-----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, Il+JpbgQlC+w+8s93WTvydnrgoXlxQHZDe85z1UINtQybcgKbniDK1cXTQZcT3Xi Y3OiCr+XuwOCUerGUTAK8Q== 0000004904-98-000105.txt : 19980817 0000004904-98-000105.hdr.sgml : 19980817 ACCESSION NUMBER: 0000004904-98-000105 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO POWER CO CENTRAL INDEX KEY: 0000073986 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 314271000 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06543 FILM NUMBER: 98687612 BUSINESS ADDRESS: STREET 1: 301 CLEVELAND AVE S W CITY: COLUMBUS STATE: OH ZIP: 44702 BUSINESS PHONE: 6142231000 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period from to
Commission Registrant; State of Incorporation; I. R. S. Employer File Number Address; and Telephone Number Identification No. 1-3525 AMERICAN ELECTRIC POWER COMPANY, INC. 13-4922640 (A New York Corporation) 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 0-18135 AEP GENERATING COMPANY (An Ohio Corporation) 31-1033833 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 1-3457 APPALACHIAN POWER COMPANY (A Virginia Corporation) 54-0124790 40 Franklin Road, Roanoke, Virginia 24011 Telephone (540) 985-2300 1-2680 COLUMBUS SOUTHERN POWER COMPANY (An Ohio Corporation) 31-4154203 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 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 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 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, 1998 was 190,884,198. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES FORM 10-Q For The Quarter Ended June 30, 1998
INDEX Page Part I. FINANCIAL INFORMATION American Electric Power Company, Inc. and Subsidiary Companies: Consolidated Statements of Income and Statements of Retained Earnings. . . . . . . . . . . . . . A-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . A-2 - A-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . A-4 Notes to Consolidated Financial Statements . . . . . . . . . A-5 - A-10 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . A-11- A-17 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-8 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . C-9 - C-13 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-7 Management's Narrative Analysis of Results of Operations . . D-8 - 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-9 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . E-10- E-16 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-7 Management's Narrative Analysis of Results of Operations . . F-8 - F-9 AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES FORM 10-Q For The Quarter Ended June 30, 1998 INDEX Page Ohio Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . G-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . G-2 - G-3 Consolidated Statements of Cash Flows. . . . . . . . . . . G-4 Notes to Consolidated Financial Statements . . . . . . . . G-5 - G-7 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . G-8 - G-12 Part II. OTHER INFORMATION Item 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Item 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3 Item 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-4 SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5 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, 1998 1997 1998 1997 OPERATING REVENUES . . . . . . . . . . . . $2,737,851 $1,382,158 $4,908,434 $2,874,227 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . 406,207 362,330 844,186 770,619 Purchased Power. . . . . . . . . . . . . 1,324,563 29,548 2,033,065 55,956 Other Operation. . . . . . . . . . . . . 310,949 300,305 602,449 602,585 Maintenance. . . . . . . . . . . . . . . 125,505 124,728 245,448 224,113 Depreciation and Amortization. . . . . . 144,653 151,549 288,269 303,501 Taxes Other Than Federal Income Taxes. . 121,158 122,166 246,331 248,780 Federal Income Taxes . . . . . . . . . . 77,626 70,277 165,564 175,440 TOTAL OPERATING EXPENSES . . . . 2,510,661 1,160,903 4,425,312 2,380,994 OPERATING INCOME . . . . . . . . . . . . . 227,190 221,255 483,122 493,233 NONOPERATING INCOME (LOSS) . . . . . . . . (92) 5,686 702 10,195 INCOME BEFORE INTEREST CHARGES AND PREFERRED DIVIDENDS . . . . . . . . . . . 227,098 226,941 483,824 503,428 INTEREST CHARGES . . . . . . . . . . . . . 106,234 103,651 209,785 197,473 PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES . . . . . . . . . . . . . 2,780 2,151 5,368 12,255 NET INCOME . . . . . . . . . . . . . . . . $ 118,084 $ 121,139 $ 268,671 $ 293,700 AVERAGE NUMBER OF SHARES OUTSTANDING . . . 190,524 188,822 190,305 188,585 EARNINGS PER SHARE . . . . . . . . . . . . $0.62 $0.64 $1.41 $1.56 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, 1998 1997 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . $1,641,607 $1,607,776 $1,605,017 $1,547,746 NET INCOME . . . . . . . . . . . . . . . . 118,084 121,139 268,671 293,700 DEDUCTIONS: Cash Dividends Declared. . . . . . . . . 114,224 113,227 228,221 226,170 Other. . . . . . . . . . . . . . . . . . 1 649 1 237 BALANCE AT END OF PERIOD . . . . . . . . . $1,645,466 $1,615,039 $1,645,466 $1,615,039 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, December 31, 1998 1997
(in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . . . $ 9,531,018 $ 9,493,158 Transmission . . . . . . . . . . . . . . . . . . . . . . 3,547,449 3,501,580 Distribution . . . . . . . . . . . . . . . . . . . . . . 4,691,746 4,654,234 General (including mining assets and nuclear fuel) . . . 1,606,781 1,604,671 Construction Work in Progress. . . . . . . . . . . . . . 431,457 342,842 Total Electric Utility Plant . . . . . . . . . . 19,808,451 19,596,485 Accumulated Depreciation and Amortization. . . . . . . . 8,179,113 7,963,636 NET ELECTRIC UTILITY PLANT . . . . . . . . . . . 11,629,338 11,632,849 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . . . 1,499,427 1,356,504 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . . . 175,338 91,481 Accounts Receivable (net). . . . . . . . . . . . . . . . 867,505 667,518 Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 245,753 224,967 Materials and Supplies . . . . . . . . . . . . . . . . . 273,802 263,613 Accrued Utility Revenues . . . . . . . . . . . . . . . . 197,280 189,191 Energy Marketing and Trading Contracts . . . . . . . . . 785,777 2,306 Prepayments. . . . . . . . . . . . . . . . . . . . . . . 95,577 81,366 TOTAL CURRENT ASSETS . . . . . . . . . . . . . . 2,641,032 1,520,442 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . . . 1,818,641 1,817,540 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . . . 223,797 288,011 TOTAL. . . . . . . . . . . . . . . . . . . . . $17,812,235 $16,615,346 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, December 31, 1998 1997
(in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock-Par Value $6.50: 1998 1997 Shares Authorized . . . .600,000,000 300,000,000 Shares Issued . . . . . .199,868,779 198,989,981 (8,999,992 shares were held in treasury) . . . . . . . $ 1,299,147 $ 1,293,435 Paid-in Capital. . . . . . . . . . . . . . . . . . . . . 1,815,409 1,778,782 Retained Earnings. . . . . . . . . . . . . . . . . . . . 1,645,466 1,605,017 Total Common Shareholders' Equity. . . . . . . . 4,760,022 4,677,234 Cumulative Preferred Stocks of Subsidiaries: Not Subject to Mandatory Redemption. . . . . . . . . . 46,350 46,724 Subject to Mandatory Redemption. . . . . . . . . . . . 127,605 127,605 Long-term Debt . . . . . . . . . . . . . . . . . . . . . 5,133,689 5,129,463 TOTAL CAPITALIZATION . . . . . . . . . . . . . . 10,067,666 9,981,026 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . 1,326,752 1,246,537 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . . . 423,109 294,454 Short-term Debt. . . . . . . . . . . . . . . . . . . . . 506,275 555,075 Accounts Payable . . . . . . . . . . . . . . . . . . . . 512,015 353,256 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 302,843 380,771 Interest Accrued . . . . . . . . . . . . . . . . . . . . 72,126 76,361 Obligations Under Capital Leases . . . . . . . . . . . . 103,050 101,089 Energy Marketing and Trading Contracts . . . . . . . . . 771,829 1,983 Other. . . . . . . . . . . . . . . . . . . . . . . . . . 380,908 322,687 TOTAL CURRENT LIABILITIES. . . . . . . . . . . . 3,072,155 2,085,676 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . 2,543,549 2,560,921 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . . . 364,753 376,250 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . . . 226,681 231,320 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . . . 210,679 133,616 COMMITMENTS AND CONTINGENCIES (Note 7) TOTAL. . . . . . . . . . . . . . . . . . . . . $17,812,235 $16,615,346 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended
June 30, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,671 $ 293,700 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . . . . 308,694 303,318 Deferred Federal Income Taxes. . . . . . . . . . . . . . . . . 13,988 (17,262) Deferred Investment Tax Credits. . . . . . . . . . . . . . . . (11,497) (11,673) Amortization of Deferred Property Taxes. . . . . . . . . . . . 78,277 76,422 Deferred Costs Under Fuel Clause Mechanisms. . . . . . . . . . (46,506) (16,517) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . . . . (199,987) (27,380) Fuel, Materials and Supplies . . . . . . . . . . . . . . . . . (30,975) (12,037) Accrued Utility Revenues . . . . . . . . . . . . . . . . . . . (8,089) 7,493 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . (14,211) (28,305) Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . 158,759 (30,177) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . . . (77,928) (41,346) Revenue Refunds Accrued. . . . . . . . . . . . . . . . . . . . 38,552 (1,606) Other (net). . . . . . . . . . . . . . . . . . . . . . . . . . . 92,330 71,790 Net Cash Flows From Operating Activities . . . . . . . . . 570,078 566,420 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . . . . (363,633) (331,278) Investment in Yorkshire Electricity Group plc. . . . . . . . . . - (357,205) Proceeds from Sale of Property and Other . . . . . . . . . . . . (14,615) 4,785 Net Cash Flows Used For Investing Activities . . . . . . . (378,248) (683,698) FINANCING ACTIVITIES: Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . 42,051 39,023 Issuance of Long-term Debt . . . . . . . . . . . . . . . . . . . 610,506 651,318 Change in Short-term Debt (net). . . . . . . . . . . . . . . . . (48,800) 319,705 Retirement of Cumulative Preferred Stock . . . . . . . . . . . . (276) (433,234) Retirement of Long-term Debt . . . . . . . . . . . . . . . . . . (483,233) (196,724) Dividends Paid on Common Stock . . . . . . . . . . . . . . . . . (228,221) (226,170) Net Cash Flows From (Used For) Financing Activities. . . . (107,973) 153,918 Net Increase in Cash and Cash Equivalents. . . . . . . . . . . . . 83,857 36,640 Cash and Cash Equivalents at Beginning of Period . . . . . . . . . 91,481 57,539 Cash and Cash Equivalents at End of Period . . . . . . . . . . . . $ 175,338 $ 94,179 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $205,609,000 and $190,815,000 and for income taxes was $117,024,000 and $146,130,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $84,897,000 and $105,663,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial state-ments should be read in conjunction with the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING AND RELATED ACTIVITIES During the first six months of 1998, subsidiaries issued $452 million of senior unsecured notes: $112 million at 6.51% and 6.55% due 2008 and $340 million at rates ranging from 7.20% to 7-3/8% due 2038 and $125 million of 7.60% junior subordinated deferrable interest debentures due 2038. The subsidiaries also increased the outstanding balance under a long-term revolving credit agreement by $15 million. The proceeds were used to retire: first mortgage bonds totaling $412 million with interest rates ranging from 6-3/4% to 9.15% and due dates ranging from 1998 to 2023, $25 million of variable rate pollution control revenue bonds due in 2025, a $16.7 million term loan with an interest rate of 6.85% at maturity and $7 million of a variable rate term loan due in 1999. As a result of the redemption of the 6-3/4% series first mortgage bonds due in 1998, the restriction on the use of retained earnings for the payment of common stock dividends was reduced to $6 million. In July 1998 subsidiaries redeemed $60 million of first mortgage bonds: $40 million of 7.95% first mortgage bonds due in 2002 and $20 million of 7.80% first mortgage bonds due in 2023. Consequently the bonds were reclassified as a current liability on the balance sheet. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter and year-to-date periods ended June 30, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. 4. INVESTMENT IN YORKSHIRE The Company has a 50% ownership interest in Yorkshire Power Group Limited which is accounted for using the equity method of accounting and included in nonoperating income. The following amounts which are not included in AEP's consolidated financial statements represent summarized consolidated financial information of Yorkshire Power Group Limited for the quarter and six months ended June 30, 1998: Quarter Year-to-Date (in millions) Income Statement Data: Operating Revenues $503.9 $1,167.1 Operating Income 92.5 182.2 Net Income (Loss) (14.8) (7.9) The net loss resulted from a write-down of an investment in Ionica, a United Kingdom telecommunications company, in the quarter ended June 30, 1998. 5. ENERGY MARKETING AND TRADING During 1998, the Company substantially increased the volume of its electricity and gas marketing and trading businesses. The purpose of such businesses is to utilize the Company's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income, thereby enhancing both customer and shareholder value. Such businesses involve the marketing of energy under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Company's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Company had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company has also purchased and sold electricity and gas options, futures and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside its traditional marketing area and for gas. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the fair value of such trading activity is reported as a current asset and a current liability. The average fair value of the current asset and the current liability was $272 million and $267 million for the six months ended June 30, 1998, respectively. Dependent on future electricity and gas market conditions and prices, the open forward marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. 6. PROPOSED MERGER As discussed in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition, the Company and Central and South West Corporation (CSW) agreed to merge. At the annual meeting in May 1998, AEP shareholders approved the issuance of AEP common shares to effect the merger and approved an increase in the authorized shares of AEP Common Stock from 300,000,000 to 600,000,000. CSW shareholders approved the merger at their annual meeting in May 1998. The companies have filed for approval to merge with the Federal Energy Regulatory Commission and all of CSW's state regulatory commissions: Arkansas, Louisiana, Oklahoma and Texas. On August 13, 1998, the Arkansas Public Service Commission approved the merger, subject to a number of conditions. The Company is reviewing the conditions in the order. 7. CONTINGENCIES Taxes As discussed in Note 10, "Federal Income Taxes", of the Notes to Consolidated Financial Statements in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deductions through June 30, 1998 would reduce earnings by approximately $307 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. Cook Nuclear Plant Shutdown As discussed in Note 4 of the Notes to Consolidated Financial Statements in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition, both units of the Cook Nuclear Plant were shut down by Indiana Michigan Power Company (I&M) in September 1997 due to questions regarding the operability of certain safety systems, which arose during a Nuclear Regulatory Commission (NRC) architect engineer design inspection. The NRC issued a Confirmatory Action Letter in September 1997 requiring I&M to address the issues identified in the letter. Certain issues identified in the letter have been addressed. I&M is working with the NRC to resolve the remaining issue in the letter and other issues related to the restart of the units. On April 17, 1998, the NRC notified I&M that it had convened a Restart Panel for Cook Plant. I&M is meeting with the Panel on a regular basis, until the Cook Plant units are returned to service, to identify and address the issues necessary for the restart of the units. On July 9, 1998, I&M presented its proposed schedule for restart activities for Cook Plant Unit 1 to the NRC. According to I&M's proposed schedule, the required maintenance activities for Unit 1 would extend into November. On July 30, 1998, I&M received a letter from the NRC providing the NRC's list of required restart activities. In response to this letter, I&M will be meeting with the NRC to further define the scope and schedule of the outage. When maintenance and other activities required for restart are complete, I&M will seek regulatory approval from the NRC to return Unit 1 to service. I&M cannot predict when regulatory approval will be granted. The restart schedule for Unit 2 has not been completed. If the units are not returned to service, there would be a material adverse effect on financial condition. The incremental cost expected to be incurred for 1998 to restart the Cook units based on a preliminary estimate is approximately $50 million. However the cost and schedule for the outage could be significantly impacted as additional work is identified. Through June 30, 1998, $13 million of costs for the restart have been incurred. On July 24, 1998, I&M received an "adverse trend letter" from the NRC indicating that NRC senior managers had determined that there had been a slow decline in performance at the Cook Plant during the 18 month period preceding the letter. The letter indicates that the NRC will closely monitor efforts to address issues at Cook Plant through additional inspection activities. The cost of electricity supplied to retail customers rose due to the outage of the two units since higher cost coal-fired generation and purchased power were substituted for low cost nuclear generation. In the Indiana and Michigan retail jurisdictions fuel cost recovery mechanisms permit the recovery, subject to regulatory commission review and approval, of changes in fuel costs including the fuel component of purchased power in the Indiana jurisdiction and changes in replacement power in the Michigan jurisdiction. Under the fuel cost recovery mechanisms, retail rates contain a fuel cost adjustment factor that reflects estimated fuel costs for the period during which the factor will be in effect subject to reconciliation to actual fuel costs in a future proceeding. When actual fuel costs exceed the estimated costs reflected in the billing factor, a regulatory asset is recorded and revenues are accrued. Due to the unscheduled Cook Plant outage, I&M's actual fuel costs significantly exceeded the estimated fuel costs reflected in its fuel cost adjustment factors. A regulatory asset has been recorded for revenues accrued in anticipation of future reconciliation and billing of the higher fuel costs to customers. At June 30, 1998, the accrued regulatory asset was $53 million. On June 3, 1998, the Indiana Utility Regulatory Commission approved an agreement authorizing I&M during the billing months of July through September 1998 to apply a fuel cost adjustment factor less than that requested by I&M, subject to future reconciliation or refund. The agreement provides the parties to the proceeding with the opportunity to conduct discovery regarding certain issues that were raised in the proceeding, including the recovery of replacement energy cost due to the Cook Plant outage, in anticipation of resolving the issues in a future fuel cost adjustment proceeding. Management believes that it should be able to recover the Cook replacement energy costs; however, if recovery of the replacement costs were to be denied, results of operations and cash flows would be adversely affected. Other The Company continues to be involved in certain other matters discussed in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Net income decreased $3.1 million or 3% in the second quarter and $25 million or 9% in the year-to-date period due primarily to the write-down of an investment in a telecommunications company and unplanned outages at some generating plants including an extended outage of the Company's nuclear plant and in the year-to-date period the cost for repair and restoration of service caused by two severe snowstorms and increased interest expense. Income statement line items which changed significantly were: Increase (Decrease) Second Quarter Year-To-Date (in millions) % (in millions) % Operating Revenues . . . . . . $1,355.7 98 $2,034.2 71 Fuel Expense . . . . . . . . . 43.9 12 73.6 10 Purchased Power Expense. . . . 1,295.0 N.M. 1,977.1 N.M. Other Operation Expense. . . . 10.6 4 (0.1) - Maintenance Expense. . . . . . 0.8 1 21.3 10 Depreciation and Amortization. (6.9) (5) (15.2) (5) Federal Income Taxes . . . . . 7.3 10 (9.9) (6) Nonoperating Income. . . . . . (5.8)(102) (9.5) (93) N.M. = Not Meaningful Although the unplanned outages at some generating units resulted in the loss of sales opportunities, operating revenues increased in both periods reflecting increased energy sales to retail and wholesale customers. Retail energy sales increased 5% in the second quarter and 2% in the year-to-date period. Energy sales to all retail customer classes increased reflecting warmer springtime temperatures, additional customers, and a return to operation of a large industrial customer after a labor strike. Revenues from lower margin wholesale sales increased significantly in both periods primarily as a result of sales from a new power marketing business started in July 1997. The new power marketing business involves the purchase and sale of large quantities of electricity through forward contracts. The significant increase in wholesale revenues was heavily offset by a significant increase in power purchases by the new power marketing operation. The increase in fuel expense was primarily attributable to an increase in coal fired generation to meet the increased demand for electricity and an increase in the average cost of fuel consumed reflecting the unavailability of lower cost nuclear generation due to the unplanned outage of both Cook Plant units in 1998. Purchases of electricity by the new power marketing business accounted for the significant increase in purchased power expense. The increase in other operation expense in the second quarter is due to steam plant costs reflecting the increase in coal-fired generation and increased energy delivery and customer service costs. Maintenance expense increased in the year-to-date period due to expenditures for repair of transmission and distribution facilities resulting from two snowstorms in the Company's Kentucky, Virginia and West Virginia service territories and the cost of work to prepare the Company's nuclear generating units for restart. The reduction in depreciation and amortization expense reflects the completion of the amortization of deferrals under rate phase-in plans by two subsidiaries. Net income was not affected by the completion of the phase-in amortizations since the recovery of the amortization ceased concurrent with the amortization. The increase in federal income tax expense attributable to operations in the second quarter was due to 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. Nonoperating income decreased in both periods primarily due to the Company's share of a write-down, by Yorkshire Power Group, of an investment in Ionica, a United Kingdom telecommunications company. FINANCIAL CONDITION Total plant and property additions including capital leases for the first six months were $449 million. During the first six months of 1998 subsidiaries issued $618 million principal amount of long-term obligations at interest rates ranging from 5.87% to 7.6%; retired $476 million principal amount of long-term debt with interest rates ranging from 3.8% to 9.15%; and decreased short-term debt by $49 million. COOK NUCLEAR PLANT SHUTDOWN As discussed in Note 4 of the Notes to Consolidated Financial Statements in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition, both units of the Cook Nuclear Plant were shut down by Indiana Michigan Power Company (I&M) in September 1997 due to questions regarding the operability of certain safety systems, which arose during a Nuclear Regulatory Commission (NRC) architect engineer design inspection. The NRC issued a Confirmatory Action Letter in September 1997 requiring I&M to address the issues identified in the letter. Certain issues identified in the letter have been addressed. I&M is working with the NRC to resolve the remaining issue in the letter and other issues related to the restart of the units. On April 17, 1998, the NRC notified I&M that it had convened a Restart Panel for Cook Plant. I&M is meeting with the Panel on a regular basis, until the Cook Plant units are returned to service, to identify and address the issues necessary for the restart of the units. On July 9, 1998, I&M presented its proposed schedule for restart activities for Cook Plant Unit 1 to the NRC. According to I&M's proposed schedule, the required maintenance activities for Unit 1 would extend into November. On July 30, 1998, I&M received a letter from the NRC providing the NRC's list of required restart activities. In response to this letter, I&M will be meeting with the NRC to further define the scope and schedule of the outage. When maintenance and other activities required for restart are complete, I&M will seek regulatory approval from the NRC to return Unit 1 to service. I&M cannot predict when regulatory approval will be granted. The restart schedule for Unit 2 has not been completed. If the units are not returned to service, there would be a material adverse effect on financial condition. The incremental cost expected to be incurred for 1998 to restart the Cook units based on a preliminary estimate is approximately $50 million. However the cost and schedule for the outage could be significantly impacted as additional work is identified. Through June 30, 1998, $13 million of costs for the restart have been incurred. On July 24, 1998, I&M received an "adverse trend letter" from the NRC indicating that NRC senior managers had determined that there had been a slow decline in performance at the Cook Plant during the 18 month period preceding the letter. The letter indicates that the NRC will closely monitor efforts to address issues at Cook Plant through additional inspection activities. The cost of electricity supplied to retail customers rose due to the outage of the two units since higher cost coal-fired generation and purchased power were substituted for low cost nuclear generation. In the Indiana and Michigan retail jurisdictions fuel cost recovery mechanisms permit the recovery, subject to regulatory commission review and approval, of changes in fuel costs including the fuel component of purchased power in the Indiana jurisdiction and changes in replacement power in the Michigan jurisdiction. Under the fuel cost recovery mechanisms, retail rates contain a fuel cost adjustment factor that reflects estimated fuel costs for the period during which the factor will be in effect subject to reconciliation to actual fuel costs in a future proceeding. When actual fuel costs exceed the estimated costs reflected in the billing factor, a regulatory asset is recorded and revenues are accrued. Due to the unscheduled Cook Plant outage, I&M's actual fuel costs significantly exceeded the estimated fuel costs reflected in its fuel cost adjustment factors. A regulatory asset has been recorded for revenues accrued in anticipation of future reconciliation and billing of the higher fuel costs to customers. At June 30, 1998, the accrued regulatory asset was $53 million. On June 3, 1998, the Indiana Utility Regulatory Commission approved an agreement authorizing I&M during the billing months of July through September 1998 to apply a fuel cost adjustment factor less than that requested by I&M, subject to future reconciliation or refund. The agreement provides the parties to the proceeding with the opportunity to conduct discovery regarding certain issues that were raised in the proceeding, including the recovery of replacement energy cost due to the Cook Plant outage, in anticipation of resolving the issues in a future fuel cost adjustment proceeding. Management believes that it should be able to recover the Cook replacement energy costs; however, if recovery of the replacement costs were to be denied, results of operations and cash flows would be adversely affected. ENERGY MARKETING AND TRADING During 1998, the Company substantially increased the volume of its electricity and gas marketing and trading businesses. The purpose of such businesses is to utilize the Company's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income, thereby enhancing both customer and shareholder value. Such businesses involve the marketing of energy under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Company's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Company had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company has also purchased and sold electricity and gas options, futures and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside its traditional marketing area and for gas. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the fair value of such trading activity is reported as a current asset and a current liability. The average fair value of the current asset and the current liability was $272 million and $267 million for the six months ended June 30, 1998, respectively. Dependent on future electricity and gas market conditions and prices, the open forward marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. TAXES The Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deductions through June 30, 1998 would reduce earnings by approximately $307 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. COMPUTER ISSUE - YEAR 2000 The Company has been addressing the issue of what will happen when the year 2000 arrives and many of the world's computer systems will encounter the "year 2000" problem, i.e., computers not being able to distinguish between the years 1900 and 2000. Internally the Company has been modifying or replacing its computer hardware and software programs to mitigate risk, minimize technical failures, and rapidly repair failures if they occur. Externally the problem is being addressed with entities that interact electronically with the Company, including but not limited to, suppliers, service providers, government agencies, customers, creditors and financial service organizations. If the Company's corrective actions, and/or the actions of other independent entities fail for critical applications, the Company may be adversely impacted in the year 2000. The Company began reviewing the issue in 1996 and has spent approximately $13 million on the project through June 30, 1998. The Company is continuing to study the impact of making its systems "year 2000" compliant and is working on various aspects of the issue. These activities are projected to cost an additional $43 million to $55 million. Although significant, the cost of correcting the "year 2000" problem is not expected to have a material impact on the results of operations for any accounting period, cash flows or financial condition. PROPOSED MERGER As discussed in the 1997 Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition, the Company and Central and South West Corporation (CSW) agreed to merge. At the annual meeting in May 1998, AEP shareholders approved the issuance of AEP common shares to effect the merger and approved an increase in the authorized shares of AEP Common Stock from 300,000,000 to 600,000,000. CSW shareholders approved the merger at their annual meeting in May 1998. The companies have filed for approval to merge with the Federal Energy Regulatory Commission and all of CSW's state regulatory commissions: Arkansas, Louisiana, Oklahoma and Texas. On August 13, 1998, the Arkansas Public Service Commission approved the merger, subject to a number of conditions. The Company is reviewing the conditions in the order. AEP GENERATING COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . $54,282 $53,433 $108,334 $112,529 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 21,264 18,739 43,765 46,089 Rent - Rockport Plant Unit 2 . . . . . 17,070 17,070 34,141 34,141 Other Operation. . . . . . . . . . . . 2,724 2,714 5,373 5,844 Maintenance. . . . . . . . . . . . . . 4,229 5,357 6,407 7,743 Depreciation . . . . . . . . . . . . . 5,412 5,412 10,824 10,807 Taxes Other Than Federal Income Taxes. 934 850 1,877 1,729 Federal Income Taxes . . . . . . . . . 755 850 1,717 1,607 TOTAL OPERATING EXPENSES . . . 52,388 50,992 104,104 107,960 OPERATING INCOME . . . . . . . . . . . . 1,894 2,441 4,230 4,569 NONOPERATING INCOME. . . . . . . . . . . 791 950 1,620 1,800 INCOME BEFORE INTEREST CHARGES . . . . . 2,685 3,391 5,850 6,369 INTEREST CHARGES . . . . . . . . . . . . 806 1,070 1,591 2,011 NET INCOME . . . . . . . . . . . . . . . $ 1,879 $ 2,321 $ 4,259 $ 4,358 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $1,732 $2,637 $2,528 $1,886 NET INCOME . . . . . . . . . . . . . . . 1,879 2,321 4,259 4,358 CASH DIVIDENDS DECLARED. . . . . . . . . 1,176 1,286 4,352 2,572 BALANCE AT END OF PERIOD . . . . . . . . $2,435 $3,672 $2,435 $3,672 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Financial Statements.
AEP GENERATING COMPANY BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production. . . . . . . . . . . . . . . . . . . . . . . . $627,983 $627,803 General . . . . . . . . . . . . . . . . . . . . . . . . . 3,150 3,137 Construction Work in Progress . . . . . . . . . . . . . . 5,957 2,510 Total Electric Utility Plant. . . . . . . . . . . 637,090 633,450 Accumulated Depreciation. . . . . . . . . . . . . . . . . 267,871 257,191 NET ELECTRIC UTILITY PLANT. . . . . . . . . . . . 369,219 376,259 CURRENT ASSETS: Cash and Cash Equivalents . . . . . . . . . . . . . . . . 2,602 237 Accounts Receivable . . . . . . . . . . . . . . . . . . . 22,513 20,710 Fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,945 10,107 Materials and Supplies. . . . . . . . . . . . . . . . . . 4,108 4,246 Prepayments . . . . . . . . . . . . . . . . . . . . . . . 228 368 TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . 45,396 35,668 REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . 6,104 5,639 DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . 2,320 1,492 TOTAL . . . . . . . . . . . . . . . . . . . . . $423,039 $419,058 See Notes to Financial Statements.
AEP GENERATING COMPANY BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - Par Value $1,000: Authorized and Outstanding - 1,000 Shares . . . . . . . $ 1,000 $ 1,000 Paid-in Capital . . . . . . . . . . . . . . . . . . . . . 37,235 39,235 Retained Earnings . . . . . . . . . . . . . . . . . . . . 2,435 2,528 Total Common Shareholder's Equity . . . . . . . . 40,670 42,763 Long-term Debt. . . . . . . . . . . . . . . . . . . . . . 44,788 69,570 TOTAL CAPITALIZATION. . . . . . . . . . . . . . . 85,458 112,333 OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . . . . . 1,069 1,259 CURRENT LIABILITIES: Short-term Debt - Notes Payable . . . . . . . . . . . . . 34,950 11,750 Accounts Payable. . . . . . . . . . . . . . . . . . . . . 17,912 9,704 Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . 4,750 3,420 Interest Accrued. . . . . . . . . . . . . . . . . . . . . 222 461 Rent Accrued - Rockport Plant Unit 2. . . . . . . . . . . 4,963 4,963 Obligations Under Capital Leases. . . . . . . . . . . . . 498 560 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,572 3,187 TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 66,867 34,045 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2 . . . . . . . . . . . . . . . . . . 136,116 138,901 REGULATORY LIABILITIES: Deferred Investment Tax Credits . . . . . . . . . . . . . 68,335 70,016 Deferred Amounts Due to Customers for Federal Income Tax. 30,728 31,375 TOTAL REGULATORY LIABILITIES. . . . . . . . . . . 99,063 101,391 DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . 34,466 31,129 TOTAL . . . . . . . . . . . . . . . . . . . . . $423,039 $419,058 See Notes to Financial Statements.
AEP GENERATING COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,259 $ 4,358 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 10,824 10,807 Deferred Federal Income Taxes. . . . . . . . . . . . . . 2,689 2,379 Deferred Investment Tax Credits. . . . . . . . . . . . . (1,681) (1,684) Amortization of Deferred Gain on Sale and Leaseback - Rockport Plant Unit 2. . . . . . . . . (2,785) (2,785) Deferred Property Taxes. . . . . . . . . . . . . . . . . (1,572) (1,460) Changes in Certain Current Assets and Liabilities: Accounts Receivable. . . . . . . . . . . . . . . . . . . (1,803) (200) Fuel, Materials and Supplies . . . . . . . . . . . . . . (5,700) 680 Accounts Payable . . . . . . . . . . . . . . . . . . . . 8,208 7,622 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 1,330 1,205 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 517 (3,914) Net Cash Flows From Operating Activities . . . . . . 14,286 17,008 INVESTING ACTIVITIES - Construction Expenditures . . . . . . (3,769) (1,765) FINANCING ACTIVITIES: Return of Capital to Parent Company. . . . . . . . . . . . (2,000) (2,000) Retirement of Long-term Debt . . . . . . . . . . . . . . . (25,000) (20,010) Change in Short-term Debt (net). . . . . . . . . . . . . . 23,200 9,225 Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (4,352) (2,572) Net Cash Flows Used For Financing Activities . . . . (8,152) (15,357) Net Increase (Decrease) in Cash and Cash Equivalents . . . . 2,365 (114) Cash and Cash Equivalents at Beginning of Period . . . . . . 237 139 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 2,602 $ 25 Supplemental Disclosure: Cash paid (received) for interest net of capitalized amounts was $1,634,000 and $1,819,000 and for income taxes was $(717,000) and $(562,000) in 1998 and 1997, respectively. See Notes to Financial Statements.
AEP GENERATING COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES In March 1998 $12.5 million of the 1995 Series A pollution control revenue bonds due 2025 and $12.5 million of the 1995 Series B pollution control revenue bonds due 2025 were redeemed. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter and year-to-date periods ended June 30, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. AEP GENERATING COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 Operating revenues are derived from the sale of Rockport Plant energy and capacity to two affiliated companies and one unaffiliated utility pursuant to Federal Energy Regulatory Commission (FERC) approved long-term unit power agreements. The unit power agreements provide for recovery of costs including a FERC approved rate of return on common equity and a return on other capital net of temporary cash investments. Net income declined $0.4 million or 19% in the second quarter and $0.1 or 2% in the year-to-date period as a result of capital returned to the Company's parent in 1997 and May 1998 and the March 1998 redemption of $25 million of pollution control revenue bonds. The retirement of this long-term debt reduced cash available for temporary investment and increased short-term debt interest which is reflected as an increase in the power bills on a one-month lag as part of the return on other capital. Income statement line items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . . $ 0.8 2 $(4.2) (4) Fuel Expense . . . . . . . . 2.5 13 (2.3) (5) Other Operation Expense. . . - - (0.5) (8) Maintenance Expense. . . . . (1.1) (21) (1.3) (17) Federal Income Taxes . . . . (0.1) (11) 0.1 7 Nonoperating Income. . . . . (0.2) (17) (0.2) (10) Interest Charges . . . . . . (0.3) (25) (0.4) (21) The increase in operating revenues during the second quarter reflects the recovery through the unit power agreements of higher operating expenses, primarily fuel expense. In the year-to-date period, recovery of lower operating expenses, primarily fuel and maintenance costs, and the above noted reduction in capital cost caused the decline in operating revenues. Fuel expense increased in the second quarter as generation increased by 19 percent. While year-to-date generation increased slightly, a lower average cost of fuel consumed, due to a reduction in coal prices, produced the reduction in fuel expense when compared to prior year. The decline in other operation expense in the year-to-date period is primarily due to a decrease in administrative and general expenses reflecting a reduction in allocated employee salary and benefit costs and a reduction in the FERC annual assessment. The decline in maintenance expense reflects lower costs due to a 1998 maintenance outage at Rockport Unit 1 being of shorter duration than a 1997 outage. In the second quarter, federal income taxes attributable to operations decreased due to a decrease in pre-tax operating income. Nonoperating income declined primarily as a result of the reduction in earnings on temporary cash investments. The decline in interest charges was due to the reduction in outstanding long-term debt balances reflecting the redemption of $20 million in June 1997 and $25 million in March 1998 of pollution control revenue bonds. APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . $759,793 $373,084 $1,377,283 $789,534 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 101,191 89,355 209,400 184,259 Purchased Power. . . . . . . . . . . . 443,948 75,468 715,334 161,008 Other Operation. . . . . . . . . . . . 62,442 61,427 117,309 125,267 Maintenance. . . . . . . . . . . . . . 31,476 29,080 66,828 51,890 Depreciation and Amortization. . . . . 35,788 34,274 71,193 68,249 Taxes Other Than Federal Income Taxes. 29,934 29,763 60,178 60,036 Federal Income Taxes . . . . . . . . . 8,822 8,320 26,600 29,094 TOTAL OPERATING EXPENSES . . . 713,601 327,687 1,266,842 679,803 OPERATING INCOME . . . . . . . . . . . . 46,192 45,397 110,441 109,731 NONOPERATING INCOME. . . . . . . . . . . 1,561 79 1,174 323 INCOME BEFORE INTEREST CHARGES . . . . . 47,753 45,476 111,615 110,054 INTEREST CHARGES . . . . . . . . . . . . 32,629 30,098 63,292 58,192 NET INCOME . . . . . . . . . . . . . . . 15,124 15,378 48,323 51,862 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 678 680 1,147 5,645 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 14,446 $ 14,698 $ 47,176 $ 46,217 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $210,545 $211,382 $207,544 $208,472 NET INCOME . . . . . . . . . . . . . . . 15,124 15,378 48,323 51,862 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 29,729 28,609 59,458 57,218 Cumulative Preferred Stock . . . . . 570 573 932 2,077 Capital Stock Expense. . . . . . . . . 108 107 215 3,568 BALANCE AT END OF PERIOD . . . . . . . . $195,262 $197,471 $195,262 $197,471 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, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,956,055 $1,942,325 Transmission . . . . . . . . . . . . . . . . . . . . 1,098,796 1,079,919 Distribution . . . . . . . . . . . . . . . . . . . . 1,621,965 1,583,161 General. . . . . . . . . . . . . . . . . . . . . . . 224,339 207,380 Construction Work in Progress. . . . . . . . . . . . 81,000 88,261 Total Electric Utility Plant . . . . . . . . 4,982,155 4,901,046 Accumulated Depreciation and Amortization. . . . . . 1,926,369 1,869,057 NET ELECTRIC UTILITY PLANT . . . . . . . . . 3,055,786 3,031,989 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 41,340 34,544 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 5,810 6,947 Accounts Receivable (net). . . . . . . . . . . . . . 164,691 163,324 Fuel . . . . . . . . . . . . . . . . . . . . . . . . 57,462 47,901 Materials and Supplies . . . . . . . . . . . . . . . 61,877 57,359 Accrued Utility Revenues . . . . . . . . . . . . . . 36,482 51,208 Energy Marketing and Trading Contracts . . . . . . . 232,141 923 Prepayments. . . . . . . . . . . . . . . . . . . . . 7,158 6,037 TOTAL CURRENT ASSETS . . . . . . . . . . . . 565,621 333,699 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 432,486 441,223 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 48,226 41,975 TOTAL. . . . . . . . . . . . . . . . . . . $4,143,459 $3,883,430 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 30,000,000 Shares Outstanding - 13,499,500 Shares. . . . . . . . . . $ 260,458 $ 260,458 Paid-in Capital. . . . . . . . . . . . . . . . . . . 638,389 613,048 Retained Earnings. . . . . . . . . . . . . . . . . . 195,262 207,544 Total Common Shareholder's Equity. . . . . . 1,094,109 1,081,050 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 19,490 19,747 Subject to Mandatory Redemption. . . . . . . . . . 22,310 22,310 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,532,543 1,415,026 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,668,452 2,538,133 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 141,858 137,371 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 19,504 79,509 Short-term Debt. . . . . . . . . . . . . . . . . . . 41,000 130,300 Accounts Payable . . . . . . . . . . . . . . . . . . 76,646 96,816 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 38,930 41,549 Customer Deposits. . . . . . . . . . . . . . . . . . 13,901 13,713 Interest Accrued . . . . . . . . . . . . . . . . . . 20,056 20,949 Revenue Refunds Accrued. . . . . . . . . . . . . . . 41,173 3,311 Energy Marketing and Trading Contracts . . . . . . . 230,785 729 Other. . . . . . . . . . . . . . . . . . . . . . . . 90,682 68,083 TOTAL CURRENT LIABILITIES. . . . . . . . . . 572,677 454,959 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 654,446 658,655 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 65,131 67,496 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 40,895 26,816 CONTINGENCIES (Note 6) TOTAL. . . . . . . . . . . . . . . . . . . $4,143,459 $3,883,430 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,323 $ 51,862 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . . 71,825 68,902 Deferred Federal Income Taxes. . . . . . . . . . . . . . . 2,151 (6,524) Deferred Power Supply Costs (net). . . . . . . . . . . . . 15,474 9,093 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . . (1,367) 3,980 Fuel, Materials and Supplies . . . . . . . . . . . . . . . (14,079) (3,761) Accrued Utility Revenues . . . . . . . . . . . . . . . . . 14,726 19,802 Accounts Payable . . . . . . . . . . . . . . . . . . . . . (20,170) 4,385 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . (2,619) 12,320 Revenue Refunds Accrued. . . . . . . . . . . . . . . . . . 37,862 (1,606) Other (net). . . . . . . . . . . . . . . . . . . . . . . . . 5,595 (10,972) Net Cash Flows From Operating Activities . . . . . . . 157,721 147,481 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . . (89,608) (91,759) Proceeds from Sale of Property . . . . . . . . . . . . . . . 880 2,241 Net Cash Flows Used For Investing Activities . . . . . (88,728) (89,518) FINANCING ACTIVITIES: Capital Contributions from Parent Company. . . . . . . . . . 25,000 20,000 Issuance of Long-term Debt . . . . . . . . . . . . . . . . . 193,431 183,257 Change in Short-term Debt (net). . . . . . . . . . . . . . . (89,300) 42,550 Retirement of Cumulative Preferred Stock . . . . . . . . . . (190) (183,842) Retirement of Long-term Debt . . . . . . . . . . . . . . . . (138,471) (56,378) Dividends Paid on Common Stock . . . . . . . . . . . . . . . (59,458) (57,218) Dividends Paid on Cumulative Preferred Stock . . . . . . . . (1,142) (4,746) Net Cash Flows Used For Financing Activities . . . . . (70,130) (56,377) Net Increase (Decrease) in Cash and Cash Equivalents . . . . . (1,137) 1,586 Cash and Cash Equivalents at Beginning of Period . . . . . . . 6,947 7,260 Cash and Cash Equivalents at End of Period . . . . . . . . . . $ 5,810 $ 8,846 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $62,272,000 and $56,791,000 and for income taxes was $30,981,000 and $24,890,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $11,893,000 and $11,797,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. RATE MATTER In September 1992 the Company implemented, subject to refund, an $8.7 million annual rate increase to its wholesale customers pending a final order from the Federal Energy Regulatory Commission (FERC). On June 29, 1998 the FERC granted an annual rate increase of $3.4 million and required a refund including interest of amounts collected in excess of the $3.4 million annual increase. As a result of the order, the Company increased the provision for revenue refund by $4.4 million (net of tax) in June 1998. As of June 30, 1998 a refund obligation of $39.6 million including interest has been recorded as a current liability. A rehearing of the FERC's order has been requested. 3. FINANCING ACTIVITIES During the first six months of 1998, the Company issued two series of senior unsecured notes of $100 million each with rates of 7.20% and 7.30% due in 2038. During the first six months of 1998, the Company reacquired the following first mortgage bonds for $138 million including reacquisition premiums: Principal Amount % Rate Due Date Reacquired (in thousands) 8.75 2022 - February 1 $29,919 8.70 2022 - May 22 35,000 7.95 2002 - March 1 60,000 8.43 2022 - June 1 12,529 In June 1998, the Company received a $25 million cash capital contribution from its parent which was credited to paid-in capital. 4. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter and year-to-date periods ended June 30, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed software acquisition and development costs with the exception of certain software costs which were capitalized in accordance with an order of the Virginia State Corporation Commission. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. 5. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $450 million for sales and approximately $450 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $80 million and $80 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. 6. CONTINGENCIES Taxes As discussed in Note 9, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deduction through June 30, 1998 would reduce earnings by approximately $76 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. Other The Company continues to be involved in certain other matters discussed in its 1997 Annual Report. APPALACHIAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Net income declined $0.3 million or 2% in the second quarter and $3.5 million or 7% in the year-to-date period primarily due to a $4.4 million net of tax provision for revenue refund recorded in June 1998 and increased interest charges reflecting an increase in long-term debt outstanding and interest on revenues to be refunded to customers under a final rate order. Income statement line items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . . $386.7 104 $587.7 74 Fuel Expense . . . . . . . . 11.8 13 25.1 14 Purchased Power Expense. . . 368.5 488 554.3 344 Other Operation Expense. . . 1.0 2 (8.0) (6) Maintenance Expense. . . . . 2.4 8 14.9 29 Federal Income Taxes . . . . 0.5 6 (2.5) (9) Interest Charges . . . . . . 2.5 8 5.1 9 Operating revenues increased significantly for both the second quarter and year-to-date period due predominantly to increased wholesale and retail sales. A new power marketing business, which started in July 1997, was the primary reason for the substantial increase in wholesale sales. The power marketing business involves the purchase and sale of large quantities of electricity through forward contracts. The increases in wholesale sales and related revenues were offset by a nearly equivalent increase in power purchases by the power marketing operation. Retail sales and revenues each increased 3% for the second quarter and 2% year-to-date as demand by weather sensitive residential and commercial customers increased reflecting warmer springtime temperatures. The increase in fuel expense was due to an increase in generation to meet the increased demand in the retail business for electricity. Purchased power expense increased as a result of purchases of electricity by the new power marketing business. The decrease in other operation expense for the year-to-date period is due to lower charges under an AEP System transmission equalization agreement and a reduction in employee pension and benefit costs. The transmission equalization agreement combines certain AEP System companies' investment in transmission facilities and shares the costs of ownership of those facilities in proportion to each AEP System company's peak demand relative to the peak demands of all AEP System companies utilizing the AEP System transmission system. The charges paid by the Company under the agreement decreased due to a decrease in the Company's prior twelve month peak demand relative to the total peak demand of all transmission agreement members. Maintenance expense increased as a result of increased expenditures to repair overhead transmission and distribution lines damaged by two severe winter snowstorms and to maintain right of way clearances from trees around distribution facilities. The decrease in federal income tax expense attributable to operations for the year-to-date period was primarily due to a decrease in pre-tax operating income. Interest charges for the quarter and year-to-date periods increased as a result of the accrual of additional interest on revenue refunds to wholesale customers under the terms of a final rate order and in the year-to-date period, an increase in long-term debt outstanding, which was issued in 1997 to finance the reacquisition of preferred stock. FINANCIAL CONDITION Total plant and property additions including capital leases for the first six months of 1998 were $102 million. During the first six months of 1998, the Company issued two series of senior unsecured notes of $100 million each with rates of 7.20% and 7.30% due in 2038 and redeemed $137 million principal amount of first mortgage bonds with interest rates from 7.95% to 8.75%. Short-term debt decreased by $89 million from year-end balances. In June 1998, the Company received a $25 million cash capital contribution from its parent which was credited to paid-in capital. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $450 million for sales and approximately $450 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $80 million and $80 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. TAXES The Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deduction through June 30, 1998 would reduce earnings by approximately $76 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. COMPUTER ISSUE - YEAR 2000 The Company has been addressing the issue of what will happen when the year 2000 arrives and many of the world's computer systems will encounter the "year 2000" problem, i.e., computers not being able to distinguish between the years 1900 and 2000. Internally the Company has been modifying or replacing its computer hardware and software programs to mitigate risk, minimize technical failures, and rapidly repair failures if they occur. Externally the problem is being addressed with entities that interact electronically with the Company, including but not limited to, suppliers, service providers, government agencies, customers, creditors and financial service organizations. If the Company's corrective actions, and/or the actions of other independent entities fail for critical applications, the Company may be adversely impacted in the year 2000. The Company began reviewing the issue in 1996 and has spent approximately $4 million on the project through June 30, 1998. The Company is continuing to study the impact of making its systems "year 2000" compliant and is working on various aspects of the issue. These activities are projected to cost an additional $13 million to $16 million. Although significant, the cost of correcting the "year 2000" problem is not expected to have a material impact on the results of operations for any accounting period, cash flows or financial condition. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . $493,285 $263,263 $868,766 $528,270 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 46,860 37,129 93,840 81,929 Purchased Power. . . . . . . . . . . . 253,804 45,319 410,723 83,834 Other Operation. . . . . . . . . . . . 46,783 43,621 91,365 85,751 Maintenance. . . . . . . . . . . . . . 14,889 19,743 29,196 33,067 Depreciation . . . . . . . . . . . . . 22,844 22,572 45,694 45,019 Amortization of Zimmer Plant Phase-in Costs . . . . . . . . - 7,334 - 15,741 Taxes Other Than Federal Income Taxes. 27,690 29,654 57,626 59,623 Federal Income Taxes . . . . . . . . . 23,264 14,923 37,942 32,908 TOTAL OPERATING EXPENSES . . . 436,134 220,295 766,386 437,872 OPERATING INCOME . . . . . . . . . . . . 57,151 42,968 102,380 90,398 NONOPERATING INCOME. . . . . . . . . . . 1,256 324 1,228 1,360 INCOME BEFORE INTEREST CHARGES . . . . . 58,407 43,292 103,608 91,758 INTEREST CHARGES . . . . . . . . . . . . 19,665 19,862 39,221 39,004 NET INCOME . . . . . . . . . . . . . . . 38,742 23,430 64,387 52,754 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 532 533 1,065 1,377 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 38,210 $ 22,897 $ 63,322 $ 51,377 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $142,623 $108,727 $138,172 $ 99,582 NET INCOME . . . . . . . . . . . . . . . 38,742 23,430 64,387 52,754 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 20,661 19,671 41,322 39,342 Cumulative Preferred Stock . . . . . 438 438 875 875 Capital Stock Expense. . . . . . . . . 95 95 191 166 BALANCE AT END OF PERIOD . . . . . . . . $160,171 $111,953 $160,171 $111,953 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, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,519,503 $1,521,381 Transmission . . . . . . . . . . . . . . . . . . . . 335,202 336,446 Distribution . . . . . . . . . . . . . . . . . . . . 918,729 926,178 General. . . . . . . . . . . . . . . . . . . . . . . 119,239 138,041 Construction Work in Progress. . . . . . . . . . . . 110,241 54,064 Total Electric Utility Plant . . . . . . . . 3,002,914 2,976,110 Accumulated Depreciation . . . . . . . . . . . . . . 1,097,984 1,074,588 NET ELECTRIC UTILITY PLANT . . . . . . . . . 1,904,930 1,901,522 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 36,263 33,235 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 8,021 12,626 Accounts Receivable (net). . . . . . . . . . . . . . 109,260 110,969 Fuel . . . . . . . . . . . . . . . . . . . . . . . . 18,159 19,549 Materials and Supplies . . . . . . . . . . . . . . . 29,051 27,628 Accrued Utility Revenues . . . . . . . . . . . . . . 65,442 51,765 Energy Marketing and Trading Contracts . . . . . . . 126,802 418 Prepayments. . . . . . . . . . . . . . . . . . . . . 37,888 29,979 TOTAL CURRENT ASSETS . . . . . . . . . . . . 394,623 252,934 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 350,052 359,481 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 38,263 66,688 TOTAL. . . . . . . . . . . . . . . . . . . $2,724,131 $2,613,860 See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 24,000,000 Shares Outstanding - 16,410,426 Shares. . . . . . . . . . $ 41,026 $ 41,026 Paid-in Capital. . . . . . . . . . . . . . . . . . . 572,302 572,112 Retained Earnings. . . . . . . . . . . . . . . . . . 160,171 138,172 Total Common Shareholder's Equity. . . . . . 773,499 751,310 Cumulative Preferred Stock - Subject to Mandatory Redemption . . . . . . . . . . . . . . . 25,000 25,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 959,416 887,850 TOTAL CAPITALIZATION . . . . . . . . . . . . 1,757,915 1,664,160 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 43,542 42,271 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 40,000 81,750 Short-term Debt. . . . . . . . . . . . . . . . . . . 52,525 66,600 Accounts Payable . . . . . . . . . . . . . . . . . . 71,831 71,287 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 80,085 131,107 Interest Accrued . . . . . . . . . . . . . . . . . . 13,876 14,198 Energy Marketing and Trading Contracts . . . . . . . 126,547 353 Other. . . . . . . . . . . . . . . . . . . . . . . . 28,373 28,619 TOTAL CURRENT LIABILITIES. . . . . . . . . . 413,237 393,914 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 431,210 433,593 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 51,159 52,934 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 27,068 26,988 CONTINGENCIES (Note 5) TOTAL. . . . . . . . . . . . . . . . . . . $2,724,131 $2,613,860 See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 1998 1997 (in thousands)
OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 64,387 $ 52,754 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 45,808 45,137 Deferred Federal Income Taxes. . . . . . . . . . . . . . 3,959 (1,385) Deferred Investment Tax Credits. . . . . . . . . . . . . (1,775) (1,803) Deferred Collection of Fuel Costs (net). . . . . . . . . (5,753) (7,315) Amortization of Deferred Property Taxes. . . . . . . . . 32,514 32,400 Amortization of Zimmer Plant Operating Expenses and Carrying Charges . . . . . . . . . . . . . . . . . . . - 15,775 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . 1,709 (37,458) Fuel, Materials and Supplies . . . . . . . . . . . . . . (33) (3,612) Accrued Utility Revenues . . . . . . . . . . . . . . . . (13,677) (21,803) Prepayments. . . . . . . . . . . . . . . . . . . . . . . (7,909) (9,135) Accounts Payable . . . . . . . . . . . . . . . . . . . . 544 10,626 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (51,022) (37,953) Other (net). . . . . . . . . . . . . . . . . . . . . . . . 8,491 (4,084) Net Cash Flows From Operating Activities . . . . . . 77,243 32,144 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (57,626) (58,623) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,287 1,470 Net Cash Flows Used For Investing Activities . . . . (55,339) (57,153) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 111,075 38,574 Change in Short-term Debt (net). . . . . . . . . . . . . . (14,075) 84,300 Retirement of Cumulative Preferred Stock . . . . . . . . . - (52,953) Retirement of Long-term Debt . . . . . . . . . . . . . . . (81,750) - Dividends Paid on Common Stock . . . . . . . . . . . . . . (41,322) (39,342) Dividends Paid on Cumulative Preferred Stock . . . . . . . (437) (1,860) Net Cash Flows From (Used For) Financing Activities. (26,509) 28,719 Net Increase (Decrease) in Cash and Cash Equivalents . . . . (4,605) 3,710 Cash and Cash Equivalents at Beginning of Period . . . . . . 12,626 9,134 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 8,021 $ 12,844 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $37,667,000 and $36,976,000 and for income taxes was $20,886,000 and $26,762,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $6,060,000 and $4,570,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES During the first six months of 1998 the Company redeemed $57 million of 9.15% and $25 million of 7.00% First Mortgage Bonds at maturity and issued $52 million of 6.51% and $60 million of 6.55% Senior Unsecured Notes due in 2008. In June 1998, the Company called $40 million of 7.95% First Mortgage Bonds due 2002 for early redemption in July. Consequently, the bonds are classified as a current liability on the balance sheet. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter and year-to-date periods ended June 30, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. 4. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $250 million for sales and approximately $250 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $44 million and $44 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. 5. CONTINGENCIES Taxes As discussed in Note 8, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of COLI interest deductions through June 30, 1998 would reduce earnings by approximately $42 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. Other The Company continues to be involved in certain other matters discussed in its 1997 Annual Report. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 Net income increased $15.3 million or 65% in the second quarter and $11.6 million or 22% in the year-to-date period primarily due to increased sales to retail customers. Income statement line items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues. . . . . $230.0 87 $340.5 64 Fuel Expense. . . . . . . . 9.7 26 11.9 15 Purchased Power Expense . . 208.5 460 326.9 390 Other Operation Expense . . 3.2 7 5.6 7 Maintenance Expense . . . . (4.9) (25) (3.9) (12) Amortization of Zimmer Plant Phase-in Costs. . . (7.3) N.M. (15.7) N.M. Taxes Other Than Federal Income Taxes . . . . . . . (2.0) (7) (2.0) (3) Federal Income Taxes. . . . 8.3 56 5.0 15 N.M. = Not Meaningful Operating revenues increased significantly in both the second quarter and the year-to-date period due predominantly to increased retail and wholesale sales. Retail revenues and sales increased 7% each in the second quarter and 3% and 2%, respectively, in the year-to-date period due to the favorable effect of warmer springtime temperatures on residential usage and increased commercial and industrial sales. Revenues from lower margin wholesale sales increased significantly in both periods primarily as a result of sales from a new power marketing business started in July 1997. The new power marketing business involves the purchase and sale of large quantities of electricity through forward contracts. The increases in wholesale sales and related revenues were offset by nearly equivalent increases in power purchases by the power marketing operation. Fuel expense increased due to the generation of more electricity in 1998 to meet the increase in customer demand. The increase in generation was due to increased availability of generating capacity in 1998 compared with 1997 when certain units were out-of-service for maintenance. The Company's share of purchases by the new power marketing business was the main reason for the increases in purchased power expense. The increase in other operation expense was mainly due to increases in generation related costs including an increase in the cost of emission allowances consumed and the effect in 1998 of the recognition of gains from the sale of allowances in 1997. Maintenance expense for both periods decreased due to scheduled power plant maintenance outages in 1997 at two generating units. The reduction in the amortization of deferred Zimmer Plant phase-in costs reflects the completion of the surcharge recovery plan and the amortization of the original deferral. The cessation of the amortization did not affect net income since the amortization was being recovered in revenues through a surcharge which terminated with the completion of the amortization. The decline in taxes other than federal income taxes was primarily due to a favorable accrual adjustment for property taxes. Federal income taxes attributable to operations increased in both periods as a result of an increase in pre-tax operating income. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . $577,018 $320,508 $1,033,433 $661,821 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 37,875 53,526 82,754 113,776 Purchased Power. . . . . . . . . . . . 315,251 34,177 501,357 70,173 Other Operation. . . . . . . . . . . . 82,850 81,300 159,283 159,911 Maintenance. . . . . . . . . . . . . . 33,259 30,459 60,337 55,695 Depreciation and Amortization. . . . . 36,234 35,106 72,027 70,124 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals. . . . . . . - 3,911 - 7,822 Taxes Other Than Federal Income Taxes. 16,105 15,591 32,497 33,876 Federal Income Taxes . . . . . . . . . 13,250 16,298 31,616 40,410 TOTAL OPERATING EXPENSES . . . 534,824 270,368 939,871 551,787 OPERATING INCOME . . . . . . . . . . . . 42,194 50,140 93,562 110,034 NONOPERATING INCOME. . . . . . . . . . . 3,585 497 2,595 965 INCOME BEFORE INTEREST CHARGES . . . . . 45,779 50,637 96,157 110,999 INTEREST CHARGES . . . . . . . . . . . . 17,243 16,729 33,877 32,832 NET INCOME . . . . . . . . . . . . . . . 28,536 33,908 62,280 78,167 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 1,202 1,217 2,419 3,325 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 27,334 $ 32,691 $ 59,861 $ 74,842 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $281,975 $282,157 $278,814 $269,071 NET INCOME . . . . . . . . . . . . . . . 28,536 33,908 62,280 78,167 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 29,366 29,065 58,732 58,130 Cumulative Preferred Stock . . . . . 1,183 1,184 2,367 2,387 Capital Stock Expense. . . . . . . . . 19 33 52 938 BALANCE AT END OF PERIOD . . . . . . . . $279,943 $285,783 $279,943 $285,783 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, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $2,545,295 $2,545,484 Transmission . . . . . . . . . . . . . . . . . . . . 909,464 908,736 Distribution . . . . . . . . . . . . . . . . . . . . 746,983 737,902 General (including nuclear fuel) . . . . . . . . . . 231,968 233,888 Construction Work in Progress. . . . . . . . . . . . 125,946 88,487 Total Electric Utility Plant . . . . . . . . 4,559,656 4,514,497 Accumulated Depreciation and Amortization. . . . . . 2,027,464 1,973,937 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,532,192 2,540,560 NUCLEAR DECOMMISSIONING AND SPENT NUCLEAR FUEL DISPOSAL TRUST FUNDS. . . . . . . . . . . . . . 614,368 566,390 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 166,704 156,085 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 32,217 5,860 Accounts Receivable: Customers. . . . . . . . . . . . . . . . . . . . . 166,495 107,087 Affiliated Companies . . . . . . . . . . . . . . . 15,338 15,662 Miscellaneous. . . . . . . . . . . . . . . . . . . 16,897 14,561 Allowance for Uncollectible Accounts . . . . . . . (1,288) (1,188) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 25,791 17,182 Materials and Supplies . . . . . . . . . . . . . . . 80,435 78,701 Accrued Utility Revenues . . . . . . . . . . . . . . 41,905 30,521 Energy Marketing and Trading Contracts . . . . . . . 148,734 143 Prepayments. . . . . . . . . . . . . . . . . . . . . 2,208 4,685 TOTAL CURRENT ASSETS . . . . . . . . . . . . 528,732 273,214 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 414,679 400,489 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 34,725 31,060 TOTAL. . . . . . . . . . . . . . . . . . . $4,291,400 $3,967,798 See Notes to Consolidated Financial Statements.
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 2,500,000 Shares Outstanding - 1,400,000 Shares . . . . . . . . . . $ 56,584 $ 56,584 Paid-in Capital. . . . . . . . . . . . . . . . . . . 732,539 732,472 Retained Earnings. . . . . . . . . . . . . . . . . . 279,943 278,814 Total Common Shareholder's Equity. . . . . . 1,069,066 1,067,870 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 9,381 9,435 Subject to Mandatory Redemption. . . . . . . . . . 68,445 68,445 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,122,322 1,014,237 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,269,214 2,159,987 OTHER NONCURRENT LIABILITIES: Nuclear Decommissioning. . . . . . . . . . . . . . . 427,580 381,016 Other. . . . . . . . . . . . . . . . . . . . . . . . 241,055 232,667 TOTAL OTHER NONCURRENT LIABILITIES . . . . . 668,635 613,683 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 20,000 35,000 Short-term Debt. . . . . . . . . . . . . . . . . . . 110,800 119,600 Accounts Payable - General . . . . . . . . . . . . . 43,992 36,729 Accounts Payable - Affiliated Companies. . . . . . . 82,381 31,665 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 34,809 46,850 Interest Accrued . . . . . . . . . . . . . . . . . . 15,618 15,741 Rent Accrued - Rockport Plant Unit 2 . . . . . . . . 4,963 4,963 Obligations Under Capital Leases . . . . . . . . . . 33,136 34,033 Energy Marketing and Trading Contracts . . . . . . . 147,272 261 Other. . . . . . . . . . . . . . . . . . . . . . . . 50,685 58,287 TOTAL CURRENT LIABILITIES. . . . . . . . . . 543,656 383,129 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 560,011 559,708 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 134,227 138,045 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 90,565 92,419 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 25,092 20,827 COMMITMENTS AND CONTINGENCIES (Note 5) TOTAL. . . . . . . . . . . . . . . . . . . $4,291,400 $3,967,798 See Notes to Consolidated Financial Statements.
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 1998 1997 (in thousands)
OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 62,280 $ 78,167 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 74,126 73,856 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals. . . . . . . . . . . . . . . . - 7,822 Deferral of Incremental Nuclear Refueling Outage Expenses (net). . . . . . . . . . . . 8,518 (9,281) Deferred Federal Income Taxes. . . . . . . . . . . . . . 7,839 (5,770) Deferred Investment Tax Credits. . . . . . . . . . . . . (3,818) (3,937) Under-recovery of Fuel and Purchased Power . . . . . . . (34,369) (3,837) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (61,320) 2,844 Fuel, Materials and Supplies . . . . . . . . . . . . . . (10,343) (921) Accrued Utility Revenues . . . . . . . . . . . . . . . . (11,384) 2,560 Accounts Payable . . . . . . . . . . . . . . . . . . . . 57,979 (19,936) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (12,041) 3,737 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (8,581) 16,061 Net Cash Flows From Operating Activities . . . . . . 68,886 141,365 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (59,812) (58,439) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 122,222 47,728 Retirement of Long-term Debt . . . . . . . . . . . . . . . (35,000) (50,000) Change in Short-term Debt (net). . . . . . . . . . . . . . (8,800) 60,425 Retirement of Cumulative Preferred Stock . . . . . . . . . (39) (78,838) Dividends Paid on Common Stock . . . . . . . . . . . . . . (58,732) (58,130) Dividends Paid on Cumulative Preferred Stock . . . . . . . (2,368) (3,562) Net Cash Flows From (Used For) Financing Activities. 17,283 (82,377) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 26,357 549 Cash and Cash Equivalents at Beginning of Period . . . . . . 5,860 8,233 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 32,217 $ 8,782 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $32,651,000 and $31,019,000 and for income taxes was $15,054,000 and $39,784,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $18,801,000 and $50,684,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements.
INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES In May 1998 the Company redeemed $35 million of 7.00% First Mortgage Bonds at maturity and issued $125 million of 7.60% Junior Subordinated Deferrable Interest Debentures due 2038. In July 1998 the Company redeemed $20 million of 7.80% First Mortgage Bonds due 2023 at 100% under maintenance provisions. Consequently the bonds are classified as a current liability on the balance sheet. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter and year-to-date periods ended June 30, 1998, there are no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. 4. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $300 million for sales and approximately $300 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $51 million and $51 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. 5. CONTINGENCIES Taxes As discussed in Note 7, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deduction through June 30, 1998 would reduce earnings by approximately $64 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. Cook Nuclear Plant Shutdown As discussed in Note 3 of the Notes to Consolidated Financial Statements in the 1997 Annual Report, both units of the Cook Nuclear Plant were shut down by the Company in September 1997 due to questions regarding the operability of certain safety systems, which arose during a Nuclear Regulatory Commission (NRC) architect engineer design inspection. The NRC issued a Confirmatory Action Letter in September 1997 requiring the Company to address the issues identified in the letter. Certain issues identified in the letter have been addressed. The Company is working with the NRC to resolve the remaining issue in the letter and other issues related to the restart of the units. On April 17, 1998, the NRC notified the Company that it had convened a Restart Panel for Cook Plant. The Company is meeting with the Panel on a regular basis, until the Cook Plant units are returned to service, to identify and address the issues necessary for the restart of the units. On July 9, 1998, the Company presented its proposed schedule for restart activities for Cook Plant Unit 1 to the NRC. According to the proposed schedule, the required maintenance activities for Unit 1 would extend into November. On July 30, 1998, the Company received a letter from the NRC providing the NRC's list of required restart activities. In response to this letter, the Company will meet with the NRC to further define the scope and schedule of the outage. When maintenance and other activities required for restart are complete, the Company will seek regulatory approval from the NRC to return Unit 1 to service. The Company cannot predict when regulatory approval will be granted. The restart schedule for Unit 2 has not been completed. If the units are not returned to service, there would be a material adverse effect on financial condition. The incremental cost expected to be incurred for 1998 to restart the Cook units based on a preliminary estimate is approximately $50 million. However the cost and schedule for the outage could be significantly impacted as additional work is identified. Through June 30, 1998, $13 million of costs for the restart have been incurred. On July 24, 1998, the Company received an "adverse trend letter" from the NRC indicating that NRC senior managers had determined that there had been a slow decline in performance at the Cook Plant during the 18 month period preceding the letter. The letter indicated that the NRC will closely monitor efforts to address issues at Cook Plant through additional inspection activities. The cost of electricity supplied to retail customers rose due to the outage of the two units since higher cost coal-fired generation and purchased power were substituted for low cost nuclear generation. In the Indiana and Michigan retail jurisdictions fuel cost recovery mechanisms permit the recovery, subject to regulatory commission review and approval, of changes in fuel costs including the fuel component of purchased power in the Indiana jurisdiction and changes in replacement power in the Michigan jurisdiction. Under the fuel cost recovery mechanisms, retail rates contain a fuel cost adjustment factor that reflects estimated fuel costs for the period during which the factor will be in effect subject to reconciliation to actual fuel costs in a future proceeding. When actual fuel costs exceed the estimated costs reflected in the billing factor, a regulatory asset is recorded and revenues are accrued. Due to the unscheduled Cook Plant outage, the Company's actual fuel costs significantly exceeded the estimated fuel costs reflected in its fuel cost adjustment factors. A regulatory asset has been recorded for revenues accrued in anticipation of future reconciliation and billing of the higher fuel costs to customers. At June 30, 1998, the accrued regulatory asset was $53 million. On June 3, 1998, the Indiana Utility Regulatory Commission approved an agreement authorizing the Company during the billing months of July through September 1998 to apply a fuel cost adjustment factor less than that requested by the Company, subject to future reconciliation or refund. The agreement provides the parties to the proceeding with the opportunity to conduct discovery regarding certain issues that were raised in the proceeding, including the recovery of replacement energy cost due to the Cook Plant outage, in anticipation of resolving the issues in a future fuel cost adjustment proceeding. Management believes that it should be able to recover the Cook replacement energy costs; however, if recovery of the replacement costs were to be denied, results of operations and cash flows would be adversely affected. Other The Company continues to be involved in certain other matters discussed in its 1997 Annual Report. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Net income decreased $5.4 million or 16% in the second quarter and $15.9 million or 20% for the year-to-date period reflecting a decrease in capacity credits from the AEP System Power Pool (Power Pool). Under the terms of the Power Pool, capacity credits and charges are designed to allocate the cost of the AEP System's capacity among the Pool members based on their relative peak demands and generating reserves. The reduction in capacity credits received can be attributed to an increase in the Company's prior twelve month peak demand relative to the total peak demand of all Power Pool members. As discussed in Note 5 of the Notes to Consolidated Financial Statements, the Cook Nuclear Plant was shut down in September 1997. The shutdown had a significant impact on the operations of the Company as reflected in the variations of certain income statement line items discussed below. Income statement line items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues. . . . $256.5 80 $371.6 56 Fuel Expense. . . . . . . (15.7) (29) (31.0) (27) Purchased Power Expense . 281.1 822 431.2 614 Maintenance Expense . . . 2.8 9 4.6 8 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals . . . . . (3.9) N.M. (7.8) N.M. Federal Income Taxes. . . (3.0) (19) (8.8) (22) Nonoperating Income . . . 3.1 621 1.6 169 N.M. = Not meaningful Operating revenues increased significantly in both the second quarter and the year-to-date period due primarily to a substantial increase in wholesale sales from a new power marketing business started in July 1997. The new power marketing business involves the purchase and sale of large quantities of electricity through forward contracts. The increases in wholesale sales and related revenues were offset by a nearly equivalent dollar increase in power purchases by the power marketing operation. The unavailability of nuclear generation decreased energy delivered to the Power Pool which partly offset the increased sales from power marketing transactions. Retail revenues increased 17% in the quarter and 11% year-to-date largely due to an increase in fuel and power supply cost recovery accruals. Under the fuel cost recovery mechanism, revenues are accrued for increased fuel expense in both of the company's retail jurisdictions and for replacement power costs in the Michigan jurisdiction. The accrued revenues are subsequently reviewed by the commissions and, if acceptable, approved for billing and recovery. During the extended outage of both nuclear units, retail revenues increased from the accrual of revenues for the increased fuel costs incurred to replace the unavailable lower cost nuclear power. Fuel expense decreased significantly in both periods due to a decline in nuclear generation reflecting the outages of both nuclear units in 1998. The significant increase in purchased power expense resulted from purchases of power by the new power marketing business and increased purchases from the Power Pool to replace power usually generated by the nuclear units which were unavailable. The extended shutdown of the Cook Plant accounted for the increase in maintenance expense. The recovery periods for Rockport Plant Unit 1 costs deferred under a rate phase-in plan in the Indiana and FERC jurisdictions ended in fall of 1997 causing the decrease in amortization of phase-in plan deferrals. The deferred costs were amortized over a 10-year period commensurate with their collection from customers pursuant to commission orders. The Company has increased its decommissioning expense accruals, pending approval from the Indiana Utility Regulatory Commission, in an amount equal to the continuing phase-in plan revenues. Federal income taxes attributable to operations decreased in both periods as a result of a decrease in pre-tax operating income. The effect of a write off of coal mining development costs in the second quarter of 1997 accounted for the increase in nonoperating income. FINANCIAL CONDITION Total plant and property additions including capital leases for the year-to-date period were $81 million. During the first six months of 1998 short-term debt outstanding decreased by $9 million. In May 1998, the Company redeemed $35 million of 7.00% First Mortgage Bonds at maturity and issued $125 million of 7.60% Junior Subordinated Deferrable Interest Debentures due 2038. COOK NUCLEAR PLANT SHUTDOWN As discussed in Note 3 of the Notes to Consolidated Financial Statements in the 1997 Annual Report, both units of the Cook Nuclear Plant were shut down by the Company in September 1997 due to questions regarding the operability of certain safety systems, which arose during a Nuclear Regulatory Commission (NRC) architect engineer design inspection. The NRC issued a Confirmatory Action Letter in September 1997 requiring the Company to address the issues identified in the letter. Certain issues identified in the letter have been addressed. The Company is working with the NRC to resolve the remaining issue in the letter and other issues related to the restart of the units. On April 17, 1998, the NRC notified the Company that it had convened a Restart Panel for Cook Plant. The Company is meeting with the Panel on a regular basis, until the Cook Plant units are returned to service, to identify and address the issues necessary for the restart of the units. On July 9, 1998, the Company presented its proposed schedule for restart activities for Cook Plant Unit 1 to the NRC. According to the proposed schedule, the required maintenance activities for Unit 1 would extend into November. On July 30, 1998, the Company received a letter from the NRC providing the NRC's list of required restart activities. In response to this letter, the Company will meet with the NRC to further define the scope and schedule of the outage. When maintenance and other activities required for restart are complete, the Company will seek regulatory approval from the NRC to return Unit 1 to service. The Company cannot predict when regulatory approval will be granted. The restart schedule for Unit 2 has not been completed. If the units are not returned to service, there would be a material adverse effect on financial condition. The incremental cost expected to be incurred for 1998 to restart the Cook units based on a preliminary estimate is approximately $50 million. However the cost and schedule for the outage could be significantly impacted as additional work is identified. Through June 30, 1998, $13 million of costs for the restart have been incurred. On July 24, 1998, the Company received an "adverse trend letter" from the NRC indicating that NRC senior managers had determined that there had been a slow decline in performance at the Cook Plant during the 18 month period preceding the letter. The letter indicated that the NRC will closely monitor efforts to address issues at Cook Plant through additional inspection activities. The cost of electricity supplied to retail customers rose due to the outage of the two units since higher cost coal-fired generation and purchased power were substituted for low cost nuclear generation. In the Indiana and Michigan retail jurisdictions fuel cost recovery mechanisms permit the recovery, subject to regulatory commission review and approval, of changes in fuel costs including the fuel component of purchased power in the Indiana jurisdiction and changes in replacement power in the Michigan jurisdiction. Under the fuel cost recovery mechanisms, retail rates contain a fuel cost adjustment factor that reflects estimated fuel costs for the period during which the factor will be in effect subject to reconciliation to actual fuel costs in a future proceeding. When actual fuel costs exceed the estimated costs reflected in the billing factor, a regulatory asset is recorded and revenues are accrued. Due to the unscheduled Cook Plant outage, the Company's actual fuel costs significantly exceeded the estimated fuel costs reflected in its fuel cost adjustment factors. A regulatory asset has been recorded for revenues accrued in anticipation of future reconciliation and billing of the higher fuel costs to customers. At June 30, 1998, the accrued regulatory asset was $53 million. On June 3, 1998, the Indiana Utility Regulatory Commission approved an agreement authorizing the Company during the billing months of July through September 1998 to apply a fuel cost adjustment factor less than that requested by the Company, subject to future reconciliation or refund. The agreement provides the parties to the proceeding with the opportunity to conduct discovery regarding certain issues that were raised in the proceeding, including the recovery of replacement energy cost due to the Cook Plant outage, in anticipation of resolving the issues in a future fuel cost adjustment proceeding. Management believes that it should be able to recover the Cook replacement energy costs; however, if recovery of the replacement costs were to be denied, results of operations and cash flows would be adversely affected. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $300 million for sales and approximately $300 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $51 million and $51 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. TAXES The Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deduction through June 30, 1998 would reduce earnings by approximately $64 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. COMPUTER ISSUE - YEAR 2000 The Company has been addressing the issue of what will happen when the year 2000 arrives and many of the world's computer systems will encounter the "year 2000" problem, i.e., computers not being able to distinguish between the years 1900 and 2000. Internally the Company has been modifying or replacing its computer hardware and software programs to mitigate risk, minimize technical failures, and rapidly repair failures if they occur. Externally the problem is being addressed with entities that interact electronically with the Company, including but not limited to, suppliers, service providers, government agencies, customers, creditors and financial service organizations. If the Company's corrective actions, and/or the actions of other independent entities fail for critical applications, the Company may be adversely impacted in the year 2000. The Company began reviewing the issue in 1996 and has spent approximately $2 million on the project through June 30, 1998. The Company is continuing to study the impact of making its systems "year 2000" compliant and is working on various aspects of the issue. These activities are projected to cost an additional $8 million to $10 million. Although significant, the cost of correcting the "year 2000" problem is not expected to have a material impact on the results of operations for any accounting period, cash flows or financial condition. KENTUCKY POWER COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . $159,554 $78,101 $289,424 $166,681 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . 18,184 19,463 40,485 38,627 Purchased Power. . . . . . . . . . . . . 102,652 21,913 166,388 45,143 Other Operation. . . . . . . . . . . . . 11,992 11,880 22,986 23,889 Maintenance. . . . . . . . . . . . . . . 7,258 5,571 16,424 10,678 Depreciation and Amortization. . . . . . 6,978 6,519 13,888 13,059 Taxes Other Than Federal Income Taxes. . 2,260 2,045 4,752 4,839 Federal Income Taxes . . . . . . . . . . 599 1,281 2,779 5,777 TOTAL OPERATING EXPENSES. . . . . 149,923 68,672 267,702 142,012 OPERATING INCOME . . . . . . . . . . . . . 9,631 9,429 21,722 24,669 NONOPERATING LOSS. . . . . . . . . . . . . (93) (148) (164) (289) INCOME BEFORE INTEREST CHARGES . . . . . . 9,538 9,281 21,558 24,380 INTEREST CHARGES . . . . . . . . . . . . . 7,125 6,140 14,128 12,108 NET INCOME . . . . . . . . . . . . . . . . $ 2,413 $ 3,141 $ 7,430 $ 12,272 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . $76,018 $86,531 $78,076 $84,090 NET INCOME . . . . . . . . . . . . . . . . 2,413 3,141 7,430 12,272 CASH DIVIDENDS DECLARED. . . . . . . . . . 7,075 6,690 14,150 13,380 BALANCE AT END OF PERIOD . . . . . . . . . $71,356 $82,982 $71,356 $82,982 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Financial Statements.
KENTUCKY POWER COMPANY BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $ 256,667 $ 249,184 Transmission . . . . . . . . . . . . . . . . . . . . 324,225 303,456 Distribution . . . . . . . . . . . . . . . . . . . . 344,286 350,793 General. . . . . . . . . . . . . . . . . . . . . . . 73,448 71,462 Construction Work in Progress. . . . . . . . . . . . 21,899 32,060 Total Electric Utility Plant . . . . . . . . 1,020,525 1,006,955 Accumulated Depreciation and Amortization. . . . . . 304,310 296,318 NET ELECTRIC UTILITY PLANT . . . . . . . . . 716,215 710,637 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 6,370 6,414 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 1,016 1,381 Accounts Receivable: Customers. . . . . . . . . . . . . . . . . . . . . 19,281 24,127 Affiliated Companies . . . . . . . . . . . . . . . 9,266 1,722 Miscellaneous. . . . . . . . . . . . . . . . . . . 3,500 3,276 Allowance for Uncollectible Accounts . . . . . . . . (655) (525) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 11,507 10,685 Materials and Supplies . . . . . . . . . . . . . . . 14,466 14,054 Accrued Utility Revenues . . . . . . . . . . . . . . 10,572 12,981 Energy Marketing and Trading Contracts . . . . . . . 49,129 177 Prepayments. . . . . . . . . . . . . . . . . . . . . 1,767 1,538 TOTAL CURRENT ASSETS . . . . . . . . . . . . 119,849 69,416 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 90,918 90,045 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 8,265 10,159 TOTAL. . . . . . . . . . . . . . . . . . . $ 941,617 $ 886,671 See Notes to Financial Statements.
KENTUCKY POWER COMPANY BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (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. . . . . . . . . . . . . . . . . . . 138,750 128,750 Retained Earnings. . . . . . . . . . . . . . . . . . 71,356 78,076 Total Common Shareholder's Equity. . . . . . 260,556 257,276 Long-term Debt . . . . . . . . . . . . . . . . . . . 313,935 341,051 TOTAL CAPITALIZATION . . . . . . . . . . . . 574,491 598,327 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 27,153 26,544 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 25,000 - Short-term Debt. . . . . . . . . . . . . . . . . . . 43,100 36,500 Accounts Payable . . . . . . . . . . . . . . . . . . 22,293 24,574 Customer Deposits. . . . . . . . . . . . . . . . . . 3,925 3,660 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 5,228 6,130 Interest Accrued . . . . . . . . . . . . . . . . . . 5,958 6,015 Energy Marketing and Trading Contracts . . . . . . . 48,858 149 Other. . . . . . . . . . . . . . . . . . . . . . . . 14,294 14,935 TOTAL CURRENT LIABILITIES. . . . . . . . . . 168,656 91,963 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 154,659 153,945 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 15,005 15,615 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 1,653 277 CONTINGENCIES (Note 5) TOTAL. . . . . . . . . . . . . . . . . . . $941,617 $886,671 See Notes to Financial Statements.
KENTUCKY POWER COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 1998 1997 (in thousands)
OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 7,430 $ 12,272 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 13,894 13,065 Deferred Federal Income Taxes. . . . . . . . . . . . . . 368 347 Deferred Investment Tax Credits. . . . . . . . . . . . . (610) (616) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (2,792) 1,213 Fuel, Materials and Supplies . . . . . . . . . . . . . . (1,234) (1,977) Accrued Utility Revenues . . . . . . . . . . . . . . . . 2,409 1,941 Accounts Payable . . . . . . . . . . . . . . . . . . . . (2,281) (8,890) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (902) 1,739 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 811 4,644 Net Cash Flows From Operating Activities . . . . . . 17,093 23,738 INVESTING ACTIVITIES - Construction Expenditures . . . . . . (17,705) (27,211) FINANCING ACTIVITIES: Capital Contributions from Parent Company. . . . . . . . . 10,000 10,000 Change in Short-term Debt (net). . . . . . . . . . . . . . 6,600 7,025 Retirement of Long-term Debt . . . . . . . . . . . . . . . (2,203) - Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (14,150) (13,380) Net Cash Flows From Financing Activities . . . . . . 247 3,645 Net Increase (Decrease) in Cash and Cash Equivalents . . . . (365) 172 Cash and Cash Equivalents at Beginning of Period . . . . . . 1,381 1,106 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 1,016 $ 1,278 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $13,982,000 and $12,046,000 and for income taxes was $4,538,000 and $4,395,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $2,960,000 and $3,571,000 in 1998 and 1997, respectively. See Notes to Financial Statements. /TABLE KENTUCKY POWER COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITIES The Company received from its parent a cash capital contribution of $10 million in June 1998 which was credited to paid-in capital. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter and year-to-date periods ended June 30, 1998, there were no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. 4. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $96 million for sales and approximately $96 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $17 million and $17 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. 5. CONTINGENCIES Taxes As discussed in Note 8, "Federal Income Taxes" of the Notes to Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1992-96. A disallowance of COLI interest deductions through June 30, 1998 would reduce earnings by approximately $7 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1992-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. Other The Company continues to be involved in certain other matters discussed in its 1997 Annual Report. KENTUCKY POWER COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 Net income decreased $0.7 million or 23% for the quarter and $4.8 million or 39% for the year-to-date period. The decrease in net income for both periods was mainly attributable to increased maintenance expense and interest charges. Income statement line items which changed significantly were: Increase(Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . . . $81.5 104 $122.7 74 Fuel Expense . . . . . . . . . (1.3) (7) 1.9 5 Purchased Power Expense. . . . 80.7 368 121.2 269 Maintenance Expense. . . . . . 1.7 30 5.7 54 Federal Income Taxes . . . . . (0.7) (53) (3.0) (52) Interest Charges . . . . . . . 1.0 16 2.0 17 Operating revenues increased significantly in both periods due to a substantial increase in wholesale sales from a new power marketing business started in July 1997. The new power marketing business involves the purchase and sale of large quantities of electricity through forward contracts. The increases in wholesale sales and related revenues were offset by nearly equivalent increases in power purchases by the new power marketing operation. Fuel expense decreased in the second quarter and increased in the year-to-date period primarily due to the operation of the fuel clause mechanism. The reversal of previously deferred fuel cost over recoveries reduced fuel expense in the second quarter. In the year-to-date period the deferral of over recovered fuel cost for subsequent reductions in customers' bills caused the increase in fuel expense. Also contributing to the decrease in the second quarter was a decline in generation resulting from a maintenance outage at one of the two units at the Company's Big Sandy Plant. The significant increase in purchased power expense resulted from purchases of power by the new power marketing business. Maintenance expense increased primarily due to increased overhead distribution line maintenance expenditures resulting from winter storm damage in 1998 and a lengthy scheduled outage for maintenance and repairs of the 260 mw Big Sandy Plant Unit 1 for a substantial portion of the second quarter of 1998. In 1997 there were no lengthy outages of either unit of the Big Sandy Plant. The decrease in federal income tax expense attributable to operations in both periods was primarily due to a decline in pre-tax operating income. Interest charges increased due to an increase in outstanding long-term debt reflecting the issuance of Senior Unsecured Notes in October 1997. OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) OPERATING REVENUES . . . . . . . . . . . . . $844,570 $447,147 $1,539,736 $931,447 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . . 180,947 144,236 374,222 306,238 Purchased Power. . . . . . . . . . . . . . 369,299 16,009 568,383 32,468 Other Operation. . . . . . . . . . . . . . 82,942 79,196 163,843 161,559 Maintenance. . . . . . . . . . . . . . . . 33,158 33,372 63,751 62,849 Depreciation and Amortization. . . . . . . 35,998 35,088 71,861 70,028 Taxes Other Than Federal Income Taxes. . . 41,862 41,950 84,520 83,863 Federal Income Taxes . . . . . . . . . . . 30,499 28,204 64,222 64,819 TOTAL OPERATING EXPENSES . . . . . 774,705 378,055 1,390,802 781,824 OPERATING INCOME . . . . . . . . . . . . . . 69,865 69,092 148,934 149,623 NONOPERATING INCOME. . . . . . . . . . . . . 3,449 2,560 4,687 7,530 INCOME BEFORE INTEREST CHARGES . . . . . . . 73,314 71,652 153,621 157,153 INTEREST CHARGES . . . . . . . . . . . . . . 20,255 21,333 40,126 41,243 NET INCOME . . . . . . . . . . . . . . . . . 53,059 50,319 113,495 115,910 PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . 368 370 738 1,908 EARNINGS APPLICABLE TO COMMON STOCK. . . . . $ 52,691 $ 49,949 $ 112,757 $114,002 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . . $597,442 $609,934 $590,151 $584,015 NET INCOME . . . . . . . . . . . . . . . . . 53,059 50,319 113,495 115,910 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . . . 52,775 86,647 105,550 124,209 Cumulative Preferred Stock . . . . . . . 369 370 739 2,459 Capital Stock Expense. . . . . . . . . . . - - - 21 BALANCE AT END OF PERIOD . . . . . . . . . . $597,357 $573,236 $597,357 $573,236 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, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . . . . $2,625,517 $2,606,981 Transmission . . . . . . . . . . . . . . . . . . . . . . . 843,063 837,953 Distribution . . . . . . . . . . . . . . . . . . . . . . . 929,507 927,239 General (including mining assets). . . . . . . . . . . . . 699,214 709,475 Construction Work in Progress. . . . . . . . . . . . . . . 83,125 74,149 Total Electric Utility Plant . . . . . . . . . . . 5,180,426 5,155,797 Accumulated Depreciation and Amortization. . . . . . . . . 2,405,483 2,349,995 NET ELECTRIC UTILITY PLANT . . . . . . . . . . . . 2,774,943 2,805,802 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . . . . 118,226 113,279 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . . . . 108,278 44,203 Accounts Receivable. . . . . . . . . . . . . . . . . . . . 430,225 296,173 Allowance for Uncollectible Accounts . . . . . . . . . . . (2,196) (2,501) Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,812 119,543 Materials and Supplies . . . . . . . . . . . . . . . . . . 82,678 80,853 Accrued Utility Revenues . . . . . . . . . . . . . . . . . 40,393 37,586 Energy Marketing and Trading Contracts . . . . . . . . . . 208,612 646 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . 42,666 36,611 TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . 1,024,468 613,114 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . . . . 529,581 523,891 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . . . . 61,229 107,116 TOTAL. . . . . . . . . . . . . . . . . . . . . . $4,508,447 $4,163,202 See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 40,000,000 Shares Outstanding - 27,952,473 Shares. . . . . . . . . . . . . $ 321,201 $ 321,201 Paid-in Capital. . . . . . . . . . . . . . . . . . . . . . 462,312 462,296 Retained Earnings. . . . . . . . . . . . . . . . . . . . . 597,357 590,151 Total Common Shareholder's Equity. . . . . . . . . 1,380,870 1,373,648 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . . . . 17,479 17,542 Subject to Mandatory Redemption. . . . . . . . . . . . . 11,850 11,850 Long-term Debt . . . . . . . . . . . . . . . . . . . . . . 1,029,513 1,012,031 TOTAL CAPITALIZATION . . . . . . . . . . . . . . . 2,439,712 2,415,071 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . . 307,075 295,375 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . . . . 18,605 83,195 Short-term Debt. . . . . . . . . . . . . . . . . . . . . . 110,100 78,700 Accounts Payable . . . . . . . . . . . . . . . . . . . . . 299,300 184,747 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . 140,322 160,055 Interest Accrued . . . . . . . . . . . . . . . . . . . . . 13,870 16,255 Obligations Under Capital Leases . . . . . . . . . . . . . 27,803 30,307 Energy Marketing and Trading Contracts . . . . . . . . . . 201,513 491 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 94,382 94,338 TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . 905,895 648,088 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . 717,042 723,172 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . . . . 41,136 42,821 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . . . . 97,587 38,675 CONTINGENCIES (Note 5) TOTAL. . . . . . . . . . . . . . . . . . . . . . $4,508,447 $4,163,202 See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1998 1997 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,495 $ 115,910 Adjustments for Noncash Items: Depreciation, Depletion and Amortization . . . . . . . . . . 87,091 86,888 Deferred Federal Income Taxes. . . . . . . . . . . . . . . . 2,480 (1,530) Deferred Fuel Costs (net). . . . . . . . . . . . . . . . . . (22,968) (13,695) Amortization of Deferred Property Taxes. . . . . . . . . . . 38,294 38,193 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . . . (134,357) 11,576 Fuel, Materials and Supplies . . . . . . . . . . . . . . . . 3,906 (2,622) Accrued Utility Revenues . . . . . . . . . . . . . . . . . . (2,807) 4,280 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . (6,055) (12,308) Accounts Payable . . . . . . . . . . . . . . . . . . . . . . 114,553 (5,138) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . . . (19,733) (19,599) Other (net). . . . . . . . . . . . . . . . . . . . . . . . . . 81,078 25,521 Net Cash Flows From Operating Activities . . . . . . . . 254,977 227,476 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . . . (71,323) (63,411) Proceeds from Sale of Property and Other . . . . . . . . . . . 3,600 4,784 Net Cash Flows Used For Investing Activities . . . . . . (67,723) (58,627) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . . . 137,566 98,958 Change in Short-term Debt (net). . . . . . . . . . . . . . . . 31,400 70,923 Retirement of Cumulative Preferred Stock . . . . . . . . . . . (47) (117,601) Retirement of Long-term Debt . . . . . . . . . . . . . . . . . (185,809) (70,337) Dividends Paid on Common Stock . . . . . . . . . . . . . . . . (105,550) (124,209) Dividends Paid on Cumulative Preferred Stock . . . . . . . . . (739) (2,459) Net Cash Flows Used For Financing Activities . . . . . . (123,179) (144,725) Net Increase in Cash and Cash Equivalents. . . . . . . . . . . . 64,075 24,124 Cash and Cash Equivalents at Beginning of Period . . . . . . . . 44,203 24,003 Cash and Cash Equivalents at End of Period . . . . . . . . . . . $ 108,278 $ 48,127 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $41,125,000 and $40,976,000 and for income taxes was $43,019,000 and $48,063,000 in 1998 and 1997, respectively. Noncash acquisitions under capital leases were $18,913,000 and $20,299,000 in 1998 and 1997, respectively. See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1997 Annual Report as incorporated in and filed with the Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. 2. FINANCING ACTIVITY In April 1998 the Company issued $140 million of 7-3/8% senior unsecured notes due 2038. During the first half of 1998 the Company and a subsidiary retired $180 million of long-term debt: $56 million of 6-3/4% first mortgage bonds and $17 million of 6.85% notes payable at maturity and two series of $50 million first mortgage bonds due in 2002 with interest rates of 8.10% and 8.25% and $7 million of variable rate notes payable due in 1999. As a result of the redemption of the 6-3/4% series first mortgage bonds due in 1998, the restriction on the use of retained earnings for the payment of common stock dividends was eliminated. 3. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" was adopted by the Company in the first quarter of 1998. SFAS No. 130 established the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. For the quarter and year-to-date periods ended June 30, 1998, there are no material differences between comprehensive income and net income. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. Previously the Company expensed all software acquisition and development costs. The SOP must be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. 4. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $400 million for sales and approximately $400 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $71 million and $69 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. 5. CONTINGENCIES Taxes As discussed in Note 8, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1997 Annual Report, the Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deduction through June 30, 1998 would reduce earnings by approximately $114 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. Other The Company continues to be involved in certain other matters discussed in the 1997 Annual Report. OHIO POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Net income increased $2.7 million or 5% in the second quarter and decreased $2.4 million or 2% in the year-to-date period. The second quarter increase is largely due to lower interest costs reflecting a decrease in long-term debt outstanding and an increase in nonoperating income. The decline in the year-to-date period is mainly due to a reduction in nonoperating income resulting from the effect of gains from the sale of emission allowances recorded in 1997. Other income statement line items which changed significantly were: Increase (Decrease) Second Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . $397.4 89 $608.3 65 Fuel Expense . . . . . . . 36.7 25 68.0 22 Purchased Power Expense. . 353.3 N.M. 535.9 N.M. Other Operation Expense. . 3.7 5 2.3 1 N.M. = Not Meaningful Operating revenues increased significantly for both periods as a result of increased wholesale and retail energy sales. A new power marketing business, which started in July 1997, was the primary reason for the substantial increase in wholesale sales. The power marketing business involves the purchase and sale of large quantities of electricity through forward contracts. The increases in power marketing sales and related revenues were offset by a nearly equivalent increase in power purchases by the power marketing operation. Wholesale revenues also increased due to increased sales to the AEP System Power Pool (Power Pool) to replace the power from an affiliate's nuclear plant which was out of service. Energy sales to retail customers were up 6% for the second quarter of 1998 and 4% for the year-to-date period as demand by all classes of retail customers increased resulting in increased retail revenues. The rise in retail sales can be attributed to warmer springtime temperatures and the resumption of operations by a major industrial customer following a labor strike. The increase in fuel expense in both periods was mainly due to a 15% increase in generation resulting from the increased retail demand for energy and to replace energy usually supplied to the Power Pool by the affiliate's out-of-service nuclear plant and an increase in cost of fuel consumed. Purchases of electricity for the power marketing business accounted for the significant increase in purchased power expense. Other operation expense increased in the second quarter due to increased costs under the AEP System transmission equalization agreement and higher steam plant costs reflecting the increased generation levels. The transmission equalization agreement combines certain AEP System companies' investment in transmission facilities and shares the costs of ownership of those facilities in proportion to each AEP System company's peak demand relative to the peak demands of all AEP System companies utilizing the AEP System transmission system. The charges paid by the Company under the agreement increased due to an increase in the Company's prior twelve month peak demand relative to the total peak demand of all transmission agreement members. FINANCIAL CONDITION Total plant and property additions including capital leases for the first six months of 1998 were $90 million. During the first six months of 1998, the Company and a subsidiary retired $180 million principal amount of long-term debt with interest rates ranging from 6.11% to 8.25%, issued $140 million of senior unsecured notes at a rate of 7-3/8% and increased short-term debt by $31 million. ENERGY MARKETING AND TRADING During 1998, American Electric Power Service Corporation, as agent for the Company and its affiliates in the AEP System Power Pool (Power Pool), substantially increased the volume of its electricity marketing and trading businesses. The purpose of such businesses is to utilize AEP's knowledge of the energy markets in order to improve the competitiveness of its generation business and contribute to non-regulated, nonoperating income. Revenues and expenses from these activities are shared by the Power Pool members based on their relative peak demands. Such businesses involve the marketing of power under physical forward contracts at fixed and variable prices and the trading of options, futures, swaps and other financial derivative contracts at both fixed and variable prices. Most contracts represent physical forward electricity marketing contracts for the purchase and sale of electricity in the Power Pool's traditional marketing area which are recorded as operating revenues and purchased power expense when the contracts settle. At June 30, 1998, the Power Pool had open marketing contracts in its traditional marketing area through the year 2004 to sell electricity with a notional value of approximately $1.5 billion and to purchase electricity with a notional value of approximately $1.5 billion. The Company's share of these notional values is approximately $400 million for sales and approximately $400 million for purchases. The Power Pool has also purchased and sold electricity options, futures, and swaps, and entered into forward purchase and sale contracts for the future delivery or receipt of electricity outside the traditional marketing area. These transactions represent non-regulated trading activities that are marked-to-market and recorded in nonoperating income. At June 30, 1998, the Company's share of the fair value of such trading contracts is reported as a current asset and a current liability. The Company's share of the average fair value of the current asset and the current liability was $71 million and $69 million for the six months ended June 30, 1998, respectively. Dependent on future electricity market conditions and prices, the open forward physical marketing contracts and the marked-to-market open trading contracts could produce material income or losses in future periods. TAXES The Internal Revenue Service (IRS) agents auditing the federal income tax returns requested a ruling from their National Office that certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company should not be allowed. As a result of a suit filed in United States District Court (discussed below) this request for ruling has been withdrawn. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deduction through June 30, 1998 would reduce earnings by approximately $114 million (including interest). No provisions for this amount have been recorded. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In July 1998, the Company made a payment of taxes and interest attributable to COLI interest deductions for taxable years 1991-96 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payment will be recorded in other property and investments and included on future balance sheets pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. COMPUTER ISSUE - YEAR 2000 The Company has been addressing the issue of what will happen when the year 2000 arrives and many of the world's computer systems will encounter the "year 2000" problem, i.e., computers not being able to distinguish between the years 1900 and 2000. Internally the Company has been modifying or replacing its computer hardware and software programs to mitigate risk, minimize technical failures, and rapidly repair failures if they occur. Externally the problem is being addressed with entities that interact electronically with the Company, including but not limited to, suppliers, service providers, government agencies, customers, creditors and financial service organizations. If the Company's corrective actions, and/or the actions of other independent entities fail for critical applications, the Company may be adversely impacted in the year 2000. The Company began reviewing the issue in 1996 and has spent approximately $4 million on the project through June 30, 1998. The Company is continuing to study the impact of making its systems "year 2000" compliant and is working on various aspects of the issue. These activities are projected to cost an additional $13 million to $17 million. Although significant, the cost of correcting the "year 2000" problem is not expected to have a material impact on the results of operations for any accounting period, cash flows or financial condition. 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 Columbus, Ohio on May 27, 1998. 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 11 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 With- held John P. DesBarres 159,621,299 2,783,151 E. Linn Draper, Jr. 159,511,321 2,893,129 Robert M. Duncan 159,354,603 3,049,847 Robert W. Fri 159,575,649 2,828,801 Lester A. Hudson, Jr. 159,608,631 2,795,819 Leonard J. Kujawa 159,501,040 2,903,410 Angus E. Peyton 159,422,264 2,982,186 Donald G. Smith 159,609,347 2,795,103 Linda Gillespie Stuntz 159,548,276 2,856,174 Kathryn D. Sullivan 158,065,421 4,339,029 Morris Tanenbaum 159,497,283 2,907,167 2. Approve the appointment by the Board of Directors of Deloitte & Touche LLP as independent auditors of AEP for the year 1998. The proposal was approved by a vote of the shareholders as follows: Votes FOR 160,614,441 Votes AGAINST 654,227 Votes ABSTAINED 1,135,782 Broker NON-VOTES* 0 3. Approve the issuance by AEP of shares of its Common Stock to the stockholders of Central and South West Corporation ("CSW") under the Agreement and Plan of Merger dated as of December 21, 1997, pursuant to which CSW would, on the closing date, merge with and into a wholly-owned merger subsidiary of AEP with CSW being the surviving corporation. The proposal was approved by a vote of the shareholders as follows: Votes FOR 136,593,812 Votes AGAINST 2,937,088 Votes ABSTAINED 1,799,090 Broker NON-VOTES* 21,074,460 4. Approve an amendment to the Restated Certificate of Incorporation to increase the number of authorized shares of AEP Common Stock from 300,000,000 to 600,000,000. The proposal was approved by a vote of the shareholders as follows: Votes FOR 135,333,767 Votes AGAINST 4,308,260 Votes ABSTAINED 1,687,963 Broker NON-VOTES* 21,074,460 *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. Appalachian Power Company ("APCo") The annual meeting of stockholders was held on April 28, 1998 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 withheld 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 28, 1998 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 withheld 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 James A. Kobyra 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 5, 1998 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 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. Item 5. Other Information. AEP and APCo Reference is made to pages 12 and 13 of the Annual Report on Form 10-K for the year ended December 31, 1997 ("1997 10-K") for a discussion of APCo's proposed transmission facilities. On May 27, 1998, the Public Service Commission of West Virginia issued an order granting APCo's application for a certificate with respect to the preferred route for the Wyoming-Cloverdale 765,000-volt line. AEP and I&M Reference is made to page 20 of the 1997 10-K for a discussion of the disposal of spent nuclear fuel and high level radioactive waste. On May 5, 1998, the U.S. Court of Appeals denied the motion filed by the various states and utilities in February 1998, in connection with the spent nuclear fuel litigation. On June 8, 1998, I&M filed a complaint in the U.S. Court of Federal Claims seeking damages in excess of $150 million due to the U.S. Department of Energy's partial material breach of its unconditional contractual deadline to begin disposing of spent nuclear fuel and high level nuclear waste generated by the Cook Nuclear Plant. Similar lawsuits have been filed by other utilities. On June 18, 1998, Region V, U.S. Environmental Protection Agency ("Federal EPA") issued a Notice to Tanners Creek Plant alleging a violation of the Indiana State Implementation Plan SO2 limit applicable to Unit 4. The Notice alleges that the plant received and used coal with a sulfur content in excess of that which would permit compliance with the specified emission requirements. Negotiations to resolve the Notice through settlement are underway. AEP, AEP Generating Company ("AEGCo"), APCo, Columbus Southern Power Company ("CSPCo"), I&M, Kentucky Power Company ("KEPCo") and OPCo Reference is made to page 25 of the 1997 10-K for a discussion of the application of new source rules to generating plant repairs and pollution control projects undertaken to comply with the Clean Air Act. On July 24, 1998, Federal EPA issued a notice soliciting comments on an alternative proposal that would significantly change the existing New Source Review rule applicable to utility sources. The proposal could result in more extensive permitting requirements governing alteration of existing sources than under the current rule. 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, AEGCo, May 15, 1998 Item 5. Other Events APCo, CSPCo, Item 7. Financial I&M, KEPCo and Statements and Exhibits OPCo CSPCo June 18, 1998 Item 5. Other Events Item 7. Financial Statements and Exhibits [scc\annual\10Q-98.2d] Signature Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature 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. By: /s/ Armando A. Pena By: /s/ Leonard V. Assante Armando A. Pena Leonard V. Assante Treasurer Controller and Chief Accounting Officer (Duly Authorized Officer) (Chief Accounting Officer) AEP GENERATING COMPANY APPALACHIAN POWER COMPANY COLUMBUS SOUTHERN POWER COMPANY INDIANA MICHIGAN POWER COMPANY KENTUCKY POWER COMPANY OHIO POWER COMPANY By: /s/ Armando A. Pena By: /s/ Leonard V. Assante Armando A. Pena Leonard V. Assante Vice President, Treasurer, Controller and and Chief Financial Officer Chief Accounting Officer (Duly Authorized Officer) (Chief Accounting Officer) Date: August 13, 1998 II-5 EX-12 2 EXHIBIT 12 OHIO POWER COMPANY Computation of Consolidated Ratio of Earnings to Fixed Charges (in thousands except ratio data)
Twelve Months Year Ended December 31, Ended 1993 1994 1995 1996 1997 6/30/98 Fixed Charges: Interest on First Mortgage Bonds. . . . . . . . $ 74,121 $ 63,805 $ 61,836 $ 52,147 $ 45,540 $ 39,891 Interest on Other Long-term Debt. . . . . . . . 24,510 21,453 23,193 27,045 29,620 33,174 Interest on Short-term Debt . . . . . . . . . . 1,122 992 2,658 4,006 4,519 5,570 Miscellaneous Interest Charges. . . . . . . . . 2,958 5,140 7,126 3,705 4,464 4,690 Estimated Interest Element in Lease Rentals . . 15,300 13,900 50,700 53,200 52,900 52,900 Total Fixed Charges. . . . . . . . . . . . $118,011 $105,290 $145,513 $140,103 $137,043 $136,225 Earnings: Net Income. . . . . . . . . . . . . . . . . . . $185,770 $162,626 $189,447 $217,655 $208,689 $206,274 Plus Federal Income Taxes . . . . . . . . . . . 64,244 74,822 93,699 117,243 121,559 119,965 Plus State Income Taxes . . . . . . . . . . . . 2,626 3,375 1,618 2,252 2,655 2,467 Plus Fixed Charges (as above) . . . . . . . . . 118,011 105,290 145,513 140,103 137,043 136,225 Total Earnings . . . . . . . . . . . . . . $370,651 $346,113 $430,277 $477,253 $469,946 $464,931 Ratio of Earnings to Fixed Charges. . . . . . . . 3.14 3.28 2.95 3.40 3.42 3.41
EX-27 3 ARTICLE UT FIN. DATA SCH. FOR 10-Q
UT 0000073986 OHIO POWER COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 2,774,943 118,226 1,024,468 61,229 529,581 4,508,447 321,201 462,312 597,357 1,380,870 11,850 17,479 1,029,513 99,900 0 10,200 18,605 0 119,231 27,803 1,792,996 4,508,447 1,539,736 65,565 1,325,237 1,390,802 148,934 4,687 153,621 40,126 113,495 738 112,757 105,550 18,746 254,977 0 0 All common stock owned by parent company; no EPS required.
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