-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dd0KUbjE6vkCZNvAY2y0YfGzPXsFw80jd7lBMZk7C0cOowUANcJbCq4TLunn4jIW LDpW64ck8Tdgh+k61dYbYw== 0000004904-98-000053.txt : 19980515 0000004904-98-000053.hdr.sgml : 19980515 ACCESSION NUMBER: 0000004904-98-000053 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ELECTRIC POWER COMPANY INC CENTRAL INDEX KEY: 0000004904 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 134922640 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03525 FILM NUMBER: 98620111 BUSINESS ADDRESS: STREET 1: 1 RIVERSIDE PLZ CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142231000 FORMER COMPANY: FORMER CONFORMED NAME: KINGSPORT UTILITIES INC DATE OF NAME CHANGE: 19660906 10-Q 1 THE CONSOLIDATED 10-Q FOR AMERICAN ELECTRIC POWER CO., INC, AND SUBSIDIARIES IS REQUESTED TO BE INCLUDED AS PART OF THE FILING. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended MARCH 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period from to Commission Registrant; State of Incorporation; I. R. S. Employer File Number Address; and Telephone Number Identification No. 1-3525 AMERICAN ELECTRIC POWER COMPANY, INC. 13-4922640 (A New York Corporation) 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 0-18135 AEP GENERATING COMPANY (An Ohio Corporation) 31-1033833 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 1-3457 APPALACHIAN POWER COMPANY (A Virginia Corporation) 54-0124790 40 Franklin Road, Roanoke, Virginia 24011 Telephone (540) 985-2300 1-2680 COLUMBUS SOUTHERN POWER COMPANY (An Ohio Corporation) 31-4154203 215 North Front Street, Columbus, Ohio 43215 Telephone (614) 464-7700 1-3570 INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation) 35-0410455 One Summit Square P.O. Box 60, Fort Wayne, Indiana 46801 Telephone (219) 425-2111 1-6858 KENTUCKY POWER COMPANY (A Kentucky Corporation) 61-0247775 1701 Central Avenue, Ashland, Kentucky 41101 Telephone (800) 572-1141 1-6543 OHIO POWER COMPANY (An Ohio Corporation) 31-4271000 301 Cleveland Avenue S.W., Canton, Ohio 44702 Telephone (330) 456-8173 AEP Generating Company, Columbus Southern Power Company and Kentucky Power Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q. Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of American Electric Power Company, Inc. Common Stock, par value $6.50, at April 30, 1998 was 190,428,046. /TABLE
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES FORM 10-Q For The Quarter Ended March 31, 1998
INDEX Page Part I. FINANCIAL INFORMATION American Electric Power Company, Inc. and Subsidiary Companies: Consolidated Statements of Income and Statements of Retained Earnings. . . . . . . . . . . . . . A-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . A-2 - A-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . A-4 Notes to Consolidated Financial Statements . . . . . . . . . A-5 - A-7 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . A-8 - A-10 AEP Generating Company: Statements of Income and Statements of Retained Earnings . . B-1 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . B-2 - B-3 Statements of Cash Flows . . . . . . . . . . . . . . . . . . B-4 Notes to Financial Statements. . . . . . . . . . . . . . . . B-5 Management's Narrative Analysis of Results of Operations . . B-6 - B-7 Appalachian Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . . C-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . C-2 - C-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . C-4 Notes to Consolidated Financial Statements . . . . . . . . . C-5 - C-6 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . C-7 - C-8 Columbus Southern Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . . D-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . D-2 - D-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . D-4 Notes to Consolidated Financial Statements . . . . . . . . . D-5 - D-6 Management's Narrative Analysis of Results of Operations . . D-7 - D-8 Indiana Michigan Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . . E-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . E-2 - E-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . E-4 Notes to Consolidated Financial Statements . . . . . . . . . E-5 - E-6 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . E-7 - E-8 Kentucky Power Company: Statements of Income and Statements of Retained Earnings . . F-1 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . F-2 - F-3 Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-4 Notes to Financial Statements. . . . . . . . . . . . . . . . F-5 - F-6 Management's Narrative Analysis of Results of Operations . . F-7 - F-8 AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES FORM 10-Q For The Quarter Ended March 31, 1998 INDEX Page Ohio Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . G-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . G-2 - G-3 Consolidated Statements of Cash Flows. . . . . . . . . . . G-4 Notes to Consolidated Financial Statements . . . . . . . . G-5 - G-6 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . G-7 - G-8 Part II. OTHER INFORMATION Item 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Item 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3 This combined Form 10-Q is separately filed by American Electric Power Company, Inc., AEP Generating Company, Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company and Ohio Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per-share amounts) (UNAUDITED)
Three Months Ended March 31, 1998 1997 OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . $2,170,582 $1,492,069 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 437,979 408,289 Purchased Power. . . . . . . . . . . . . . . . . . . . . 708,502 26,408 Other Operation. . . . . . . . . . . . . . . . . . . . . 291,499 302,280 Maintenance. . . . . . . . . . . . . . . . . . . . . . . 119,943 99,385 Depreciation and Amortization. . . . . . . . . . . . . . 143,616 151,952 Taxes Other Than Federal Income Taxes. . . . . . . . . . 125,173 126,614 Federal Income Taxes . . . . . . . . . . . . . . . . . . 87,938 105,163 TOTAL OPERATING EXPENSES. . . . . . . . . . . . . 1,914,650 1,220,091 OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 255,932 271,978 NONOPERATING INCOME. . . . . . . . . . . . . . . . . . . . 794 4,509 INCOME BEFORE INTEREST CHARGES AND PREFERRED DIVIDENDS . . 256,726 276,487 INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . 103,551 93,822 PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES. . . 2,589 10,103 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 150,586 $ 172,562 AVERAGE NUMBER OF SHARES OUTSTANDING . . . . . . . . . . . 190,084 188,347 EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . $0.79 $0.92 CASH DIVIDENDS PAID PER SHARE. . . . . . . . . . . . . . . $0.60 $0.60 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended March 31, 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . . . . . . . . $1,605,017 $1,547,746 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 150,586 172,562 DEDUCTIONS: Cash Dividends Declared. . . . . . . . . . . . . . . . . 113,996 112,943 Other. . . . . . . . . . . . . . . . . . . . . . . . . . - (411) BALANCE AT END OF PERIOD . . . . . . . . . . . . . . . . . $1,641,607 $1,607,776 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $ 9,497,574 $ 9,493,158 Transmission . . . . . . . . . . . . . . . . . . . . 3,531,071 3,501,580 Distribution . . . . . . . . . . . . . . . . . . . . 4,641,887 4,654,234 General (including mining assets and nuclear fuel) . 1,610,709 1,604,671 Construction Work in Progress. . . . . . . . . . . . 408,740 342,842 Total Electric Utility Plant . . . . . . . . 19,689,981 19,596,485 Accumulated Depreciation and Amortization. . . . . . 8,080,362 7,963,636 NET ELECTRIC UTILITY PLANT . . . . . . . . . 11,609,619 11,632,849 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 1,483,751 1,358,810 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 133,190 91,481 Accounts Receivable (net). . . . . . . . . . . . . . 714,868 667,518 Fuel . . . . . . . . . . . . . . . . . . . . . . . . 218,597 224,967 Materials and Supplies . . . . . . . . . . . . . . . 263,178 263,613 Accrued Utility Revenues . . . . . . . . . . . . . . 163,345 189,191 Prepayments. . . . . . . . . . . . . . . . . . . . . 92,457 81,366 TOTAL CURRENT ASSETS . . . . . . . . . . . . 1,585,635 1,518,136 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 1,833,663 1,817,540 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 285,735 288,011 TOTAL. . . . . . . . . . . . . . . . . . . $16,798,403 $16,615,346 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock-Par Value $6.50: 1998 1997 Shares Authorized . . . .300,000,000 300,000,000 Shares Issued . . . . . .199,374,727 198,989,981 (8,999,992 shares were held in treasury) . . . . . $ 1,295,936 $ 1,293,435 Paid-in Capital. . . . . . . . . . . . . . . . . . . 1,795,378 1,778,782 Retained Earnings. . . . . . . . . . . . . . . . . . 1,641,607 1,605,017 Total Common Shareholders' Equity. . . . . . 4,732,921 4,677,234 Cumulative Preferred Stocks of Subsidiaries: Not Subject to Mandatory Redemption. . . . . . . . 46,566 46,724 Subject to Mandatory Redemption. . . . . . . . . . 127,605 127,605 Long-term Debt . . . . . . . . . . . . . . . . . . . 5,181,556 5,129,463 TOTAL CAPITALIZATION . . . . . . . . . . . . 10,088,648 9,981,026 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 1,307,883 1,246,537 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 120,285 294,454 Short-term Debt. . . . . . . . . . . . . . . . . . . 640,150 555,075 Accounts Payable . . . . . . . . . . . . . . . . . . 342,162 353,256 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 416,331 380,771 Interest Accrued . . . . . . . . . . . . . . . . . . 110,284 76,361 Obligations Under Capital Leases . . . . . . . . . . 100,784 101,089 Other. . . . . . . . . . . . . . . . . . . . . . . . 325,541 322,687 TOTAL CURRENT LIABILITIES. . . . . . . . . . 2,055,537 2,083,693 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 2,552,020 2,560,921 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 370,502 376,250 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 229,001 231,320 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 194,812 135,599 CONTINGENCIES (Note 5) TOTAL. . . . . . . . . . . . . . . . . . . $16,798,403 $16,615,346 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 150,586 $ 172,562 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 153,576 151,716 Deferred Federal Income Taxes. . . . . . . . . . . . . . 8,333 (8,192) Deferred Investment Tax Credits. . . . . . . . . . . . . (5,748) (5,836) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (47,350) (45,745) Fuel, Materials and Supplies . . . . . . . . . . . . . . 6,805 25,918 Accrued Utility Revenues . . . . . . . . . . . . . . . . 25,846 21,025 Prepayments. . . . . . . . . . . . . . . . . . . . . . . (11,091) (25,553) Accounts Payable . . . . . . . . . . . . . . . . . . . . (11,094) (47,478) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 35,560 62,307 Interest Accrued . . . . . . . . . . . . . . . . . . . . 33,923 36,406 Rent Accrued - Rockport Plant Unit 2 . . . . . . . . . . 36,928 36,928 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (37,284) 42,953 Net Cash Flows From Operating Activities . . . . . . 338,990 417,011 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (153,025) (125,687) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . (7,645) 1,048 Net Cash Flows Used For Investing Activities . . . . (160,670) (124,639) FINANCING ACTIVITIES: Issuance of Common Stock . . . . . . . . . . . . . . . . . 18,760 19,572 Issuance of Long-term Debt . . . . . . . . . . . . . . . . 184,374 274,352 Change in Short-term Debt (net). . . . . . . . . . . . . . 85,075 14,623 Retirement of Cumulative Preferred Stock . . . . . . . . . (117) (382,932) Retirement of Long-term Debt . . . . . . . . . . . . . . . (310,707) (76,500) Dividends Paid on Common Stock . . . . . . . . . . . . . . (113,996) (112,943) Net Cash Flows Used For Financing Activities . . . . (136,611) (263,828) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 41,709 28,544 Cash and Cash Equivalents at Beginning of Period . . . . . . 91,481 57,539 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 133,190 $ 86,083 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $66,422,000 and $54,005,000 and for income taxes was $1,946,000 and $3,839,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $47,365,000 and $56,916,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial state-ments should be read in conjunction with the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING AND RELATED ACTIVITIES During the first three months of 1998, subsidiaries issued two series of senior unsecured notes totaling $152 million ($52 million at 6.51% and $100 million at 7.20% due in 2008 and 2038, respectively,) and increased the outstanding balance under a long-term revolving credit agreement by $15 million. The proceeds and short-term debt were used during the first quarter to retire: first mortgage bonds totaling $250 million with interest rates ranging from 6-3/4% to 9.15% and due dates ranging from 1998 to 2022, $25 million of variable rate pollution control revenue bonds due in 2025 and a $16.7 million term loan with an interest rate of 6.85% at maturity. As a result of the redemption of the 6-3/4% series first mortgage bonds due in 1998, the restriction on the use of retained earnings for the payment of common stock dividends was reduced to $6 million. In April 1998 a subsidiary issued $100 million of 7.30% senior unsecured notes due in 2038 and in May another subsidiary redeemed $35 million of its 7% series first mortgage bonds at maturity. A subsidiary called $100 million of outstanding first mortgage bonds ($50 million each at 8.25% and 8.10%) due in 2002 for early redemption in May 1998 and issued $140 million of 7-3/8% senior unsecured notes due in 2038. Consequently the bonds were not reclassified as a current liability on the balance sheet. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter ended March 31, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP did not have a material effect on results of operations, cash flows or financial condition. 4. INVESTMENT IN YORKSHIRE The Company has a 50% ownership interest in Yorkshire Power Group Limited which is accounted for using the equity method of accounting and included in nonoperating income. The following amounts which are not included in AEP's consolidated financial statements represent summarized consolidated financial information of Yorkshire Power Group Limited for the three months ended March 31, 1998: (in millions) Income Statement Data: Operating Revenues $663.2 Operating Income 89.7 Net Income 6.9 5. CONTINGENCIES Taxes As discussed in Note 10, "Federal Income Taxes", of the Notes to Consolidated Financial Statements in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. The Company filed a brief with the IRS National Office refuting the agents' position. No ruling has been received from the IRS National Office. Although no adjustments have been formally proposed, a disallowance of the COLI interest deductions through March 31, 1998 would reduce earnings by approximately $296 million (including interest). No provisions for this amount have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations and cash flows. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. Cook Plant Shutdown As discussed in Note 4 of the Notes to Consolidated Financial Statements in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition, both units of the Cook Plant were shut down in September 1997 due to questions regarding the operability of certain safety systems during a Nuclear Regulatory Commission (NRC) architect engineer design inspection. The NRC issued a Confirmatory Action Letter in September 1997 requiring the Company to address the issues identified in the letter. Certain issues identified in the letter have been addressed. The Company is working with the NRC to resolve the remaining issues in the letter and other issues related to the restart of the units. 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 reasonable period of time, it could have a material adverse impact on results of operations, cash flows and possibly financial condition. Other The Company continues to be involved in certain other matters discussed in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 1998 vs. FIRST QUARTER 1997 RESULTS OF OPERATIONS Net income decreased $22 million or 13% due primarily to the effect of mild weather on electricity sales to residential customers and damage from two severe snowstorms. The outage of the Cook Nuclear Plant limited the amount of energy the AEP System was able to sell to other utilities in the first quarter of 1998. Income statement line items which changed significantly were: Increase (Decrease) (in millions) % Operating Revenues . . . . . . . . . . $678.5 45 Fuel Expense . . . . . . . . . . . . . 29.7 7 Purchased Power Expense. . . . . . . . 682.1 N.M. Other Operation Expense. . . . . . . . (10.8) (4) Maintenance Expense. . . . . . . . . . 20.6 21 Depreciation and Amortization. . . . . (8.3) (5) Federal Income Taxes . . . . . . . . . (17.2) (16) Interest Charges . . . . . . . . . . . 9.7 10 Preferred Stock Dividend Requirements of Subsidiaries . . . . (7.5) (74) N.M. = Not Meaningful The significant increase in operating revenues was predominantly due to a substantial increase in wholesale sales from a new power marketing business started in July 1997. The power marketing business involves the purchase and sale of large quantities of electricity. The increase in wholesale sales and related revenues were offset by a nearly equivalent increase in power purchases by the new power marketing operation resulting in a minor positive impact on net income. While wholesale sales increased, retail sales were unchanged as a 4% decline in weather-sensitive residential sales was offset by growth related increases in commercial and industrial sales. Moderate temperatures throughout the winter months were responsible for the decrease in residential customers' energy usage. The increase in fuel expense is primarily attributable to an increase in the average cost of fuel consumed reflecting the unavailability of lower cost nuclear generation due to the unplanned outage of both nuclear units in 1998. Purchases of electricity for the power marketing business caused the significant increase in purchased power expense. The decrease in other operation expense is primarily due to a refund of nuclear insurance policy premiums and reduced employee pension and benefit costs. Maintenance expense increased due to expenditures for repair of transmission and distribution facilities resulting from two snowstorms in the Company's Kentucky, Virginia and West Virginia service territories. The reduction in depreciation and amortization expense reflects the completion of the amortization of deferrals under rate phase-in plans by two subsidiaries. Net income was not affected by the completion of the phase-in amortizations since the recovery of the amortization in revenues ceased concurrent with the amortization. The decrease in federal income tax expense attributable to operations was primarily due to a decrease in pre-tax operating income and changes in certain book/tax differences accounted for on a flow-through basis for rate-making purposes. Additional borrowings to fund the Company's non-regulated operations (including the investment in Yorkshire Electricity Group plc) and to refinance reacquired preferred stock were the primary reason interest charges increased. Preferred stock dividend requirements of subsidiaries decreased due to the reacquisition of over 4 million shares of cumulative preferred stock in March and April 1997. FINANCIAL CONDITION Total plant and property additions including capital leases for the current period were $201 million. During the quarter subsidiaries issued $167 million principal amount of long-term debt at interest rates ranging from 5.8675% to 7.20%, retired $267 million principal amount of fixed rate long-term debt at interest rates ranging from 6.75% to 9.15% and $25 million of daily variable rate debt. In April 1998 a subsidiary issued $100 million of 7.30% senior unsecured notes due in 2038 and in May another subsidiary redeemed $35 million of its 7% series first mortgage bonds at maturity. A subsidiary called $100 million of outstanding first mortgage bonds ($50 million each at 8.10% and 8.25%) due in 2002 for early redemption in May 1998 and issued $140 million of 7-3/8% senior unsecured notes due in 2038. Consequently the bonds were not reclassified as a current liability on the balance sheet. Market Risks The Company as a major power producer, a trader of electricity and gas and an investor in foreign operations has certain financial market risks inherent in its routine business activities. The trading of electricity and gas and related future contracts exposes the Company to commodity price fluctuations. The Company is subject to currency translation rate risk from investment in two foreign currency denominated joint ventures. Short- and long-term borrowings to fund business operations exposes the Company to changes in interest rates. From December 31, 1997 through March 31, 1998 there have been no material changes in the Company's exposures to market risks from that discussed under "Market Risks" in the December 31, 1997 Management's Discussion and Analysis of Results of Operations and Financial Condition. AEP GENERATING COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . $54,052 $59,096 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,501 27,350 Rent - Rockport Plant Unit 2 . . . . . . . . . . . . . . . . 17,071 17,071 Other Operation. . . . . . . . . . . . . . . . . . . . . . . 2,649 3,130 Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . 2,178 2,386 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 5,412 5,395 Taxes Other Than Federal Income Taxes. . . . . . . . . . . . 943 879 Federal Income Taxes . . . . . . . . . . . . . . . . . . . . 962 757 TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . 51,716 56,968 OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . 2,336 2,128 NONOPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 829 850 INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . . . . . 3,165 2,978 INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . . . 785 941 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,380 $ 2,037 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended March 31, 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . $2,528 $1,886 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 2,380 2,037 CASH DIVIDENDS DECLARED. . . . . . . . . . . . . . . . . . . . 3,176 1,286 BALANCE AT END OF PERIOD . . . . . . . . . . . . . . . . . . . $1,732 $2,637 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Financial Statements. /TABLE AEP GENERATING COMPANY BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production. . . . . . . . . . . . . . . . . . . . . . . . $627,953 $627,803 General . . . . . . . . . . . . . . . . . . . . . . . . . 3,138 3,137 Construction Work in Progress . . . . . . . . . . . . . . 3,688 2,510 Total Electric Utility Plant. . . . . . . . . . . 634,779 633,450 Accumulated Depreciation. . . . . . . . . . . . . . . . . 262,636 257,191 NET ELECTRIC UTILITY PLANT. . . . . . . . . . . . 372,143 376,259 CURRENT ASSETS: Cash and Cash Equivalents . . . . . . . . . . . . . . . . 127 237 Accounts Receivable - Affiliated Companies. . . . . . . . 17,731 20,710 Fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . 13,916 10,107 Materials and Supplies. . . . . . . . . . . . . . . . . . 4,258 4,246 Prepayments . . . . . . . . . . . . . . . . . . . . . . . 340 368 TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . 36,372 35,668 REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . 6,164 5,639 DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . 3,400 1,492 TOTAL . . . . . . . . . . . . . . . . . . . . . $418,079 $419,058 See Notes to Financial Statements. /TABLE AEP GENERATING COMPANY BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - Par Value $1,000: Authorized and Outstanding - 1,000 Shares . . . . . . . $ 1,000 $ 1,000 Paid-in Capital . . . . . . . . . . . . . . . . . . . . . 39,235 39,235 Retained Earnings . . . . . . . . . . . . . . . . . . . . 1,732 2,528 Total Common Shareholder's Equity . . . . . . . . 41,967 42,763 Long-term Debt. . . . . . . . . . . . . . . . . . . . . . 44,786 69,570 TOTAL CAPITALIZATION. . . . . . . . . . . . . . . 86,753 112,333 OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . . . . . 1,133 1,259 CURRENT LIABILITIES: Short-term Debt - Notes Payable . . . . . . . . . . . . . 15,175 11,750 Accounts Payable. . . . . . . . . . . . . . . . . . . . . 13,823 9,704 Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . 6,136 3,420 Interest Accrued. . . . . . . . . . . . . . . . . . . . . 159 461 Rent Accrued - Rockport Plant Unit 2. . . . . . . . . . . 23,427 4,963 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 840 3,747 TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 59,560 34,045 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2 . . . . . . . . . . . . . . . . . . 137,508 138,901 REGULATORY LIABILITIES: Deferred Investment Tax Credits . . . . . . . . . . . . . 69,175 70,016 Amounts Due to Customers for Federal Income Tax . . . . . 31,051 31,375 TOTAL REGULATORY LIABILITIES. . . . . . . . . . . 100,226 101,391 DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . 32,899 31,129 TOTAL . . . . . . . . . . . . . . . . . . . . . $418,079 $419,058 See Notes to Financial Statements. /TABLE AEP GENERATING COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,380 $ 2,037 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 5,412 5,395 Deferred Federal Income Taxes. . . . . . . . . . . . . . 1,446 1,258 Deferred Investment Tax Credits. . . . . . . . . . . . . (841) (842) Amortization of Deferred Gain on Sale and Leaseback - Rockport Plant Unit 2. . . . . . . . . . . . . . . . . (1,393) (1,393) Deferred Property Taxes. . . . . . . . . . . . . . . . . (2,385) (2,217) Changes in Certain Current Assets and Liabilities: Accounts Receivable. . . . . . . . . . . . . . . . . . . 2,979 (1,910) Fuel, Materials and Supplies . . . . . . . . . . . . . . (3,821) 7,217 Accounts Payable . . . . . . . . . . . . . . . . . . . . 4,119 (4,485) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 2,716 2,470 Rent Accrued - Rockport Plant Unit 2 . . . . . . . . . . 18,464 18,464 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (3,019) (2,625) Net Cash Flows From Operating Activities . . . . . . 26,057 23,369 INVESTING ACTIVITIES - Construction Expenditures . . . . . . (1,416) (314) FINANCING ACTIVITIES: Return of Capital to Parent Company. . . . . . . . . . . . - (2,000) Retirement of Long-term Debt . . . . . . . . . . . . . . . (25,000) - Change in Short-term Debt (net). . . . . . . . . . . . . . 3,425 (9,575) Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (3,176) (1,286) Net Cash Flows Used For Financing Activities . . . . (24,751) (12,861) Net Increase (Decrease) in Cash and Cash Equivalents . . . . (110) 10,194 Cash and Cash Equivalents at Beginning of Period . . . . . . 237 139 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 127 $ 10,333 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $982,000 and $889,000 and for income taxes was $15,000 and $2,000 in 1998 and 1997, respectively. See Notes to Financial Statements. /TABLE AEP GENERATING COMPANY NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES In March 1998 $25 million of pollution control revenue bonds due in 2025 were redeemed; $12.5 million of the 1995 Series A bonds and $12.5 million of the 1995 Series B bonds. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter ended March 31, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP did not have a material effect on results of operations, cash flows or financial condition. AEP GENERATING COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS FIRST QUARTER 1998 vs. FIRST QUARTER 1997 Operating revenues are derived from the sale of Rockport Plant energy and capacity to two affiliated companies and one unaffiliated utility pursuant to Federal Energy Regulatory Commission (FERC) approved long-term unit power agreements. The unit power agreements provide for recovery of the cost of producing the power including a FERC approved rate of return on common equity and a return on other capital net of temporary cash investments. Net income increased $0.3 million or 17% primarily as a result of the March 1998 redemption of $25 million of pollution control revenue bonds. The resultant reduction in interest charges caused net income to increase since decreased borrowing costs are not reflected in billings to customers as a component of the return on other capital until the subsequent month. Income statement line items which changed significantly were: Increase (Decrease) (in millions) % Operating Revenues $(5.0) (9) Fuel Expense (4.8) (18) Other Operation Expense (0.5) (15) Maintenance Expense (0.2) (9) Federal Income Taxes 0.2 27 Interest Charges (0.2) (17) The decrease in operating revenues reflects recovery of lower operating expenses primarily fuel expense. Fuel expense decreased due to a decrease in the average cost of fuel consumed due to lower coal prices and a reduction in generation in the first quarter of 1998 due to reduced availability of the Rockport Plant. Rockport Plant generation was reduced as a result of a planned general boiler inspection and repair outage for Unit 1 and an unscheduled Unit 2 outage for tube leaks. The decrease in other operation expense is primarily due to a decline in administration and general expenses reflecting reduced employee benefit costs and a reduction in the FERC annual assessment. Maintenance expense decreased for Rockport Plant during 1998 reflecting outage cost reduction efforts. Federal income taxes attributable to operations increased due to an increase in pre-tax operating income. The decline in interest charges was due to a reduction in outstanding long-term debt balances reflecting the redemption of $20 million in June 1997 and $25 million in March 1998 of pollution control revenue bonds. APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . $617,490 $416,450 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 108,209 94,904 Purchased Power. . . . . . . . . . . . . . . . . . . . . 271,386 85,540 Other Operation. . . . . . . . . . . . . . . . . . . . . 54,867 63,840 Maintenance. . . . . . . . . . . . . . . . . . . . . . . 35,352 22,810 Depreciation and Amortization. . . . . . . . . . . . . . 35,405 33,975 Taxes Other Than Federal Income Taxes. . . . . . . . . . 30,244 30,273 Federal Income Taxes . . . . . . . . . . . . . . . . . . 17,778 20,774 TOTAL OPERATING EXPENSES . . . . . . . . . . . . 553,241 352,116 OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 64,249 64,334 NONOPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . (387) 244 INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . . . 63,862 64,578 INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . 30,663 28,094 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 33,199 36,484 PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . . . . . . . . 469 4,965 EARNINGS APPLICABLE TO COMMON STOCK. . . . . . . . . . . . $ 32,730 $ 31,519 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended March 31, 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . . . . . . . . $207,544 $208,472 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 33,199 36,484 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . . . . . . . . . . 29,729 28,609 Cumulative Preferred Stock . . . . . . . . . . . . . . 362 1,504 Capital Stock Expense. . . . . . . . . . . . . . . . . . 107 3,461 BALANCE AT END OF PERIOD . . . . . . . . . . . . . . . . . $210,545 $211,382 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,945,818 $1,942,325 Transmission . . . . . . . . . . . . . . . . . . . . 1,095,260 1,079,919 Distribution . . . . . . . . . . . . . . . . . . . . 1,600,375 1,583,161 General. . . . . . . . . . . . . . . . . . . . . . . 211,360 207,380 Construction Work in Progress. . . . . . . . . . . . 84,476 88,261 Total Electric Utility Plant . . . . . . . . 4,937,289 4,901,046 Accumulated Depreciation and Amortization. . . . . . 1,896,903 1,869,057 NET ELECTRIC UTILITY PLANT . . . . . . . . . 3,040,386 3,031,989 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 51,069 35,467 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 6,494 6,947 Accounts Receivable. . . . . . . . . . . . . . . . . 168,960 164,657 Allowance for Uncollectible Accounts . . . . . . . . (954) (1,333) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 50,708 47,901 Materials and Supplies . . . . . . . . . . . . . . . 57,520 57,359 Accrued Utility Revenues . . . . . . . . . . . . . . 35,758 51,208 Prepayments. . . . . . . . . . . . . . . . . . . . . 5,572 6,037 TOTAL CURRENT ASSETS . . . . . . . . . . . . 324,058 332,776 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 439,039 441,223 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 53,720 41,975 TOTAL. . . . . . . . . . . . . . . . . . . $3,908,272 $3,883,430 See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 30,000,000 Shares Outstanding - 13,499,500 Shares. . . . . . . . . $ 260,458 $ 260,458 Paid-in Capital. . . . . . . . . . . . . . . . . . 613,256 613,048 Retained Earnings. . . . . . . . . . . . . . . . . 210,545 207,544 Total Common Shareholder's Equity. . . . . 1,084,259 1,081,050 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . 19,589 19,747 Subject to Mandatory Redemption. . . . . . . . . 22,310 22,310 Long-term Debt . . . . . . . . . . . . . . . . . . 1,435,432 1,415,026 TOTAL CAPITALIZATION . . . . . . . . . . . 2,561,590 2,538,133 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . 158,816 137,371 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . 19,504 79,509 Short-term Debt. . . . . . . . . . . . . . . . . . 142,400 130,300 Accounts Payable . . . . . . . . . . . . . . . . . 81,713 96,816 Taxes Accrued. . . . . . . . . . . . . . . . . . . 65,119 41,549 Customer Deposits. . . . . . . . . . . . . . . . . 13,692 13,713 Interest Accrued . . . . . . . . . . . . . . . . . 29,729 20,949 Other. . . . . . . . . . . . . . . . . . . . . . . 73,830 71,394 TOTAL CURRENT LIABILITIES. . . . . . . . . 425,987 454,230 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . 653,049 658,655 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . 66,314 67,496 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . 42,516 27,545 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . $3,908,272 $3,883,430 See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 33,199 $ 36,484 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . 35,731 34,301 Deferred Federal Income Taxes. . . . . . . . . . . . . (2,138) (2,832) Deferred Investment Tax Credits. . . . . . . . . . . . (1,182) (1,190) Deferred Power Supply Costs (net). . . . . . . . . . . 7,390 5,230 Provision for Rate Refunds . . . . . . . . . . . . . . 14,965 33 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . (4,682) (4,809) Fuel, Materials and Supplies . . . . . . . . . . . . . (2,968) 4,263 Accrued Utility Revenues . . . . . . . . . . . . . . . 15,450 19,575 Prepayments. . . . . . . . . . . . . . . . . . . . . . 465 (5,986) Accounts Payable . . . . . . . . . . . . . . . . . . . (15,103) 26 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . 23,570 24,480 Interest Accrued . . . . . . . . . . . . . . . . . . . 8,780 9,738 Other (net). . . . . . . . . . . . . . . . . . . . . . . (14,392) (8,355) Net Cash Flows From Operating Activities . . . . . 99,085 110,958 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . (40,066) (38,924) Proceeds from Sale of Property . . . . . . . . . . . . . 535 931 Net Cash Flows Used For Investing Activities . . . (39,531) (37,993) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . 96,781 135,575 Change in Short-term Debt (net). . . . . . . . . . . . . 12,100 15,750 Retirement of Cumulative Preferred Stock . . . . . . . . (117) (133,541) Retirement of Long-term Debt . . . . . . . . . . . . . . (138,470) (56,332) Dividends Paid on Common Stock . . . . . . . . . . . . . (29,729) (28,609) Dividends Paid on Cumulative Preferred Stock . . . . . . (572) (3,450) Net Cash Flows Used For Financing Activities . . . (60,007) (70,607) Net Increase (Decrease) in Cash and Cash Equivalents . . . (453) 2,358 Cash and Cash Equivalents at Beginning of Period . . . . . 6,947 7,260 Cash and Cash Equivalents at End of Period . . . . . . . . $ 6,494 $ 9,618 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $20,933,000 and $17,490,000 and for income taxes was $570,000 and $1,325,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $6,120,000 and $6,170,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES In March 1998, the Company issued $100 million of 7.20% senior unsecured notes due in 2038. During the first quarter of 1998, the Company reacquired the following first mortgage bonds for $138 million including reacquisition premiums: Principal Amount % Rate Due Date Reacquired (in thousands) 8.75 2022 - February 1 $29,919 8.70 2022 - May 22 35,000 7.95 2002 - March 1 60,000 8.43 2022 - June 1 12,529 In April 1998 the Company issued $100 million of 7.30% senior unsecured notes due in 2038. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter ended March 31, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed software acquisition and development costs with the exception of certain software costs which were capitalized in accordance with an order of the Virginia State Corporation Commission. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP did not have a material effect on results of operations, cash flows or financial condition. 4. CONTINGENCIES As discussed in Note 9, "Federal Income Taxes", of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. AEP filed a brief with the IRS National Office refuting the agents' position. No ruling has been received from the IRS National Office. Although no adjustments have been formally proposed, a disallowance of the COLI interest deductions through March 31, 1998 would reduce earnings by approximately $74 million (including interest). No provisions for this amount have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations and cash flows. In order to resolve this issue without further delay, on March 24, 1998, AEP filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. The Company continues to be involved in certain other matters discussed in its 1997 Annual Report. APPALACHIAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 1998 vs. FIRST QUARTER 1997 RESULTS OF OPERATIONS Net income decreased $3.3 million or 9% as a result of increased interest charges reflecting higher outstanding balances of long-term and short-term debt and increased maintenance expense for damage caused by two snowstorms. Income statement line items which changed significantly were: Increase (Decrease) (in millions) % Operating Revenues. . . . . . . . . . $201.0 48 Fuel Expense. . . . . . . . . . . . . 13.3 14 Purchased Power Expense . . . . . . . 185.8 217 Other Operation Expense . . . . . . . (9.0) (14) Maintenance Expense . . . . . . . . . 12.5 55 Federal Income Taxes. . . . . . . . . (3.0) (14) Interest Charges. . . . . . . . . . . 2.6 9 Both retail and wholesale revenues increased. The increase in retail revenues resulted from increased sales to commercial and industrial customers of 8% and 5%, respectively. Partially offsetting the increase in commercial and industrial sales and revenues was a 4% decline in revenues and sales to weather-sensitive residential customers. Wholesale revenues increased 254% from a 191% increase in wholesale sales. The increase in wholesale sales and revenues is primarily due to new power marketing transactions which began in July 1997 and involve the purchase and sale of large quantities of electricity. The increases in wholesale sales and related revenues were offset by a nearly equivalent increase in power purchases by the new power marketing operation resulting in a minor positive impact on net income. The increase in fuel expense was primarily due to an increase in generation to meet the increased demand for electricity. Purchased power expense increased due to the Company's share of purchases of electricity by the power marketing business. The decrease in other operation expense reflects a reduction in employee pension and benefit costs and lower charges under an AEP System transmission equalization agreement. The transmission equalization agreement combines certain AEP System companies' investment in transmission facilities and shares the costs of ownership of those facilities in proportion to each AEP System company's peak demand relative to the peak demands of all AEP System companies utilizing the AEP System transmission system. The charges paid by the Company under the agreement decreased due to a decrease in the Company's prior twelve month peak demand relative to the total peak demand of all transmission agreement members. Maintenance expense increased significantly due to the cost of repairing overhead transmission and distribution lines following two severe snowstorms. The decrease in federal income tax expense attributable to operations was primarily due to a decrease in pre-tax operating income and changes in certain book/tax differences accounted for on a flow-through basis for rate-making purposes. Interest charges increased due to higher outstanding balances of long-term and short-term debt in 1998. The issuance of debt in March 1997 to partially fund the redemption of preferred stock led to the increased level of debt outstanding. FINANCIAL CONDITION Total plant and property additions including capital leases for the first three months of 1998 were $46 million. In March 1998 the Company issued $100 million of 7.20% senior unsecured notes due in 2038. During the first quarter of 1998 the Company redeemed $137.4 million of first mortgage bonds with interest rates from 7.95% to 8.75%. Short-term debt increased by $12 million during the quarter. In April 1998 the Company issued $100 million of 7.30% senior unsecured notes due in 2038. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . $375,481 $265,007 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,980 44,800 Purchased Power. . . . . . . . . . . . . . . . . . . . . . . 156,919 38,515 Other Operation. . . . . . . . . . . . . . . . . . . . . . . 44,582 42,130 Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . 14,307 13,324 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 22,850 22,447 Amortization of Zimmer Plant Phase-in Costs. . . . . . . . . - 8,407 Taxes Other Than Federal Income Taxes. . . . . . . . . . . . 29,936 29,969 Federal Income Taxes . . . . . . . . . . . . . . . . . . . . 14,678 17,985 TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . . 330,252 217,577 OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . 45,229 47,430 NONOPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . (28) 1,036 INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . . . . . 45,201 48,466 INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . . . 19,556 19,142 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 25,645 29,324 PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . . . . . . . . . . 533 1,493 EARNINGS APPLICABLE TO COMMON STOCK. . . . . . . . . . . . . . $ 25,112 $ 27,831 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended March 31, 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . $138,172 $ 99,582 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 25,645 29,324 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . . . . . . . . . . . . 20,661 19,671 Cumulative Preferred Stock . . . . . . . . . . . . . . . . 437 437 Capital Stock Expense. . . . . . . . . . . . . . . . . . . . 96 71 BALANCE AT END OF PERIOD . . . . . . . . . . . . . . . . . . . $142,623 $108,727 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,520,064 $1,521,381 Transmission . . . . . . . . . . . . . . . . . . . . 336,111 336,446 Distribution . . . . . . . . . . . . . . . . . . . . 911,411 926,178 General. . . . . . . . . . . . . . . . . . . . . . . 139,365 138,041 Construction Work in Progress. . . . . . . . . . . . 87,624 54,064 Total Electric Utility Plant . . . . . . . . 2,994,575 2,976,110 Accumulated Depreciation . . . . . . . . . . . . . . 1,092,927 1,074,588 NET ELECTRIC UTILITY PLANT . . . . . . . . . 1,901,648 1,901,522 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 41,265 33,653 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 9,520 12,626 Accounts Receivable: Customers. . . . . . . . . . . . . . . . . . . . . 83,719 87,357 Affiliated Companies . . . . . . . . . . . . . . . 50,686 12,317 Miscellaneous. . . . . . . . . . . . . . . . . . . 13,381 12,353 Allowance for Uncollectible Accounts . . . . . . . (996) (1,058) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 22,251 19,549 Materials and Supplies . . . . . . . . . . . . . . . 27,381 27,628 Accrued Utility Revenues . . . . . . . . . . . . . . 47,326 51,765 Prepayments. . . . . . . . . . . . . . . . . . . . . 33,662 29,979 TOTAL CURRENT ASSETS . . . . . . . . . . . . 286,930 252,516 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 354,490 359,481 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 53,090 66,688 TOTAL. . . . . . . . . . . . . . . . . . . $2,637,423 $2,613,860 See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 24,000,000 Shares Outstanding - 16,410,426 Shares. . . . . . . . . . $ 41,026 $ 41,026 Paid-in Capital. . . . . . . . . . . . . . . . . . . 572,207 572,112 Retained Earnings. . . . . . . . . . . . . . . . . . 142,623 138,172 Total Common Shareholder's Equity. . . . . . 755,856 751,310 Cumulative Preferred Stock - Subject to Mandatory Redemption . . . . . . . . . . . . . . . 25,000 25,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 939,659 887,850 TOTAL CAPITALIZATION . . . . . . . . . . . . 1,720,515 1,664,160 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 42,723 42,271 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 24,750 81,750 Short-term Debt. . . . . . . . . . . . . . . . . . . 60,050 66,600 Accounts Payable - General . . . . . . . . . . . . . 44,034 43,199 Accounts Payable - Affiliated Companies. . . . . . . 61,880 28,088 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 115,926 131,107 Interest Accrued . . . . . . . . . . . . . . . . . . 26,055 14,198 Other. . . . . . . . . . . . . . . . . . . . . . . . 24,714 28,619 TOTAL CURRENT LIABILITIES. . . . . . . . . . 357,409 393,561 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 431,794 433,593 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 52,046 52,934 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 32,936 27,341 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $2,637,423 $2,613,860 See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 25,645 $ 29,324 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 22,907 22,506 Deferred Federal Income Taxes. . . . . . . . . . . . . . 1,481 632 Deferred Investment Tax Credits. . . . . . . . . . . . . (888) (900) Deferred Fuel Costs (net). . . . . . . . . . . . . . . . (522) (5,391) Amortization of Zimmer Plant Phase-in Costs. . . . . . . - 8,407 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (35,821) (32,643) Fuel, Materials and Supplies . . . . . . . . . . . . . . (2,455) (812) Accrued Utility Revenues . . . . . . . . . . . . . . . . 4,439 (10,832) Prepayments. . . . . . . . . . . . . . . . . . . . . . . (3,683) 6,607 Accounts Payable . . . . . . . . . . . . . . . . . . . . 34,627 (19,964) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (15,181) (11,526) Interest Accrued . . . . . . . . . . . . . . . . . . . . 11,857 12,691 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 7,568 12,921 Net Cash Flows From Operating Activities . . . . . . 49,974 11,020 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (22,113) (20,302) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,129 986 Net Cash Flows Used For Investing Activities . . . . (19,984) (19,316) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 51,552 38,574 Change in Short-term Debt (net). . . . . . . . . . . . . . (6,550) 47,417 Retirement of Cumulative Preferred Stock . . . . . . . . . - (52,953) Retirement of Long-term Debt . . . . . . . . . . . . . . . (57,000) - Dividends Paid on Common Stock . . . . . . . . . . . . . . (20,661) (19,671) Dividends Paid on Cumulative Preferred Stock . . . . . . . (437) (1,422) Net Cash Flows From (Used For) Financing Activities. (33,096) 11,945 Net Increase (Decrease) in Cash and Cash Equivalents . . . . (3,106) 3,649 Cash and Cash Equivalents at Beginning of Period . . . . . . 12,626 9,134 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 9,520 $ 12,783 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $6,744,000 and $5,453,000 and for income taxes was $129,000 and $89,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $3,378,000 and $2,942,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. Certain prior period amounts have been reclassified to conform with current-period presentation. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES In February 1998 the Company redeemed $57 million of 9.15% first mortgage bonds at maturity and issued $52 million of 6.51% senior unsecured notes due in 2008. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter ended March 31, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP did not have a material effect on results of operations, cash flows or financial condition. 4. CONTINGENCIES As discussed in Note 8, "Federal Income Taxes", of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. AEP filed a brief with the IRS National Office refuting the agents' position. No ruling has been received from the IRS National Office. Although no adjustments have been formally proposed, a disallowance of the COLI interest deductions through March 31, 1998 would reduce earnings by approximately $40 million (including interest). No provisions for this amount have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations and cash flows. In order to resolve this issue without further delay, on March 24, 1998, AEP filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. The Company continues to be involved in certain other matters discussed in its 1997 Annual Report. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS FIRST QUARTER 1998 vs. FIRST QUARTER 1997 Net income decreased $3.7 million or 13% in the first quarter of 1998 due primarily to the effect of mild weather on electricity sales to residential customers. Income statement line items which changed significantly were: Increase (Decrease) (in millions) % Operating Revenues . . . . . . . . . . . $110.5 42 Fuel Expense . . . . . . . . . . . . . . 2.2 5 Purchased Power Expense. . . . . . . . . 118.4 307 Other Operation Expense. . . . . . . . . 2.5 6 Amortization of Zimmer Plant Phase-in Costs . . . . . . . . . . . . (8.4) (100) Federal Income Taxes . . . . . . . . . . (3.3) (18) Although mild winter weather reduced residential customers' electricity consumption by 3%, revenues increased significantly as a result of a substantial increase in wholesale sales from a new power marketing business the AEP System started in July 1997. The increases in wholesale sales and related revenues were offset by a nearly equivalent increase in power purchases by the new power marketing operation resulting in a minor positive impact on net income. The increase in fuel expense was due to the operation of the fuel clause adjustment mechanism which resulted in a credit to fuel expense in 1997 from the amortization of previously deferred overrecovered fuel costs. The Company's share of purchases by the new power marketing business were the main reason for the increase in purchased power expense. Other operation expense increased primarily due to an increase in generation costs including an increase in the cost of emission allowances consumed and the recognition of gains on the sale of allowances in 1997. The reduction in the amortization of deferred Zimmer Plant phase-in costs reflects the completion of the surcharge recovery plan and the full amortization of the original deferral. The cessation of the amortization did not affect net income since the amortization was being recovered in revenues through a surcharge which terminated with the completion of the amortization. Federal income taxes attributable to operations decreased primarily due to a decrease in pre-tax operating income and changes in certain book/tax differences accounted for on a flow-through basis for rate-making purposes. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . $456,415 $341,313 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 44,879 60,250 Purchased Power. . . . . . . . . . . . . . . . . . . . . 186,106 35,996 Other Operation. . . . . . . . . . . . . . . . . . . . . 76,433 78,611 Maintenance. . . . . . . . . . . . . . . . . . . . . . . 27,078 25,236 Depreciation and Amortization. . . . . . . . . . . . . . 35,793 35,018 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals. . . . . . . . . . . . . . . . - 3,911 Taxes Other Than Federal Income Taxes. . . . . . . . . . 16,392 18,285 Federal Income Taxes . . . . . . . . . . . . . . . . . . 18,366 24,112 TOTAL OPERATING EXPENSES . . . . . . . . . . . . 405,047 281,419 OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 51,368 59,894 NONOPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . (990) 468 INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . . . 50,378 60,362 INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . 16,634 16,103 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 33,744 44,259 PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . . . . . . . . 1,217 2,108 EARNINGS APPLICABLE TO COMMON STOCK. . . . . . . . . . . . $ 32,527 $ 42,151 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended March 31, 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . . . . . . . . $278,814 $269,071 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 33,744 44,259 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . . . . . . . . . . 29,366 29,065 Cumulative Preferred Stock . . . . . . . . . . . . . . 1,184 1,203 Capital Stock Expense. . . . . . . . . . . . . . . . . . 33 905 BALANCE AT END OF PERIOD . . . . . . . . . . . . . . . . . $281,975 $282,157 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $2,542,488 $2,545,484 Transmission . . . . . . . . . . . . . . . . . . . . 909,815 908,736 Distribution . . . . . . . . . . . . . . . . . . . . 739,418 737,902 General (including nuclear fuel) . . . . . . . . . . 232,239 233,888 Construction Work in Progress. . . . . . . . . . . . 106,262 88,487 Total Electric Utility Plant . . . . . . . . 4,530,222 4,514,497 Accumulated Depreciation and Amortization. . . . . . 2,001,265 1,973,937 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,528,957 2,540,560 NUCLEAR DECOMMISSIONING AND SPENT NUCLEAR FUEL DISPOSAL TRUST FUNDS . . . . . . . . . . . . . . . . 592,494 566,390 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 175,850 156,228 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 11,614 5,860 Accounts Receivable (net). . . . . . . . . . . . . . 136,026 136,122 Fuel . . . . . . . . . . . . . . . . . . . . . . . . 22,757 17,182 Materials and Supplies . . . . . . . . . . . . . . . 78,965 78,701 Accrued Utility Revenues . . . . . . . . . . . . . . 31,485 30,521 Prepayments. . . . . . . . . . . . . . . . . . . . . 5,908 4,685 TOTAL CURRENT ASSETS . . . . . . . . . . . . 286,755 273,071 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 411,042 400,489 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 43,265 31,060 TOTAL. . . . . . . . . . . . . . . . . . . $4,038,363 $3,967,798 See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 2,500,000 Shares Outstanding - 1,400,000 Shares . . . . . . . . . . $ 56,584 $ 56,584 Paid-in Capital. . . . . . . . . . . . . . . . . . . 732,506 732,472 Retained Earnings. . . . . . . . . . . . . . . . . . 281,975 278,814 Total Common Shareholder's Equity. . . . . . 1,071,065 1,067,870 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 9,435 9,435 Subject to Mandatory Redemption. . . . . . . . . . 68,445 68,445 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,017,419 1,014,237 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,166,364 2,159,987 OTHER NONCURRENT LIABILITIES: Nuclear Decommissioning. . . . . . . . . . . . . . . 405,419 381,016 Other. . . . . . . . . . . . . . . . . . . . . . . . 240,724 232,667 TOTAL OTHER NONCURRENT LIABILITIES . . . . . 646,143 613,683 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 35,000 35,000 Short-term Debt. . . . . . . . . . . . . . . . . . . 110,475 119,600 Accounts Payable - General . . . . . . . . . . . . . 34,154 36,729 Accounts Payable - Affiliated Companies. . . . . . . 44,811 31,665 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 64,401 46,850 Interest Accrued . . . . . . . . . . . . . . . . . . 17,290 15,741 Rent Accrued - Rockport Plant Unit 2 . . . . . . . . 23,427 4,963 Obligations Under Capital Leases . . . . . . . . . . 33,497 34,033 Other. . . . . . . . . . . . . . . . . . . . . . . . 45,499 58,287 TOTAL CURRENT LIABILITIES. . . . . . . . . . 408,554 382,868 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 562,547 559,708 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 136,136 138,045 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 91,492 92,419 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 27,127 21,088 CONTINGENCIES (Note 3) TOTAL. . . . . . . . . . . . . . . . . . . $4,038,363 $3,967,798 See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 33,744 $ 44,259 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 36,889 36,922 Amortization (Deferral) of Incremental Nuclear Refueling Outage Expenses (net). . . . . . . . . . . . 4,777 (10,965) Deferred Federal Income Taxes. . . . . . . . . . . . . . 6,494 (2,151) Deferred Investment Tax Credits. . . . . . . . . . . . . (1,909) (1,969) Deferred Property Taxes. . . . . . . . . . . . . . . . . (8,185) (11,793) Unrecovered Fuel and Purchased Costs . . . . . . . . . . (22,203) (2,888) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . 96 1,679 Fuel, Materials and Supplies . . . . . . . . . . . . . . (5,839) 9,113 Accrued Utility Revenues . . . . . . . . . . . . . . . . (964) 4,003 Prepayments. . . . . . . . . . . . . . . . . . . . . . . (1,223) (6,489) Accounts Payable . . . . . . . . . . . . . . . . . . . . 10,571 (14,758) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 17,551 35,514 Rent Accrued - Rockport Plant Unit 2 . . . . . . . . . . 18,464 18,464 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (18,242) 10,685 Net Cash Flows From Operating Activities . . . . . . 70,021 109,626 INVESTING ACTIVITIES - Construction Expenditures . . . . . . (24,592) (16,800) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . - 47,728 Change in Short-term Debt (net). . . . . . . . . . . . . . (9,125) (29,825) Retirement of Cumulative Preferred Stock . . . . . . . . . - (78,838) Dividends Paid on Common Stock . . . . . . . . . . . . . . (29,366) (29,065) Dividends Paid on Cumulative Preferred Stock . . . . . . . (1,184) (2,359) Net Cash Flows Used For Financing Activities . . . . (39,675) (92,359) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 5,754 467 Cash and Cash Equivalents at Beginning of Period . . . . . . 5,860 8,233 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 11,614 $ 8,700 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $14,412,000 and $11,765,000 in 1998 and 1997, respectively and for income taxes was $125,000 in 1997. Noncash acquisitions under capital leases were $16,630,000 and $34,342,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter ended March 31, 1998, there are no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP did not have a material effect on results of operations, cash flows or financial condition. 3. CONTINGENCIES Taxes As discussed in Note 7, "Federal Income Taxes", of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. The Company filed a brief with the IRS National Office refuting the agents' position. No ruling has been received from the IRS National Office. Although no adjustments have been formally proposed, a disallowance of the COLI interest deductions through March 31, 1998 would reduce earnings by approximately $61 million (including interest). No provisions for this amount have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations and cash flows. In order to resolve this issue without further delay, on March 24, 1998, AEP filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. Cook Plant Shutdown As discussed in Note 3 of the Notes to Consolidated Financial Statements in the 1997 Annual Report, both units of the Cook Plant were shut down in September 1997 due to questions regarding the operability of certain safety systems during a Nuclear Regulatory Commission (NRC) architect engineer design inspection. The NRC issued a Confirmatory Action Letter in September 1997 requiring the Company to address the issues identified in the letter. Certain issues identified in the letter have been addressed. The Company is working with the NRC to resolve the remaining issues in the letter and other issues related to the restart of the units. 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 reasonable period of time, it could have a material adverse impact on results of operations, cash flows and possibly financial condition. Other The Company continues to be involved in other matters discussed in its 1997 Annual Report. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 1998 vs. FIRST QUARTER 1997 RESULTS OF OPERATIONS Net income decreased $10.5 million or 24% due to the effect of mild winter weather on energy sales to residential customers and a decrease in capacity credits from the AEP System Power Pool (Power Pool). Under the terms of the Power Pool, capacity credits and charges are designed to allocate the cost of the AEP System's capacity among the Pool members based on their relative peak demands and generating reserves. The reduction in capacity credits received can be attributed to an increase in the Company's prior twelve month peak demand relative to the total peak demand of all Power Pool members. As discussed in Note 3 of the Notes to Consolidated Financial Statements, the Cook Nuclear Plant was shut down in September 1997. Although the shutdown did not have a material effect on results of operations, it did have a significant impact on the operations of the Company as reflected in the variations of certain income statement line items discussed below. Income statement line items which changed significantly were: Increase (Decrease) (in millions) % Operating Revenues. . . . . . . . . . . . $115.1 34 Fuel Expense. . . . . . . . . . . . . . . (15.4) (26) Purchased Power Expense . . . . . . . . . 150.1 417 Other Operation Expense . . . . . . . . . (2.2) (3) Maintenance Expense . . . . . . . . . . . 1.8 7 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals . . . . . . . . (3.9) (100) Taxes Other Than Federal Income Taxes . . (1.9) (10) Federal Income Taxes. . . . . . . . . . . (5.7) (24) Operating revenues increased significantly due to a 6% increase in retail revenues and a 72% increase in wholesale sales. The increase in retail revenues reflects an increase in fuel and power supply clause recovery accruals. Under the fuel clause recovery mechanism, revenues are accrued for increased fuel expenses in both of the Company's retail jurisdictions and for replacement power costs in the Michigan jurisdiction until approved for billing and recovery. During the extended outage of both nuclear units, retail revenues increased from the accrual of revenues for the increased cost of fuel and replacement power. The increase in wholesale sales was mainly due to the commencement of power marketing transactions in July 1997. The new power marketing business involves the purchase and sale of large quantities of electricity. The increases in wholesale sales and related revenues were offset by a nearly equivalent increase in power purchases by the power marketing operation resulting in a minor positive impact on net income. The unavailability of nuclear generation decreased energy delivered to the Power Pool which partly offset the increased sales from power marketing transactions. Fuel expense decreased significantly as a result of the decline in nuclear generation reflecting the outage of both nuclear units in the first quarter of 1998. The significant increase in purchased power expense resulted from purchases of power by the new power marketing business and increased purchases from the Power Pool to replace power usually generated by the nuclear units which were unavailable. Other operation expense decreased due to a reduction in employee pension and other benefit costs and a refund of nuclear insurance premiums. The decrease was partially offset by increased nuclear operation expenses for engineering and supervision during the extended shutdown. The extended shutdown of the Cook Plant accounted for the increase in maintenance expense. The recovery periods for Rockport Plant Unit 1 costs deferred under a rate phase-in plan in the Indiana and FERC jurisdictions ended in fall of 1997 causing the decrease in amortization of phase-in plan deferrals. The deferred costs were amortized over a 10-year period commensurate with their collection from customers pursuant to commission orders. The decrease in taxes other than federal income taxes was the result of a reduction in Indiana income taxes reflecting a decrease in taxable income. Federal income taxes attributable to operations decreased due to a decrease in pre-tax operating income. FINANCIAL CONDITION Total plant and property additions including capital leases for the period were $42 million. During the first three months of 1998 short-term debt outstanding decreased by $9 million. KENTUCKY POWER COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . . . . . $129,870 $88,580 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . . . . . 22,301 19,164 Purchased Power. . . . . . . . . . . . . . . . . . 63,736 23,230 Other Operation. . . . . . . . . . . . . . . . . . 10,994 12,009 Maintenance. . . . . . . . . . . . . . . . . . . . 9,166 5,107 Depreciation and Amortization. . . . . . . . . . . 6,910 6,540 Taxes Other Than Federal Income Taxes. . . . . . . 2,492 2,794 Federal Income Taxes . . . . . . . . . . . . . . . 2,180 4,496 TOTAL OPERATING EXPENSES . . . . . . . . . 117,779 73,340 OPERATING INCOME . . . . . . . . . . . . . . . . . . 12,091 15,240 NONOPERATING LOSS. . . . . . . . . . . . . . . . . . (71) (141) INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . 12,020 15,099 INTEREST CHARGES . . . . . . . . . . . . . . . . . . 7,003 5,968 NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 5,017 $ 9,131 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended March 31, 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . . . . . $78,076 $84,090 NET INCOME . . . . . . . . . . . . . . . . . . . . . 5,017 9,131 CASH DIVIDENDS DECLARED. . . . . . . . . . . . . . . 7,075 6,690 BALANCE AT END OF PERIOD . . . . . . . . . . . . . . $76,018 $86,531 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Financial Statements. /TABLE KENTUCKY POWER COMPANY BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . $ 254,759 $ 249,184 Transmission . . . . . . . . . . . . . . . . 308,685 303,456 Distribution . . . . . . . . . . . . . . . . 341,575 350,793 General. . . . . . . . . . . . . . . . . . . 71,845 71,462 Construction Work in Progress. . . . . . . . 35,392 32,060 Total Electric Utility Plant . . . . 1,012,256 1,006,955 Accumulated Depreciation and Amortization. . 301,368 296,318 NET ELECTRIC UTILITY PLANT . . . . . 710,888 710,637 OTHER PROPERTY AND INVESTMENTS . . . . . . . . 8,064 6,591 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . 990 1,381 Accounts Receivable: Customers. . . . . . . . . . . . . . . . . 22,759 24,127 Affiliated Companies . . . . . . . . . . . 7,859 1,722 Miscellaneous. . . . . . . . . . . . . . . 3,692 3,276 Allowance for Uncollectible Accounts . . . (610) (525) Fuel . . . . . . . . . . . . . . . . . . . . 10,146 10,685 Materials and Supplies . . . . . . . . . . . 14,051 14,054 Accrued Utility Revenues . . . . . . . . . . 10,255 12,981 Prepayments. . . . . . . . . . . . . . . . . 1,037 1,538 TOTAL CURRENT ASSETS . . . . . . . . 70,179 69,239 REGULATORY ASSETS. . . . . . . . . . . . . . . 90,698 90,045 DEFERRED CHARGES . . . . . . . . . . . . . . . 9,129 10,159 TOTAL. . . . . . . . . . . . . . . $ 888,958 $ 886,671 See Notes to Financial Statements.
KENTUCKY POWER COMPANY BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - Par Value $50: Authorized - 2,000,000 Shares Outstanding - 1,009,000 Shares . . . . . . $ 50,450 $ 50,450 Paid-in Capital. . . . . . . . . . . . . . . 128,750 128,750 Retained Earnings. . . . . . . . . . . . . . 76,018 78,076 Total Common Shareholder's Equity. . 255,218 257,276 Long-term Debt . . . . . . . . . . . . . . . 338,891 341,051 TOTAL CAPITALIZATION . . . . . . . . 594,109 598,327 OTHER NONCURRENT LIABILITIES . . . . . . . . . 26,727 26,693 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . 2,203 - Short-term Debt. . . . . . . . . . . . . . . 39,275 36,500 Accounts Payable . . . . . . . . . . . . . . 18,353 24,574 Customer Deposits. . . . . . . . . . . . . . 3,737 3,660 Taxes Accrued. . . . . . . . . . . . . . . . 8,825 6,130 Interest Accrued . . . . . . . . . . . . . . 7,986 6,015 Other. . . . . . . . . . . . . . . . . . . . 14,344 14,935 TOTAL CURRENT LIABILITIES. . . . . . 94,723 91,814 DEFERRED INCOME TAXES. . . . . . . . . . . . . 154,150 153,945 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . 15,310 15,615 DEFERRED CREDITS . . . . . . . . . . . . . . . 3,939 277 CONTINGENCIES (Note 3) TOTAL. . . . . . . . . . . . . . . $888,958 $886,671 See Notes to Financial Statements. /TABLE KENTUCKY POWER COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . $ 5,017 $ 9,131 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . 6,913 6,543 Deferred Federal Income Taxes. . . . . . . . . . 32 521 Deferred Investment Tax Credits. . . . . . . . . (305) (308) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . (5,100) (2,816) Fuel, Materials and Supplies . . . . . . . . . . 542 (686) Accrued Utility Revenues . . . . . . . . . . . . 2,726 3,102 Accounts Payable . . . . . . . . . . . . . . . . (6,221) (7,845) Taxes Accrued. . . . . . . . . . . . . . . . . . 2,695 4,323 Interest Accrued . . . . . . . . . . . . . . . . 1,971 1,139 Other (net). . . . . . . . . . . . . . . . . . . . 2,192 2,044 Net Cash Flows From Operating Activities . . 10,462 15,148 INVESTING ACTIVITIES - Construction Expenditures . . (6,553) (13,536) FINANCING ACTIVITIES: Change in Short-term Debt (net). . . . . . . . . . 2,775 7,475 Dividends Paid . . . . . . . . . . . . . . . . . . (7,075) (6,690) Net Cash Flows From (Used For) Financing Activities . . . . . . . . . . . (4,300) 785 Net Increase (Decrease) in Cash and Cash Equivalents (391) 2,397 Cash and Cash Equivalents at Beginning of Period . . 1,381 1,106 Cash and Cash Equivalents at End of Period . . . . . $ 990 $ 3,503 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $4,931,000 and $4,755,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $1,568,000 and $822,000 in 1998 and 1997, respectively. See Notes to Financial Statements. /TABLE KENTUCKY POWER COMPANY NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter ended March 31, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP did not have a material effect on results of operations, cash flows or financial condition. 3. CONTINGENCIES As discussed in Note 8, "Federal Income Taxes", of the Notes to Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. AEP filed a brief with the IRS National Office refuting the agents' position. No ruling has been received from the IRS National Office. Although no adjustments have been formally proposed, a disallowance of the COLI interest deductions through March 31, 1998 would reduce earnings by approximately $7 million (including interest). No provisions for this contingency have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations. In order to resolve this issue without further delay, on March 24, 1998, AEP filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. The Company continues to be involved in certain other matters discussed in its 1997 Annual Report. KENTUCKY POWER COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS FIRST QUARTER 1998 vs. FIRST QUARTER 1997 Net income decreased $4.1 million or 45% due to an increase in operating expenses and an increase in interest charges. Income statement line items which changed significantly were: Increase(Decrease) (in millions) % Operating Revenues. . . . . . . . . . . $41.3 47 Fuel Expense. . . . . . . . . . . . . . 3.1 16 Purchased Power Expense . . . . . . . . 40.5 174 Other Operation Expense . . . . . . . . (1.0) (8) Maintenance Expense . . . . . . . . . . 4.1 79 Depreciation and Amortization . . . . . 0.4 6 Taxes Other Than Federal Income Taxes . (0.3) (11) Federal Income Taxes. . . . . . . . . . (2.3) (52) Interest Charges. . . . . . . . . . . . 1.0 17 Operating revenues increased significantly due to an increase in wholesale sales from a new powering marketing business the AEP System started in July 1997. The increases in wholesale sales and related revenues were offset by a nearly equivalent increase in power purchases by the new power marketing operation resulting in a minor positive impact on net income. The increase in fuel expense is primarily attributable to the operation of the fuel clause mechanism whereby previously deferred overrecoveries of fuel costs were credited to expense in 1997 and previously deferred underrecoveries of fuel costs were charged to expense in the current period. Purchased power expense increased primarily due to purchases for the new power marketing business. The decline in other operation expense is due to increased credits received under the AEP System's transmission equalization agreement and decreased demand side management costs. The transmission equalization agreement combines certain AEP System companies' investments in transmission facilities and shares the cost of ownership of those facilities in proportion to each AEP System company's peak demand relative to the peak demands of all AEP System companies utilizing the AEP System transmission system. The credit received by the Company under the agreement increased due to a decrease in the Company's prior twelve month peak demand relative to the total peak demand of all transmission agreement members. The increase in maintenance expense was primarily due to increased overhead distribution line maintenance expenditures resulting from storm damage in 1998. The increase in depreciation and amortization expense reflects additional investment in depreciable plant as a result of improvements in 1997 to the transmission and distribution systems. A decline in pre-tax operating income was the primary cause of the decrease in federal income taxes attributable to operations and state income taxes included in taxes other than federal income taxes. The increase in interest charges was due to an increase in outstanding long-term debt reflecting the issuance of senior unsecured notes in October 1997. OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . . $695,166 $484,300 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,275 162,002 Purchased Power. . . . . . . . . . . . . . . . . . . . . . . . 199,084 16,459 Other Operation. . . . . . . . . . . . . . . . . . . . . . . . 80,901 82,363 Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . 30,593 29,477 Depreciation and Amortization. . . . . . . . . . . . . . . . . 35,863 34,940 Taxes Other Than Federal Income Taxes. . . . . . . . . . . . . 42,658 41,913 Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . 33,723 36,615 TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . 616,097 403,769 OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . 79,069 80,531 NONOPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . . 1,238 4,970 INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . . . . . . 80,307 85,501 INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . . . . 19,871 19,910 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,436 65,591 PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . . . . . . . . . . . 370 1,538 EARNINGS APPLICABLE TO COMMON STOCK. . . . . . . . . . . . . . . $ 60,066 $ 64,053 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended March 31, 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . $590,151 $584,015 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,436 65,591 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 52,775 37,562 Cumulative Preferred Stock . . . . . . . . . . . . . . . . . 370 2,089 Capital Stock Expense. . . . . . . . . . . . . . . . . . . . . - 21 BALANCE AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . $597,442 $609,934 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Consolidated Financial Statements. /TABLE OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $2,606,491 $2,606,981 Transmission . . . . . . . . . . . . . . . . . . . . 845,378 837,953 Distribution . . . . . . . . . . . . . . . . . . . . 920,140 927,239 General (including mining assets). . . . . . . . . . 706,562 709,475 Construction Work in Progress. . . . . . . . . . . . 87,280 74,149 Total Electric Utility Plant . . . . . . . . 5,165,851 5,155,797 Accumulated Depreciation and Amortization. . . . . . 2,381,164 2,349,995 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,784,687 2,805,802 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 126,792 113,925 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 83,662 44,203 Accounts Receivable (net). . . . . . . . . . . . . . 329,798 293,672 Fuel . . . . . . . . . . . . . . . . . . . . . . . . 98,819 119,543 Materials and Supplies . . . . . . . . . . . . . . . 80,047 80,853 Accrued Utility Revenues . . . . . . . . . . . . . . 35,095 37,586 Prepayments. . . . . . . . . . . . . . . . . . . . . 41,541 36,611 TOTAL CURRENT ASSETS . . . . . . . . . . . . 668,962 612,468 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 536,643 523,891 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 82,975 107,116 TOTAL. . . . . . . . . . . . . . . . . . . $4,200,059 $4,163,202 See Notes to Consolidated Financial Statements. /TABLE OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 40,000,000 Shares Outstanding - 27,952,473 Shares. . . . . . . . . . $ 321,201 $ 321,201 Paid-in Capital. . . . . . . . . . . . . . . . . . . 462,296 462,296 Retained Earnings. . . . . . . . . . . . . . . . . . 597,442 590,151 Total Common Shareholder's Equity. . . . . . 1,380,939 1,373,648 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 17,542 17,542 Subject to Mandatory Redemption. . . . . . . . . . 11,850 11,850 Long-term Debt . . . . . . . . . . . . . . . . . . . 994,312 1,012,031 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,404,643 2,415,071 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 297,583 295,375 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 26,031 83,195 Short-term Debt. . . . . . . . . . . . . . . . . . . 167,500 78,700 Accounts Payable . . . . . . . . . . . . . . . . . . 177,525 184,747 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 156,138 160,055 Interest Accrued . . . . . . . . . . . . . . . . . . 25,026 16,255 Obligations Under Capital Leases . . . . . . . . . . 27,835 30,307 Other. . . . . . . . . . . . . . . . . . . . . . . . 83,823 94,338 TOTAL CURRENT LIABILITIES. . . . . . . . . . 663,878 647,597 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 722,404 723,172 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 41,979 42,821 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 69,572 39,166 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $4,200,059 $4,163,202 See Notes to Consolidated Financial Statements. /TABLE OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 60,436 $ 65,591 Adjustments for Noncash Items: Depreciation, Depletion and Amortization . . . . . . . . 43,259 43,728 Deferred Federal Income Taxes. . . . . . . . . . . . . . 3,466 (4,363) Deferred Fuel Costs (net). . . . . . . . . . . . . . . . (11,000) (1,359) Amortization of Deferred Property Taxes. . . . . . . . . 19,344 18,739 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (36,126) 15,114 Fuel, Materials and Supplies . . . . . . . . . . . . . . 21,530 6,626 Accrued Utility Revenues . . . . . . . . . . . . . . . . 2,491 3,949 Prepayments. . . . . . . . . . . . . . . . . . . . . . . (4,930) (16,263) Accounts Payable . . . . . . . . . . . . . . . . . . . . (7,222) (8,130) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (3,917) 7,660 Interest Accrued . . . . . . . . . . . . . . . . . . . . 8,771 7,891 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 15,712 25,793 Net Cash Flows From Operating Activities . . . . . . 111,814 164,976 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (35,186) (25,701) Proceeds from Sale of Property and Other . . . . . . . . . 2,413 715 Net Cash Flows Used For Investing Activities . . . . (32,773) (24,986) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . - 48,858 Change in Short-term Debt (net). . . . . . . . . . . . . . 88,800 (5,902) Retirement of Cumulative Preferred Stock . . . . . . . . . - (117,601) Retirement of Long-term Debt . . . . . . . . . . . . . . . (75,237) (20,169) Dividends Paid on Common Stock . . . . . . . . . . . . . . (52,775) (37,562) Dividends Paid on Cumulative Preferred Stock . . . . . . . (370) (2,089) Net Cash Flows Used For Financing Activities . . . . (39,582) (134,465) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 39,459 5,525 Cash and Cash Equivalents at Beginning of Period . . . . . . 44,203 24,003 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 83,662 $ 29,528 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $10,377,000 and $11,365,000 and for income taxes was $539,000 and $934,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $10,294,000 and $8,023,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES The Company and a subsidiary redeemed at maturity $55.7 million of 6-3/4% series first mortgage bonds and $16.7 million of 6.85% notes payable. In April 1998, the Company called the entire $50 million outstanding balances each of 8.25% and 8.10% series first mortgage bonds due in 2002 for early redemption in May 1998 and issued $140 million of 7-3/8% senior unsecured notes due in 2038. Consequently the bonds were not reclassified as a current liability on the balance sheet. As a result of the redemption of the 6-3/4% series first mortgage bonds due in 1998, the restriction on the use of retained earnings for the payment of common stock dividends was eliminated. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter ended March 31, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP did not have a material effect on results of operations, cash flows or financial condition. 4. CONTINGENCIES As discussed in Note 8, "Federal Income Taxes", of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. AEP filed a brief with the IRS National Office refuting the agents' position. No ruling has been received from the IRS National Office. Although no adjustments have been formally proposed, a disallowance of the COLI interest deductions through March 31, 1998 would reduce earnings by approximately $110 million (including interest). No provisions for this amount have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations and cash flows. In order to resolve this issue without further delay, on March 24, 1998, AEP filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. The Company continues to be involved in certain other matters discussed in the 1997 Annual Report. OHIO POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 1998 vs. FIRST QUARTER 1997 RESULTS OF OPERATIONS Net income decreased $5 million or 8% due to the effects of mild winter weather on energy sales to residential customers and a reduction in nonoperating income resulting from the effect of gains on the sale of emission allowances recorded in 1997. Income statement line items which changed significantly were: Increase (Decrease) (in millions) % Operating Revenues. . . . . . . . . . . $210.9 44 Fuel Expense. . . . . . . . . . . . . . 31.3 19 Purchased Power Expense . . . . . . . . 182.6 N.M. Federal Income Taxes. . . . . . . . . . (2.9) (8) Nonoperating Income . . . . . . . . . . (3.7) (75) N.M. = Not Meaningful Both retail and wholesale revenues increased. The increase in retail revenues resulted from increased sales to a major industrial customer reflecting a return to work following a labor strike. The increase in industrial sales was partially offset by a 5% decline in sales to weather-sensitive residential customers reflecting mild winter weather. Revenues from wholesale customers increased 153% while wholesale sales increased 135%. The substantial increase was largely due to a new power marketing business the AEP System started in July 1997. The substantial increases in wholesale sales and related revenues were offset by a nearly equivalent increase in power purchases by the power marketing operations resulting in a minor positive impact on net income. Also contributing to the increase in wholesale revenues were increased sales to the AEP System Power Pool (Power Pool) to replace the power from an affiliate's nuclear units which were out of service. The increase in fuel expense was due to an increase in generation to meet the increased demand from the Power Pool resulting from the outage of the affiliate's nuclear units. Purchased power expense increased due to the Company's share of purchases of electricity by AEP's power marketing business. The decrease in federal income expense attributable to operations is primarily due to a decline in pre-tax operating income and changes in certain book/tax differences accounted for on a flow-through basis. Nonoperating income decreased due to the effect of gains in 1997 on emission allowance transactions. FINANCIAL CONDITION Total plant and property additions including capital leases for the current period were $46 million. During the first quarter of 1998, the Company and a subsidiary retired at maturity $55.7 million of 6-3/4% series first mortgage bonds and $16.7 million of notes payable with an interest rate of 6.85%. Short-term debt increased by $89 million from the beginning of 1998. In April 1998, the Company called the entire $50 million outstanding balances each of 8.25% and 8.10% series first mortgage bonds due in 2002 for early redemption in May 1998 and issued $140 million of 7-3/8% senior unsecured notes due in 2038. Consequently the bonds were not reclassified as a current liability on the balance sheet. PART II. OTHER INFORMATION Item 5. Other Information. American Electric Power Company, Inc. ("AEP") and Appalachian Power Company ("APCo") Reference is made to page 10 of the Annual Report on Form 10-K for the year ended December 31, 1997 ("1997 10-K") for a discussion of "retail customer choice" legislation passed in Virginia and West Virginia. Both bills have been signed into law. On March 20, 1998, the State Corporation Commission of Virginia ("Virginia SCC") issued an order which, among other things, directed APCo and another unaffiliated utility to begin work on the implementation of at least one retail access pilot program and study in their respective service territories. The details of such proposed pilot programs are to be filed with the Virginia SCC by August 1, 1998. AEP Reference is made to page 11 of the 1997 10-K for a discussion of the request for approval filed with the Securities and Exchange Commission ("SEC") to issue and sell securities in an amount up to 100% of AEP's consolidated retained earnings (approximately $1,600,000,000 at December 31, 1997), and to use the proceeds for investment in exempt wholesale generators and foreign utility companies. On April 27, 1998, the SEC issued an order approving this request. AEP, AEP Generating Company ("AEGCo"), APCo, Columbus Southern Power Company ("CSPCo"), Indiana Michigan Power Company ("I&M"), Kentucky Power Company ("KEPCo") and Ohio Power Company ("OPCo") Reference is made to pages 22 and 23 of the 1997 10-K for a discussion of the NOx SIP Call issued by the U.S. Environmental Protection Agency ("Federal EPA") and the Section 126 petitions filed by eight northeastern states. On April 29, 1998, Federal EPA released a Supplemental Notice of Proposed Rulemaking addressing a number of issues initially raised in the October 1997 rulemaking, including a determination regarding proposed NOx emission budgets for the states affected by the rulemaking, a proposed model emissions trading rule for NOx and the results of computer modeling of the budget levels. On April 30, 1998, Federal EPA published an Advance Notice of Proposed Rulemaking initiating a proceeding to determine whether Federal EPA should approve the petitions filed by the eight northeastern states in August 1997 under Section 126 of the Clean Air Act. On April 28, 1998, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision granting Federal EPA's motion to dismiss the petitions filed by a number of utilities (including the AEP System operating companies) that sought a review of Federal EPA's Memorandum of Agreement. The court concluded that Federal EPA's actions were not final for purposes of judicial review. On March 30, 1998, a number of utilities (including the AEP System operating companies) filed motions to intervene in, and to dismiss, the litigation initiated by eight northeastern states in the U.S. District Court for the Southern District of New York that seeks an order directing Federal EPA to rule on the Section 126 petitions within 60 days of receipt. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: APCo, CSPCo, I&M, KEPCo and OPCo Exhibit 12 - Statement re: Computation of Ratios. AEP, AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo Exhibit 27 - Financial Data Schedule. Exhibit 99 - Press Release of AEP and Central and South West Corporation, dated April 30, 1998 announcing the joint filing of requests with the Federal Energy Regulatory Commission for approval of their proposed merger and with the Public Utility Commission of Texas for a finding that the merger is in the public interest. (b) Reports on Form 8-K: AEP, AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo No reports on Form 8-K were filed during the quarter ended March 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signatures for each undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. AMERICAN ELECTRIC POWER COMPANY, INC. A.A. Pena P.J. DeMaria A.A. Pena, Treasurer P.J. DeMaria, Controller AEP GENERATING COMPANY A.A. Pena P.J. DeMaria A.A. Pena, Treasurer P.J. DeMaria, Vice President and Controller APPALACHIAN POWER COMPANY A.A. Pena P.J. DeMaria A.A. Pena, Treasurer P.J. DeMaria, Vice President and Controller COLUMBUS SOUTHERN POWER COMPANY A.A. Pena P.J. DeMaria A.A. Pena, Treasurer P.J. DeMaria, Vice President and Controller INDIANA MICHIGAN POWER COMPANY A.A. Pena P.J. DeMaria A.A. Pena, Treasurer P.J. DeMaria, Vice President and Controller KENTUCKY POWER COMPANY A.A. Pena P.J. DeMaria A.A. Pena, Treasurer P.J. DeMaria, Vice President and Controller OHIO POWER COMPANY A.A. Pena P.J. DeMaria A.A. Pena, Treasurer P.J. DeMaria, Vice President and Controller Date: May 13, 1998 II-3 EX-27 2 ARTICLE UT FIN. DATA SCH. FOR 10-Q
UT 0000004904 AMERICAN ELECTRIC POWER COMPANY, INC. 1,000 3-MOS DEC-31-1997 MAR-31-1998 PER-BOOK 11,609,619 1,483,751 1,585,635 285,735 1,833,663 16,798,403 1,295,936 1,795,378 1,641,607 4,732,921 127,605 46,566 5,181,556 179,900 0 460,250 120,285 0 445,247 100,784 5,403,289 16,798,403 2,170,582 91,604 1,823,046 1,914,650 255,932 794 256,726 103,551 150,586 2,589 150,586 113,996 55,604 338,990 $0.79 $0.79 Represents preferred stock dividend requirements of subsidiaries; deducted before computation of net income.
-----END PRIVACY-ENHANCED MESSAGE-----