File No. 70-8527
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO FORM U-1
APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
* * *
OHIO VALLEY ELECTRIC CORPORATION
P. O. Box 468, Piketon, Ohio 45661
(Name of company 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)
* * *
A. A. Pena, Treasurer
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
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)
Ohio Valley Electric Corporation ("OVEC") hereby amends its
Application-Declaration on Form U-1 in File No. 70-8527, as
follows:
By adding the following paragraphs at the end of ITEM 1:
"Under the Commission's orders dated December 28, 1994 and
December 12, 1996 in this file, OVEC was authorized to incur short-
term indebtedness through the issuance and sale of notes to banks
in an aggregate amount not to exceed $25,000,000 outstanding at any
one time, from time to time through December 31, 2001, as funds may
be required, provided that no such notes shall mature later than
June 30, 2002.
OVEC hereby requests that said authorization be increased to
an aggregate amount not to exceed $50,000,000 outstanding at any
one time. OVEC is complying with the SO2 provision of the Clean Air
Act by pursuing coal switching at its two generating stations.
This least-cost strategy of purchasing low cost coal with slightly
higher sulfur content and additional SO2 allowances will produce
Clean Air Act compliance and low power costs for the fulfillment of
a Power Agreement with the Department of Energy. The current coal
supply projections indicate that OVEC will need approximately
426,000 additional SO2 allowances to operate its generating
facilities through 2001, and an additional 643,000 to operate from
2001 through the end of the Power Agreement with the Department of
Energy on December 31, 2005. The market price for SO2 allowances
is presently around $90 per allowance. OVEC plans to increase its
SO2 allowance inventory through the use of short-term debt to
finance additional SO2 allowance purchases.
Notes will mature not more than 270 days after the date of
issuance or renewal thereof; provided that no note will mature
later than June 30, 2002. Notes will bear interest at an annual
rate not greater than the bank's prime commercial rate in effect
from time to time. Such credit arrangements may require the
payment of a fee that is not greater than 1/5 of 1% per annum of
the size of the line of credit made available by the bank and the
maintenance of additional balances of not greater than 20% of the
line of credit.
The maximum effective annual interest cost under any of the
above arrangements, assuming full use of the line of credit, will
not exceed 125% of the prime commercial rate in effect from time to
time, or not more than 10.625% on the basis of a prime commercial
rate of 8.5%.
The proceeds of the short-term debt incurred by OVEC will be
added to its general funds and used to pay its general obligations
and for other corporate purposes.
Certificates of notification pursuant to rule 24 would
continue to be filed quarterly when there are outstanding
borrowings in any quarter.
Compliance with Rule 54
Rule 54 provides that in determining whether to approve
certain transactions other than those involving an exempt wholesale
generator ('EWG') or a foreign utility company ('FUCO'), as defined
in the Public Utility Holding Company Act of 1935 ('1935 Act'), the
Commission will not consider the effect of the capitalization or
earnings of any subsidiary which is an EWG or FUCO if Rule 53(a),
(b) and (c) are satisfied. The requirements of Rule 53(a), (b) and
(c) are satisfied.
Rule 53(a)(1). As of September 30, 1997, American Electric
Power Company, Inc. ('AEP'), through its subsidiary, AEP Resources,
Inc., had aggregate investment in FUCOs of $388,096,000. This
investment represents approximately 24.4% of $1,590,817,000, the
average of the consolidated retained earnings of AEP reported on
Form 10-K or Form 10-Q, as applicable, for the four consecutive
quarters ended September 30, 1997.
Rule 53(a)(2). Each FUCO in which AEP invests will maintain
books and records and make available the books and records required
by Rule 53(a)(2).
Rule 53(a)(3). No more than 2% of the employees of the
operating company subsidiaries of AEP will, at any one time,
directly or indirectly, render services to any FUCO.
Rule 53(a)(4). AEP has submitted and will submit a copy of
Item 9 and Exhibits G and H of AEP's Form U5S to each of the public
service commissions having jurisdiction over the retail rates of
AEP's operating company subsidiaries.
Rule 53(b). (i) Neither AEP nor any subsidiary of AEP is the
subject of any pending bankruptcy or similar proceeding; (ii) AEP's
average consolidated retained earnings for the four most recent
quarterly periods ($1,590,817,000) represented an increase of
approximately $165,000,000 (or 1%) in the average consolidated
retained earnings from the previous four quarterly periods
($1,574,652,000); and (iii) for the fiscal year ended December 31,
1996, AEP did not report operating losses attributable to AEP's
direct or indirect investments in EWGs and FUCOs.
Rule 53(c). Rule 53(c) is inapplicable because the require-
ments of Rule 53(a) and (b) have been satisfied."
* * *
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
this Post-Effective Amendment to its Application or Declaration on
Form U-1 be issued on or before March 2, 1998. OVEC waives any
recommended decision by a hearing officer 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, become effective forthwith. OVEC
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 of Public Utility Regulation opposes the
matters covered by this Post-Effective Amendment to its Application
or Declaration on Form U-1.
* * *
Filed herewith are (i) Balance Sheets as of December 31, 1996
and 1995; (ii) Statements of Income and Retained Earnings for the
years ended December 31, 1996 and 1995 and year to date as of
September 30, 1997; and (iii) a Source of Funds Statement.
SIGNATURES
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned company has duly
caused this Post-Effective Amendment No. 2 to be signed on its
behalf by the undersigned thereunto duly authorized.
OHIO VALLEY ELECTRIC CORPORATION
By:_/s/ G. P. Maloney_________
Vice President
Dated: January 14, 1998
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE>
Report of Independent Public Accountants
To the Board of Directors,
Ohio Valley Electric Corporation:
We have audited the accompanying consolidated balance sheets of
OHIO VALLEY ELECTRIC CORPORATION (an Ohio corporation) and its
subsidiary company, INDIANA-KENTUCKY ELECTRIC CORPORATION (an
Indiana corporation), as of December 31, 1996 and 1995, and the
related consolidated statements of income and retained earnings
and cash flows for the years then ended. These financial
statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ohio
Valley Electric Corporation and its subsidiary company as of
December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Columbus, Ohio,
March 21, 1997.
<PAGE>
<PAGE>
<TABLE>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<CAPTION>
ASSETS 1996 1995
------ ------------ ------------
<S> <C> <C>
ELECTRIC PLANT -- at original cost -
Ohio Valley Electric Corporation $269,307,341 $268,915,431
Indiana-Kentucky Electric Corporation 386,770,022 384,901,718
------------ ------------
656,077,363 653,817,149
Less-Accumulated provisions for
depreciation and amortization 585,032,275 575,433,410
------------ ------------
71,045,088 78,383,739
Construction work in progress 8,297,408 7,938,958
------------ ------------
79,342,496 86,322,697
------------ ------------
INVESTMENTS AND OTHER:
Special funds held by trustee --- 1,933,979
------------ ------------
--- 1,933,979
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 3,009,372 4,779,628
Accounts receivable 17,223,111 20,832,872
Interest receivable 1,021 1,126
Coal in storage, at average cost 18,411,661 12,008,455
Coal sold under agreement to repurchase 19,000,000 21,000,000
Materials and supplies, at average cost 18,807,525 19,138,253
Property taxes applicable to subsequent years 3,600,000 3,800,000
SO2 Allowances 32,197 ---
Refundable Federal income taxes 1,885,551 ---
Prepaid expenses and other 1,076,180 730,201
------------ ------------
83,046,618 82,290,535
------------ ------------
DEFERRED CHARGES AND OTHER:
Unamortized debt expense 357,126 397,177
Future Federal income tax benefits 60,661,824 58,982,590
Unrecognized postemployment benefits expense 1,265,593 1,353,348
Unrecognized pension expense 9,559,181 8,995,953
Unrecognized postretirement benefits expense 35,065,000 33,485,000
Deferred depreciation 4,130,807 2,364,518
Prepaids and other 800,365 239,444
------------ ------------
111,839,896 105,818,030
------------ ------------
TOTAL ASSETS $274,229,010 $276,365,241
============ ============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<CAPTION>
CAPITALIZATION AND LIABILITIES 1996 1995
------------------------------ ------------ ------------
<S> <C> <C>
CAPITALIZATION:
Common stock, $100 par value -
Authorized, 300,000 shares;
outstanding, 100,000 shares $ 10,000,000 $ 10,000,000
Senior secured notes 64,666,520 70,727,840
Retained earnings 2,430,811 1,605,888
------------ ------------
77,097,331 82,333,728
------------ ------------
CURRENT LIABILITIES:
Note payable maturing in one year 8,500,000 9,000,000
Current portion of long-term debt 6,061,320 5,682,480
Accounts payable 18,655,656 15,431,024
Coal purchase obligation 19,000,000 21,000,000
Accrued taxes 10,109,199 10,780,129
Deferred income --- 1,753,468
Accrued Federal income taxes --- 328,454
Accrued interest and other 4,446,499 4,121,138
------------ ------------
66,772,674 68,096,693
------------ ------------
DEFERRED CREDITS AND OTHER:
Investment tax credits 10,610,318 10,610,318
Accrued pension liability 9,559,181 8,995,953
Customer advances for construction 6,873,000 6,903,040
Net antitrust settlement 4,111,809 4,111,809
Deferred credit - tax benefits 61,994,623 60,061,874
Postretirement benefits obligation 35,065,000 33,485,000
Postemployment benefits obligation 1,265,593 1,353,348
Deferred credit - SO2 allowances 879,481 413,478
------------ ------------
130,359,005 125,934,820
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $274,229,010 $276,365,241
============ ============
The accompanying notes to financial statements are an integral part of these
balance sheets.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Sales of electric energy to:
Department of Energy $223,789,842 $257,608,039
Sponsoring Companies 88,128,059 41,145,339
Other 872,211 875,174
------------ ------------
Total operating revenues 312,790,112 299,628,552
------------ ------------
OPERATING EXPENSES:
Fuel consumed in operation 211,943,720 205,407,471
Purchased power 12,117,320 4,000,973
Other operations 36,198,416 35,832,525
Maintenance 33,453,773 29,343,947
Depreciation 5,682,480 3,589,680
Taxes, other than Federal income taxes 8,432,592 9,421,083
Federal income taxes (331,940) 2,928,564
------------ ------------
Total operating expenses 307,496,361 290,524,243
------------ ------------
Operating income 5,293,751 9,104,309
OTHER INCOME (EXPENSE) 2,372,794 (620,368)
------------ ------------
Income before interest charges 7,666,545 8,483,941
------------ ------------
INTEREST CHARGES:
Amortization of debt expense 40,051 94,379
Interest expense, net 5,311,571 6,212,635
------------ ------------
Total interest charges 5,351,622 6,307,014
------------ ------------
Net income 2,314,923 2,176,927
RETAINED EARNINGS, beginning of year 1,605,888 938,961
CASH DIVIDENDS ON COMMON STOCK 1,490,000 1,510,000
------------ ------------
RETAINED EARNINGS, end of year $ 2,430,811 $ 1,605,888
============ ============
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FROM OPERATIONS:
Net income $ 2,314,923 $ 2,176,927
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 5,682,480 3,589,680
Debt expense amortization 40,051 94,379
Future Federal income and deferred
credit tax benefits 253,515 1,462,832
Changes in assets and liabilities:
Accounts receivable 3,609,761 (8,540,468)
Interest receivable 105 631
Coal in storage and coal sold under
agreement to repurchase (4,403,206) (608,356)
Materials and supplies 330,728 227,562
Property taxes applicable to
subsequent years 200,000 (200,000)
Prepaid expenses and other (378,176) 2,505
Accounts payable 3,224,632 (1,666,711)
Deferred income (1,753,468) 1,753,468
Accrued taxes (2,884,935) 2,898,664
Accrued interest and other 325,361 (53,178)
Other (94,878) (449,058)
Net cash provided by (used in) ----------- ------------
operating activities 6,466,893 688,877
----------- ------------
INVESTING ACTIVITIES:
Reimbursement for plant replacements
and additional facilities 2,749,245 5,079,097
Net electric plant additions (3,247,893) (15,318,421)
----------- ------------
Net cash used in investing activities (498,648) (10,239,324)
----------- ------------
FINANCING ACTIVITIES:
Special funds held by trustee 1,933,979 10,622,900
Note payable maturing in one year (500,000) (500,000)
Senior secured notes (5,682,480) (3,589,680)
Coal purchase obligation (2,000,000) 21,000,000
Lines-of-credit borrowings --- (22,500,000)
Dividends on common stock (1,490,000) (1,510,000)
Net cash provided by (used in) ----------- ------------
financing activities (7,738,501) 3,523,220
----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $(1,770,256) $ (6,027,227)
=========== ============
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 4,779,628 $ 10,806,855
----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,009,372 $ 4,779,628
=========== ============
SUPPLEMENTAL DISCLOSURES:
INTEREST PAID $ 6,680,670 $ 7,624,944
=========== ============
FEDERAL INCOME TAXES PAID (RECEIVED) $ 1,630,849 $ (427,155)
=========== ============
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
<PAGE>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Ohio Valley
Electric Corporation (OVEC) and its totally held subsidiary, Indiana-
Kentucky Electric Corporation (IKEC), (collectively, the Companies). All
intercompany transactions have been eliminated in consolidation.
The United States of America, acting through the Department of Energy
(DOE), has contracted, through December 31, 2005, to purchase power for
its Portsmouth, Ohio, uranium enrichment plant from the Companies'
facilities, which had a capability of approximately 2,240 megawatts (MW)
during 1995 and ranged from 2,240 to 2,260 MW during 1996. Steps taken
to comply with the Clean Air Act have resulted in fluctuations of the
capability of the Companies' facilities. The contract demand ranged from
1,305 MW to 1,603 MW during 1996 and 1,274 MW to 1,878 MW during 1995, as
provided under the DOE Power Agreement. Effective January 1, 1997, the
contract demand was 1,670 MW.
On July 1, 1993, the uranium enrichment processing responsibilities of
the United States Government were transferred from DOE to the United
States Enrichment Corporation (USEC). The USEC is a wholly owned
government corporation and an agency and instrumentality of the United
States of America. OVEC modified the DOE Power Agreement to permit DOE
to resell the OVEC power to USEC.
The proceeds from the sale of power to DOE and the sale of power to
Sponsoring Companies (according to the terms of the Inter-Company Power
Agreement) are designed to be sufficient for OVEC to meet its operating
expenses and fixed costs, as well as earn a return on equity before
Federal income taxes. The rate of return is subject to quarterly
adjustment. In addition, the proceeds from power sales include debt
amortization (in lieu of depreciation) and interest expense associated
with financing. Depreciation expense on the 1996 and 1995 income
statements represents an amount equal to debt service payments for the
fuel switching facilities placed into service in 1994. The difference
between debt service payments and straight-line depreciation on these
facilities is recorded as deferred depreciation.
Property additions and replacements are charged to utility plant
accounts. The 1996 and 1995 costs of certain new or replaced property
were billable currently under the terms of the DOE Power Agreement.
Collections for incomplete projects are recorded as customer advances
until completion of the related projects. Upon completion, the property
is closed to plant in service and the related customer advance amount is
transferred to accumulated depreciation. When property is replaced, any
net removal cost is charged to DOE with an offsetting entry made to
accumulated depreciation and no gain or loss is recognized in the income
accounts. Repairs of property are charged to maintenance.
The Companies have retained approximately $4.1 million remaining from a
net settlement of antitrust damage suits and $10.6 million of
undistributed investment tax credits which will be refunded to DOE and
Sponsoring Companies on or before termination of the DOE and Inter-
Company Power Agreements.
Approximately 27% of the Companies' employees are covered by a collective
bargaining agreement that expires August 31, 1999.
For purposes of these statements, the Companies consider temporary cash
investments to be cash equivalents since they are readily convertible
into cash and have maturities of less than three months.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications have been made to 1995 information to conform
with 1996 presentation.
In 1996, the Companies adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 did not have a
material impact on the Companies' financial position and results of
operations.
(2) RELATED PARTY TRANSACTIONS
Transactions with Sponsoring Companies during 1996 and 1995 included the
sale of generated power to them, the purchase of power from them in order
to supplement generated power to meet DOE's demand and minor transactions
for services and materials. The Companies have a Lease Agreement with
Louisville Gas and Electric Company; a Facility Agreement with The
Cincinnati Gas & Electric Company; Arranged Power Agreements with
Louisville Gas and Electric Company, The Cincinnati Gas & Electric
Company, The Dayton Power and Light Company and American Electric Power
Service Corporation as agent for the American Electric Power Companies;
and Transmission Service Agreements with Louisville Gas and Electric
Company, The Cincinnati Gas & Electric Company, The Dayton Power and
Light Company, The Toledo Edison Company and Ohio Edison Company.
Balances due from or to Sponsoring Companies at December 31:
1996 1995
---------- ----------
Accounts receivable $5,473,020 $ 9,691,030
Accounts payable 107,451 200,384
American Electric Power Company, Inc. and a subsidiary company own 44.2%
of the common stock of OVEC. The following is a summary of the principal
services received from the American Electric Power Service Corporation as
authorized by the Companies' Boards of Directors:
1996 1995
---------- ----------
General services $1,637,345 $ 1,840,879
Specific projects 265,211 1,045,786
---------- ----------
$1,902,556 $ 2,886,665
========== ==========
The services are provided in accordance with the operating agreement
dated December 15, 1956, between the Companies and the American Electric
Power Service Corporation. During 1996 and 1995, amounts for specific
projects consist primarily of services provided in conjunction with the
Clean Air Act modifications.
(3) COAL SUPPLY
The Companies had a Coal Reserve and Supply Agreement with a
nonaffiliated company to provide for financing the coal reserves at the
OVEC and IKEC Generating Stations. The provisions of the Agreement
included the terms of acquisition, storage and sale, at cost, to the
Companies of such coal as needed for consumption. Charges to cover the
nonaffiliate's services were $1,217,502 for 1996 and $1,309,414 for 1995.
The coal owned by the nonaffiliated company is reflected as "Coal Sold
Under Agreement to Repurchase" with a corresponding amount reflected as
"Coal Purchase Obligation" in the accompanying balance sheets. At
December 31, 1996 and 1995, coal sold under agreement to repurchase was $
19,000,000 and $21,000,000, respectively.
As part of the Companies' Clean Air Act compliance strategy, OVEC
terminated one of its coal contracts and reduced the future purchases
under another coal contract subsequent to December 31, 1996. The
termination charges of approximately $3.9 million will be recovered under
the terms of the DOE Power Agreement and the Inter-Company Power
Agreement.
The Companies have coal supply agreements with certain nonaffiliated
companies that expire at various dates from the years 1999 through 2004.
Pricing for coal under these contracts is subject to contract provisions
and adjustments.
(4) BORROWING ARRANGEMENTS AND SENIOR SECURED NOTES
On June 23, 1992, OVEC obtained a $10 million term loan agreement. As of
December 31, 1996 and 1995, there were balances of $8.5 million and $9
million, respectively, outstanding under the agreement. The agreement
expired on January 31, 1997 at which time the Company paid $900,000 and
issued a note for the remaining $7.6 million. The note bears a fixed
interest rate of 6.1875% and matures July 31, 1997.
OVEC had bank lines of credit with borrowing limits of $25 million in
1996 and 1995. The current lines of credit were renewed in December 1996
and will expire on December 31, 1997. At December 31, 1996 and 1995,
there were no amounts outstanding on the lines of credit. Interest
accrues on outstanding borrowings at the bank's fluctuating or fixed base
rate. Interest expense related to lines-of-credit borrowings was $0 in
1996 and $468,822 in 1995. During 1996 and 1995, OVEC incurred quarterly
service fees of one-eighth and three-sixteenths of one percent,
respectively, based on the borrowing limits of the lines of credit.
OVEC financed a portion of the Clean Air Act modifications through the
issuance of a private debt placement of $80 million of senior secured
notes (Notes) with several institutional investors. The placement
consisted of $40 million of Series A Notes, bearing interest at a monthly
coupon rate of 6.37% per annum, and $40 million of Series B Notes,
bearing interest at a monthly coupon rate of 6.57% per annum. The Notes
will mature on December 1, 2005. OVEC used the proceeds from the
issuance of the Notes to fund the modifications of the IKEC Generating
Station relating to the Clean Air Act Amendments of 1990. Unrequired
proceeds of $0.2 million and investment income of $1.8 million were
returned to note holders by satisfying monthly interest payments and DOE
was credited for $2 million in 1996. The monthly principal and interest
payments of $871,640 are fixed from June 1, 1995 until maturity. The
principal and interest payments payable by OVEC are billable to DOE under
the terms of the DOE Power Agreement. The principal balance outstanding
was $70.7 million and $76.4 million as of December 31, 1996 and 1995,
respectively. Debt proceeds used to finance construction at IKEC are
reflected as noninterest-bearing intercompany advances in the
accompanying financial statements.
(5) IRREVOCABLE LETTER OF CREDIT
IKEC established an irrevocable standby letter of credit, effective July
15, 1995, up to an aggregate amount of $7,668,333 as security for closure
and post-closure costs related to the dry fly ash landfill located at
IKEC's Generating Station. This letter of credit was established to
fulfill financial responsibility requirements under Indiana law. The
letter of credit expires July 15, 1997, but automatically will be
extended for a period of one year on that and each successive expiration
date unless the State of Indiana Department of Environmental Management
and IKEC are notified one hundred twenty days prior to the expiration
date. IKEC is assessed service fees of three-eighths of one percent of
the aggregate amount of the letter of credit. Any site remediation costs
would be reimbursable costs under the terms of the DOE Power Agreement.
(6) FEDERAL INCOME TAXES
OVEC and IKEC file a consolidated Federal income tax return. All current
Federal income tax financial reporting entries are recorded on OVEC's
books. Deferred taxes, resulting from differences between the tax and
book bases of assets and liabilities, have been recorded on a separate
company basis.
OVEC and IKEC record deferred tax charges or credits based on differences
between book and tax bases of assets and liabilities measured using the
enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Deferred tax charges or credits are adjusted
for future changes in tax rates.
The deferred Federal income tax benefits represent deferred taxes on
depreciation differences, as well as a gross-up requirement on the
unamortized investment tax credit balance and other miscellaneous timing
differences. OVEC and IKEC have recorded offsetting amounts reflected
as deferred credit-tax benefits representing the amount of deferred tax
assets that may be refunded to DOE and Sponsoring Companies, pursuant to
the applicable agreements among the parties, as the deferred tax assets
are realized.
A reconciliation of the Federal statutory rate to taxes on income for the
years ended December 31 is as follows:
1996 1995
----------- ----------
Tax expense at statutory rate $ 674,214 $ 1,735,867
Tax on replacements and additional
facilities, net (1,097,229) 908,515
Other items, net 91,075 284,182
----------- ----------
Tax (benefit) expense on income
statement $ (331,940) $ 2,928,564
=========== ==========
Effective tax rate (16.7)% 57.4%
=========== ==========
The Companies do not reflect a deferred income tax for the difference
between book and tax depreciation on certain assets for which the DOE
Power Agreement provides for the flow through of such difference. In
1996, the tax benefit was a result of the excess of 1995 tax depreciation
over 1995 book depreciation reflected in the 1996 rates to DOE.
Federal income tax (benefit) expense for the years ended December 31
consists of the following:
1996 1995
----------- ----------
Federal income tax currently
payable (refundable) $ (605,124) $ 1,445,852
Increase resulting from:
Deferred taxes -
Excess of tax over book
depreciation on pollution control
facilities and other 253,515 1,462,832
Rights-of-way and clearing rights-of-
way depreciation not charged
against book income 19,669 19,880
----------- ----------
Total Federal income tax
(benefit) expense $ (331,940) $ 2,928,564
=========== ==========
(7) PENSION AND SAVINGS PLANS
The Companies have a noncontributory defined benefit pension plan (the
Plan) covering substantially all of their employees. The benefits are
based on years of service and each employee's highest consecutive thirty-
six month compensation period. Employees are vested in the Plan after
five years of service with the Companies.
Pension expense for 1996 and 1995 was $829,182 and $1,058,268,
respectively. Expense is recognized as amounts are contributed to the
Plan, and the funding policy is to contribute the maximum amount that can
be deducted for Federal income tax purposes. The accumulated difference
between recorded pension expense and the yearly net periodic pension
expense as calculated under SFAS No. 87 is billable under the DOE Power
Agreement when contributed to the pension fund.
The net periodic pension expense as actuarially determined for the years
ended December 31, 1996 and 1995, included the following components:
1996 1995
----------- ----------
Service cost - benefits earned
during the year $ 2,158,164 $ 1,848,771
Interest cost on projected benefit
obligation 5,665,385 5,508,306
Actual return on Plan assets (4,839,978) (11,467,819)
Net amortization and deferral (1,591,161) 5,479,165
----------- ----------
Net periodic pension expense $ 1,392,410 $ 1,368,423
=========== ==========
The Plan's assets consist of individual annuities which were purchased
from the inception of the Plan through 1970 and a group annuity contract.
The following table sets forth the Plan's funded status and the net
accrued pension expense recognized on the balance sheets at December 31,
1996 and 1995:
1996 1995
----------- ----------
Actuarial present value of
benefit obligations:
Vested benefits $63,953,845 $64,820,395
Nonvested benefits 6,810,784 6,702,790
----------- ----------
Accumulated benefit obligation $70,764,629 $71,523,185
=========== ==========
Plan assets at fair value $94,282,096 $93,178,403
Actuarial present value of projected
benefit obligation for service
rendered to date 85,379,588 87,704,281
----------- ----------
Plan assets in excess of projected
benefit obligation 8,902,508 5,474,122
Unrecognized net gain from past
experience (26,759,009) (23,275,075)
Unrecognized prior service cost 8,536,320 9,083,000
Unrecognized net obligation being
amortized over approximately 16 years(239,000) (278,000)
----------- -----------
Net accrued pension expense $(9,559,181) $(8,995,953)
=========== ===========
The weighted-average discount rates were 7.0% and 6.5%, respectively, at
December 31, 1996 and 1995, and the expected long-term rate of return on
assets used in determining the actuarial present value of the projected
benefit obligation was 7.0% for 1996 and 1995. The rate of increase in
future compensation levels was 4.5% in 1996 and 1995.
The Companies have a trusteed defined contribution supplemental pension
and savings plan which includes 401(k) features and is available to
employees who have met eligibility requirements. Company contributions
to the savings plan are made in amounts equal to 50% of the employee-
participants' contributions up to 6% of regular compensation. Benefits
to participating employees are based solely upon amounts contributed to
the participants' accounts and investment earnings. By its nature, the
plan is fully funded at all times. The cost of the savings plan for 1996
and 1995 was $791,716 and $789,469, respectively.
(8) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS AND POSTEMPLOYMENT
BENEFITS
The Companies provide certain health care and life insurance benefits for
retired employees. Substantially all of the Companies' employees become
eligible for these benefits if they reach retirement age while working
for the Companies. These and similar benefits for active employees are
provided through employer funding and insurance policies.
The Companies record the expected cost of postretirement benefits over
the service period during which such benefits are earned. The 1992
modification of the DOE Power Agreement provides cost recovery provisions
for these accrued postretirement health care and life insurance benefits.
As of December 31, 1996 and 1995, the plan was unfunded.
The cost of these benefits for all recipients for 1996 and 1995 was
$2,898,000 and $3,097,000, respectively. Cash payments for such benefits
in 1996 and 1995 for retirees were $1,318,000 and $1,086,000,
respectively, and were expensed and billed to DOE under the terms of the
DOE Power Agreement. The remaining accrued postretirement benefit
obligation has been recorded as a deferred liability with a corresponding
deferred charge, representing the unrecognized postretirement benefits
costs billable in the future under the terms of the DOE Power Agreement.
The postretirement cost components for 1996 and 1995 were as follows:
1996 1995
----------- ----------
Service cost - benefits earned
during the period $ 864,000 $ 837,000
Interest cost on service cost and
projected benefits obligation 2,034,000 2,260,000
----------- ----------
Net postretirement benefits cost $ 2,898,000 $ 3,097,000
=========== ==========
The accrued postretirement benefits liability as of December 31, 1996 and
1995, is as follows:
1996 1995
----------- ----------
Accumulated postretirement benefits
obligation:
Retirees, dependents and surviving
spouses $14,921,000 $13,758,000
Active employees
fully eligible 1,674,000 2,170,000
Active employees
not fully eligible 15,479,000 14,911,000
----------- ----------
Total accumulated postretirement
benefits obligation 32,074,000 30,839,000
Unrecognized net (loss)/gain 2,991,000 2,646,000
----------- ----------
Accrued postretirement benefits
liability $35,065,000 $33,485,000
=========== ==========
The actuarial assumptions used to determine the accumulated
postretirement benefits obligation included weighted-average discount
rates of 7.0% and 6.5% at December 31, 1996 and 1995, and the rate
increases in future compensation levels were 4.5% at December 31, 1996
and 1995. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation at December 31, 1996, was
10%, gradually declining to 5.5% in 2005 and thereafter. A one-
percentage point increase in the health care cost trend rate would
increase the 1996 interest and service costs by approximately $366,000
and the accumulated postretirement benefits obligation as of December 31,
1996, by $3,037,000.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," which requires the Companies to accrue the
estimated cost of benefits provided to former or inactive employees after
employment but before retirement. Such benefits include, but are not
limited to, salary continuations, supplemental unemployment, severance,
disability (including workers' compensation), job training, counseling
and continuation of benefits such as health care and life insurance
coverage.
The Companies adopted the standard in 1994. The liability is offset with
a corresponding deferred charge and represents unrecognized
postemployment benefits billable in the future under the terms of the DOE
Power Agreement. The accrued cost of such benefits was $1,265,593 and
$1,353,348 at December 31, 1996 and 1995, respectively.
(9) ENVIRONMENTAL MATTERS
The Clean Air Act Amendments of 1990 required the Companies to reduce
their annual sulfur dioxide emissions beginning January 1, 1995. The
Companies selected a fuel switching strategy to comply with the emission
restrictions. The Companies received $466,003 and $413,478 in 1996 and
1995, respectively, from the United States Environmental Protection
Agency (EPA) as a result of the mandatory sale of certain of OVEC's and
IKEC's sulfur dioxide (SO2) emission allowances. The sale of allowance
proceeds have been recorded as a deferred credit on the financial
statements. In 1995, OVEC purchased $925,450 in SO2 allowances to
replace allowances sold by the EPA. In 1996, OVEC purchased $2,850,000
in SO2 allowances in order to remain in compliance with emission
restrictions for 1996. Subsequent to year end, OVEC entered into a
contract to purchase $18,748,800 in SO2 allowances for vintage years 2003
and prior. The cost of such allowances are included in the cost of fuel
consumed when used.
The generation of electricity involves the use of materials and the
creation of by-products that are environmentally regulated. The
Companies have incurred substantial costs over the years to store and
dispose of these materials and by-products. The capital expenditures and
operating expenses are recoverable under the terms of the DOE and Inter-
Company Power Agreements. New environmental laws and regulations could
result in significant additional costs to the Companies to maintain
compliance.
On December 19, 1996, the U.S. EPA issued final Title IV NOx regulations.
These regulations established the NOx emission limits for Phase II, Group
II Boilers which include those at the OVEC and IKEC Generating Stations.
The emission rate for the OVEC-IKEC boilers is 0.84 lb/mmBtu and is based
on retrofit of gas reburning or selective catalytic reduction (SCR) and
must be complied with by January 1, 2000. The Companies have retained an
outside consultant to estimate the cost of compliance utilizing the SCR
technology. The cost of compliance with the NOX regulations could be
substantial.
(10) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107) requires
disclosure of the fair value of certain financial instruments. For
purposes of this disclosure, the fair value of a financial instrument is
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale. Fair value may be based on quoted market prices for
the same or similar financial instruments or on valuation techniques such
as the present value of estimated future cash flows using a discount rate
commensurate with the risks involved.
The estimates of fair value required under SFAS No. 107 require the
application of broad assumptions and estimates. Accordingly, any actual
exchange of such financial instruments could occur at values
significantly different from the amounts disclosed. As cash and
temporary cash investments, current receivables, current payables, and
certain other short-term financial instruments are all short term in
nature, their carrying amounts approximate fair value. The fair value of
the senior secured notes was estimated using discounted cash flow
analyses based on current incremental borrowing rates for similar types
of borrowing arrangements.
1996 1995
----------- ----------
Fair value $67,996,634 $78,870,879
Recorded value 70,727,840 76,410,320
(11) OPERATING LEASE
OVEC has entered into an operating lease to secure railcars for the
transportation of coal in connection with the fuel switching
modifications at the IKEC Generating Station. The basic term of the
lease extends through December 30, 2005, with semiannual lease payments
beginning June 30, 1995. The annual lease cost is $2,113,820 per year
through the term of the agreement.
<PAGE>
<TABLE>
<CAPTION>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR TO DATE SEPTEMBER 30, 1997
<S> <C>
OPERATING REVENUES:
Sales of electric energy to:
Department of Energy $174,221,822
Sponsoring Companies 47,916,045
Other 601,219
------------
Total operating revenues 222,739,086
------------
OPERATING EXPENSES:
Fuel consumed in operation 152,754,710
Purchased power 469,153
Other operation 29,060,281
Maintenance 22,332,687
Depreciation - Coal Switch 4,509,120
Taxes, other than Federal income taxes 6,526,224
Federal income taxes 1,626,711
------------
Total operating expenses 217,278,886
------------
Operating income 5,460,200
INTEREST INCOME AND OTHER 309,058
------------
Income before interest charges 5,769,258
INTEREST EXPENSE 3,919,936
------------
Net income 1,849,322
RETAINED EARNINGS, January 1, 1997 2,430,811
CASH DIVIDENDS ON COMMON STOCK (1,050,000)
------------
RETAINED EARNINGS, September 30, 1997 $ 3,230,133
============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
ASSETS
------
<S> <C>
ELECTRIC PLANT -- at original cost $659,687,898
Less-Accumulated provisions for
depreciation and amortization 594,218,538
------------
65,469,360
Construction work in progess 5,998,136
------------
71,467,496
------------
CURRENT ASSETS:
Cash and cash equivalents 6,166,727
Accounts receivable 20,160,612
Interest receivable 1,381
Coal in storage, at average cost 13,246,933
Coal sold under agreement to repurchase 19,000,000
Materials and supplies, at average cost 20,723,048
Property taxes 900,000
SO2 Allowances 14,891,670
Prepaid expenses and other 2,071,586
------------
Total Current Assets 97,161,957
------------
DEFERRED CHARGES AND OTHER:
Unamortized debt expense 327,087
Future Federal income tax benefits 58,729,075
Unrecognized postretirement benefits expense 35,065,000
Unrecognized postemployment benefits expense 1,265,593
Unrecognized pension expense 9,559,181
Deferred depreciation - Coal Switch 5,208,263
Prepaids and other 4,545,210
------------
Total Deferred Charges 114,699,409
------------
TOTAL ASSETS $283,328,862
============
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
OHIO VALLEY ELECTRIC CORPORATION
AND SUBSIDIARY COMPANY
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C>
CAPITALIZATION:
Common stock, $100 par value -
Authorized, 300,000 shares;
outstanding, 100,000 shares $ 10,000,000
Senior secured notes 64,666,520
Retained earnings 3,230,133
------------
77,896,653
CURRENT LIABILITIES:
Lines-of-credit borrowings 20,000,000
Notes payable maturing in one year 7,600,000
Current portion of long-term debt 1,552,200
Accounts payable 22,282,617
Coal purchase obligation 19,000,000
Accrued taxes 6,754,288
Deferred income 3,438
Accrued interest and other 1,687,719
------------
78,880,262
------------
DEFERRED CREDITS:
Investment tax credits 10,610,318
Accrued pension liability 9,559,181
Customer advances for construction 4,215,909
Net antitrust settlement 4,111,809
Deferred credit - tax benefits 60,061,874
Postretirement benefits obligation 35,065,000
Postemployment benefits obligation 1,265,593
Deferred credit - S02 allowance 1,661,262
Deferred credit - other 1,001
------------
126,551,947
------------
TOTAL CAPITALIZATION AND LIABILITIES $283,328,862
============
</TABLE>
OHIO VALLEY ELECTRIC CORPORATION (OVEC)
PROJECTED WORKING FUNDS FLOW STATEMENT
FOR THE CALENDAR YEARS 1998 THROUGH 2001
($ MILLIONS)
<TABLE>
<CAPTION>
Beginning Ending
USE OF FUNDS Balance 1998 1999 2000 2001 Balance
<S> <C> <C> <C> <C> <C> <C>
Plant and Capital Improvements 666 11 13 8 10 708
Fuel in Storage 32 0 0 0 0 32
SO2 Allowances 16 13 13 8 8 57
Material and Supplies 21 (1) (1) (1) (1) 17
TOTAL 734 23 25 15 17 814
SOURCE OF FUNDS
Contractual Funding (1) 596 17 20 15 18 686
Common Equity 10 0 0 0 0 10
Retained Earnings 2 0 0 0 0 2
Long-Term Debt (Net of Maturities) (2) 65 (6) (7) (7) (8) 37
Term Loan 8 (1) (1) (1) (1) 4
Coal Reserve and Supply Agreement 16 0 0 0 0 16
Other 17 (1) (1) (1) (1) 13
Short-Term Debt (Net of Maturities) 20 14 14 9 9 66
TOTAL 734 23 25 15 17 814
SHORT-TERM DEBT BALANCES
Beginning 20 34 48 57
Ending 34 46 57 66
</TABLE>
(1) Plant and Capital Improvements are funded through a Power
Sales Agreement with the United States Department of Energy.
These capital payments may be through direct reimbursements
of financed funds with debt redemption payments.
(2) Long-Term Debt includes two $40 million issues of senior
secured notes at 6.37% and 6.576% due 12/1/05.<PAGE>
