Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from ____ to ____
Commission
 
Registrant; State of Incorporation;
 
I.R.S. Employer
File Number
 
Address and Telephone Number
 
Identification No.
 
 
 
 
 
333-217143
 
AEP TRANSMISSION COMPANY, LLC (A Delaware Corporation)
 
46-1125168
 
 
1 Riverside Plaza, Columbus, Ohio 43215-2373
 
 
 
 
Telephone (614) 716-1000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x     No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large Accelerated filer ¨         Accelerated filer ¨         Non-accelerated filer x   (Do not check if a smaller reporting company)
 
 
 
 
 
 
 
Smaller reporting company ¨
 
Emerging growth company ¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨      No x
 
 
 
 
 
 
AEP Transmission Company, LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.









AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
INDEX OF QUARTERLY REPORT ON FORM 10-Q
March 31, 2017
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
Number
Glossary of Terms
 
 
 
 
 
Forward-Looking Information
 
 
 
 
 
Part I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
Items 1, 2 and 4 - Financial Statements, Management’s Narrative Discussion and Analysis of Results of Operations and Controls and Procedures:
 
 
 
 
 
 
AEP Transmission Company, LLC and Subsidiaries:
 
 
Management’s Narrative Discussion and Analysis of Results of Operations
 
Condensed Consolidated Financial Statements
 
 
 
 
 
Index of Condensed Notes to Condensed Financial Statements
 
 
 
 
 
Controls and Procedures
 
 
 
 
 
Part II.  OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
  Legal Proceedings
 
Item 1A.
  Risk Factors
 
Item 4.
  Mine Safety Disclosures
 
Item 5.
  Other Information
 
Item 6.
  Exhibits:
 
 
 
Exhibit 12
 
 
 
 
Exhibit 31(a)
 
 
 
 
Exhibit 31(b)
 
 
 
 
Exhibit 32(a)
 
 
 
 
Exhibit 32(b)
 
 
 
 
Exhibit 101.INS
 
 
 
 
Exhibit 101.SCH
 
 
 
 
Exhibit 101.CAL
 
 
 
 
Exhibit 101.DEF
 
 
 
 
Exhibit 101.LAB
 
 
 
 
Exhibit 101.PRE
 
 
 
 
 
 
SIGNATURE
 
 





GLOSSARY OF TERMS

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
Term
 
Meaning
 
 
 
AEP
 
American Electric Power Company, Inc., an investor-owned electric public utility holding company which includes American Electric Power Company, Inc. (Parent) and majority owned consolidated subsidiaries and consolidated affiliates.
AEP East Transmission
   Companies
 
APTCo, IMTCo, KTCo, OHTCo and WVTCo.
AEP System
 
American Electric Power System, an electric system, owned and operated by AEP subsidiaries.
AEP Transmission Holdco
 
AEP Transmission Holding Company, LLC, a wholly-owned subsidiary of AEP.
AEP West Transmission
   Companies
 
OKTCo and SWTCo.
AEPSC
 
American Electric Power Service Corporation, an AEP service subsidiary providing management and professional services to AEP and its subsidiaries.
AEPTCo
 
AEP Transmission Company, LLC, a holding company which includes AEPTCo Parent and its consolidated State Transcos. AEPTCo is a subsidiary of AEP Transmission Holdco.
AEPTCo Parent
 
AEP Transmission Company, LLC, the equity owner of the State Transcos within the AEPTCo consolidation.
APSC
 
Arkansas Public Service Commission.
APTCo
 
AEP Appalachian Transmission Company, Inc., a wholly-owned AEPTCo transmission subsidiary.
ASU
 
Accounting Standards Update.
CWIP
 
Construction Work in Progress.
FASB
 
Financial Accounting Standards Board.
FERC
 
Federal Energy Regulatory Commission.
GAAP
 
Accounting Principles Generally Accepted in the United States of America.
IMTCo
 
AEP Indiana Michigan Transmission Company, Inc., a wholly-owned AEPTCo transmission subsidiary.
IRS
 
Internal Revenue Service.
KTCo
 
AEP Kentucky Transmission Company, Inc., a wholly-owned AEPTCo transmission subsidiary.
LPSC
 
Louisiana Public Service Commission.
OATT
 
Open Access Transmission Tariff.
OHTCo
 
AEP Ohio Transmission Company, Inc., a wholly-owned AEPTCo transmission subsidiary.
OKTCo
 
AEP Oklahoma Transmission Company, Inc., a wholly-owned AEPTCo transmission subsidiary.
Parent
 
American Electric Power Company, Inc., the equity owner of AEP subsidiaries within the AEP consolidation.
PJM
 
Pennsylvania - New Jersey - Maryland regional transmission organization.
Registration Statement
 
AEPTCo’s Registration Statement on Form S-4 (File No. 333-217143), filed on April 4, 2017 and declared effective by the SEC on April 14, 2017.
RTO
 
Regional Transmission Organization, responsible for moving electricity over large interstate areas.
SEC
 
U.S. Securities and Exchange Commission.
SPP
 
Southwest Power Pool regional transmission organization.
State Transcos
 
Wholly-owned AEPTCo transmission subsidiaries; APTCo, IMTCo, KTCo, OHTCo, OKTCo, SWTCo and WVTCo.
SWTCo
 
AEP Southwestern Transmission Company, Inc., a wholly-owned AEPTCo transmission subsidiary.
Utility Money Pool
 
Centralized funding mechanism AEP uses to meet the short-term cash requirements of certain utility subsidiaries.
WVTCo
 
AEP West Virginia Transmission Company, Inc., a wholly-owned AEPTCo transmission subsidiary.

1



FORWARD-LOOKING INFORMATION

This report made by AEPTCo contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  Many forward-looking statements appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of AEPTCo’s Registration Statement, but there are others throughout this document which may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “project,” “continue” and similar expressions, and include statements reflecting future results or guidance and statements of outlook.  These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected.  Forward-looking statements in this document are presented as of the date of this document.  Except to the extent required by applicable law, management undertakes no obligation to update or revise any forward-looking statement.  Among the factors that could cause actual results to differ materially from those in the forward-looking statements are:
Ÿ
The economic climate, growth or contraction within and changes in market demand and demographic patterns in the Company’s service territory.
Ÿ
Inflationary or deflationary interest rate trends.
Ÿ
Volatility in the financial markets, particularly developments affecting the availability or cost of capital to finance new capital projects and refinance existing debt.
Ÿ
The availability and cost of funds to finance working capital and capital needs.
Ÿ
Weather conditions, including storms and drought conditions.
Ÿ
The ability to build transmission lines and facilities (including the ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms.
Ÿ
New legislation, litigation and government regulation.
Ÿ
A reduction in the federal statutory tax rate could result in an accelerated return of deferred federal income taxes to customers.
Ÿ
Regulatory decisions, including rate or other recovery of new investments in transmission service.
Ÿ
The ability to constrain operation and maintenance costs.
Ÿ
Changes in utility regulation and the allocation of costs within regional transmission organizations, including PJM and SPP.
Ÿ
Actions of rating agencies, including changes in the ratings of debt.
Ÿ
Accounting pronouncements periodically issued by accounting standard-setting bodies.
Ÿ
Other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes, cyber security threats and other catastrophic events.

The forward-looking statements of AEPTCo speak only as of the date of this report or as of the date they are made.  AEPTCo expressly disclaims any obligation to update any forward-looking information.  For a more detailed discussion of these factors, see “Risk Factors” in AEPTCo’s Registration Statement and in Part II of this report.

Investors should note that AEPTCo announces material financial information in SEC filings, press releases and public conference calls. Based on guidance from the SEC, AEPTCo may use the Investors section of AEP’s website (www.aep.com) to communicate with investors about AEPTCo. It is possible that the financial and other information posted there could be deemed to be material information. The information on AEP’s website is not part of this report.

2





AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Company Overview
AEP Transmission Company, LLC (“AEPTCo” or the “Company”) is a holding company for seven FERC regulated transmission-only electric utilities. AEPTCo is an indirect wholly-owned subsidiary of American Electric Power Company, Inc. (“AEP”).

AEPTCo’s seven wholly-owned public utility companies are (collectively referred to herein as the “State Transcos”):
AEP Appalachian Transmission Company, Inc. (“APTCo”)
AEP Indiana Michigan Transmission Company, Inc. (“IMTCo”)
AEP Kentucky Transmission Company, Inc. (“KTCo”)
AEP Ohio Transmission Company, Inc. (“OHTCo”)
AEP Oklahoma Transmission Company, Inc. (“OKTCo”)
AEP Southwestern Transmission Company, Inc. (“SWTCo”)
AEP West Virginia Transmission Company, Inc. (“WVTCo”)

AEPTCo’s business activities are the development, construction and operation of transmission facilities through investments in the State Transcos. The State Transcos have assets in service or under construction across two RTOs and in seven states, with additional states planned or pending approval.  As of March 31, 2017, the State Transcos had $4.2 billion of transmission assets in-service with plans to construct approximately $4.5 billion of additional transmission assets through 2019.  AEPTCo anticipates the need for extensive additional investment in transmission infrastructure within PJM and SPP to maintain the required level of grid reliability, resiliency, security and efficiency and to address an aging transmission infrastructure.  AEPTCo also foresees the need to construct additional transmission facilities based on changes in generating resources, such as wind or solar projects, generation additions or retirements, and additional new customer interconnections. AEPTCo will continue its investment to enhance physical and cyber security of its assets, and is also investing in improving the telecommunication network that supports the operation and control of the grid. AEPTCo’s fundamental obligation to meet state, federal, regulatory and industry standards will continue to drive transmission investment.  The table below summarizes AEPTCo’s investment in transmission assets as of March 31, 2017 and March 31, 2016.

Summary of Transmission Property
 
 
As of March 31,
 
 
2017
 
2016
 
 
(in thousands)
Plant In Service
 
$
4,162,326

 
$
2,873,665

CWIP
 
1,184,430

 
1,102,701

Accumulated Depreciation
 
117,821

 
62,944

Total Transmission Property, Net
 
$
5,228,935

 
$
3,913,422


FERC Transmission Complaint

In October 2016, several parties filed a joint complaint with the FERC that states the base return on common equity used by various AEP affiliates, including the State Transcos that operate in PJM, in calculating formula transmission rates under the PJM OATT is excessive and should be reduced from 10.99% to 8.32%, effective upon the date of the complaint. Management believes its financial statements adequately address the impact of the complaint. If the FERC orders revenue reductions as a result of the complaint, including refunds from the date of the complaint filing, it could reduce future net income and cash flows and impact financial condition.

3



Modifications to AEP East Transmission Companies Rates

In November 2016, certain AEP affiliates, including the AEP East Transmission Companies, filed an application with the FERC to modify the PJM OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to estimated expenses. In March 2017, the FERC accepted the modifications effective January 1, 2017, subject to refund, and set this matter for hearing and settlement procedures. Effective January 1, 2017, the AEP East Transmission Companies’ implemented the modified PJM OATT formula rate calculation which established the 2017 calendar year formula rates based on projected 2017 calendar year financial activity and projected plant balances. As accepted by the FERC, the AEP East Transmission Companies established 2017 calendar year rates based on a projected annual transmission revenue requirement of $583 million and recovery of the remaining $33 million of 2015 under-recovered revenues included in the May 2016 transmission rate filing. In May 2017, AEPSC, on behalf of the AEP East Transmission Companies, filed its calendar year 2016 annual transmission revenue true up, consisting of a $65 million under-recovery of revenues excluding carrying charges, with the FERC and PJM. The 2016 over-recovery of revenues, including carrying charges, will be incorporated in the 2018 projected transmission revenue requirement. If the FERC determines that any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.




4



RESULTS OF OPERATIONS

First Quarter of 2017 Compared to First Quarter of 2016

Reconciliation of First Quarter of 2016 to First Quarter of 2017
Net Income
(in thousands)
First Quarter of 2016
 
$
25,843

 
 
 
Changes in Transmission Revenues:
 
 
Transmission Revenues
 
73,024

Total Change in Transmission Revenues
 
73,024

 
 
 
Changes in Expenses and Other:
 
 
Other Operation and Maintenance
 
(3,514
)
Depreciation and Amortization
 
(8,185
)
Taxes Other Than Income Taxes
 
(5,794
)
Interest Income - Affiliated
 
153

Allowance for Equity Funds Used During Construction
 
(1,419
)
Interest Expense
 
(5,138
)
Total Change in Expenses and Other
 
(23,897
)
 
 
 
Income Tax Expense
 
(18,014
)
 
 
 
First Quarter of 2017
 
$
56,956


The major components of the increase in Transmission Revenues, which consists of wholesale sales to affiliates and non-affiliates, were as follows:

Transmission Revenues increased $73 million primarily due to the following:
A $71 million increase due to the updated formula rate filing driven by continued investment in transmission assets and the related increases in recoverable operating expenses.
A $2 million increase in rent revenue related to various AEPTCo facilities.

Expenses and Other and Income Tax Expense changed between years as follows:

Other Operation and Maintenance expenses increased $4 million primarily due to increased transmission investment.
Depreciation and Amortization expenses increased $8 million primarily due to a higher depreciable base.
Taxes Other Than Income Taxes increased $6 million primarily due to increased property taxes as a result of additional transmission investment.
Interest Expense increased $5 million primarily due to higher outstanding long-term debt balances.
Income Tax Expense increased $18 million primarily due to an increase in pretax book income.


5




AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2017 and 2016
(in thousands)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
REVENUES
 
 
 
 
Transmission Revenues
 
$
19,194

 
$
21,974

Sales to AEP Affiliates
 
133,390

 
57,660

Other Revenues
 
75

 
1

TOTAL REVENUES
 
152,659

 
79,635

 
 
 
 
 
EXPENSES
 
 
 
 
Other Operation
 
9,126

 
7,208

Maintenance
 
3,055

 
1,459

Depreciation and Amortization
 
23,319

 
15,134

Taxes Other Than Income Taxes
 
26,793

 
20,999

TOTAL EXPENSES
 
62,293

 
44,800

 
 
 
 
 
OPERATING INCOME
 
90,366

 
34,835

 
 
 
 
 
Other Income (Expense):
 
 
 
 
Interest Income − Affiliated
 
218

 
65

Allowance for Equity Funds Used During Construction
 
10,852

 
12,271

Interest Expense
 
(15,950
)
 
(10,812
)
 
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE
 
85,486

 
36,359

 
 
 
 
 
Income Tax Expense
 
28,530

 
10,516

 
 
 
 
 
NET INCOME
 
$
56,956

 
$
25,843

 
 
 
 
 
See Condensed Notes to Condensed Financial Statements beginning on page 11.

6



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER’S EQUITY
For the Three Months Ended March 31, 2017 and 2016
(in thousands)
(Unaudited)
 
 
Paid-in
Capital
 
Retained
Earnings
 
Total Member’s Equity
TOTAL MEMBER'S EQUITY – DECEMBER 31, 2015
 
$
1,243,000

 
$
309,884

 
$
1,552,884

 
 
 
 
 
 
 

Capital Contributions from Member
 
26,750

 
 
 
26,750

Net Income
 


 
25,843

 
25,843

TOTAL MEMBER'S EQUITY – MARCH 31, 2016
 
$
1,269,750

 
$
335,727

 
$
1,605,477

 
 
 
 
 
 
 

TOTAL MEMBER'S EQUITY – DECEMBER 31, 2016
 
$
1,455,009

 
$
502,573

 
$
1,957,582

 
 
 
 
 
 
 

Capital Contributions from Member
 
125,500

 
 
 
125,500

Net Income
 
 
 
56,956

 
56,956

TOTAL MEMBER'S EQUITY – MARCH 31, 2017
 
$
1,580,509

 
$
559,529

 
$
2,140,038

 
 
 
 
 
 
 

See Condensed Notes to Condensed Financial Statements beginning on page 11.

7



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2017 and December 31, 2016
(in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2017
 
2016
CURRENT ASSETS
 
 
 
 
Advances to Affiliates
 
$
10,256

 
$
67,108

Accounts Receivable:
 
 
 
 
Customers
 
25,560

 
11,306

Affiliated Companies
 
91,178

 
66,632

Miscellaneous
 
190

 

Total Accounts Receivable
 
116,928

 
77,938

Materials and Supplies
 
8,797

 
5,001

Accrued Tax Benefits
 
70,928

 
26,002

Prepayments and Other Current Assets
 
2,509

 
2,717

TOTAL CURRENT ASSETS
 
209,418

 
178,766

 
 
 
 
 
TRANSMISSION PROPERTY
 
 
 
 
Transmission Property
 
4,060,434

 
3,973,516

Other Property, Plant and Equipment
 
101,892

 
99,337

Construction Work in Progress
 
1,184,430

 
981,332

Total Transmission Property
 
5,346,756

 
5,054,185

Accumulated Depreciation and Amortization
 
117,821

 
99,566

TOTAL TRANSMISSION PROPERTY  NET
 
5,228,935

 
4,954,619

 
 
 
 
 
OTHER NONCURRENT ASSETS
 
 
 
 
Regulatory Assets
 
115,885

 
112,311

Deferred Property Taxes
 
85,401

 
102,157

Deferred Charges and Other Noncurrent Assets
 
1,550

 
1,942

TOTAL OTHER NONCURRENT ASSETS
 
202,836

 
216,410

 
 
 
 
 
TOTAL ASSETS
 
$
5,641,189

 
$
5,349,795

 
 
 
 
 
See Condensed Notes to Condensed Financial Statements beginning on page 11.

8



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND MEMBER’S EQUITY
March 31, 2017 and December 31, 2016
(in thousands)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2017
 
2016
CURRENT LIABILITIES
 
 
 
 
Advances from Affiliates
 
$
154,958

 
$
4,077

Accounts Payable:
 
 
 
 
General
 
185,633

 
289,740

Affiliated Companies
 
34,579

 
43,098

Accrued Taxes
 
157,611

 
191,777

Accrued Interest
 
28,174

 
10,541

Other Current Liabilities
 
6,180

 
10,890

TOTAL CURRENT LIABILITIES
 
567,135

 
550,123

 
 
 
 
 
NONCURRENT LIABILITIES
 
 
 
 
Long-term Debt – Nonaffiliated
 
1,931,364

 
1,931,984

Deferred Income Taxes
 
941,517

 
862,051

Regulatory Liabilities
 
48,981

 
44,049

Deferred Credits and Other Noncurrent Liabilities
 
12,154

 
4,006

TOTAL NONCURRENT LIABILITIES
 
2,934,016

 
2,842,090

 
 
 
 
 
TOTAL LIABILITIES
 
3,501,151

 
3,392,213

 
 
 
 
 
Rate Matters (Note 3)
 

 

Commitments and Contingencies (Note 4)
 

 

 
 
 
 
 
MEMBER’S EQUITY
 
 
 
 
Paid-in Capital
 
1,580,509

 
1,455,009

Retained Earnings
 
559,529

 
502,573

TOTAL MEMBER’S EQUITY
 
2,140,038

 
1,957,582

 
 
 
 
 
TOTAL LIABILITIES AND MEMBER’S EQUITY
 
$
5,641,189

 
$
5,349,795

 
 
 
 
 
See Condensed Notes to Condensed Financial Statements beginning on page 11.


9



AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2017 and 2016
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
56,956

 
$
25,843

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
Depreciation and Amortization
 
23,319

 
15,134

Deferred Income Taxes
 
74,060

 
52,946

Allowance for Equity Funds Used During Construction
 
(10,852
)
 
(12,271
)
Property Taxes
 
16,756

 
16,431

Change in Other Noncurrent Assets
 
2,190

 
2,120

Change in Other Noncurrent Liabilities
 
8,273

 
201

Changes in Certain Components of Working Capital:
 
 
 
 
Accounts Receivable, Net
 
(38,990
)
 
10,865

Materials and Supplies
 
(3,796
)
 

Accounts Payable
 
(8,170
)
 
(4,968
)
Accrued Taxes, Net
 
(79,092
)
 
48,300

Accrued Interest
 
17,633

 
11,595

Other Current Assets
 
209

 
428

Other Current Liabilities
 
(17
)
 
75

Net Cash Flows from Operating Activities
 
58,479

 
166,699

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Construction Expenditures
 
(390,414
)
 
(280,913
)
Change in Advances to Affiliates, Net
 
56,852

 
59,603

Acquisitions of Assets
 
(598
)
 
(1,990
)
Other Investing Activities
 
45

 
1,835

Net Cash Flows Used for Investing Activities
 
(334,115
)
 
(221,465
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Capital Contributions from Member
 
125,500

 
26,750

Change in Advances from Affiliates, Net
 
150,881

 
28,016

Other Financing Activities
 
(745
)
 

Net Cash Flows from Financing Activities
 
275,636

 
54,766

 
 
 
 
 
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
 
 
 
 
Net Cash Paid (Received) for Income Taxes
 
$
(610
)
 
$
(118,579
)
Construction Expenditures Included in Current Liabilities as of March 31,
 
189,237

 
141,731

 
 
 

 
 

See Condensed Notes to Condensed Financial Statements beginning on page 11.


10




INDEX OF CONDENSED NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 
Page
Note
 
Number
 
 
 
Significant Accounting Matters
 
New Accounting Pronouncements
 
Rate Matters
 
Commitments, Guarantees and Contingencies
 
Business Segments
 
Fair Value Measurements
 
Income Taxes
 
Financing Activities
 


11



1. SIGNIFICANT ACCOUNTING MATTERS

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. Net income for the three months ended March 31, 2017 is not necessarily indicative of results that may be expected for the year ending December 31, 2017. The condensed financial statements are unaudited and should be read in conjunction with the audited 2016 financial statements and notes thereto, filed in AEPTCo’s Registration Statement.

12



2. NEW ACCOUNTING PRONOUNCEMENTS

Upon issuance of final pronouncements, management reviews the new accounting literature to determine its relevance, if any, to AEPTCo’s business. The following final pronouncements will impact the financial statements.

ASU 2014-09 “Revenue from Contracts with Customers” (ASU 2014-09)

In May 2014, the FASB issued ASU 2014-09 clarifying the method used to determine the timing and requirements for revenue recognition on the statements of income. Under the new standard, an entity must identify the performance obligations in a contract, determine the transaction price and allocate the price to specific performance obligations to recognize the revenue when the obligation is completed. The amendments in this update also require disclosure of sufficient information to allow users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts.

The FASB deferred implementation of ASU 2014-09 under the terms in ASU 2015-14, “Revenue from Contracts with Customers (Topic: 606): Deferral of the Effective Date.” The new accounting guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted.

Management continues to analyze the impact of the new revenue standard and related ASUs. During 2016 and continuing through the first quarter of 2017, revenue contract assessments were completed. Material revenue streams were identified within the AEP System and representative contract/transaction types were sampled. Performance obligations identified within each material revenue stream were evaluated to determine whether the obligations were satisfied at a point in time or over time. Contracts determined to be satisfied over time generally qualified for the invoicing practical expedient since the invoiced amounts reasonably represented the value to customers of performance obligations fulfilled to date. Based upon the completed assessments, management does not expect a material impact to the timing of revenue recognized or net income and plans to elect the modified retrospective transition approach upon adoption. Management also continues to monitor unresolved industry implementation issues, including items related to collectability, and will analyze the related impacts to revenue recognition. Management plans to adopt ASU 2014-09 effective January 1, 2018.

ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01)

In January 2016, the FASB issued ASU 2016-01 enhancing the reporting model for financial instruments. Under the new standard, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are required to be measured at fair value with changes in fair value recognized in net income. The new standard also amends disclosure requirements and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. The amendments also clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

The new accounting guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted. The amendments will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Management is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net income. Management plans to adopt ASU 2016-01 effective January 1, 2018.


13



ASU 2016-02 “Accounting for Leases” (ASU 2016-02)

In February 2016, the FASB issued ASU 2016-02 increasing the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new standard, an entity must recognize an asset and liability for operating leases on the balance sheets. Additionally, a capital lease will be known as a finance lease going forward. Leases with lease terms of 12 months or longer will be subject to the new requirements. Fundamentally, the criteria used to determine lease classification will remain the same, but will be more subjective under the new standard.

The new accounting guidance is effective for annual periods beginning after December 15, 2018 with early adoption permitted. The guidance will be applied by means of a modified retrospective approach. The modified retrospective approach will require lessees and lessors to recognize and measure leases at the beginning of the earliest period presented.

Management continues to analyze the impact of the new lease standard. During 2016 and continuing through the first quarter of 2017, lease contract assessments were completed. The AEP System lease population was identified and representative lease contracts were sampled. Based upon the completed assessments, management prepared a system gap analysis to outline new disclosure compliance requirements compared to current system capabilities. Lease system options are currently being evaluated. Management plans to elect certain of the following practical expedients upon adoption:
Practical Expedient
 
Description
Overall Expedients (for leases commenced prior to adoption date and must be adopted as a package)
 
Do not need to reassess whether any expired or existing contracts are/or contain leases, do not need to reassess the lease classification for any expired or existing leases and do not need to reassess initial direct costs for any existing leases.
Lease and Non-lease Components (elect by class of underlying asset)
 
Elect as an accounting policy to not separate non-lease components from lease components and instead account for each lease and associated non-lease component as a single lease component.
Short-term Lease (elect by class of underlying asset)
 
Elect as an accounting policy to not apply the recognition requirements to short-term leases.
Lease term
 
Elect to use hindsight to determine the lease term.

Management expects the new standard to impact financial position, but not results of operations or cash flows. Management also continues to monitor unresolved industry implementation issues, including items related to pole attachments, easements and right-of-ways, and will analyze the related impacts to lease accounting. Management plans to adopt ASU 2016-02 effective January 1, 2019.


14



3. RATE MATTERS

As discussed in AEPTCo’s 2016 Annual Report included within AEPTCo’s Registration Statement, the State Transcos are involved in rate and regulatory proceedings at the FERC and their state commissions. The Rate Matters and Effects of Regulation notes within AEPTCo’s Registration Statement should be read in conjunction with this report to gain a complete understanding of material rate matters still pending that could impact net income, cash flows and possibly financial condition. The following discusses ratemaking developments in 2017 and updates AEPTCo’s 2016 Annual Report included within AEPTCo’s Registration Statement.

Louisiana Rate Matters

In 2011, SWTCo filed with the LPSC to seek commission approval, to the extent necessary, of SWTCo’s status as a transmission-only public utility in the state of Louisiana. In 2014, SWTCo filed additional supplemental testimony with the LPSC. A decision from the LPSC is pending. Management is unable to predict the outcome of this filing.

FERC Rate Matters

FERC Transmission Complaint

In October 2016, several parties filed a joint complaint with the FERC that states the base return on common equity used by various AEP affiliates, including the State Transcos that operate in PJM, in calculating formula transmission rates under the PJM OATT is excessive and should be reduced from 10.99% to 8.32%, effective upon the date of the complaint. Management believes its financial statements adequately address the impact of the complaint. If the FERC orders revenue reductions as a result of the complaint, including refunds from the date of the complaint filing, it could reduce future net income and cash flows and impact financial condition.

Modifications to AEP East Transmission Companies Rates

In November 2016, certain AEP affiliates, including the AEP East Transmission Companies, filed an application with the FERC to modify the PJM OATT formula transmission rate calculation, including an adjustment to recover a tax-related regulatory asset and a shift from historical to estimated expenses. In March 2017, the FERC accepted the modifications effective January 1, 2017, subject to refund, and set this matter for hearing and settlement procedures. Effective January 1, 2017, the AEP East Transmission Companies implemented the modified PJM OATT formula rate calculation which established the 2017 calendar year formula rates based on projected 2017 calendar year financial activity and projected plant balances. See “2016 and 2017 Transmission Rate Filings for AEP East Transmission Companies” discussed below. If the FERC determines that any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.

2016 and 2017 Transmission Rate Filings for AEP East Transmission Companies

The AEP East Transmission Companies implemented a modified PJM OATT formula rate calculation which established the 2017 calendar year formula rates based on projected 2017 calendar year financial activity and projected plant balances. As accepted by the FERC, the AEP East Transmission Companies established 2017 calendar year rates based on a projected annual transmission revenue requirement of $583 million and recovery of the remaining $33 million of 2015 under-recovered revenues included in its 2016 transmission rate filing. The new rates were effective January 2017, subject to refund and true up. In May 2017, AEPSC, on behalf of the AEP East Transmission Companies, filed its calendar year 2016 annual transmission revenue true up, consisting of a $65 million under-recovery of revenues excluding carrying charges, with the FERC and PJM. The 2016 over-recovery of revenues, including carrying charges, will be incorporated in the 2018 projected transmission revenue requirement. If the FERC determines that any of these costs are not recoverable, it could reduce future net income and cash flows and impact financial condition.




15



2017 Transmission Rate Filings for AEP West Transmission Companies

In May 2017, AEPSC, on behalf of the AEP West Transmission Companies, filed annual transmission revenue requirements with the FERC and SPP for the period July 2017 through June 2018. This filing established the following projected revenue requirements and prior year (over)/under recovery of revenues, including carrying charges:
 
 
Projected
 
Prior Year
 
 
Revenue
 
(Over)/Under-Recovery
Company
 
Requirements
 
of Revenues
 
 
(in thousands)
OKTCo
 
$
96,376

 
$
9,332

SWTCo
 
125

 
(4
)
Total  SPP Activity
 
$
96,501

 
$
9,328


SPP will implement these rates in July 2017, subject to refund and true-up.

2016 Transmission Rate Filings for AEP West Transmission Companies

In May 2016, AEPSC, on behalf of the AEP West Transmission Companies, filed annual transmission revenue requirements with the FERC and SPP for the period July 2016 through June 2017. This filing established the following projected revenue requirements and prior year (over)/under recovery of revenues, including carrying charges:
 
 
Projected
 
Prior Year
 
 
Revenue
 
(Over)/Under-Recovery
Company
 
Requirements
 
of Revenues
 
 
(in thousands)
OKTCo
 
$
63,676

 
$
5,969

SWTCo
 
131

 
(53
)
Total – SPP Activity
 
$
63,807

 
$
5,916


SPP implemented these rates in July 2016, subject to refund and true-up.

16



4. COMMITMENTS, GUARANTEES AND CONTINGENCIES

AEPTCo is subject to certain claims and legal actions arising in its ordinary course of business. In addition, the business activities of AEPTCo are subject to extensive governmental regulation related to public health and the environment. The ultimate outcome of such pending or potential litigation cannot be predicted. Management accrues contingent liabilities only when management concludes that it is both probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. When management determines that it is not probable, but rather reasonably possible that a liability has been incurred at the date of the financial statements, management discloses such contingencies and the possible loss or range of loss if such estimate can be made. Any estimated range is based on currently available information and involves elements of judgment and significant uncertainties. Any estimated range of possible loss may not represent the maximum possible loss exposure. Circumstances change over time and actual results may vary significantly from estimates.

Management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on the financial statements. The Commitments, Guarantees and Contingencies note included within AEPTCo’s Registration Statement should be read in conjunction with this report.

GUARANTEES

Liabilities for guarantees are recorded in accordance with the accounting guidance for “Guarantees.” There is no collateral held in relation to any guarantees. In the event any guarantee is drawn, there is no recourse to third parties unless specified below.

Indemnifications and Other Guarantees

AEPTCo enters into certain types of contracts which require indemnifications. Typically these contracts include, but are not limited to, lease agreements, purchase agreements and financing agreements. Generally, these agreements may include, but are not limited to, indemnifications around certain tax, contractual and environmental matters. As of March 31, 2017, there were no material liabilities recorded for any indemnifications.

17



5. BUSINESS SEGMENTS

AEPTCo Parent is the holding company of seven FERC-regulated transmission-only electric utilities (State Transcos). The seven State Transcos have been identified as operating segments of AEPTCo under the accounting guidance for “Segment Reporting”. The State Transcos business consists of developing, constructing and operating transmission facilities at the request of the regional transmission organizations in which they operate and in replacing and upgrading facilities, assets and components of the existing AEP transmission system as needed to maintain reliability standards and providing service to AEP’s wholesale and retail customers. The State Transcos are regulated for rate-making purposes exclusively by FERC and earn revenues through tariff rates charged for the use of their electric transmission systems.

AEPTCo’s Chief Operating Decision Maker (CODM) makes operating decisions, allocates resources to and assesses performance based on these operating segments. The seven State Transco operating segments all have similar economic characteristics and meet all of the criteria under the accounting guidance for “Segment Reporting” to be aggregated into one operating segment. As a result, AEPTCo has one reportable segment. The remainder of AEPTCo’s activity is presented in AEPTCo Parent. While not considered a reportable segment, AEPTCo Parent represents the activity of the holding company which primarily relates to debt financing activity and general corporate activities.

The tables below present AEPTCo’s reportable segment income statement information for the three months ended March 31, 2017 and 2016 and reportable segment balance sheet information as of March 31, 2017 and December 31, 2016. These amounts include certain estimates and allocations where necessary.
 
State Transcos
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated
 
(in thousands)
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
Revenues from:
 
 
 
 
 
 
 
External Customers
$
19,194

 
$

 
$

 
$
19,194

Sales to AEP Affiliates
133,390

 

 

 
133,390

Other
75

 

 

 
75

Total Revenues
$
152,659

 
$

 
$

 
$
152,659

 
 
 
 
 
 
 
 
Interest Income - Affiliated
$
146

 
$
19,070

 
$
(18,998
)
(a)
$
218

Interest Expense
15,795

 
19,153

 
(18,998
)
(a)
15,950

Income Tax Expense
28,452

 
78

 

 
28,530

Equity Earnings in State Transcos

 
56,812

 
(56,812
)
(b)

 
 
 
 
 
 
 
 
Net Income (Loss)
$
56,812

 
$
56,956

 
$
(56,812
)
(b)
$
56,956

 
State Transcos
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated
 
(in thousands)
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
Revenues from:
 
 
 
 
 
 
 
External Customers
$
21,974

 
$

 
$

 
$
21,974

Sales to AEP Affiliates
57,660

 

 

 
57,660

Other
1

 

 

 
1

Total Revenues
$
79,635

 
$

 
$

 
$
79,635

 
 
 
 
 
 
 
 
Interest Income - Affiliated
$
28

 
$
13,886

 
$
(13,849
)
(a)
$
65

Interest Expense
10,810

 
13,851

 
(13,849
)
(a)
10,812

Income Tax Expense
10,516

 

 

 
10,516

Equity Earnings in State Transcos

 
25,844

 
(25,844
)
(b)

 
 
 
 
 
 
 
 
Net Income (Loss)
$
25,844

 
$
25,843

 
$
(25,844
)
(b)
$
25,843



18



 
State Transcos
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated
 
(in thousands)
As of March 31, 2017
 
 
 
 
 
 
 
Total Transmission Property
$
5,346,756

 
$

 
$

 
$
5,346,756

Accumulated Depreciation and Amortization
117,821

 

 

 
117,821

Total Transmission Property – Net
$
5,228,935

 
$

 
$

 
$
5,228,935

 
 
 
 
 
 
 
 
Notes Receivable - Affiliated
$

 
$
1,950,000

 
$
(1,950,000
)
(c)
$

 
 
 
 
 
 
 
 
Total Assets
$
5,631,235

 
$
4,132,527

 
$
(4,122,573
)
(d)
$
5,641,189

 
 
 
 
 
 
 
 
Total Long-term Debt
$
1,931,445

 
$
1,949,919

 
$
(1,950,000
)
(c)
$
1,931,364

 
State Transcos
 
AEPTCo Parent
 
Reconciling Adjustments
 
AEPTCo
Consolidated
 
(in thousands)
As of December 31, 2016
 
 
 
 
 
 
 
Total Transmission Property
$
5,054,185

 
$

 
$

 
$
5,054,185

Accumulated Depreciation and Amortization
99,566

 

 

 
99,566

Total Transmission Property – Net
$
4,954,619

 
$

 
$

 
$
4,954,619

 
 
 
 
 
 
 
 
Notes Receivable - Affiliated
$

 
$
1,950,000

 
$
(1,950,000
)
(c)
$

 
 
 
 
 
 
 
 
Total Assets
$
5,337,501

 
$
3,947,814

 
$
(3,935,520
)
(d)
$
5,349,795

 
 
 
 
 
 
 
 
Total Long-term Debt
$
1,931,984

 
$
1,950,000

 
$
(1,950,000
)
(c)
$
1,931,984


(a)
Elimination of intercompany interest income/interest expense on affiliated debt arrangement.
(b)
Elimination of AEPTCo Parent’s equity earnings in the State Transcos.
(c)
Elimination of intercompany debt.
(d)
Primarily relates to the elimination of AEPTCo Parent’s investment in the State Transcos and Notes Receivable from the State Transcos.

19



6. FAIR VALUE MEASUREMENTS

Fair Value Measurements of Long-term Debt

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs. These instruments are not marked-to-market. The estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange.

The book values and fair values of Long-term Debt as of March 31, 2017 and December 31, 2016 are summarized in the following table:
 
 
March 31, 2017
 
December 31, 2016
 
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
 
 
(in thousands)
Long-term Debt
 
$
1,931,364

 
$
2,072,100

 
$
1,931,984

 
$
1,984,318


20



7. INCOME TAXES

AEP System Tax Allocation Agreement

AEPTCo and its subsidiaries join in the filing of a consolidated federal income tax return with its affiliates in the AEP System. The allocation of the AEP System’s current consolidated federal income tax to the AEP System companies allocates the benefit of current tax losses to the AEP System companies giving rise to such losses in determining their current tax expense. The consolidated net operating loss of the AEP System is allocated to each company in the consolidated group with taxable losses. The tax benefit of the Parent is allocated to its subsidiaries with taxable income. With the exception of the allocation of the consolidated AEP System net operating loss and the loss of the Parent, the method of allocation reflects a separate return result for each company in the consolidated group.

Federal and State Income Tax Audit Status

AEPTCo and other AEP subsidiaries are no longer subject to U.S. federal examination for years before 2011. The IRS examination of years 2011, 2012 and 2013 started in April 2014. AEP and subsidiaries received a Revenue Agents Report in April 2016, completing the 2011 through 2013 audit cycle indicating an agreed upon audit. The 2011 through 2013 audit was submitted to the Congressional Joint Committee on Taxation for approval. The Joint Committee referred the audit back to the IRS exam team for further consideration. Although the outcome of tax audits is uncertain, in management’s opinion, adequate provisions for federal income taxes have been made for potential liabilities resulting from such matters. In addition, AEPTCo accrues interest on these uncertain tax positions. Management is not aware of any issues for open tax years that upon final resolution are expected to materially impact net income.

AEPTCo and other AEP subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine the tax returns. AEPTCo and other AEP subsidiaries are currently under examination in several state and local jurisdictions. However, it is possible that previously filed tax returns have positions that may be challenged by these tax authorities. Management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such challenges and that the ultimate resolution of these audits will not materially impact net income.

21



8. FINANCING ACTIVITIES

Long-term Debt

There was no long-term debt issued or retired during the first three months of 2017.

Corporate Borrowing Program

The AEP System uses a corporate borrowing program to meet the short-term borrowing needs of AEP’s subsidiaries. The corporate borrowing program includes a Utility Money Pool, which funds AEP’s utility subsidiaries. The AEP System Utility Money Pool operates in accordance with the terms and conditions of the AEP System Utility Money Pool agreement filed with the FERC. AEP has a direct financing relationship with AEPTCo Parent and SWTCo to meet their short-term borrowing needs. APTCo, IMTCo, KTCo, OHTCo, OKTCo and WVTCo have been approved to participate in the Utility Money Pool to finance their short-term borrowing needs. SWTCo is awaiting regulatory approval from the LPSC to begin participating in AEP’s Utility Money Pool.

The amounts of outstanding loans to (borrowings from) the Utility Money Pool as of March 31, 2017 and December 31, 2016 are included in Advances to Affiliates and Advances from Affiliates, respectively, on the balance sheet. AEPTCo’s money pool activity for the three months ended March 31, 2017 is described in the following table:
Maximum
 
Maximum
 
Average
 
Average
 
 
 
 
 
Borrowings
 
Loans
 
Borrowings
 
Loans
 
Borrowings
 
Authorized
 
from the
 
to the
 
from the
 
to the
 
from the Utility
 
Short-term
 
Utility
 
Utility
 
Utility
 
Utility
 
Money Pool as of
 
Borrowing
 
Money Pool
 
Money Pool
 
Money Pool
 
Money Pool
 
March 31, 2017
 
Limit
 
(in thousands)
$
228,090

 
$
52,871

 
$
112,173

 
$
12,319

 
$
153,879

 
$
795,000

(a)

(a)
Amount represents the combined authorized short-term borrowing limit the State Transcos have through their agreements with the FERC or state regulatory commissions.

AEPTCo’s maximum, minimum and average interest rates for funds either borrowed from or loaned to the Utility Money Pool are summarized in the following table:
 
 
Maximum
 
Minimum
 
Maximum
 
Minimum
 
Average
 
Average
 
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
 
Borrowed
 
Borrowed
 
Loaned
 
Loaned
 
Borrowed
 
Loaned
Three Months
 
from the
 
from the
 
to the
 
to the
 
from the
 
to the
Ended
 
Utility
 
Utility
 
Utility
 
Utility
 
Utility
 
Utility
March 31,
 
Money Pool
 
Money Pool
Money Pool
 
Money Pool
 
Money Pool
 
Money Pool
2017
 
1.27
%
 
0.92
%
 
1.03
%
 
0.92
%
 
1.08
%
 
0.99
%
2016
 
0.83
%
 
0.69
%
 
0.82
%
 
0.69
%
 
0.74
%
 
0.73
%

The amounts of outstanding loans to (borrowings from) AEP as of March 31, 2017 and December 31, 2016 are included in Advances to Affiliates and Advances from Affiliates, respectively, on the balance sheet. AEPTCo Parent’s and SWTCo’s direct borrowing and lending activity with AEP for the three months ended March 31, 2017 is described in the following table:
 
 
 
 
 
 
 
 
Borrowings
 
 
Maximum
 
Maximum
 
Average
 
Average
 
from
 
Loans to
Borrowings
 
Loans
 
Borrowings
 
Loans
 
AEP as of
 
AEP as of
from AEP
 
to AEP
 
from AEP
 
to AEP
 
March 31, 2017
 
March 31, 2017
(in thousands)
$
1,089

 
$
54,681

 
$
1,081

 
$
27,655

 
$
1,079

 
$
10,256



22



Maximum, minimum and average interest rates for funds either borrowed from or loaned to AEP are summarized in the following table for AEPTCo Parent and SWTCo:
 
 
Maximum
 
Minimum
 
Maximum
 
Minimum
 
Average
 
Average
 
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
Interest Rate
 
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
 
for Funds
Three Months
 
Borrowed
 
Borrowed
 
Loaned
 
Loaned
 
Borrowed
 
Loaned
Ended
 
from
 
 from
 
to
 
 to
 
 from
 
to
March 31,
 
AEP
 
AEP
AEP
 
AEP
 
AEP
 
AEP
2017
 
1.27
%
 
0.92
%
 
1.27
%
 
0.92
%
 
1.03
%
 
1.04
%
2016
 
0.83
%
 
0.69
%
 
0.83
%
 
0.69
%
 
0.73
%
 
0.73
%

Debt Covenants

AEPTCo’s note purchase agreements contain certain covenants and requires it to maintain percentage of debt to total capitalization at a level that does not exceed 67.5%. The method for calculating outstanding debt and capitalization is contractually defined in the note purchase agreements. In addition, subject to certain conditions, AEPTCo has covenanted that it will not incur debt secured by a lien unless its other indebtedness is similarly secured.

Covenants in AEPTCo’s note purchase agreements and indenture also limit the amount of contractually-defined priority debt (which includes a further sub-limit of $50 million of secured debt) to 10% of consolidated tangible net assets which was $486 million as of March 31, 2017. The following table provides detail used in the calculation of AEPTCo’s priority debt covenants as of March 31, 2017:
Advances from
 
Advances to
 
Secured
 
Priority
Affiliates
 
Affiliates
 
Debt
 
Debt
(in thousands)
$
154,958

 
$
10,256

 
$

 
$
154,958


Nonperformance under these covenants could result in an event of default under these note purchase agreements.

Dividend Restrictions

Federal Power Act

In accordance with the Federal Power Act, the State Transcos are prohibited from paying dividends to AEPTCo Parent out of capital accounts, other than retained earnings, without regulatory approval. As a result, the State Transcos may be limited in their ability to transfer funds to AEPTCo Parent in the form of dividends.

Leverage Restrictions

Pursuant to the leverage restrictions in AEPTCo’s note purchase agreements, AEPTCo must maintain a percentage of debt to total capitalization at a level that does not exceed 67.5%.  These leverage restrictions can limit the ability of AEPTCo to pay dividends out of retained earnings to AEP Parent. The payment of cash dividends indirectly results in an increase in the percentage of debt to total capitalization of the company distributing the dividend.  The method for calculating outstanding debt and capitalization is contractually defined in the note purchase agreements.  As of March 31, 2017, the leverage restriction did not limit the ability of AEPTCo to pay dividends out of retained earnings to AEP Parent.

Capital Contributions

In April 2017, AEP Transmission Holdco made a capital contribution of $10.2 million to AEPTCo Parent. Consequently, AEPTCo Parent made capital contributions of $7.5 million and $2.7 million to OHTCo and WVTCo, respectively.

23



CONTROLS AND PROCEDURES

During the first quarter of 2017, management, including the principal executive officer and principal financial officer of AEPTCo (the Company), evaluated the Company’s disclosure controls and procedures. Disclosure controls and procedures are defined as controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of March 31, 2017, these officers concluded that the disclosure controls and procedures in place are effective and provide reasonable assurance that the disclosure controls and procedures accomplished their objectives.

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2017 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

24



PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

For a discussion of material legal proceedings, see “FERC Rate Matters” and “Commitments, Guarantees and Contingencies” of Note 3 and Note 4, respectively, incorporated herein by reference.

Item 1A.  Risk Factors

AEPTCo’s Registration Statement includes a detailed discussion of risk factors.  As of March 31, 2017, there have been no material changes to the risk factors previously disclosed in AEPTCo’s Registration Statement.

Item 4.  Mine Safety Disclosures

None

Item 5.  Other Information

None

Item 6.  Exhibits

12 – Computation of Consolidated Ratio of Earnings to Fixed Charges

31(a) – Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31(b) – Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32(a) – Certification of Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
32(b) – Certification of Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

101.INS – XBRL Instance Document
101.SCH – XBRL Taxonomy Extension Schema
101.CAL – XBRL Taxonomy Extension Calculation Linkbase
101.DEF – XBRL Taxonomy Extension Definition Linkbase
101.LAB – XBRL Taxonomy Extension Label Linkbase
101.PRE – XBRL Taxonomy Extension Presentation Linkbase


25



SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


AEP TRANSMISSION COMPANY, LLC

By: /s/ Joseph M. Buonaiuto
Joseph M. Buonaiuto
Controller and Chief Accounting Officer



Date:  May 25, 2017


26
Exhibit


EXHIBIT 12
 
 
AEP TRANSMISSION COMPANY, LLC AND SUBSIDIARIES
Computation of Consolidated Ratios of Earnings to Fixed Charges
(in thousands except ratio data)
 
 
 
 
 
 
 
 
 
 
 
 
Twelve
 
Three
 
 
 
 
 
 
 
 
 
 
 
 
Months
 
Months
 
 
Years Ended December 31,
 
Ended 
 
Ended
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
3/31/2017
 
3/31/2017
EARNINGS
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Income Before Income Taxes
 
$
22,004

 
$
60,825

 
$
137,317

 
$
192,987

 
$
286,768

 
$
335,895

 
$
85,486

Fixed Charges (as below)
 
4,716

 
18,408

 
32,556

 
52,509

 
61,950

 
67,570

 
20,274

Total Earnings
 
$
26,720

 
$
79,233

 
$
169,873

 
$
245,496

 
$
348,718

 
$
403,465

 
$
105,760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FIXED CHARGES
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
$
3,242

 
$
9,854

 
$
21,385

 
$
34,596

 
$
46,034

 
$
51,172

 
$
15,950

Credit for Allowance for Borrowed Funds Used During Construction
 
1,374

 
8,454

 
11,071

 
17,713

 
15,616

 
16,098

 
4,249

Estimated Interest Element in Lease Rentals
 
100

 
100

 
100

 
200

 
300

 
300

 
75

Total Fixed Charges
 
$
4,716

 
$
18,408

 
$
32,556

 
$
52,509

 
$
61,950

 
$
67,570

 
$
20,274

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of Earnings to Fixed Charges
 
5.66

 
4.30

 
5.21

 
4.67

 
5.62

 
5.97

 
5.21





Exhibit


EXHIBIT 31(a)
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Nicholas K. Akins, certify that:
1.
I have reviewed this report on Form 10-Q of AEP Transmission Company, LLC;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of each registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 25, 2017
By:
 
/s/ Nicholas K. Akins
 
 
 
Nicholas K. Akins
 
 
 
Chief Executive Officer


Exhibit


EXHIBIT 31(b)
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002


I, Brian X. Tierney, certify that:

1.
I have reviewed this report on Form 10-Q of AEP Transmission Company, LLC;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of each registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 25, 2017
By:
 
/s/ Brian X. Tierney
 
 
 
Brian X. Tierney
 
 
 
Chief Financial Officer




Exhibit


Exhibit 32(a)


This Certification is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  This Certification shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, except as otherwise stated in such filing.



Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code


In connection with the Quarterly Report of AEP Transmission Company, LLC (the “Company”) on Form 10-Q (the “Report”) for the quarter ended
March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof, I, Nicholas K. Akins, the chief executive officer of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, based on my knowledge (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Nicholas K. Akins
Nicholas K. Akins
Chief Executive Officer


May 25, 2017


A signed original of this written statement required by Section 906 has been provided to AEP Transmission Company, LLC and will be retained by AEP Transmission Company, LLC and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit


Exhibit 32(b)


This Certification is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  This Certification shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, except as otherwise stated in such filing.



Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code


In connection with the Quarterly Report of AEP Transmission Company, LLC (the “Company”) on Form 10-Q (the “Report”) for the quarter ended
March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof, I, Brian X. Tierney, the chief financial officer of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, based on my knowledge (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Brian X. Tierney
Brian X. Tierney
Chief Financial Officer


May 25, 2017


A signed original of this written statement required by Section 906 has been provided to AEP Transmission Company, LLC and will be retained by AEP Transmission Company, LLC and furnished to the Securities and Exchange Commission or its staff upon request.