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Significant Accounting Matters
 9 Months Ended
Sep. 30, 2018
Significant Accounting Matters
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 presentation of the net income, financial position and cash flows for the interim periods for each Registrant.  Net income for the three and nine months ended September 30, 2018 is not necessarily indicative of results that may be expected for the year ending December 31, 2018.  The condensed financial statements are unaudited and should be read in conjunction with the audited 2017 financial statements and notes thereto, which are included in the Registrants’ Annual Reports on Form 10-K as filed with the SEC on February 22, 2018.

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 options and awards.

The following tables present AEP’s basic and diluted EPS calculations included on the statements of income:
 
Three Months Ended September 30,
 
2018
 
2017
 
(in millions, except per share data)
 
 

 
$/share
 
 
 
$/share
Earnings Attributable to AEP Common Shareholders
$
577.6

 
 

 
$
544.7

 
 

 
 
 
 
 
 
 
 
Weighted Average Number of Basic Shares Outstanding
493.0

 
$
1.17

 
491.8

 
$
1.11

Weighted Average Dilutive Effect of Stock-Based Awards
0.9

 
—

 
1.2

 
(0.01
)
Weighted Average Number of Diluted Shares Outstanding
493.9

 
$
1.17

 
493.0

 
$
1.10

 
Nine Months Ended September 30,
 
2018
 
2017
 
(in millions, except per share data)
 
 

 
$/share
 
 
 
$/share
Earnings Attributable to AEP Common Shareholders
$
1,560.4

 
 
 
$
1,511.9

 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Basic Shares Outstanding
492.6

 
$
3.17

 
491.8

 
$
3.07

Weighted Average Dilutive Effect of Stock-Based Awards
0.9

 
(0.01
)
 
0.6

 
—

Weighted Average Number of Diluted Shares Outstanding
493.5

 
$
3.16

 
492.4

 
$
3.07



There were no antidilutive shares outstanding as of September 30, 2018 and 2017.

Nonconsolidated Variable Interest Entity (Applies to AEP and SWEPCo)

SWEPCo recorded prior year income tax adjustments in the second quarter of 2017 related to DHLC that impacted Equity Earnings (Loss) of Unconsolidated Subsidiary in the amount of $6 million.
Revisions to Previously Issued Financial Statements (Applies to only AEPTCo)
 
In the second quarter of 2018, management identified certain transmission assets that it believes should not have been included in AEPTCo’s SPP transmission formula rates. As a result, AEPTCo recorded a pretax out of period correction of an error of approximately $17 million related to revenue recorded from 2013 through March 31, 2018 in the second quarter of 2018. Subsequent to filing the second quarter 2018 Form 10-Q, AEPTCo identified an additional error in its previously issued financial statements. This error resulted from the improper capitalization of AFUDC and subsequent revenue recorded on the AFUDC. The impact of this misstatement reduced AEPTCo’s pretax income by approximately $7 million on a cumulative basis for the period 2011 through June 30, 2018.
 
Management assessed the materiality of the misstatements on all previously issued AEPTCo financial statements in accordance with SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, codified in ASC 250, Presentation of Financial Statements and concluded these misstatements were not material, individually or in the aggregate, to any prior annual or interim period. In accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), management revised the prior period AEPTCo financial statements included in this report to reflect the impact of correcting the immaterial misstatements described above. In addition, management will revise the historical 2017, March 31, 2018 and June 30, 2018 periods presented in AEPTCo’s previously issued financial statements in future SEC Form 10-Q and Form 10-K filings to reflect the impact of the misstatements. The $(18) million adjustment to pretax income for the nine months ended September 30, 2017 includes adjustments of $(12) million relating to 2016 and earlier periods. The effect of recording this adjustment of $(12) million in 2017 is not material to AEPTCo’s financial statements for 2017 or any earlier period.
 
AEPTCo has also corrected other previously recorded immaterial out of period adjustments. The impact of these additional adjustments did not impact net income in any period.
 
Management also assessed the materiality of the AEPTCo’s misstatements discussed above on all previously issued and the current year AEP financial statements in accordance with ASC 250, and concluded these misstatements were not material, individually or in the aggregate, to any prior and current interim and annual period financial statements. As a result, AEP recorded the correction in the third quarter of 2018.
 
Statements of Income
 
The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s statements of income for the three and nine months ended September 30, 2017:
 
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
 
As Reported
 
Adjustments
 
As Adjusted
 
As Reported
 
Adjustments
 
As Adjusted
 
 
(in millions)
 
(in millions)
TOTAL REVENUES
 
$
167.3

 
$
(1.7
)
 
$
165.6

 
$
549.4

 
$
(14.6
)
 
$
534.8

 
 
 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 
 
 

 
 

 
 
 
 

Depreciation and Amortization
 
24.8

 
(0.2
)
 
24.6

 
70.9

 
(1.2
)
 
69.7

TOTAL EXPENSES
 
72.2

 
(0.2
)
 
72.0

 
198.5

 
(1.2
)
 
197.3

 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
95.1

 
(1.5
)
 
93.6

 
350.9

 
(13.4
)
 
337.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 
 
 

 
 

 
 
 
 

Allowance for Equity Funds Used During Construction
 
11.7

 
(0.3
)
 
11.4

 
36.0

 
(3.0
)
 
33.0

Interest Expense
 
(16.9
)
 
(0.2
)
 
(17.1
)
 
(48.6
)
 
(1.8
)
 
(50.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
90.1

 
(2.0
)
 
88.1

 
338.8

 
(18.2
)
 
320.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Income Tax Expense
 
30.2

 
(0.7
)
 
29.5

 
114.5

 
(6.3
)
 
108.2

 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
59.9

 
$
(1.3
)
 
$
58.6

 
$
224.3

 
$
(11.9
)
 
$
212.4


Balance Sheet

The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s Balance Sheet as of December 31, 2017:
 
 
December 31, 2017
 
 
As Reported
 
Adjustment
 
As Adjusted
CURRENT ASSETS
 
(in millions)
Accounts Receivable:
 
 
 
 
 
 
Customers
 
$
19.1

 
$
(4.1
)
 
$
15.0

Total Accounts Receivable
 
113.6

 
(4.1
)
 
109.5

Accrued Tax Benefits
 
46.6

 
2.8

 
49.4

TOTAL CURRENT ASSETS
 
327.7

 
(1.3
)
 
326.4

 
 
 
 
 
 
 
TRANSMISSION PROPERTY
 
 
 
 
 
 
Transmission Property
 
5,336.1

 
(16.4
)
 
5,319.7

Other Property, Plant and Equipment
 
131.4

 
(4.6
)
 
126.8

Construction Work in Progress
 
1,312.7

 
11.3

 
1,324.0

Total Transmission Property
 
6,780.2

 
(9.7
)
 
6,770.5

Accumulated Depreciation and Amortization
 
170.4

 
(17.8
)
 
152.6

TOTAL TRANSMISSION PROPERTY – NET
 
6,609.8

 
8.1

 
6,617.9

 
 
 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
 
 
Deferred Property Taxes
 
117.8

 
7.2

 
125.0

TOTAL OTHER NONCURRENT ASSETS
 
130.6

 
7.2

 
137.8

 
 
 
 
 
 
 
TOTAL ASSETS
 
$
7,068.1

 
$
14.0

 
$
7,082.1


CURRENT LIABILITIES
 
 
 
 
 
 
Accounts Payable:
 
 
 
 
 
 
General
 
$
473.2

 
$
11.3

 
$
484.5

Affiliated Companies
 
52.9

 
13.2

 
66.1

Accrued Taxes
 
225.4

 
6.1

 
231.5

TOTAL CURRENT LIABILITIES
 
836.3

 
30.6

 
866.9

 
 
 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
 
 
Deferred Income Taxes
 
601.7

 
(1.3
)
 
600.4

Regulatory Liabilities
 
493.7

 
0.1

 
493.8

TOTAL NONCURRENT LIABILITIES
 
3,626.5

 
(1.2
)
 
3,625.3

 
 
 
 
 
 
 
TOTAL LIABILITIES
 
4,462.8

 
29.4

 
4,492.2

 
 
 
 
 
 
 
MEMBER’S EQUITY
 
 
 
 
 
 
Retained Earnings
 
788.7

 
(15.4
)
 
773.3

TOTAL MEMBER’S EQUITY
 
2,605.3

 
(15.4
)
 
2,589.9

 
 
 
 
 
 
 
TOTAL LIABILITIES AND MEMBER’S EQUITY
 
$
7,068.1

 
$
14.0

 
$
7,082.1



Statement of Cash Flows
 
The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s statement of cash flows for the nine months ended September 30, 2017:
 
 
Nine Months Ended September 30, 2017
 
 
As Reported
 
Adjustments
 
As Adjusted
 
 
(in millions)
OPERATING ACTIVITIES
 
 
 
 
 
 
Net Income
 
$
224.3

 
$
(11.9
)
 
$
212.4

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
 
 
Depreciation and Amortization
 
70.9

 
(1.2
)
 
69.7

Deferred Income Taxes
 
193.0

 
(1.1
)
 
191.9

Allowance for Equity Funds Used During Construction
 
(36.0
)
 
3.0

 
(33.0
)
Change in Other Noncurrent Assets
 
7.6

 
1.0

 
8.6

Changes in Certain Components of Working Capital:
 
 
 


 
 
Accounts Receivable, Net
 
(44.4
)
 
3.6

 
(40.8
)
Accounts Payable
 
8.6

 
11.8

 
20.4

Accrued Taxes, Net
 
(66.0
)
 
(5.2
)
 
(71.2
)
Net Cash Flows from Operating Activities
 
444.9

 
—

 
444.9

 
 
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 


 


Net Cash Flows Used for Investing Activities
 
(1,277.4
)
 
—

 
(1,277.4
)
 
 
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 
 
 

Net Cash Flows from Financing Activities
 
832.5

 
—

 
832.5

 
 
 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
—

 
—

 
—

Cash and Cash Equivalents at Beginning of Period
 
—

 
—

 
—

Cash and Cash Equivalents at End of Period
 
$
—

 
$
—

 
$
—

 
 
 
 


 


SUPPLEMENTARY INFORMATION
 
 
 
 
 
 
Cash Paid for Interest, Net of Capitalized Amounts
 
$
28.6

 
$
1.8

 
$
30.4

Construction Expenditures Included in Current Liabilities as of September 30,
 
239.0

 
9.9

 
248.9


 
Statement of Changes in Member’s Equity
 
The statement of changes in AEPTCo’s member’s equity reflects the adjustments to Net Income of $(1) million and $(12) million for the three and nine months ended September 30, 2017 as shown in the table under Net Income above. The statement of changes in member’s equity also reflects the adjustments to Retained Earnings of $(15) million as of December 31, 2017 as shown in the table under Balance Sheet above.
 
Restricted Cash (Applies to AEP, AEP Texas, APCo and OPCo)
 
Restricted Cash primarily includes funds held by trustees for the payment of securitization bonds.
 
Reconciliation of Cash, Cash Equivalents and Restricted Cash
 
The following tables provide a reconciliation of Cash, Cash Equivalents and Restricted Cash reported on the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:
 
 
September 30, 2018
 
 
AEP
 
AEP Texas
 
APCo
 
OPCo
 
 
(in millions)
Cash and Cash Equivalents
 
$
788.3

 
$
0.1

 
$
2.2

 
$
3.5

Restricted Cash
 
149.2

 
124.2

 
9.9

 
15.2

Total Cash, Cash Equivalents and Restricted Cash
 
$
937.5

 
$
124.3

 
$
12.1

 
$
18.7

 
 
December 31, 2017
 
 
AEP
 
AEP Texas
 
APCo
 
OPCo
 
 
(in millions)
Cash and Cash Equivalents
 
$
214.6

 
$
2.0

 
$
2.9

 
$
3.1

Restricted Cash
 
198.0

 
155.2

 
16.3

 
26.6

Total Cash, Cash Equivalents and Restricted Cash
 
$
412.6

 
$
157.2

 
$
19.2

 
$
29.7