THE CONSOLIDATED 10-Q FOR AMERICAN ELECTRIC POWER CO., INC, AND
SUBSIDIARIES IS REQUESTED TO BE INCLUDED AS PART OF THE FILING.
<PAGE>
<TABLE>
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 JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from to
<CAPTION>
Commission Registrant; State of Incorporation; I. R. S. Employer
File Number Address; and Telephone Number Identification No.
<S> <C> <C>
1-3525 AMERICAN ELECTRIC POWER COMPANY, INC. 13-4922640
(A New York Corporation)
1 Riverside Plaza, Columbus, Ohio 43215
Telephone (614) 223-1000
0-18135 AEP GENERATING COMPANY (An Ohio Corporation) 31-1033833
1 Riverside Plaza, Columbus, Ohio 43215
Telephone (614) 223-1000
1-3457 APPALACHIAN POWER COMPANY (A Virginia Corporation) 54-0124790
40 Franklin Road, Roanoke, Virginia 24011
Telephone (540) 985-2300
1-2680 COLUMBUS SOUTHERN POWER COMPANY (An Ohio Corporation) 31-4154203
1 Riverside Plaza, Columbus, Ohio 43215
Telephone (614) 223-1000
1-3570 INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation) 35-0410455
One Summit Square
P.O. Box 60, Fort Wayne, Indiana 46801
Telephone (219) 425-2111
1-6858 KENTUCKY POWER COMPANY (A Kentucky Corporation) 61-0247775
1701 Central Avenue, Ashland, Kentucky 41101
Telephone (800) 572-1141
1-6543 OHIO POWER COMPANY (An Ohio Corporation) 31-4271000
1 Riverside Plaza, Columbus, Ohio 43215
Telephone (614) 223-1000
AEP Generating Company, Columbus Southern Power Company and Kentucky Power Company meet
the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are
therefore filing this Form 10-Q with the reduced disclosure format specified in General
Instruction H(2) to Form 10-Q.
Indicate by check mark whether the registrants (1) have filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrants were required to file such
reports), and (2) have been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of American Electric Power Company, Inc. Common Stock,
par value $6.50, at July 31, 1998 was 190,884,198.
/TABLE
<PAGE>
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<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q
For The Quarter Ended June 30, 1998
<CAPTION>
INDEX
Page
Part I. FINANCIAL INFORMATION
<S> <C>
American Electric Power Company, Inc. and Subsidiary Companies:
Consolidated Statements of Income and
Statements of Retained Earnings. . . . . . . . . . . . . . A-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . A-2 - A-3
Consolidated Statements of Cash Flows. . . . . . . . . . . . A-4
Notes to Consolidated Financial Statements . . . . . . . . . A-5 - A-10
Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . A-11- A-17
AEP Generating Company:
Statements of Income and Statements of Retained Earnings . . B-1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . B-2 - B-3
Statements of Cash Flows . . . . . . . . . . . . . . . . . . B-4
Notes to Financial Statements. . . . . . . . . . . . . . . . B-5
Management's Narrative Analysis of Results of Operations . . B-6 - B-7
Appalachian Power Company and Subsidiaries:
Consolidated Statements of Income and
Consolidated Statements of Retained Earnings . . . . . . . C-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . C-2 - C-3
Consolidated Statements of Cash Flows. . . . . . . . . . . . C-4
Notes to Consolidated Financial Statements . . . . . . . . . C-5 - C-8
Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . C-9 - C-13
Columbus Southern Power Company and Subsidiaries:
Consolidated Statements of Income and
Consolidated Statements of Retained Earnings . . . . . . . D-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . D-2 - D-3
Consolidated Statements of Cash Flows. . . . . . . . . . . . D-4
Notes to Consolidated Financial Statements . . . . . . . . . D-5 - D-7
Management's Narrative Analysis of Results of Operations . . D-8 - D-9
Indiana Michigan Power Company and Subsidiaries:
Consolidated Statements of Income and
Consolidated Statements of Retained Earnings . . . . . . . E-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . E-2 - E-3
Consolidated Statements of Cash Flows. . . . . . . . . . . . E-4
Notes to Consolidated Financial Statements . . . . . . . . . E-5 - E-9
Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . E-10- E-16
Kentucky Power Company:
Statements of Income and Statements of Retained Earnings . . F-1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . F-2 - F-3
Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-4
Notes to Financial Statements. . . . . . . . . . . . . . . . F-5 - F-7
Management's Narrative Analysis of Results of Operations . . F-8 - F-9
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q
For The Quarter Ended June 30, 1998
INDEX
Page
Ohio Power Company and Subsidiaries:
Consolidated Statements of Income and
Consolidated Statements of Retained Earnings . . . . . . G-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . G-2 - G-3
Consolidated Statements of Cash Flows. . . . . . . . . . . G-4
Notes to Consolidated Financial Statements . . . . . . . . G-5 - G-7
Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . G-8 - G-12
Part II. OTHER INFORMATION
Item 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
Item 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3
Item 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-4
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5
This combined Form 10-Q is separately filed by American Electric Power Company, Inc.,
AEP Generating Company, Appalachian Power Company, Columbus Southern Power Company,
Indiana Michigan Power Company, Kentucky Power Company and Ohio Power Company.
Information contained herein relating to any individual registrant is filed by such
registrant on its own behalf. Each registrant makes no representation as to information
relating to the other registrants.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . $2,737,851 $1,382,158 $4,908,434 $2,874,227
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . . 406,207 362,330 844,186 770,619
Purchased Power. . . . . . . . . . . . . 1,324,563 29,548 2,033,065 55,956
Other Operation. . . . . . . . . . . . . 310,949 300,305 602,449 602,585
Maintenance. . . . . . . . . . . . . . . 125,505 124,728 245,448 224,113
Depreciation and Amortization. . . . . . 144,653 151,549 288,269 303,501
Taxes Other Than Federal Income Taxes. . 121,158 122,166 246,331 248,780
Federal Income Taxes . . . . . . . . . . 77,626 70,277 165,564 175,440
TOTAL OPERATING EXPENSES . . . . 2,510,661 1,160,903 4,425,312 2,380,994
OPERATING INCOME . . . . . . . . . . . . . 227,190 221,255 483,122 493,233
NONOPERATING INCOME (LOSS) . . . . . . . . (92) 5,686 702 10,195
INCOME BEFORE INTEREST CHARGES AND
PREFERRED DIVIDENDS . . . . . . . . . . . 227,098 226,941 483,824 503,428
INTEREST CHARGES . . . . . . . . . . . . . 106,234 103,651 209,785 197,473
PREFERRED STOCK DIVIDEND REQUIREMENTS
OF SUBSIDIARIES . . . . . . . . . . . . . 2,780 2,151 5,368 12,255
NET INCOME . . . . . . . . . . . . . . . . $ 118,084 $ 121,139 $ 268,671 $ 293,700
AVERAGE NUMBER OF SHARES OUTSTANDING . . . 190,524 188,822 190,305 188,585
EARNINGS PER SHARE . . . . . . . . . . . . $0.62 $0.64 $1.41 $1.56
CASH DIVIDENDS PAID PER SHARE. . . . . . . $0.60 $0.60 $1.20 $1.20
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
BALANCE AT BEGINNING OF PERIOD . . . . . . $1,641,607 $1,607,776 $1,605,017 $1,547,746
NET INCOME . . . . . . . . . . . . . . . . 118,084 121,139 268,671 293,700
DEDUCTIONS:
Cash Dividends Declared. . . . . . . . . 114,224 113,227 228,221 226,170
Other. . . . . . . . . . . . . . . . . . 1 649 1 237
BALANCE AT END OF PERIOD . . . . . . . . . $1,645,466 $1,615,039 $1,645,466 $1,615,039
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1998 1997
<CAPTION>
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production . . . . . . . . . . . . . . . . . . . . . . . $ 9,531,018 $ 9,493,158
Transmission . . . . . . . . . . . . . . . . . . . . . . 3,547,449 3,501,580
Distribution . . . . . . . . . . . . . . . . . . . . . . 4,691,746 4,654,234
General (including mining assets and nuclear fuel) . . . 1,606,781 1,604,671
Construction Work in Progress. . . . . . . . . . . . . . 431,457 342,842
Total Electric Utility Plant . . . . . . . . . . 19,808,451 19,596,485
Accumulated Depreciation and Amortization. . . . . . . . 8,179,113 7,963,636
NET ELECTRIC UTILITY PLANT . . . . . . . . . . . 11,629,338 11,632,849
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . . . 1,499,427 1,356,504
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . . . 175,338 91,481
Accounts Receivable (net). . . . . . . . . . . . . . . . 867,505 667,518
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 245,753 224,967
Materials and Supplies . . . . . . . . . . . . . . . . . 273,802 263,613
Accrued Utility Revenues . . . . . . . . . . . . . . . . 197,280 189,191
Energy Marketing and Trading Contracts . . . . . . . . . 785,777 2,306
Prepayments. . . . . . . . . . . . . . . . . . . . . . . 95,577 81,366
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . 2,641,032 1,520,442
REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . . . 1,818,641 1,817,540
DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . . . 223,797 288,011
TOTAL. . . . . . . . . . . . . . . . . . . . . $17,812,235 $16,615,346
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1998 1997
<CAPTION>
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock-Par Value $6.50:
1998 1997
Shares Authorized . . . .600,000,000 300,000,000
Shares Issued . . . . . .199,868,779 198,989,981
(8,999,992 shares were held in treasury) . . . . . . . $ 1,299,147 $ 1,293,435
Paid-in Capital. . . . . . . . . . . . . . . . . . . . . 1,815,409 1,778,782
Retained Earnings. . . . . . . . . . . . . . . . . . . . 1,645,466 1,605,017
Total Common Shareholders' Equity. . . . . . . . 4,760,022 4,677,234
Cumulative Preferred Stocks of Subsidiaries:
Not Subject to Mandatory Redemption. . . . . . . . . . 46,350 46,724
Subject to Mandatory Redemption. . . . . . . . . . . . 127,605 127,605
Long-term Debt . . . . . . . . . . . . . . . . . . . . . 5,133,689 5,129,463
TOTAL CAPITALIZATION . . . . . . . . . . . . . . 10,067,666 9,981,026
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . 1,326,752 1,246,537
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . . . . . 423,109 294,454
Short-term Debt. . . . . . . . . . . . . . . . . . . . . 506,275 555,075
Accounts Payable . . . . . . . . . . . . . . . . . . . . 512,015 353,256
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 302,843 380,771
Interest Accrued . . . . . . . . . . . . . . . . . . . . 72,126 76,361
Obligations Under Capital Leases . . . . . . . . . . . . 103,050 101,089
Energy Marketing and Trading Contracts . . . . . . . . . 771,829 1,983
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 380,908 322,687
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . 3,072,155 2,085,676
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . 2,543,549 2,560,921
DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . . . 364,753 376,250
DEFERRED GAIN ON SALE AND LEASEBACK -
ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . . . 226,681 231,320
DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . . . 210,679 133,616
COMMITMENTS AND CONTINGENCIES (Note 7)
TOTAL. . . . . . . . . . . . . . . . . . . . . $17,812,235 $16,615,346
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
<CAPTION>
June 30,
1998 1997
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,671 $ 293,700
Adjustments for Noncash Items:
Depreciation and Amortization. . . . . . . . . . . . . . . . . 308,694 303,318
Deferred Federal Income Taxes. . . . . . . . . . . . . . . . . 13,988 (17,262)
Deferred Investment Tax Credits. . . . . . . . . . . . . . . . (11,497) (11,673)
Amortization of Deferred Property Taxes. . . . . . . . . . . . 78,277 76,422
Deferred Costs Under Fuel Clause Mechanisms. . . . . . . . . . (46,506) (16,517)
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net). . . . . . . . . . . . . . . . . . . (199,987) (27,380)
Fuel, Materials and Supplies . . . . . . . . . . . . . . . . . (30,975) (12,037)
Accrued Utility Revenues . . . . . . . . . . . . . . . . . . . (8,089) 7,493
Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . (14,211) (28,305)
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . 158,759 (30,177)
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . . . (77,928) (41,346)
Revenue Refunds Accrued. . . . . . . . . . . . . . . . . . . . 38,552 (1,606)
Other (net). . . . . . . . . . . . . . . . . . . . . . . . . . . 92,330 71,790
Net Cash Flows From Operating Activities . . . . . . . . . 570,078 566,420
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . . . . . . . . . (363,633) (331,278)
Investment in Yorkshire Electricity Group plc. . . . . . . . . . - (357,205)
Proceeds from Sale of Property and Other . . . . . . . . . . . . (14,615) 4,785
Net Cash Flows Used For Investing Activities . . . . . . . (378,248) (683,698)
FINANCING ACTIVITIES:
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . 42,051 39,023
Issuance of Long-term Debt . . . . . . . . . . . . . . . . . . . 610,506 651,318
Change in Short-term Debt (net). . . . . . . . . . . . . . . . . (48,800) 319,705
Retirement of Cumulative Preferred Stock . . . . . . . . . . . . (276) (433,234)
Retirement of Long-term Debt . . . . . . . . . . . . . . . . . . (483,233) (196,724)
Dividends Paid on Common Stock . . . . . . . . . . . . . . . . . (228,221) (226,170)
Net Cash Flows From (Used For) Financing Activities. . . . (107,973) 153,918
Net Increase in Cash and Cash Equivalents. . . . . . . . . . . . . 83,857 36,640
Cash and Cash Equivalents at Beginning of Period . . . . . . . . . 91,481 57,539
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . $ 175,338 $ 94,179
Supplemental Disclosure:
Cash paid for interest net of capitalized amounts was $205,609,000 and $190,815,000 and
for income taxes was $117,024,000 and $146,130,000 in 1998 and 1997, respectively.
Noncash acquisitions under capital leases were $84,897,000 and $105,663,000 in 1998 and
1997, respectively.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial state-ments should
be read in conjunction with the 1997 Financial
Statements and Management's Discussion and Analysis of Results
of Operations and Financial Condition as incorporated in and
filed with the Form 10-K. In the opinion of management, the
financial statements reflect all adjustments (consisting of
only normal recurring accruals) which are necessary for a fair
presentation of the results of operations for interim periods.
2. FINANCING AND RELATED ACTIVITIES
During the first six months of 1998, subsidiaries issued
$452 million of senior unsecured notes: $112 million at 6.51%
and 6.55% due 2008 and $340 million at rates ranging from 7.20%
to 7-3/8% due 2038 and $125 million of 7.60% junior
subordinated deferrable interest debentures due 2038. The
subsidiaries also increased the outstanding balance under a
long-term revolving credit agreement by $15 million.
The proceeds were used to retire: first mortgage bonds
totaling $412 million with interest rates ranging from 6-3/4%
to 9.15% and due dates ranging from 1998 to 2023, $25 million
of variable rate pollution control revenue bonds due in 2025,
a $16.7 million term loan with an interest rate of 6.85% at
maturity and $7 million of a variable rate term loan due in
1999.
As a result of the redemption of the 6-3/4% series first
mortgage bonds due in 1998, the restriction on the use of
retained earnings for the payment of common stock dividends was
reduced to $6 million.
In July 1998 subsidiaries redeemed $60 million of first
mortgage bonds: $40 million of 7.95% first mortgage bonds due
in 2002 and $20 million of 7.80% first mortgage bonds due in
2023. Consequently the bonds were reclassified as a current
liability on the balance sheet.
3. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" was adopted by the Company in
the first quarter of 1998. SFAS No. 130 established the
standards for reporting and displaying components of
"comprehensive income," which is the total of net income and
all transactions not included in net income affecting equity
except those with shareholders. For the quarter and year-to-date periods
ended June 30, 1998, there were no material
differences between comprehensive income and net income.
<PAGE>
In the first quarter of 1998 the Company adopted the
American Institute of Certified Public Accountants' Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP
requires the capitalization and amortization of certain costs
of acquiring or developing internal use computer software.
Previously the Company expensed all software acquisition and
development costs. The SOP must be adopted at the beginning
of a fiscal year with no restatement or retroactive adjustment
of prior periods. The adoption of the SOP effective January
1, 1998 did not have a material effect on results of
operations, cash flows or financial condition.
4. INVESTMENT IN YORKSHIRE
The Company has a 50% ownership interest in Yorkshire Power
Group Limited which is accounted for using the equity method
of accounting and included in nonoperating income. The
following amounts which are not included in AEP's consolidated
financial statements represent summarized consolidated
financial information of Yorkshire Power Group Limited for the
quarter and six months ended June 30, 1998:
Quarter Year-to-Date
(in millions)
Income Statement Data:
Operating Revenues $503.9 $1,167.1
Operating Income 92.5 182.2
Net Income (Loss) (14.8) (7.9)
The net loss resulted from a write-down of an investment
in Ionica, a United Kingdom telecommunications company, in the
quarter ended June 30, 1998.
5. ENERGY MARKETING AND TRADING
During 1998, the Company substantially increased the volume
of its electricity and gas marketing and trading businesses.
The purpose of such businesses is to utilize the Company's
knowledge of the energy markets in order to improve the
competitiveness of its generation business and contribute to
non-regulated, nonoperating income, thereby enhancing both
customer and shareholder value.
Such businesses involve the marketing of energy under
physical forward contracts at fixed and variable prices and the
trading of options, futures, swaps and other financial
derivative contracts at both fixed and variable prices. Most
contracts represent physical forward electricity marketing
contracts for the purchase and sale of electricity in the
Company's traditional marketing area which are recorded as
operating revenues and purchased power expense when the
contracts settle. At June 30, 1998, the Company had open
marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion.<PAGE>
The Company
has also purchased and sold electricity and gas
options, futures and swaps, and entered into forward purchase
and sale contracts for the future delivery or receipt of
electricity outside its traditional marketing area and for gas.
These transactions represent non-regulated trading activities
that are marked-to-market and recorded in nonoperating income.
At June 30, 1998, the fair value of such trading activity is
reported as a current asset and a current liability. The
average fair value of the current asset and the current
liability was $272 million and $267 million for the six months
ended June 30, 1998, respectively.
Dependent on future electricity and gas market conditions
and prices, the open forward marketing contracts and the
marked-to-market open trading contracts could produce material
income or losses in future periods.
6. PROPOSED MERGER
As discussed in the 1997 Financial Statements and
Management's Discussion and Analysis of Results of Operations
and Financial Condition, the Company and Central and South West
Corporation (CSW) agreed to merge. At the annual meeting in
May 1998, AEP shareholders approved the issuance of AEP common
shares to effect the merger and approved an increase in the
authorized shares of AEP Common Stock from 300,000,000 to
600,000,000. CSW shareholders approved the merger at their
annual meeting in May 1998. The companies have filed for
approval to merge with the Federal Energy Regulatory Commission
and all of CSW's state regulatory commissions: Arkansas,
Louisiana, Oklahoma and Texas.
On August 13, 1998, the Arkansas Public Service Commission
approved the merger, subject to a number of conditions. The
Company is reviewing the conditions in the order.
7. CONTINGENCIES
Taxes
As discussed in Note 10, "Federal Income Taxes", of the
Notes to Consolidated Financial Statements in the 1997
Financial Statements and Management's Discussion and Analysis
of Results of Operations and Financial Condition, the Internal
Revenue Service (IRS) agents auditing the federal income tax
returns requested a ruling from their National Office that
certain interest deductions relating to corporate owned life
insurance (COLI) claimed by the Company should not be allowed.
As a result of a suit filed in United States District Court
(discussed below) this request for ruling has been withdrawn.
Adjustments have been or will be proposed by the IRS
disallowing COLI interest deductions for taxable years 1991-96.
A disallowance of the COLI interest deductions through June 30,
1998 would reduce earnings by approximately $307 million
(including interest). No provisions for this amount have been
recorded.
In order to resolve this issue without further delay, on
March 24, 1998, the Company filed suit against the United
States in the United States District Court for the Southern
District of Ohio. Management believes that it has a
meritorious position and will vigorously pursue this lawsuit.
In July 1998, the Company made a payment of taxes and interest
attributable to COLI interest deductions for taxable years
1991-96 to avoid the potential assessment by the IRS of any
additional above market rate interest on the contested amount.
The payment will be recorded in other property and investments
and included on future balance sheets pending the resolution
of this matter. The Company will seek refund, either
administratively or through litigation, of all amounts paid.
In the event the resolution of this matter is unfavorable, it
will have a material adverse impact on results of operations
and cash flows.
Cook Nuclear Plant Shutdown
As discussed in Note 4 of the Notes to Consolidated
Financial Statements in the 1997 Financial Statements and
Management's Discussion and Analysis of Results of Operations
and Financial Condition, both units of the Cook Nuclear Plant
were shut down by Indiana Michigan Power Company (I&M) in
September 1997 due to questions regarding the operability of
certain safety systems, which arose during a Nuclear Regulatory
Commission (NRC) architect engineer design inspection. The NRC
issued a Confirmatory Action Letter in September 1997 requiring
I&M to address the issues identified in the letter. Certain
issues identified in the letter have been addressed. I&M is
working with the NRC to resolve the remaining issue in the
letter and other issues related to the restart of the units.
On April 17, 1998, the NRC notified I&M that it had
convened a Restart Panel for Cook Plant. I&M is meeting with
the Panel on a regular basis, until the Cook Plant units are
returned to service, to identify and address the issues
necessary for the restart of the units. On July 9, 1998, I&M
presented its proposed schedule for restart activities for Cook
Plant Unit 1 to the NRC. According to I&M's proposed schedule,
the required maintenance activities for Unit 1 would extend
into November. On July 30, 1998, I&M received a letter from
the NRC providing the NRC's list of required restart
activities. In response to this letter, I&M will be meeting
with the NRC to further define the scope and schedule of the
outage. When maintenance and other activities required for
restart are complete, I&M will seek regulatory approval from
the NRC to return Unit 1 to service. I&M cannot predict when
regulatory approval will be granted. The restart schedule for
Unit 2 has not been completed. If the units are not returned
to service, there would be a material adverse effect on
financial condition.
<PAGE>
The incremental cost expected to be incurred for 1998 to
restart the Cook units based on a preliminary estimate is
approximately $50 million. However the cost and schedule for
the outage could be significantly impacted as additional work
is identified. Through June 30, 1998, $13 million of costs for
the restart have been incurred.
On July 24, 1998, I&M received an "adverse trend letter"
from the NRC indicating that NRC senior managers had determined
that there had been a slow decline in performance at the Cook
Plant during the 18 month period preceding the letter. The
letter indicates that the NRC will closely monitor efforts to
address issues at Cook Plant through additional inspection
activities.
The cost of electricity supplied to retail customers rose
due to the outage of the two units since higher cost coal-fired
generation and purchased power were substituted for low cost
nuclear generation. In the Indiana and Michigan retail
jurisdictions fuel cost recovery mechanisms permit the
recovery, subject to regulatory commission review and approval,
of changes in fuel costs including the fuel component of
purchased power in the Indiana jurisdiction and changes in
replacement power in the Michigan jurisdiction. Under the fuel
cost recovery mechanisms, retail rates contain a fuel cost
adjustment factor that reflects estimated fuel costs for the
period during which the factor will be in effect subject to
reconciliation to actual fuel costs in a future proceeding.
When actual fuel costs exceed the estimated costs reflected in
the billing factor, a regulatory asset is recorded and revenues
are accrued.
Due to the unscheduled Cook Plant outage, I&M's actual fuel
costs significantly exceeded the estimated fuel costs reflected
in its fuel cost adjustment factors. A regulatory asset has
been recorded for revenues accrued in anticipation of future
reconciliation and billing of the higher fuel costs to
customers. At June 30, 1998, the accrued regulatory asset was
$53 million.
On June 3, 1998, the Indiana Utility Regulatory Commission
approved an agreement authorizing I&M during the billing months
of July through September 1998 to apply a fuel cost adjustment
factor less than that requested by I&M, subject to future
reconciliation or refund. The agreement provides the parties
to the proceeding with the opportunity to conduct discovery
regarding certain issues that were raised in the proceeding,
including the recovery of replacement energy cost due to the
Cook Plant outage, in anticipation of resolving the issues in
a future fuel cost adjustment proceeding. Management believes
that it should be able to recover the Cook replacement energy
costs; however, if recovery of the replacement costs were to
be denied, results of operations and cash flows would be
adversely affected.
<PAGE>
Other
The Company continues to be involved in certain other
matters discussed in the 1997 Financial Statements and
Management's Discussion and Analysis of Results of Operations
and Financial Condition.
<PAGE>
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
SECOND QUARTER 1998 vs. SECOND QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Net income decreased $3.1 million or 3% in the second quarter
and $25 million or 9% in the year-to-date period due primarily to
the write-down of an investment in a telecommunications company and
unplanned outages at some generating plants including an extended
outage of the Company's nuclear plant and in the year-to-date
period the cost for repair and restoration of service caused by two
severe snowstorms and increased interest expense.
Income statement line items which changed significantly were:
Increase (Decrease)
Second Quarter Year-To-Date
(in millions) % (in millions) %
Operating Revenues . . . . . . $1,355.7 98 $2,034.2 71
Fuel Expense . . . . . . . . . 43.9 12 73.6 10
Purchased Power Expense. . . . 1,295.0 N.M. 1,977.1 N.M.
Other Operation Expense. . . . 10.6 4 (0.1) -
Maintenance Expense. . . . . . 0.8 1 21.3 10
Depreciation and Amortization. (6.9) (5) (15.2) (5)
Federal Income Taxes . . . . . 7.3 10 (9.9) (6)
Nonoperating Income. . . . . . (5.8)(102) (9.5) (93)
N.M. = Not Meaningful
Although the unplanned outages at some generating units
resulted in the loss of sales opportunities, operating revenues
increased in both periods reflecting increased energy sales to
retail and wholesale customers. Retail energy sales increased 5%
in the second quarter and 2% in the year-to-date period. Energy
sales to all retail customer classes increased reflecting warmer
springtime temperatures, additional customers, and a return to
operation of a large industrial customer after a labor strike.
Revenues from lower margin wholesale sales increased
significantly in both periods primarily as a result of sales from
a new power marketing business started in July 1997. The new power
marketing business involves the purchase and sale of large
quantities of electricity through forward contracts. The
significant increase in wholesale revenues was heavily offset by a
significant increase in power purchases by the new power marketing
operation.
The increase in fuel expense was primarily attributable to an
increase in coal fired generation to meet the increased demand for
electricity and an increase in the average cost of fuel consumed
reflecting the unavailability of lower cost nuclear generation due
to the unplanned outage of both Cook Plant units in 1998.
Purchases of electricity by the new power marketing business
accounted for the significant increase in purchased power expense.
The increase in other operation expense in the second quarter
is due to steam plant costs reflecting the increase in coal-fired
generation and increased energy delivery and customer service
costs.
Maintenance expense increased in the year-to-date period due
to expenditures for repair of transmission and distribution
facilities resulting from two snowstorms in the Company's Kentucky,
Virginia and West Virginia service territories and the cost of work
to prepare the Company's nuclear generating units for restart.
The reduction in depreciation and amortization expense reflects
the completion of the amortization of deferrals under rate phase-in
plans by two subsidiaries. Net income was not affected by the
completion of the phase-in amortizations since the recovery of the
amortization ceased concurrent with the amortization.
The increase in federal income tax expense attributable to
operations in the second quarter was due to an increase in pre-tax
operating income and changes in certain book/tax timing differences
accounted for on a flow-through basis for rate-making and financial
reporting purposes.
Nonoperating income decreased in both periods primarily due to
the Company's share of a write-down, by Yorkshire Power Group, of
an investment in Ionica, a United Kingdom telecommunications
company.
<PAGE>
FINANCIAL CONDITION
Total plant and property additions including capital leases for
the first six months were $449 million.
During the first six months of 1998 subsidiaries issued $618
million principal amount of long-term obligations at interest rates
ranging from 5.87% to 7.6%; retired $476 million principal amount
of long-term debt with interest rates ranging from 3.8% to 9.15%;
and decreased short-term debt by $49 million.
COOK NUCLEAR PLANT SHUTDOWN
As discussed in Note 4 of the Notes to Consolidated Financial
Statements in the 1997 Financial Statements and Management's
Discussion and Analysis of Results of Operations and Financial
Condition, both units of the Cook Nuclear Plant were shut down by
Indiana Michigan Power Company (I&M) in September 1997 due to
questions regarding the operability of certain safety systems,
which arose during a Nuclear Regulatory Commission (NRC) architect
engineer design inspection. The NRC issued a Confirmatory Action
Letter in September 1997 requiring I&M to address the issues
identified in the letter. Certain issues identified in the letter
have been addressed. I&M is working with the NRC to resolve the
remaining issue in the letter and other issues related to the
restart of the units.
On April 17, 1998, the NRC notified I&M that it had convened
a Restart Panel for Cook Plant. I&M is meeting with the Panel on
a regular basis, until the Cook Plant units are returned to
service, to identify and address the issues necessary for the
restart of the units. On July 9, 1998, I&M presented its proposed
schedule for restart activities for Cook Plant Unit 1 to the NRC.
According to I&M's proposed schedule, the required maintenance
activities for Unit 1 would extend into November. On July 30,
1998, I&M received a letter from the NRC providing the NRC's list
of required restart activities. In response to this letter, I&M
will be meeting with the NRC to further define the scope and
schedule of the outage. When maintenance and other activities
required for restart are complete, I&M will seek regulatory
approval from the NRC to return Unit 1 to service. I&M cannot
predict when regulatory approval will be granted. The restart
schedule for Unit 2 has not been completed. If the units are not
returned to service, there would be a material adverse effect on
financial condition.
The incremental cost expected to be incurred for 1998 to
restart the Cook units based on a preliminary estimate is
approximately $50 million. However the cost and schedule for the
outage could be significantly impacted as additional work is
identified. Through June 30, 1998, $13 million of costs for the
restart have been incurred.
On July 24, 1998, I&M received an "adverse trend letter" from
the NRC indicating that NRC senior managers had determined that
there had been a slow decline in performance at the Cook Plant
during the 18 month period preceding the letter. The letter
indicates that the NRC will closely monitor efforts to address
issues at Cook Plant through additional inspection activities.
The cost of electricity supplied to retail customers rose due
to the outage of the two units since higher cost coal-fired
generation and purchased power were substituted for low cost
nuclear generation. In the Indiana and Michigan retail
jurisdictions fuel cost recovery mechanisms permit the recovery,
subject to regulatory commission review and approval, of changes in
fuel costs including the fuel component of purchased power in the
Indiana jurisdiction and changes in replacement power in the
Michigan jurisdiction. Under the fuel cost recovery mechanisms,
retail rates contain a fuel cost adjustment factor that reflects
estimated fuel costs for the period during which the factor will be
in effect subject to reconciliation to actual fuel costs in a
future proceeding. When actual fuel costs exceed the estimated
costs reflected in the billing factor, a regulatory asset is
recorded and revenues are accrued.
Due to the unscheduled Cook Plant outage, I&M's actual fuel
costs significantly exceeded the estimated fuel costs reflected in
its fuel cost adjustment factors. A regulatory asset has been
recorded for revenues accrued in anticipation of future
reconciliation and billing of the higher fuel costs to customers.
At June 30, 1998, the accrued regulatory asset was $53 million.
On June 3, 1998, the Indiana Utility Regulatory Commission
approved an agreement authorizing I&M during the billing months of
July through September 1998 to apply a fuel cost adjustment factor
less than that requested by I&M, subject to future reconciliation
or refund. The agreement provides the parties to the proceeding
with the opportunity to conduct discovery regarding certain issues
that were raised in the proceeding, including the recovery of
replacement energy cost due to the Cook Plant outage, in
anticipation of resolving the issues in a future fuel cost
adjustment proceeding. Management believes that it should be able
to recover the Cook replacement energy costs; however, if recovery
of the replacement costs were to be denied, results of operations
and cash flows would be adversely affected.
ENERGY MARKETING AND TRADING
During 1998, the Company substantially increased the volume of
its electricity and gas marketing and trading businesses. The
purpose of such businesses is to utilize the Company's knowledge of
the energy markets in order to improve the competitiveness of its
generation business and contribute to non-regulated, nonoperating
income, thereby enhancing both customer and shareholder value.
Such businesses involve the marketing of energy under physical
forward contracts at fixed and variable prices and the trading of
options, futures, swaps and other financial derivative contracts at
both fixed and variable prices. Most contracts represent physical
forward electricity marketing contracts for the purchase and sale
of electricity in the Company's traditional marketing area which
are recorded as operating revenues and purchased power expense
when the contracts settle. At June 30, 1998, the Company had open
marketing contracts in its traditional marketing area through the
year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion.
The Company has also purchased and sold electricity and gas
options, futures and swaps, and entered into forward purchase and
sale contracts for the future delivery or receipt of electricity
outside its traditional marketing area and for gas. These
transactions represent non-regulated trading activities that are
marked-to-market and recorded in nonoperating income. At June 30,
1998, the fair value of such trading activity is reported as a
current asset and a current liability. The average fair value of
the current asset and the current liability was $272 million and
$267 million for the six months ended June 30, 1998, respectively.
Dependent on future electricity and gas market conditions and
prices, the open forward marketing contracts and the marked-to-market open
trading contracts could produce material income or
losses in future periods.
TAXES
The Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National Office
that certain interest deductions relating to corporate owned life
insurance (COLI) claimed by the Company should not be allowed. As
a result of a suit filed in United States District Court (discussed
below) this request for ruling has been withdrawn. Adjustments
have been or will be proposed by the IRS disallowing COLI interest
deductions for taxable years 1991-96. A disallowance of the COLI
interest deductions through June 30, 1998 would reduce earnings by
approximately $307 million (including interest). No provisions for
this amount have been recorded.
In order to resolve this issue without further delay, on March
24, 1998, the Company filed suit against the United States in the
United States District Court for the Southern District of Ohio.
Management believes that it has a meritorious position and will
vigorously pursue this lawsuit. In July 1998, the Company made a
payment of taxes and interest attributable to COLI interest
deductions for taxable years 1991-96 to avoid the potential
assessment by the IRS of any additional above market rate interest
on the contested amount. The payment will be recorded in other
property and investments and included on future balance sheets
pending the resolution of this matter. The Company will seek
refund, either administratively or through litigation, of all
amounts paid. In the event the resolution of this matter is
unfavorable, it will have a material adverse impact on results of
operations and cash flows.
COMPUTER ISSUE - YEAR 2000
The Company has been addressing the issue of what will happen
when the year 2000 arrives and many of the world's computer systems
will encounter the "year 2000" problem, i.e., computers not being
able to distinguish between the years 1900 and 2000. Internally
the Company has been modifying or replacing its computer hardware
and software programs to mitigate risk, minimize technical
failures, and rapidly repair failures if they occur. Externally
the problem is being addressed with entities that interact
electronically with the Company, including but not limited to,
suppliers, service providers, government agencies, customers,
creditors and financial service organizations. If the Company's
corrective actions, and/or the actions of other independent
entities fail for critical applications, the Company may be
adversely impacted in the year 2000. The Company began reviewing
the issue in 1996 and has spent approximately $13 million on the
project through June 30, 1998. The Company is continuing to study
the impact of making its systems "year 2000" compliant and is
working on various aspects of the issue. These activities are
projected to cost an additional $43 million to $55 million.
Although significant, the cost of correcting the "year 2000"
problem is not expected to have a material impact on the results of
operations for any accounting period, cash flows or financial
condition.
PROPOSED MERGER
As discussed in the 1997 Financial Statements and Management's
Discussion and Analysis of Results of Operations and Financial
Condition, the Company and Central and South West Corporation (CSW)
agreed to merge. At the annual meeting in May 1998, AEP
shareholders approved the issuance of AEP common shares to effect
the merger and approved an increase in the authorized shares of AEP
Common Stock from 300,000,000 to 600,000,000. CSW shareholders
approved the merger at their annual meeting in May 1998. The
companies have filed for approval to merge with the Federal Energy
Regulatory Commission and all of CSW's state regulatory
commissions: Arkansas, Louisiana, Oklahoma and Texas.
On August 13, 1998, the Arkansas Public Service Commission
approved the merger, subject to a number of conditions. The
Company is reviewing the conditions in the order.
<PAGE>
<PAGE>
<TABLE>
AEP GENERATING COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . $54,282 $53,433 $108,334 $112,529
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . 21,264 18,739 43,765 46,089
Rent - Rockport Plant Unit 2 . . . . . 17,070 17,070 34,141 34,141
Other Operation. . . . . . . . . . . . 2,724 2,714 5,373 5,844
Maintenance. . . . . . . . . . . . . . 4,229 5,357 6,407 7,743
Depreciation . . . . . . . . . . . . . 5,412 5,412 10,824 10,807
Taxes Other Than Federal Income Taxes. 934 850 1,877 1,729
Federal Income Taxes . . . . . . . . . 755 850 1,717 1,607
TOTAL OPERATING EXPENSES . . . 52,388 50,992 104,104 107,960
OPERATING INCOME . . . . . . . . . . . . 1,894 2,441 4,230 4,569
NONOPERATING INCOME. . . . . . . . . . . 791 950 1,620 1,800
INCOME BEFORE INTEREST CHARGES . . . . . 2,685 3,391 5,850 6,369
INTEREST CHARGES . . . . . . . . . . . . 806 1,070 1,591 2,011
NET INCOME . . . . . . . . . . . . . . . $ 1,879 $ 2,321 $ 4,259 $ 4,358
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
BALANCE AT BEGINNING OF PERIOD . . . . . $1,732 $2,637 $2,528 $1,886
NET INCOME . . . . . . . . . . . . . . . 1,879 2,321 4,259 4,358
CASH DIVIDENDS DECLARED. . . . . . . . . 1,176 1,286 4,352 2,572
BALANCE AT END OF PERIOD . . . . . . . . $2,435 $3,672 $2,435 $3,672
The common stock of the Company is wholly owned by
American Electric Power Company, Inc.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AEP GENERATING COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production. . . . . . . . . . . . . . . . . . . . . . . . $627,983 $627,803
General . . . . . . . . . . . . . . . . . . . . . . . . . 3,150 3,137
Construction Work in Progress . . . . . . . . . . . . . . 5,957 2,510
Total Electric Utility Plant. . . . . . . . . . . 637,090 633,450
Accumulated Depreciation. . . . . . . . . . . . . . . . . 267,871 257,191
NET ELECTRIC UTILITY PLANT. . . . . . . . . . . . 369,219 376,259
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . 2,602 237
Accounts Receivable . . . . . . . . . . . . . . . . . . . 22,513 20,710
Fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,945 10,107
Materials and Supplies. . . . . . . . . . . . . . . . . . 4,108 4,246
Prepayments . . . . . . . . . . . . . . . . . . . . . . . 228 368
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . 45,396 35,668
REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . 6,104 5,639
DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . 2,320 1,492
TOTAL . . . . . . . . . . . . . . . . . . . . . $423,039 $419,058
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AEP GENERATING COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock - Par Value $1,000:
Authorized and Outstanding - 1,000 Shares . . . . . . . $ 1,000 $ 1,000
Paid-in Capital . . . . . . . . . . . . . . . . . . . . . 37,235 39,235
Retained Earnings . . . . . . . . . . . . . . . . . . . . 2,435 2,528
Total Common Shareholder's Equity . . . . . . . . 40,670 42,763
Long-term Debt. . . . . . . . . . . . . . . . . . . . . . 44,788 69,570
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . 85,458 112,333
OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . . . . . 1,069 1,259
CURRENT LIABILITIES:
Short-term Debt - Notes Payable . . . . . . . . . . . . . 34,950 11,750
Accounts Payable. . . . . . . . . . . . . . . . . . . . . 17,912 9,704
Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . 4,750 3,420
Interest Accrued. . . . . . . . . . . . . . . . . . . . . 222 461
Rent Accrued - Rockport Plant Unit 2. . . . . . . . . . . 4,963 4,963
Obligations Under Capital Leases. . . . . . . . . . . . . 498 560
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,572 3,187
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 66,867 34,045
DEFERRED GAIN ON SALE AND LEASEBACK -
ROCKPORT PLANT UNIT 2 . . . . . . . . . . . . . . . . . . 136,116 138,901
REGULATORY LIABILITIES:
Deferred Investment Tax Credits . . . . . . . . . . . . . 68,335 70,016
Deferred Amounts Due to Customers for Federal Income Tax. 30,728 31,375
TOTAL REGULATORY LIABILITIES. . . . . . . . . . . 99,063 101,391
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . 34,466 31,129
TOTAL . . . . . . . . . . . . . . . . . . . . . $423,039 $419,058
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AEP GENERATING COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
June 30,
1998 1997
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,259 $ 4,358
Adjustments for Noncash Items:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 10,824 10,807
Deferred Federal Income Taxes. . . . . . . . . . . . . . 2,689 2,379
Deferred Investment Tax Credits. . . . . . . . . . . . . (1,681) (1,684)
Amortization of Deferred Gain on Sale
and Leaseback - Rockport Plant Unit 2. . . . . . . . . (2,785) (2,785)
Deferred Property Taxes. . . . . . . . . . . . . . . . . (1,572) (1,460)
Changes in Certain Current Assets and Liabilities:
Accounts Receivable. . . . . . . . . . . . . . . . . . . (1,803) (200)
Fuel, Materials and Supplies . . . . . . . . . . . . . . (5,700) 680
Accounts Payable . . . . . . . . . . . . . . . . . . . . 8,208 7,622
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 1,330 1,205
Other (net). . . . . . . . . . . . . . . . . . . . . . . . 517 (3,914)
Net Cash Flows From Operating Activities . . . . . . 14,286 17,008
INVESTING ACTIVITIES - Construction Expenditures . . . . . . (3,769) (1,765)
FINANCING ACTIVITIES:
Return of Capital to Parent Company. . . . . . . . . . . . (2,000) (2,000)
Retirement of Long-term Debt . . . . . . . . . . . . . . . (25,000) (20,010)
Change in Short-term Debt (net). . . . . . . . . . . . . . 23,200 9,225
Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (4,352) (2,572)
Net Cash Flows Used For Financing Activities . . . . (8,152) (15,357)
Net Increase (Decrease) in Cash and Cash Equivalents . . . . 2,365 (114)
Cash and Cash Equivalents at Beginning of Period . . . . . . 237 139
Cash and Cash Equivalents at End of Period . . . . . . . . . $ 2,602 $ 25
Supplemental Disclosure:
Cash paid (received) for interest net of capitalized amounts was $1,634,000 and
$1,819,000 and for income taxes was $(717,000) and $(562,000) in 1998 and 1997,
respectively.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
AEP GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements should be read
in conjunction with the 1997 Annual Report as incorporated in and
filed with the Form 10-K. In the opinion of management, the
financial statements reflect all adjustments (consisting of only
normal recurring accruals) which are necessary for a fair
presentation of the results of operations for interim periods.
2. FINANCING ACTIVITIES
In March 1998 $12.5 million of the 1995 Series A pollution
control revenue bonds due 2025 and $12.5 million of the 1995 Series
B pollution control revenue bonds due 2025 were redeemed.
3. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" was adopted by the Company in the
first quarter of 1998. SFAS No. 130 established the standards for
reporting and displaying components of "comprehensive income,"
which is the total of net income and all transactions not included
in net income affecting equity except those with shareholders. For
the quarter and year-to-date periods ended June 30, 1998, there
were no material differences between comprehensive income and net
income.
In the first quarter of 1998 the Company adopted the American
Institute of Certified Public Accountants' Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The SOP requires the
capitalization and amortization of certain costs of acquiring or
developing internal use computer software. Previously the Company
expensed all software acquisition and development costs. The SOP
must be adopted at the beginning of a fiscal year with no
restatement or retroactive adjustment of prior periods. The
adoption of the SOP effective January 1, 1998 did not have a
material effect on results of operations, cash flows or financial
condition.
<PAGE>
<PAGE>
AEP GENERATING COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
SECOND QUARTER 1998 vs. SECOND QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
Operating revenues are derived from the sale of Rockport Plant
energy and capacity to two affiliated companies and one
unaffiliated utility pursuant to Federal Energy Regulatory
Commission (FERC) approved long-term unit power agreements. The
unit power agreements provide for recovery of costs including a
FERC approved rate of return on common equity and a return on other
capital net of temporary cash investments.
Net income declined $0.4 million or 19% in the second quarter
and $0.1 or 2% in the year-to-date period as a result of capital
returned to the Company's parent in 1997 and May 1998 and the March
1998 redemption of $25 million of pollution control revenue bonds.
The retirement of this long-term debt reduced cash available for
temporary investment and increased short-term debt interest which
is reflected as an increase in the power bills on a one-month lag
as part of the return on other capital.
Income statement line items which changed significantly were:
Increase (Decrease)
Second Quarter Year-to-Date
(in millions) % (in millions) %
Operating Revenues . . . . . $ 0.8 2 $(4.2) (4)
Fuel Expense . . . . . . . . 2.5 13 (2.3) (5)
Other Operation Expense. . . - - (0.5) (8)
Maintenance Expense. . . . . (1.1) (21) (1.3) (17)
Federal Income Taxes . . . . (0.1) (11) 0.1 7
Nonoperating Income. . . . . (0.2) (17) (0.2) (10)
Interest Charges . . . . . . (0.3) (25) (0.4) (21)
The increase in operating revenues during the second quarter
reflects the recovery through the unit power agreements of higher
operating expenses, primarily fuel expense. In the year-to-date
period, recovery of lower operating expenses, primarily fuel and
maintenance costs, and the above noted reduction in capital cost
caused the decline in operating revenues.
<PAGE>
Fuel expense increased in the second quarter as generation
increased by 19 percent. While year-to-date generation increased
slightly, a lower average cost of fuel consumed, due to a reduction
in coal prices, produced the reduction in fuel expense when
compared to prior year.
The decline in other operation expense in the year-to-date
period is primarily due to a decrease in administrative and general
expenses reflecting a reduction in allocated employee salary and
benefit costs and a reduction in the FERC annual assessment.
The decline in maintenance expense reflects lower costs due to
a 1998 maintenance outage at Rockport Unit 1 being of shorter
duration than a 1997 outage.
In the second quarter, federal income taxes attributable to
operations decreased due to a decrease in pre-tax operating income.
Nonoperating income declined primarily as a result of the
reduction in earnings on temporary cash investments.
The decline in interest charges was due to the reduction in
outstanding long-term debt balances reflecting the redemption of
$20 million in June 1997 and $25 million in March 1998 of pollution
control revenue bonds.
<PAGE>
<PAGE>
<TABLE>
APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . $759,793 $373,084 $1,377,283 $789,534
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . 101,191 89,355 209,400 184,259
Purchased Power. . . . . . . . . . . . 443,948 75,468 715,334 161,008
Other Operation. . . . . . . . . . . . 62,442 61,427 117,309 125,267
Maintenance. . . . . . . . . . . . . . 31,476 29,080 66,828 51,890
Depreciation and Amortization. . . . . 35,788 34,274 71,193 68,249
Taxes Other Than Federal Income Taxes. 29,934 29,763 60,178 60,036
Federal Income Taxes . . . . . . . . . 8,822 8,320 26,600 29,094
TOTAL OPERATING EXPENSES . . . 713,601 327,687 1,266,842 679,803
OPERATING INCOME . . . . . . . . . . . . 46,192 45,397 110,441 109,731
NONOPERATING INCOME. . . . . . . . . . . 1,561 79 1,174 323
INCOME BEFORE INTEREST CHARGES . . . . . 47,753 45,476 111,615 110,054
INTEREST CHARGES . . . . . . . . . . . . 32,629 30,098 63,292 58,192
NET INCOME . . . . . . . . . . . . . . . 15,124 15,378 48,323 51,862
PREFERRED STOCK DIVIDEND REQUIREMENTS. . 678 680 1,147 5,645
EARNINGS APPLICABLE TO COMMON STOCK. . . $ 14,446 $ 14,698 $ 47,176 $ 46,217
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
BALANCE AT BEGINNING OF PERIOD . . . . . $210,545 $211,382 $207,544 $208,472
NET INCOME . . . . . . . . . . . . . . . 15,124 15,378 48,323 51,862
DEDUCTIONS:
Cash Dividends Declared:
Common Stock . . . . . . . . . . . . 29,729 28,609 59,458 57,218
Cumulative Preferred Stock . . . . . 570 573 932 2,077
Capital Stock Expense. . . . . . . . . 108 107 215 3,568
BALANCE AT END OF PERIOD . . . . . . . . $195,262 $197,471 $195,262 $197,471
The common stock of the Company is wholly owned by
American Electric Power Company, Inc.
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production . . . . . . . . . . . . . . . . . . . . . $1,956,055 $1,942,325
Transmission . . . . . . . . . . . . . . . . . . . . 1,098,796 1,079,919
Distribution . . . . . . . . . . . . . . . . . . . . 1,621,965 1,583,161
General. . . . . . . . . . . . . . . . . . . . . . . 224,339 207,380
Construction Work in Progress. . . . . . . . . . . . 81,000 88,261
Total Electric Utility Plant . . . . . . . . 4,982,155 4,901,046
Accumulated Depreciation and Amortization. . . . . . 1,926,369 1,869,057
NET ELECTRIC UTILITY PLANT . . . . . . . . . 3,055,786 3,031,989
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 41,340 34,544
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 5,810 6,947
Accounts Receivable (net). . . . . . . . . . . . . . 164,691 163,324
Fuel . . . . . . . . . . . . . . . . . . . . . . . . 57,462 47,901
Materials and Supplies . . . . . . . . . . . . . . . 61,877 57,359
Accrued Utility Revenues . . . . . . . . . . . . . . 36,482 51,208
Energy Marketing and Trading Contracts . . . . . . . 232,141 923
Prepayments. . . . . . . . . . . . . . . . . . . . . 7,158 6,037
TOTAL CURRENT ASSETS . . . . . . . . . . . . 565,621 333,699
REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 432,486 441,223
DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 48,226 41,975
TOTAL. . . . . . . . . . . . . . . . . . . $4,143,459 $3,883,430
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock - No Par Value:
Authorized - 30,000,000 Shares
Outstanding - 13,499,500 Shares. . . . . . . . . . $ 260,458 $ 260,458
Paid-in Capital. . . . . . . . . . . . . . . . . . . 638,389 613,048
Retained Earnings. . . . . . . . . . . . . . . . . . 195,262 207,544
Total Common Shareholder's Equity. . . . . . 1,094,109 1,081,050
Cumulative Preferred Stock:
Not Subject to Mandatory Redemption. . . . . . . . 19,490 19,747
Subject to Mandatory Redemption. . . . . . . . . . 22,310 22,310
Long-term Debt . . . . . . . . . . . . . . . . . . . 1,532,543 1,415,026
TOTAL CAPITALIZATION . . . . . . . . . . . . 2,668,452 2,538,133
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 141,858 137,371
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . . . 19,504 79,509
Short-term Debt. . . . . . . . . . . . . . . . . . . 41,000 130,300
Accounts Payable . . . . . . . . . . . . . . . . . . 76,646 96,816
Taxes Accrued. . . . . . . . . . . . . . . . . . . . 38,930 41,549
Customer Deposits. . . . . . . . . . . . . . . . . . 13,901 13,713
Interest Accrued . . . . . . . . . . . . . . . . . . 20,056 20,949
Revenue Refunds Accrued. . . . . . . . . . . . . . . 41,173 3,311
Energy Marketing and Trading Contracts . . . . . . . 230,785 729
Other. . . . . . . . . . . . . . . . . . . . . . . . 90,682 68,083
TOTAL CURRENT LIABILITIES. . . . . . . . . . 572,677 454,959
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 654,446 658,655
DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 65,131 67,496
DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 40,895 26,816
CONTINGENCIES (Note 6)
TOTAL. . . . . . . . . . . . . . . . . . . $4,143,459 $3,883,430
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
APPALACHIAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
June 30,
1998 1997
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,323 $ 51,862
Adjustments for Noncash Items:
Depreciation and Amortization. . . . . . . . . . . . . . . 71,825 68,902
Deferred Federal Income Taxes. . . . . . . . . . . . . . . 2,151 (6,524)
Deferred Power Supply Costs (net). . . . . . . . . . . . . 15,474 9,093
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net). . . . . . . . . . . . . . . . . (1,367) 3,980
Fuel, Materials and Supplies . . . . . . . . . . . . . . . (14,079) (3,761)
Accrued Utility Revenues . . . . . . . . . . . . . . . . . 14,726 19,802
Accounts Payable . . . . . . . . . . . . . . . . . . . . . (20,170) 4,385
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . (2,619) 12,320
Revenue Refunds Accrued. . . . . . . . . . . . . . . . . . 37,862 (1,606)
Other (net). . . . . . . . . . . . . . . . . . . . . . . . . 5,595 (10,972)
Net Cash Flows From Operating Activities . . . . . . . 157,721 147,481
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . . . . . . . (89,608) (91,759)
Proceeds from Sale of Property . . . . . . . . . . . . . . . 880 2,241
Net Cash Flows Used For Investing Activities . . . . . (88,728) (89,518)
FINANCING ACTIVITIES:
Capital Contributions from Parent Company. . . . . . . . . . 25,000 20,000
Issuance of Long-term Debt . . . . . . . . . . . . . . . . . 193,431 183,257
Change in Short-term Debt (net). . . . . . . . . . . . . . . (89,300) 42,550
Retirement of Cumulative Preferred Stock . . . . . . . . . . (190) (183,842)
Retirement of Long-term Debt . . . . . . . . . . . . . . . . (138,471) (56,378)
Dividends Paid on Common Stock . . . . . . . . . . . . . . . (59,458) (57,218)
Dividends Paid on Cumulative Preferred Stock . . . . . . . . (1,142) (4,746)
Net Cash Flows Used For Financing Activities . . . . . (70,130) (56,377)
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . (1,137) 1,586
Cash and Cash Equivalents at Beginning of Period . . . . . . . 6,947 7,260
Cash and Cash Equivalents at End of Period . . . . . . . . . . $ 5,810 $ 8,846
Supplemental Disclosure:
Cash paid for interest net of capitalized amounts was $62,272,000 and $56,791,000 and
for income taxes was $30,981,000 and $24,890,000 in 1998 and 1997, respectively.
Noncash acquisitions under capital leases were $11,893,000 and $11,797,000 in 1998
and 1997, respectively.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
APPALACHIAN POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial
statements should be read in conjunction with the 1997
Annual Report as incorporated in and filed with the Form 10-K.
In the opinion of management, the financial statements
reflect all adjustments (consisting of only normal recurring
accruals) which are necessary for a fair presentation of the
results of operations for interim periods.
2. RATE MATTER
In September 1992 the Company implemented, subject to
refund, an $8.7 million annual rate increase to its
wholesale customers pending a final order from the Federal
Energy Regulatory Commission (FERC). On June 29, 1998 the
FERC granted an annual rate increase of $3.4 million and
required a refund including interest of amounts collected in
excess of the $3.4 million annual increase. As a result of
the order, the Company increased the provision for revenue
refund by $4.4 million (net of tax) in June 1998. As of
June 30, 1998 a refund obligation of $39.6 million including
interest has been recorded as a current liability. A
rehearing of the FERC's order has been requested.
3. FINANCING ACTIVITIES
During the first six months of 1998, the Company issued
two series of senior unsecured notes of $100 million each
with rates of 7.20% and 7.30% due in 2038.
During the first six months of 1998, the Company
reacquired the following first mortgage bonds for $138
million including reacquisition premiums:
Principal
Amount
% Rate Due Date Reacquired
(in thousands)
8.75 2022 - February 1 $29,919
8.70 2022 - May 22 35,000
7.95 2002 - March 1 60,000
8.43 2022 - June 1 12,529
In June 1998, the Company received a $25 million cash
capital contribution from its parent which was credited to
paid-in capital.
<PAGE>
4. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" was adopted by the Company in
the first quarter of 1998. SFAS No. 130 established the
standards for reporting and displaying components of
"comprehensive income," which is the total of net income and
all transactions not included in net income affecting equity
except those with shareholders. For the quarter and year-to-date periods
ended June 30, 1998, there were no material
differences between comprehensive income and net income.
In the first quarter of 1998 the Company adopted the
American Institute of Certified Public Accountants' Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP
requires the capitalization and amortization of certain costs
of acquiring or developing internal use computer software.
Previously the Company expensed software acquisition and
development costs with the exception of certain software costs
which were capitalized in accordance with an order of the
Virginia State Corporation Commission. The SOP must be adopted
at the beginning of a fiscal year with no restatement or
retroactive adjustment of prior periods. The adoption of the
SOP effective January 1, 1998 did not have a material effect
on results of operations, cash flows or financial condition.
5. ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation,
as agent for the Company and its affiliates in the AEP System
Power Pool (Power Pool), substantially increased the volume of
its electricity marketing and trading businesses. The purpose
of such businesses is to utilize AEP's knowledge of the energy
markets in order to improve the competitiveness of its
generation business and contribute to non-regulated,
nonoperating income. Revenues and expenses from these
activities are shared by the Power Pool members based on their
relative peak demands.
Such businesses involve the marketing of power under
physical forward contracts at fixed and variable prices and the
trading of options, futures, swaps and other financial
derivative contracts at both fixed and variable prices. Most
contracts represent physical forward electricity marketing
contracts for the purchase and sale of electricity in the Power
Pool's traditional marketing area which are recorded as
operating revenues and purchased power expense when the
contracts settle. At June 30, 1998, the Power Pool had open
marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's
share of these notional values is approximately $450 million
for sales and approximately $450 million for purchases.
<PAGE>
The Power Pool has also purchased and sold electricity
options, futures, and swaps, and entered into forward purchase
and sale contracts for the future delivery or receipt of
electricity outside the traditional marketing area. These
transactions represent non-regulated trading activities that
are marked-to-market and recorded in nonoperating income. At
June 30, 1998, the Company's share of the fair value of such
trading contracts is reported as a current asset and a current
liability. The Company's share of the average fair value of
the current asset and the current liability was $80 million and
$80 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and
prices, the open forward physical marketing contracts and the
marked-to-market open trading contracts could produce material
income or losses in future periods.
6. CONTINGENCIES
Taxes
As discussed in Note 9, "Federal Income Taxes" of the Notes
to Consolidated Financial Statements in the 1997 Annual Report,
the Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National
Office that certain interest deductions relating to corporate
owned life insurance (COLI) claimed by the Company should not
be allowed. As a result of a suit filed in United States
District Court (discussed below) this request for ruling has
been withdrawn. Adjustments have been or will be proposed by
the IRS disallowing COLI interest deductions for taxable years
1991-96. A disallowance of the COLI interest deduction through
June 30, 1998 would reduce earnings by approximately $76
million (including interest). No provisions for this amount
have been recorded.
In order to resolve this issue without further delay, on
March 24, 1998, the Company filed suit against the United
States in the United States District Court for the Southern
District of Ohio. Management believes that it has a
meritorious position and will vigorously pursue this lawsuit.
In July 1998, the Company made a payment of taxes and interest
attributable to COLI interest deductions for taxable years
1991-96 to avoid the potential assessment by the IRS of any
additional above market rate interest on the contested amount.
The payment will be recorded in other property and investments
and included on future balance sheets pending the resolution
of this matter. The Company will seek refund, either
administratively or through litigation, of all amounts paid.
In the event the resolution of this matter is unfavorable, it
will have a material adverse impact on results of operations
and cash flows.
<PAGE>
Other
The Company continues to be involved in certain other
matters discussed in its 1997 Annual Report.<PAGE>
<PAGE>
APPALACHIAN POWER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
SECOND QUARTER 1998 vs. SECOND QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Net income declined $0.3 million or 2% in the second quarter
and $3.5 million or 7% in the year-to-date period primarily due to
a $4.4 million net of tax provision for revenue refund recorded in
June 1998 and increased interest charges reflecting an increase in
long-term debt outstanding and interest on revenues to be refunded
to customers under a final rate order.
Income statement line items which changed significantly were:
Increase (Decrease)
Second Quarter Year-to-Date
(in millions) % (in millions) %
Operating Revenues . . . . . $386.7 104 $587.7 74
Fuel Expense . . . . . . . . 11.8 13 25.1 14
Purchased Power Expense. . . 368.5 488 554.3 344
Other Operation Expense. . . 1.0 2 (8.0) (6)
Maintenance Expense. . . . . 2.4 8 14.9 29
Federal Income Taxes . . . . 0.5 6 (2.5) (9)
Interest Charges . . . . . . 2.5 8 5.1 9
Operating revenues increased significantly for both the second
quarter and year-to-date period due predominantly to increased
wholesale and retail sales. A new power marketing business, which
started in July 1997, was the primary reason for the substantial
increase in wholesale sales. The power marketing business involves
the purchase and sale of large quantities of electricity through
forward contracts. The increases in wholesale sales and related
revenues were offset by a nearly equivalent increase in power
purchases by the power marketing operation.
Retail sales and revenues each increased 3% for the second
quarter and 2% year-to-date as demand by weather sensitive
residential and commercial customers increased reflecting warmer
springtime temperatures.
The increase in fuel expense was due to an increase in
generation to meet the increased demand in the retail business for
electricity.
<PAGE>
Purchased power expense increased as a result of purchases of
electricity by the new power marketing business.
The decrease in other operation expense for the year-to-date
period is due to lower charges under an AEP System transmission
equalization agreement and a reduction in employee pension and
benefit costs. The transmission equalization agreement combines
certain AEP System companies' investment in transmission facilities
and shares the costs of ownership of those facilities in proportion
to each AEP System company's peak demand relative to the peak
demands of all AEP System companies utilizing the AEP System
transmission system. The charges paid by the Company under the
agreement decreased due to a decrease in the Company's prior twelve
month peak demand relative to the total peak demand of all
transmission agreement members.
Maintenance expense increased as a result of increased
expenditures to repair overhead transmission and distribution lines
damaged by two severe winter snowstorms and to maintain right of
way clearances from trees around distribution facilities.
The decrease in federal income tax expense attributable to
operations for the year-to-date period was primarily due to a
decrease in pre-tax operating income.
Interest charges for the quarter and year-to-date periods
increased as a result of the accrual of additional interest on
revenue refunds to wholesale customers under the terms of a final
rate order and in the year-to-date period, an increase in long-term
debt outstanding, which was issued in 1997 to finance the
reacquisition of preferred stock.
FINANCIAL CONDITION
Total plant and property additions including capital leases for
the first six months of 1998 were $102 million.
During the first six months of 1998, the Company issued two
series of senior unsecured notes of $100 million each with rates of
7.20% and 7.30% due in 2038 and redeemed $137 million principal
amount of first mortgage bonds with interest rates from 7.95% to
8.75%. Short-term debt decreased by $89 million from year-end
balances. In June 1998, the Company received a $25 million cash
capital contribution from its parent which was credited to paid-in
capital.<PAGE>
ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation, as
agent for the Company and its affiliates in the AEP System Power
Pool (Power Pool), substantially increased the volume of its
electricity marketing and trading businesses. The purpose of such
businesses is to utilize AEP's knowledge of the energy markets in
order to improve the competitiveness of its generation business and
contribute to non-regulated, nonoperating income. Revenues and
expenses from these activities are shared by the Power Pool members
based on their relative peak demands.
Such businesses involve the marketing of power under physical
forward contracts at fixed and variable prices and the trading of
options, futures, swaps and other financial derivative contracts at
both fixed and variable prices. Most contracts represent physical
forward electricity marketing contracts for the purchase and sale
of electricity in the Power Pool's traditional marketing area which
are recorded as operating revenues and purchased power expense
when the contracts settle. At June 30, 1998, the Power Pool had
open marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's share
of these notional values is approximately $450 million for sales
and approximately $450 million for purchases.
The Power Pool has also purchased and sold electricity options,
futures, and swaps, and entered into forward purchase and sale
contracts for the future delivery or receipt of electricity outside
the traditional marketing area. These transactions represent non-regulated
trading activities that are marked-to-market and recorded
in nonoperating income. At June 30, 1998, the Company's share of
the fair value of such trading contracts is reported as a current
asset and a current liability. The Company's share of the average
fair value of the current asset and the current liability was $80
million and $80 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and prices,
the open forward physical marketing contracts and the marked-to-market open
trading contracts could produce material income or
losses in future periods.
TAXES
The Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National Office
that certain interest deductions relating to corporate owned life
insurance (COLI) claimed by the Company should not be allowed. As
a result of a suit filed in United States District Court (discussed
below) this request for ruling has been withdrawn. Adjustments
have been or will be proposed by the IRS disallowing COLI interest
deductions for taxable years 1991-96. A disallowance of the COLI
interest deduction through June 30, 1998 would reduce earnings by
approximately $76 million (including interest). No provisions for
this amount have been recorded.
In order to resolve this issue without further delay, on March
24, 1998, the Company filed suit against the United States in the
United States District Court for the Southern District of Ohio.
Management believes that it has a meritorious position and will
vigorously pursue this lawsuit. In July 1998, the Company made a
payment of taxes and interest attributable to COLI interest
deductions for taxable years 1991-96 to avoid the potential
assessment by the IRS of any additional above market rate interest
on the contested amount. The payment will be recorded in other
property and investments and included on future balance sheets
pending the resolution of this matter. The Company will seek
refund, either administratively or through litigation, of all
amounts paid. In the event the resolution of this matter is
unfavorable, it will have a material adverse impact on results of
operations and cash flows.
COMPUTER ISSUE - YEAR 2000
The Company has been addressing the issue of what will happen
when the year 2000 arrives and many of the world's computer systems
will encounter the "year 2000" problem, i.e., computers not being
able to distinguish between the years 1900 and 2000. Internally
the Company has been modifying or replacing its computer hardware
and software programs to mitigate risk, minimize technical
failures, and rapidly repair failures if they occur. Externally
the problem is being addressed with entities that interact
electronically with the Company, including but not limited to,
suppliers, service providers, government agencies, customers,
creditors and financial service organizations. If the Company's
corrective actions, and/or the actions of other independent
entities fail for critical applications, the Company may be
adversely impacted in the year 2000. The Company began reviewing
the issue in 1996 and has spent approximately $4 million on the
project through June 30, 1998. The Company is continuing to study
the impact of making its systems "year 2000" compliant and is
working on various aspects of the issue. These activities are
projected to cost an additional $13 million to $16 million.
Although significant, the cost of correcting the "year 2000"
problem is not expected to have a material impact on the results of
operations for any accounting period, cash flows or financial
condition.
<PAGE>
<PAGE>
<TABLE>
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
(in thousands)
OPERATING REVENUES . . . . . . . . . . . $493,285 $263,263 $868,766 $528,270
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . 46,860 37,129 93,840 81,929
Purchased Power. . . . . . . . . . . . 253,804 45,319 410,723 83,834
Other Operation. . . . . . . . . . . . 46,783 43,621 91,365 85,751
Maintenance. . . . . . . . . . . . . . 14,889 19,743 29,196 33,067
Depreciation . . . . . . . . . . . . . 22,844 22,572 45,694 45,019
Amortization of Zimmer
Plant Phase-in Costs . . . . . . . . - 7,334 - 15,741
Taxes Other Than Federal Income Taxes. 27,690 29,654 57,626 59,623
Federal Income Taxes . . . . . . . . . 23,264 14,923 37,942 32,908
TOTAL OPERATING EXPENSES . . . 436,134 220,295 766,386 437,872
OPERATING INCOME . . . . . . . . . . . . 57,151 42,968 102,380 90,398
NONOPERATING INCOME. . . . . . . . . . . 1,256 324 1,228 1,360
INCOME BEFORE INTEREST CHARGES . . . . . 58,407 43,292 103,608 91,758
INTEREST CHARGES . . . . . . . . . . . . 19,665 19,862 39,221 39,004
NET INCOME . . . . . . . . . . . . . . . 38,742 23,430 64,387 52,754
PREFERRED STOCK DIVIDEND REQUIREMENTS. . 532 533 1,065 1,377
EARNINGS APPLICABLE TO COMMON STOCK. . . $ 38,210 $ 22,897 $ 63,322 $ 51,377
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
BALANCE AT BEGINNING OF PERIOD . . . . . $142,623 $108,727 $138,172 $ 99,582
NET INCOME . . . . . . . . . . . . . . . 38,742 23,430 64,387 52,754
DEDUCTIONS:
Cash Dividends Declared:
Common Stock . . . . . . . . . . . . 20,661 19,671 41,322 39,342
Cumulative Preferred Stock . . . . . 438 438 875 875
Capital Stock Expense. . . . . . . . . 95 95 191 166
BALANCE AT END OF PERIOD . . . . . . . . $160,171 $111,953 $160,171 $111,953
The common stock of the Company is wholly owned by American Electric Power Company, Inc.
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production . . . . . . . . . . . . . . . . . . . . . $1,519,503 $1,521,381
Transmission . . . . . . . . . . . . . . . . . . . . 335,202 336,446
Distribution . . . . . . . . . . . . . . . . . . . . 918,729 926,178
General. . . . . . . . . . . . . . . . . . . . . . . 119,239 138,041
Construction Work in Progress. . . . . . . . . . . . 110,241 54,064
Total Electric Utility Plant . . . . . . . . 3,002,914 2,976,110
Accumulated Depreciation . . . . . . . . . . . . . . 1,097,984 1,074,588
NET ELECTRIC UTILITY PLANT . . . . . . . . . 1,904,930 1,901,522
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 36,263 33,235
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 8,021 12,626
Accounts Receivable (net). . . . . . . . . . . . . . 109,260 110,969
Fuel . . . . . . . . . . . . . . . . . . . . . . . . 18,159 19,549
Materials and Supplies . . . . . . . . . . . . . . . 29,051 27,628
Accrued Utility Revenues . . . . . . . . . . . . . . 65,442 51,765
Energy Marketing and Trading Contracts . . . . . . . 126,802 418
Prepayments. . . . . . . . . . . . . . . . . . . . . 37,888 29,979
TOTAL CURRENT ASSETS . . . . . . . . . . . . 394,623 252,934
REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 350,052 359,481
DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 38,263 66,688
TOTAL. . . . . . . . . . . . . . . . . . . $2,724,131 $2,613,860
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock - No Par Value:
Authorized - 24,000,000 Shares
Outstanding - 16,410,426 Shares. . . . . . . . . . $ 41,026 $ 41,026
Paid-in Capital. . . . . . . . . . . . . . . . . . . 572,302 572,112
Retained Earnings. . . . . . . . . . . . . . . . . . 160,171 138,172
Total Common Shareholder's Equity. . . . . . 773,499 751,310
Cumulative Preferred Stock - Subject to
Mandatory Redemption . . . . . . . . . . . . . . . 25,000 25,000
Long-term Debt . . . . . . . . . . . . . . . . . . . 959,416 887,850
TOTAL CAPITALIZATION . . . . . . . . . . . . 1,757,915 1,664,160
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 43,542 42,271
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . . . 40,000 81,750
Short-term Debt. . . . . . . . . . . . . . . . . . . 52,525 66,600
Accounts Payable . . . . . . . . . . . . . . . . . . 71,831 71,287
Taxes Accrued. . . . . . . . . . . . . . . . . . . . 80,085 131,107
Interest Accrued . . . . . . . . . . . . . . . . . . 13,876 14,198
Energy Marketing and Trading Contracts . . . . . . . 126,547 353
Other. . . . . . . . . . . . . . . . . . . . . . . . 28,373 28,619
TOTAL CURRENT LIABILITIES. . . . . . . . . . 413,237 393,914
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 431,210 433,593
DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 51,159 52,934
DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 27,068 26,988
CONTINGENCIES (Note 5)
TOTAL. . . . . . . . . . . . . . . . . . . $2,724,131 $2,613,860
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
(in thousands)
<CAPTION>
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 64,387 $ 52,754
Adjustments for Noncash Items:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 45,808 45,137
Deferred Federal Income Taxes. . . . . . . . . . . . . . 3,959 (1,385)
Deferred Investment Tax Credits. . . . . . . . . . . . . (1,775) (1,803)
Deferred Collection of Fuel Costs (net). . . . . . . . . (5,753) (7,315)
Amortization of Deferred Property Taxes. . . . . . . . . 32,514 32,400
Amortization of Zimmer Plant Operating Expenses and
Carrying Charges . . . . . . . . . . . . . . . . . . . - 15,775
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net). . . . . . . . . . . . . . . . 1,709 (37,458)
Fuel, Materials and Supplies . . . . . . . . . . . . . . (33) (3,612)
Accrued Utility Revenues . . . . . . . . . . . . . . . . (13,677) (21,803)
Prepayments. . . . . . . . . . . . . . . . . . . . . . . (7,909) (9,135)
Accounts Payable . . . . . . . . . . . . . . . . . . . . 544 10,626
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (51,022) (37,953)
Other (net). . . . . . . . . . . . . . . . . . . . . . . . 8,491 (4,084)
Net Cash Flows From Operating Activities . . . . . . 77,243 32,144
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . . . . . . (57,626) (58,623)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,287 1,470
Net Cash Flows Used For Investing Activities . . . . (55,339) (57,153)
FINANCING ACTIVITIES:
Issuance of Long-term Debt . . . . . . . . . . . . . . . . 111,075 38,574
Change in Short-term Debt (net). . . . . . . . . . . . . . (14,075) 84,300
Retirement of Cumulative Preferred Stock . . . . . . . . . - (52,953)
Retirement of Long-term Debt . . . . . . . . . . . . . . . (81,750) -
Dividends Paid on Common Stock . . . . . . . . . . . . . . (41,322) (39,342)
Dividends Paid on Cumulative Preferred Stock . . . . . . . (437) (1,860)
Net Cash Flows From (Used For) Financing Activities. (26,509) 28,719
Net Increase (Decrease) in Cash and Cash Equivalents . . . . (4,605) 3,710
Cash and Cash Equivalents at Beginning of Period . . . . . . 12,626 9,134
Cash and Cash Equivalents at End of Period . . . . . . . . . $ 8,021 $ 12,844
Supplemental Disclosure:
Cash paid for interest net of capitalized amounts was $37,667,000 and $36,976,000
and for income taxes was $20,886,000 and $26,762,000 in 1998 and 1997, respectively.
Noncash acquisitions under capital leases were $6,060,000 and $4,570,000 in 1998
and 1997, respectively.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial
statements should be read in conjunction with the 1997 Annual
Report as incorporated in and filed with the Form 10-K. In the
opinion of management, the financial statements reflect all
adjustments (consisting of only normal recurring accruals)
which are necessary for a fair presentation of the results of
operations for interim periods.
2. FINANCING ACTIVITIES
During the first six months of 1998 the Company redeemed
$57 million of 9.15% and $25 million of 7.00% First Mortgage
Bonds at maturity and issued $52 million of 6.51% and $60
million of 6.55% Senior Unsecured Notes due in 2008.
In June 1998, the Company called $40 million of 7.95% First
Mortgage Bonds due 2002 for early redemption in July.
Consequently, the bonds are classified as a current liability
on the balance sheet.
3. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" was adopted by the Company in
the first quarter of 1998. SFAS No. 130 established the
standards for reporting and displaying components of
"comprehensive income," which is the total of net income and
all transactions not included in net income affecting equity
except those with shareholders. For the quarter and year-to-date periods
ended June 30, 1998, there were no material
differences between comprehensive income and net income.
In the first quarter of 1998 the Company adopted the
American Institute of Certified Public Accountants' Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP
requires the capitalization and amortization of certain costs
of acquiring or developing internal use computer software.
Previously the Company expensed all software acquisition and
development costs. The SOP must be adopted at the beginning
of a fiscal year with no restatement or retroactive adjustment
of prior periods. The adoption of the SOP effective January
1, 1998 did not have a material effect on results of
operations, cash flows or financial condition.
4. ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation,
as agent for the Company and its affiliates in the AEP System
Power Pool (Power Pool), substantially increased the volume of
its electricity marketing and trading businesses. The purpose
of such businesses is to utilize AEP's knowledge of the energy
markets in order to improve the competitiveness of its
generation business and contribute to non-regulated,
nonoperating income. Revenues and expenses from these
activities are shared by the Power Pool members based on their
relative peak demands.
Such businesses involve the marketing of power under
physical forward contracts at fixed and variable prices and the
trading of options, futures, swaps and other financial
derivative contracts at both fixed and variable prices. Most
contracts represent physical forward electricity marketing
contracts for the purchase and sale of electricity in the Power
Pool's traditional marketing area which are recorded as
operating revenues and purchased power expense when the
contracts settle. At June 30, 1998, the Power Pool had open
marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's
share of these notional values is approximately $250 million
for sales and approximately $250 million for purchases.
The Power Pool has also purchased and sold electricity
options, futures, and swaps, and entered into forward purchase
and sale contracts for the future delivery or receipt of
electricity outside the traditional marketing area. These
transactions represent non-regulated trading activities that
are marked-to-market and recorded in nonoperating income. At
June 30, 1998, the Company's share of the fair value of such
trading contracts is reported as a current asset and a current
liability. The Company's share of the average fair value of
the current asset and the current liability was $44 million and
$44 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and
prices, the open forward physical marketing contracts and the
marked-to-market open trading contracts could produce material
income or losses in future periods.
5. CONTINGENCIES
Taxes
As discussed in Note 8, "Federal Income Taxes" of the Notes
to Consolidated Financial Statements in the 1997 Annual Report,
the Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National
Office that certain interest deductions relating to corporate
owned life insurance (COLI) claimed by the Company should not
be allowed. As a result of a suit filed in United States
District Court (discussed below) this request for ruling has
been withdrawn. Adjustments have been or will be proposed by
the IRS disallowing COLI interest deductions for taxable years
1991-96. A disallowance of COLI interest deductions through
June 30, 1998 would reduce earnings by approximately $42
million (including interest). No provisions for this amount
have been recorded.
In order to resolve this issue without further delay, on
March 24, 1998, the Company filed suit against the United
States in the United States District Court for the Southern
District of Ohio. Management believes that it has a
meritorious position and will vigorously pursue this lawsuit.
In July 1998, the Company made a payment of taxes and interest
attributable to COLI interest deductions for taxable years
1991-96 to avoid the potential assessment by the IRS of any
additional above market rate interest on the contested amount.
The payment will be recorded in other property and investments
and included on future balance sheets pending the resolution
of this matter. The Company will seek refund, either
administratively or through litigation, of all amounts paid.
In the event the resolution of this matter is unfavorable, it
will have a material adverse impact on results of operations
and cash flows.
Other
The Company continues to be involved in certain other
matters discussed in its 1997 Annual Report.
<PAGE>
<PAGE>
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
SECOND QUARTER 1998 vs. SECOND QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
Net income increased $15.3 million or 65% in the second
quarter and $11.6 million or 22% in the year-to-date period
primarily due to increased sales to retail customers.
Income statement line items which changed significantly
were:
Increase (Decrease)
Second Quarter Year-to-Date
(in millions) % (in millions) %
Operating Revenues. . . . . $230.0 87 $340.5 64
Fuel Expense. . . . . . . . 9.7 26 11.9 15
Purchased Power Expense . . 208.5 460 326.9 390
Other Operation Expense . . 3.2 7 5.6 7
Maintenance Expense . . . . (4.9) (25) (3.9) (12)
Amortization of Zimmer
Plant Phase-in Costs. . . (7.3) N.M. (15.7) N.M.
Taxes Other Than Federal
Income Taxes . . . . . . . (2.0) (7) (2.0) (3)
Federal Income Taxes. . . . 8.3 56 5.0 15
N.M. = Not Meaningful
Operating revenues increased significantly in both the second
quarter and the year-to-date period due predominantly to increased
retail and wholesale sales. Retail revenues and sales increased 7%
each in the second quarter and 3% and 2%, respectively, in the
year-to-date period due to the favorable effect of warmer
springtime temperatures on residential usage and increased
commercial and industrial sales.
Revenues from lower margin wholesale sales increased
significantly in both periods primarily as a result of sales from
a new power marketing business started in July 1997. The new power
marketing business involves the purchase and sale of large
quantities of electricity through forward contracts. The increases
in wholesale sales and related revenues were offset by nearly
equivalent increases in power purchases by the power marketing
operation.
<PAGE>
Fuel expense increased due to the generation of more
electricity in 1998 to meet the increase in customer demand. The
increase in generation was due to increased availability of
generating capacity in 1998 compared with 1997 when certain units
were out-of-service for maintenance.
The Company's share of purchases by the new power marketing
business was the main reason for the increases in purchased power
expense.
The increase in other operation expense was mainly due to
increases in generation related costs including an increase in the
cost of emission allowances consumed and the effect in 1998 of the
recognition of gains from the sale of allowances in 1997.
Maintenance expense for both periods decreased due to scheduled
power plant maintenance outages in 1997 at two generating units.
The reduction in the amortization of deferred Zimmer Plant
phase-in costs reflects the completion of the surcharge recovery
plan and the amortization of the original deferral. The cessation
of the amortization did not affect net income since the
amortization was being recovered in revenues through a surcharge
which terminated with the completion of the amortization.
The decline in taxes other than federal income taxes was
primarily due to a favorable accrual adjustment for property taxes.
Federal income taxes attributable to operations increased in
both periods as a result of an increase in pre-tax operating
income.
<PAGE>
<PAGE>
<TABLE> INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . $577,018 $320,508 $1,033,433 $661,821
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . 37,875 53,526 82,754 113,776
Purchased Power. . . . . . . . . . . . 315,251 34,177 501,357 70,173
Other Operation. . . . . . . . . . . . 82,850 81,300 159,283 159,911
Maintenance. . . . . . . . . . . . . . 33,259 30,459 60,337 55,695
Depreciation and Amortization. . . . . 36,234 35,106 72,027 70,124
Amortization of Rockport Plant Unit 1
Phase-in Plan Deferrals. . . . . . . - 3,911 - 7,822
Taxes Other Than Federal Income Taxes. 16,105 15,591 32,497 33,876
Federal Income Taxes . . . . . . . . . 13,250 16,298 31,616 40,410
TOTAL OPERATING EXPENSES . . . 534,824 270,368 939,871 551,787
OPERATING INCOME . . . . . . . . . . . . 42,194 50,140 93,562 110,034
NONOPERATING INCOME. . . . . . . . . . . 3,585 497 2,595 965
INCOME BEFORE INTEREST CHARGES . . . . . 45,779 50,637 96,157 110,999
INTEREST CHARGES . . . . . . . . . . . . 17,243 16,729 33,877 32,832
NET INCOME . . . . . . . . . . . . . . . 28,536 33,908 62,280 78,167
PREFERRED STOCK DIVIDEND REQUIREMENTS. . 1,202 1,217 2,419 3,325
EARNINGS APPLICABLE TO COMMON STOCK. . . $ 27,334 $ 32,691 $ 59,861 $ 74,842
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
BALANCE AT BEGINNING OF PERIOD . . . . . $281,975 $282,157 $278,814 $269,071
NET INCOME . . . . . . . . . . . . . . . 28,536 33,908 62,280 78,167
DEDUCTIONS:
Cash Dividends Declared:
Common Stock . . . . . . . . . . . . 29,366 29,065 58,732 58,130
Cumulative Preferred Stock . . . . . 1,183 1,184 2,367 2,387
Capital Stock Expense. . . . . . . . . 19 33 52 938
BALANCE AT END OF PERIOD . . . . . . . . $279,943 $285,783 $279,943 $285,783
The common stock of the Company is wholly owned
by American Electric Power Company, Inc.
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production . . . . . . . . . . . . . . . . . . . . . $2,545,295 $2,545,484
Transmission . . . . . . . . . . . . . . . . . . . . 909,464 908,736
Distribution . . . . . . . . . . . . . . . . . . . . 746,983 737,902
General (including nuclear fuel) . . . . . . . . . . 231,968 233,888
Construction Work in Progress. . . . . . . . . . . . 125,946 88,487
Total Electric Utility Plant . . . . . . . . 4,559,656 4,514,497
Accumulated Depreciation and Amortization. . . . . . 2,027,464 1,973,937
NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,532,192 2,540,560
NUCLEAR DECOMMISSIONING AND SPENT NUCLEAR
FUEL DISPOSAL TRUST FUNDS. . . . . . . . . . . . . . 614,368 566,390
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 166,704 156,085
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 32,217 5,860
Accounts Receivable:
Customers. . . . . . . . . . . . . . . . . . . . . 166,495 107,087
Affiliated Companies . . . . . . . . . . . . . . . 15,338 15,662
Miscellaneous. . . . . . . . . . . . . . . . . . . 16,897 14,561
Allowance for Uncollectible Accounts . . . . . . . (1,288) (1,188)
Fuel . . . . . . . . . . . . . . . . . . . . . . . . 25,791 17,182
Materials and Supplies . . . . . . . . . . . . . . . 80,435 78,701
Accrued Utility Revenues . . . . . . . . . . . . . . 41,905 30,521
Energy Marketing and Trading Contracts . . . . . . . 148,734 143
Prepayments. . . . . . . . . . . . . . . . . . . . . 2,208 4,685
TOTAL CURRENT ASSETS . . . . . . . . . . . . 528,732 273,214
REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 414,679 400,489
DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 34,725 31,060
TOTAL. . . . . . . . . . . . . . . . . . . $4,291,400 $3,967,798
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock - No Par Value:
Authorized - 2,500,000 Shares
Outstanding - 1,400,000 Shares . . . . . . . . . . $ 56,584 $ 56,584
Paid-in Capital. . . . . . . . . . . . . . . . . . . 732,539 732,472
Retained Earnings. . . . . . . . . . . . . . . . . . 279,943 278,814
Total Common Shareholder's Equity. . . . . . 1,069,066 1,067,870
Cumulative Preferred Stock:
Not Subject to Mandatory Redemption. . . . . . . . 9,381 9,435
Subject to Mandatory Redemption. . . . . . . . . . 68,445 68,445
Long-term Debt . . . . . . . . . . . . . . . . . . . 1,122,322 1,014,237
TOTAL CAPITALIZATION . . . . . . . . . . . . 2,269,214 2,159,987
OTHER NONCURRENT LIABILITIES:
Nuclear Decommissioning. . . . . . . . . . . . . . . 427,580 381,016
Other. . . . . . . . . . . . . . . . . . . . . . . . 241,055 232,667
TOTAL OTHER NONCURRENT LIABILITIES . . . . . 668,635 613,683
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . . . 20,000 35,000
Short-term Debt. . . . . . . . . . . . . . . . . . . 110,800 119,600
Accounts Payable - General . . . . . . . . . . . . . 43,992 36,729
Accounts Payable - Affiliated Companies. . . . . . . 82,381 31,665
Taxes Accrued. . . . . . . . . . . . . . . . . . . . 34,809 46,850
Interest Accrued . . . . . . . . . . . . . . . . . . 15,618 15,741
Rent Accrued - Rockport Plant Unit 2 . . . . . . . . 4,963 4,963
Obligations Under Capital Leases . . . . . . . . . . 33,136 34,033
Energy Marketing and Trading Contracts . . . . . . . 147,272 261
Other. . . . . . . . . . . . . . . . . . . . . . . . 50,685 58,287
TOTAL CURRENT LIABILITIES. . . . . . . . . . 543,656 383,129
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 560,011 559,708
DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 134,227 138,045
DEFERRED GAIN ON SALE AND LEASEBACK -
ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 90,565 92,419
DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 25,092 20,827
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL. . . . . . . . . . . . . . . . . . . $4,291,400 $3,967,798
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
(in thousands)
<CAPTION>
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 62,280 $ 78,167
Adjustments for Noncash Items:
Depreciation and Amortization. . . . . . . . . . . . . . 74,126 73,856
Amortization of Rockport Plant Unit 1
Phase-in Plan Deferrals. . . . . . . . . . . . . . . . - 7,822
Deferral of Incremental Nuclear
Refueling Outage Expenses (net). . . . . . . . . . . . 8,518 (9,281)
Deferred Federal Income Taxes. . . . . . . . . . . . . . 7,839 (5,770)
Deferred Investment Tax Credits. . . . . . . . . . . . . (3,818) (3,937)
Under-recovery of Fuel and Purchased Power . . . . . . . (34,369) (3,837)
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net). . . . . . . . . . . . . . . . (61,320) 2,844
Fuel, Materials and Supplies . . . . . . . . . . . . . . (10,343) (921)
Accrued Utility Revenues . . . . . . . . . . . . . . . . (11,384) 2,560
Accounts Payable . . . . . . . . . . . . . . . . . . . . 57,979 (19,936)
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (12,041) 3,737
Other (net). . . . . . . . . . . . . . . . . . . . . . . . (8,581) 16,061
Net Cash Flows From Operating Activities . . . . . . 68,886 141,365
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . . . . . . (59,812) (58,439)
FINANCING ACTIVITIES:
Issuance of Long-term Debt . . . . . . . . . . . . . . . . 122,222 47,728
Retirement of Long-term Debt . . . . . . . . . . . . . . . (35,000) (50,000)
Change in Short-term Debt (net). . . . . . . . . . . . . . (8,800) 60,425
Retirement of Cumulative Preferred Stock . . . . . . . . . (39) (78,838)
Dividends Paid on Common Stock . . . . . . . . . . . . . . (58,732) (58,130)
Dividends Paid on Cumulative Preferred Stock . . . . . . . (2,368) (3,562)
Net Cash Flows From (Used For) Financing Activities. 17,283 (82,377)
Net Increase in Cash and Cash Equivalents. . . . . . . . . . 26,357 549
Cash and Cash Equivalents at Beginning of Period . . . . . . 5,860 8,233
Cash and Cash Equivalents at End of Period . . . . . . . . . $ 32,217 $ 8,782
Supplemental Disclosure:
Cash paid for interest net of capitalized amounts was $32,651,000 and $31,019,000
and for income taxes was $15,054,000 and $39,784,000 in 1998 and 1997, respectively.
Noncash acquisitions under capital leases were $18,801,000 and $50,684,000 in 1998
and 1997, respectively.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements
should be read in conjunction with the 1997 Annual Report
as incorporated in and filed with the Form 10-K. In the opinion
of management, the financial statements reflect all adjustments
(consisting of only normal recurring accruals) which are
necessary for a fair presentation of the results of operations
for interim periods.
2. FINANCING ACTIVITIES
In May 1998 the Company redeemed $35 million of 7.00% First
Mortgage Bonds at maturity and issued $125 million of 7.60%
Junior Subordinated Deferrable Interest Debentures due 2038.
In July 1998 the Company redeemed $20 million of 7.80%
First Mortgage Bonds due 2023 at 100% under maintenance
provisions. Consequently the bonds are classified as a current
liability on the balance sheet.
3. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" was adopted by the Company in
the first quarter of 1998. SFAS No. 130 established the
standards for reporting and displaying components of
"comprehensive income," which is the total of net income and
all transactions not included in net income affecting equity
except those with shareholders. For the quarter and year-to-date periods
ended June 30, 1998, there are no material
differences between comprehensive income and net income.
In the first quarter of 1998 the Company adopted the
American Institute of Certified Public Accountants' Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP
requires the capitalization and amortization of certain costs
of acquiring or developing internal use computer software.
Previously the Company expensed all software acquisition and
development costs. The SOP must be adopted at the beginning
of a fiscal year with no restatement or retroactive adjustment
of prior periods. The adoption of the SOP effective January
1, 1998 did not have a material effect on results of
operations, cash flows or financial condition.
<PAGE>
4. ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation,
as agent for the Company and its affiliates in the AEP System
Power Pool (Power Pool), substantially increased the volume of
its electricity marketing and trading businesses. The purpose
of such businesses is to utilize AEP's knowledge of the energy
markets in order to improve the competitiveness of its
generation business and contribute to non-regulated,
nonoperating income. Revenues and expenses from these
activities are shared by the Power Pool members based on their
relative peak demands.
Such businesses involve the marketing of power under
physical forward contracts at fixed and variable prices and the
trading of options, futures, swaps and other financial
derivative contracts at both fixed and variable prices. Most
contracts represent physical forward electricity marketing
contracts for the purchase and sale of electricity in the Power
Pool's traditional marketing area which are recorded as
operating revenues and purchased power expense when the
contracts settle. At June 30, 1998, the Power Pool had open
marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's
share of these notional values is approximately $300 million
for sales and approximately $300 million for purchases.
The Power Pool has also purchased and sold electricity
options, futures, and swaps, and entered into forward purchase
and sale contracts for the future delivery or receipt of
electricity outside the traditional marketing area. These
transactions represent non-regulated trading activities that
are marked-to-market and recorded in nonoperating income. At
June 30, 1998, the Company's share of the fair value of such
trading contracts is reported as a current asset and a current
liability. The Company's share of the average fair value of
the current asset and the current liability was $51 million and
$51 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and
prices, the open forward physical marketing contracts and the
marked-to-market open trading contracts could produce material
income or losses in future periods.
5. CONTINGENCIES
Taxes
As discussed in Note 7, "Federal Income Taxes" of the Notes
to Consolidated Financial Statements in the 1997 Annual Report,
the Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National
Office that certain interest deductions relating to corporate
owned life insurance (COLI) claimed by the Company should not
be allowed. As a result of a suit filed in United States
District Court (discussed below) this request for ruling has
been withdrawn. Adjustments have been or will be proposed by
the IRS disallowing COLI interest deductions for taxable years
1991-96. A disallowance of the COLI interest deduction through
June 30, 1998 would reduce earnings by approximately $64
million (including interest). No provisions for this amount
have been recorded.
In order to resolve this issue without further delay, on
March 24, 1998, the Company filed suit against the United
States in the United States District Court for the Southern
District of Ohio. Management believes that it has a
meritorious position and will vigorously pursue this lawsuit.
In July 1998, the Company made a payment of taxes and interest
attributable to COLI interest deductions for taxable years
1991-96 to avoid the potential assessment by the IRS of any
additional above market rate interest on the contested amount.
The payment will be recorded in other property and investments
and included on future balance sheets pending the resolution
of this matter. The Company will seek refund, either
administratively or through litigation, of all amounts paid.
In the event the resolution of this matter is unfavorable, it
will have a material adverse impact on results of operations
and cash flows.
Cook Nuclear Plant Shutdown
As discussed in Note 3 of the Notes to Consolidated
Financial Statements in the 1997 Annual Report, both units of
the Cook Nuclear Plant were shut down by the Company in
September 1997 due to questions regarding the operability of
certain safety systems, which arose during a Nuclear Regulatory
Commission (NRC) architect engineer design inspection. The NRC
issued a Confirmatory Action Letter in September 1997 requiring
the Company to address the issues identified in the letter.
Certain issues identified in the letter have been addressed.
The Company is working with the NRC to resolve the remaining
issue in the letter and other issues related to the restart of
the units.
On April 17, 1998, the NRC notified the Company that it had
convened a Restart Panel for Cook Plant. The Company is
meeting with the Panel on a regular basis, until the Cook Plant
units are returned to service, to identify and address the
issues necessary for the restart of the units. On July 9,
1998, the Company presented its proposed schedule for restart
activities for Cook Plant Unit 1 to the NRC. According to the
proposed schedule, the required maintenance activities for Unit
1 would extend into November. On July 30, 1998, the Company
received a letter from the NRC providing the NRC's list of
required restart activities. In response to this letter, the
Company will meet with the NRC to further define the scope and
schedule of the outage. When maintenance and other activities
required for restart are complete, the Company will seek
regulatory approval from the NRC to return Unit 1 to service.
The Company cannot predict when regulatory approval will be
granted. The restart schedule for Unit 2 has not been
completed. If the units are not returned to service, there
would be a material adverse effect on financial condition.
The incremental cost expected to be incurred for 1998 to
restart the Cook units based on a preliminary estimate is
approximately $50 million. However the cost and schedule for
the outage could be significantly impacted as additional work
is identified. Through June 30, 1998, $13 million of costs for
the restart have been incurred.
On July 24, 1998, the Company received an "adverse trend
letter" from the NRC indicating that NRC senior managers had
determined that there had been a slow decline in performance
at the Cook Plant during the 18 month period preceding the
letter. The letter indicated that the NRC will closely monitor
efforts to address issues at Cook Plant through additional
inspection activities.
The cost of electricity supplied to retail customers rose
due to the outage of the two units since higher cost coal-fired
generation and purchased power were substituted for low cost
nuclear generation. In the Indiana and Michigan retail
jurisdictions fuel cost recovery mechanisms permit the
recovery, subject to regulatory commission review and approval,
of changes in fuel costs including the fuel component of
purchased power in the Indiana jurisdiction and changes in
replacement power in the Michigan jurisdiction. Under the fuel
cost recovery mechanisms, retail rates contain a fuel cost
adjustment factor that reflects estimated fuel costs for the
period during which the factor will be in effect subject to
reconciliation to actual fuel costs in a future proceeding.
When actual fuel costs exceed the estimated costs reflected in
the billing factor, a regulatory asset is recorded and revenues
are accrued.
Due to the unscheduled Cook Plant outage, the Company's
actual fuel costs significantly exceeded the estimated fuel
costs reflected in its fuel cost adjustment factors. A
regulatory asset has been recorded for revenues accrued in
anticipation of future reconciliation and billing of the higher
fuel costs to customers. At June 30, 1998, the accrued
regulatory asset was $53 million.
On June 3, 1998, the Indiana Utility Regulatory Commission
approved an agreement authorizing the Company during the
billing months of July through September 1998 to apply a fuel
cost adjustment factor less than that requested by the Company,
subject to future reconciliation or refund. The agreement
provides the parties to the proceeding with the opportunity to
conduct discovery regarding certain issues that were raised in
the proceeding, including the recovery of replacement energy
cost due to the Cook Plant outage, in anticipation of resolving
the issues in a future fuel cost adjustment proceeding.
Management believes that it should be able to recover the Cook
replacement energy costs; however, if recovery of the
replacement costs were to be denied, results of operations and
cash flows would be adversely affected.
Other
The Company continues to be involved in certain other
matters discussed in its 1997 Annual Report.
<PAGE>
<PAGE>
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
SECOND QUARTER 1998 vs. SECOND QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Net income decreased $5.4 million or 16% in the second quarter
and $15.9 million or 20% for the year-to-date period reflecting a
decrease in capacity credits from the AEP System Power Pool (Power
Pool). Under the terms of the Power Pool, capacity credits and
charges are designed to allocate the cost of the AEP System's
capacity among the Pool members based on their relative peak
demands and generating reserves. The reduction in capacity credits
received can be attributed to an increase in the Company's prior
twelve month peak demand relative to the total peak demand of all
Power Pool members.
As discussed in Note 5 of the Notes to Consolidated Financial
Statements, the Cook Nuclear Plant was shut down in September 1997.
The shutdown had a significant impact on the operations of the
Company as reflected in the variations of certain income statement
line items discussed below.
Income statement line items which changed significantly were:
Increase (Decrease)
Second Quarter Year-to-Date
(in millions) % (in millions) %
Operating Revenues. . . . $256.5 80 $371.6 56
Fuel Expense. . . . . . . (15.7) (29) (31.0) (27)
Purchased Power Expense . 281.1 822 431.2 614
Maintenance Expense . . . 2.8 9 4.6 8
Amortization of Rockport
Plant Unit 1 Phase-in
Plan Deferrals . . . . . (3.9) N.M. (7.8) N.M.
Federal Income Taxes. . . (3.0) (19) (8.8) (22)
Nonoperating Income . . . 3.1 621 1.6 169
N.M. = Not meaningful
Operating revenues increased significantly in both the second
quarter and the year-to-date period due primarily to a substantial
increase in wholesale sales from a new power marketing business
started in July 1997. The new power marketing business involves
the purchase and sale of large quantities of electricity through
forward contracts. The increases in wholesale sales and related
revenues were offset by a nearly equivalent dollar increase in
power purchases by the power marketing operation. The
unavailability of nuclear generation decreased energy delivered to
the Power Pool which partly offset the increased sales from power
marketing transactions.
Retail revenues increased 17% in the quarter and 11% year-to-date
largely due to an increase in fuel and power supply cost
recovery accruals. Under the fuel cost recovery mechanism,
revenues are accrued for increased fuel expense in both of the
company's retail jurisdictions and for replacement power costs in
the Michigan jurisdiction. The accrued revenues are subsequently
reviewed by the commissions and, if acceptable, approved for
billing and recovery. During the extended outage of both nuclear
units, retail revenues increased from the accrual of revenues for
the increased fuel costs incurred to replace the unavailable lower
cost nuclear power.
Fuel expense decreased significantly in both periods due to a
decline in nuclear generation reflecting the outages of both
nuclear units in 1998.
The significant increase in purchased power expense resulted
from purchases of power by the new power marketing business and
increased purchases from the Power Pool to replace power usually
generated by the nuclear units which were unavailable.
The extended shutdown of the Cook Plant accounted for the
increase in maintenance expense.
The recovery periods for Rockport Plant Unit 1 costs deferred
under a rate phase-in plan in the Indiana and FERC jurisdictions
ended in fall of 1997 causing the decrease in amortization of
phase-in plan deferrals. The deferred costs were amortized over
a 10-year period commensurate with their collection from customers
pursuant to commission orders. The Company has increased its
decommissioning expense accruals, pending approval from the Indiana
Utility Regulatory Commission, in an amount equal to the continuing
phase-in plan revenues.
Federal income taxes attributable to operations decreased in
both periods as a result of a decrease in pre-tax operating income.
The effect of a write off of coal mining development costs in
the second quarter of 1997 accounted for the increase in
nonoperating income.
FINANCIAL CONDITION
Total plant and property additions including capital leases for
the year-to-date period were $81 million. During the first six
months of 1998 short-term debt outstanding decreased by $9 million.
In May 1998, the Company redeemed $35 million of 7.00% First
Mortgage Bonds at maturity and issued $125 million of 7.60% Junior
Subordinated Deferrable Interest Debentures due 2038.
COOK NUCLEAR PLANT SHUTDOWN
As discussed in Note 3 of the Notes to Consolidated Financial
Statements in the 1997 Annual Report, both units of the Cook
Nuclear Plant were shut down by the Company in September 1997 due
to questions regarding the operability of certain safety systems,
which arose during a Nuclear Regulatory Commission (NRC) architect
engineer design inspection. The NRC issued a Confirmatory Action
Letter in September 1997 requiring the Company to address the
issues identified in the letter. Certain issues identified in the
letter have been addressed. The Company is working with the NRC to
resolve the remaining issue in the letter and other issues related
to the restart of the units.
On April 17, 1998, the NRC notified the Company that it had
convened a Restart Panel for Cook Plant. The Company is meeting
with the Panel on a regular basis, until the Cook Plant units are
returned to service, to identify and address the issues necessary
for the restart of the units. On July 9, 1998, the Company
presented its proposed schedule for restart activities for Cook
Plant Unit 1 to the NRC. According to the proposed schedule, the
required maintenance activities for Unit 1 would extend into
November. On July 30, 1998, the Company received a letter from the
NRC providing the NRC's list of required restart activities. In
response to this letter, the Company will meet with the NRC to
further define the scope and schedule of the outage. When
maintenance and other activities required for restart are complete,
the Company will seek regulatory approval from the NRC to return
Unit 1 to service. The Company cannot predict when regulatory
approval will be granted. The restart schedule for Unit 2 has not
been completed. If the units are not returned to service, there
would be a material adverse effect on financial condition.
<PAGE>
The incremental cost expected to be incurred for 1998 to
restart the Cook units based on a preliminary estimate is
approximately $50 million. However the cost and schedule for the
outage could be significantly impacted as additional work is
identified. Through June 30, 1998, $13 million of costs for the
restart have been incurred.
On July 24, 1998, the Company received an "adverse trend
letter" from the NRC indicating that NRC senior managers had
determined that there had been a slow decline in performance at the
Cook Plant during the 18 month period preceding the letter. The
letter indicated that the NRC will closely monitor efforts to
address issues at Cook Plant through additional inspection
activities.
The cost of electricity supplied to retail customers rose due
to the outage of the two units since higher cost coal-fired
generation and purchased power were substituted for low cost
nuclear generation. In the Indiana and Michigan retail
jurisdictions fuel cost recovery mechanisms permit the recovery,
subject to regulatory commission review and approval, of changes in
fuel costs including the fuel component of purchased power in the
Indiana jurisdiction and changes in replacement power in the
Michigan jurisdiction. Under the fuel cost recovery mechanisms,
retail rates contain a fuel cost adjustment factor that reflects
estimated fuel costs for the period during which the factor will be
in effect subject to reconciliation to actual fuel costs in a
future proceeding. When actual fuel costs exceed the estimated
costs reflected in the billing factor, a regulatory asset is
recorded and revenues are accrued.
Due to the unscheduled Cook Plant outage, the Company's actual
fuel costs significantly exceeded the estimated fuel costs
reflected in its fuel cost adjustment factors. A regulatory asset
has been recorded for revenues accrued in anticipation of future
reconciliation and billing of the higher fuel costs to customers.
At June 30, 1998, the accrued regulatory asset was $53 million.
On June 3, 1998, the Indiana Utility Regulatory Commission
approved an agreement authorizing the Company during the billing
months of July through September 1998 to apply a fuel cost
adjustment factor less than that requested by the Company, subject
to future reconciliation or refund. The agreement provides the
parties to the proceeding with the opportunity to conduct discovery
regarding certain issues that were raised in the proceeding,
including the recovery of replacement energy cost due to the Cook
Plant outage, in anticipation of resolving the issues in a future
fuel cost adjustment proceeding. Management believes that it
should be able to recover the Cook replacement energy costs;
however, if recovery of the replacement costs were to be denied,
results of operations and cash flows would be adversely affected.
ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation, as
agent for the Company and its affiliates in the AEP System Power
Pool (Power Pool), substantially increased the volume of its
electricity marketing and trading businesses. The purpose of such
businesses is to utilize AEP's knowledge of the energy markets in
order to improve the competitiveness of its generation business and
contribute to non-regulated, nonoperating income. Revenues and
expenses from these activities are shared by the Power Pool members
based on their relative peak demands.
Such businesses involve the marketing of power under physical
forward contracts at fixed and variable prices and the trading of
options, futures, swaps and other financial derivative contracts at
both fixed and variable prices. Most contracts represent physical
forward electricity marketing contracts for the purchase and sale
of electricity in the Power Pool's traditional marketing area which
are recorded as operating revenues and purchased power expense
when the contracts settle. At June 30, 1998, the Power Pool had
open marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's share
of these notional values is approximately $300 million for sales
and approximately $300 million for purchases.
The Power Pool has also purchased and sold electricity options,
futures, and swaps, and entered into forward purchase and sale
contracts for the future delivery or receipt of electricity outside
the traditional marketing area. These transactions represent non-regulated
trading activities that are marked-to-market and recorded
in nonoperating income. At June 30, 1998, the Company's share of
the fair value of such trading contracts is reported as a current
asset and a current liability. The Company's share of the average
fair value of the current asset and the current liability was $51
million and $51 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and prices,
the open forward physical marketing contracts and the marked-to-market open
trading contracts could produce material income or
losses in future periods.
TAXES
The Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National Office
that certain interest deductions relating to corporate owned life
insurance (COLI) claimed by the Company should not be allowed. As
a result of a suit filed in United States District Court (discussed
below) this request for ruling has been withdrawn. Adjustments
have been or will be proposed by the IRS disallowing COLI interest
deductions for taxable years 1991-96. A disallowance of the COLI
interest deduction through June 30, 1998 would reduce earnings by
approximately $64 million (including interest). No provisions for
this amount have been recorded.
In order to resolve this issue without further delay, on March
24, 1998, the Company filed suit against the United States in the
United States District Court for the Southern District of Ohio.
Management believes that it has a meritorious position and will
vigorously pursue this lawsuit. In July 1998, the Company made a
payment of taxes and interest attributable to COLI interest
deductions for taxable years 1991-96 to avoid the potential
assessment by the IRS of any additional above market rate interest
on the contested amount. The payment will be recorded in other
property and investments and included on future balance sheets
pending the resolution of this matter. The Company will seek
refund, either administratively or through litigation, of all
amounts paid. In the event the resolution of this matter is
unfavorable, it will have a material adverse impact on results of
operations and cash flows.
<PAGE>
COMPUTER ISSUE - YEAR 2000
The Company has been addressing the issue of what will happen
when the year 2000 arrives and many of the world's computer systems
will encounter the "year 2000" problem, i.e., computers not being
able to distinguish between the years 1900 and 2000. Internally
the Company has been modifying or replacing its computer hardware
and software programs to mitigate risk, minimize technical
failures, and rapidly repair failures if they occur. Externally
the problem is being addressed with entities that interact
electronically with the Company, including but not limited to,
suppliers, service providers, government agencies, customers,
creditors and financial service organizations. If the Company's
corrective actions, and/or the actions of other independent
entities fail for critical applications, the Company may be
adversely impacted in the year 2000. The Company began reviewing
the issue in 1996 and has spent approximately $2 million on the
project through June 30, 1998. The Company is continuing to study
the impact of making its systems "year 2000" compliant and is
working on various aspects of the issue. These activities are
projected to cost an additional $8 million to $10 million.
Although significant, the cost of correcting the "year 2000"
problem is not expected to have a material impact on the results of
operations for any accounting period, cash flows or financial
condition.
<PAGE>
<PAGE>
<TABLE>
KENTUCKY POWER COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . $159,554 $78,101 $289,424 $166,681
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . . 18,184 19,463 40,485 38,627
Purchased Power. . . . . . . . . . . . . 102,652 21,913 166,388 45,143
Other Operation. . . . . . . . . . . . . 11,992 11,880 22,986 23,889
Maintenance. . . . . . . . . . . . . . . 7,258 5,571 16,424 10,678
Depreciation and Amortization. . . . . . 6,978 6,519 13,888 13,059
Taxes Other Than Federal Income Taxes. . 2,260 2,045 4,752 4,839
Federal Income Taxes . . . . . . . . . . 599 1,281 2,779 5,777
TOTAL OPERATING EXPENSES. . . . . 149,923 68,672 267,702 142,012
OPERATING INCOME . . . . . . . . . . . . . 9,631 9,429 21,722 24,669
NONOPERATING LOSS. . . . . . . . . . . . . (93) (148) (164) (289)
INCOME BEFORE INTEREST CHARGES . . . . . . 9,538 9,281 21,558 24,380
INTEREST CHARGES . . . . . . . . . . . . . 7,125 6,140 14,128 12,108
NET INCOME . . . . . . . . . . . . . . . . $ 2,413 $ 3,141 $ 7,430 $ 12,272
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
BALANCE AT BEGINNING OF PERIOD . . . . . . $76,018 $86,531 $78,076 $84,090
NET INCOME . . . . . . . . . . . . . . . . 2,413 3,141 7,430 12,272
CASH DIVIDENDS DECLARED. . . . . . . . . . 7,075 6,690 14,150 13,380
BALANCE AT END OF PERIOD . . . . . . . . . $71,356 $82,982 $71,356 $82,982
The common stock of the Company is wholly owned by
American Electric Power Company, Inc.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
KENTUCKY POWER COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production . . . . . . . . . . . . . . . . . . . . . $ 256,667 $ 249,184
Transmission . . . . . . . . . . . . . . . . . . . . 324,225 303,456
Distribution . . . . . . . . . . . . . . . . . . . . 344,286 350,793
General. . . . . . . . . . . . . . . . . . . . . . . 73,448 71,462
Construction Work in Progress. . . . . . . . . . . . 21,899 32,060
Total Electric Utility Plant . . . . . . . . 1,020,525 1,006,955
Accumulated Depreciation and Amortization. . . . . . 304,310 296,318
NET ELECTRIC UTILITY PLANT . . . . . . . . . 716,215 710,637
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 6,370 6,414
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 1,016 1,381
Accounts Receivable:
Customers. . . . . . . . . . . . . . . . . . . . . 19,281 24,127
Affiliated Companies . . . . . . . . . . . . . . . 9,266 1,722
Miscellaneous. . . . . . . . . . . . . . . . . . . 3,500 3,276
Allowance for Uncollectible Accounts . . . . . . . . (655) (525)
Fuel . . . . . . . . . . . . . . . . . . . . . . . . 11,507 10,685
Materials and Supplies . . . . . . . . . . . . . . . 14,466 14,054
Accrued Utility Revenues . . . . . . . . . . . . . . 10,572 12,981
Energy Marketing and Trading Contracts . . . . . . . 49,129 177
Prepayments. . . . . . . . . . . . . . . . . . . . . 1,767 1,538
TOTAL CURRENT ASSETS . . . . . . . . . . . . 119,849 69,416
REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 90,918 90,045
DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 8,265 10,159
TOTAL. . . . . . . . . . . . . . . . . . . $ 941,617 $ 886,671
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
KENTUCKY POWER COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock - $50 Par Value:
Authorized - 2,000,000 Shares
Outstanding - 1,009,000 Shares . . . . . . . . . . $ 50,450 $ 50,450
Paid-in Capital. . . . . . . . . . . . . . . . . . . 138,750 128,750
Retained Earnings. . . . . . . . . . . . . . . . . . 71,356 78,076
Total Common Shareholder's Equity. . . . . . 260,556 257,276
Long-term Debt . . . . . . . . . . . . . . . . . . . 313,935 341,051
TOTAL CAPITALIZATION . . . . . . . . . . . . 574,491 598,327
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 27,153 26,544
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . . . 25,000 -
Short-term Debt. . . . . . . . . . . . . . . . . . . 43,100 36,500
Accounts Payable . . . . . . . . . . . . . . . . . . 22,293 24,574
Customer Deposits. . . . . . . . . . . . . . . . . . 3,925 3,660
Taxes Accrued. . . . . . . . . . . . . . . . . . . . 5,228 6,130
Interest Accrued . . . . . . . . . . . . . . . . . . 5,958 6,015
Energy Marketing and Trading Contracts . . . . . . . 48,858 149
Other. . . . . . . . . . . . . . . . . . . . . . . . 14,294 14,935
TOTAL CURRENT LIABILITIES. . . . . . . . . . 168,656 91,963
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 154,659 153,945
DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 15,005 15,615
DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 1,653 277
CONTINGENCIES (Note 5)
TOTAL. . . . . . . . . . . . . . . . . . . $941,617 $886,671
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
KENTUCKY POWER COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
(in thousands)
<CAPTION>
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 7,430 $ 12,272
Adjustments for Noncash Items:
Depreciation and Amortization. . . . . . . . . . . . . . 13,894 13,065
Deferred Federal Income Taxes. . . . . . . . . . . . . . 368 347
Deferred Investment Tax Credits. . . . . . . . . . . . . (610) (616)
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net). . . . . . . . . . . . . . . . (2,792) 1,213
Fuel, Materials and Supplies . . . . . . . . . . . . . . (1,234) (1,977)
Accrued Utility Revenues . . . . . . . . . . . . . . . . 2,409 1,941
Accounts Payable . . . . . . . . . . . . . . . . . . . . (2,281) (8,890)
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (902) 1,739
Other (net). . . . . . . . . . . . . . . . . . . . . . . . 811 4,644
Net Cash Flows From Operating Activities . . . . . . 17,093 23,738
INVESTING ACTIVITIES - Construction Expenditures . . . . . . (17,705) (27,211)
FINANCING ACTIVITIES:
Capital Contributions from Parent Company. . . . . . . . . 10,000 10,000
Change in Short-term Debt (net). . . . . . . . . . . . . . 6,600 7,025
Retirement of Long-term Debt . . . . . . . . . . . . . . . (2,203) -
Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (14,150) (13,380)
Net Cash Flows From Financing Activities . . . . . . 247 3,645
Net Increase (Decrease) in Cash and Cash Equivalents . . . . (365) 172
Cash and Cash Equivalents at Beginning of Period . . . . . . 1,381 1,106
Cash and Cash Equivalents at End of Period . . . . . . . . . $ 1,016 $ 1,278
Supplemental Disclosure:
Cash paid for interest net of capitalized amounts was $13,982,000 and $12,046,000
and for income taxes was $4,538,000 and $4,395,000 in 1998 and 1997, respectively.
Noncash acquisitions under capital leases were $2,960,000 and $3,571,000 in 1998
and 1997, respectively.
See Notes to Financial Statements.
/TABLE
<PAGE>
<PAGE>
KENTUCKY POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements should be
read in conjunction with the 1997 Annual Report as incorporated
in and filed with the Form 10-K. In the opinion of management,
the financial statements reflect all adjustments (consisting
of only normal recurring accruals) which are necessary for a
fair presentation of the results of operations for interim
periods.
2. FINANCING ACTIVITIES
The Company received from its parent a cash capital
contribution of $10 million in June 1998 which was credited to
paid-in capital.
3. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" was adopted by the Company in
the first quarter of 1998. SFAS No. 130 established the
standards for reporting and displaying components of
"comprehensive income," which is the total of net income and
all transactions not included in net income affecting equity
except those with shareholders. For the quarter and year-to-date
periods ended June 30, 1998, there were no material
differences between comprehensive income and net income.
In the first quarter of 1998 the Company adopted the
American Institute of Certified Public Accountants' Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP
requires the capitalization and amortization of certain costs
of acquiring or developing internal use computer software.
Previously the Company expensed all software acquisition and
development costs. The SOP must be adopted at the beginning
of a fiscal year with no restatement or retroactive adjustment
of prior periods. The adoption of the SOP effective January
1, 1998 did not have a material effect on results of
operations, cash flows or financial condition.
4. ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation,
as agent for the Company and its affiliates in the AEP System
Power Pool (Power Pool), substantially increased the volume of
its electricity marketing and trading businesses. The purpose
of such businesses is to utilize AEP's knowledge of the energy
markets in order to improve the competitiveness of its
generation business and contribute to non-regulated,
nonoperating income. Revenues and expenses from these
activities are shared by the Power Pool members based on their
relative peak demands.
Such businesses involve the marketing of power under
physical forward contracts at fixed and variable prices and the
trading of options, futures, swaps and other financial
derivative contracts at both fixed and variable prices. Most
contracts represent physical forward electricity marketing
contracts for the purchase and sale of electricity in the Power
Pool's traditional marketing area which are recorded as
operating revenues and purchased power expense when the
contracts settle. At June 30, 1998, the Power Pool had open
marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's
share of these notional values is approximately $96 million for
sales and approximately $96 million for purchases.
The Power Pool has also purchased and sold electricity
options, futures, and swaps, and entered into forward purchase
and sale contracts for the future delivery or receipt of
electricity outside the traditional marketing area. These
transactions represent non-regulated trading activities that
are marked-to-market and recorded in nonoperating income. At
June 30, 1998, the Company's share of the fair value of such
trading contracts is reported as a current asset and a current
liability. The Company's share of the average fair value of
the current asset and the current liability was $17 million and
$17 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and
prices, the open forward physical marketing contracts and the
marked-to-market open trading contracts could produce material
income or losses in future periods.
5. CONTINGENCIES
Taxes
As discussed in Note 8, "Federal Income Taxes" of the Notes
to Financial Statements in the 1997 Annual Report, the Internal
Revenue Service (IRS) agents auditing the federal income tax
returns requested a ruling from their National Office that
certain interest deductions relating to corporate owned life
insurance (COLI) claimed by the Company should not be allowed.
As a result of a suit filed in United States District Court
(discussed below) this request for ruling has been withdrawn.
Adjustments have been or will be proposed by the IRS
disallowing COLI interest deductions for taxable years 1992-96.
A disallowance of COLI interest deductions through June 30,
1998 would reduce earnings by approximately $7 million
(including interest). No provisions for this amount have been
recorded.
<PAGE>
In order to resolve this issue without further delay, on
March 24, 1998, the Company filed suit against the United
States in the United States District Court for the Southern
District of Ohio. Management believes that it has a
meritorious position and will vigorously pursue this lawsuit.
In July 1998, the Company made a payment of taxes and interest
attributable to COLI interest deductions for taxable years
1992-96 to avoid the potential assessment by the IRS of any
additional above market rate interest on the contested amount.
The payment will be recorded in other property and investments
and included on future balance sheets pending the resolution
of this matter. The Company will seek refund, either
administratively or through litigation, of all amounts paid.
In the event the resolution of this matter is unfavorable, it
will have a material adverse impact on results of operations
and cash flows.
Other
The Company continues to be involved in certain other
matters discussed in its 1997 Annual Report.
<PAGE>
<PAGE>
KENTUCKY POWER COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
SECOND QUARTER 1998 vs. SECOND QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
Net income decreased $0.7 million or 23% for the quarter and
$4.8 million or 39% for the year-to-date period. The decrease in
net income for both periods was mainly attributable to increased
maintenance expense and interest charges.
Income statement line items which changed significantly were:
Increase(Decrease)
Second Quarter Year-to-Date
(in millions) % (in millions) %
Operating Revenues . . . . . . $81.5 104 $122.7 74
Fuel Expense . . . . . . . . . (1.3) (7) 1.9 5
Purchased Power Expense. . . . 80.7 368 121.2 269
Maintenance Expense. . . . . . 1.7 30 5.7 54
Federal Income Taxes . . . . . (0.7) (53) (3.0) (52)
Interest Charges . . . . . . . 1.0 16 2.0 17
Operating revenues increased significantly in both periods due
to a substantial increase in wholesale sales from a new power
marketing business started in July 1997. The new power marketing
business involves the purchase and sale of large quantities of
electricity through forward contracts. The increases in wholesale
sales and related revenues were offset by nearly equivalent
increases in power purchases by the new power marketing operation.
Fuel expense decreased in the second quarter and increased in
the year-to-date period primarily due to the operation of the fuel
clause mechanism. The reversal of previously deferred fuel cost
over recoveries reduced fuel expense in the second quarter. In the
year-to-date period the deferral of over recovered fuel cost for
subsequent reductions in customers' bills caused the increase in
fuel expense. Also contributing to the decrease in the second
quarter was a decline in generation resulting from a maintenance
outage at one of the two units at the Company's Big Sandy Plant.
The significant increase in purchased power expense resulted
from purchases of power by the new power marketing business.
<PAGE>
Maintenance expense increased primarily due to increased
overhead distribution line maintenance expenditures resulting from
winter storm damage in 1998 and a lengthy scheduled outage for
maintenance and repairs of the 260 mw Big Sandy Plant Unit 1 for a
substantial portion of the second quarter of 1998. In 1997 there
were no lengthy outages of either unit of the Big Sandy Plant.
The decrease in federal income tax expense attributable to
operations in both periods was primarily due to a decline in pre-tax
operating income.
Interest charges increased due to an increase in outstanding
long-term debt reflecting the issuance of Senior Unsecured Notes in
October 1997.
<PAGE>
<PAGE>
<TABLE>
OHIO POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . $844,570 $447,147 $1,539,736 $931,447
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . . . 180,947 144,236 374,222 306,238
Purchased Power. . . . . . . . . . . . . . 369,299 16,009 568,383 32,468
Other Operation. . . . . . . . . . . . . . 82,942 79,196 163,843 161,559
Maintenance. . . . . . . . . . . . . . . . 33,158 33,372 63,751 62,849
Depreciation and Amortization. . . . . . . 35,998 35,088 71,861 70,028
Taxes Other Than Federal Income Taxes. . . 41,862 41,950 84,520 83,863
Federal Income Taxes . . . . . . . . . . . 30,499 28,204 64,222 64,819
TOTAL OPERATING EXPENSES . . . . . 774,705 378,055 1,390,802 781,824
OPERATING INCOME . . . . . . . . . . . . . . 69,865 69,092 148,934 149,623
NONOPERATING INCOME. . . . . . . . . . . . . 3,449 2,560 4,687 7,530
INCOME BEFORE INTEREST CHARGES . . . . . . . 73,314 71,652 153,621 157,153
INTEREST CHARGES . . . . . . . . . . . . . . 20,255 21,333 40,126 41,243
NET INCOME . . . . . . . . . . . . . . . . . 53,059 50,319 113,495 115,910
PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . 368 370 738 1,908
EARNINGS APPLICABLE TO COMMON STOCK. . . . . $ 52,691 $ 49,949 $ 112,757 $114,002
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands)
BALANCE AT BEGINNING OF PERIOD . . . . . . . $597,442 $609,934 $590,151 $584,015
NET INCOME . . . . . . . . . . . . . . . . . 53,059 50,319 113,495 115,910
DEDUCTIONS:
Cash Dividends Declared:
Common Stock . . . . . . . . . . . . . . 52,775 86,647 105,550 124,209
Cumulative Preferred Stock . . . . . . . 369 370 739 2,459
Capital Stock Expense. . . . . . . . . . . - - - 21
BALANCE AT END OF PERIOD . . . . . . . . . . $597,357 $573,236 $597,357 $573,236
The common stock of the Company is wholly owned by
American Electric Power Company, Inc.
See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
OHIO POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production . . . . . . . . . . . . . . . . . . . . . . . . $2,625,517 $2,606,981
Transmission . . . . . . . . . . . . . . . . . . . . . . . 843,063 837,953
Distribution . . . . . . . . . . . . . . . . . . . . . . . 929,507 927,239
General (including mining assets). . . . . . . . . . . . . 699,214 709,475
Construction Work in Progress. . . . . . . . . . . . . . . 83,125 74,149
Total Electric Utility Plant . . . . . . . . . . . 5,180,426 5,155,797
Accumulated Depreciation and Amortization. . . . . . . . . 2,405,483 2,349,995
NET ELECTRIC UTILITY PLANT . . . . . . . . . . . . 2,774,943 2,805,802
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . . . . 118,226 113,279
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . . . . 108,278 44,203
Accounts Receivable. . . . . . . . . . . . . . . . . . . . 430,225 296,173
Allowance for Uncollectible Accounts . . . . . . . . . . . (2,196) (2,501)
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,812 119,543
Materials and Supplies . . . . . . . . . . . . . . . . . . 82,678 80,853
Accrued Utility Revenues . . . . . . . . . . . . . . . . . 40,393 37,586
Energy Marketing and Trading Contracts . . . . . . . . . . 208,612 646
Prepayments. . . . . . . . . . . . . . . . . . . . . . . . 42,666 36,611
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . 1,024,468 613,114
REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . . . . 529,581 523,891
DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . . . . 61,229 107,116
TOTAL. . . . . . . . . . . . . . . . . . . . . . $4,508,447 $4,163,202
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE> OHIO POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock - No Par Value:
Authorized - 40,000,000 Shares
Outstanding - 27,952,473 Shares. . . . . . . . . . . . . $ 321,201 $ 321,201
Paid-in Capital. . . . . . . . . . . . . . . . . . . . . . 462,312 462,296
Retained Earnings. . . . . . . . . . . . . . . . . . . . . 597,357 590,151
Total Common Shareholder's Equity. . . . . . . . . 1,380,870 1,373,648
Cumulative Preferred Stock:
Not Subject to Mandatory Redemption. . . . . . . . . . . 17,479 17,542
Subject to Mandatory Redemption. . . . . . . . . . . . . 11,850 11,850
Long-term Debt . . . . . . . . . . . . . . . . . . . . . . 1,029,513 1,012,031
TOTAL CAPITALIZATION . . . . . . . . . . . . . . . 2,439,712 2,415,071
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . . 307,075 295,375
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . . . . . . 18,605 83,195
Short-term Debt. . . . . . . . . . . . . . . . . . . . . . 110,100 78,700
Accounts Payable . . . . . . . . . . . . . . . . . . . . . 299,300 184,747
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . 140,322 160,055
Interest Accrued . . . . . . . . . . . . . . . . . . . . . 13,870 16,255
Obligations Under Capital Leases . . . . . . . . . . . . . 27,803 30,307
Energy Marketing and Trading Contracts . . . . . . . . . . 201,513 491
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 94,382 94,338
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . 905,895 648,088
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . 717,042 723,172
DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . . . . 41,136 42,821
DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . . . . 97,587 38,675
CONTINGENCIES (Note 5)
TOTAL. . . . . . . . . . . . . . . . . . . . . . $4,508,447 $4,163,202
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
OHIO POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
(in thousands)
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,495 $ 115,910
Adjustments for Noncash Items:
Depreciation, Depletion and Amortization . . . . . . . . . . 87,091 86,888
Deferred Federal Income Taxes. . . . . . . . . . . . . . . . 2,480 (1,530)
Deferred Fuel Costs (net). . . . . . . . . . . . . . . . . . (22,968) (13,695)
Amortization of Deferred Property Taxes. . . . . . . . . . . 38,294 38,193
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net). . . . . . . . . . . . . . . . . . (134,357) 11,576
Fuel, Materials and Supplies . . . . . . . . . . . . . . . . 3,906 (2,622)
Accrued Utility Revenues . . . . . . . . . . . . . . . . . . (2,807) 4,280
Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . (6,055) (12,308)
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . 114,553 (5,138)
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . . (19,733) (19,599)
Other (net). . . . . . . . . . . . . . . . . . . . . . . . . . 81,078 25,521
Net Cash Flows From Operating Activities . . . . . . . . 254,977 227,476
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . . . . . . . . (71,323) (63,411)
Proceeds from Sale of Property and Other . . . . . . . . . . . 3,600 4,784
Net Cash Flows Used For Investing Activities . . . . . . (67,723) (58,627)
FINANCING ACTIVITIES:
Issuance of Long-term Debt . . . . . . . . . . . . . . . . . . 137,566 98,958
Change in Short-term Debt (net). . . . . . . . . . . . . . . . 31,400 70,923
Retirement of Cumulative Preferred Stock . . . . . . . . . . . (47) (117,601)
Retirement of Long-term Debt . . . . . . . . . . . . . . . . . (185,809) (70,337)
Dividends Paid on Common Stock . . . . . . . . . . . . . . . . (105,550) (124,209)
Dividends Paid on Cumulative Preferred Stock . . . . . . . . . (739) (2,459)
Net Cash Flows Used For Financing Activities . . . . . . (123,179) (144,725)
Net Increase in Cash and Cash Equivalents. . . . . . . . . . . . 64,075 24,124
Cash and Cash Equivalents at Beginning of Period . . . . . . . . 44,203 24,003
Cash and Cash Equivalents at End of Period . . . . . . . . . . . $ 108,278 $ 48,127
Supplemental Disclosure:
Cash paid for interest net of capitalized amounts was $41,125,000 and $40,976,000 and
for income taxes was $43,019,000 and $48,063,000 in 1998 and 1997, respectively.
Noncash acquisitions under capital leases were $18,913,000 and $20,299,000 in 1998 and
1997, respectively.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
OHIO POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements
should be read in conjunction with the 1997 Annual Report
as incorporated in and filed with the Form 10-K. In the
opinion of management, the financial statements reflect all
adjustments (consisting of only normal recurring accruals)
which are necessary for a fair presentation of the results of
operations for interim periods.
2. FINANCING ACTIVITY
In April 1998 the Company issued $140 million of 7-3/8%
senior unsecured notes due 2038. During the first half of 1998
the Company and a subsidiary retired $180 million of long-term
debt: $56 million of 6-3/4% first mortgage bonds and $17
million of 6.85% notes payable at maturity and two series of
$50 million first mortgage bonds due in 2002 with interest
rates of 8.10% and 8.25% and $7 million of variable rate notes
payable due in 1999.
As a result of the redemption of the 6-3/4% series first
mortgage bonds due in 1998, the restriction on the use of
retained earnings for the payment of common stock dividends was
eliminated.
3. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" was adopted by the Company in
the first quarter of 1998. SFAS No. 130 established the
standards for reporting and displaying components of
"comprehensive income," which is the total of net income and
all transactions not included in net income affecting equity
except those with shareholders. For the quarter and year-to-date
periods ended June 30, 1998, there are no material
differences between comprehensive income and net income.
In the first quarter of 1998 the Company adopted the
American Institute of Certified Public Accountants' Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP
requires the capitalization and amortization of certain costs
of acquiring or developing internal use computer software.
Previously the Company expensed all software acquisition and
development costs. The SOP must be adopted at the beginning
of a fiscal year with no restatement or retroactive adjustment
of prior periods. The adoption of the SOP effective January
1, 1998 did not have a material effect on results of
operations, cash flows or financial condition.<PAGE>
4.
ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation,
as agent for the Company and its affiliates in the AEP System
Power Pool (Power Pool), substantially increased the volume of
its electricity marketing and trading businesses. The purpose
of such businesses is to utilize AEP's knowledge of the energy
markets in order to improve the competitiveness of its
generation business and contribute to non-regulated,
nonoperating income. Revenues and expenses from these
activities are shared by the Power Pool members based on their
relative peak demands.
Such businesses involve the marketing of power under
physical forward contracts at fixed and variable prices and the
trading of options, futures, swaps and other financial
derivative contracts at both fixed and variable prices. Most
contracts represent physical forward electricity marketing
contracts for the purchase and sale of electricity in the Power
Pool's traditional marketing area which are recorded as
operating revenues and purchased power expense when the
contracts settle. At June 30, 1998, the Power Pool had open
marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's
share of these notional values is approximately $400 million
for sales and approximately $400 million for purchases.
The Power Pool has also purchased and sold electricity
options, futures, and swaps, and entered into forward purchase
and sale contracts for the future delivery or receipt of
electricity outside the traditional marketing area. These
transactions represent non-regulated trading activities that
are marked-to-market and recorded in nonoperating income. At
June 30, 1998, the Company's share of the fair value of such
trading contracts is reported as a current asset and a current
liability. The Company's share of the average fair value of
the current asset and the current liability was $71 million and
$69 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and
prices, the open forward physical marketing contracts and the
marked-to-market open trading contracts could produce material
income or losses in future periods.
5. CONTINGENCIES
Taxes
As discussed in Note 8, "Federal Income Taxes" of the Notes
to Consolidated Financial Statements in the 1997 Annual Report,
the Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National
Office that certain interest deductions relating to corporate
owned life insurance (COLI) claimed by the Company should not
be allowed. As a result of a suit filed in United States
District Court (discussed below) this request for ruling has
been withdrawn. Adjustments have been or will be proposed by
the IRS disallowing COLI interest deductions for taxable years
1991-96. A disallowance of the COLI interest deduction through
June 30, 1998 would reduce earnings by approximately $114
million (including interest). No provisions for this amount
have been recorded.
In order to resolve this issue without further delay, on
March 24, 1998, the Company filed suit against the United
States in the United States District Court for the Southern
District of Ohio. Management believes that it has a
meritorious position and will vigorously pursue this lawsuit.
In July 1998, the Company made a payment of taxes and interest
attributable to COLI interest deductions for taxable years
1991-96 to avoid the potential assessment by the IRS of any
additional above market rate interest on the contested amount.
The payment will be recorded in other property and investments
and included on future balance sheets pending the resolution
of this matter. The Company will seek refund, either
administratively or through litigation, of all amounts paid.
In the event the resolution of this matter is unfavorable, it
will have a material adverse impact on results of operations
and cash flows.
Other
The Company continues to be involved in certain other
matters discussed in the 1997 Annual Report.
<PAGE>
<PAGE>
OHIO POWER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
SECOND QUARTER 1998 vs. SECOND QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Net income increased $2.7 million or 5% in the second quarter
and decreased $2.4 million or 2% in the year-to-date period. The
second quarter increase is largely due to lower interest costs
reflecting a decrease in long-term debt outstanding and an increase
in nonoperating income. The decline in the year-to-date period is
mainly due to a reduction in nonoperating income resulting from the
effect of gains from the sale of emission allowances recorded in
1997.
Other income statement line items which changed significantly
were:
Increase (Decrease)
Second Quarter Year-to-Date
(in millions) % (in millions) %
Operating Revenues . . . . $397.4 89 $608.3 65
Fuel Expense . . . . . . . 36.7 25 68.0 22
Purchased Power Expense. . 353.3 N.M. 535.9 N.M.
Other Operation Expense. . 3.7 5 2.3 1
N.M. = Not Meaningful
Operating revenues increased significantly for both periods as
a result of increased wholesale and retail energy sales. A new
power marketing business, which started in July 1997, was the
primary reason for the substantial increase in wholesale sales.
The power marketing business involves the purchase and sale of
large quantities of electricity through forward contracts. The
increases in power marketing sales and related revenues were offset
by a nearly equivalent increase in power purchases by the power
marketing operation. Wholesale revenues also increased due to
increased sales to the AEP System Power Pool (Power Pool) to
replace the power from an affiliate's nuclear plant which was out
of service.
Energy sales to retail customers were up 6% for the second
quarter of 1998 and 4% for the year-to-date period as demand by all
classes of retail customers increased resulting in increased retail
revenues. The rise in retail sales can be attributed to warmer
springtime temperatures and the resumption of operations by a major
industrial customer following a labor strike.
The increase in fuel expense in both periods was mainly due to
a 15% increase in generation resulting from the increased retail
demand for energy and to replace energy usually supplied to the
Power Pool by the affiliate's out-of-service nuclear plant and an
increase in cost of fuel consumed.
Purchases of electricity for the power marketing business
accounted for the significant increase in purchased power expense.
Other operation expense increased in the second quarter due to
increased costs under the AEP System transmission equalization
agreement and higher steam plant costs reflecting the increased
generation levels. The transmission equalization agreement
combines certain AEP System companies' investment in transmission
facilities and shares the costs of ownership of those facilities in
proportion to each AEP System company's peak demand relative to the
peak demands of all AEP System companies utilizing the AEP System
transmission system. The charges paid by the Company under the
agreement increased due to an increase in the Company's prior
twelve month peak demand relative to the total peak demand of all
transmission agreement members.
FINANCIAL CONDITION
Total plant and property additions including capital leases for
the first six months of 1998 were $90 million.
During the first six months of 1998, the Company and a
subsidiary retired $180 million principal amount of long-term debt
with interest rates ranging from 6.11% to 8.25%, issued $140
million of senior unsecured notes at a rate of 7-3/8% and increased
short-term debt by $31 million.
ENERGY MARKETING AND TRADING
During 1998, American Electric Power Service Corporation, as
agent for the Company and its affiliates in the AEP System Power
Pool (Power Pool), substantially increased the volume of its
electricity marketing and trading businesses. The purpose of such
businesses is to utilize AEP's knowledge of the energy markets in
order to improve the competitiveness of its generation business and
contribute to non-regulated, nonoperating income. Revenues and
expenses from these activities are shared by the Power Pool members
based on their relative peak demands.
Such businesses involve the marketing of power under physical
forward contracts at fixed and variable prices and the trading of
options, futures, swaps and other financial derivative contracts at
both fixed and variable prices. Most contracts represent physical
forward electricity marketing contracts for the purchase and sale
of electricity in the Power Pool's traditional marketing area which
are recorded as operating revenues and purchased power expense
when the contracts settle. At June 30, 1998, the Power Pool had
open marketing contracts in its traditional marketing area through
the year 2004 to sell electricity with a notional value of
approximately $1.5 billion and to purchase electricity with a
notional value of approximately $1.5 billion. The Company's share
of these notional values is approximately $400 million for sales
and approximately $400 million for purchases.
The Power Pool has also purchased and sold electricity options,
futures, and swaps, and entered into forward purchase and sale
contracts for the future delivery or receipt of electricity outside
the traditional marketing area. These transactions represent non-regulated
trading activities that are marked-to-market and recorded
in nonoperating income. At June 30, 1998, the Company's share of
the fair value of such trading contracts is reported as a current
asset and a current liability. The Company's share of the average
fair value of the current asset and the current liability was $71
million and $69 million for the six months ended June 30, 1998,
respectively.
Dependent on future electricity market conditions and prices,
the open forward physical marketing contracts and the marked-to-market open
trading contracts could produce material income or
losses in future periods.
TAXES
The Internal Revenue Service (IRS) agents auditing the federal
income tax returns requested a ruling from their National Office
that certain interest deductions relating to corporate owned life
insurance (COLI) claimed by the Company should not be allowed. As
a result of a suit filed in United States District Court (discussed
below) this request for ruling has been withdrawn. Adjustments
have been or will be proposed by the IRS disallowing COLI interest
deductions for taxable years 1991-96. A disallowance of the COLI
interest deduction through June 30, 1998 would reduce earnings by
approximately $114 million (including interest). No provisions for
this amount have been recorded.
In order to resolve this issue without further delay, on March
24, 1998, the Company filed suit against the United States in the
United States District Court for the Southern District of Ohio.
Management believes that it has a meritorious position and will
vigorously pursue this lawsuit. In July 1998, the Company made a
payment of taxes and interest attributable to COLI interest
deductions for taxable years 1991-96 to avoid the potential
assessment by the IRS of any additional above market rate interest
on the contested amount. The payment will be recorded in other
property and investments and included on future balance sheets
pending the resolution of this matter. The Company will seek
refund, either administratively or through litigation, of all
amounts paid. In the event the resolution of this matter is
unfavorable, it will have a material adverse impact on results of
operations and cash flows.
COMPUTER ISSUE - YEAR 2000
The Company has been addressing the issue of what will happen
when the year 2000 arrives and many of the world's computer systems
will encounter the "year 2000" problem, i.e., computers not being
able to distinguish between the years 1900 and 2000. Internally
the Company has been modifying or replacing its computer hardware
and software programs to mitigate risk, minimize technical
failures, and rapidly repair failures if they occur. Externally
the problem is being addressed with entities that interact
electronically with the Company, including but not limited to,
suppliers, service providers, government agencies, customers,
creditors and financial service organizations. If the Company's
corrective actions, and/or the actions of other independent
entities fail for critical applications, the Company may be
adversely impacted in the year 2000. The Company began reviewing
the issue in 1996 and has spent approximately $4 million on the
project through June 30, 1998. The Company is continuing to study
the impact of making its systems "year 2000" compliant and is
working on various aspects of the issue. These activities are
projected to cost an additional $13 million to $17 million.
Although significant, the cost of correcting the "year 2000"
problem is not expected to have a material impact on the results of
operations for any accounting period, cash flows or financial
condition.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
American Electric Power Company, Inc. ("AEP")
The annual meeting of shareholders was held in Columbus, Ohio
on May 27, 1998. The holders of shares entitled to vote at the
meeting or their proxies cast votes at the meeting with respect to
the following four matters, as indicated below:
1. Election of 11 directors to hold office until the next
annual meeting and until their successors are duly
elected. Each nominee for director was elected by a vote
of the shareholders as follows:
Number of Shares Number of
Nominee Voted For Votes With-
held
John P. DesBarres 159,621,299 2,783,151
E. Linn Draper, Jr. 159,511,321 2,893,129
Robert M. Duncan 159,354,603 3,049,847
Robert W. Fri 159,575,649 2,828,801
Lester A. Hudson, Jr. 159,608,631 2,795,819
Leonard J. Kujawa 159,501,040 2,903,410
Angus E. Peyton 159,422,264 2,982,186
Donald G. Smith 159,609,347 2,795,103
Linda Gillespie Stuntz 159,548,276 2,856,174
Kathryn D. Sullivan 158,065,421 4,339,029
Morris Tanenbaum 159,497,283 2,907,167
2. Approve the appointment by the Board of Directors of
Deloitte & Touche LLP as independent auditors of AEP for
the year 1998. The proposal was approved by a vote of the
shareholders as follows:
Votes FOR 160,614,441
Votes AGAINST 654,227
Votes ABSTAINED 1,135,782
Broker NON-VOTES* 0
3. Approve the issuance by AEP of shares of its Common Stock
to the stockholders of Central and South West Corporation
("CSW") under the Agreement and Plan of Merger dated as of
December 21, 1997, pursuant to which CSW would, on the
closing date, merge with and into a wholly-owned merger
subsidiary of AEP with CSW being the surviving
corporation. The proposal was approved by a vote of the
shareholders as follows:
Votes FOR 136,593,812
Votes AGAINST 2,937,088
Votes ABSTAINED 1,799,090
Broker NON-VOTES* 21,074,460
4. Approve an amendment to the Restated Certificate of
Incorporation to increase the number of authorized shares
of AEP Common Stock from 300,000,000 to 600,000,000. The
proposal was approved by a vote of the shareholders as
follows:
Votes FOR 135,333,767
Votes AGAINST 4,308,260
Votes ABSTAINED 1,687,963
Broker NON-VOTES* 21,074,460
*A non-vote occurs when a nominee holding shares for a
beneficial owner votes on one proposal, but does not vote
on another proposal because the nominee does not have
discretionary voting power and has not received
instructions from the beneficial owner.
Appalachian Power Company ("APCo")
The annual meeting of stockholders was held on April 28, 1998
at 1 Riverside Plaza, Columbus, Ohio. At the meeting, 13,499,500
votes were cast FOR each of the following seven persons for
election as directors and there were no votes withheld and such
persons were elected directors to hold office for one year or until
their successors are elected and qualify:
Peter J. DeMaria Gerald P. Maloney
E. Linn Draper, Jr. James J. Markowsky
Henry W. Fayne Joseph H. Vipperman
William J. Lhota
No other business was transacted at the meeting.
Indiana Michigan Power Company ("I&M")
The annual meeting of stockholders was held on April 28, 1998
at 1 Riverside Plaza, Columbus, Ohio. At the meeting, 1,400,000
votes were cast FOR each of the following thirteen persons for
election as directors and there were no votes withheld and such
persons were elected directors to hold office for one year or until
their successors are elected and qualify:
Karl G. Boyd Gerald P. Maloney
C. R. Boyle, III James J. Markowsky
G. A. Clark David B. Synowiec
Peter J. DeMaria Joseph H. Vipperman
James A. Kobyra William E. Walters
E. Linn Draper, Jr. Earl H. Wittkamper
William J. Lhota
No other business was transacted at the meeting.
Ohio Power Company ("OPCo")
The annual meeting of shareholders was held on May 5, 1998 at
1 Riverside Plaza, Columbus, Ohio. At the meeting, 27,952,473
votes were cast FOR each of the following seven persons for elec-
tion as directors and there were no votes withheld and such persons
were elected directors to hold office for one year or until their
successors are elected and qualify:
Peter J. DeMaria Gerald P. Maloney
E. Linn Draper, Jr. James J. Markowsky
Henry W. Fayne Joseph H. Vipperman
William J. Lhota
No other business was transacted at the meeting.
Item 5. Other Information.
AEP and APCo
Reference is made to pages 12 and 13 of the Annual Report on
Form 10-K for the year ended December 31, 1997 ("1997 10-K") for a
discussion of APCo's proposed transmission facilities. On May 27,
1998, the Public Service Commission of West Virginia issued an
order granting APCo's application for a certificate with respect to
the preferred route for the Wyoming-Cloverdale 765,000-volt line.
AEP and I&M
Reference is made to page 20 of the 1997 10-K for a discussion
of the disposal of spent nuclear fuel and high level radioactive
waste. On May 5, 1998, the U.S. Court of Appeals denied the motion
filed by the various states and utilities in February 1998, in
connection with the spent nuclear fuel litigation. On June 8,
1998, I&M filed a complaint in the U.S.
Court of Federal Claims seeking damages in excess of $150 million
due to the U.S. Department of Energy's partial material breach of
its unconditional contractual deadline to begin disposing of spent
nuclear fuel and high level nuclear waste generated by the Cook
Nuclear Plant. Similar lawsuits have been filed by other utilities.
On June 18, 1998, Region V, U.S. Environmental Protection
Agency ("Federal EPA") issued a Notice to Tanners Creek Plant
alleging a violation of the Indiana State Implementation Plan SO2
limit applicable to Unit 4. The Notice alleges that the plant
received and used coal with a sulfur content in excess of that
which would permit compliance with the specified emission
requirements. Negotiations to resolve the Notice through
settlement are underway.
AEP, AEP Generating Company ("AEGCo"), APCo, Columbus Southern
Power Company ("CSPCo"), I&M, Kentucky Power Company ("KEPCo") and
OPCo
Reference is made to page 25 of the 1997 10-K for a discussion
of the application of new source rules to generating plant repairs
and pollution control projects undertaken to comply with the Clean
Air Act. On July 24, 1998, Federal EPA issued a notice soliciting
comments on an alternative proposal that would significantly change
the existing New Source Review rule applicable to utility sources.
The proposal could result in more extensive permitting requirements
governing alteration of existing sources than under the current
rule.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
APCo, CSPCo, I&M, KEPCo and OPCo
Exhibit 12 - Statement re: Computation of Ratios.
AEP, AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
Company
Reporting Date of Report Items Reported
AEP, AEGCo, May 15, 1998 Item 5. Other Events
APCo, CSPCo, Item 7. Financial
I&M, KEPCo and Statements and Exhibits
OPCo
CSPCo June 18, 1998 Item 5. Other Events
Item 7. Financial
Statements and Exhibits
[scc\annual\10Q-98.2d]
<PAGE>
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, each registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized. The
signature for each undersigned company shall be deemed to relate
only to matters having reference to such company and any
subsidiaries thereof.
AMERICAN ELECTRIC POWER COMPANY, INC.
By: /s/ Armando A. Pena By: /s/ Leonard V. Assante
Armando A. Pena Leonard V. Assante
Treasurer Controller and
Chief Accounting Officer
(Duly Authorized Officer) (Chief Accounting Officer)
AEP GENERATING COMPANY
APPALACHIAN POWER COMPANY
COLUMBUS SOUTHERN POWER COMPANY
INDIANA MICHIGAN POWER COMPANY
KENTUCKY POWER COMPANY
OHIO POWER COMPANY
By: /s/ Armando A. Pena By: /s/ Leonard V. Assante
Armando A. Pena Leonard V. Assante
Vice President, Treasurer, Controller and
and Chief Financial Officer Chief Accounting Officer
(Duly Authorized Officer) (Chief Accounting Officer)
Date: August 13, 1998
II-5
<TABLE>
EXHIBIT 12
COLUMBUS SOUTHERN POWER COMPANY
Computation of Consolidated Ratios of Earnings to Fixed Charges
(in thousands except ratio data)
<CAPTION>
Twelve
Months
Year Ended December 31, Ended
1993 1994 1995 1996 1997 6/30/98
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest on First Mortgage Bonds. . . . . . . . $74,119 $68,471 $66,811 $59,711 $55,156 $52,396
Interest on Other Long-term Debt. . . . . . . . 10,436 10,221 8,829 12,125 15,525 19,107
Interest on Short-term Debt . . . . . . . . . . 1,305 817 1,328 2,400 5,104 4,328
Miscellaneous Interest Charges. . . . . . . . . 4,036 4,566 4,657 4,374 4,729 4,538
Estimated Interest Element in Lease Rentals . . 3,700 3,700 4,100 4,600 4,100 4,100
Total Fixed Charges. . . . . . . . . . . . $93,596 $87,775 $85,725 $83,210 $84,614 $84,469
Earnings:
Net Income (Loss) . . . . . . . . . . . . . . .$(55,898) $109,845 $110,616 $107,108 $119,379 $131,012
Plus Federal Income Taxes . . . . . . . . . . . 34,154 49,838 58,648 60,302 69,760 74,704
Plus State Income Taxes . . . . . . . . . . . . - 1 7 11 6 6
Plus Fixed Charges (as above) . . . . . . . . . 93,596 87,775 85,725 83,210 84,614 84,469
Total Earnings . . . . . . . . . . . . . .$ 71,852 $247,459 $254,996 $250,631 $273,759 $290,191
Ratio of Earnings to Fixed Charges. . . . . . . . 0.76(a) 2.81 2.97 3.01 3.23 3.43
(a) Ratio includes the effect of the Loss from Zimmer Plant Disallowance of $144,533,000 (net of applicable
income taxes of $14,534,000). As a result, earnings for the twelve months ended December 31, 1993 were
inadequate to cover fixed charges by $21,744,000. If the effect of the Loss from Zimmer Plant Disallowance
were excluded, the ratio would be 2.46 for the twelve months ended December 31, 1993.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000022198
<NAME> COLUMBUS SOUTHERN POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,904,930
<OTHER-PROPERTY-AND-INVEST> 36,263
<TOTAL-CURRENT-ASSETS> 394,623
<TOTAL-DEFERRED-CHARGES> 38,263
<OTHER-ASSETS> 350,052
<TOTAL-ASSETS> 2,724,131
<COMMON> 41,026
<CAPITAL-SURPLUS-PAID-IN> 572,302
<RETAINED-EARNINGS> 160,171
<TOTAL-COMMON-STOCKHOLDERS-EQ> 773,499
25,000
0
<LONG-TERM-DEBT-NET> 959,416
<SHORT-TERM-NOTES> 25,900
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 26,625
<LONG-TERM-DEBT-CURRENT-PORT> 40,000
0
<CAPITAL-LEASE-OBLIGATIONS> 34,642
<LEASES-CURRENT> 6,329
<OTHER-ITEMS-CAPITAL-AND-LIAB> 832,720
<TOT-CAPITALIZATION-AND-LIAB> 2,724,131
<GROSS-OPERATING-REVENUE> 868,766
<INCOME-TAX-EXPENSE> 37,945
<OTHER-OPERATING-EXPENSES> 728,441
<TOTAL-OPERATING-EXPENSES> 766,386
<OPERATING-INCOME-LOSS> 102,380
<OTHER-INCOME-NET> 1,228
<INCOME-BEFORE-INTEREST-EXPEN> 103,608
<TOTAL-INTEREST-EXPENSE> 39,221
<NET-INCOME> 64,387
1,065
<EARNINGS-AVAILABLE-FOR-COMM> 63,322
<COMMON-STOCK-DIVIDENDS> 41,322
<TOTAL-INTEREST-ON-BONDS> 24,932
<CASH-FLOW-OPERATIONS> 77,243
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> All common stock owned by parent company; no EPS required.
</FN>
</TABLE>
