-----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, IVHWrNAbTYwgUBQukWUuYO78NauC67vuncScTL+IZnz4QBFl11Xc+8r1OPfqYAFa 9kPFeSgqGpubQj6NJt3yRQ== 0000004904-97-000119.txt : 19970927 0000004904-97-000119.hdr.sgml : 19970927 ACCESSION NUMBER: 0000004904-97-000119 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970919 SROS: NONE 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: U-1/A SEC ACT: SEC FILE NUMBER: 070-09021 FILM NUMBER: 97682864 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 U-1/A 1 File No. 70-9021 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________ AMENDMENT NO. 2 TO FORM U-1 __________________________________ APPLICATION OR DECLARATION under the PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 * * * AMERICAN ELECTRIC POWER COMPANY, INC. AEP RESOURCES, INC. 1 Riverside Plaza, Columbus, Ohio 43215 (Name of company or companies filing this statement and addresses of principal executive offices) * * * AMERICAN ELECTRIC POWER COMPANY, INC. 1 Riverside Plaza, Columbus, Ohio 43215 (Name of top registered holding company parent of each applicant or declarant) * * * John F. Di Lorenzo, Jr., Associate General Counsel AMERICAN ELECTRIC POWER SERVICE CORPORATION 1 Riverside Plaza, Columbus, Ohio 43215 (Names and addresses of agents for service) Jeffrey D. Cross, General Counsel AEP RESOURCES, INC. 1 Riverside Plaza, Columbus, Ohio 43215 (Names and addresses of agents for service) American Electric Power Company, Inc., a registered holding company under the Public Utility Holding Company Act of 1935, as amended, and its subsidiary, AEP Resources, Inc., hereby amend their Application or Declaration on Form U-1 in File No. 70-9021. 1. The first paragraph of Item 1. Description of Proposed Transaction is amended and restated as follows: "American Electric Power Company, Inc. ('American'), a holding company registered under the Public Utility Holding Company Act of 1935 ('1935 Act'), and AEP Resources, Inc. ('Resources'), a wholly-owned nonutility subsidiary of American, request that the Commission exempt American from the requirements of Rule 53(a)(1) such that American may use the net proceeds of currently authorized financings and issue Guarantees (as defined herein) in an aggregate amount at any one time outstanding which, when added to American's direct and indirect aggregate investment in all Exempt Projects (as defined herein), would not at any time exceed American's consolidated retained earnings. American and all of its subsidiaries1 are collectively referred to herein as the 'American System' and American and Resources are sometimes collectively referred to herein as the 'Applicants'." 1Appalachian Power Company ('APCo'), Columbus Southern Power Company ('CSPCo'), Kentucky Power Company ('KPCo'), Kingsport Power Company ('KgpCo'), Indiana Michigan Power Company ('I&M'), Ohio Power Company ('OPCo') and Wheeling Power Company ('WPCo'), electric utility subsidiaries of American (sometimes collectively referred to herein as 'Operating Companies'). 2. Section B of Item 1 is amended and restated as follows: "B. Exempt Projects Presently Owned or Under Investigation by American American's consolidated retained earnings (as defined under Rule 53(a) of the 1935 Act) as of June 30, 1997 were approximately $1.574 billion and, accordingly, its Investment Limit was about $787 million. As of June 30, 1997, American had invested $359 million in Yorkshire Electricity Group plc. In addition, it has $110 million designated for Nanyang General Light Electric Co. Ltd., of which approximately $22 million was invested as of June 30, 1997. American is considering further investment opportunities, some of which would require an 'investment' in excess of the approximately $318 million of undesignated Investment Limit. (1) Yorkshire Electricity Group plc On February 24, 1997 American and Public Service Company of Colorado ('PSCo'), indirectly through Yorkshire Holdings plc ('Yorkshire Holdings'), announced their intention to commence an offer in the United Kingdom to acquire all of the outstanding share capital of Yorkshire Electricity Group plc ('Yorkshire Electricity') for an aggregate purchase price of approximately $2.4 billion. Yorkshire Electricity, which is a FUCO, serves approximately 2.1 million customers in England. Yorkshire Electricity's distribution territory covers approximately 4,180 square miles of northeast England. It was one of the 12 regional electricity companies created in 1990 by the British government as part of the privatization of the electric utility industry in England and Wales. Yorkshire Electricity is primarily a distribution and supply company, purchasing most of its electricity requirements from third-party generators. The purchase price for the outstanding shares of Yorkshire Electricity was financed by loans made by Yorkshire Holdings' sole shareholder, Yorkshire Power Group Limited ('YPG'), a company organized under the laws of the United Kingdom. YPG financed its loans to Yorkshire Holdings by borrowing approximately 1 billion UK pounds (US $1.5 billion) through a term loan and revolving facility and by equity contributions from its shareholders, Resources and New Century International, Inc. The loan facility is neither guaranteed by, nor otherwise provides for recourse to, American, Resources or any of American's operating utility subsidiaries. Resources invested 220 million UK pounds (US $357 million) for 50% of the equity of YPG. Resources funded its investment with a $50 million cash investment from American, $7 million of short term borrowing and a $300 million adjustable rate term loan under a revolving credit agreement with Bank of New York as agent. Resources' borrowings are guaranteed by American. American's cash investment was funded by proceeds of the sale of its Common Stock under its dividend reinvestment and savings plans. As of June 30, 1997, American's 'aggregate investment' (as defined under Rule 53(a) of the 1935 Act) in Yorkshire Electricity was $359 million, including $2 million of capitalized expenses. American anticipates that, with the exception of the loss associated with the windfall profit tax discussed below, Yorkshire Electricity will make a contribution to American's earnings per share. In addition to providing American with a relatively stable source of income in the future, the acquisition of Yorkshire Electricity will enable the grouping of all three companies to: * add to the established achievements of Yorkshire Electricity's management team. Yorkshire Holdings believes that there are further opportunities in the United Kingdom electricity market which it can assist Yorkshire Electricity in pursuing; * promote further competition in each of the companies' markets to the benefit of customers; * share effective best practice initiatives between the three companies across the areas of customer service, cost-to-customer, operational and financial disciplines; * add proven expertise from American and PSCo in trading, generation, transmission and gas marketing; and * bring the financial resources and technical marketing awareness of American and PSCo to bear on Yorkshire Electricity's approach to the deregulation of the United Kingdom supply market post-1998. Prior to the announcement of the intention of Yorkshire Holdings to offer to acquire the outstanding shares of Yorkshire Electricity, Standard & Poor's and Moody's Investors Service rated the senior unsecured debt of Yorkshire Electricity AA and Aa3, respectively. As customary, after the announcement of the takeover bid, both rating agencies placed these ratings on review for possible downgrade. These announcements recognized the uncertainties concerning the financial implications for Yorkshire Electricity of the bid. Standard & Poor's, however, noted that it expected sufficient regulatory protection to maintain a rating in the investment-grade range. See Exhibit C-1. (2) Nanyang General Light Electric Co., Ltd. On September 22, 1996, AEP Pushan Power LDC ('AEPP'), a special purpose subsidiary of Resources (formed as a Project Parent under the laws of the Cayman Islands), signed a joint venture agreement together with two local Chinese partners in connection with the formation of the Nanyang General Light Electric Co. Ltd. ('Nanyang'), a cooperative joint venture company formed under the laws of the People's Republic of China. Nanyang was established to own, construct, finance and operate a coal-fired electric generating station in Nanyang, Henan Province China, with two units of 125 megawatts each ('Nanyang Project'). On November 4, 1996, Nanyang was granted its business license and its initial Board of Directors meeting was held on November 13-14, 1996. AEPP owns 70% of Nanyang, and special purpose financing companies established by the Henan Electric Power Company ('Henan Electric') and the City of Nanyang, respectively, each own 15%. Under the joint venture agreement, AEPP's total commitment in U.S. Dollars will not exceed $110 million. It is anticipated that this commitment will take the form of approximately $40 million as a direct equity investment, and approximately $70 million in the form of a shareholder loan provided from Resources. As of June 30, 1997, $6 million and $13 million of equity and debt, respectively, had been provided and American's 'aggregate investment' (as defined in Rule 53(a) of the 1935 Act) in Nanyang was $22 million, including $3 million of capitalized expenses. Henan Electric will construct the Nanyang Project under an engineering, construction and procurement contract, will operate the Nanyang Project under an operating and maintenance contract and will purchase the electric output from the Nanyang Project under a 20 year power purchase contract. These contracts were executed between Nanyang and Henan Electric on November 14, 1996. Unit 1 of the Nanyang Project is expected to be operational by June 1999 with Unit 2 following 5 months later. (3) Additional Investments in Exempt Projects Although American is considering further investments in Exempt Projects, its ability to invest in, or begin development of, additional projects is restricted by the approximately $318 million that it has available. Projects under consideration include generation opportunities in Europe, China, Central Asia and the United States as well as privatizations of electric utilities in Australia and Brazil." 3. The following is added at the end of Item 1, Section C, Paragraph 2(d), Financial risks: "As of June 30, 1997, the aggregate amount of nonrecourse debt applicable to Exempt Projects owned directly or indirectly by American was approximately $2.27 billion, of which approximately $1.135 billion is related to American's proportionate ownership interests in these Exempt Projects." 4. Paragraph (3) of Section C of Item 1 is amended and restated as follows: "(3) Application of Review Process and Risk Factors to Specific Investment Decisions American's acquisition activity in China and the United Kingdom provides an illustration of the review process and risk analysis outlined above. (a) Nanyang Project. The Nanyang Project was developed and executed by a Resources team with several years' experience in the China electricity market. In September of 1994, Resources was invited to visit Northeast China in connection with a potential development opportunity of a large coal-fired power project. Although those meetings have not yet led to a project there, Resources' personnel have met many times with numerous senior central and provincial level government officials throughout China and sent engineering teams to visit various Chinese design and manufacturing facilities. The Nanyang Project arose as an opportunity from these various contacts. Once the preliminary terms of the Nanyang Project were discussed with the Chinese parties, including affiliates of Henan Electric, representing the power bureau for Henan Province, and the City of Nanyang in July 1995, senior management of Resources discussed this matter with the Finance Committee of American's board of directors. This Committee reviewed and approved the conditions for making this investment into China including the maximum dollar commitment for the Nanyang Project. Resources then entered into a series of negotiations with Henan Electric and the City of Nanyang over the next 14 months leading to the signing of the Joint Venture Contract in September 1996. Henan Electric is the legal entity responsible for the operation, administration and development of the power industry in Henan Province, which has a population of approximately 90 million. Henan Electric is also part of the Central China Power Grid Network, which coordinates the supply of electricity in the four provinces in Central China (Henan, Hebei, Hubei and Jingxi). Henan Electric is also responsible for monitoring all the major power plant construction projects in Henan Province. Henan Electric owns or controls 13 coal-fired power plants and other major power distribution and administration centers throughout Henan Province. Resources sought to minimize operating risks for the Nanyang Project by developing coal-fired generation - a technology with which the American System has existing competencies. Due diligence was carried out by Resources' engineers with experience in coal-fired generation. The risk of changes in the price of fuel is passed through to Henan Electric under the power purchase contract. Henan Electric is responsible for the operations of the Nanyang Project, reducing the operating risk further. Construction risks are minimized under a fixed- price construction contract with milestones and performance guarantees (e.g., guaranteed heat rates, availability factors), backed by appropriate levels of liquidated damages, again with Henan Electric. The creditworthiness and 'track record' of Henan Electric was an important consideration. The 20-year power purchase contract with Henan Electric also reduced commercial risks of the project. 'Political' or country risk was mitigated by partnering with both the City of Nanyang and Henan Electric in this project and ensuring that the project had broad governmental support at every level, including Beijing and Premier Li Peng. Although initially the Nanyang Project could not be financed with non-recourse debt, it is the intent of Resources to refinance the loan with long-term non-recourse debt as soon as the capital markets will provide such funding. To facilitate this, the Nanyang Project documentation is in a form Resources believes will be acceptable for an international project financing. To address currency risk, Resources is paid under the power purchase contract in U.S. Dollars. (b) Yorkshire Electricity The Yorkshire acquisition was very different from Nanyang. First, it contributed to portfolio diversification because it is located in a different region of the world, has primarily distribution not generation assets and consists of existing operating assets rather than ones under construction. Operating, construction and commercial risks were minimized because Yorkshire Electricity is an existing profitable business with a strong management team. Resources engaged in a substantial due diligence effort prior to the acquisition of Yorkshire Electricity. It employed financial and operational personnel from American System companies as well as retaining U.S. and U.K. financial, legal and accounting advisors. It concluded that all relevant risks were adequately mitigated. Yorkshire Electricity supplies and distributes electricity to 2.1 million customers in England. Yorkshire Electricity has been licensed under the Electricity Act to distribute and supply electricity in an authorized area. The Office of Electricity Regulations ('OFFER') regulates Yorkshire Electricity and other regional electric companies. The distribution of electricity is Yorkshire Electricity's core business and provides approximately 75% of its profitability. Regulation of the distribution business is subject to an annual rate cap formula based on changes in inflation less an efficiency factor. Regulatory review and reset of the formula is scheduled for 2000. The formula provides a partial price hedge against increased expenses and so helps reduce operating risk. Efficiency gains and cost reductions below the rate cap formula benefit shareholders. The supply business in the United Kingdom currently is subject to competition for loads in excess of 100 kw. The business is scheduled to become competitive for all loads in 1998. Yorkshire Electricity currently has the lowest supply prices in the United Kingdom. Yorkshire Electricity purchases electricity in the wholesale market for its supply business and uses hedge contracts to minimize exposure to fluctuating electric prices. Yorkshire Electricity's policy is to substantially hedge its forecasted load by entering into hedging contracts with individual generators. This mitigates operating risk on the supply side. Financial risk was a key area of focus for Resources in acquiring Yorkshire Electricity. First, over 70% of the acquisition price was funded with non-recourse debt. YPG borrowed approximately 1 billion UK pounds (US $1.5 billion) through a nonrecourse loan and revolving facility. Resources' financial risk was then limited to its equity investment. Although the acquisition was initially funded with variable rate debt by both YPG and Resources, it is expected that 70%-80% portions of the debt will be refunded with fixed-rate long-term debt in the near future. In anticipation of that refunding, YPG has fixed the interest rate on 60% of the bank facility through interest rate swaps. Foreign currency risk has been and will continue to be minimized by borrowing in pounds sterling or if in U.S. Dollars, hedging the conversion rate. For example, the current YPG credit facility is denominated in pounds. In addition, when Resources made its commitment to invest in YPG, it hedged the conversion rate. Legal risks were deemed minimal because Resources did not believe that the United Kingdom presented any country specific political risks due to its established legal and regulatory framework." 5. The following is added at the end of Section D of Item 1: "(3) The actual use of the expanded investment authority cannot be determined at this time. Although the potential opportunities are numerous, until the authority is received, firm commitments cannot be made to the early development of projects. As a result of various factors, however, it is expected that a majority of the funds will be invested in FUCOs whose principal activities are subject to some sort of price regulation in the local country. These factors include the fact that more of these opportunities appear to be available and that both of Resources current investments are of this type. However, Resources also may consider investments in generation plants which sell their output in a spot price power market as opposed to under long term contracts." 6. Section E. of Item 1 is amended and restated as follows: "E. Proposed Increase in Financing of Exempt Projects For the reasons stated above, American and Resources hereby requests that the Commission exempt American and Resources from the requirements of Rule 53(a)(1) under the 1935 Act such that American and Resources may use the net proceeds from the issuance of recourse debt and equity securities and issue Guarantees, each in accordance with and upon the terms of the Financing Orders, in an aggregate amount at any time outstanding which, when added to American's direct and indirect aggregate investment in all Exempt Projects, would not at any time exceed American's consolidated retained earnings. Based on the $359 million of investment in Yorkshire Electricity and the $110 million designated for the Nanyang Project and American's consolidated retained earnings as of June 30, 1997 (approximately $1.574 billion), such limitation would allow financing of investments in additional Exempt Projects of approximately $1.105 billion. The authority requested herein will be sufficient to enable American to make investments in all Exempt Projects it is presently developing, as well as in Exempt Projects that are under investigation at present or that arise in the future." 7. Paragraph 1 of Item 3. Applicable Statutory Provisions is amended and restated as follows: "(1) The use of proceeds from the issuance of debt and equity securities of American to make investments in EWGs (as well as in FUCOs), and the issuance of, or provision for, Guarantees in connection therewith by American, in amounts of up to American's consolidated retained earnings will not have a 'substantial adverse impact' on the financial integrity of the American System. The lack of any 'substantial adverse impact' on American's financial integrity as a result of increased levels of investments in Exempt Projects can be demonstrated in several ways, including by analyses of historic trends in American's consolidated capitalization ratios and retained earnings and the market view of American's securities. Consideration of these and other relevant factors supports the conclusion that the issuance of securities and Guarantees by American to finance investments in Exempt Projects exceeding the 50% consolidated retained earnings limitation in Rule 53(a)(1) will not have any 'substantial adverse impact' on the financial integrity of the American System. American has a low-cost core electric utility business and is developing an international presence and other diversified businesses that will provide benefits to its core utility business, as well as enhance the potential for substantial long- term earnings growth. American's consolidated retained earnings have grown on average almost 7% per year over the previous three years. American's consolidated capitalization and interest coverage ratios are within industry ranges for A-/BBB+ rated companies. After announcement of the offer to acquire Yorkshire Electricity, the rating agencies reaffirmed these ratings. Finally, the market's assessment of American's prospect for future growth and earnings compares favorably to other electric utility companies and its dividend payout ratio is improving. (a) Aggregate investments in Exempt Projects in amounts up to 100% of American's consolidated retained earnings (as defined in Rule 53(a)), which were $1.574 billion as of June 30, 1997, would still represent a relatively small commitment of capital for a company the size of American, based on various key financial ratios at June 30, 1997. For example, investments of this amount would be equal to only 15.9% of American's total capitalization ($9.9 billion), 13.7% of consolidated net utility plant ($11.5 billion), 9.7% of total consolidated assets ($16.3 billion), and 19.9% of the market value of American's outstanding common stock ($7.9 billion). Such percentages are lower than those of Southern as of December 31, 1995 (16.3%, 15.4%, 11.0% and 20.4%, respectively) and those of CSW as of June 30, 1995 (23%, 23%, 14% and 31%, respectively) described by the Commission in their Orders as 'a relatively small commitment of capital'. Taken together with the credit strength of the five major Operating Companies (which are presently rated at the equivalent of BBB+ or higher by the three major credit rating agencies), American's actual consolidated capitalization and interest coverage ratios for 1996 are well within industry ranges set by independent debt rating agencies for BBB+ rated companies, as shown below: Actual 1996 Capitalization and Interest Coverage Ratios (Excluding Non-Recourse Project Debt) Total Debt/Capital 50.3% Pre-Tax Interest Coverage 3.6 Funds from Operating Income Interest Coverage 4.2 1996 Industry Ratios for BBB+ Rated Investor-Owned Utilities* High Average Low Total Debt/Capital 59.2% 50.4% 41.3% Pre-Tax Interest Coverage 3.8 3.1 2.3 Funds for Operating Income Interest Coverage 5.3 4.1 2.8 ___________ * Source: Moody's Investor Service - Electric Utility Sourcebook, October 1996. American's consolidated capitalization ratio as of June 30, 1997 was 44.6% common and preferred equity and 55.4% debt (including approximately $639 million of short term debt). No nonrecourse debt of Exempt Projects is consolidated for financial reporting purposes. This ratio continues to be within industry ranges set by independent debt rating agencies for BBB+ rated companies. (b) American's consolidated retained earnings have grown on average almost 7% per year over the previous three years. Consolidated retained earnings increased $56 million during 1994, a 4.4% increase; by $84 million during 1995, a 6.3% increase; by $138 million during 1996, a 9.8% increase; and by $67 million during the first half of 1997, a 4.3% increase. (c) The market's assessment of American's future growth and earnings also compares favorably to other electric utility issuers in the 1994 to present time frame. This can be shown by comparison of price-earnings and market-to-book ratios, both of which show a significant strengthening when compared with the electric utility industry average in that period. These measures indicate investor confidence in American's ability to deliver shareholder value. Twelve Months Ended 1993 1994 1995 1996 6/30/97 P/E Ratio: American 13.7 12.1 14.2 13.1 13.4 Electric Industry2 14.0 11.7 13.8 12.4 12.3 Market-to-Book Ratio: American 165% 144% 174% 169% 170% Electric Industry3 167% 136% 140% 145% N/A (d) In recent years, American's dividend payout ratio (percentage of earnings paid out in dividends), has been slightly above the electric utility industry average, but has been improving. Twelve Months Ended 1993 1994 1995 1996 6/30/97 American Payout Ratio %: 88.8* 88.6 84.1 76.5 76.7 Electric Industry %4 78.5 79.5 75.7 74.1 N/A ________________ * Restated to eliminate the disallowance of Zimmer Generating Station costs. (e) None of the conditions described in paragraph (b) of Rule 53 is applicable. Specifically, (1) there has been no bankruptcy of any American associate company; (2) American's 2Average of Standard & Poor's 26 Electric Power Company Index as reported by Goldman Sachs Selected Electric Industry Statistics, July 1997, Table 13. 3Goldman Sachs Selected Electric Industry Statistics, July 1997, Table 16. 4Goldman Sachs Selected Electric Industry Statistics, July 1997, Tables 11 and 12. consolidated retained earnings, as previously indicated, have increased in recent years; and (3) to date, American has not reported an 'operating loss' attributable to its Exempt Projects. SFAS 121 requires a listing of all assets of a utility that a company plans to write down and take as a loss. American presently has no assets listed pursuant to SFAS 121. Based on American's current knowledge, no assets with respect to any Exempt Project presently owned (directly or indirectly) by American are expected to be placed on such list pursuant to SFAS 121. Finally, no associate Exempt Project has ever defaulted under the terms of any financing document. None of the circumstances described in Rule 53(b) has occurred. American undertakes to notify the Commission by filing a post-effective amendment in this proceeding in the event that any of the circumstances described in Rule 53(b) occurs during the authorization period. In the general election held in the United Kingdom on May 1, 1997, as was expected, the Labour Party won control of the government with a considerable majority. Prior to the general election, the Labour Party had announced, and Resources was aware, that, if elected the Labour Party would impose a windfall profits tax on certain industries in the United Kingdom, including certain privatized business entities. On July 2, 1997, the one-time windfall profits tax was introduced in the Labour Party's Budget and on July 31, 1997, it became law. The windfall tax liability for Yorkshire Electricity is estimated to be 135 million pounds sterling ($220 million). The tax will be payable in two equal installments with the first in December 1997 and the second installment a year later. American expects that Yorkshire Electricity will have sufficient cash resources to pay the tax without the need for additional long-term borrowings or equity contributions from Resources. The net earnings effect on American of the windfall profits tax is expected to be $110 million and is expected to be recorded in the third quarter. Nonetheless, the net loss attributable to American's investment in EWGs and FUCOs for 1997 should not exceed 5% of American's consolidated retained earnings as at December 31, 1997. Therefore, the conditions of Rule 53(b)(2) and (3) should continue to be satisfied. (f) Numerous financial indicators show the financial strength of American. For example, American's earnings per share and return on equity were $3.14 and 13.2%, respectively, for the year ended 1996 and $2.85 and 12.4%, respectively, for the year ended 1995." 8. Paragraphs 2(d) and (e) of Item 3 are amended and restated as follows: "(d) The major Operating Companies' ability to issue debt and equity securities in the future depends upon earnings coverages at the time such securities are issued; that is, they must comply with certain coverage requirements designated in their mortgage bond indentures. The Operating Companies should have more than adequate earnings coverages for financing requirements in the foreseeable future.5 (e) The major Operating Companies' coverages have generally been within the A and BBB+ ranges set by the major rating agencies in recent years. The Operating Companies continue to show adequate financial statistics as measured by the rating agencies (pre-tax interest coverage, debt ratio, funds from operations to debt, funds from operations interest coverage, and net cash flow to capital expenditures). S&P Rating: 1993 1994 1995 1996 Current APCo A- A- A- A- A- CSPCo BBB+ BBB+ A- A- A- I&M BBB+ BBB+ BBB+ BBB+ BBB+ KPCo BBB+ BBB+ BBB+ BBB+ BBB+ OPCo A- A- A- A- A- Moody's Rating: 1993 1994 1995 1996 Current APCo A2 A2 A2 A3 A3 CSPCo Baa2 Baa2 Baa1 A3 A3 I&M Baa1 Baa1 Baa1 Baa1 Baa1 KPCo Baa1 Baa1 Baa1 Baa1 Baa1 OPCo A3 A3 A3 A3 A3 Duff & Phelps Rating: 1993 1994 1995 1996 Current APCo A A A A A CSPCo BBB BBB+ BBB+ A- A I&M BBB BBB+ BBB+ BBB+ N/A KPCo BBB+ BBB BBB BBB N/A OPCo A A A A A 5June 30, 1997 indenture earnings coverages for the Operating Companies range from about 3.65 to 8.44, in each case well above the required coverages of 2x. In addition, the rating agencies consider the Operating Companies to have relatively favorable competitive positions, with Standard & Poor's ranking them 'somewhat above average' business position. See Standard & Poor's Global Sector Review, November 1996. Fitch Investors Service's Competitive Indicator scores for the Operating Companies are 2.30, 2.38, 2.65, 2.60 and 2.45 for APCo, CSPCo, I&M, KPCo and OPCo, respectively, relatively favorable as compared to the average score of 2.73. See Fitch Report on American Electric Power, October 14, 1996. (A lower score indicating relatively less vulnerability to competition.) American does not believe that investments made in Exempt Projects have negatively affected the first mortgage bond ratings of its operating utility subsidiaries, APCo, CSPCo, I&M, KPCo and OPCo. Upon announcement of the acquisition of Yorkshire Electricity, the credit ratings of the operating utility subsidiaries were affirmed by Moody's, Standard & Poor's and Duff & Phelps. In a separate action at that time, Duff & Phelps downgraded the preferred stock of APCo and OPCo, but the downgrade is not reflective of either recent financial performance or the participation of American in the bid to acquire Yorkshire Electricity." See Exhibit C-2. 9. The following additional exhibits are filed in Item 6: Exhibit B-1 Pro forma financial statements Exhibit B-2 American Capitalization Summary as of June 30, 1997 Exhibit B-3 American Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997 (SEC File No. 1-3525) is incorporated by reference herein. Exhibit C-1 Rating Agency Announcements re Yorkshire Electric Group Exhibit C-2 Rating Agency Announcements re American and Operating Companies SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned companies have duly caused this statement to be signed on their behalf by the undersigned thereunto duly authorized. AMERICAN ELECTRIC POWER COMPANY, INC. AEP RESOURCES, INC. By_/s/ G. P. Maloney______ Vice President Dated: September 19, 1997 Exhibit B-1 DESCRIPTION OF THE TRANSACTION The following discussion describes the pro forma effects on the historical consolidated financial statements of American of the acquisition of Yorkshire Electricity by Yorkshire Power Group Limited ("Yorkshire Power"), a joint venture formed by subsidiaries of American and Public Service Company of Colorado ("PSCo"). The acquisition of Yorkshire Electricity was made by Yorkshire Holdings plc ("Yorkshire Holdings"), a wholly-owned subsidiary of the joint venture. The total consideration paid by Yorkshire Holdings to acquire Yorkshire Electricity is estimated to be approximately $2.4 billion (1.5 billion pounds sterling). The funds for the acquisition were obtained from American's and PSCo's subsidiaries' investment in Yorkshire Power of approximately $360 million (220 million pounds sterling) each, with the remainder obtained by Yorkshire Power through the issuance of non-recourse debt. Yorkshire Power, in turn, funded Yorkshire Holdings for the purpose of the acquisition. American's subsidiary initially funded its equity investment in Yorkshire Power with a $50 million cash investment from American, $10 million of short-term borrowing and a $300 million adjustable rate term loan under a long-term revolving credit agreement with Bank of New York as agent. American's investment in Yorkshire Power will be accounted for under the equity method of accounting. A limited number of adjustments are required to reflect the pro forma effects of the transaction; therefore, the information is being furnished in a narrative format as permitted by Article 11 of Regulation S-X. PERIODS PRESENTED Unaudited pro forma income statement information is provided for the twelve months ended December 31, 1996, and for the three months ended March 31, 1997, as if the transaction had been consummated on January 1, 1996, and January 1, 1997, respectively. Unaudited pro forma balance sheet information is provided as of March 31, 1997, as if the transaction had been consummated on such date. Pro forma income statement adjustments related to Yorkshire Power for the year ended December 31, 1996, reflect the twelve months ended December 31, 1996, and for the quarter ended March 31, 1997, reflect the three months ended December 31, 1996. Consequently, the pro forma income statement adjustments for the three month period ended March 31, 1997, are reflected in both periods. EFFECTS OF PRO FORMA ADJUSTMENTS ON AMERICAN'S STATEMENTS OF INCOME The pro forma items necessary to reflect the acquisition of Yorkshire Electricity on American's statement of income include the recognition of equity in the estimated earnings of Yorkshire Power, an adjustment for interest expense on debt associated with American's investment in Yorkshire Power, and related income taxes. The estimated earnings of Yorkshire Power include the historical earnings of Yorkshire Electricity adjusted for the effects of purchase accounting (including increased depreciation on the revalued fixed assets and the amortization of goodwill), interest expense on debt issued by Yorkshire Power in connection with the acquisition, and related income taxes. American's equity in the resulting earnings is 50%, the same as its ownership interest in Yorkshire Power. Yorkshire Electricity's historical earnings, based on United Kingdom generally accepted accounting principles, totaled 102.4 million pounds sterling ($159.8 million) for the twelve months ended December 31, 1996 and 19.6 million pounds sterling ($32.1 million) for the three months ended December 31, 1996. Included in Yorkshire Electricity's earnings is the effect of a nonrecurring adjustment related to the write-off of certain computer development costs which totaled 22.2 million pounds sterling (net of tax) for the twelve months and three months ended December 31, 1996. The estimated effect of purchase accounting by Yorkshire Power and the conversion to United States generally accepted accounting principles would increase American's net income on a pro forma basis by approximately $19.4 million and $0.7 million for the twelve months ended December 31, 1996 and three months ended March 31, 1997, respectively. American's pro forma share of Yorkshire Power's earnings for the twelve months ended December 31, 1996 and three months ended March 31, 1997 would include, among other things, (a) increased depreciation of $5.2 million and $1.4 million, respectively, due to the revaluation of assets; (b) the amortization of goodwill of $21.1 million and $5.4 million, respectively; and (c) interest expense of $62.4 million and $16.4 million, respectively, on the non-recourse debt issued by Yorkshire Power in connection with the acquisition. (All dollar amounts have been converted using the average exchange rates for the twelve month period and three month period of $1.561/pound sterling and $1.636/pound sterling, respectively.) The following table shows the effect of the aforementioned pro forma adjustments on American's net income and earnings per share.
Twelve Months Ended Three Months Ended December 31, 1996 March 31, 1997 Net Income Earnings Net Income Earnings (millions) Per Share* (millions) Per Share* (unaudited) (unaudited) American . . . . . . . . . . . . $587.4 $3.14 $172.6 $0.92 Pro forma adjustments: Equity in Earnings of Yorkshire Power** . . . . . 19.4 0.7 Interest expense, net of tax . . (11.3) (2.9) Pro forma result . . . . . . . . $595.5 $3.18 $170.4 $0.90
* Based on the average number of common shares outstanding of 187,321,000 and 188,347,000 for the twelve months ended December 31, 1996, and three months ended March 31, 1997, respectively. ** Includes $12.3 million, net of tax ($0.07 per share) for the twelve months ended December 31, 1996 and three months ended March 31, 1997 for a nonrecurring write-off by Yorkshire Electricity of certain computer development costs. EFFECTS OF PRO FORMA ADJUSTMENTS ON AMERICAN'S BALANCE SHEET The only pro forma adjustments needed to reflect the acquisition of Yorkshire Electricity on American's balance sheet are the incorporation of American's investment in Yorkshire Power of $360 million and the inclusion of the associated short-term and long-term debt. There is no pro forma impact on total common shareholders' equity. At March 31, 1997, American's unaudited balance sheet reported total assets of $15,905.7 million, other property and investments of $917.5 million, cash and cash equivalents of $86.1 million, short-term debt of $334.3 million and long-term debt of $4,786.6 million. After adjusting for American's estimated investment in Yorkshire Power, the pro forma March 31, 1997 balance sheet would report total assets of $16,215.7 million, other property and investments of $1,277.5 million, cash and cash equivalents of $36.1 million, short-term debt of $344.3 million and long-term debt of $5,086.6 million. Exhibit B-2 AMERICAN ELECTRIC POWER COMPANY, INC. CAPITALIZATION Actual June 30, 1997
$ Millions Percentage Debt: First Mortgage Bonds . . . . . . $ 3,159 Other Long-Term Debt . . . . . . 2,185 Short-Term Debt . . . . . . . . . 639 $ 5,983 55.4% Preferred: Stock . . . . . . . . . . . . . . $ 174 1.6% Common Equity: Common Stock . . . . . . . . . . $ 1,288 Paid-in Capital . . . . . . . . . 1,746 Retained Earnings . . . . . . . . 1,615 $ 4,649 43.0% Total Capitalization . . . . . . . $10,806 100.0%
The foregoing table includes no non-recourse debt related to Exempt Entities that is consolidated for financial reporting purposes. The following table sets forth American's pro forma capitalization, including the additional amount of outstanding non-recourse debt ($1.135 billion) related to American's proportionate ownership interest in Exempt Entities. Pro Forma June 30, 1997
$ Millions Percentage Debt: First Mortgage Bonds . . . . . . $ 3,159 Other Long-Term Debt . . . . . . 3,320 Short-Term Debt . . . . . . . . . 639 $ 7,118 59.6% Preferred: Stock . . . . . . . . . . . . . . $ 174 1.5% Common Equity: Common Stock . . . . . . . . . . $ 1,288 Paid-in Capital . . . . . . . . . 1,746 Retained Earnings . . . . . . . . 1,615 $ 4,649 38.9% Total Capitalization . . . . . . . $11,941 100.0%
Exhibit C-1 Moody's Investors Service Rating Action Global Credit Research Yorkshire Electricity Group plc Published on 02/24/97 London London Richard Stephan Simon Atkinson Managing Director Senior Analyst European Corporates European Corporates Moody's Investors Service Moody's Investors Service Journalists: Journalists: (171)772-5454 (171)772-5454 Subscribers: (171)772-5366 Subscribers: (171)772-5366 (171)772-5454 MOODY'S PLACES Aa3 SENIOR DEBT RATINGS OF YORKSHIRE ELECTRICITY GROUP PLC AND ITS PRIME-1 RATING FOR COMMERCIAL PAPER ON REVIEW FOR POSSIBLE DOWNGRADE Approximately GBP350 Million of Long Term Debt Securities Affected London, 2/24/1997 -- Moody's Investors Service placed the Aa3 senior debt ratings and Prime-1 rating for commercial paper of Yorkshire Electricity plc (Yorkshire) on review for possible downgrade in response to a potentially large increase in debt service requirements following the announcement of a proposed acquisition by AEP and PS Colorado of 100% of Yorkshire's share capital. The offer is recommended by the board of Yorkshire but has yet to receive clearance from the regulatory authorities. Moody's review will focus on the implications for Yorkshire's business and financial strategies of the proposed change in ownership and an assessment of any assurances given by Yorkshire's proposed new owners to address any regulatory concerns of the Director General of Electricity Supply. Ratings under review for possible downgrade are: Yorkshire Electricity Group plc--9.25% Eurobonds due 2020; 8.625% Eurobonds due 2005 at Aa3: short term rating for commercial paper at Prime-1. Yorkshire Electricity Group plc is one of the UK regional electricity companies and has its head office in Leeds, Yorkshire, United Kingdom. The company had turnover of approximately 1.3 billion UK pounds, excluding National Grid Group, for the year ended 31st March, 1996. Balance Sheet Statistics Yorkshire Electricity Group plc (1) 1996 1995 1994 Total debt % capital 49.7 38.7 24.4 Equity % capital 50.3 61.3 75.6 Total capital (million UK pounds) 1,035 1,023 923 (1) Years ending March 31 Opinion Rating Rationale YEG is a medium-sized UK REC, and the Aa3 rating reflects YEG's strong and stable earnings and cash flow resulting from its monopoly distribution business, which is the predominant contributor to earnings and cash flow. YEG has retained a strong balance sheet relative to its business risk, and net cash flows have benefitted from efficiency gains in the operation of its distribution business. In common with other RECs, YEG faces growing pressures in energy markets, emerging regulatory policy and the political environment leaning towards retrospective taxation. Regulation centres on prices, and the ringfencing regime for distribution utilities allows for dividend distributions from distributable earnings, so major restructurings are permissible. Value has been distributed to shareholders via special dividends, but YEG retains a strong balance sheet relative to its business risk. YEG's strategy is now to focus strongly on the efficiency of its core distribution business, although its earnings stream is expected to benefit in the future from core-related activities in electricity generation, electricity sales, and the pending deregulated gas market. Rating Outlook Negative. The ratings were placed under review for possible downgrade in response to the large increase in debt service requirements following the announcement of the acquisition by AEP and PS Colorado of 100% of YEG's share capital. The review will focus on the implications for YEG's business and financial strategies of the proposed change in ownership and an assessment of any assurances given by the new owners to address any regulatory concerns of the Director General of Electricity Supply. Yorkshire Electricity Ratings Placed on CreditWatch, Negative Standard & Poor's placed its 'AA' senior unsecured debt and corporate credit ratings and 'A-1+' commercial paper rating of Yorkshire Electricity plc on CreditWatch with negative implications. The CreditWatch placement followed the announcement by Yorkshire Electricity that it is recommending a takeover bid by American Electric Power Company, Inc. and Public Service Company of Colorado (bidding jointly as Yorkshire Holdings plc), valuing the company at 1.5 billion UK pounds. The CreditWatch announcement acknowledges uncertainties concerning the financial implications for Yorkshire Electricity if the bid clears regulatory hurdles. Standard & Poor's recognizes that the funding of such a takeover may lead to weaker debt servicing capacity than would be consistent with its current rating. Yorkshire Electricity's current ratings reflect the company's cash generative core business, a stable regulatory environment, and a relatively strong financial profile. Yorkshire distributed 23,223 gigawatt-hours to its two million customers in the year ended March 1996. Revenues are regulated through distribution and supply price caps linked to inflation. Standard & Poor's will review the credit implications of a successful bid for Yorkshire Electricity. Specifically, Standard & Poor's will assess: * Any regulatory or governmental actions that may have implications for the proposed takeover; * The effects on the financial profile of Yorkshire Electricity of the acquisition; * The group structure and the location of the debt financing within that structure; and * Any operational benefits that may arise from the takeover. Following an assessment of these and other factors, Standard & Poor's will adjust the current ratings as appropriate. Given the recent statements of the government in relation to other recent bids in this sector, Standard & Poor's would expect sufficient regulatory protection to maintain the resultant rating in the investment-grade range. (See related News Comment on American Electric Power Company, Inc. and Public Service Company of Colorado). Michael Wilkins, London (44)171-826-3528 Marc Watton, London (44)171-826-3641 Judith Waite, New York (1)212-208-1663 Exhibit C-2 Moody's Investors Service Rating Action Global Credit Research Yorkshire Electricity Group plc Published on 02/24/97 New York New York Susan D. Abbott A. Tucker Hackett Jonathan Cohen Managing Director Senior Analyst Associate Analyst Energy Energy Communications & Speculative Grade Moody's Investors Service Moody's Investors Service Journalists: (212)553-0376 Journalists: (212)553-0376 Subscribers: (212)553-1653 Subscribers: (212)553-1653 MOODY'S AFFIRMS CREDIT RATINGS OF AEP (P-2) AND SUBSIDIARIES; AFFIRMS CREDIT RATINGS OF PUBLIC SERVICE COMPANY OF COLORADO BUT CHANGES OUTLOOK TO NEGATIVE Approximately $10.7 Billion of Securities Affected NEW YORK, February 24, 1997 -- Moody's Investors Service has affirmed the Prime-2 short-term rating of American Electric Power Company (AEP) and the ratings of its subsidiaries. Moody's concurrently affirmed the ratings of Public Service Company of Colorado (senior secured at A3), but changed the outlook for Public Service of Colorado (PSCo) to negative. The change in outlook is in response to the proposed $2.4 billion tender offer for Yorkshire Electricity plc (Aa3 senior unsecured) by Yorkshire Holdings plc, a 50-50 joint venture newly formed by AEP and PSCo. The acquisition will be financed with a $1.9 billion non-recourse bank facility and with equity contributions of $360.2 million each from AEP and PSCo. The proposed tender offer for Yorkshire Electricity will not trigger a review by Moody's of AEP's or PSCo's credit ratings. However, the rating agency believes that the issue of incremental leverage by PSCo to finance its $360 million equity investment justifies a negative outlook for PSCo's ratings until this financing is replaced with equity or other non-debt mechanism. Failure to reduce leverage within the 18 months contemplated would put pressure on the company's ratings. While AEP's proposed timetable for taking out the additional leverage is not as aggressive as PSCo's, the impact on AEP's credit profile is less dramatic than the impact of additional leverage on PSCo, a smaller company. AEP will finance its equity investment largely with debt and proceeds from the company's $70 million per year dividend reinvestment program. AEP system ratings affirmed are the Prime-2 short-term ratings of AEP and its operating subsidiaries, the long-term ratings of Appalachian Power Company, Columbus Southern Power Company, and Ohio Power Company (A3 senior secured); of Indiana Michigan Power Company and Kentucky Power Company (Baa1 senior secured); and of RGS (AEGCO) Funding Corporation and RGS (I&M) Funding Corporation (Baa2 senior secured). PSCo's ratings (A3 senior secured) are affirmed with a negative outlook, as are that of its subsidiary, PS Colorado Credit Corporation (Baa1 senior unsecured). Yorkshire Electricity plc is headquartered in Leeds, United Kingdom. Its senior unsecured Aa3 rating and P-1 commercial paper ratings have been watchlisted for potential downgrade. AEP is headquartered in Columbus, Ohio and PSCo is headquartered in Denver, Colorado. American Electric Power Units' Ratings Affirmed; PSCo Still on CreditWatch Standard & Poor's affirmed its 'A-' senior secured debt rating on Appalachian Power Company, Columbus Southern Power Company, and Ohio Power Company, as well as its 'BBB+' senior secured ratings on Indiana Michigan Power Company and Kentucky Power Company, all of which are American Electric Power Company (AEP) operating units. The outlook on all five AEP operating units is still stable. In addition, the 'A-' senior secured debt rating of Public Service Company of Colorado (PSCo) is affirmed and remains on CreditWatch, with positive implications. This action follows the announcement by AEP and PSCo that they will acquire the British regional electric distribution company (REC) Yorkshire Electricity Group plc ('AA' senior unsecured debt; CreditWatch, negative) for $2.4 billion. Yorkshire's board of directors has agreed to the offer. As of December 31, 1996, AEP had about $8 billion of consolidated debt and PSCo had about $1.6 billion of debt outstanding. To execute the acquisition, AEP and PSCo have formed a 50/50 joint venture company, Yorkshire Holdings plc, under their unregulated entities, AEP Resources, Inc. and New Century International, Inc. About $1.7 billion will be borrowed by Yorkshire Electricity Group plc, without legal recourse to any of the domestic entities. The remaining $720 million, or about $360 million each, will be borrowed by domestic units of AEP and PSCo to fund their equity investment in Yorkshire. Yorkshire is one of 12 RECs in the U.K. Headquartered in Leeds (about 250 miles northeast of London), it serves 2.1 million customers in northeast England, in an area having a population of about 4.4 million. Overall, it appears that Yorkshire is a relatively low-risk investment, with solid earnings, sales growth potential, and a stable regulatory environment. And, the bulk of the acquisition debt is legally nonrecourse to AEP and PSCo. However, Standard & Poor's will attribute at least a portion of this debt to the consolidated financials of the buyers, premised on the assumption that neither AEP nor PSCo would permit Yorkshire to default on debt service. Moreover, the borrowing costs associated with short-term financing of the equity portion will lower consolidated coverage ratios over the near term for both utilities. AEP is expected to use the proceeds from its new issuedividend reinvestment program - about $70 million per year - to pay down this $360 million recourse transaction-related debt. PSCo is expected to pay down its domestic borrowing with proceeds from the sale of equity within the next six to 18 months. Although AEP and PSCo have the debt capacity to finance this acquisition without significant credit impact, this potentially large acquisition may restrain both utilities' domestic financing flexibility and divert management attention. This offer is subject to final approval by British regulators and Yorkshire shareholders. Standard & Poor's assessment of this proposed acquisition will be reviewed as details and events unfold. (See related News Comment on Yorkshire Electricity Group plc.) Steve Zimmerman, New York (1)212-208-1658 Judith Waite, New York (1)212-208-1663 DCR Reaffirms Most Ratings of Selected AEP Subsidiaries; Downgrade Preferred Stock Ratings of APC and OPC Chicago (March 7, 1997) -- Duff & Phelps Credit Rating Co. (DCR) has reaffirmed the credit ratings of Appalachian Power Company (APC), Columbus Southern Power Company (CSPC) and Ohio Power Company (OPC) excluding the ratings on the preferred stock of APC and OPC which have been downgraded following the recent redemption of the majority of same and the expected debt financings needed to fund these transactions. The preferred stock downgrades reflect only the strategic proportional changes in each of the two companies' capital structures and is not reflective of either recent financial performance of the recently announced participation of American Electric Power Company, Inc. (AEP, the parent company of APC, CSPC and OPC) in a bid to acquire Yorkshire Electricity Group plc. APC's ratings include: First mortgage bonds and secured MTN's at A (Single-A), junior subordinated deferred interest debentures at A- (single-A-minus), preferred stock at BBB+ (triple-B-plus), and commercial paper at D-1 (D-One). APC's preferred stock had been rated A- (single-A-minus). CSPC's ratings include: First mortgage bonds and secured MTN's at A- (Single-A-minus), junior subordinated deferred interest debentures and preferred stock at BBB+ (triple-B-plus), and commercial paper at D-1- (D-One-minus). OPC's ratings include: First mortgage bonds (Single-A), debentures and junior subordinated deferred interest debentures at BBB+ (triple B-plus), preferred stock at BBB (triple-B), and commercial paper at D-1 (D-One). OPC's preferred stock had been rated BBB+ (triple-B-plus). The ratings reflect the overall strong performance and solid credit protection measures of each company. The ratings also reflect each company's improving capital structure and expectations of greater future emphasis on common equity and unsecured debt, principally junior subordinated, and reduced reliance on preferred equity. APC and OPC have redeemed 59 and 80 percent, respectively, of their respective outstanding preferred stock which will be funded through unsecured debt consisting of junior subordinated debentures and short term borrowings. This proportional shift toward unsecured debt and away from preferred stock in the capital structure creates the need at APC and OPC to differentiate the ratings of such debt relative to the preferred stock. While CSPC has also redeemed most of its outstanding preferred stock, its reliance on unsecured debt, including both senior and junior subordinated, in its capital structure is expected to be proportionally less than that of APC and OPC, thus its preferred stock rating remains unchanged. AEP recently announced that it will be a 50 percent partner, along with Public Service Company of Colorado, in a joint venture to acquire Yorkshire Electricity Group, plc, an electric utility company based in Leeds, England. Each company will contribute $360 million in equity capital with AEP funding its share through a combination of debt and equity. The debt will initially be raised via a bank facility at AEP Resources, Inc., a subsidiary of AEP, while the equity will come from AEP's dividend reinvestment plan. The acquisition is not expected to have a significant financial impact on APC, CSPC or OPC. Yorkshire is not anticipated to require any additional capital from AEP beyond its initial investment. Yorkshire will be operated independent from the operating utility companies in the U.S. Yorkshire's internal cash flow is expected to be sufficient to cover its capital expenditures as well as the associated debt requirements of the U.K. parent holding company and the U.S. parent companies. APC's credit protection measures are expected to remain stable in the future due to its low cost structure and resulting competitive rates. Internal cash flow is insufficient to cover capital expenditures thus continued access to the capital markets is needed which could pressure leverage. APC benefits from its affiliation with AEP in terms of balancing power generation needs. The company also benefits from low Clean Air Act compliance costs. CSPC's credit protection measures are solid and are expected to remain stable going forward. Costs remain near the regional average primarily due to amortization of costs associated with the Zimmer plant resulting in competitive pricing pressure. The company benefits from strong regional economic growth, a relatively low industrial load, its affiliation with the highly efficient AEP system and strong internal cash flow sufficient to cover capital expenditures and limit the need to access the capital markets. OPC's credit protection measures have shown improvement and are expected to remain stable going forward. OPC benefits from a low cost structure, competitive rates, strong regional economic growth, its affiliation with the AEP system and strong internal cash flow sufficient to cover capital expenditures and limit the need to access the capital markets. Significant off-balance sheet, debt-like obligations associated with scrubbers at its Gavin plant create a leveraging effect which increases financial risk when such obligations are reflected in an adjusted capital structure. APC, CSPC and OPC are three of the seven operating electric utility subsidiaries of AEP, which all together serve seven million retail customers in seven states. APC serves 865 thousand retail customers in Virginia and West Virginia. CSPC serves over 600 thousand retail customers in central and southern Ohio including the city of Columbus. OPC serves 673 thousand retail customers throughout Ohio. All three companies are also involved in the generation, purchase and transmission of electric power. DCR Contacts: Brian M. Youngberg Daniel R. Kastholm, CFA (312)368-3332 (312)368-2070 youngberg@dcrco.com kastholm@dcrco.com -----END PRIVACY-ENHANCED MESSAGE-----