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Significant Accounting Matters
 6 Months Ended
Jun. 30, 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 and six months ended June 30, 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 tables present AEP’s basic and diluted EPS calculations included on the statements of income:
 
Three Months Ended June 30,
 
2019
 
2018
 
(in millions, except per share data)
 
 

 
$/share
 
 
 
$/share
Earnings Attributable to AEP Common Shareholders
$
461.3

 
 

 
$
528.4

 
 

 
 
 
 
 
 
 
 
Weighted Average Number of Basic Shares Outstanding
493.6

 
$
0.93

 
492.7

 
$
1.07

Weighted Average Dilutive Effect of Stock-Based Awards
1.8

 
—

 
0.8

 
—

Weighted Average Number of Diluted Shares Outstanding
495.4

 
$
0.93

 
493.5

 
$
1.07

 
Six Months Ended June 30,
 
2019
 
2018
 
(in millions, except per share data)
 
 

 
$/share
 
 
 
$/share
Earnings Attributable to AEP Common Shareholders
$
1,034.1

 
 
 
$
982.8

 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Basic Shares Outstanding
493.4

 
$
2.10

 
492.5

 
$
2.00

Weighted Average Dilutive Effect of Stock-Based Awards
1.5

 
(0.01
)
 
0.8

 
(0.01
)
Weighted Average Number of Diluted Shares Outstanding
494.9

 
$
2.09

 
493.3

 
$
1.99



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, 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 June 30, 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 sheets that sum to the total of the same amounts shown on the statements of cash flows:
 
 
June 30, 2019
 
 
AEP
 
AEP Texas
 
APCo
 
OPCo
 
 
(in millions)
Cash and Cash Equivalents
 
$
210.5

 
$
0.1

 
$
2.3

 
$
2.7

Restricted Cash
 
179.1

 
125.4

 
25.4

 
28.2

Total Cash, Cash Equivalents and Restricted Cash
 
$
389.6

 
$
125.5

 
$
27.7

 
$
30.9

 
 
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 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.
 
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 the 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.
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 six months ended June 30, 2018:
 
 
Three Months Ended 
June 30, 2018
 
Six Months Ended 
June 30, 2018
 
 
As Reported
 
Adjustments
 
As Adjusted
 
As Reported
 
Adjustments
 
As Adjusted
 
 
(in millions)
 
(in millions)
TOTAL REVENUES
 
$
183.8

 
$
16.3

 
$
200.1

 
$
377.3

 
$
14.5

 
$
391.8

 
 
 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 
 
 

 
 

 
 
 
 

Depreciation and Amortization
 
32.4

 
(0.1
)
 
32.3

 
63.0

 
(0.4
)
 
62.6

TOTAL EXPENSES
 
89.7

 
(0.1
)
 
89.6

 
170.6

 
(0.4
)
 
170.2

 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
94.1

 
16.4

 
110.5

 
206.7

 
14.9

 
221.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 
 
 

 
 

 
 
 
 

Allowance for Equity Funds Used During Construction
 
16.3

 
(0.5
)
 
15.8

 
31.6

 
(0.9
)
 
30.7

Interest Expense
 
(20.3
)
 
(0.3
)
 
(20.6
)
 
(40.2
)
 
(0.7
)
 
(40.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
90.5

 
15.6

 
106.1

 
198.9

 
13.3

 
212.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Income Tax Expense
 
20.0

 
4.1

 
24.1

 
42.5

 
3.6

 
46.1

 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
70.5

 
$
11.5

 
$
82.0

 
$
156.4

 
$
9.7

 
$
166.1



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 six months ended June 30, 2018:
 
 
Six Months Ended June 30, 2018
 
 
As Reported
 
Adjustments
 
As Adjusted
 
 
(in millions)
OPERATING ACTIVITIES
 
 
 
 
 
 
Net Income
 
$
156.4

 
$
9.7

 
$
166.1

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
 
 
Depreciation and Amortization
 
63.0

 
(0.4
)
 
62.6

Deferred Income Taxes
 
50.2

 
(0.3
)
 
49.9

Allowance for Equity Funds Used During Construction
 
(31.6
)
 
0.9

 
(30.7
)
Change in Other Noncurrent Assets
 
(7.0
)
 
0.3

 
(6.7
)
Changes in Certain Components of Working Capital:
 
 
 


 
 
Accounts Receivable, Net
 
8.4

 
0.1

 
8.5

Accounts Payable
 
13.7

 
(10.3
)
 
3.4

Net Cash Flows from Operating Activities
 
246.1

 
—

 
246.1

 
 
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 


 


Net Cash Flows Used for Investing Activities
 
(774.7
)
 
—

 
(774.7
)
 
 
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 
 
 

Net Cash Flows from Financing Activities
 
528.6

 
—

 
528.6

 
 
 
 
 
 
 
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
 
$
42.7

 
$
0.4

 
$
43.1

Construction Expenditures Included in Current Liabilities as of June 30,
 
234.7

 
6.4

 
241.1



Statement of Changes in Member’s Equity
 
The statement of changes in AEPTCo’s member’s equity reflects the adjustments to Net Income of $12 million and $10 million for the three and six months ended June 30, 2018 as shown in the table under Net Income above.