Significant Accounting Matters

3 Months Ended

Mar. 31, 2019

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 months ended March 31, 2019 is not necessarily indicative of results that may be expected for the year ending December 31, 2019.  The condensed financial statements are unaudited and should be read in conjunction with the audited 2018 financial statements and notes thereto, which are included in the Registrants’ Annual Reports on Form 10-K as filed with the SEC on February 21, 2019.

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

	Three Months Ended March 31,
	2019				2018
	(in millions, except per share data)
			$/share				$/share
Earnings Attributable to AEP Common Shareholders	$	572.8			$	454.4
Weighted Average Number of Basic Shares Outstanding	493.3		$	1.16	492.3		$	0.92
Weighted Average Dilutive Effect of Stock-Based Awards	1.2		—		0.8		—
Weighted Average Number of Diluted Shares Outstanding	494.5		$	1.16	493.1		$	0.92

Equity Units issued in March 2019 are potentially dilutive securities but were excluded from the calculation of diluted EPS for the three months ended March 31, 2019, as the dilutive stock price threshold was not met. See Note 13 - Financing Activities for more information related to Equity Units.

There were no antidilutive shares outstanding as of March 31, 2019 and 2018.

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 within the balance sheet that sum to the total of the same amounts shown on the statement of cash flows:

	March 31, 2019
	AEP		AEP Texas		APCo		OPCo
	(in millions)
Cash and Cash Equivalents	$	227.7	$	0.1	$	2.9	$	3.3
Restricted Cash	135.4		100.6		18.3		16.5
Total Cash, Cash Equivalents and Restricted Cash	$	363.1	$	100.7	$	21.2	$	19.8

	December 31, 2018
	AEP		AEP Texas		APCo		OPCo
	(in millions)
Cash and Cash Equivalents	$	234.1	$	3.1	$	4.2	$	4.9
Restricted Cash	210.0		156.7		25.6		27.6
Total Cash, Cash Equivalents and Restricted Cash	$	444.1	$	159.8	$	29.8	$	32.5

Revisions to Previously Issued Financial Statements (Applies to 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 June 30, 2018 period presented in AEPTCo’s previously issued financial statements in the quarterly period ended June 30, 2019 SEC Form 10-Q filing to reflect the impact of the misstatements.

AEPTCo has also corrected other 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 AEPTCo’s misstatements discussed above on all previously issued AEP financial statements in accordance with ASC 250, and concluded these misstatements were not material, individually or in the aggregate, to any prior interim and annual period financial statements. As a result, AEP recorded the correction in the third quarter of 2018.

Statement of Income

The table below reflects the effects of correcting the immaterial errors described above on AEPTCo’s statement of income for the three months ended March 31, 2018:

	Three Months Ended March 31, 2018
	As Reported			Adjustments			As Adjusted
	(in millions)
TOTAL REVENUES	$	193.5		$	(1.8	)	$	191.7
EXPENSES
Depreciation and Amortization	30.6			(0.3		)	30.3
TOTAL EXPENSES	80.9			(0.3		)	80.6
OPERATING INCOME	112.6			(1.5		)	111.1
Other Income (Expense):
Allowance for Equity Funds Used During Construction	15.3			(0.4		)	14.9
Interest Expense	(19.9		)	(0.4		)	(20.3		)
INCOME BEFORE INCOME TAX EXPENSE	108.4			(2.3		)	106.1
Income Tax Expense	22.5			(0.5		)	22.0
NET INCOME	$	85.9		$	(1.8	)	$	84.1

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 three months ended March 31, 2018:

	Three Months Ended March 31, 2018
	As Reported			Adjustments			As Adjusted
	(in millions)
OPERATING ACTIVITIES
Net Income	$	85.9		$	(1.8	)	$	84.1
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation and Amortization	30.6			(0.3		)	30.3
Deferred Income Taxes	15.7			(0.2		)	15.5
Allowance for Equity Funds Used During Construction	(15.3		)	0.4			(14.9		)
Change in Other Noncurrent Assets	2.7			0.2			2.9
Changes in Certain Components of Working Capital:
Accounts Receivable, Net	(10.1		)	0.5			(9.6		)
Accounts Payable	(12.3		)	1.6			(10.7		)
Accrued Taxes, Net	(33.6		)	(0.4		)	(34.0		)
Net Cash Flows from Operating Activities	127.1			—			127.1
INVESTING ACTIVITIES
Net Cash Flows Used for Investing Activities	(458.4		)	—			(458.4		)
FINANCING ACTIVITIES
Net Cash Flows from Financing Activities	331.3			—			331.3
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
Construction Expenditures Included in Current Liabilities as of March 31,	$	210.6		$	3.2		$	213.8

Statement of Changes in Member’s Equity

The statement of changes in AEPTCo’s member’s equity reflects the adjustments to Net Income of $(2) million for the three months ended March 31, 2018 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.