-----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, JDgJDE509UPvVplboXZsKRXTqytDihA4cThOHrWWvy7Xc7X7KFOZ6MmeJztEYeMc wIGPGKCRvDrW1rFgEToaPg== 0000004904-97-000097.txt : 19970815 0000004904-97-000097.hdr.sgml : 19970815 ACCESSION NUMBER: 0000004904-97-000097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 1934 Act SEC FILE NUMBER: 001-03525 FILM NUMBER: 97660705 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 JUNE 30, 1997 [ ] 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 July 31, 1997 was 189,188,675. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES FORM 10-Q For The Quarter Ended June 30, 1997
INDEX Page Part I. FINANCIAL INFORMATION American Electric Power Company, Inc. and Subsidiary Companies: Consolidated Statements of Income and Consolidated 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-11 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-7 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . C-8 - C-11 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-9 Indiana Michigan Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . . E-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . E-2 - E-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . E-4 Notes to Consolidated Financial Statements . . . . . . . . . E-5 - E-6 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . E-7 - E-9 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 June 30, 1997 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-10 Part II. OTHER INFORMATION Item 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 - II-3 Item 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3 - II-5 Item 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-6 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 Six Months Ended June 30, June 30, 1997 1996 1997 1996 OPERATING REVENUES . . . . . . . . . . . .$1,382,158 $1,400,941 $2,874,227 $2,918,722 OPERATING EXPENSES: Fuel and Purchased Power . . . . . . . . 391,878 404,914 826,575 845,891 Other Operation. . . . . . . . . . . . . 300,305 300,723 602,585 604,431 Maintenance. . . . . . . . . . . . . . . 124,728 139,043 224,113 244,466 Depreciation and Amortization. . . . . . 151,549 149,414 303,501 298,528 Taxes Other Than Federal Income Taxes. . 122,166 120,990 248,780 248,616 Federal Income Taxes . . . . . . . . . . 70,277 65,232 175,440 164,043 TOTAL OPERATING EXPENSES . . . . 1,160,903 1,180,316 2,380,994 2,405,975 OPERATING INCOME . . . . . . . . . . . . . 221,255 220,625 493,233 512,747 NONOPERATING INCOME (LOSS) . . . . . . . . 5,686 1,030 10,195 (97) INCOME BEFORE INTEREST CHARGES AND PREFERRED DIVIDENDS . . . . . . . . . . . 226,941 221,655 503,428 512,650 INTEREST CHARGES . . . . . . . . . . . . . 103,651 98,363 197,473 198,388 PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES . . . . . . . . . . . . . 2,151 10,626 12,255 21,584 NET INCOME . . . . . . . . . . . . . . . .$ 121,139 $ 112,666 $ 293,700 $ 292,678 AVERAGE NUMBER OF SHARES OUTSTANDING . . . 188,822 187,104 188,585 186,913 EARNINGS PER SHARE . . . . . . . . . . . . $0.64 $0.60 $1.56 $1.57 CASH DIVIDENDS PAID PER SHARE. . . . . . . $0.60 $0.60 $1.20 $1.20 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . $1,607,776 $1,477,852 $1,547,746 $1,409,645 NET INCOME . . . . . . . . . . . . . . . . 121,139 112,666 293,700 292,678 DEDUCTIONS: Cash Dividends Declared. . . . . . . . . 113,227 112,205 226,170 224,188 Other. . . . . . . . . . . . . . . . . . 649 120 237 (58) BALANCE AT END OF PERIOD . . . . . . . . . $1,615,039 $1,478,193 $1,615,039 $1,478,193 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . . . $ 9,393,950 $ 9,341,849 Transmission . . . . . . . . . . . . . . . . . . . . . . 3,399,090 3,380,258 Distribution . . . . . . . . . . . . . . . . . . . . . . 4,498,915 4,402,449 General (including mining assets and nuclear fuel) . . . 1,516,360 1,491,781 Construction Work in Progress. . . . . . . . . . . . . . 406,401 353,832 Total Electric Utility Plant . . . . . . . . . . 19,214,716 18,970,169 Accumulated Depreciation and Amortization. . . . . . . . 7,745,799 7,549,798 NET ELECTRIC UTILITY PLANT . . . . . . . . . . . 11,468,917 11,420,371 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . . . 1,321,882 892,674 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . . . 94,179 57,539 Accounts Receivable. . . . . . . . . . . . . . . . . . . 565,939 535,024 Allowance for Uncollectible Accounts . . . . . . . . . . (7,227) (3,692) Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 255,363 235,257 Materials and Supplies . . . . . . . . . . . . . . . . . 243,827 251,896 Accrued Utility Revenues . . . . . . . . . . . . . . . . 167,473 174,966 Prepayments. . . . . . . . . . . . . . . . . . . . . . . 132,196 103,891 TOTAL CURRENT ASSETS . . . . . . . . . . . . . . 1,451,750 1,354,881 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . . . 1,850,321 1,889,482 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . . . 233,948 325,580 TOTAL. . . . . . . . . . . . . . . . . . . . . $16,326,818 $15,882,988 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock-Par Value $6.50: 1997 1996 Shares Authorized . . . .300,000,000 300,000,000 Shares Issued . . . . . .198,188,667 197,234,992 (8,999,992 shares were held in treasury) . . . . . . . $ 1,288,226 $ 1,282,027 Paid-in Capital. . . . . . . . . . . . . . . . . . . . . 1,745,759 1,715,554 Retained Earnings. . . . . . . . . . . . . . . . . . . . 1,615,039 1,547,746 Total Common Shareholders' Equity. . . . . . . . 4,649,024 4,545,327 Cumulative Preferred Stocks of Subsidiaries: Not Subject to Mandatory Redemption. . . . . . . . . . 46,869 90,323 Subject to Mandatory Redemption. . . . . . . . . . . . 127,605 509,900 Long-term Debt . . . . . . . . . . . . . . . . . . . . . 5,077,757 4,796,768 TOTAL CAPITALIZATION . . . . . . . . . . . . . . 9,901,255 9,942,318 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . 1,106,210 1,002,208 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . . . 265,870 86,942 Short-term Debt. . . . . . . . . . . . . . . . . . . . . 639,400 319,695 Accounts Payable . . . . . . . . . . . . . . . . . . . . 176,050 206,227 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 372,827 414,173 Interest Accrued . . . . . . . . . . . . . . . . . . . . 75,171 75,124 Obligations Under Capital Leases . . . . . . . . . . . . 94,417 89,553 Other. . . . . . . . . . . . . . . . . . . . . . . . . . 294,536 304,323 TOTAL CURRENT LIABILITIES. . . . . . . . . . . . 1,918,271 1,496,037 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . 2,601,701 2,643,143 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . . . 389,818 401,491 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . . . 235,959 240,598 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . . . 173,604 157,193 COMMITMENTS AND CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . . . $16,326,818 $15,882,988 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 293,700 $ 292,678 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . . . . 303,318 294,865 Deferred Federal Income Taxes. . . . . . . . . . . . . . . . . (17,262) (9,048) Deferred Investment Tax Credits. . . . . . . . . . . . . . . . (11,673) (11,760) Amortization of Deferred Property Taxes. . . . . . . . . . . . 76,422 74,709 Amortization of Operating Expenses and Carrying Charges (net). . . . . . . . . . . . . . . . . . . 14,317 18,183 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . . . . (27,380) (52,667) Fuel, Materials and Supplies . . . . . . . . . . . . . . . . . (12,037) 622 Accrued Utility Revenues . . . . . . . . . . . . . . . . . . . 7,493 36,269 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . (28,305) (44,902) Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . (30,177) (42,423) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . . . (41,346) (49,668) Revenue Refunds Accrued. . . . . . . . . . . . . . . . . . . . (1,606) 26,812 Other (net). . . . . . . . . . . . . . . . . . . . . . . . . . . 40,956 20,615 Net Cash Flows From Operating Activities . . . . . . . . . 566,420 554,285 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . . . . (331,278) (215,227) Investment in Yorkshire Electricity Group plc. . . . . . . . . . (357,205) - Proceeds from Sale of Property and Other . . . . . . . . . . . . 4,785 6,670 Net Cash Flows Used For Investing Activities . . . . . . . (683,698) (208,557) FINANCING ACTIVITIES: Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . 39,023 33,121 Issuance of Long-term Debt . . . . . . . . . . . . . . . . . . . 651,318 309,404 Change in Short-term Debt (net). . . . . . . . . . . . . . . . . 319,705 161,346 Retirement of Cumulative Preferred Stock . . . . . . . . . . . . (433,234) (38,057) Retirement of Long-term Debt . . . . . . . . . . . . . . . . . . (196,724) (556,895) Dividends Paid on Common Stock . . . . . . . . . . . . . . . . . (226,170) (224,188) Net Cash Flows From (Used For) Financing Activities. . . . 153,918 (315,269) Net Increase in Cash and Cash Equivalents. . . . . . . . . . . . . 36,640 30,459 Cash and Cash Equivalents at Beginning of Period . . . . . . . . . 57,539 79,955 Cash and Cash Equivalents at End of Period . . . . . . . . . . . . $ 94,179 $ 110,414 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $190,815,000 and $191,603,000 and for income taxes was $146,130,000 and $138,641,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $105,663,000 and $83,502,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial state-ments should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. Certain prior-period amounts have been reclassified to conform with current-period presentation. 2. FINANCING AND RELATED ACTIVITIES During the first six months of 1997, subsidiaries issued $655 million principal amount of long-term obligations: three series of first mortgage bonds totaling $144 million at 6.35%, 6.4% and 6.71% all due in 2000; $180 million of junior subordinated deferrable interest debentures at 7.92% and 8% due in 2027; $50 million of financing obligations under a sale-leaseback agreement and other loan agreements of $275 million at 6.06% for an investment in the United Kingdom due in 1999 and $6 million at 12.42% for an investment in China due in 2000. The proceeds were used during 1997 to redeem 4,257,490 shares of cumulative preferred stock as detailed in the table below and to retire $196 million principal amount of long-term debt: $156 million of first mortgage bonds with interest rates ranging from 8.75% to 9.35% due in 2021 and 2022; $20 million of variable rate installment purchase contracts due in 2025; and $20 million of term loans with an interest rate of 7.19% at maturity. Number Total of Shares Reacquisition Series Retired Price Range Price (in thousands) 4.08%-4.56% 434,540 $ 61.00-$ 69.94 $ 29,361 5.90%-5.92% 1,515,900 101.83- 103.20 156,074 6.02%-6-7/8% 1,307,050 103.71- 107.26 137,071 7.80%-7-7/8% 1,000,000 105.20- 105.50 105,232 $427,738 3. YORKSHIRE ACQUISITION In April 1997 the Company and Public Service Company of Colorado through an equally owned joint venture acquired all of the outstanding shares of Yorkshire Electricity Group plc, an electric distribution company in the United Kingdom. Total consideration paid by the joint venture was approximately $2.4 billion which was financed by a combination of equity and non-recourse debt. The Company uses the equity method of accounting for its investment in Yorkshire Electricity. The investment in the joint venture is included in other property and investments ($361 million) and the earnings ($4.1 million)from the Yorkshire investment are included in nonoperating income. 4. COMMITMENTS AND CONTINGENCIES Taxes As discussed in Note 3, the Company and Public Service Company of Colorado acquired a United Kingdom distribution company, Yorkshire Electricity Group plc. On July 2, 1997 the United Kingdom's governing Labour Party proposed a budget that includes a windfall profits tax on certain privatized entities. The tax was enacted on July 31, 1997. The windfall profits tax liability for Yorkshire Electricity Group plc is estimated to be 135 million pounds sterling ($222 million) and is payable in two equal installments with the first due in December 1997 and the second installment a year later. AEP's share of the tax is estimated to be $111 million. The effect on after tax net earnings of the windfall profits tax is currently being assessed and will be recorded in the third quarter. As discussed in Note 9, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. The Company filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of COLI interest deductions through June 30, 1997 would reduce earnings by approximately $267 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Steam Generator Replacement The Company has announced plans to replace the four steam generators in the Donald C. Cook Nuclear Plant's Unit 1 in Bridgman, Michigan. The replacement will take place during the regularly scheduled refueling outage in the spring of the year 2000. The unit is expected to be out of service for about 100 days. The cost of similar steam generator replacement projects in the industry have ranged from $150 million to $180 million. Certain construction commitments to produce the steam generator components with long lead time production requirements have been made. The plant's Unit 2 steam generators were replaced in 1988. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it would have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in the 1996 Annual Report. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1997 vs. SECOND QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Net income increased 8% or $8.5 million in the second quarter primarily due to reduced operating expenses, increased nonoperating income and the favorable effects of a preferred stock redemption program. For the year-to-date period net income was relatively unchanged as the negative effects of milder weather on revenues were largely offset by the effects of decreased operating expenses, increased nonoperating income and the favorable impact of the preferred stock redemptions. Operating revenues decreased in both periods as a result of decreased energy sales to retail customers partly offset by the effect of increased wholesale energy transactions. Retail energy sales decreased 1% in the second quarter and 2% in the year-to-date period reflecting decreased energy sales to residential and commercial customers due to milder weather in 1997. Energy sales to wholesale customers were up 13% in the second quarter and 11% in the year-to-date period primarily due to increased coal conversion service sales which are for the conversion of customers' coal to electricity. The substantial increase in coal conversion service sales reflects the cost effectiveness of this service to customers. An increase in transmission and other related services to wholesale customers also contributed to an increase in wholesale revenues. Income statement items which changed significantly were: Increase (Decrease) Second Quarter Year-To-Date (in millions) % (in millions) % Fuel and Purchased Power Expense . . . . . . . . $(13.0) (3) $(19.3) (2) Maintenance Expense. . . . . . (14.3) (10) (20.4) (8) Federal Income Taxes . . . . . 5.0 8 11.4 7 Nonoperating Income. . . . . . 4.7 N.M. 10.3 N.M. Preferred Stock Dividend Requirements of Subsidiaries. (8.5) (80) (9.3) (43) N.M. = Not Meaningful The decrease in operating expenses were mainly due to reductions in fuel, purchased power and maintenance expenses. The decrease in fuel and purchased power expense was mainly due to reduced generation reflecting the weather related decrease in sales to retail customers. Maintenance expense declined due primarily to a decline in storm damage reflecting the milder weather. The increase in federal income tax expense attributable to operations was due to changes in certain book/tax timing differences accounted for on a flow-through basis for rate-making and financial reporting purposes, including the effect of recent federal legislation limiting corporate owned life insurance tax deductions. Nonoperating income increased in both periods due to the Company's 50% share of earnings from the recently acquired Yorkshire Electricity Group plc of approximately $4.1 million. Also contributing to the year-to-date increase were the effect of losses recorded in the first quarter of 1996 from certain demand side management program costs and clean-up of underground fuel storage tanks at a subsidiary's facilities. Preferred stock dividend requirements of the subsidiaries decreased in both comparative periods reflecting the redemption of over 4 million shares of cumulative preferred stock completed during the first half of 1997 as part of a redemption program. FINANCIAL CONDITION Total plant and property additions including capital leases for the first six months were $438 million. During the first six months of 1997 subsidiaries issued $655 million principal amount of long-term obligations at interest rates ranging from 6.06% to 12.42%; retired $196 million principal amount of long-term debt with interest rates ranging from 3.45% to 9.35%; redeemed 4,257,490 shares of cumulative preferred stock with rates ranging from 4.08% to 7-7/8% at a total cost of $433 million and increased short-term debt by $320 million. YORKSHIRE ACQUISITION Yorkshire Electricity Group plc, an electric distribution company in the United Kingdom, was acquired by the Company and Public Service Company of Colorado through an equally owned joint venture in April 1997. Total consideration paid by the joint venture was approximately $2.4 billion which was financed by a combination of equity and non-recourse debt. The Company uses the equity method of accounting for its investment in Yorkshire Electricity. The investment in the joint venture is included in other property and investments and the earnings from the Yorkshire investment are included in nonoperating income. TAXES On July 2, 1997 the United Kingdom's governing Labour Party proposed a budget that includes a windfall profits tax on certain privatized entities. The tax was enacted on July 31, 1997. The windfall profits tax liability for Yorkshire Electricity Group plc is estimated to be 135 million pounds sterling ($222 million) and is payable in two equal installments with the first due in December 1997 and the second installment a year later. AEP's share of the tax is estimated to be $111 million. The effect on after tax net earnings of the windfall profits tax is currently being assessed and will be recorded in the third quarter. STEAM GENERATOR REPLACEMENT The Company has announced plans to replace the four steam generators in its Donald C. Cook Nuclear Plant's Unit 1. The replacement will take place during a regularly scheduled refueling outage in the spring of the year 2000. The unit is expected to be out of service for about 100 days. The cost of similar steam generator replacement projects in the industry have ranged from $150 million to $180 million. Certain construction commitments to produce the steam generator components with long lead time production requirements have been made. The plant's Unit 2 steam generators were replaced in 1988. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published revised a National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it would have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. AEP GENERATING COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $53,433 $55,313 $112,529 $112,797 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 18,739 21,736 46,089 45,268 Rent - Rockport Plant Unit 2 . . . . . 17,070 17,071 34,141 34,148 Other Operation. . . . . . . . . . . . 2,714 2,962 5,844 6,111 Maintenance. . . . . . . . . . . . . . 5,357 3,883 7,743 7,376 Depreciation . . . . . . . . . . . . . 5,412 5,413 10,807 10,826 Taxes Other Than Federal Income Taxes. 850 907 1,729 1,882 Federal Income Taxes . . . . . . . . . 850 886 1,607 1,937 TOTAL OPERATING EXPENSES . . . 50,992 52,858 107,960 107,548 OPERATING INCOME . . . . . . . . . . . . 2,441 2,455 4,569 5,249 NONOPERATING INCOME. . . . . . . . . . . 950 834 1,800 1,624 INCOME BEFORE INTEREST CHARGES . . . . . 3,391 3,289 6,369 6,873 INTEREST CHARGES . . . . . . . . . . . . 1,070 1,058 2,011 2,144 NET INCOME . . . . . . . . . . . . . . . $ 2,321 $ 2,231 $ 4,358 $ 4,729 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $2,637 $1,953 $1,886 $1,955 NET INCOME . . . . . . . . . . . . . . . 2,321 2,231 4,358 4,729 CASH DIVIDENDS DECLARED. . . . . . . . . 1,286 2,000 2,572 4,500 BALANCE AT END OF PERIOD . . . . . . . . $3,672 $2,184 $3,672 $2,184 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)
June 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production. . . . . . . . . . . . . . . . . . . . . . . . $626,769 $627,926 General . . . . . . . . . . . . . . . . . . . . . . . . . 3,082 2,931 Construction Work in Progress . . . . . . . . . . . . . . 2,346 1,400 Total Electric Utility Plant. . . . . . . . . . . 632,197 632,257 Accumulated Depreciation. . . . . . . . . . . . . . . . . 247,114 238,532 NET ELECTRIC UTILITY PLANT. . . . . . . . . . . . 385,083 393,725 CURRENT ASSETS: Cash and Cash Equivalents . . . . . . . . . . . . . . . . 25 139 Accounts Receivable . . . . . . . . . . . . . . . . . . . 19,079 18,879 Fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,200 17,792 Materials and Supplies. . . . . . . . . . . . . . . . . . 4,178 4,266 Prepayments . . . . . . . . . . . . . . . . . . . . . . . 607 804 TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . 41,089 41,880 REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . 5,748 5,857 DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . 2,986 1,449 TOTAL . . . . . . . . . . . . . . . . . . . . . $434,906 $442,911 See Notes to Financial Statements.
AEP GENERATING COMPANY BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (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 . . . . . . . . . . . . . . . . . . . . . 42,235 44,235 Retained Earnings . . . . . . . . . . . . . . . . . . . . 3,672 1,886 Total Common Shareholder's Equity . . . . . . . . 46,907 47,121 Long-term Debt. . . . . . . . . . . . . . . . . . . . . . 69,562 89,554 TOTAL CAPITALIZATION. . . . . . . . . . . . . . . 116,469 136,675 OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . . . . . 1,463 1,613 CURRENT LIABILITIES: Short-term Debt - Notes Payable . . . . . . . . . . . . . 18,800 9,575 Accounts Payable. . . . . . . . . . . . . . . . . . . . . 15,132 7,510 Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . 4,108 2,903 Rent Accrued - Rockport Plant Unit 2. . . . . . . . . . . 4,963 4,963 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 299 3,932 TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 43,302 28,883 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2 . . . . . . . . . . . . . . . . . . 141,687 144,472 REGULATORY LIABILITIES: Deferred Investment Tax Credits . . . . . . . . . . . . . 71,776 73,460 Amounts Due to Customers for Income Taxes . . . . . . . . 33,221 33,893 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 88 66 TOTAL REGULATORY LIABILITIES. . . . . . . . . . . 105,085 107,419 DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . 26,900 23,849 TOTAL . . . . . . . . . . . . . . . . . . . . . $434,906 $442,911 See Notes to Financial Statements. /TABLE AEP GENERATING COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,358 $ 4,729 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 10,807 10,826 Deferred Federal Income Taxes. . . . . . . . . . . . . . 2,379 2,434 Deferred Investment Tax Credits. . . . . . . . . . . . . (1,684) (1,687) Amortization of Deferred Gain on Sale and Leaseback - Rockport Plant Unit 2. . . . . . . . . (2,785) (2,786) Deferred Property Taxes. . . . . . . . . . . . . . . . . (1,460) (1,562) Changes in Certain Current Assets and Liabilities: Accounts Receivable. . . . . . . . . . . . . . . . . . . (200) (609) Fuel, Materials and Supplies . . . . . . . . . . . . . . 680 (1,831) Accounts Payable . . . . . . . . . . . . . . . . . . . . 7,622 (584) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 1,205 3,387 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (3,914) (1,616) Net Cash Flows From Operating Activities . . . . . . 17,008 10,701 INVESTING ACTIVITIES - Construction Expenditures . . . . . . (1,765) (1,251) FINANCING ACTIVITIES: Return of Capital to Parent Company. . . . . . . . . . . . (2,000) (500) Retirement of Long-term Debt . . . . . . . . . . . . . . . (20,010) - Change in Short-term Debt (net). . . . . . . . . . . . . . 9,225 (4,400) Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (2,572) (4,500) Net Cash Flows Used For Financing Activities . . . . (15,357) (9,400) Net Increase (Decrease) in Cash and Cash Equivalents . . . . (114) 50 Cash and Cash Equivalents at Beginning of Period . . . . . . 139 22 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 25 $ 72 Supplemental Disclosure: Cash paid (received) for interest net of capitalized amounts was $1,819,000 and $2,035,000 and for income taxes was $(562,000) and $(764,000) in 1997 and 1996, respectively. See Notes to Financial Statements.
AEP GENERATING COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. FINANCING ACTIVITIES In June 1997, the Company redeemed $10 million each of the 1995 Series A and 1995 Series B Pollution Control Revenue Bonds due 2025. AEP GENERATING COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS SECOND QUARTER 1997 vs. SECOND QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 Operating revenues are derived from the sale of Rockport Plant energy and capacity to two affiliated companies and one unaffiliated utility pursuant to Federal Energy Regulatory Commission (FERC) approved long-term unit power agreements. The unit power agreements provide for recovery of costs including a FERC approved rate of return on common equity and a return on other capital net of temporary cash investments. Net income increased $0.1 million or 4% in the second quarter primarily due to income earned on temporary cash investments. The decrease in net income of $0.4 million or 8% for the year-to-date period is a result of a decrease in the return on common equity due to a return of capital to the parent company, and a decrease in the return on other capital, partially offset by income earned on temporary cash investments and lower financing costs. Income statement items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . . $(1.9) (3) $(0.3) N.M. Fuel Expense . . . . . . . . (3.0) (14) 0.8 2 Other Operation Expense. . . (0.2) (8) (0.3) (4) Maintenance Expense. . . . . 1.5 38 0.4 5 Taxes Other Than Federal Income Taxes . . . . . . . (0.1) (6) (0.2) (8) Federal Income Taxes . . . . N.M. N.M. (0.3) (17) Nonoperating Income. . . . . 0.1 14 0.2 11 Interest Charges . . . . . . N.M. N.M. (0.1) (6) N.M. = Not Meaningful The decrease in operating revenues for the second quarter is primarily attributable to a decrease in recoverable fuel expense. The decrease for the year-to-date period reflects the decreased returns previously mentioned, partially offset by an increase in recoverable operating expenses. Fuel expense decreased in the second quarter due to reduced generation as Rockport Plant Unit 1 was out-of-service for general boiler inspection and repair. Although generation decreased, fuel expense increased in the year-to-date period due to an increase in the average cost of coal consumed. Other operation expense decreased for both comparative periods as a result of lower general and administrative expenses. The general boiler inspection and repair on Rockport Plant Unit 1 accounted for the increased maintenance expense. Taxes other than federal income taxes decreased due to a reduction in Indiana property tax expense resulting from decreases in assessed values for personal property and a reduction in the Indiana supplemental net income tax accrual resulting from lower pre-tax book income. Federal income taxes attributable to operations also decreased due to lower pre-tax book income. The increases in nonoperating income reflect the effect of higher average balances of temporary cash investments during the current period. Year-to-date interest charges declined due to lower average short-term debt balances. APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $373,084 $379,887 $789,534 $820,859 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 89,355 91,907 184,259 181,503 Purchased Power. . . . . . . . . . . . 75,468 76,510 161,008 167,637 Other Operation. . . . . . . . . . . . 61,427 61,066 125,267 123,809 Maintenance. . . . . . . . . . . . . . 29,080 36,225 51,890 59,376 Depreciation and Amortization. . . . . 34,274 33,168 68,249 66,041 Taxes Other Than Federal Income Taxes. 29,763 29,014 60,036 60,316 Federal Income Taxes . . . . . . . . . 8,320 8,778 29,094 35,321 TOTAL OPERATING EXPENSES . . . 327,687 336,668 679,803 694,003 OPERATING INCOME . . . . . . . . . . . . 45,397 43,219 109,731 126,856 NONOPERATING INCOME (LOSS) . . . . . . . 79 (21) 323 576 INCOME BEFORE INTEREST CHARGES . . . . . 45,476 43,198 110,054 127,432 INTEREST CHARGES . . . . . . . . . . . . 30,098 27,092 58,192 55,702 NET INCOME . . . . . . . . . . . . . . . 15,378 16,106 51,862 71,730 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 680 4,100 5,645 8,201 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 14,698 $ 12,006 $ 46,217 $ 63,529 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $211,382 $223,469 $208,472 $199,021 NET INCOME . . . . . . . . . . . . . . . 15,378 16,106 51,862 71,730 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 28,609 27,075 57,218 54,150 Cumulative Preferred Stock . . . . . 573 3,917 2,077 7,834 Capital Stock Expense. . . . . . . . . 107 184 3,568 368 BALANCE AT END OF PERIOD . . . . . . . . $197,471 $208,399 $197,471 $208,399 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)
June 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,912,168 $1,883,271 Transmission . . . . . . . . . . . . . . . . . . . . 1,067,101 1,054,207 Distribution . . . . . . . . . . . . . . . . . . . . 1,538,707 1,495,445 General. . . . . . . . . . . . . . . . . . . . . . . 198,763 188,740 Construction Work in Progress. . . . . . . . . . . . 78,987 95,469 Total Electric Utility Plant . . . . . . . . 4,795,726 4,717,132 Accumulated Depreciation and Amortization. . . . . . 1,825,806 1,782,017 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,969,920 2,935,115 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 29,151 29,621 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 8,846 7,260 Accounts Receivable. . . . . . . . . . . . . . . . . 157,611 160,021 Allowance for Uncollectible Accounts . . . . . . . . (2,257) (687) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 60,031 52,605 Materials and Supplies . . . . . . . . . . . . . . . 52,940 56,605 Accrued Utility Revenues . . . . . . . . . . . . . . 32,041 51,843 Prepayments. . . . . . . . . . . . . . . . . . . . . 14,657 10,797 TOTAL CURRENT ASSETS . . . . . . . . . . . . 323,869 338,444 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 443,131 451,272 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 41,792 46,285 TOTAL. . . . . . . . . . . . . . . . . . . $3,807,863 $3,800,737 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (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. . . . . . . . . . . . . . . . . . . 592,815 575,380 Retained Earnings. . . . . . . . . . . . . . . . . . 197,471 208,472 Total Common Shareholder's Equity. . . . . . 1,050,744 1,044,310 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 19,795 29,815 Subject to Mandatory Redemption. . . . . . . . . . 22,310 190,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,494,041 1,365,834 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,586,890 2,629,959 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 127,408 109,203 CURRENT LIABILITIES: Short-term Debt. . . . . . . . . . . . . . . . . . . 103,250 60,700 Accounts Payable . . . . . . . . . . . . . . . . . . 90,277 85,892 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 53,255 40,935 Customer Deposits. . . . . . . . . . . . . . . . . . 13,832 13,750 Interest Accrued . . . . . . . . . . . . . . . . . . 20,530 20,938 Other. . . . . . . . . . . . . . . . . . . . . . . . 56,278 80,360 TOTAL CURRENT LIABILITIES. . . . . . . . . . 337,422 302,575 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 659,893 669,964 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 70,296 72,677 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 25,954 16,359 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $3,807,863 $3,800,737 See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,862 $ 71,730 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . . 68,902 66,694 Deferred Federal Income Taxes. . . . . . . . . . . . . . . (6,524) 2,030 Deferred Investment Tax Credits. . . . . . . . . . . . . . (2,381) (2,409) Deferred Power Supply Costs (net). . . . . . . . . . . . . 9,093 5,006 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . . 3,980 (37,278) Fuel, Materials and Supplies . . . . . . . . . . . . . . . (3,761) 16,312 Accrued Utility Revenues . . . . . . . . . . . . . . . . . 19,802 14,095 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . (3,860) (10,792) Accounts Payable . . . . . . . . . . . . . . . . . . . . . 4,385 819 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . 12,320 (774) Revenue Refunds Accrued. . . . . . . . . . . . . . . . . . (1,606) 26,812 Other (net). . . . . . . . . . . . . . . . . . . . . . . . . (4,731) (15,370) Net Cash Flows From Operating Activities . . . . . . . 147,481 136,875 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . . (91,759) (74,210) Proceeds from Sale of Property . . . . . . . . . . . . . . . 2,241 1,079 Net Cash Flows Used For Investing Activities . . . . . (89,518) (73,131) FINANCING ACTIVITIES: Capital Contributions from Parent Company. . . . . . . . . . 20,000 25,000 Issuance of Long-term Debt . . . . . . . . . . . . . . . . . 183,257 200,825 Change in Short-term Debt (net). . . . . . . . . . . . . . . 42,550 (31,775) Retirement of Cumulative Preferred Stock . . . . . . . . . . (183,842) - Retirement of Long-term Debt . . . . . . . . . . . . . . . . (56,378) (189,164) Dividends Paid on Common Stock . . . . . . . . . . . . . . . (57,218) (54,150) Dividends Paid on Cumulative Preferred Stock . . . . . . . . (4,746) (7,834) Net Cash Flows Used For Financing Activities . . . . . (56,377) (57,098) Net Increase in Cash and Cash Equivalents. . . . . . . . . . . 1,586 6,646 Cash and Cash Equivalents at Beginning of Period . . . . . . . 7,260 8,664 Cash and Cash Equivalents at End of Period . . . . . . . . . . $ 8,846 $ 15,310 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $56,791,000 and $51,719,000 and for income taxes was $24,890,000 and $29,226,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $11,797,000 and $5,584,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. Certain prior-period amounts have been reclassified to conform with current-period presentation. 2. RATE MATTERS On June 13, 1997, the Company filed an application with the Virginia State Corporation Commission (Virginia SCC) for approval of an alternative regulatory plan (Plan) and for an increase of $30.5 million in base rates on an annual basis to be effective July 13, 1997. The Company's Plan would institute a moratorium period during which no changes would be made prior to January 1, 2001, from the total rate levels (including the Company's current 1.482 cents/kwh fuel factor) proposed by the Company. The Company's filing includes a proposal to shift revenue among the Company's customer classes with the effect that customer rates could change significantly from year to year. In addition, it includes a sharing of earnings above certain levels between the Company and its customers, and acceleration of the recovery of certain regulatory assets. On July 10, 1997, the Virginia SCC issued an order suspending implementation of new rates until November 11, 1997. A public hearing has been scheduled for May 19, 1998 to consider the Company's proposal. 3. FINANCING ACTIVITIES During the first six months of 1996, the Company issued two series of first mortgage bonds of $48 million each with rates of 6.35% and 6.71% due in 2000 and $90 million of 8% Series Junior Subordinated Deferrable Interest Debentures due in 2027. In March 1997, the Company redeemed $56 million of first mortgage bonds with interest rates of 8.75% and 9.35%. As part of a tender offer, the following number of shares of Cumulative Preferred Stock were reacquired and retired at the prices listed plus an amount equal to accrued dividends: Number Price Total of Shares Paid Per Reacquisition Series Retired Share Price (in thousands) 4-1/2% 99,563 $ 69.02 $ 6,872 5.90% 422,900 103.17 43,631 5.92% 538,500 103.20 55,573 6.85% 215,500 107.26 23,114 7.80% 22,500 105.50 2,374 In April 1997, the Company redeemed the remaining 477,500 shares of 7.80% Series Cumulative Preferred Stock, par value $100, at $105.20 per share. In June 1997, the Company received a $20 million cash capital contribution from its parent which was credited to paid-in capital. 4. CONTINGENCIES Taxes As discussed in Note 9, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of the COLI interest deductions through June 30, 1997 would reduce earnings by approximately $67 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it could have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in its 1996 Annual Report. APPALACHIAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1997 vs. SECOND QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Net income declined 5% in the second quarter primarily due to a reduction in operating revenues and increased interest charges reflecting an increase in long-term debt outstanding. For the year-to-date period net income decreased 28% predominantly due to a decline in retail revenues reflecting milder winter weather in 1997. Income statement lines which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . . $(6.8) (2) $(31.3) (4) Fuel Expense . . . . . . . . (2.6) (3) 2.8 2 Purchased Power Expense. . . (1.0) (1) (6.6) (4) Maintenance Expense. . . . . (7.1) (20) (7.5) (13) Federal Income Taxes . . . . (0.5) (5) (6.2) (18) Interest Charges . . . . . . 3.0 11 2.5 4 The reduction in operating revenues was due to declines in both retail and wholesale revenues. Retail revenues declined due to decreased energy demand from weather-sensitive residential and commercial customers of 1% and 4%, respectively, in the second quarter and 9% and 5%, respectively, in the year-to-date period. Revenues from wholesale customers decreased 4% in the quarter and 5% in the year-to-date period while wholesale sales increased 7% in the quarter and 4% in the year-to-date period. The decreases in wholesale revenues resulted from a decrease in the average price per kilowatthour sold. The increases in wholesale sales resulted from substantial increases in coal conversion services partially offset by decreases of 8% in the second quarter and 11% in the year-to-date period of traditional sales for resale to unaffiliated utilities. Coal conversion service sales are for the conversion of customers' coal to electricity and are priced to exclude customer-provided fuel. Traditional sales for resale are for the sale of electricity generated from the Company's coal and are priced to include the cost of coal. The substantial increase in coal conversion service sales reflects the cost effectiveness of this service to customers. The reduction in traditional sales for resale resulted from the milder winter weather in 1997 and the increasingly competitive nature of the wholesale power markets. The decrease in fuel expense in the quarter was due to a decrease in generation. In the year-to-date period fuel expense increased due to the operation of the West Virginia power supply cost recovery mechanism as overcollections of fuel cost were deferred in accordance with a rate order, partly offset by decreased coal-fired generation. Purchased power expense declined in the year-to-date period as lower demand led to reduced purchases of energy from the AEP System Power Pool (Power Pool), partly offset by an increase in Power Pool capacity charges. An increase in the Company's prior twelve-month peak demand relative to the total peak demand of all Power Pool members caused the increase in Power Pool capacity charges. Maintenance expense decreased as a result of the effects of the recognition of incremental storm damage expense in accordance with directions of the Virginia State Corporation Commission in the second quarter of 1996 and reduced levels of repairs to distribution facilities in 1997. The decrease in federal income tax expense attributable to operations was primarily due to a decrease in pre-tax operating income. Interest charges increased primarily as a result of an increase in the balance of long-term debt outstanding issued to finance the reacquisition of preferred stock. A January 1997 tender offer that retired $130 million stated value preferred stock on February 28, 1997 and the subsequent reacquisition of $48 million stated value preferred stock on April 11, 1997 were responsible for a decrease in preferred stock dividend requirements. FINANCIAL CONDITION Total plant and property additions including capital leases for the first six months of 1997 were $104 million. The Company issued two series of first mortgage bonds of $48 million each with rates of 6.35% and 6.71% due in 2000. The Company also issued $90 million of 8% series Junior Subordinated Deferrable Interest Debentures due in 2027. In March 1997, the Company redeemed $56 million of first mortgage bonds with interest rates of 8.75% and 9.35%. Short-term debt increased by $43 million from year-end balances. In June 1997, the Company received a $20 million cash capital contribution from its parent which was credited to paid-in capital. As part of the January 1997 tender offer for all of the Company's outstanding preferred stock that was announced in conjunction with a special meeting of shareholders, 1,298,963 shares of $100 stated value preferred stocks were reacquired. The total cost of the stock reacquisition was $134 million. At the special meeting of shareholders held on February 28, 1997, the Company's articles of incorporation were amended to remove certain capitalization ratio requirements which restricted the Company's ability to issue debt. As a result unsecured borrowings are now limited only by the Public Utility Holding Company Act of 1935 and the Virginia State Corporation Commission with the current limitation set at $250 million for unsecured short-term borrowings. In April 1997, all remaining shares of the 7.80% Series of Preferred Stock were reacquired for $50 million. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of the cost of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it could have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $263,263 $269,023 $528,270 $540,063 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 37,129 45,169 81,929 92,675 Purchased Power. . . . . . . . . . . . 45,319 39,971 83,834 83,440 Other Operation. . . . . . . . . . . . 43,621 46,844 85,751 91,008 Maintenance. . . . . . . . . . . . . . 19,743 17,409 33,067 31,332 Depreciation . . . . . . . . . . . . . 22,572 21,966 45,019 43,757 Amortization of Zimmer Plant Phase-in Costs . . . . . . . . 7,334 7,965 15,741 16,413 Taxes Other Than Federal Income Taxes. 29,654 28,088 59,623 56,195 Federal Income Taxes . . . . . . . . . 14,923 14,438 32,908 29,644 TOTAL OPERATING EXPENSES . . . 220,295 221,850 437,872 444,464 OPERATING INCOME . . . . . . . . . . . . 42,968 47,173 90,398 95,599 NONOPERATING INCOME (LOSS) . . . . . . . 324 385 1,360 (2,520) INCOME BEFORE INTEREST CHARGES . . . . . 43,292 47,558 91,758 93,079 INTEREST CHARGES . . . . . . . . . . . . 19,862 20,062 39,004 40,457 NET INCOME . . . . . . . . . . . . . . . 23,430 27,496 52,754 52,622 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 533 1,374 1,377 3,044 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 22,897 $ 26,122 $ 51,377 $ 49,578 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $108,727 $78,984 $ 99,582 $74,320 NET INCOME . . . . . . . . . . . . . . . 23,430 27,496 52,754 52,622 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 19,671 18,969 39,342 37,938 Cumulative Preferred Stock . . . . . 438 1,422 875 2,844 Capital Stock Expense. . . . . . . . . 95 70 166 141 BALANCE AT END OF PERIOD . . . . . . . . $111,953 $86,019 $111,953 $86,019 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,509,654 $1,503,371 Transmission . . . . . . . . . . . . . . . . . . . . 325,986 326,247 Distribution . . . . . . . . . . . . . . . . . . . . 912,908 885,267 General. . . . . . . . . . . . . . . . . . . . . . . 134,210 130,946 Construction Work in Progress. . . . . . . . . . . . 69,557 54,062 Total Electric Utility Plant . . . . . . . . 2,952,315 2,899,893 Accumulated Depreciation . . . . . . . . . . . . . . 1,050,976 1,016,909 NET ELECTRIC UTILITY PLANT . . . . . . . . . 1,901,339 1,882,984 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 23,624 24,069 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 12,844 9,134 Accounts Receivable (net). . . . . . . . . . . . . . 100,461 63,003 Fuel . . . . . . . . . . . . . . . . . . . . . . . . 23,397 18,278 Materials and Supplies . . . . . . . . . . . . . . . 22,492 23,999 Accrued Utility Revenues . . . . . . . . . . . . . . 53,629 31,826 Prepayments. . . . . . . . . . . . . . . . . . . . . 41,465 32,330 TOTAL CURRENT ASSETS . . . . . . . . . . . . 254,288 178,570 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 360,449 385,689 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 38,880 70,274 TOTAL. . . . . . . . . . . . . . . . . . . $2,578,580 $2,541,586 See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (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. . . . . . . . . . . . . . . . . . . 571,922 574,709 Retained Earnings. . . . . . . . . . . . . . . . . . 111,953 99,582 Total Common Shareholder's Equity. . . . . . 724,901 715,317 Cumulative Preferred Stock - Subject to Mandatory Redemption . . . . . . . . . . . . . . . 25,000 25,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 839,875 882,641 TOTAL CAPITALIZATION . . . . . . . . . . . . 1,589,776 1,622,958 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 41,175 40,068 CURRENT LIABILITIES: Preferred Stock Due Within One Year. . . . . . . . . - 50,000 Long-term Debt Due Within One Year . . . . . . . . . 96,390 14,640 Short-term Debt. . . . . . . . . . . . . . . . . . . 136,100 51,800 Accounts Payable . . . . . . . . . . . . . . . . . . 65,454 54,828 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 91,476 129,429 Interest Accrued . . . . . . . . . . . . . . . . . . 13,623 13,605 Other. . . . . . . . . . . . . . . . . . . . . . . . 32,732 32,314 TOTAL CURRENT LIABILITIES. . . . . . . . . . 435,775 346,616 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 433,693 441,477 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 55,298 57,101 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 22,863 33,366 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $2,578,580 $2,541,586 See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 52,754 $ 52,622 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 45,137 43,571 Deferred Federal Income Taxes. . . . . . . . . . . . . . (1,385) (3,789) Deferred Investment Tax Credits. . . . . . . . . . . . . (1,803) (1,824) Deferred Collection of Fuel Costs (net). . . . . . . . . (7,315) 2,121 Amortization of Deferred Property Taxes. . . . . . . . . 32,400 30,446 Amortization of Zimmer Plant Operating Expenses and Carrying Charges . . . . . . . . . . . . . . . . . . . 15,775 15,211 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (37,458) 1,186 Fuel, Materials and Supplies . . . . . . . . . . . . . . (3,612) 2,475 Accrued Utility Revenues . . . . . . . . . . . . . . . . (21,803) (699) Prepayments. . . . . . . . . . . . . . . . . . . . . . . (9,135) (10,840) Accounts Payable . . . . . . . . . . . . . . . . . . . . 10,626 (8,809) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (37,953) (29,193) Other (net). . . . . . . . . . . . . . . . . . . . . . . . (4,084) (4,853) Net Cash Flows From Operating Activities . . . . . . 32,144 87,625 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (58,623) (38,642) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,470 2,301 Net Cash Flows Used For Investing Activities . . . . (57,153) (36,341) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 38,574 - Change in Short-term Debt (net). . . . . . . . . . . . . . 84,300 64,225 Retirement of Cumulative Preferred Stock . . . . . . . . . (52,953) (7,500) Retirement of Long-term Debt . . . . . . . . . . . . . . . - (68,255) Dividends Paid on Common Stock . . . . . . . . . . . . . . (39,342) (37,938) Dividends Paid on Cumulative Preferred Stock . . . . . . . (1,860) (3,022) Net Cash Flows From (Used For) Financing Activities. 28,719 (52,490) Net Increase (Decrease) in Cash and Cash Equivalents . . . . 3,710 (1,206) Cash and Cash Equivalents at Beginning of Period . . . . . . 9,134 10,577 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 12,844 $ 9,371 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $36,976,000 and $39,244,000 and for income taxes was $26,762,000 and $18,674,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $4,570,000 and $6,941,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. 2. FINANCING ACTIVITIES In January 1997 the Company terminated an agreement under which $50 million of undivided interests in designated pools of accounts receivable and accrued utility revenues were sold with limited recourse. In March 1997 the Company redeemed the entire 500,000 shares outstanding of its 7-7/8% Series of Cumulative Preferred Stock, par value $100, at the regular redemption price of $105.25 per share and issued $40 million of 7.92% Junior Subordinated Deferrable Interest Debentures due in 2027. 3. ZIMMER PHASE-IN PLAN In June 1997 the Company completed recovery of the Zimmer Plant phase-in plan deferrals and ceased charging a 3.39% temporary surcharge. The temporary surcharge was placed into effect on February 1, 1994 to allow the Company to recover a rate phase-in deferral of $93.9 million. The amount of net phase-in deferrals that were collected through the surcharge was $18.5 million in 1994, $28.5 million in 1995, $31.5 million in 1996 and $15.4 million through June 26, 1997 when the total amount was collected. The completion of the recovery of amounts deferred under the phase-in plan and the cessation of the surcharge will not affect net income since the deferred costs were amortized commensurate with their recovery. For other information regarding the Zimmer rate case refer to the 1996 Annual Report - Notes to Consolidated Financial Statements - Note 2. 4. CONTINGENCIES Taxes As discussed in Note 8, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of COLI interest deductions through June 30, 1997 would reduce earnings by approximately $36 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. The revised standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it could have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in its 1996 Annual Report. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS SECOND QUARTER 1997 vs. SECOND QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 Net income decreased $4.1 million or 15% in the second quarter of 1997 due to decreased sales to residential customers, increased maintenance expense and increased taxes other than federal income taxes. Year-to-date net income increased slightly as the second quarter decline largely offset a first quarter increase that resulted from an increase in nonoperating income and decreased interest charges. Operating revenues decreased 2% in both the second quarter and year-to-date periods due predominantly to lower retail fuel clause revenues which decreased due to the amortization of previously overcollected fuel costs and gains from the sale of emission allowances. The Public Utilities Commission of Ohio fuel clause adjustment mechanism requires the recordation of a regulatory liability when fuel is overrecovered. Therefore, the decrease in fuel clause revenues did not affect net income since it was offset by the amortization of a regulatory liability recorded in a prior period. Retail revenues decreased 3% in both periods due to weather-related residential sales decreases which were partly offset by increases in industrial sales. Revenues from wholesale customers increased 5% on a 21% increase in sales during the second quarter and increased less than 1% on a 15% sales increase during the year-to-date period. The modest increase in revenues compared to the increases in sales resulted from a decrease in the average price per kilowatthour sold. The increases in wholesale sales resulted from increased coal conversion services which are for the conversion of customers' coal to electricity and are priced to exclude the customer-provided fuel. The substantial increase in conversion service sales reflects the cost effectiveness of this service to customers. Income statement lines which changed significantly were as follows: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Fuel Expense. . . . . . . . $(8.0) (18) $(10.7) (12) Purchased Power Expense . . 5.3 13 0.4 N.M. Other Operation Expense . . (3.2) (7) (5.3) (6) Maintenance Expense . . . . 2.3 13 1.7 6 Taxes Other Than Federal Income Taxes . . . . . . . 1.6 6 3.4 6 Federal Income Taxes. . . . 0.5 3 3.3 11 Nonoperating Income . . . . - - 3.9 N.M. N.M. = Not Meaningful The decline in fuel expense was due to decreased generation and the operation of the fuel clause adjustment mechanism which credited fuel expenses in the current period with the amortization of deferred fuel costs recorded as a regulatory liability in the prior period. Purchased power expense increased in the second quarter of 1997 due to increased energy charges from the AEP System Power Pool as Conesville Plant Units 5 and 6 were out of service for a major part of the second quarter for maintenance. The decline in other operation expense was mainly due to the amortization of deferred gains on the sale of emission allowances, commensurate with recognition as a reduction to customers bills, and a decline in employee pensions and benefits expense. Maintenance expense increased during the second quarter of 1997 due to scheduled maintenance of boiler plant at Conesville Units 5 and 6. The increase in taxes other than federal income taxes was primarily due to increased property taxes, as a result of increases in assessed property values and tax rates, and higher gross receipts taxes, as a result of the effect of a tax credit recorded in 1996 and increased revenues during the assessment period. Federal income taxes attributable to operations increased primarily due to changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes. Nonoperating income in the year-to-date period increased due to the effect of losses recorded in the first quarter of 1996 from certain deferred demand side management program costs and the clean-up of underground fuel storage tanks at one of the Company's facilities. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $320,508 $323,494 $661,821 $653,377 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 53,526 56,532 113,776 116,555 Purchased Power. . . . . . . . . . . . 34,177 34,653 70,173 69,316 Other Operation. . . . . . . . . . . . 81,300 78,686 159,911 157,496 Maintenance. . . . . . . . . . . . . . 30,459 30,107 55,695 56,549 Depreciation and Amortization. . . . . 35,106 35,086 70,124 69,978 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals. . . . . . . 3,911 3,911 7,822 7,822 Taxes Other Than Federal Income Taxes. 15,591 18,440 33,876 38,361 Federal Income Taxes . . . . . . . . . 16,298 15,649 40,410 33,852 TOTAL OPERATING EXPENSES . . . 270,368 273,064 551,787 549,929 OPERATING INCOME . . . . . . . . . . . . 50,140 50,430 110,034 103,448 NONOPERATING INCOME (LOSS) . . . . . . . 497 272 965 (365) INCOME BEFORE INTEREST CHARGES . . . . . 50,637 50,702 110,999 103,083 INTEREST CHARGES . . . . . . . . . . . . 16,729 17,195 32,832 33,809 NET INCOME . . . . . . . . . . . . . . . 33,908 33,507 78,167 69,274 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 1,217 2,910 3,325 5,858 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 32,691 $ 30,597 $ 74,842 $ 63,416 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $282,157 $239,799 $269,071 $235,107 NET INCOME . . . . . . . . . . . . . . . 33,908 33,507 78,167 69,274 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 29,065 28,127 58,130 56,254 Cumulative Preferred Stock . . . . . 1,184 2,359 2,387 5,249 Capital Stock Expense. . . . . . . . . 33 551 938 609 BALANCE AT END OF PERIOD . . . . . . . . $285,783 $242,269 $285,783 $242,269 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)
June 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $2,531,212 $2,525,969 Transmission . . . . . . . . . . . . . . . . . . . . 880,822 881,407 Distribution . . . . . . . . . . . . . . . . . . . . 711,603 696,069 General (including nuclear fuel) . . . . . . . . . . 208,126 189,619 Construction Work in Progress. . . . . . . . . . . . 96,942 84,605 Total Electric Utility Plant . . . . . . . . 4,428,705 4,377,669 Accumulated Depreciation and Amortization. . . . . . 1,917,166 1,861,893 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,511,539 2,515,776 NUCLEAR DECOMMISSIONING AND SPENT NUCLEAR FUEL DISPOSAL TRUST FUNDS. . . . . . . . . . . . . . 522,856 490,778 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 158,869 154,265 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 8,782 8,233 Accounts Receivable. . . . . . . . . . . . . . . . . 124,234 125,822 Allowance for Uncollectible Accounts . . . . . . . . (1,412) (156) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 26,416 23,977 Materials and Supplies . . . . . . . . . . . . . . . 75,556 77,074 Accrued Utility Revenues . . . . . . . . . . . . . . 35,735 38,295 Prepayments. . . . . . . . . . . . . . . . . . . . . 11,196 10,271 TOTAL CURRENT ASSETS . . . . . . . . . . . . 280,507 283,516 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 417,054 421,692 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 32,186 31,457 TOTAL. . . . . . . . . . . . . . . . . . . $3,923,011 $3,897,484 See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (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. . . . . . . . . . . . . . . . . . . 732,406 731,272 Retained Earnings. . . . . . . . . . . . . . . . . . 285,783 269,071 Total Common Shareholder's Equity. . . . . . 1,074,773 1,056,927 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 9,499 21,977 Subject to Mandatory Redemption. . . . . . . . . . 68,445 135,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,009,723 1,042,104 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,162,440 2,256,008 OTHER NONCURRENT LIABILITIES: Nuclear Decommissioning. . . . . . . . . . . . . . . 341,165 313,845 Other. . . . . . . . . . . . . . . . . . . . . . . . 200,163 174,903 TOTAL OTHER NONCURRENT LIABILITIES . . . . . 541,328 488,748 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 35,000 - Short-term Debt. . . . . . . . . . . . . . . . . . . 103,925 43,500 Accounts Payable . . . . . . . . . . . . . . . . . . 41,956 61,892 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 69,137 65,400 Interest Accrued . . . . . . . . . . . . . . . . . . 15,714 15,281 Obligations Under Capital Leases . . . . . . . . . . 35,935 29,740 Other. . . . . . . . . . . . . . . . . . . . . . . . 62,147 66,436 TOTAL CURRENT LIABILITIES. . . . . . . . . . 363,814 282,249 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 582,706 594,879 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 142,536 146,473 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 94,272 96,125 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 35,915 33,002 COMMITMENTS AND CONTINGENCIES (Note 3) TOTAL. . . . . . . . . . . . . . . . . . . $3,923,011 $3,897,484 See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 78,167 $ 69,274 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 73,856 73,820 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals. . . . . . . . . . . . . . . . 7,822 7,822 Deferral of Incremental Nuclear Refueling Outage Expenses (net). . . . . . . . . . . . (9,281) (4,850) Deferred Federal Income Taxes. . . . . . . . . . . . . . (5,770) (7,712) Deferred Investment Tax Credits. . . . . . . . . . . . . (3,937) (3,963) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . 2,844 (9,172) Fuel, Materials and Supplies . . . . . . . . . . . . . . (921) (2,596) Accrued Utility Revenues . . . . . . . . . . . . . . . . 2,560 11,403 Accounts Payable . . . . . . . . . . . . . . . . . . . . (19,936) (9,679) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 3,737 2,486 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 12,224 5,306 Net Cash Flows From Operating Activities . . . . . . 141,365 132,139 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (59,723) (37,128) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284 853 Net Cash Flows Used For Investing Activities . . . . (58,439) (36,275) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 47,728 38,579 Change in Short-term Debt (net). . . . . . . . . . . . . . 60,425 (3,250) Retirement of Cumulative Preferred Stock . . . . . . . . . (78,838) (30,555) Retirement of Long-term Debt . . . . . . . . . . . . . . . (50,000) (46,091) Dividends Paid on Common Stock . . . . . . . . . . . . . . (58,130) (56,254) Dividends Paid on Cumulative Preferred Stock . . . . . . . (3,562) (5,780) Net Cash Flows Used For Financing Activities . . . . (82,377) (103,351) Net Increase (Decrease) in Cash and Cash Equivalents. . . . 549 (7,487) Cash and Cash Equivalents at Beginning of Period . . . . . . 8,233 13,723 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 8,782 $ 6,236 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $31,019,000 and $32,516,000 and for income taxes was $39,784,000 and $44,183,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $50,684,000 and $42,290,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial state-ments should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. 2. FINANCING ACTIVITIES In February 1997, the Company issued $48 million of 6.40% First Mortgage Bonds due 2000. In May 1997, the Company redeemed $50 million of 8.75% First Mortgage Bonds due 2022. In March 1997, the Company, as part of a tender offer, reacquired and retired the following number of shares of Cumulative Preferred Stock at the prices listed plus an amount equal to accrued dividends: Number Price Total of Shares Paid Per Reacquisition Series Retired Share Price (in thousands) 4.12% 20,669 $ 64.17 $ 1,326 4-1/8% 59,325 62.31 3,697 4.56% 28,525 69.94 1,995 5.90% 233,000 101.83 23,726 6-1/4% 97,500 103.79 10,120 6.30% 217,550 103.71 22,562 6-7/8% 117,500 106.45 12,508 3. COMMITMENTS AND CONTINGENCIES Steam Generator Replacement The Company has announced plans to replace the four steam generators in its Donald C. Cook Nuclear Plant's Unit 1. The replacement will take place during a regularly scheduled refueling outage in the spring of the year 2000. The unit is expected to be out of service for about 100 days. The cost of similar steam generator replacement projects in the industry have ranged from $150 million to $180 million. Certain construction commitments to produce the steam generator components with long lead time production requirements have been made. The plant's Unit 2 steam generators were replaced in 1988. Taxes As discussed in Note 7, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) claimed on Federal income tax returns should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of the COLI interest deductions through June 30, 1997 would reduce earnings by approximately $55 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company is to bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it would have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in its 1996 Annual Report. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1997 vs. SECOND QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Net income although relatively unchanged for the second quarter, increased 13% or $8.9 million for the year-to-date period reflecting an increase in first quarter revenues. Revenues increased 1% or $8.4 million in the year-to-date period due primarily to a 2% increase in retail sales, partly offset by a 2% decline in wholesale sales. The increase in retail sales was largely attributable to increased industrial customer usage. Retail revenues also increased due to an increase in fuel clause recoveries. Under a fuel clause recovery mechanism unrecovered fuel costs are deferred for future recovery. The decline in wholesale sales reflects a decrease in energy deliveries to the AEP System Power Pool (Power Pool) due to planned generating unit outages that reduced the availability of generation. Partly offsetting the decline in wholesale sales were additional Power Pool sales to nonaffiliated companies for coal conversion and transmission services. Coal conversion service sales are for the conversion of customers' coal to electricity. The increase in coal conversion service sales reflects the cost effectiveness of this service to customers. Income statement line items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Fuel Expense. . . . . . . $(3.0) (5) $(2.8) (2) Other Operation Expense . 2.6 3 2.4 2 Taxes Other Than Federal Income Taxes . . (2.8) (15) (4.5) (12) Federal Income Taxes. . . 0.6 4 6.6 19 Nonoperating Income . . . 0.2 83 1.3 N.M. N.M. = Not meaningful Fuel expense decreased in both periods due to the reduction in generation caused by the planned generating unit outages. Also contributing to the decrease in the quarter was the use of an increased proportion of lower cost nuclear generation to coal-fired generation reflecting the effects of plant maintenance outages in the second quarter. Nuclear generation was available for a greater portion of the second quarter in 1997 than in 1996 since a refueling and maintenance outage at the Donald C. Cook Nuclear Plant (Cook Nuclear Plant) Unit 1 was completed earlier in the second quarter of 1997 than a similar refueling and maintenance outage for Cook Nuclear Plant Unit 2 performed in 1996. Also Rockport Unit 1 and Tanners Creek Unit 4 experienced general boiler and inspection maintenance in the second quarter of 1997 reducing the availability of coal-fired generation when compared with the same period in 1996. Other operation expense increased in both periods due to increased administrative and general expenses. The decrease in taxes other than federal income taxes in both periods was the result of lower Indiana and Michigan real and personal property tax accruals recorded this year as compared with 1996 due to declines in assessed property values. Federal income taxes attributable to operations increased in both periods as a result of an increase in pre-tax operating income and changes in certain book/tax timing differences accounted for on a flow-through basis for rate-making and financial reporting purposes. The increase in nonoperating income for the year-to-date period was due to the effect of a loss on the sale of a western coal property in the first quarter of 1996. FINANCIAL CONDITION Total plant and property additions including capital leases for the year-to-date period were $111 million. During the first six months of 1997 short-term debt outstanding increased by $60 million. In February 1997, the Company issued $48 million of 6.40% First Mortage Bonds, due 2000. In May 1997, the Company redeemed $50 million of 8.75% First Mortgage Bonds due 2022. As part of a January 1997 tender offer for all of the Company's outstanding preferred stock that was announced in conjunction with a special meeting of shareholders, 774,069 shares of $100 par value preferred stocks were reacquired. The total cost of the stock reacquisition was $78 million. At the special meeting of shareholders held on February 28, 1997, the Company's articles of incorporation were amended to remove certain capitalization ratio requirements which restricted the Company's ability to issue unsecured debt. As a result, unsecured borrowings are now limited only by the Public Utility Holding Company Act of 1935 with the current limitation set at $175 million for unsecured short-term borrowings. STEAM GENERATOR REPLACEMENT The Company has announced plans to replace the four steam generators in its Cook Nuclear Plant's Unit 1. The replacement will take place during a regularly scheduled refueling outage in the spring of the year 2000. The unit is expected to be out of service for about 100 days. The costs of similar steam generator replacement projects in the industry have ranged from $150 million to $180 million. Certain construction commitments to produce the steam generator components with long lead time production requirements have been made. The plant's Unit 2 steam generators were replaced in 1988. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it could have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. KENTUCKY POWER COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . . $78,101 $78,730 $166,681 $167,319 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . 19,463 20,110 38,627 41,790 Purchased Power. . . . . . . . . . . . . 21,913 22,102 45,143 44,621 Other Operation. . . . . . . . . . . . . 11,880 11,974 23,889 24,330 Maintenance. . . . . . . . . . . . . . . 5,571 7,634 10,678 15,354 Depreciation and Amortization. . . . . . 6,519 6,267 13,059 12,521 Taxes Other Than Federal Income Taxes. . 2,045 1,744 4,839 4,118 Federal Income Taxes . . . . . . . . . . 1,281 598 5,777 3,126 TOTAL OPERATING EXPENSES. . . . . 68,672 70,429 142,012 145,860 OPERATING INCOME . . . . . . . . . . . . . 9,429 8,301 24,669 21,459 NONOPERATING LOSS. . . . . . . . . . . . . (148) (95) (289) (429) INCOME BEFORE INTEREST CHARGES . . . . . . 9,281 8,206 24,380 21,030 INTEREST CHARGES . . . . . . . . . . . . . 6,140 5,837 12,108 11,905 NET INCOME . . . . . . . . . . . . . . . . $ 3,141 $ 2,369 $ 12,272 $ 9,125 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . $86,531 $92,071 $ 84,090 $91,381 NET INCOME . . . . . . . . . . . . . . . . 3,141 2,369 12,272 9,125 CASH DIVIDENDS DECLARED. . . . . . . . . . 6,690 6,066 13,380 12,132 BALANCE AT END OF PERIOD . . . . . . . . . $82,982 $88,374 $ 82,982 $88,374 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)
June 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $241,828 $244,805 Transmission . . . . . . . . . . . . . . . . . . . . 264,425 264,563 Distribution . . . . . . . . . . . . . . . . . . . . 330,282 329,184 General. . . . . . . . . . . . . . . . . . . . . . . 67,055 64,650 Construction Work in Progress. . . . . . . . . . . . 67,766 48,400 Total Electric Utility Plant . . . . . . . . 971,356 951,602 Accumulated Depreciation and Amortization. . . . . . 290,263 286,640 NET ELECTRIC UTILITY PLANT . . . . . . . . . 681,093 664,962 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 6,376 6,452 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 1,278 1,106 Accounts Receivable. . . . . . . . . . . . . . . . . 27,541 28,589 Allowance for Uncollectible Accounts . . . . . . . . (437) (272) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 11,519 9,244 Materials and Supplies . . . . . . . . . . . . . . . 12,877 13,175 Accrued Utility Revenues . . . . . . . . . . . . . . 6,234 8,175 Prepayments. . . . . . . . . . . . . . . . . . . . . 2,215 2,011 TOTAL CURRENT ASSETS . . . . . . . . . . . . 61,227 62,028 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 88,789 88,776 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 8,758 11,361 TOTAL. . . . . . . . . . . . . . . . . . . $846,243 $833,579 See Notes to Financial Statements.
KENTUCKY POWER COMPANY BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - $50 Par Value: Authorized - 2,000,000 Shares Outstanding - 1,009,000 Shares . . . . . . . . . . $ 50,450 $ 50,450 Paid-in Capital. . . . . . . . . . . . . . . . . . . 118,750 108,750 Retained Earnings. . . . . . . . . . . . . . . . . . 82,982 84,090 Total Common Shareholder's Equity. . . . . . 252,182 243,290 First Mortgage Bonds . . . . . . . . . . . . . . . . 179,358 179,305 Notes Payable. . . . . . . . . . . . . . . . . . . . 75,000 75,000 Subordinated Debentures. . . . . . . . . . . . . . . 38,913 38,893 TOTAL CAPITALIZATION . . . . . . . . . . . . 545,453 536,488 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 21,990 19,467 CURRENT LIABILITIES: Short-term Debt. . . . . . . . . . . . . . . . . . . 58,700 51,675 Accounts Payable . . . . . . . . . . . . . . . . . . 22,167 31,057 Customer Deposits. . . . . . . . . . . . . . . . . . 3,387 3,409 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 6,803 5,064 Interest Accrued . . . . . . . . . . . . . . . . . . 5,113 5,217 Other. . . . . . . . . . . . . . . . . . . . . . . . 11,427 9,199 TOTAL CURRENT LIABILITIES. . . . . . . . . . 107,597 105,621 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 154,087 153,538 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 16,391 17,007 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 725 1,458 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $846,243 $833,579 See Notes to Financial Statements.
KENTUCKY POWER COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 12,272 $ 9,125 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 13,065 12,557 Deferred Federal Income Taxes. . . . . . . . . . . . . . 347 415 Deferred Investment Tax Credits. . . . . . . . . . . . . (616) (622) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . 1,213 60 Fuel, Materials and Supplies . . . . . . . . . . . . . . (1,977) (5,129) Accrued Utility Revenues . . . . . . . . . . . . . . . . 1,941 7,247 Accounts Payable . . . . . . . . . . . . . . . . . . . . (8,890) (5,091) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 1,739 (1,797) Other (net). . . . . . . . . . . . . . . . . . . . . . . . 4,644 (123) Net Cash Flows From Operating Activities . . . . . . 23,738 16,642 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (27,211) (18,181) Proceeds from Sales of Property. . . . . . . . . . . . . . - 250 Net Cash Flows Used For Investing Activities . . . . (27,211) (17,931) FINANCING ACTIVITIES: Capital Contributions from Parent Company. . . . . . . . . 10,000 10,000 Issuance of Long-term Debt . . . . . . . . . . . . . . . . - 50,000 Change in Short-term Debt (net). . . . . . . . . . . . . . 7,025 29,975 Retirement of Long-term Debt . . . . . . . . . . . . . . . - (74,738) Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (13,380) (12,132) Net Cash Flows From Financing Activities . . . . . . 3,645 3,105 Net Increase in Cash and Cash Equivalents. . . . . . . . . . 172 1,816 Cash and Cash Equivalents at Beginning of Period . . . . . . 1,106 1,031 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 1,278 $ 2,847 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $12,046,000 and $12,114,000 and for income taxes was $4,395,000 and $4,505,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $3,571,000 and $2,831,000 in 1997 and 1996, respectively. See Notes to Financial Statements.
KENTUCKY POWER COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. 2. FINANCING ACTIVITIES The Company received from its parent a cash capital contribution of $10 million in June 1997 which was credited to paid-in capital. 3. RATE MATTERS In a May 27, 1997 order the Kentucky Public Service Commission (KPSC) approved the Company's request for a monthly surcharge to recover environmental compliance costs. The surcharge was applied to bills rendered on and after July 7, 1997. However, as part of the May 27, 1997 order the KPSC directed the Company to refund to ratepayers $2.3 million ($1.5 million after tax) of emission allowance sale proceeds (received in 1996), as a reduction of the first twelve months of environmental surcharge revenues. Management believes the KPSC's May 27, 1997 order unlawfully requires the Company to refund the allowance sale proceeds and intends to pursue a favorable resolution of this matter through the appeals process. The Company believes, based on the advice of counsel, that it is probable it will prevail on the appeal. It is expected that this matter will be resolved in the fourth quarter of 1997. No provision for loss has been recorded. 4. CONTINGENCIES Taxes As discussed in Note 7, "Federal Income Taxes" of the Notes to Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company for 1992 and 1993 should be disallowed. The COLI program was established in 1992 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of COLI interest deductions through June 30, 1997 would reduce earnings by approximately $6 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it could have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in its 1996 Annual Report. KENTUCKY POWER COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS SECOND QUARTER 1997 vs. SECOND QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 Although revenues decreased $0.6 million in both the second quarter and year-to-date periods, net income increased 33% or $0.8 million for the quarter and 34% or $3.1 million for the year-to-date period. The increase in net income for both periods was mainly attributable to decreased maintenance expense. Operating revenues decreased in the second quarter due to decreased wholesale energy sales to the AEP System Power Pool (Power Pool) partly offset by increased retail energy sales. Milder weather in 1997 compared with unseasonably warm temperatures in 1996 accounted for the decrease in sales to the Power Pool. Energy sales to retail customers increased mainly due to increased industrial customer usage. Year-to-date operating revenues decreased as a result of decreased energy sales to retail customers offset in part by an increase in wholesale revenues. Residential and commercial energy sales declined, due to decreased customer usage as a result of warmer winter weather, more than offsetting an increase in sales to industrial customers. Wholesale revenues rose mainly due to an increase in coal conversion services and transmission services. Coal conversion services are for the conversion of customers' coal to electricity. The substantial increase in coal conversion service sales reflects the cost effectiveness of this service to customers. Other income statement items which changed significantly were: Increase(Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Fuel Expense . . . . . . . . $(0.6) (3) $(3.2) (8) Maintenance Expense. . . . . (2.1) (27) (4.7) (30) Taxes Other Than Federal Income Taxes. . . . . . . . 0.3 17 0.7 18 Federal Income Taxes . . . . 0.7 114 2.7 85 Fuel expense decreased as a result of a decline in fuel consumed, due to increased plant efficiency and decreased generation. The significant decrease in maintenance expense reflects the effects of scheduled steam plant maintenance work in 1996 at the Company's Big Sandy Plant Unit 2 and reduced overhead distribution line maintenance expenditures in 1997. Taxes other than federal income taxes increased primarily due to increased state income taxes as a result of an increase in pre-tax operating income. The increase in federal income tax expense attributable to operations in both periods was primarily due to increases in pre-tax operating income, changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes and in the year-to-date period the completion of the amortization of deferred federal income taxes in excess of the statutory tax rate as ordered by the Kentucky Public Service Commission. OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . $447,147 $449,383 $931,447 $954,124 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . 144,236 144,426 306,238 322,752 Purchased Power. . . . . . . . . . . . . . 16,009 16,175 32,468 31,240 Other Operation. . . . . . . . . . . . . . 79,196 78,985 161,559 161,876 Maintenance. . . . . . . . . . . . . . . . 33,372 42,083 62,849 71,150 Depreciation and Amortization. . . . . . . 35,088 34,369 70,028 68,643 Taxes Other Than Federal Income Taxes. . . 41,950 40,532 83,863 82,735 Federal Income Taxes . . . . . . . . . . . 28,204 25,530 64,819 60,601 TOTAL OPERATING EXPENSES . . . . . 378,055 382,100 781,824 798,997 OPERATING INCOME . . . . . . . . . . . . . . 69,092 67,283 149,623 155,127 NONOPERATING INCOME. . . . . . . . . . . . . 2,560 128 7,530 2,262 INCOME BEFORE INTEREST CHARGES . . . . . . . 71,652 67,411 157,153 157,389 INTEREST CHARGES . . . . . . . . . . . . . . 21,333 23,462 41,243 46,904 NET INCOME . . . . . . . . . . . . . . . . . 50,319 43,949 115,910 110,485 PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . 370 2,240 1,908 4,480 EARNINGS APPLICABLE TO COMMON STOCK. . . . . $ 49,949 $ 41,709 $114,002 $106,005 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . $609,934 $546,611 $584,015 $518,029 NET INCOME . . . . . . . . . . . . . . . . . 50,319 43,949 115,910 110,485 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . . . 86,647 35,714 124,209 71,428 Cumulative Preferred Stock . . . . . . . 370 2,194 2,459 4,388 Capital Stock Expense. . . . . . . . . . . - 47 21 93 BALANCE AT END OF PERIOD . . . . . . . . . . $573,236 $552,605 $573,236 $552,605 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)
June 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . . . . $2,572,319 $2,556,507 Transmission . . . . . . . . . . . . . . . . . . . . . . . 827,109 820,636 Distribution . . . . . . . . . . . . . . . . . . . . . . . 880,366 872,936 General (including mining assets). . . . . . . . . . . . . 680,922 680,443 Construction Work in Progress. . . . . . . . . . . . . . . 86,244 66,099 Total Electric Utility Plant . . . . . . . . . . . 5,046,960 4,996,621 Accumulated Depreciation and Amortization. . . . . . . . . 2,278,774 2,216,534 NET ELECTRIC UTILITY PLANT . . . . . . . . . . . . 2,768,186 2,780,087 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . . . . 106,900 106,485 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . . . . 48,127 24,003 Accounts Receivable. . . . . . . . . . . . . . . . . . . . 221,694 232,734 Allowance for Uncollectible Accounts . . . . . . . . . . . (1,969) (1,433) Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,801 113,361 Materials and Supplies . . . . . . . . . . . . . . . . . . 75,090 75,908 Accrued Utility Revenues . . . . . . . . . . . . . . . . . 34,572 38,852 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . 56,511 44,203 TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . 550,826 527,628 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . . . . 540,369 540,123 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . . . . 82,934 137,843 TOTAL. . . . . . . . . . . . . . . . . . . . . . $4,049,215 $4,092,166 See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 (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. . . . . . . . . . . . . . . . . . . . . . 462,285 460,662 Retained Earnings. . . . . . . . . . . . . . . . . . . . . 573,236 584,015 Total Common Shareholder's Equity. . . . . . . . . 1,356,722 1,365,878 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . . . . 17,575 38,532 Subject to Mandatory Redemption. . . . . . . . . . . . . 11,850 109,900 Long-term Debt . . . . . . . . . . . . . . . . . . . . . . 969,590 1,002,436 TOTAL CAPITALIZATION . . . . . . . . . . . . . . . 2,355,737 2,516,746 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . . 264,612 245,032 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . . . . 129,472 67,293 Short-term Debt. . . . . . . . . . . . . . . . . . . . . . 112,225 41,302 Accounts Payable . . . . . . . . . . . . . . . . . . . . . 84,261 89,399 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . 143,199 162,798 Interest Accrued . . . . . . . . . . . . . . . . . . . . . 17,021 18,094 Obligations Under Capital Leases . . . . . . . . . . . . . 26,788 24,153 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 88,525 84,385 TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . 601,491 487,424 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . 729,157 738,626 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . . . . 44,619 46,308 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . . . . 53,599 58,030 CONTINGENCIES (Note 3) TOTAL. . . . . . . . . . . . . . . . . . . . . . $4,049,215 $4,092,166 See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,910 $ 110,485 Adjustments for Noncash Items: Depreciation, Depletion and Amortization . . . . . . . . . . 86,888 82,863 Deferred Federal Income Taxes. . . . . . . . . . . . . . . . (1,530) 1,180 Deferred Fuel Costs (net). . . . . . . . . . . . . . . . . . (13,695) (2,368) Amortization of Deferred Property Taxes. . . . . . . . . . . 38,193 39,099 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . . . 11,576 1,009 Fuel, Materials and Supplies . . . . . . . . . . . . . . . . (2,622) (8,691) Accrued Utility Revenues . . . . . . . . . . . . . . . . . . 4,280 3,152 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . (12,308) (16,469) Accounts Payable . . . . . . . . . . . . . . . . . . . . . . (5,138) (25,365) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . . (19,599) (23,203) Other (net). . . . . . . . . . . . . . . . . . . . . . . . . . 25,521 33,939 Net Cash Flows From Operating Activities . . . . . . . . 227,476 195,631 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . . . (63,411) (44,831) Proceeds from Sale of Property and Other . . . . . . . . . . . 4,784 5,529 Net Cash Flows Used For Investing Activities . . . . . . (58,627) (39,302) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . . . 98,958 - Change in Short-term Debt (net). . . . . . . . . . . . . . . . 70,923 108,521 Retirement of Cumulative Preferred Stock . . . . . . . . . . . (117,601) - Retirement of Long-term Debt . . . . . . . . . . . . . . . . . (70,337) (158,649) Dividends Paid on Common Stock . . . . . . . . . . . . . . . . (124,209) (71,428) Dividends Paid on Cumulative Preferred Stock . . . . . . . . . (2,459) (4,388) Net Cash Flows Used For Financing Activities . . . . . . (144,725) (125,944) Net Increase in Cash and Cash Equivalents. . . . . . . . . . . . 24,124 30,385 Cash and Cash Equivalents at Beginning of Period . . . . . . . . 24,003 44,000 Cash and Cash Equivalents at End of Period . . . . . . . . . . . $ 48,127 $ 74,385 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $40,976,000 and $46,627,000 and for income taxes was $48,063,000 and $39,244,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $20,299,000 and $14,108,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial state- ments should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. 2. FINANCING ACTIVITY During the first half of 1997 the Company issued $50 million of 7.92% Junior Subordinated Deferrable Interest Debentures due 2027 and a coal mining subsidiary received $50 million under a sale-leaseback agreement accounted for as a financing. Under this accounting the assets sold remain on the books and the seller recognizes a financing liability as part of long-term debt. The Company and a subsidiary retired $70 million of long-term debt; $20 million at maturity and $50 million of 8.75% First Mortage Bonds due in 2022 under maintenance provisions at 100%. In March 1997 the Company, as part of a tender offer, reacquired and retired the following number of shares of Cumulative Preferred Stock at the prices listed plus an amount equal to accrued dividends: Number Price Total of Shares Paid Per Reacquisition Series Retired Share Price (in thousands) 4.08% 27,182 $ 64.56 $ 1,755 4.20% 28,875 66.46 1,919 4.40% 55,889 69.62 3,891 4-1/2% 97,616 69.02 6,737 5.90% 321,500 103.09 33,143 6.02% 364,000 103.71 37,750 6.35% 295,000 105.14 31,016 3. CONTINGENCIES Taxes As discussed in Note 8, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deduction. Although no disallowance has been proposed, a disallowance of COLI interest deductions through June 30, 1997 would reduce earnings by approximately $99 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it could have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in the 1996 Annual Report. OHIO POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1997 vs. SECOND QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Net income increased $6.4 million or 14% in the second quarter and $5.4 million or 5% in the year-to-date period due to reduced maintenance and financing costs and increased nonoperating income. Operating revenues decreased in both periods as a result of a 3% reduction in retail energy sales and a reduction in the contract price for the sale of electricity to a major industrial customer. The effects of milder weather and a labor strike at another major industrial customer reduced retail sales. Energy sales to wholesale customers were up 31% in the second quarter of 1997 and 14% in the year-to-date period primarily due to an increase in energy supplied to the AEP System Power Pool (Power Pool) and coal conversion services to power marketers. Coal conversion services are for the conversion of customers' coal to electricity. The substantial increase in coal conversion service sales reflects the cost effectiveness of this service to customers. The energy supplied to the Power Pool rose due to the unavailability of an affiliate's nuclear unit. Although energy sales increased in both periods, wholesale revenues increased only 9% in the quarter and were flat in the year-to-date period reflecting a decrease in the average price per kilowatthour sold. The average price decreased since Power Pool sales are at cost and conversion services are priced to exclude customer-provided fuel. Other income statement items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Fuel Expense . . . . . . . $(0.2) - $(16.5) (5) Maintenance Expense. . . . (8.7) (21) (8.3) (12) Federal Income Taxes . . . 2.7 10 4.2 7 Nonoperating Income. . . . 2.4 N.M. 5.3 233 Interest Charges . . . . . (2.1) (9) (5.7) (12) N.M. = Not Meaningful The decrease in fuel expense in the year-to-date period was mainly due to a decline in generation resulting from the reduced demand for energy in the first quarter of 1997 reflecting the milder weather and the unavailability of certain of the Company's generating units. Maintenance expense decreased in both periods due to a decrease in production plant maintenance work during the second quarter. Both units of the Gavin Plant were out of service for inspection and repairs in the second quarter of 1996 whereas in the second quarter of 1997 these units did not have major outages for maintenance. The increase in both periods in federal income tax expense attributable to operations was due to an increase in pre-tax operating income and in the comparative year-to-date period due to changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes. Nonoperating income increased in both periods reflecting the positive effect of a loss recorded in June 1996 on emission allowances. Also contributing to the year-to-date increase was recognition in March 1997 of a gain on the sale of emission allowances. A refinancing program reduced outstanding debt and lowered average interest rates resulting in decreased interest charges. A January 1997 tender offer that retired $119 million par value preferred stock on February 28, 1997 was responsible for a decrease in preferred stock dividend requirements. FINANCIAL CONDITION Total plant and property additions including capital leases for the first six months of 1997 were $84 million. During the first six months of 1997, the Company and a subsidiary retired $70 million principal amount of long-term debt with interest rates ranging from 7.19% to 8.75%, issued $100 million of long-term obligations at rates of 6.98% and 7.92% and increased short-term debt by $71 million. As part of the January 1997 tender offer for all of the Company's outstanding preferred stock that was announced in conjunction with a special meeting of shareholders, 1,190,062 shares of $100 par value preferred stocks were reacquired. The total cost of the stock reacquisition was $118 million. At the special meeting of shareholders held on February 28, 1997 the Company's articles of incorporation were amended to remove certain capitalization ratio requirements which restricted the Company's ability to issue unsecured debt. As a result unsecured borrowings are now limited only by the Public Utility Holding Company Act of 1935 with the current limitation set at $250 million for unsecured short-term borrowings. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size) in the Federal Register. These standards are expected to result in redesignation of a number of areas of the country currently in attainment to nonattainment which could ultimately dictate more stringent emission restrictions for AEP System generating units. The new rules provide that the states must first determine the attainment status of their areas. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Management is reviewing the impact of the new rules, however, we are unable to estimate compliance costs without knowledge of reductions that the states will find necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in the region or county that is in violation of the revised standards, it could have a material adverse effect on results of operations or possibly financial condition unless such costs are recovered. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. American Electric Power Company, Inc. ("AEP") The annual meeting of shareholders was held in Kingsport, Tennessee on April 23, 1997. The holders of shares entitled to vote at the meeting or their proxies cast votes at the meeting with respect to the following four matters, as indicated below: 1. Election of 12 directors to hold office until the next annual meeting and until their successors are duly elected. Each nominee for director was elected by a vote of the shareholders as follows: Number of Shares Number of Nominee Voted For Votes Withheld Peter J. DeMaria 154,830,048 2,091,583 John P. DesBarres 154,644,655 2,276,976 E. Linn Draper, Jr. 154,676,011 2,245,620 Robert M. Duncan 154,633,578 2,288,053 Robert W. Fri 154,753,183 2,168,448 Lester A. Hudson, Jr. 154,779,240 2,142,391 Leonard J. Kujawa 154,705,529 2,216,102 Gerald P. Maloney 154,823,818 2,097,813 Angus E. Peyton 154,620,060 2,301,571 Donald G. Smith 154,803,572 2,118,059 Linda Gillespie Stuntz 154,717,848 2,203,783 Morris Tanenbaum 154,687,800 2,233,831 2. Approve the appointment by the Board of Directors of Deloitte & Touche LLP as independent auditors of AEP for the year 1997. The proposal was approved by a vote of the shareholders as follows: Votes FOR 155,049,794 Votes AGAINST 775,823 Votes ABSTAINED 1,096,014 Broker NON-VOTES* 0 II-1 3. Approve the Deferred Compensation and Stock Plan for Non-Employee Directors. The proposal was approved by a vote of the shareholders as follows: Votes FOR 142,784,266 Votes AGAINST 9,625,655 Votes ABSTAINED 4,511,710 Broker NON-VOTES* 0 4. Approve amendments to the Restated Certificate of Incorporation and By-Laws to reduce the minimum required number of directors from 12 to nine. The proposal was approved by a vote of the shareholders as follows: Votes FOR 131,652,720 Votes AGAINST 2,984,508 Votes ABSTAINED 2,104,958 Broker NON-VOTES* 20,179,445 *A non-vote occurs when a nominee holding shares for a beneficial owner votes on one proposal, but does not vote on another proposal because the nominee does not have discretionary voting power and has not received instructions from the beneficial owner. II-2 Appalachian Power Company ("APCo") The annual meeting of stockholders was held on April 22, 1997 at 1 Riverside Plaza, Columbus, Ohio. At the meeting, 13,499,500 votes were cast FOR each of the following seven persons for election as directors and there were no votes with- held and such persons were elected directors to hold office for one year or until their successors are elected and qualify: Peter J. DeMaria Gerald P. Maloney E. Linn Draper, Jr. James J. Markowsky Henry W. Fayne Joseph H. Vipperman William J. Lhota No other business was transacted at the meeting. Indiana Michigan Power Company ("I&M") The annual meeting of stockholders was held on April 22, 1997 at 1 Riverside Plaza, Columbus, Ohio. At the meeting, 1,400,000 votes were cast FOR each of the following thirteen persons for election as directors and there were no votes with- held and such persons were elected directors to hold office for one year or until their successors are elected and qualify: Karl G. Boyd Gerald P. Maloney C. R. Boyle, III James J. Markowsky G. A. Clark David B. Synowiec Peter J. DeMaria Joseph H. Vipperman William N. D'Onofrio William E. Walters E. Linn Draper, Jr. Earl H. Wittkamper William J. Lhota No other business was transacted at the meeting. Ohio Power Company ("OPCo") The annual meeting of shareholders was held on May 6, 1997 at 1 Riverside Plaza, Columbus, Ohio. At the meeting, 27,952,473 votes were cast FOR each of the following seven persons for elec- tion as directors and there were no votes withheld and such per- sons were elected directors to hold office for one year or until their successors are elected and qualify: Peter J. DeMaria Gerald P. Maloney E. Linn Draper, Jr. James J. Markowsky Henry W. Fayne Joseph H. Vipperman William J. Lhota No other business was transacted at the meeting. Item 5. Other Information. AEP and I&M Reference is made to page 9 of the Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 10-K") for a dis- cussion of competition and retail wheeling in Michigan. On June 5, 1997, the Michigan Public Service Commission ("MPSC") entered an order requiring electric utilities to phase in retail open access for customers, with full customer choice by 2002. Under the order, customer choice is phased in from 1997 through 2001, II-3 at the rate of 2.5% of each utility's customer load per year, with all customers becoming eligible to choose their electric supplier effective January 1, 2002. The order essentially adopted the December 1996 MPSC staff report that recommended full recovery of stranded costs of utilities, including nuclear gen- erating investment, through the use of a transition charge applicable to customers exercising choice. The order found securitization of stranded costs to be feasible, but also found that legislation is required before securitization can be used. As required by the order, on July 31, 1997, I&M filed its imple- mentation proposal and tariff provisions. A number of petitions for rehearing and clarification of the June 5 order have been filed, including one by I&M on July 3, 1997, and other unaffili- ated parties have commenced judicial appeals. AEP, AEP Generating Company ("AEGCo"), APCo, Columbus Southern Power Company ("CSPCo"), I&M, Kentucky Power Company ("KEPCo") and OPCo Reference is made to page 22 of the 1996 10-K for a discus- sion of the assessment of long range transport of ozone precur- sors and other air quality issues. On June 19, 1997, the Ozone Transport Assessment Group ("OTAG") adopted recommendations to the United States Environ- mental Protection Agency ("Federal EPA") regarding source controls for nitrogen oxides ("NOx") and volatile organic com- pounds. Recommended utility source controls for NOx range from current Clean Air Act requirements to reductions of up to 85% from 1990 emission levels. Federal EPA is expected to issue proposed State Implementation Plan deficiency notices ("SIP calls") to states within the OTAG region in September 1997. The SIP calls will prescribe state-by-state NOx emission reduction requirements. Opportunity will be provided to comment on the appropriateness of Federal EPA's action. II-4 On July 9, 1997, Federal EPA published in the Federal Register notice of proposed New Source Performance Standard changes for NOx emissions from utility boilers. The more stringent proposed revision, if finalized, will apply to utility boilers constructed, modified or reconstructed after the date of the proposal. On July 31, 1997, Federal EPA published in the Federal Register proposed Regional Haze rules governing prevention and remediation of visibility impairment in mandatory Class I federal areas (national parks and wilderness areas). These proposed regulations are expected to target emissions from coal-fired power plants in conjunction with control requirements associated with the revised ozone and fine particulate National Ambient Air Quality Standards. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: APCo, CSPCo, I&M, KEPCo and OPCo Exhibit 12 - Statement re: Computation of Ratios. AEP, AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K: Company Reporting Date of Report Items Reported AEP April 1, 1997 Item 5. Other Events AEP April 1, 1997 Item 7. Financial Statements and Exhibits AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo No reports on Form 8-K were filed during the quarter ended June 30, 1997. II-5 In the opinion of the companies, the financial statements contained herein reflect all adjustments (consisting of only normal recurring accruals) which are necessary to a fair presentation of the results of operations for the interim periods. 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. G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Controller and Secretary AEP GENERATING COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller APPALACHIAN POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller COLUMBUS SOUTHERN POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller INDIANA MICHIGAN POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller KENTUCKY POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller OHIO POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller Date: August 12, 1997 II-6 EX-27 2 ARTICLE UT FIN. DATA SCH. FOR 10-Q
UT 0000004904 AMERICAN ELECTRIC POWER COMPANY, INC. 1,000 6-MOS DEC-31-1996 JUN-30-1997 PER-BOOK 11,468,917 1,321,882 1,451,750 233,948 1,850,321 16,326,818 1,288,226 1,745,759 1,615,039 4,649,024 127,605 46,869 5,077,757 104,575 0 534,825 265,870 0 371,014 94,417 5,054,862 16,326,818 2,874,227 186,634 2,194,360 2,380,994 493,233 10,195 503,428 197,473 293,700 12,255 293,700 226,170 119,995 566,420 $1.56 $1.56 Represents preferred stock dividend requirements of subsidiaries; deducted before computation of net income.
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