AMERICAN ELECTRIC POWER COMPANY INC, U-1/A, 1998-02-24

AMERICAN ELECTRIC POWER COMPANY INC
U-1/A, 1998-02-24
ELECTRIC SERVICES

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File No. 70-9021

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________

AMENDMENT NO. 3
TO
FORM U-1
__________________________________

APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

* * *

AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of company or companies filing this statement
and addresses of principal executive offices)

* * *

AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of top registered holding company
parent of each applicant or declarant)

* * *

John F. Di Lorenzo, Jr., Associate General Counsel
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)

Jeffrey D. Cross, General Counsel
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)

American Electric Power Company, Inc., a registered holding
company under the Public Utility Holding Company Act of 1935, as
amended, and its subsidiary, AEP Resources, Inc., hereby amend and
restate their Application or Declaration on Form U-1 in File No.
70-9021 as follows:
"ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
American Electric Power Company, Inc. ('American'), a holding
company registered under the Public Utility Holding Company Act of
1935 ('1935 Act'), and AEP Resources, Inc. ('Resources'), a wholly-
owned nonutility subsidiary of American, request that the
Commission authorize American to use the net proceeds of currently
authorized financings and issue Guarantees (as defined herein) in
an aggregate amount at any one time outstanding which, when added
to American's direct and indirect aggregate investment in all
Exempt Projects (as defined herein), would not at any time exceed
American's consolidated retained earnings. American and all of its
subsidiariesFN1 are collectively referred to herein as the
'American System' and American and Resources are sometimes
collectively referred to herein as the 'Applicants'.
FN1 Appalachian Power Company ('APCo'), Columbus Southern Power
Company ('CSPCo'), Kentucky Power Company ('KPCo'), Kingsport
Power Company ('KgpCo'), Indiana Michigan Power Company
('I&M'), Ohio Power Company ('OPCo') and Wheeling Power
Company ('WPCo'), electric utility subsidiaries of American
(sometimes collectively referred to herein as 'Operating
Companies'). American is primarily engaged, through the
Operating Companies, in the generation, transmission and
distribution of electric energy. The Operating Companies
operate an integrated public utility system that provides
service in Indiana, Kentucky, Michigan, Ohio, Tennessee,
Virginia and West Virginia.

A. History and Nature of Request
Since 1989, American, directly or indirectly through
Resources, has engaged in preliminary development activities
related to qualifying cogeneration facilities and qualifying small
power production facilities (collectively, 'QFs'), as defined under
the Public Utility Regulatory Policies Act of 1978, as amended, and
the rules thereunder. Since 1994, American, directly or indirectly
through Resources, has engaged in preliminary development
activities related to exempt wholesale generators ('EWGs'), as
defined in Section 32(a) of the 1935 Act, foreign utility companies
('FUCOs'), as defined in Section 33(a) of the 1935 Act,FN2 and
other independent power projects which constitute a part of
American's integrated electric utility system within the meaning of
Section 2(a)(29)(A) of the 1935 Act.
FN2 EWGs and FUCOs are sometimes referred to herein collectively
as 'Exempt Projects').

American is presently authorized under the terms of orders and
supplemental orders issued under File No. 70-7622 and File No. 70-
8429 (collectively, the 'Financing Orders') to finance the above
operations of American and Resources and their respective
subsidiaries by issuing and selling debt and equity securities and
by issuing guarantees of the obligations of certain subsidiaries.
American's and Resources' authorizations under the Financing Orders
may be summarized as follows:
(1) File No. 70-7622
Pursuant to an order of the Commission dated June 6, 1989
(HCAR No. 24898) and supplemental orders dated October 8, 1993
(HCAR No. 25905) and February 4, 1994 (HCAR No. 25984) with respect
to File No. 70-7622, (i) American obtained authorization to invest
in Resources up to $7.5 million per year through December 31, 1996
for preliminary development activities related to QFs, EWGs, FUCOs
and other power projects and to issue guarantees and assume
liabilities of Resources in connection with such development
activities, and (ii) Resources obtained authorization to engage in
such preliminary development activities, including the
investigation of sites, preliminary engineering and licensing
activities, acquiring options and rights, contract drafting and
negotiation, preparation of proposals and other necessary
activities to identify and analyze feasible investment
opportunities and to initiate commercialization of a project and to
obtain debt financing from unaffiliated third parties. Pursuant to
these Orders, American also obtained authorization to make
investments in Resources by acquisition of Resources' common stock,
capital contributions, open account advances and/or subordinated
loans, and to guarantee any debt financing of Resources.
(2) File No. 70-8429
Pursuant to an order of the Commission dated December 22,
1994 (HCAR No. 26200), American and Resources obtained
authorization (i) to issue and sell from time to time up to $300
million in debt and/or equity securities through June 30, 1997 to
invest in Exempt Projects; (ii) to acquire the securities of one or
more companies ('Project Parents') that will directly or indirectly
own and hold the securities of one or more Exempt Projects; (iii)
for American to guarantee the debt securities and other commitments
of Resources; (iv) for American and Resources to guarantee the
securities of one or more Project Parents or Exempt Projects; and
(v) for Project Parents to guarantee the securities of their Exempt
Projects, in an aggregate amount which together with the securities
issued will not exceed $300 million.
Pursuant to an order of the Commission dated May 10, 1996
(HCAR No. 26516), American and Resources obtained authorization,
among other things, (i) to invest in Exempt Projects in an amount
up to 50% of American's consolidated retained earnings as
determined in accordance with Rule 53(a)(1)(ii) under the 1935 Act
for such investments for which there is recourse to American; (ii)
to extend through December 31, 2000 the authority granted in the
December 22, 1994 Order authorizing (a) the issue and sale of debt
and equity securities, (b) the acquisition by Resources and the
Project Parents of securities of new Project Parents, and (c)
American, Resources and the Project Parents to guarantee securities
('Guarantees'); and (iii) for American to issue and sell up to ten
million additional shares of its authorized but unissued common
stock or treasury shares.
B. Exempt Projects Presently Owned or Under Investigation by
American
American's consolidated retained earnings (as defined under
Rule 53(a) of the 1935 Act) as of September 30, 1997 were
approximately $1.591 billion and, accordingly, its Investment Limit
was about $795 million. As of December 31, 1997, American had
invested $363 million in Yorkshire Electricity Group plc. In
addition, it has $110 million designated for Nanyang General Light
Electric Co., Ltd., of which approximately $42 million was invested
as of December 31, 1997. Yorkshire Electricity Group plc and
Nanyang General Light Electric Co., Ltd. are both FUCOs; at
present, American has no investments in EWGs or QFs. American is
considering further investment opportunities, some of which would
require an 'investment' in excess of the approximately $322 million
of undesignated Investment Limit.
As of December 31, 1997, American's aggregate investments in
Exempt Projects were approximately $405 million, which comprised
its investment in the two FUCOs, Yorkshire Electricity Group plc
and Nanyang General Light Electric Co. In addition, on February 6,
1998, American agreed to acquire a 20% equity interest in Pacific
Hydro Limited ('Pacific Hydro') for approximately $10 million.
Pacific Hydro is a FUCO. At present, American has no investments
in EWGs and QFs. American's investment of $405 million as of
December 31, 1997 (and the $10 million commitment for Pacific Hydro
for a total of $415 million) represents approximately 26.1% of its
consolidated retained earnings as of September 30, 1997
(approximately $1.591 billion). The authorization sought in this
File would allow the financing of investments in additional Exempt
Projects of approximately $1.186 billion.
(1) Yorkshire Electricity Group plc
On February 24, 1997 American and Public Service Company
of Colorado ('PSCo'), indirectly through Yorkshire Holdings plc
('Yorkshire Holdings'), announced their intention to commence an
offer in the United Kingdom to acquire all of the outstanding share
capital of Yorkshire Electricity Group plc ('Yorkshire
Electricity') for an aggregate purchase price of approximately $2.4
billion. Yorkshire Electricity serves approximately 2.1 million
customers in England. Yorkshire Electricity's distribution
territory covers approximately 4,180 square miles of northeast
England. It was one of the 12 regional electricity companies
created in 1990 by the British government as part of the
privatization of the electric utility industry in England and
Wales. Yorkshire Electricity is primarily a distribution and
supply company, purchasing most of its electricity requirements
from third-party generators.
The purchase price for the outstanding shares of
Yorkshire Electricity was financed by loans made by Yorkshire
Holdings' sole shareholder, Yorkshire Power Group Limited ('YPG'),
a company organized under the laws of the United Kingdom. YPG
financed its loans to Yorkshire Holdings by borrowing approximately
1 billion UK pounds (US $1.5 billion) through a term loan and
revolving facility and by equity contributions from its
shareholders, Resources and New Century International, Inc. The
loan facility is neither guaranteed by, nor otherwise provides for
recourse to, American, Resources or any of American's operating
utility subsidiaries. YPG's success in obtaining non-recourse
financing for its investment in Yorkshire Electricity indicates
that the market assesses the overall quality of that investment
favorably.
Resources invested 220 million UK pounds (US $357
million) for 50% of the equity of YPG. Resources funded its
investment with a $50 million cash investment from American, $7
million of short term borrowing and a $300 million adjustable rate
term loan under a revolving credit agreement with Bank of New York
as agent. Resources' borrowings are guaranteed by American.
American's cash investment was funded by proceeds of the sale of
its Common Stock under its dividend reinvestment and savings plans.
As of December 31, 1997, American's 'aggregate investment' (as
defined under Rule 53(a) of the 1935 Act) in Yorkshire Electricity
was $363 million.
With the exception of the loss associated with the
windfall profit tax discussed below, Yorkshire Electricity has
made, and American anticipates that Yorkshire Electricity will
continue to make, a contribution to American's earnings per share.
In addition to providing American with a relatively stable source
of income in the future, the acquisition of Yorkshire Electricity
will enable the grouping of all three companies to:
* add to the established achievements of Yorkshire
Electricity's management team. Yorkshire Holdings
believes that there are further opportunities in the
United Kingdom electricity market which it can assist
Yorkshire Electricity in pursuing;
* promote further competition in each of the companies'
markets to the benefit of customers;
* share effective best practice initiatives between the
three companies across the areas of customer service,
cost-to-customer, operational and financial disciplines;
* add proven expertise from American and PSCo in trading,
generation, transmission and gas marketing; and
* bring the financial resources and technical marketing
awareness of American and PSCo to bear on Yorkshire
Electricity's approach to the deregulation of the United
Kingdom supply market post-1998.
Prior to the announcement of the intention of Yorkshire
Holdings to offer to acquire the outstanding shares of Yorkshire
Electricity, Standard & Poor's and Moody's Investors Service rated
the senior unsecured debt of Yorkshire Electricity AA and Aa3,
respectively. After the announcement of the takeover bid, both
rating agencies placed these ratings on review for possible
downgrade. On October 1, 1997, Standard & Poor's issued revised
ratings for Yorkshire Electricity of BBB+ and on October 6, 1997,
Moody's issued revised ratings for Yorkshire Electricity of Baa1.
Standard & Poor's indicated that the downgrade reflected the impact
of higher financial leverage on Yorkshire Electricity's future
debt-servicing capacity.FN3 See Exhibits C-1 and C-2.
FN3 Although the higher financial leverage resulted in reduction
in the ratings of Yorkshire Electricity, it benefits American
and the Operating Companies because the leverage is non-
recourse debt. See the discussion below in paragraph C(2)(d)
of Item 1.

The acquisition of other United Kingdom regional
electricity companies also resulted in reductions of ratings of
senior debt as a result of higher financial leverage. For example,
prior to being acquired by Entergy Corporation, the ratings of
London Electricity were Aa1 and AA+ by Moody's and Standard &
Poor's, respectively. When the acquisition was announced in 1996,
both agencies placed the ratings on review for possible downgrade.
In October, 1997, Moody's and Standard & Poor's issued revised
ratings of Baa2 and BBB-, respectively. Similarly, the Aa3 and AA
ratings of East Midlands Electricity were reduced to A3 and A-, by
Moody's and Standard & Poor's, respectively, after being acquired
by Dominion Resources, and the AA+ Standard & Poor's rating for
SEEBOARD was reduced to A- after being acquired by Central and
South West Corporation. Exhibit C-3 sets forth the current ratings
of United Kingdom regional electric companies.
(2) Nanyang General Light Electric Co., Ltd.
On September 22, 1996, AEP Pushan Power LDC ('AEPP'), a
special purpose subsidiary of Resources (formed as a Project Parent
under the laws of the Cayman Islands), signed a joint venture
agreement together with two local Chinese partners in connection
with the formation of the Nanyang General Light Electric Co., Ltd.
('Nanyang'), a cooperative joint venture company formed under the
laws of the People's Republic of China.
Nanyang was established to own, construct, finance and
operate a coal-fired electric generating station in Nanyang, Henan
Province China, with two units of 125 megawatts each ('Nanyang
Project'). On November 4, 1996, Nanyang was granted its business
license and its initial Board of Directors meeting was held on
November 13-14, 1996. AEPP owns 70% of Nanyang, and special
purpose financing companies established by the Henan Electric Power
Company ('Henan Electric') and the City of Nanyang, respectively,
each own 15%. Under the joint venture agreement, AEPP's total
commitment in U.S. Dollars will not exceed $110 million. It is
anticipated that this commitment will take the form of
approximately $40 million as a direct equity investment, and
approximately $70 million in the form of a shareholder loan
provided from Resources. As of December 31, 1997, $14 million and
$28 million of equity and debt, respectively, had been provided and
American's 'aggregate investment' (as defined in Rule 53(a) of the
1935 Act) in Nanyang was $42 million.
Henan Electric will construct the Nanyang Project under
an engineering, construction and procurement contract, will operate
the Nanyang Project under an operating and maintenance contract and
will purchase the electric output from the Nanyang Project under a
20 year power purchase contract. These contracts were executed
between Nanyang and Henan Electric on November 14, 1996. Unit 1 of
the Nanyang Project is expected to be operational by June 1999 with
Unit 2 following 5 months later.
(3) Additional Investments in Exempt Projects
Although American is considering further investments in
Exempt Projects, its ability to invest in, or begin development of,
additional projects is restricted by the approximately $326 million
that it has available. Projects under consideration include
generation opportunities in Europe, China, Central Asia and the
United States as well as privatizations of electric utilities in
Australia and Brazil.
C. Risk Profile of American's Investments in Exempt Projects
Investments in independent power production facilities and
foreign utility systems involve a variety of risks that are not
necessarily present in the traditional, regulated, electric utility
industry. The Applicants have established comprehensive procedures
to identify and address (i.e., limit and/or mitigate) these risks.
(1) The Project Review Process
Every potential project investment opportunity developed
by Resources is subjected to a series of formal reviews to ensure
the project's soundness. The process begins with a consideration
of Resources' strategic plans which survey independent power
opportunities domestically and throughout the world and provide a
variety of tools to assist in the evaluation of risks. These
plans, which are updated periodically, lead to the identification
of projects and countries where Resources intends to pursue project
development efforts. The plans also lead to the development of
budgeted levels of expenditure on foreign development activities.
This careful planning and budgeting process helps to mitigate an
important risk of the independent power business: the expenditure
of development funds without a realistic expectation of success in
terms of both making investments in projects and in obtaining
appropriate levels of non-recourse financing on commercially
reasonable terms.
Before American makes any investment in a foreign
country, an analysis of that opportunity, including the specific
country risk, is presented first to the executive management group
at Resources, then to the board of directors of Resources, the
Finance Committee of American's board of directors, and finally to
American's board of directors. The analysis includes a review of
the political and economic stability of the particular country, the
government's commitment to private power, the legal and regulatory
framework for private investment in electricity facilities, the
local business support for long-term investment of private capital,
the economic viability of the project, the technology and fuel
supply, the environmental impact, the currency conversion and
repatriation and the potential for future partial sales of the
investment interest to other investors. The board of directors of
both American and Resources must approve investments in any foreign
country.
Once development of a project is undertaken, milestones
are established to ensure that continuing expenditures on
development are producing acceptable results. In addition, project
teams are required to identify the major technical, financial,
commercial and legal risks associated with their particular project
and whether and how those risks have been mitigated. The members
of the project team are responsible for the due diligence
investigation of those risks that have been identified and must
present their findings to an officer of Resources with functional
oversight over the relevant risk factor subject matter.
Finally, every project is subjected to increasing levels
of management review. Depending on the amount of American's
projected financial exposure to a particular project, the proposed
investment must be approved successively by the entire executive
management group of Resources, the board of directors of Resources,
the Finance Committee of American's board of directors, and the
board of directors of American.
Significantly, the final project review process, in most
cases, is to a large extent replicated by the lenders who agree to
provide construction or permanent debt financing on a non-recourse
basis, since repayment of that debt will depend solely upon the
success of the project. Project debt maturities are frequently
long-term (e.g., 15 or more years), meaning that the lenders'
exposure to the risks of a project extends for many years after
closing or completion of construction. Project debt documents
customarily require the establishment of plant overhaul or utility
system maintenance, debt service and other funded reserves, all of
which are designed to preserve the asset and protect the financial
performance of the project against interruptions in revenues and
other contingencies. AEP Resources' success in arranging
appropriate levels of non-recourse financing for its investment in
Yorkshire Electricity in effect serves as a validation of the
project review process described above.
(2) Risk Mitigation of Independent Power Projects and
Foreign Utility Investments
Resources carefully evaluates the potential risks of an
independent power project or foreign utility system before
American's funds are committed.
(a) Operating risks. Resources has focused its
project development efforts on projects using fuel technologies
with which the American System has existing competencies in
generation, transmission and distribution. Due diligence of
operating assumptions is carried out by Resources' engineers with
experience in the technology being evaluated and by outside
technical consultants. The risk of changes in the price of fuel is
typically passed through to the purchaser of electricity under the
negotiated terms of a long-term power sales agreement. Other
operating risks can be covered by equipment warranties and by
casualty, business interruption and other forms of insurance. If
Resources or one of its affiliates is responsible for the
operations of an Exempt Project, the operating risk will be further
reduced.
(b) Construction risks. Construction risks are
commonly addressed under fixed-price contracts with milestones and
performance guarantees (e.g., guaranteed heat rates, availability
factors), backed by appropriate levels of liquidated damages. The
creditworthiness and 'track record' of the construction contractor
is a very important consideration in this regard. In those cases
where Resources or its respective affiliate serves as its own
general construction contractor, it looks to pre-negotiated cost
and damage provisions from sub-contractors, including, without
limitation, equipment vendors, to protect against performance
shortfalls, cost overruns and schedule delays.
(c) Commercial risks. Many independent power
projects rely on the 'off-take' commitment of a single power
purchaser, normally the local utility company, to eliminate all or
most of the risk of variation in revenues. In such cases,
Resources makes an assessment of the creditworthiness of the power
purchaser over the life of the project and/or seeks to have a
contingency plan in the event of off-take defaults.
In competitive power markets outside the United
States, long-term off-take contracts are not always available and
electricity prices may be determined by supply and demand.
Resources conducts extensive investigations of the electricity
markets in these environments to ensure the viability of long-term
demand. Resources seeks projects that will be capable of producing
electricity at or below long-run marginal costs in the region, thus
providing that the project will be a competitive supplier.
(d) Financial risks. Resources addresses the
financial risks of its projects in a variety of ways. First and
foremost, Resources seeks to secure the maximum amount of permanent
debt financing for such projects that is available at reasonable
cost and that is, by its express terms, non-recourse to American or
any associate company (other than the Exempt Projects or Project
Parents). This means that the non-recourse debt of each project or
foreign utility system is secured solely by its assets and
revenues, and creditors have no ability to seek repayment upon
default from American. This method of financing ensures that
American's exposure to any independent power project is limited to
the amount of its equity commitment and that the Operating
Companies and their customers bear no risk of a project's failure
or financial distress. From time to time, American may agree to
provide Guarantees in connection with Exempt Project financings,
but these financial supports will be carefully monitored and
treated as a part of American's equity commitment for regulatory
reporting purposes. To date, American has not issued any such
Guarantee with respect to an investment in an Exempt Project.
In addition to the non-recourse nature of most
project debt financing, project debt is carefully structured to
meet, or match, the characteristics of the particular project. For
example, when the value of a project depends on a long-term, fixed-
price, off-take contract (i.e., a power purchase contract), the
project debt is often designed to be of a similar term, with
scheduled debt payments covered by fixed charges (usually the
capacity payment component in the contract). On the other hand,
where there is no long-term, fixed source of revenue, the
percentage of non-recourse debt financing should be smaller, so
that financial risk is not increased by excessive debt levels.
Thus, while Resources' projects with long-term off-take contracts
may have debt capitalization levels in the 70% to 80% range,
Resources' other projects are anticipated to be leveraged at levels
similar to those of United States regulated utilities, in the 50%
to 60% range.
Another financing risk is the potential variability
of interest rates. This risk is addressed, in part, by borrowing,
to the extent possible, on a long-term, fixed-rate basis. After
contractual terms for a project have been agreed to but before
financial closing, Resources is also exposed to interest rate
variability. This risk can be (and will be, upon approval of the
Treasurer of Resources, as described in the next sentence)
mitigated by purchasing financial instruments which provide hedges
against interest rate volatility. The Treasurer and the financial
staff of Resources are responsible for reviewing, analyzing and
comparing the costs of such financial instruments and the perceived
interest rate risk, for approving the purchase of such financial
instruments when the cost of the perceived risk exceeds the costs
associated with the financial instrument and for monitoring the use
of these instruments to ensure they are used properly.
As of September 30, 1997, the aggregate amount of
nonrecourse debt applicable to Exempt Projects owned directly or
indirectly by American was approximately $2.27 billion, of which
approximately $1.135 billion is related to American's proportionate
ownership interests in these Exempt Projects.
(e) Foreign currency exchange risk. There are
several ways in which Resources may address the foreign currency
exchange risk element, depending on the status of the host country.
In countries which do not have a history of stability in the
management of their exchange policy, part or all of the revenue
from a project may be payable in or indexed to hard currency
(almost invariably U.S. dollars), as is presently the case with the
Nanyang Project. Back-up guarantees or other undertakings by the
central government may be available to ensure that the U.S. dollar
payments due under an off-take contract are actually made available
by the central bank or ministry of finance.
In other cases (Yorkshire Holdings for example), the
non-recourse project debt is borrowed in the same currency as the
project's revenues, thereby ensuring a match between debt service
obligations and operating income. In more developed countries,
long-term currency swaps are available to provide further hedging
for the equity component of the investment.
(f) Legal risks. Legal risks are addressed by
careful review of any investment by legal counsel, including local
and international counsel where foreign projects are concerned.
Such legal reviews address regulatory and permitting risks,
environmental risks, the adequacy and enforceability of guarantees
or other contractual undertakings of third parties, the status of
title to utility property and the obligations inherent in the
financing arrangements.
In addition to the specific risks mentioned above,
investment outside the United States can entail country-specific
risks related to political or economic performance. As indicated
above, Resources evaluates country risk at the outset of any
project development effort and attempts to mitigate this risk
through a number of measures. Most important, the country review
process described above ensures that the political and economic
stability of any country has been reviewed at several levels up to
and including American's board of directors before any investment
occurs. The country analysis also focuses specifically on the
country's electric sector and on the government's support for
private ownership in that sector.
At the outset of development work in a foreign
country, Resources seeks local partners who are experienced in
doing business in the host country. Local partners are a very
important element in reducing the risk of future expropriation or
unfair regulatory treatment. Another mitigating factor is the
participation of official or multilateral agencies in a project.
When funds for the project are supplied by government-sponsored
export credit agencies or other governments or institutions such as
the World Bank through its International Finance Corporation
affiliate, the host country has strong incentives not to take
actions which would harm a project's viability.
Most political risk can be addressed through
political risk insurance obtained from the Overseas Private
Investment Corporation, a United States agency, or the Multilateral
Investment Guaranty Agency, a World Bank affiliate, or in the
commercial insurance market. Political risk insurance is available
to insure the project debt or the return of an investor's equity.
One can also insure against outright expropriation, acts of civil
violence or even 'creeping' nationalization brought about by
punitive regulation. American analyzes the perceived risk and its
costs and compares that with the cost of obtaining such insurance
and, when such costs associated with such risks exceed the costs of
insurance coverage therefor, American plans to procure such
insurance.
(g) Portfolio Diversification. Apart from the
detailed and comprehensive approach to the specific risks described
above, American's fundamental view is that the best long-term
approach to managing the risk of investing in the independent power
business and foreign utility systems is through diversifying both
the type and the location of projects. American recognizes that
the risk inherent in any investment cannot be eliminated entirely,
even by the most careful approach to project development.
Consequently, American is committed to diversifying its investments
across countries and regions of the world. American's strategy has
been focused on investment opportunities in North America (outside
the core regulated business of American), Europe, Latin America,
Australia and Asia. American plans to make investments in Exempt
Projects to diversify its portfolio of Exempt Projects by country,
project type and stage of development.
Regional diversification is important since
historically economic and political instability tends to involve
multiple countries in a region. Accordingly, American's board of
directors may set limits on investment in specific countries which
vary according to an assessment of the country's stability.
Another element of American's diversification policy
is to achieve a balance between so-called 'greenfield' projects and
acquisitions of existing facilities and power systems. Greenfield
projects involve development and construction of completely new
electric facilities, principally generating stations, which present
a higher degree of risk due to the length of such development and
construction. Funds are expended during the early years of such
projects; return on investment is not earned until the project is
in operation. Nevertheless, while these projects have higher
levels of risk and deferred returns, they are important to American
because they generally produce higher rates of return on investment
than investments in existing assets and because they lay the
foundation for continued earnings growth for American in the
future.
To balance these greenfield project development
efforts, American's development efforts target assets to be
purchased that are already in operation, either from existing
private owners or through privatizations. These acquisitions
reduce the risk of American's overall business by producing near-
term earnings without significant development or construction risk.
The result of this balanced portfolio strategy is
that American will not be dependent on any single country,
regulatory environment or type of asset for its earnings from
independent power projects and foreign utility investments.
(3) Application of Review Process and Risk Factors to
Specific Investment Decisions
American's acquisition activity in China and the United
Kingdom provides an illustration of the review process and risk
analysis outlined above.
(a) Nanyang Project.
The Nanyang Project was developed and executed by a
Resources team with several years' experience in the China
electricity market. In September of 1994, Resources was invited to
visit Northeast China in connection with a potential development
opportunity of a large coal-fired power project. Although those
meetings have not yet led to a project there, Resources' personnel
have met many times with numerous senior central and provincial
level government officials throughout China and sent engineering
teams to visit various Chinese design and manufacturing facilities.
The Nanyang Project arose as an opportunity from these various
contacts.
Once the preliminary terms of the Nanyang Project
were discussed with the Chinese parties, including affiliates of
Henan Electric, representing the power bureau for Henan Province,
and the City of Nanyang in July 1995, senior management of
Resources discussed this matter with the Finance Committee of
American's board of directors. This Committee reviewed and
approved the conditions for making this investment into China
including the maximum dollar commitment for the Nanyang Project.
Resources then entered into a series of negotiations with Henan
Electric and the City of Nanyang over the next 14 months leading to
the signing of the Joint Venture Contract in September 1996.
Henan Electric is the legal entity responsible for
the operation, administration and development of the power industry
in Henan Province, which has a population of approximately 90
million. Henan Electric is also part of the Central China Power
Grid Network, which coordinates the supply of electricity in the
four provinces in Central China (Henan, Hebei, Hubei and Jingxi).
Henan Electric is also responsible for monitoring all the major
power plant construction projects in Henan Province. Henan
Electric owns or controls 13 coal-fired power plants and other
major power distribution and administration centers throughout
Henan Province.
Resources sought to minimize operating risks for the
Nanyang Project by developing coal-fired generation - a technology
with which the American System has existing competencies. Due
diligence was carried out by Resources' engineers with experience
in coal-fired generation. The risk of changes in the price of fuel
is passed through to Henan Electric under the power purchase
contract. Henan Electric is responsible for the operations of the
Nanyang Project, reducing the operating risk further.
Construction risks are minimized under a fixed-price
construction contract with milestones and performance guarantees
(e.g., guaranteed heat rates, availability factors), backed by
appropriate levels of liquidated damages, again with Henan
Electric. The creditworthiness and 'track record' of Henan
Electric was an important consideration. The 20-year power
purchase contract with Henan Electric also reduced commercial risks
of the project.
'Political' or country risk was mitigated by
partnering with both the City of Nanyang and Henan Electric in this
project and ensuring that the project had broad governmental
support at every level, including Beijing and Premier Li Peng.
Although initially the Nanyang Project could not be
financed with non-recourse debt, it is the intent of Resources to
refinance the loan with long-term non-recourse debt as soon as the
capital markets will provide such funding. To facilitate this, the
Nanyang Project documentation is in a form Resources believes will
be acceptable for an international project financing. To address
currency risk, Resources is paid under the power purchase contract
in U.S. Dollars.
(b) Yorkshire Electricity
The Yorkshire acquisition was very different from
Nanyang. First, it contributed to portfolio diversification
because it is located in a different region of the world, has
primarily distribution not generation assets and consists of
existing operating assets rather than ones under construction.
Operating, construction and commercial risks were minimized because
Yorkshire Electricity is an existing profitable business with a
strong management team.
Resources engaged in a substantial due diligence
effort prior to the acquisition of Yorkshire Electricity. It
employed financial and operational personnel from American System
companies as well as retaining U.S. and U.K. financial, legal and
accounting advisors. It concluded that all relevant risks were
adequately mitigated.
Yorkshire Electricity supplies and distributes
electricity to 2.1 million customers in England. Yorkshire
Electricity has been licensed under the Electricity Act to
distribute and supply electricity in an authorized area. The
Office of Electricity Regulations ('OFFER') regulates Yorkshire
Electricity and other regional electric companies.
The distribution of electricity is Yorkshire
Electricity's core business and provides approximately 75% of its
profitability. Regulation of the distribution business is subject
to an annual rate cap formula based on changes in inflation less an
efficiency factor. Regulatory review and reset of the formula is
scheduled for 2000. The formula provides a partial price hedge
against increased expenses and so helps reduce operating risk.
Efficiency gains and cost reductions below the rate cap formula
benefit shareholders.
The supply business in the United Kingdom currently
is subject to competition for loads in excess of 100 kw. The
business is scheduled to become competitive for all loads in 1998.
Yorkshire Electricity currently has the lowest supply prices in the
United Kingdom. Yorkshire Electricity purchases electricity in the
wholesale market for its supply business and uses hedge contracts
to minimize exposure to fluctuating electric prices. Yorkshire
Electricity's policy is to substantially hedge its forecasted load
by entering into hedging contracts with individual generators.
This mitigates operating risk on the supply side.
Financial risk was a key area of focus for Resources
in acquiring Yorkshire Electricity. First, over 70% of the
acquisition price was funded with non-recourse debt. YPG borrowed
approximately 1 billion UK pounds (US $1.5 billion) through a
nonrecourse loan and revolving facility. Resources' financial risk
was then limited to its equity investment.
Although the acquisition was initially funded with
variable rate debt by both YPG and Resources, it is expected that
70%-80% portions of the debt will be refunded with fixed-rate long-
term debt in the near future. In anticipation of that refunding,
YPG has fixed the interest rate on 60% of the bank facility through
interest rate swaps.
Foreign currency risk has been and will continue to
be minimized by borrowing in pounds sterling or if in U.S. Dollars,
hedging the conversion rate. For example, the current YPG credit
facility is denominated in pounds. In addition, when Resources
made its commitment to invest in YPG, it hedged the conversion
rate.
Legal risks were deemed minimal because Resources
did not believe that the United Kingdom presented any country
specific political risks due to its established legal and
regulatory framework.
D. Potential Investments in Additional Exempt Projects
Resources is presently investigating, alone and in conjunction
with others, investment opportunities in domestic and foreign power
projects and existing foreign utility systems. Most of these
ventures should qualify as either EWGs or FUCOs. In particular,
several foreign countries are now privatizing state-owned utility
systems. Other countries are promoting private investment to
construct, own and operate generating plants. Several domestic
utilities have indicated that they intend to sell generation assets
in the near future.
American intends to make substantial investments in Exempt
Projects, primarily for the following reasons:
(1) Present projections indicate that the Operating
Companies other than APCo and KPCo will continue to fund their
operations and their construction expenditures from internal
sources of cash and from sales of senior securities and other
borrowings for the next five years. In 1996 American made equity
infusions in APCo and KPCo totaling $80 million and expects to make
additional equity contributions of up to $215 million by 2000.
After 1996, American forecasts that these capital investments will
be funded through American's retained earnings and other sources,
including short-term debt and new common equity of American. Thus,
acquisitions of Exempt Projects present American with the
opportunity to continue to grow through reinvestment of retained
earnings not used for capital infusions in an industry sector in
which American has decades of experience, while at the same time
diversifying overall asset risk. Because American's intended
portfolio will be diversified by region and operating assets, have
an increased potential for revenue growth and be less susceptible
to adverse effects from any one particular market, American
believes that its investments in Exempt Projects will give the
American System a larger and more diversified base for raising
equity capital in the event that one or more of the Operating
Companies requires additional equity capital. Investments in
Exempt Projects will help the American System remain competitive as
competition increases in the United States electric utility
industry and its investments in Exempt Projects will not have a
negative effect on its ability to make any additional equity
investments in the Operating Companies that may be required in the
future.
(2) American, directly or through Resources, is
purposely pursuing investments in utility systems in geographical
regions, such as Australia and Europe, which have moved much
further than the United States towards deregulation and full
competition in both wholesale and retail electricity markets.
American believes that the creation and maintenance of value for
its shareholders will depend on its ability to successfully operate
its core business in the United States as that business becomes
subject to increasing competition. American's experience in
markets that are already largely deregulated will be critical to
the long-term success of its core business. Moreover, the lessons
learned from these markets provide American with insights about the
market structures that produce efficient and equitable results for
consumers and shareholders. These insights will allow American to
play a role in shaping the evolution of the electric sector of the
United States.
(3) The actual use of the expanded investment authority
cannot be determined at this time. Although the potential
opportunities are numerous, until the authority is received, firm
commitments cannot be made to the early development of projects.
As a result of various factors, however, it is expected that a
majority of the funds will be invested in FUCOs whose principal
activities are subject to some sort of price regulation in the
local country. These factors include the fact that more of these
opportunities appear to be available and that both of Resources
current investments are of this type. However, Resources also may
consider investments in generation plants which sell their output
in a spot price power market as opposed to under long term
contracts.
E. Proposed Increase in Financing of Exempt Projects
For the reasons stated above, American and Resources hereby
requests that the Commission authorize American to use the net
proceeds from the issuance of recourse debt and equity securities
and issue Guarantees, each in accordance with and upon the terms of
the Financing Orders, in an aggregate amount at any time
outstanding which, when added to American's direct and indirect
aggregate investment in all Exempt Projects, would not at any time
exceed American's consolidated retained earnings. Based on the
$363 million of investment in Yorkshire Electricity and the $110
million designated for the Nanyang Project and American's
consolidated retained earnings as of September 30, 1997
(approximately $1.591 billion), such limitation would allow
financing of investments in additional Exempt Projects of
approximately $1.118 billion. The authority requested herein will
be sufficient to enable American to make investments in all Exempt
Projects it is presently developing, as well as in Exempt Projects
that are under investigation at present or that arise in the
future.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
No fees, commissions or expenses, other than expenses
estimated not to exceed $20,000 to be billed at cost by American
Electric Power Service Corporation, are to be paid by the
Applicants or any associate company in connection with the proposed
transaction.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The proposal herein is subject to Sections 6(a), 7, 12(b), 32
and 33 of the 1935 Act and Rules 45, 53 and 54 thereunder. Rule 53
provides that, if each of the conditions of paragraph (a) thereof
is met, and none of the conditions of paragraph (b) thereof is
applicable, then the Commission may not make certain adverse
findings under Sections 7 and 12 of the 1935 Act in determining
whether to approve a proposal by a registered holding company to
issue securities in order to finance an investment in any EWG or to
guarantee the securities of any EWG. Giving effect to the
proposals contained herein, American will satisfy all of the
conditions of Rule 53(a) except for clause (1) thereof, since
American is proposing herein that American's aggregate investment
may exceed 50% of American's consolidated retained earnings. None
of the conditions specified in Rule 53(b) is or will be applicable.
Rule 53(c) states that, in connection with a proposal to issue
and sell securities to finance an investment in any EWG, or to
guarantee the securities of any EWG, a registered holding company
that is unable to satisfy the requirements of paragraph (a) or (b)
of Rule 53 must 'affirmatively demonstrate' that such proposal:
(a) will not have a substantial adverse impact
upon the financial integrity of the registered
holding company system; and
(b) will not have an adverse impact on any utility
subsidiary of the registered holding company,
or its customers, or on the ability of State
commissions to protect such subsidiary or
customers.
The Commission has performed an analysis of the requirements
of Rule 53(c) with respect to an application-declaration filed by
The Southern Company ('Southern') in File No. 70-8725 and by
Central and South West Corporation ('CSW') in File No. 70-8809. In
these application-declarations, Southern and CSW sought almost
identical authority to the authority sought by the Applicants
hereunder, namely relief from the safe-harbor requirements of Rule
53(a)(1) to allow investments in Exempt Projects in an amount not
to exceed its consolidated retained earnings. The Commission
granted such authority by issuing its orders making such
application-declarations effective on April 1, 1996 (HCAR No.
26501) (the 'Southern Order') and January 24, 1997 (HCAR No. 26653)
(the 'CSW Order'). In those orders, the Commission found that
Southern and CSW had demonstrated successfully, through the use of
certain financial indicators, that investing in Exempt Projects in
an amount not to exceed their consolidated retained earnings would
not have a substantial adverse impact on the financial integrity of
its system. A comparison with American of those financial
indicators used by Southern and CSW, considering the size and
market position of American relative to Southern and CSW,
demonstrates that the financial integrity of the American System is
substantially similar to the financial integrity of the Southern
and CSW systems. Thus, this Application-Declaration, which seeks
substantially the same authority (for American to invest in Exempt
Projects in an aggregate amount not to exceed its consolidated
retained earnings), is consistent with the rationale of, and the
conclusions reached by the Commission in, the Southern and CSW
Orders.
American addresses each of the requirements of Rule 53(c) as
follows:
(1) The use of proceeds from the issuance of debt and
equity securities of American to make investments in EWGs (as well
as in FUCOs), and the issuance of, or provision for, Guarantees in
connection therewith by American, in amounts of up to American's
consolidated retained earnings will not have a 'substantial adverse
impact' on the financial integrity of the American System.
The lack of any 'substantial adverse impact' on
American's financial integrity as a result of increased levels of
investments in Exempt Projects can be demonstrated in several ways,
including by analyses of historic trends in American's consolidated
capitalization ratios and retained earnings and the market view of
American's securities. Consideration of these and other relevant
factors supports the conclusion that the issuance of securities and
Guarantees by American to finance investments in Exempt Projects
exceeding the 50% consolidated retained earnings limitation in Rule
53(a)(1) will not have any 'substantial adverse impact' on the
financial integrity of the American System.
American has a low-cost core electric utility business
and is developing an international presence and other diversified
businesses that will provide benefits to its core utility business,
as well as enhance the potential for substantial long-term earnings
growth. American's consolidated retained earnings have grown on
average almost 7% per year over the previous three years.
American's consolidated capitalization and interest coverage ratios
are within industry ranges for A-/BBB+ rated companies. After
announcement of the offer to acquire Yorkshire Electricity, the
rating agencies reaffirmed these ratings. Finally, the market's
assessment of American's prospect for future growth and earnings
compares favorably to other electric utility companies and its
dividend payout ratio is improving.
(a) Aggregate investments in Exempt Projects in
amounts up to 100% of American's consolidated retained earnings (as
defined in Rule 53(a)), which were $1.591 billion as of September
30, 1997, would still represent a relatively small commitment of
capital for a company the size of American, based on various key
financial ratios at September 30, 1997. For example, investments
of this amount would be equal to only 16.0% of American's total
capitalization ($9.9 billion), 13.8% of consolidated net utility
plant ($11.5 billion), 9.8% of total consolidated assets ($16.2
billion), and 18.5% of the market value of American's outstanding
common stock ($8.6 billion). Such percentages are lower than those
of Southern as of December 31, 1995 (16.3%, 15.4%, 11.0% and 20.4%,
respectively) and those of CSW as of June 30, 1995 (23%, 23%, 14%
and 31%, respectively) described by the Commission in their Orders
as 'a relatively small commitment of capital'.
Taken together with the credit strength of the five
major Operating Companies (which are presently rated at the
equivalent of BBB+ or higher by the three major credit rating
agencies), American's actual consolidated capitalization and
interest coverage ratios for 1996 are well within industry ranges
set by independent debt rating agencies for BBB+ rated companies,
as shown below:
Actual 1996 Capitalization and Interest Coverage Ratios
(Excluding Non-Recourse Project Debt)

Total Debt/Capital 50.3%
Pre-Tax Interest Coverage 3.6
Funds from Operating Income Interest Coverage 4.2

1996 Industry Ratios for BBB+ Rated Investor-Owned Utilities*

High Average Low

Total Debt/Capital 59.2% 50.4% 41.3%
Pre-Tax Interest Coverage 3.8 3.1 2.3
Funds for Operating Income
Interest Coverage 5.3 4.1 2.8
* Source: Moody's Investor Service - Electric Utility
Sourcebook, October 1996.

American's consolidated capitalization ratio as of
September 30, 1997 was 45.2% common and preferred equity and 54.8%
debt (including approximately $508 million of short term debt). No
nonrecourse debt of Exempt Projects is consolidated for financial
reporting purposes. This ratio continues to be within industry
ranges set by independent debt rating agencies for BBB+ rated
companies.
(b) American's consolidated retained earnings have
grown on average almost 7% per year over the previous three years.
Consolidated retained earnings increased $56 million during 1994,
a 4.4% increase; by $84 million during 1995, a 6.3% increase; by
$138 million during 1996, a 9.8% increase; and by $45 million
during the first three-quarters of 1997, a 2.9% increase.
(c) The market's assessment of American's future
growth and earnings also compares favorably to other electric
utility issuers in the 1994 to present time frame. This can be
shown by comparison of price-earnings and market-to-book ratios,
both of which show a significant strengthening when compared with
the electric utility industry average in that period. These
measures indicate investor confidence in American's ability to
deliver shareholder value.
Twelve
Months
Ended
1993 1994 1995 1996 9/30/97

P/E Ratio:
American 13.7 12.1 14.2 13.1 13.7
Electric IndustryFN4 14.0 11.7 13.8 12.4 13.4

FN4 Average of Standard & Poor's 26 Electric Power Company Index as reported
by Goldman Sachs Public Utility Survey, November 1997, Table 29.

Market-to-Book Ratio:
American 165% 144% 174% 169% 185%
Electric IndustryFN5 167% 136% 140% 145% N/A

FN5 Goldman Sachs Selected Electric Industry Statistics, July 1997, Table
16.

(d) In recent years, American's dividend payout
ratio (percentage of earnings paid out in dividends), has been
slightly above the electric utility industry average, but has been
improving.
Twelve
Months
Ended
1993 1994 1995 1996 9/30/97

American Payout Ratio %: 88.8* 88.6 84.1 76.5 72.1**
Electric Industry %FN6 78.5 79.5 75.7 74.1 N/A

FN6 Goldman Sachs Selected Electric Industry Statistics, July 1997, Tables
11 and 12.

* Restated to eliminate the disallowance of Zimmer Generating
Station costs.
** Restated to eliminate the extraordinary loss from the windfall
profits tax on Yorkshire Electricity.

(e) None of the conditions described in paragraph
(b) of Rule 53 is applicable. Specifically, (1) there has been no
bankruptcy of any American associate company; (2) American's
consolidated retained earnings, as previously indicated, have
increased in recent years; and (3) to date, American has not
reported an 'operating loss' attributable to its Exempt Projects.
SFAS 121 requires a listing of all assets of a
utility that a company plans to write down and take as a loss.
American presently has no assets listed pursuant to SFAS 121.
Based on American's current knowledge, no assets with respect to
any Exempt Project presently owned (directly or indirectly) by
American are expected to be placed on such list pursuant to SFAS
121. Finally, no associate Exempt Project has ever defaulted under
the terms of any financing document. None of the circumstances
described in Rule 53(b) has occurred. American undertakes to
notify the Commission by filing a post-effective amendment in this
proceeding in the event that any of the circumstances described in
Rule 53(b) occurs during the authorization period.
In the general election held in the United Kingdom
on May 1, 1997, as was expected, the Labour Party won control of
the government with a considerable majority. Prior to the general
election, the Labour Party had announced, and Resources was aware,
that, if elected the Labour Party would impose a windfall profits
tax on certain industries in the United Kingdom, including certain
privatized business entities. On July 2, 1997, the one-time
windfall profits tax was introduced in the Labour Party's Budget
and on July 31, 1997, it became law. The windfall tax liability
for Yorkshire Electricity is estimated to be 135 million pounds
sterling ($221 million). The tax will be payable in two equal
installments with the first in December 1997 and the second
installment a year later. American expects that Yorkshire
Electricity will have sufficient cash resources to pay the tax
without the need for additional long-term borrowings or equity
contributions from Resources.
American's $110.6 million share of the windfall
profits tax was recorded as an extraordinary loss in the third
quarter. Nonetheless, the net loss attributable to American's
investment in EWGs and FUCOs for 1997 should not exceed 5% of
American's consolidated retained earnings as at December 31, 1997.
Therefore, the conditions of Rule 53(b)(2) and (3) should continue
to be satisfied.
(f) Numerous financial indicators show the
financial strength of American. For example, American's earnings
per share and return on equity were $3.14 and 13.2%, respectively,
for the year ended 1996 and $2.85 and 12.4%, respectively, for the
year ended 1995.
(2) The proposed increased use of financing proceeds to
invest in Exempt Projects will not have an 'adverse impact' on any
of American's Operating Companies, their respective customers, or
on the ability of the seven State commissions having jurisdiction
over one or more such Operating Companies to protect such Operating
Companies or such customers.
The conclusion that the Operating Companies and their
customers will not be adversely impacted by increased levels of
investment by American in Exempt Projects is well supported by (i)
analyses of the Operating Companies' financial integrity (including
ability of the Operating Companies to issue senior securities);
(ii) the modest need for equity capital from American foreseen for
the next five years (as discussed in Subsection (2)(c) of this Item
3); (iii) continuing compliance with other applicable requirements
of Rule 53(a); and (iv) the proven effectiveness of State
commission oversight together with the affirmation by the State
commissions of Indiana, Kentucky, Michigan, Ohio, Tennessee,
Virginia and West Virginia that they have authority and
jurisdiction, and will exercise such authority, to protect
ratepayers in their respective state from any adverse impact. The
State commissions can set the cost of capital for electric
utilities by comparison with selected groups of domestic utilities,
which may exclude any utilities with adverse impacts due to foreign
investments or EWGs. Therefore, the States have the authority and
the mechanism to prohibit any adverse effects on the cost of
capital due to investments in Exempt Projects from being passed on
to ratepayers. American has complied and will continue to comply
with the requirements of Rule 53(a)(4) regarding filing of copies
of applications and reports with other regulatory commissions.
(a) All of American's investments in Exempt
Projects are, and in the future should remain, segregated from the
Operating Companies. The Operating Companies are, and are
currently expected in the future to remain, insulated from the
direct effects of investments by American in Exempt Projects. No
Operating Company owes indebtedness or has extended credit or sold
or pledged its assets directly or indirectly to any Exempt Project
in which American owns any interestFN7,
FN7 It should be noted that Section 33(f), with a minor exception,
prohibits State regulated public utilities from financing
investments in FUCOs, and Section 33(g) prohibits outright any
pledge or encumbrance of utility assets by a State regulated
public utility for the benefit of any associate FUCO.

no Operating Company intends to do so in the future, and any losses
that may be incurred by such Exempt Projects would have no effect
on domestic rates of any Operating Company (because of the
Applicants' undertaking not to seek recovery in rates). American
represents that it will not seek recovery through higher rates to
the Operating Companies' utility customers in order to compensate
American for any possible losses that it may sustain on investments
in Exempt Projects or for any inadequate returns on such
investments.
(b) Debt (including short-term debt) ratios of the
major Operating Companies are consistent with industry averages for
A/BBB+ rated electric utilities. The current industry average for
BBB+ electric utilities is approximately 50%.FN8

FN8 Source: Moody's Investors Services.

Debt as % of Capitalization 1992 1993 1994 1995 1996

APCo 52% 51% 53% 53% 53%
CSPCo 55% 58% 55% 57% 55%
I&M 52% 49% 48% 48% 47%
KPCo 58% 60% 60% 59% 59%
OPCo 48% 45% 44% 46% 42%

Due to a reduction in debt ratios attributable largely to projected
growth in retained earnings, debt ratios of the Operating Companies
should steadily decline, moving from an average of 51% in 1996 to
49% by the year 2000.
(c) Additional investments in Exempt Projects will
not have any negative impact on the Operating Companies' ability to
fund operations and growth. Present projections indicate that the
Operating Companies other than APCo and KPCo will continue to fund
substantially all of their construction expenditures from internal
sources of cash and from sales of senior securities and other
borrowings for the next five years. American anticipates making
equity infusions in APCo and KPCo of up to $215 million by 2000.
Based on these projections, the Operating Companies will be able to
fund their operations and growth and still improve their debt
ratios as indicated above.
Operating Companies - Construction Expenditures:
actual (1992-1996) and projected (1997) expenditures, including
Allowance for Funds Used During Construction ($million):
1992 1993 1994 1995 1996 1997
629 628 642 601 578 672

Percent internally generated:

1992 1993 1994 1995 1996
63% 139% 83% 101% 142%

American presently estimates that, for the five year period of
1997-2001, the estimated cash flow from operations will be
sufficient to fund aggregate projected construction expenditures.
(d) The major Operating Companies' ability to issue
debt and equity securities in the future depends upon earnings
coverages at the time such securities are issued; that is, they
must comply with certain coverage requirements designated in their
mortgage bond indentures. The Operating Companies should have more
than adequate earnings coverages for financing requirements in the
foreseeable future.FN9
FN9 September 30, 1997 indenture earnings coverages for the
Operating Companies range from about 3.64 to 8.41, in each
case well above the required coverages of 2x.

(e) The major Operating Companies' coverages have
generally been within the A and BBB+ ranges set by the major rating
agencies in recent years. The Operating Companies continue to show
adequate financial statistics as measured by the rating agencies
(pre-tax interest coverage, debt ratio, funds from operations to
debt, funds from operations interest coverage, and net cash flow to
capital expenditures).
DEBT RATINGS

S&P Rating: 1993 1994 1995 1996 Current

APCo A- A- A- A- A-
CSPCo BBB+ BBB+ A- A- A-
I&M BBB+ BBB+ BBB+ BBB+ BBB+
KPCo BBB+ BBB+ BBB+ BBB+ BBB+
OPCo A- A- A- A- A-

Moody's Rating: 1993 1994 1995 1996 Current

APCo A2 A2 A2 A3 A3
CSPCo Baa2 Baa2 Baa1 A3 A3
I&M Baa1 Baa1 Baa1 Baa1 Baa1
KPCo Baa1 Baa1 Baa1 Baa1 Baa1
OPCo A3 A3 A3 A3 A3

Duff & Phelps Rating: 1993 1994 1995 1996 Current

CSPCo BBB BBB+ BBB+ A- A
I&M BBB BBB+ BBB+ BBB+ N/A
KPCo BBB+ BBB BBB BBB N/A
OPCo A A A A A

PREFERRED STOCK RATINGS

S&P Rating: Current

APCo BBB+
CSPCo BBB+
I&M BBB
OPCo BBB+

Moody's Rating: Current

APCo baa1
CSPCo baa1
I&M baa2
OPCo baa1

Duff & Phelps Rating: Current

APCo BBB+
CSPCo BBB+
I&M n/a
OPCo BBB

In addition, the rating agencies consider the
Operating Companies to have relatively favorable competitive
positions, with Standard & Poor's ranking them 'somewhat above
average' business position. See Standard & Poor's Global Sector
Review, November 1996. Fitch Investors Service's Competitive
Indicator scores for the Operating Companies are 2.30, 2.38, 2.65,
2.60 and 2.45 for APCo, CSPCo, I&M, KPCo and OPCo, respectively,
relatively favorable as compared to the average score of 2.73. See
Fitch Report on American Electric Power, October 14, 1996. (A
lower score indicating relatively less vulnerability to
competition.)
American does not believe that investments made in
Exempt Projects have negatively affected the first mortgage bond
ratings of its Operating Companies, APCo, CSPCo, I&M, KPCo and
OPCo. Upon announcement of the acquisition of Yorkshire
Electricity, the credit ratings of the Operating Companies were
affirmed by Moody's, Standard & Poor's and Duff & Phelps. In a
separate action at that time, Duff & Phelps downgraded the
preferred stock of APCo and OPCo, but the downgrade is not
reflective of either recent financial performance or the
participation of American in the bid to acquire Yorkshire
Electricity. See Exhibit C-2. None of the ratings of the
Operating Companies have been downgraded as a result of investments
by American in an EWG or FUCO.
(f) American has complied and will continue to
comply with the requirements of Rule 53(a)(2) regarding preparation
of and making available books and records and financial reports
regarding Exempt Projects.
(g) American has complied and will continue to
comply with the requirements of Rule 53(a)(3) regarding the
limitation on the use of Operating Company employees in connection
with providing services to Exempt Projects. Increased levels of
investment in Exempt Projects are not anticipated to have any
impact on utilization of Operating Company employees. The
Operating Companies have not and will not increase staffing levels
or acquire other resources to support the operations of Exempt
Projects. Project development, management and home office support
functions for the Exempt Projects are largely performed by American
Electric Power Service Corporation, and by outside consultants
(e.g., engineers, investment advisors, accountants and attorneys)
engaged by Resources. Accordingly, Resources' need for the support
of personnel provided by the Operating Companies has been and is
expected to remain relatively modest.
(h) In the opinion of American and Resources, the
seven State commissions of Indiana, Kentucky, Michigan, Ohio,
Tennessee, Virginia and West Virginia having jurisdiction over the
Operating Companies are able to protect utility customers within
their respective states. The State commissions have not raised
objections to American's current investments in Exempt Projects.
FN10 Section 33(c) (2) provides that the State commissions may make
recommendations to the Commission regarding a registered
holding company's relationship to FUCOs, and that the
Commission shall 'reasonably and fully consider' such
recommendations.

To provide the Commission with added assurances, American met with
each of the State commissions having jurisdiction over the
Operating Companies and requested each to provide the Commission
with a letter certifying that such State Commission has
jurisdiction over certain Operating Companies and that such State
commission will protect ratepayers from any adverse effect or costs
that might result from American's investments in Exempt Projects.
American and its affiliates have been subjected to
numerous audits by this Commission and the Federal Energy
Regulatory Commission, and it is assumed both staffs will
participate in future audits. Audits by the Commission have not
raised 'significant' questions. Rule 54 provides that the
Commission, in determining whether to approve the issue or sale of
a security by a registered holding company for purposes other than
the acquisition of an Exempt Project, or other transactions by such
registered holding company or its subsidiary other than with
respect to Exempt Projects, shall not consider the effect of the
capitalization or earnings of any subsidiary which is an Exempt
Project upon the registered holding company system if the
provisions of Rule 53(a), (b) and (c) are satisfied. If the
transactions contemplated hereby are consummated and American's
aggregate investment in Exempt Projects exceeds 50% of its
consolidated retained earnings, the provisions of Rule 53(a) will
not be satisfied. The Applicants have included in this
Application-Declaration certain reporting requirements that are
intended to enable the Commission to monitor the impact of the
transactions for which authority is sought hereby. The Applicants
believe that such reporting requirements will assist the Commission
in its determinations concerning the effect of Exempt Projects on
other transactions for which American will require authorization.
ITEM 4. REGULATORY APPROVAL
The issuance and sale of securities by American and the use of
the proceeds thereof to acquire or guarantee the securities of any
Exempt Project are not subject to the jurisdiction of any State
commission or of any federal commission other than this Commission.
American has complied with the requirements of Rule 53(a)(4) by
submitting a copy of this Application-Declaration to the public
utility commissions in Indiana, Kentucky, Michigan, Ohio,
Tennessee, Virginia and West Virginia. American and the Operating
Companies have discussed the request for further investment
authority set forth in this Application-Declaration with each of
the seven State commissions having jurisdiction over one or more
such Operating Companies.
ITEM 5. PROCEDURE
It is requested, pursuant to Rule 23(c) of the Rules and
Regulations of the Commission, that the Commission's order
granting, and permitting to become effective this Application-
Declaration be issued forthwith. American waives any recommended
decision by a hearing officer of or by any other responsible
officer of the Commission and waives the 30-day waiting period
between the issuance of the Commission's order and the date it is
to become effective, since it is desired that the Commission's
order, when issued, becomes effective forthwith. American consents
to the Office of Public Utility Regulation assisting in the
preparation of the Commission's decision and/or order in this
matter, unless the Office opposes the matter covered by this
Application-Declaration.
American proposes to file, within 60 days after the end of the
applicable quarter, a quarterly report pursuant to Rule 24,
commencing with the report for the quarter ending June 30, 1998,
which contains the following information:
(i) a computation in accordance with Rule 53(a) (as
modified by the Commission's order in this proceeding) of
American's aggregate investment in all Exempt Projects;
(ii) American's cumulative aggregate investment in all
Exempt Projects expressed as a percentage of total
capitalization, net utility plant, total consolidated assets
and market value of common equity, all as of the end of such
quarter;
(iii) Consolidated capitalization ratios as of the end of
such quarter, with consolidated debt to be inclusive of all
short-term debt and non-recourse debt of Exempt Projects to
the extent normally consolidated under applicable financial
reporting rules;
(iv) The market-to-book ratio of American's common stock
at the end of such quarter;
(v) An analysis of the growth in consolidated retained
earnings which segregates earnings growth attributable to
Exempt Projects as a whole versus all other subsidiaries of
American; and
(vi) A breakdown in revenues and net income of each of
the Exempt Projects for the 12-months then ended.
American proposes to file a single report under Rule 24 which
combines the foregoing information with the information required
pursuant to Rule 24 in File No. 70-8429 (HCAR No. 26200, dated
December 22, 1994, and HCAR No. 26516, May 10, 1996).
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
The following additional exhibits are filed in Item 6:
Exhibit A-1 Letter of the Indiana Utility Regulatory
Commission (previously filed)

Exhibit A-2 Letter of the Kentucky Public Service Commission
(previously filed)

Exhibit A-3 Opinion and Order of the Michigan Public Service
Commission (previously filed)

Exhibit A-4 Letter of The Public Utilities Commission of Ohio
(previously filed)

Exhibit A-5 Letter of the Tennessee Regulatory Authority
(previously filed)

Exhibit A-6 Letter of the Virginia State Corporation Commission
(previously filed)

Exhibit A-7 Letter of the Public Service Commission of West
Virginia (previously filed)

Exhibit B-1 Pro forma financial statements (previously filed)

Exhibit B-1-1 American Financial Statements at September 30, 1997

Exhibit B-2 American Capitalization Summary as of June 30, 1997
(previously filed)

Exhibit B-2 American Capitalization Summary as of September 30,
1997

Exhibit B-3 American Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1997 (SEC File No. 1-3525)
is incorporated by reference herein.

Exhibit C-1 Rating Agency Announcements re Yorkshire
Electricity (previously filed)

Exhibit C-1-1 Rating Agency Announcements re Yorkshire
Electricity

Exhibit C-2 Rating Agency Announcements re American and
Operating Companies (previously filed)

Exhibit C-3 Ratings of United Kingdom Regional Electric
Companies

Exhibit G Proposed Notice (previously filed)

ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
It is believed that the proposed transactions will not have
any environmental effects which would require an environmental
impact statement under Section 102(c)(2) of the National
Environmental Policy Act. No other federal agency has prepared or
is preparing an environmental impact statement with respect to the
proposed transactions."

SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned company has duly caused this
statement to be signed on its behalf by the undersigned thereunto
duly authorized.
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.

By__/s/ A. A. Pena__________________
Treasurer

Dated: February 24, 1998

Exhibit B-1-1

<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 Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . $1,583,994 $1,484,422 $4,458,221 $4,403,144 $5,904,311 $5,828,572

OPERATING EXPENSES:
Fuel and Purchased Power . . . . . . . . 522,776 416,470 1,349,351 1,262,361 1,773,744 1,662,354
Other Operation. . . . . . . . . . . . . 302,307 299,496 904,892 903,927 1,210,992 1,219,418
Maintenance. . . . . . . . . . . . . . . 123,781 129,140 347,894 373,606 477,129 522,301
Depreciation and Amortization. . . . . . 144,342 151,809 447,843 450,337 598,357 598,512
Taxes Other Than Federal Income Taxes. . 123,943 128,155 372,723 376,771 494,519 494,712
Federal Income Taxes . . . . . . . . . . 91,755 99,607 267,195 263,650 345,767 325,625

TOTAL OPERATING EXPENSES . . . . 1,308,904 1,224,677 3,689,898 3,630,652 4,900,508 4,822,922

OPERATING INCOME . . . . . . . . . . . . . 275,090 259,745 768,323 772,492 1,003,803 1,005,650

NONOPERATING INCOME. . . . . . . . . . . . 32,835 3,655 43,030 3,558 41,684 13,190

INCOME BEFORE INTEREST CHARGES AND
PREFERRED DIVIDENDS. . . . . . . . . . . 307,925 263,400 811,353 776,050 1,045,487 1,018,840

INTEREST CHARGES . . . . . . . . . . . . . 103,378 90,878 300,851 289,266 392,913 388,303

PREFERRED STOCK DIVIDEND
REQUIREMENTS OF SUBSIDIARIES . . . . . . 2,801 10,198 15,056 31,782 24,700 44,115

INCOME BEFORE EXTRAORDINARY ITEM . . . . . 201,746 162,324 495,446 455,002 627,874 586,422

EXTRAORDINARY LOSS - U. K. WINDFALL TAX. . (110.565) - (110.565) - (110.565) -

NET INCOME . . . . . . . . . . . . . . . . $ 91,181 $ 162,324 $ 384,881 $ 455,002 $ 517,309 $ 586,422

AVERAGE NUMBER OF SHARES OUTSTANDING . . . 189,287 187,528 188,819 187,118 188,596 186,933

EARNINGS PER SHARE:
Before Extraordinary Item . . . . . . . . $1.07 $0.87 $2.62 $2.43 $3.33 $3.14

Extraordinary Loss - U. K. Windfall Tax . (0.59) - (0.58) - (0.59) -

Net Income. . . . . . . . . . . . . . . . $0.48 $0.87 $2.04 $2.43 $2.74 $3.14

CASH DIVIDENDS PAID PER SHARE. . . . . . . $0.60 $0.60 $1.80 $1.80 $2.40 $2.40

See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
September 30,
1997 1996
(in thousands)
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production . . . . . . . . . . . . . . . . . . . . . $ 9,424,789 $ 9,278,377
Transmission . . . . . . . . . . . . . . . . . . . . 3,417,136 3,357,849
Distribution . . . . . . . . . . . . . . . . . . . . 4,551,816 4,321,685
General (including mining assets and nuclear fuel) . 1,549,018 1,489,816
Construction Work in Progress. . . . . . . . . . . . 419,754 344,492
Total Electric Utility Plant . . . . . . . . 19,362,513 18,792,219
Accumulated Depreciation and Amortization. . . . . . 7,860,161 7,451,534

NET ELECTRIC UTILITY PLANT . . . . . . . . . 11,502,352 11,340,685

OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 1,313,845 866,659

CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 91,767 112,704
Accounts Receivable. . . . . . . . . . . . . . . . . 580,677 529,023
Allowance for Uncollectible Accounts . . . . . . . . (7,009) (3,459)
Fuel . . . . . . . . . . . . . . . . . . . . . . . . 236,716 252,822
Materials and Supplies . . . . . . . . . . . . . . . 240,084 249,518
Accrued Utility Revenues . . . . . . . . . . . . . . 149,402 145,078
Prepayments and Other. . . . . . . . . . . . . . . . 87,443 111,126

TOTAL CURRENT ASSETS . . . . . . . . . . . . 1,379,080 1,396,812

REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 1,838,720 1,875,724

DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 216,417 204,104

TOTAL. . . . . . . . . . . . . . . . . . . $16,250,414 $15,683,984

See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
September 30,
1997 1996
(in thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock-Par Value $6.50:
1997 1996
Shares Authorized. .300,000,000 300,000,000
Shares Issued. . . .198,610,998 196,834,992
(8,999,992 shares were held in treasury) . . . . . $ 1,290,971 $ 1,279,427
Paid-in Capital. . . . . . . . . . . . . . . . . . . 1,762,296 1,702,102
Retained Earnings. . . . . . . . . . . . . . . . . . 1,592,705 1,528,045
Total Common Shareholders' Equity. . . . . . 4,645,972 4,509,574
Cumulative Preferred Stocks of Subsidiaries:
Not Subject to Mandatory Redemption. . . . . . . . 46,869 115,365
Subject to Mandatory Redemption. . . . . . . . . . 127,605 490,225
Long-term Debt . . . . . . . . . . . . . . . . . . . 5,122,382 4,813,827

TOTAL CAPITALIZATION . . . . . . . . . . . . 9,942,828 9,928,991

OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 1,173,160 968,175

CURRENT LIABILITIES:
Preferred Stock and Long-term
Debt Due Within One Year . . . . . . . . . . . . . 219,422 97,304
Short-term Debt. . . . . . . . . . . . . . . . . . . 507,750 275,351
Accounts Payable . . . . . . . . . . . . . . . . . . 207,669 177,779
Taxes Accrued. . . . . . . . . . . . . . . . . . . . 260,739 283,763
Interest Accrued . . . . . . . . . . . . . . . . . . 112,043 112,716
Obligations Under Capital Leases . . . . . . . . . . 95,609 93,260
Other. . . . . . . . . . . . . . . . . . . . . . . . 358,942 311,369

TOTAL CURRENT LIABILITIES. . . . . . . . . . 1,762,174 1,351,542

DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 2,573,150 2,616,045

DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 383,981 409,657

DEFERRED GAIN ON SALE AND LEASEBACK -
ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 233,640 242,917

DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 181,481 166,657

COMMITMENTS AND CONTINGENCIES (Note 5)

TOTAL. . . . . . . . . . . . . . . . . . . $16,250,414 $15,683,984

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 384,881 $ 455,002
Adjustments for Noncash Items:
Depreciation and Amortization. . . . . . . . . . . . . . 455,494 442,205
Deferred Federal Income Taxes. . . . . . . . . . . . . . (35,566) (14,126)
Deferred Investment Tax Credits. . . . . . . . . . . . . (17,510) (17,643)
Amortization of Deferred Property Taxes. . . . . . . . . 132,251 132,061
Amortization of Operating Expenses and
Carrying Charges (net) . . . . . . . . . . . . . . . . 24,356 38,226
Extraordinary Loss - U.K. Windfall Tax . . . . . . . . . 110,565 -
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net). . . . . . . . . . . . . . . . (42,336) (33,281)
Fuel, Materials and Supplies . . . . . . . . . . . . . . 10,353 20,644
Accrued Utility Revenues . . . . . . . . . . . . . . . . 25,564 62,841
Accounts Payable . . . . . . . . . . . . . . . . . . . . 1,442 (42,363)
Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (153,434) (136,429)
Interest Accrued . . . . . . . . . . . . . . . . . . . . 36,919 31,868
Other (net). . . . . . . . . . . . . . . . . . . . . . . . 33,016 45,555
Net Cash Flows From Operating Activities . . . . . . 965,995 984,560

INVESTING ACTIVITIES:
Construction Expenditures. . . . . . . . . . . . . . . . . (496,155) (355,878)
Investment in Yorkshire Electricity Group plc. . . . . . . (361,795) -
Proceeds from Sale of Property and Other . . . . . . . . . 2,492 8,825
Net Cash Flows Used For Investing Activities . . . . (855,458) (347,053)

FINANCING ACTIVITIES:
Issuance of Common Stock . . . . . . . . . . . . . . . . . 58,045 49,337
Issuance of Long-term Debt . . . . . . . . . . . . . . . . 776,441 406,905
Retirement of Cumulative Preferred Stock . . . . . . . . . (433,234) (39,966)
Retirement of Long-term Debt . . . . . . . . . . . . . . . (325,931) (594,609)
Change in Short-term Debt (net). . . . . . . . . . . . . . 188,055 (89,774)
Dividends Paid on Common Stock . . . . . . . . . . . . . . (339,685) (336,651)
Net Cash Flows Used For Financing Activities . . . . (76,309) (604,758)

Net Increase in Cash and Cash Equivalents. . . . . . . . . . 34,228 32,749
Cash and Cash Equivalents at Beginning of Period . . . . . . 57,539 79,955
Cash and Cash Equivalents at End of Period . . . . . . . . . $ 91,767 $ 112,704

Supplemental Disclosure:
Cash paid for interest net of capitalized amounts was $253,884,000 and $247,393,000
and for income taxes was $290,682,000 and $278,050,000 in 1997 and 1996, respectively.
Noncash acquisitions under capital leases were $171,947,000 and $108,340,000 in
1997 and 1996, respectively.

See Notes to Consolidated Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD . . . . . . $1,615,039 $1,478,193 $1,547,746 $1,409,645 $1,528,045 $1,390,007

NET INCOME . . . . . . . . . . . . . . . . 91,181 162,324 384,881 455,002 517,309 586,422

DEDUCTIONS:
Cash Dividends Declared. . . . . . . . . 113,515 112,463 339,685 336,651 452,387 448,424
Other. . . . . . . . . . . . . . . . . . - 9 237 (49) 262 (40)

BALANCE AT END OF PERIOD . . . . . . . . . $1,592,705 $1,528,045 $1,592,705 $1,528,045 $1,592,705 $1,528,045

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)

1. GENERAL

The accompanying unaudited consolidated financial statements should
be read in conjunction with the 1996 Annual Report as incorporated in and
filed with the Form 10-K. Certain prior-period amounts have been
reclassified to conform to current-period presentation.

2. FINANCING AND RELATED ACTIVITIES

During the first nine months of 1997, the utility operating
subsidiaries issued $422 million principal amount of long-term
obligations: three series of first mortgage bonds totaling $144 million
at 6.35%, 6.4% and 6.71% all due in 2000; $180 million of junior
subordinated deferrable interest debentures at 7.92% and 8% due in 2027;
one $48 million unsecured note due 2004 at 6.73% and $50 million of
financing obligations under a sale leaseback agreement.

The proceeds were used during 1997 to redeem 4,257,490 shares of
cumulative preferred stock as detailed in the table below and to retire
$243 million principal amount of long-term debt: $203 million of first
mortgage bonds with interest rates ranging from 6-1/2% to 9.35% due from
1997 to 2022; $20 million of variable rate installment purchase contracts
due in 2025; and a $20 million term loan with an interest rate of 7.19%
at maturity.

Number Total
of Shares Reacquisition
Series Retired Price Range Price
(in thousands)

4.08%-4.56% 434,540 $ 61.00-$ 69.94 $ 29,361
5.90%-5.92% 1,515,900 101.83- 103.20 156,074
6.02%-6-7/8% 1,307,050 103.71- 107.26 137,071
7.80%-7-7/8% 1,000,000 105.20- 105.50 105,232
$427,738

As a result of the redemption of the 6-1/2% series first mortgage
bonds due in 1997, the restriction on the use of retained earnings for
the payment of common stock dividends was reduced to $27 million.

At September 30, 1997, AEP Resources, Inc., a subsidiary which is
pursuing new business opportunities, had $270 million of outstanding debt
at LIBOR rates under its long-term revolving credit agreement which
expires in 1999, primarily for its investment in Yorkshire Electricity
Group, plc.

In October 1997 two domestic electric operating subsidiaries issued
$96 million of unsecured medium term notes due in 2005 and 2007 at 6.85%
and 6.91%, respectively.

3. EXTRAORDINARY LOSS - WINDFALL TAX

The Company and New Century Energies, Inc. acquired a United Kingdom
distribution company, Yorkshire Electricity Group plc, through an equally
owned joint venture in April 1997. Total consideration paid by the joint
venture was approximately $2.4 billion which was financed by a
combination of equity and non-recourse debt. The Company uses the equity
method of accounting for its $273 million equity investment in Yorkshire
Electricity which is included in other property and investments.

In July 1997 the British government enacted a new law that imposed a
one-time windfall tax on a revised privatization value which originally
had been computed in 1990 of certain privatized utilities. The windfall
tax is actually an adjustment of the original privatization price by the
U.K. government. The windfall tax liability for Yorkshire Electricity
Group plc is estimated to be 135 million pounds ($221 million) and is
payable in two equal installments with the first due in December 1997 and
the second installment a year later. The Company's $110.6 million share
of the tax is reported as an extraordinary loss. The earnings from the
Yorkshire investment excluding the extraordinary loss, which are included
in nonoperating income, are $34 million for the third quarter and $38
million for the year-to-date period which includes $26 million of
nonrecurring tax benefits related to a reduction of the United Kingdom
corporate income tax rate from 33% to 31% and the utilization of foreign
tax credits.

4. ZIMMER PHASE-IN PLAN

In June 1997 a domestic electric operating subsidiary, Columbus
Southern Power Company, completed recovery of its Zimmer Plant phase-in
plan deferrals through the cessation of a 3.39% temporary surcharge. The
temporary surcharge was placed into effect on February 1, 1994 to allow
recovery of a rate phase-in deferral of $93.9 million. The amount of net
phase-in deferrals that were collected through the surcharge was $18.5
million in 1994, $28.5 million in 1995, $31.5 million in 1996 and $15.4
million in 1997. The cessation of the surcharge recovery of amounts
deferred under the phase-in plan did not affect net income since the
deferred costs were amortized commensurate with their recovery. For
other information regarding the Zimmer rate case refer to the 1996 Annual
Report - Notes to Consolidated Financial Statements - Note 3.

5. CONTINGENCIES

Taxes

As discussed in Note 9, "Federal Income Taxes" of the Notes to
Consolidated Financial Statements in the 1996 Annual Report, the Internal
Revenue Service (IRS) agents auditing the consolidated federal income tax
returns for the years 1991 through 1993 requested a ruling from their
National Office as to whether certain interest deductions relating to
corporate owned life insurance (COLI) should be disallowed. The COLI
program was established in 1990 as part of the Company's strategy to fund
and reduce the cost of medical benefits for retired employees. The
Company filed a brief with the IRS National Office defending the subject
deductions. Although no disallowance has been proposed, a disallowance
of COLI interest deductions through September 30, 1997 would reduce
earnings by approximately $276 million inclusive of interest. Management
believes it will ultimately prevail on this issue and will vigorously
contest any disallowance that may be proposed.

Revised Air Quality Standards

On July 18, 1997, the United States Environmental Protection Agency
published a revised National Ambient Air Quality Standard (NAAQS) for
ozone and a new NAAQS for fine particulate matter (less than 2.5 microns
in size). The new ozone standard is expected to result in redesignation
of a number of areas of the country that are currently in compliance with
the existing standard to nonattainment status which could ultimately
dictate more stringent emission restrictions for AEP System generating
units. New stringent emission restrictions on AEP System generating units
to achieve attainment of the fine particulate matter standard could also
be imposed. The AEP System operating companies joined with other
utilities to appeal the revised NAAQS and filed petitions for review in
August and September 1997 in the U.S. Court of Appeals for the District
of Columbia Circuit.

Management is unable to estimate compliance costs without knowledge
of the reductions that may be necessary to meet the new standards. If
such costs are significant, it could have a material adverse effect on
results of operations and possibly financial condition unless such costs
are recovered.

Cook Plant Shutdown

On September 9 and 10, 1997, during a Nuclear Regulatory Commission
(NRC) architect engineer design inspection, questions regarding the
operability of certain safety systems caused Company operations personnel
to shut down Units 1 and 2 of the Cook Nuclear Plant. On September 19,
1997, the NRC issued a Confirmatory Action Letter requiring the Company
to address certain issues identified in the letter. The Company is
working with the NRC to resolve this matter. At this time management is
unable to determine when the units will be returned to service. If the
units are not returned to service in a timely manner, it could have an
adverse impact on results of operations and possibly financial condition.

The Company continues to be involved in certain other matters
discussed in the 1996 Annual Report.
<PAGE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
OPERATING REVENUES AND ENERGY SALES
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996

<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES (in thousands):
Retail:
Residential:
Without Electric Heating. . . . . . $ 321,536 $ 328,044 $ 848,571 $ 874,174 $1,106,538 $1,141,796
With Electric Heating . . . . . . . 157,156 154,721 579,169 609,023 796,556 839,379
Total Residential . . . . . . . . 478,692 482,765 1,427,740 1,483,197 1,903,094 1,981,175
Commercial. . . . . . . . . . . . . . 338,103 335,801 963,772 974,774 1,273,668 1,293,076
Industrial. . . . . . . . . . . . . . 407,679 409,096 1,210,273 1,218,175 1,610,941 1,624,767
Miscellaneous . . . . . . . . . . . . 16,865 16,431 49,956 50,582 66,304 68,246

Total Retail. . . . . . . . . . . 1,241,339 1,244,093 3,651,741 3,726,728 4,854,007 4,967,264

Wholesale (sales for resale). . . . . . 291,445 204,282 679,583 586,941 885,234 746,701

Total Revenues from Energy Sales. 1,532,784 1,448,375 4,331,324 4,313,669 5,739,241 5,713,965

Provision for Refunds of Revenues
Collected in Prior Periods. . . . . . - 1,149 (250) (7,508) (323) (7,508)
Total Net of Provision
for Refunds . . . . . . . . . . 1,532,784 1,449,524 4,331,074 4,306,161 5,738,918 5,706,457

Other . . . . . . . . . . . . . . . . . 51,210 34,898 127,147 96,983 165,393 122,115

TOTAL OPERATING REVENUES. . . . . $1,583,994 $1,484,422 $4,458,221 $4,403,144 $5,904,311 $5,828,572

ENERGY SALES (in millions of kilowatthours):
Retail:
Residential:
Without Electric Heating. . . . . . 4,685 4,689 12,247 12,554 15,992 16,382
With Electric Heating . . . . . . . 2,604 2,520 10,085 10,642 13,997 14,740
Total Residential . . . . . . . . 7,289 7,209 22,332 23,196 29,989 31,122
Commercial. . . . . . . . . . . . . . 6,116 5,973 17,086 17,124 22,520 22,631
Industrial. . . . . . . . . . . . . . 11,506 11,299 34,299 33,975 45,719 45,119
Miscellaneous . . . . . . . . . . . . 316 300 933 936 1,261 1,261

Total Retail. . . . . . . . . . . 25,227 24,781 74,650 75,231 99,489 100,133

Wholesale (sales for resale). . . . . . 11,090 7,741 28,569 23,427 37,645 28,841

TOTAL ENERGY SALES. . . . . . . . 36,317 32,522 103,219 98,658 137,134 128,974
</TABLE>

<PAGE>

AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
C0NSOLIDATED RETAINED EARNINGS
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands)

Retained Earnings 5% Test

Consolidated Retained Earnings:
September 30, 1997 $1,592,705
June 30, 1997 1,615,039
March 31, 1997 1,607,776
December 31, 1996 1,547,746
Consolidated Retained Earnings 6,363,266
Average 1,590,817

5% of Average Consolidated Retained Earnings 79,541
Loss attributable to investment in
Yorkshire Electricity Group plc
(a foreign utility company as defined
in the Public Utility Holding
Company Act of 1935):
Yorkshire Earnings Recorded During the Second Quarter 4,102
Yorkshire Earnings Recorded During the Third Quarter
(including $26,449 of nonrecurring tax benefits
related to a reduction of the U.K. corporate income
tax rate and the utilization of foreign tax credits) 33,728
Extraordinary Loss - U.K. Windfall Tax (110,565)
Loss from investment in foreign utility company (72,735)
Difference - Excess of 5% of average consolidated
retained earnings over loss from investment in
foreign utility company $ 6,806

Exhibit B-2

AMERICAN ELECTRIC POWER COMPANY, INC.
CAPITALIZATION

Actual
September 30, 1997

$ Millions Percentage
<S> <C> <C>

Debt:
First Mortgage Bonds . . . . . . $ 3,112
Other Long-Term Debt . . . . . . 2,230
Short-Term Debt . . . . . . . . . 508
$ 5,850 54.8%
Preferred:
Stock . . . . . . . . . . . . . . $ 174 1.6%

Common Equity:
Common Stock . . . . . . . . . . $ 1,291
Paid-in Capital . . . . . . . . . 1,762
Retained Earnings . . . . . . . . 1,593
$ 4,646 43.6%

Total Capitalization . . . . . . . $10,670 100.0%
</TABLE>

The foregoing table includes no non-recourse debt related to
Exempt Entities that is consolidated for financial reporting
purposes. The following table sets forth American's pro forma
capitalization, including the additional amount of outstanding
non-recourse debt ($1.135 billion) related to American's
proportionate ownership interest in Exempt Entities which is not
consolidated under generally accepted accounting principles.

Pro Forma
September 30, 1997

$ Millions Percentage
<S> <C> <C>

Debt:
First Mortgage Bonds . . . . . . $ 3,112
Other Long-Term Debt . . . . . . 3,365
Short-Term Debt . . . . . . . . . 508
$ 6,985 59.2%
Preferred:
Stock . . . . . . . . . . . . . . $ 174 1.5%

Common Equity:
Common Stock . . . . . . . . . . $ 1,291
Paid-in Capital . . . . . . . . . 1,762
Retained Earnings . . . . . . . . 1,593
$ 4,646 39.3%

Total Capitalization . . . . . . . $11,805 100.0%
/TABLE
<PAGE>

Exhibit C-1-1

DEBT TO BAA1 FROM AA3
17:29 06 Oct RTRS-MOODY'S CUTS YORKSHIRE ELECTRICITY SHORT-TERM
DEBT TO PRIME-2 FROM PRIME-1
17:36 06 Oct RTRS-Moody's cuts Yorkshire Electricity <YKE.L>
ratings

(Press release provided by Moody's Investors Service)

NEW YORK, Oct 6 - Moody's Investors Service has downgraded the
senior unsecured long-term debt ratings of Yorkshire Electricity
Group plc to Baa1 from Aa3 and the short-term rating for Commercial
Paper from Prime-1 to Prime-2, following the group's acquisition in
a leveraged transaction which we expect will result in reduced
financial flexibility over the foreseeable future.

The rating action concludes a review initiated on 24 February
1997. Long term ratings of Yorkshire Electricity Group plc
("Yorkshire") that have been downgraded are: 8.625% GBP 150
million Eurobond due 2005 from Aa3 to Baa1; and 9.25% GBP200
million Eurobond due 2020 from Aa3 to Baa1.

Yorkshire was acquired by two US utility holding companies:
Public Service Company of Colorado (now New Century Energies, Inc.
following a merger) and American Electric Power Company, Inc.

The GBP 1.5 billion transaction was financed with GBP 220
million equity contributions from each company, giving both an
equal share in Yorkshire, with the remainder financed by bank
borrowings held at UK-registered parent Yorkshire Power Group
Limited ("YPG").

These additional borrowings have increased the leverage to
among the highest seen in acquisitions of Regional Electricity
Companies (RECs") and will be compounded by further borrowings to
fund the GBP 134 million retrospective "Windfall" tax liability
recently enacted by Parliament.

However, it is expected that the bank debt will be refinanced
in due course with a series of offerings including a capital
securities issue of up to 10% of total capitalization. It is also
expected that some of Yorkshire's investments will be disposed of
over the next two years, with the resultant proceeds being used to
reduce borrowings.

Yorkshire will now be required to make significant dividend
payments to support the acquisition debt at YPG. This constrains
financial flexibility, as debt protection measurements for the
combination of Yorkshire and YPG are now considerably weaker.

However, Moody's expects that Yorkshire will maintain adequate
and stable earnings in its monopoly distribution business, which
will continue to generate around three-quarters of EBITDA.
Yorkshire has good distribution profitability and an excellent
supply business with low domestic tariffs.

Moody's believes that this confers strong competitive
advantages in the run-up to deregulation in gas and electricity
supply. In common with other RECs, Yorkshire faces the impact of
the next regulatory distribution price review in the year 2000, as
well as the need to hedge the volatile price of electricity against
the essentially fixed prices at which the RECs sell electricity to
their customers.

Yorkshire Electricity Group plc is a UK Regional Electricity
Company headquartered in Leeds, England. Its principal business is
the distribution and supply of electricity to 2.1 million customers
in the North East of England.

The company had turnover of approximately GBP 1.3 billion in
the financial year ended 31 March 1997.

Global Ratings Development
25 Broadway
New York, NY 10004-1064
Telephone: 212/208-1167
Fax: 212/208-0084

Standard & Poor's
A Division of The McGraw-Hill Companies

October 1, 1997

Mr. Nick Dahlareen
Treasurer
Yorkshire Power Group Limited
Wetherby Road
Scarcroft, Leeds LS14 3HS
United Kingdom

Re: Yorkshire Power Group Limited Credit Rating

Dear Mr. Dahlareen:

Pursuant to your request, Standard & Poor's has reviewed the
information presented to us by Yorkshire Power Group Limited and
has reviewed the information presented to us by Yorkshire Power
Group Limited and has assigned Yorkshire Power Group Limited a
credit rating of "BBB+/A-2". If you have any questions relating to
this rating, we will be pleased to answer them.

We will maintain surveillance in accordance with Standard & Poor's
policies. Standard & Poor's relies on the issuer, its counsel,
accountants and other experts for the accuracy and completeness of
the information submitted in connection with the rating and
surveillance process. Accordingly, in order to maintain our rating
surveillance, we should receive all pertinent information. In the
event that we do not receive such information, the rating may be at
risk of withdrawal.

This letter constitutes Standard & Poor's permission to you to
disseminate the above-assigned rating to interested parties. You
understand that Standard & Poor's has not consented to, and will
not consent to, being named an "expert" under applicable securities
laws. In addition, it should be understood that the rating is not
a "market" rating nor a recommendation to buy, hold or sell any
financial obligation of the company. Standard & Poor's reserves
the right to advise its own clients, subscribers, and the public of
the rating.

We are pleased to have had the opportunity of being of service to
your. If we can be of further help, please do not hesitate to call
upon us.

Very truly yours,
/s/ Curtis Moulton
Managing Director

Exhibit C-3

Ratings of United Kingdom Regional Electric Companies

Company S&P Moody's

South Western Electricity A- Baa1

East Midlands Electricity A- A3

Eastern Electricity A A2

London Electricity BBB- Baa2

Avon Energy Holdings A- Baa2
(Midlands Electricity)

SEEBOARD A- Baa1

Northern Electric BBB+ A3

Yorkshire Electricity BBB+ Baa1

Southern Electric AA Aa3

Not Rated

MANWEB
NORWEB
SWALEC