The authors propose a smart transmission system islanding scheme during an out-of-step (OOS) condition using PMU data. An OOS condition leads to the formation of electrical centers on a few transmission lines. The distance relays on the lines misinterpret it as a bolted three-phase fault and trip leading to an uncontrolled system separation. The load-rich islands can blackout due to massive generation-load imbalance. Recent research has shown that the evolution of electrical centers can be tracked by PMUs and hence, distance relays on these lines can be temporarily blocked from operation. The authors now propose an adaptive islanding scheme wherein (i) the islands contain coherent generators and (ii) overall load shed is minimised. In other words, the authors propose a simple and efficient method for determining the optimal cutset using PMU data. The method does not require explicit coherency determination of generators and can be implemented within the time interval of two PMU frames (40 ms in India). Simulation results on the 16-generator system and the Indian power system demonstrate the efficacy of the proposed method.