	1.05	495.4		$	0.93


	Six Months Ended June 30,
	2020						2019
	(in millions, except per share data)
			$/share				$/share


Earnings Attributable to AEP Common Shareholders	$	1,016.0			$	1,034.1

Weighted Average Number of Basic Shares Outstanding	495.1		$	2.05	493.4		$	2.10
Weighted Average Dilutive Effect of Stock-Based Awards	1.9		(0.01)		1.5		(0.01)
Weighted Average Number of Diluted Shares Outstanding	497.0		$	2.04	494.9		$	2.09

Equity Units issued in March 2019 are potentially dilutive securities but were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2020 and 2019, as the dilutive stock price threshold was not met. See Note 12 - Financing Activities for more information related to Equity Units.

There were 156 thousand and 0 antidilutive shares outstanding as of June 30, 2020 and 2019, respectively. The antidilutive shares were excluded from the calculation of diluted EPS.

Restricted Cash (Applies to AEP, AEP Texas and APCo)

Restricted Cash primarily included funds held by trustee for the payment of securitization bonds and contractually restricted deposits held for the future payment of the remaining construction activities at Santa Rita East.

Reconciliation of Cash, Cash Equivalents and Restricted Cash

The following tables provide a reconciliation of Cash, Cash Equivalents and Restricted Cash reported within the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:


	June 30, 2020
	AEP		AEP Texas		APCo
	(in millions)
Cash and Cash Equivalents	$	348.8	$	0.1	$	2.5
Restricted Cash	155.9		136.6		19.3
Total Cash, Cash Equivalents and Restricted Cash	$	504.7	$	136.7	$	21.8


	December 31, 2019
	AEP		AEP Texas		APCo
	(in millions)
Cash and Cash Equivalents	$	246.8	$	3.1	$	3.3
Restricted Cash	185.8		154.7		23.5
Total Cash, Cash Equivalents and Restricted Cash	$	432.6	$	157.8	$	26.8

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Allowance for Uncollectible Accounts

Generally, AEP Credit records bad debt expense based upon a 12-month rolling average of bad debt write-offs in proportion to gross accounts receivable purchased from participating AEP subsidiaries. The assessment is performed separately by each participating AEP subsidiary, which inherently contemplates any differences in geographical risk characteristics for the allowance. For receivables related to APCo’s West Virginia operations, the bad debt reserve is calculated based on a rolling two-year average write-off in proportion to gross accounts receivable. For customer accounts receivables relating to risk management activities, accounts receivables are reviewed for bad debt reserves at a specific counterparty level basis. For AEP Texas, bad debt reserves are calculated using the specific identification of receivable balances greater than 120 days delinquent, and for those balances less than 120 days where the collection is doubtful. For miscellaneous accounts receivable, bad debt expense is recorded based upon a 12-month rolling average of bad debt write-offs in proportion to gross accounts receivable, unless specifically identified. In addition to these processes, management contemplates available current information, as well as any reasonable and supportable forecast information, to determine if allowances for uncollectible accounts should be further adjusted in accordance with the accounting guidance for “Credit Losses.” Management’s assessments contemplate expected losses over the life of the accounts receivable.