-----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, Is2oRYWbdb3VpLP4o54xDSi5/PH256Bii9QIwmfbk5Ac6h1v9vmlWem/mp4RMG3t o97iWMGXmnOtDdZyFHcilA== 0000004904-97-000133.txt : 19971113 0000004904-97-000133.hdr.sgml : 19971113 ACCESSION NUMBER: 0000004904-97-000133 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: 97716693 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 SEPTEMBER 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period from to Commission Registrant; State of Incorporation; I. R. S. Employer File Number Address; and Telephone Number Identification No. 1-3525 AMERICAN ELECTRIC POWER COMPANY, INC. 13-4922640 (A New York Corporation) 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 0-18135 AEP GENERATING COMPANY (An Ohio Corporation) 31-1033833 1 Riverside Plaza, Columbus, Ohio 43215 Telephone (614) 223-1000 1-3457 APPALACHIAN POWER COMPANY (A Virginia Corporation) 54-0124790 40 Franklin Road, Roanoke, Virginia 24011 Telephone (540) 985-2300 1-2680 COLUMBUS SOUTHERN POWER COMPANY (An Ohio Corporation) 31-4154203 215 North Front Street, Columbus, Ohio 43215 Telephone (614) 464-7700 1-3570 INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation) 35-0410455 One Summit Square P.O. Box 60, Fort Wayne, Indiana 46801 Telephone (219) 425-2111 1-6858 KENTUCKY POWER COMPANY (A Kentucky Corporation) 61-0247775 1701 Central Avenue, Ashland, Kentucky 41101 Telephone (800) 572-1141 1-6543 OHIO POWER COMPANY (An Ohio Corporation) 31-4271000 301 Cleveland Avenue S.W., Canton, Ohio 44702 Telephone (330) 456-8173 AEP Generating Company, Columbus Southern Power Company and Kentucky Power Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q. Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of American Electric Power Company, Inc. Common Stock, par value $6.50, at October 31, 1997 was 189,611,006. /TABLE
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES FORM 10-Q For The Quarter Ended September 30, 1997
INDEX Page Part I. FINANCIAL INFORMATION American Electric Power Company, Inc. and Subsidiary Companies: Consolidated Statements of Income. . . . . . . . . . . . . . A-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . A-2 - A-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . A-4 Consolidated Statements of Retained Earnings . . . . . . . . A-5 Notes to Consolidated Financial Statements . . . . . . . . . A-6 - A-8 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . A-9 - A-12 AEP Generating Company: Statements of Income and Statements of Retained Earnings . . B-1 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . B-2 - B-3 Statements of Cash Flows . . . . . . . . . . . . . . . . . . B-4 Notes to Financial Statements. . . . . . . . . . . . . . . . B-5 Management's Narrative Analysis of Results of Operations . . B-6 - B-7 Appalachian Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . . C-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . C-2 - C-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . C-4 Notes to Consolidated Financial Statements . . . . . . . . . C-5 - C-7 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . C-8 - C-10 Columbus Southern Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . . D-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . D-2 - D-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . D-4 Notes to Consolidated Financial Statements . . . . . . . . . D-5 - D-6 Management's Narrative Analysis of Results of Operations . . D-7 - D-9 Indiana Michigan Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . . E-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . E-2 - E-3 Consolidated Statements of Cash Flows. . . . . . . . . . . . E-4 Notes to Consolidated Financial Statements . . . . . . . . . E-5 - E-7 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . E-8 - E-10 Kentucky Power Company: Statements of Income and Statements of Retained Earnings . . F-1 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . F-2 - F-3 Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-4 Notes to Financial Statements. . . . . . . . . . . . . . . . F-5 - F-6 Management's Narrative Analysis of Results of Operations . . F-7 - F-8 AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES FORM 10-Q For The Quarter Ended September 30, 1997 INDEX Page Ohio Power Company and Subsidiaries: Consolidated Statements of Income and Consolidated Statements of Retained Earnings . . . . . . G-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . . G-2 - G-3 Consolidated Statements of Cash Flows. . . . . . . . . . . G-4 Notes to Consolidated Financial Statements . . . . . . . . G-5 - G-6 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . G-7 - G-10 Part II. OTHER INFORMATION Item 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Item 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3 This combined Form 10-Q is separately filed by American Electric Power Company, Inc., AEP Generating Company, Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company and Ohio Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per-share amounts) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 OPERATING REVENUES . . . . . . . . . . . $1,583,994 $1,484,422 $4,458,221 $4,403,144 OPERATING EXPENSES: Fuel and Purchased Power . . . . . . . 522,776 416,470 1,349,351 1,262,361 Other Operation. . . . . . . . . . . . 302,307 299,496 904,892 903,927 Maintenance. . . . . . . . . . . . . . 123,781 129,140 347,894 373,606 Depreciation and Amortization. . . . . 144,342 151,809 447,843 450,337 Taxes Other Than Federal Income Taxes. 123,943 128,155 372,723 376,771 Federal Income Taxes . . . . . . . . . 91,755 99,607 267,195 263,650 TOTAL OPERATING EXPENSES . . . 1,308,904 1,224,677 3,689,898 3,630,652 OPERATING INCOME . . . . . . . . . . . . 275,090 259,745 768,323 772,492 NONOPERATING INCOME. . . . . . . . . . . 32,835 3,655 43,030 3,558 INCOME BEFORE INTEREST CHARGES AND PREFERRED DIVIDENDS. . . . . . . . . . 307,925 263,400 811,353 776,050 INTEREST CHARGES . . . . . . . . . . . . 103,378 90,878 300,851 289,266 PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES. . . . . . . . . . . . 2,801 10,198 15,056 31,782 INCOME BEFORE EXTRAORDINARY ITEM . . . . 201,746 162,324 495,446 455,002 EXTRAORDINARY LOSS - U. K. WINDFALL TAX. (110,565) - (110,565) - NET INCOME . . . . . . . . . . . . . . . $ 91,181 $ 162,324 $ 384,881 $ 455,002 AVERAGE NUMBER OF SHARES OUTSTANDING . . 189,287 187,528 188,819 187,118 EARNINGS PER SHARE: Before Extraordinary Item . . . . . . . $1.07 $0.87 $2.62 $2.43 Extraordinary Loss - U. K. Windfall Tax (0.59) - (0.58) - Net Income. . . . . . . . . . . . . . . $0.48 $0.87 $2.04 $2.43 CASH DIVIDENDS PAID PER SHARE. . . . . . $0.60 $0.60 $1.80 $1.80 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $ 9,424,789 $ 9,341,849 Transmission . . . . . . . . . . . . . . . . . . . . 3,417,136 3,380,258 Distribution . . . . . . . . . . . . . . . . . . . . 4,551,816 4,402,449 General (including mining assets and nuclear fuel) . 1,549,018 1,491,781 Construction Work in Progress. . . . . . . . . . . . 419,754 353,832 Total Electric Utility Plant . . . . . . . . 19,362,513 18,970,169 Accumulated Depreciation and Amortization. . . . . . 7,860,161 7,549,798 NET ELECTRIC UTILITY PLANT . . . . . . . . . 11,502,352 11,420,371 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 1,313,845 892,674 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 91,767 57,539 Accounts Receivable. . . . . . . . . . . . . . . . . 580,677 535,024 Allowance for Uncollectible Accounts . . . . . . . . (7,009) (3,692) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 236,716 235,257 Materials and Supplies . . . . . . . . . . . . . . . 240,084 251,896 Accrued Utility Revenues . . . . . . . . . . . . . . 149,402 174,966 Prepayments. . . . . . . . . . . . . . . . . . . . . 87,443 103,891 TOTAL CURRENT ASSETS . . . . . . . . . . . . 1,379,080 1,354,881 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 1,838,720 1,889,482 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 216,417 325,580 TOTAL. . . . . . . . . . . . . . . . . . . $16,250,414 $15,882,988 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock-Par Value $6.50: 1997 1996 Shares Authorized . . . .300,000,000 300,000,000 Shares Issued . . . . . .198,610,998 197,234,992 (8,999,992 shares were held in treasury) . . . . . $ 1,290,971 $ 1,282,027 Paid-in Capital. . . . . . . . . . . . . . . . . . . 1,762,296 1,715,554 Retained Earnings. . . . . . . . . . . . . . . . . . 1,592,705 1,547,746 Total Common Shareholders' Equity. . . . . . 4,645,972 4,545,327 Cumulative Preferred Stocks of Subsidiaries: Not Subject to Mandatory Redemption. . . . . . . . 46,869 90,323 Subject to Mandatory Redemption. . . . . . . . . . 127,605 509,900 Long-term Debt . . . . . . . . . . . . . . . . . . . 5,122,382 4,796,768 TOTAL CAPITALIZATION . . . . . . . . . . . . 9,942,828 9,942,318 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 1,173,160 1,002,208 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 219,422 86,942 Short-term Debt. . . . . . . . . . . . . . . . . . . 507,750 319,695 Accounts Payable . . . . . . . . . . . . . . . . . . 207,669 206,227 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 260,739 414,173 Interest Accrued . . . . . . . . . . . . . . . . . . 112,043 75,124 Obligations Under Capital Leases . . . . . . . . . . 95,609 89,553 Other. . . . . . . . . . . . . . . . . . . . . . . . 358,942 304,323 TOTAL CURRENT LIABILITIES. . . . . . . . . . 1,762,174 1,496,037 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 2,573,150 2,643,143 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 383,981 401,491 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 233,640 240,598 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 181,481 157,193 COMMITMENTS AND CONTINGENCIES (Note 5) TOTAL. . . . . . . . . . . . . . . . . . . $16,250,414 $15,882,988 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 384,881 $ 455,002 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 455,494 442,205 Deferred Federal Income Taxes. . . . . . . . . . . . . . (35,566) (14,126) Deferred Investment Tax Credits. . . . . . . . . . . . . (17,510) (17,643) Amortization of Deferred Property Taxes. . . . . . . . . 132,251 132,061 Amortization of Operating Expenses and Carrying Charges (net) . . . . . . . . . . . . . . . . 24,356 38,226 Extraordinary Loss - U.K. Windfall Tax . . . . . . . . . 110,565 - Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (42,336) (33,281) Fuel, Materials and Supplies . . . . . . . . . . . . . . 10,353 20,644 Accrued Utility Revenues . . . . . . . . . . . . . . . . 25,564 62,841 Accounts Payable . . . . . . . . . . . . . . . . . . . . 1,442 (42,363) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (153,434) (136,429) Interest Accrued . . . . . . . . . . . . . . . . . . . . 36,919 31,868 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 33,016 45,555 Net Cash Flows From Operating Activities . . . . . . 965,995 984,560 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (496,155) (355,878) Investment in Yorkshire Electricity Group plc. . . . . . . (361,795) - Proceeds from Sale of Property and Other . . . . . . . . . 2,492 8,825 Net Cash Flows Used For Investing Activities . . . . (855,458) (347,053) FINANCING ACTIVITIES: Issuance of Common Stock . . . . . . . . . . . . . . . . . 58,045 49,337 Issuance of Long-term Debt . . . . . . . . . . . . . . . . 776,441 406,905 Retirement of Cumulative Preferred Stock . . . . . . . . . (433,234) (39,966) Retirement of Long-term Debt . . . . . . . . . . . . . . . (325,931) (594,609) Change in Short-term Debt (net). . . . . . . . . . . . . . 188,055 (89,774) Dividends Paid on Common Stock . . . . . . . . . . . . . . (339,685) (336,651) Net Cash Flows Used For Financing Activities . . . . (76,309) (604,758) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 34,228 32,749 Cash and Cash Equivalents at Beginning of Period . . . . . . 57,539 79,955 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 91,767 $ 112,704 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $253,884,000 and $247,393,000 and for income taxes was $290,682,000 and $278,050,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $171,947,000 and $108,340,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $1,615,039 $1,478,193 $1,547,746 $1,409,645 NET INCOME . . . . . . . . . . . . . . . 91,181 162,324 384,881 455,002 DEDUCTIONS: Cash Dividends Declared. . . . . . . . 113,515 112,463 339,685 336,651 Other. . . . . . . . . . . . . . . . . - 9 237 (49) BALANCE AT END OF PERIOD . . . . . . . . $1,592,705 $1,528,045 $1,592,705 $1,528,045 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial state-ments should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. Certain prior-period amounts have been reclassified to conform to current-period presentation. 2. FINANCING AND RELATED ACTIVITIES During the first nine months of 1997, the utility operating subsidiaries issued $422 million principal amount of long-term obligations: three series of first mortgage bonds totaling $144 million at 6.35%, 6.4% and 6.71% all due in 2000; $180 million of junior subordinated deferrable interest debentures at 7.92% and 8% due in 2027; one $48 million unsecured note due 2004 at 6.73% and $50 million of financing obligations under a sale leaseback agreement. The proceeds were used during 1997 to redeem 4,257,490 shares of cumulative preferred stock as detailed in the table below and to retire $243 million principal amount of long-term debt: $203 million of first mortgage bonds with interest rates ranging from 6-1/2% to 9.35% due from 1997 to 2022; $20 million of variable rate installment purchase contracts due in 2025; and a $20 million term loan with an interest rate of 7.19% at maturity. Number Total of Shares Reacquisition Series Retired Price Range Price (in thousands) 4.08%-4.56% 434,540 $ 61.00-$ 69.94 $ 29,361 5.90%-5.92% 1,515,900 101.83- 103.20 156,074 6.02%-6-7/8% 1,307,050 103.71- 107.26 137,071 7.80%-7-7/8% 1,000,000 105.20- 105.50 105,232 $427,738 As a result of the redemption of the 6-1/2% series first mortgage bonds due in 1997, the restriction on the use of retained earnings for the payment of common stock dividends was reduced to $27 million. At September 30, 1997, AEP Resources, Inc., a subsidiary which is pursuing new business opportunities, had $270 million of outstanding debt at LIBOR rates under its long-term revolving credit agreement which expires in 1999, primarily for its investment in Yorkshire Electricity Group, plc. In October 1997 two domestic electric operating subsidiaries issued $96 million of unsecured medium term notes due in 2005 and 2007 at 6.85% and 6.91%, respectively. 3. EXTRAORDINARY LOSS - WINDFALL TAX The Company and New Century Energies, Inc. acquired a United Kingdom distribution company, Yorkshire Electricity Group plc, through an equally owned joint venture in April 1997. Total consideration paid by the joint venture was approximately $2.4 billion which was financed by a combination of equity and non-recourse debt. The Company uses the equity method of accounting for its $273 million equity investment in Yorkshire Electricity which is included in other property and investments. In July 1997 the British government enacted a new law that imposed a one-time windfall tax on a revised privatization value which originally had been computed in 1990 of certain privatized utilities. The windfall tax is actually an adjustment of the original privatization price by the U.K. government. The windfall tax liability for Yorkshire Electricity Group plc is estimated to be 135 million pounds ($221 million) and is payable in two equal installments with the first due in December 1997 and the second installment a year later. The Company's $110.6 million share of the tax is reported as an extraordinary loss. The earnings from the Yorkshire investment excluding the extraordinary loss, which are included in nonoperating income, are $34 million for the third quarter and $38 million for the year-to-date period which includes $26 million of nonrecurring tax benefits related to a reduction of the United Kingdom corporate income tax rate from 33% to 31% and the utilization of foreign tax credits. 4. ZIMMER PHASE-IN PLAN In June 1997, a domestic electic operating subsidiary, Columbus Southern Power Company, completed recovery of its Zimmer Plant phase-in plan deferrals through the cessation of a 3.39% temporary surcharge. The temporary surcharge was placed into effect on February 1, 1994 to allow recovery of a rate phase-in deferral of $93.9 million. The amount of net phase-in deferrals that were collected through the surcharge was $18.5 million in 1994, $28.5 million in 1995, $31.5 million in 1996 and $15.4 million in 1997. The cessation of the surcharge recovery of amounts deferred under the phase-in plan did not affect net income since the deferred costs were amortized commensurate with their recovery. For other information regarding the Zimmer rate case refer to the 1996 Annual Report - Notes to Consolidated Financial Statements - Note 3. 5. CONTINGENCIES Taxes As discussed in Note 9, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. The Company filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of COLI interest deductions through September 30, 1997 would reduce earnings by approximately $276 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. Cook Plant Shutdown On September 9 and 10, 1997, during a Nuclear Regulatory Commission (NRC) architect engineer design inspection, questions regarding the operability of certain safety systems caused Company operations personnel to shut down Units 1 and 2 of the Cook Nuclear Plant. On September 19, 1997, the NRC issued a Confirmatory Action Letter requiring the Company to address certain issues identified in the letter. The Company is working with the NRC to resolve this matter. At this time management is unable to determine when the units will be returned to service. If the units are not returned to service in a timely manner, it could have an adverse impact on results of operations and possibly financial condition. The Company continues to be involved in certain other matters discussed in the 1996 Annual Report. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Income before extraordinary loss increased by $39.4 million for the quarter and $40.4 for the year-to-date period due predominantly to increased wholesale sales, reduced preferred stock dividends due to a redemption program and nonoperating income from AEP's April 1997 investment in Yorkshire Electricity Group plc. Net income decreased $71.1 million or 44% for the third quarter and $70.1 million or 15% for the year-to-date period primarily due to an extraordinary loss incurred by Yorkshire Electricity Group plc. The extraordinary loss resulted from the United Kingdom's one-time windfall tax on a revision or recomputation of the original privatization value of certain privatized utilities. Income statement lines which changed significantly were: Increase (Decrease) Third Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . . . $ 99.6 7 $55.1 1 Fuel and Purchased Power Expense . . . . . . . . 106.3 26 87.0 7 Maintenance Expense. . . . . . (5.4) (4) (25.7) (7) Depreciation and Amortization Expense . . . . . . . . . . . (7.5) (5) (2.5) (1) Federal Income Taxes . . . . . (7.9) (8) 3.5 1 Nonoperating Income. . . . . . 29.2 N.M. 39.5 N.M. Interest Charges . . . . . . . 12.5 14 11.6 4 Preferred Stock Dividend Requirements of Subsidiaries. (7.4) (73) (16.7) (53) N.M. = Not Meaningful Operating revenues increased for the third quarter as a result of a 43% increase in sales to wholesale customers largely as a result of new power marketing transactions which began in July 1997. The new power marketing transactions involve the purchase and sale of electricity outside the AEP transmission system. Although energy sales to retail customers rose 2% primarily due to growth in the number of commercial customers and increased industrial customer usage, retail revenues were flat reflecting price reductions from rate decreases, expiration of a phase-in plan surcharge and reduced prices negotiated with certain industrial customers. The increase in operating revenues for the year-to-date period resulted from increased wholesale energy sales. Sales to wholesale customers rose 22% due to the new power marketing transactions and an increase in coal conversion service sales, which are for the conversion of customers' coal to electricity. Operating revenues from retail customers declined 2% primarily due to a 4% decrease in energy sales to residential customers reflecting mild weather in the first and second quarters of 1997. The increases in fuel and purchased power expense for both periods were due mainly to purchases of electricity as part of the new power marketing transactions. Also contributing to the increase in the quarter were increased fuel costs resulting from increased coal-fired generation and reduced nuclear generation as both units of the Cook Nuclear Plant were shut down in September 1997 to resolve concerns regarding the documentation of safety systems. Maintenance expense decreased for the year-to-date period due primarily to reduced levels of repairs to distribution facilities in 1997 and the effects of the recognition of incremental storm damage expense in accordance with an order of the Virginia regulatory commission in the second quarter of 1996. The reduction in depreciation and amortization expense for the third quarter reflects the completion of a rate phase-in plan for Zimmer Plant costs which had been deferred and were being amortized commensurate with recovery in rates. Federal income tax expense attributable to operations decreased in the third quarter due to a decrease in pre-tax operating income inclusive of interest charges and changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes. The increases in nonoperating income for both periods reflects the Company's share of Yorkshire Electricity Group plc's earnings of $34 million for the third quarter and $38 million for the year-to-date period which includes $26 million of nonrecurring tax benefits related to a reduction of the United Kingdom corporate income tax rate from 33% to 31% and the utilization of foreign tax credits. Interest charges increased in both periods due to higher outstanding balances of long-term and short-term debt. The increase in borrowing was primarily for international investment, including the acquisition of a 50% interest in Yorkshire Electricity in April 1997, and to redeem preferred stock. Preferred stock dividend requirements of the subsidiaries decreased in both periods reflecting the redemption of over 4 million shares of cumulative preferred stock during the first half of 1997 as part of a redemption program. FINANCIAL CONDITION Total plant and property additions including capital leases for the first nine months of 1997 were $670 million. During the first nine months of 1997 subsidiaries and their minority interest partners issued $699 million principal amount of long-term obligations at interest rates ranging from 6.1% to 12.42%; retired $243 million principal amount of long-term debt with interest rates ranging from 6-1/2% to 9.35%; redeemed 4,257,490 shares of cumulative preferred stock with rates ranging from 4.08% to 7-7/8% at a total cost of $433 million and increased short-term debt by $188 million. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. JOINT VENTURES ANNOUNCED On October 2, 1997 the Company and Conoco, the energy subsidiary of DuPont, signed a letter of intent to form two jointly held venture companies to provide energy management and capital to industrial and large commercial customers. AEP Conoco Energy Capital will acquire and lease back energy assets at industrial and large commercial facilities and provide future capital for energy projects. AEP Conoco Energy Management Services will also provide energy management services. The ventures will initially acquire and manage industrial energy assets valued at approximately $1 billion for DuPont energy facilities at 33 U.S. industrial plants. The Company, through its AEP Resources subsidiary, and DuPont will each invest approximately $125 million in equity in the joint ventures with the remainder to be financed through non-recourse debt. COOK PLANT SHUTDOWN On September 9 and 10, 1997, during a Nuclear Regulatory Commission (NRC) architect engineer design inspection, questions regarding the operability of certain safety systems caused Company operations personnel to shut down Units 1 and 2 of the Cook Nuclear Plant. On September 19, 1997, the NRC issued a Confirmatory Action Letter requiring the Company to address certain issues identified in the letter. The Company is working with the NRC to resolve this matter. At this time management is unable to determine when the units will be returned to service. If the units are not returned to service in a timely manner, it could have an adverse impact on results of operations and possibly financial condition. AEP GENERATING COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $58,136 $56,821 $170,665 $169,618 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 26,354 23,701 72,443 68,969 Rent - Rockport Plant Unit 2 . . . . . 17,071 17,070 51,212 51,218 Other Operation. . . . . . . . . . . . 2,518 3,036 8,362 9,147 Maintenance. . . . . . . . . . . . . . 2,372 3,154 10,115 10,530 Depreciation . . . . . . . . . . . . . 5,402 5,413 16,209 16,239 Taxes Other Than Federal Income Taxes. 1,015 821 2,744 2,703 Federal Income Taxes . . . . . . . . . 922 987 2,529 2,924 TOTAL OPERATING EXPENSES . . . 55,654 54,182 163,614 161,730 OPERATING INCOME . . . . . . . . . . . . 2,482 2,639 7,051 7,888 NONOPERATING INCOME. . . . . . . . . . . 831 1,018 2,631 2,642 INCOME BEFORE INTEREST CHARGES . . . . . 3,313 3,657 9,682 10,530 INTEREST CHARGES . . . . . . . . . . . . 986 1,042 2,997 3,186 NET INCOME . . . . . . . . . . . . . . . $ 2,327 $ 2,615 $ 6,685 $ 7,344 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $3,672 $2,184 $1,886 $1,955 NET INCOME . . . . . . . . . . . . . . . 2,327 2,615 6,685 7,344 CASH DIVIDENDS DECLARED. . . . . . . . . 3,286 3,000 5,858 7,500 BALANCE AT END OF PERIOD . . . . . . . . $2,713 $1,799 $2,713 $1,799 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Financial Statements. /TABLE AEP GENERATING COMPANY BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production. . . . . . . . . . . . . . . . . . . . . . . . $626,880 $627,926 General . . . . . . . . . . . . . . . . . . . . . . . . . 3,082 2,931 Construction Work in Progress . . . . . . . . . . . . . . 2,007 1,400 Total Electric Utility Plant. . . . . . . . . . . 631,969 632,257 Accumulated Depreciation. . . . . . . . . . . . . . . . . 252,026 238,532 NET ELECTRIC UTILITY PLANT. . . . . . . . . . . . 379,943 393,725 CURRENT ASSETS: Cash and Cash Equivalents . . . . . . . . . . . . . . . . 1,810 139 Accounts Receivable . . . . . . . . . . . . . . . . . . . 20,683 18,879 Fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,735 17,792 Materials and Supplies. . . . . . . . . . . . . . . . . . 4,174 4,266 Prepayments . . . . . . . . . . . . . . . . . . . . . . . 483 804 TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . 37,885 41,880 REGULATORY ASSETS . . . . . . . . . . . . . . . . . . . . . 5,694 5,857 DEFERRED CHARGES. . . . . . . . . . . . . . . . . . . . . . 2,419 1,449 TOTAL . . . . . . . . . . . . . . . . . . . . . $425,941 $442,911 See Notes to Financial Statements.
AEP GENERATING COMPANY BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - Par Value $1,000: Authorized and Outstanding - 1,000 Shares . . . . . . . $ 1,000 $ 1,000 Paid-in Capital . . . . . . . . . . . . . . . . . . . . . 42,235 44,235 Retained Earnings . . . . . . . . . . . . . . . . . . . . 2,713 1,886 Total Common Shareholder's Equity . . . . . . . . 45,948 47,121 Long-term Debt. . . . . . . . . . . . . . . . . . . . . . 69,565 89,554 TOTAL CAPITALIZATION. . . . . . . . . . . . . . . 115,513 136,675 OTHER NONCURRENT LIABILITIES. . . . . . . . . . . . . . . . 1,358 1,613 CURRENT LIABILITIES: Short-term Debt - Notes Payable . . . . . . . . . . . . . - 9,575 Accounts Payable. . . . . . . . . . . . . . . . . . . . . 4,855 7,510 Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . 5,195 2,903 Rent Accrued - Rockport Plant Unit 2. . . . . . . . . . . 23,427 4,963 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,031 3,932 TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 36,508 28,883 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2 . . . . . . . . . . . . . . . . . . 140,294 144,472 REGULATORY LIABILITIES: Deferred Investment Tax Credits . . . . . . . . . . . . . 70,934 73,460 Amounts Due to Customers for Income Taxes . . . . . . . . 32,885 33,893 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 28 66 TOTAL REGULATORY LIABILITIES. . . . . . . . . . . 103,847 107,419 DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . 28,421 23,849 TOTAL . . . . . . . . . . . . . . . . . . . . . $425,941 $442,911 See Notes to Financial Statements.
AEP GENERATING COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 6,685 $ 7,344 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 16,209 16,239 Deferred Federal Income Taxes. . . . . . . . . . . . . . 3,564 3,710 Deferred Investment Tax Credits. . . . . . . . . . . . . (2,526) (2,531) Amortization of Deferred Gain on Sale and Leaseback - Rockport Plant Unit 2. . . . . . . . . (4,178) (4,178) Changes in Certain Current Assets and Liabilities: Accounts Receivable. . . . . . . . . . . . . . . . . . . (1,804) (328) Fuel, Materials and Supplies . . . . . . . . . . . . . . 7,149 (729) Accounts Payable . . . . . . . . . . . . . . . . . . . . (2,655) (3,920) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 2,292 2,201 Rent Accrued - Rockport Plant Unit 2 . . . . . . . . . . 18,464 18,464 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (2,044) (2,924) Net Cash Flows From Operating Activities . . . . . . 41,156 33,348 INVESTING ACTIVITIES - Construction Expenditures . . . . . . (2,042) (1,492) FINANCING ACTIVITIES: Return of Capital to Parent Company. . . . . . . . . . . . (2,000) (500) Retirement of Long-term Debt . . . . . . . . . . . . . . . (20,010) - Change in Short-term Debt (net). . . . . . . . . . . . . . (9,575) (21,725) Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (5,858) (7,500) Net Cash Flows Used For Financing Activities . . . . (37,443) (29,725) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 1,671 2,131 Cash and Cash Equivalents at Beginning of Period . . . . . . 139 22 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 1,810 $ 2,153 Supplemental Disclosure: Cash paid (received) for interest net of capitalized amounts was $2,699,000 and $3,009,000 and for income taxes was $(1,598,000) and $(1,374,000) in 1997 and 1996, respectively. See Notes to Financial Statements.
AEP GENERATING COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. FINANCING ACTIVITIES In June 1997, the Company redeemed $10 million each of the 1995 Series A and 1995 Series B Pollution Control Revenue Bonds due 2025. In 1997, the Company returned capital to its parent in the amount of $2 million. AEP GENERATING COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 Operating revenues are derived from the sale of Rockport Plant energy and capacity to two affiliated companies and one unaffiliated utility pursuant to Federal Energy Regulatory Commission (FERC) approved long-term unit power agreements. The unit power agreements provide for recovery of costs including a FERC approved rate of return on common equity and a return on other capital, net of temporary cash investments. Net income decreased $0.3 million or 11% for the third quarter and $0.7 million or 9% for the year-to-date period as a result of the decrease in the return on common equity due to a return of capital to the parent company and a decrease in the return on other capital due to lower financing costs, partially offset in the year-to-date period by income earned on temporary cash investments. Income statement items which changed significantly were as follows: Increase (Decrease) Third Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues. . . . . $1.3 2 $1.0 1 Fuel Expense. . . . . . . . 2.7 11 3.5 5 Other Operation Expense . . (.5) (17) (.8) (9) Maintenance Expense . . . . (.8) (25) (.4) (4) Taxes Other Than Federal Income Taxes. . . .2 24 - - Federal Income Taxes. . . . (.1) (7) (.4) (14) Nonoperating Income . . . . (.2) (18) - - Interest Charges. . . . . . (.1) (5) (.2) (6) The increase in operating revenues for both periods is primarily attributable to collection of increased fuel expense under the terms of the unit power agreements, partly offset by the decrease in allowed returns previously mentioned. It should be noted that increases in operating expenses are recoverable through the unit power agreement and do not impact net income. Fuel expense increased due to an increase in generation for the quarter and an increase in the average cost of fuel consumed for both the quarter and year-to-date periods. A decrease in other operation expense for both periods was caused by a reduction in the annual Federal Energy Regulatory Commission fee assessment. Maintenance expense decreased due to the effect of recording a write-off of obsolete maintenance materials in the third quarter of 1996. Taxes other than federal income taxes increased for the quarter due to the effect of an unfavorable accrual adjustment for Indiana property tax. Federal income taxes attributable to operations decreased reflecting the decline in pre-tax operating income. The decrease in nonoperating income for the current period was due to the effect of a credit adjustment recorded in 1996. Interest charges decreased for both periods due to the redemption of $20 million of Pollution Control Revenue Bonds in June of this year. Additionally year-to-date interest charges declined due to a reduction in the average balances of short-term debt outstanding. APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $438,510 $393,797 $1,228,044 $1,214,656 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 104,514 82,432 288,773 263,935 Purchased Power. . . . . . . . . . . . 100,587 84,388 261,595 252,025 Other Operation. . . . . . . . . . . . 60,585 53,561 185,852 177,370 Maintenance. . . . . . . . . . . . . . 27,615 28,279 79,505 87,655 Depreciation and Amortization. . . . . 34,568 33,450 102,817 99,491 Taxes Other Than Federal Income Taxes. 29,544 29,758 89,580 90,074 Federal Income Taxes . . . . . . . . . 16,317 20,670 45,411 55,991 TOTAL OPERATING EXPENSES . . . 373,730 332,538 1,053,533 1,026,541 OPERATING INCOME . . . . . . . . . . . . 64,780 61,259 174,511 188,115 NONOPERATING INCOME (LOSS) . . . . . . . 305 (240) 628 336 INCOME BEFORE INTEREST CHARGES . . . . . 65,085 61,019 175,139 188,451 INTEREST CHARGES . . . . . . . . . . . . 30,332 26,380 88,524 82,082 NET INCOME . . . . . . . . . . . . . . . 34,753 34,639 86,615 106,369 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 681 4,099 6,326 12,300 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 34,072 $ 30,540 $ 80,289 $ 94,069 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $197,471 $208,399 $208,472 $199,021 NET INCOME . . . . . . . . . . . . . . . 34,753 34,639 86,615 106,369 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 28,609 27,075 85,827 81,225 Cumulative Preferred Stock . . . . . 572 3,914 2,649 11,748 Capital Stock Expense. . . . . . . . . 109 184 3,677 552 BALANCE AT END OF PERIOD . . . . . . . . $202,934 $211,865 $202,934 $211,865 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)
September 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,915,626 $1,883,271 Transmission . . . . . . . . . . . . . . . . . . . . 1,067,090 1,054,207 Distribution . . . . . . . . . . . . . . . . . . . . 1,557,679 1,495,445 General. . . . . . . . . . . . . . . . . . . . . . . 206,130 188,740 Construction Work in Progress. . . . . . . . . . . . 94,011 95,469 Total Electric Utility Plant . . . . . . . . 4,840,536 4,717,132 Accumulated Depreciation and Amortization. . . . . . 1,850,887 1,782,017 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,989,649 2,935,115 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 36,699 29,621 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 8,667 7,260 Accounts Receivable. . . . . . . . . . . . . . . . . 147,498 160,021 Allowance for Uncollectible Accounts . . . . . . . . (1,622) (687) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 59,509 52,605 Materials and Supplies . . . . . . . . . . . . . . . 51,464 56,605 Accrued Utility Revenues . . . . . . . . . . . . . . 32,901 51,843 Prepayments. . . . . . . . . . . . . . . . . . . . . 7,102 10,797 TOTAL CURRENT ASSETS . . . . . . . . . . . . 305,519 338,444 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 441,959 451,272 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 35,295 46,285 TOTAL. . . . . . . . . . . . . . . . . . . $3,809,121 $3,800,737 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 30,000,000 Shares Outstanding - 13,499,500 Shares. . . . . . . . . . $ 260,458 $ 260,458 Paid-in Capital. . . . . . . . . . . . . . . . . . . 592,924 575,380 Retained Earnings. . . . . . . . . . . . . . . . . . 202,934 208,472 Total Common Shareholder's Equity. . . . . . 1,056,316 1,044,310 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 19,795 29,815 Subject to Mandatory Redemption. . . . . . . . . . 22,310 190,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,494,283 1,365,834 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,592,704 2,629,959 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 132,777 109,203 CURRENT LIABILITIES: Short-term Debt. . . . . . . . . . . . . . . . . . . 83,525 60,700 Accounts Payable . . . . . . . . . . . . . . . . . . 99,080 85,892 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 42,577 40,935 Customer Deposits. . . . . . . . . . . . . . . . . . 13,764 13,750 Interest Accrued . . . . . . . . . . . . . . . . . . 33,223 20,938 Other. . . . . . . . . . . . . . . . . . . . . . . . 58,424 80,360 TOTAL CURRENT LIABILITIES. . . . . . . . . . 330,593 302,575 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 656,896 669,964 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 69,106 72,677 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 27,045 16,359 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $3,809,121 $3,800,737 See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 86,615 $106,369 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 103,796 100,471 Deferred Federal Income Taxes. . . . . . . . . . . . . . (8,719) 838 Deferred Investment Tax Credits. . . . . . . . . . . . . (3,571) (3,614) Provision for Rate Refunds . . . . . . . . . . . . . . . 3,083 (5,547) Deferred Power Supply Costs (net). . . . . . . . . . . . 13,951 (425) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . 13,458 (13,318) Fuel, Materials and Supplies . . . . . . . . . . . . . . (1,763) 9,195 Accrued Utility Revenues . . . . . . . . . . . . . . . . 18,942 21,123 Prepayments. . . . . . . . . . . . . . . . . . . . . . . 3,695 (5,637) Accounts Payable . . . . . . . . . . . . . . . . . . . . 13,188 (409) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . 1,642 (12,670) Interest Accrued . . . . . . . . . . . . . . . . . . . . 12,285 12,588 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (8,076) 6,928 Net Cash Flows From Operating Activities . . . . . . 248,526 215,892 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (146,039) (120,761) Proceeds from Sale of Property . . . . . . . . . . . . . . 4,204 1,546 Net Cash Flows Used For Investing Activities . . . . (141,835) (119,215) FINANCING ACTIVITIES: Capital Contributions from Parent Company. . . . . . . . . 20,000 25,000 Issuance of Long-term Debt . . . . . . . . . . . . . . . . 183,257 273,340 Change in Short-term Debt (net). . . . . . . . . . . . . . 22,825 (104,825) Retirement of Cumulative Preferred Stock . . . . . . . . . (183,842) (146) Retirement of Long-term Debt . . . . . . . . . . . . . . . (56,378) (195,909) Dividends Paid on Common Stock . . . . . . . . . . . . . . (85,827) (81,225) Dividends Paid on Cumulative Preferred Stock . . . . . . . (5,319) (11,751) Net Cash Flows Used For Financing Activities . . . . (105,284) (95,516) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 1,407 1,161 Cash and Cash Equivalents at Beginning of Period . . . . . . 7,260 8,664 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 8,667 $ 9,825 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $73,466,000 and $67,073,000 and for income taxes was $46,965,000 and $54,583,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $14,377,000 and $10,741,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE APPALACHIAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. Certain prior-period amounts have been reclassified to conform with current-period presentation. 2. RATE MATTERS On June 13, 1997, the Company filed an application with the Virginia State Corporation Commission (Virginia SCC) for approval of an alternative regulatory plan (Plan) and for an increase of $30.5 million in base rates on an annual basis to be effective July 13, 1997. The Company's Plan would institute a moratorium period during which no changes in rates would be made prior to January 1, 2001, from the current rate levels (including the Company's current 1.482 cents/kwh fuel factor) proposed by the Company. In addition, it includes a sharing of earnings above certain levels between the Company and its customers, and acceleration of the recovery of certain regulatory assets. On July 10, 1997, the Virginia SCC issued an order suspending implementation of new rates until November 11, 1997. A public hearing has been scheduled for May 19, 1998 to consider the Company's proposal. 3. FINANCING ACTIVITIES During the first nine months of 1997, the Company issued two series of first mortgage bonds of $48 million each with rates of 6.35% and 6.71% due in 2000 and $90 million of 8% Series Junior Subordinated Deferrable Interest Debentures due in 2027. In March 1997, the Company redeemed $56 million of first mortgage bonds with interest rates of 8.75% and 9.35%. As part of a tender offer, the following shares of Cumulative Preferred Stock were reacquired and retired at the prices listed plus an amount equal to accrued dividends: Number Price Total of Shares Paid Per Reacquisition Series Retired Share Price (in thousands) 4-1/2% 99,563 $ 69.02 $ 6,872 5.90% 422,900 103.17 43,631 5.92% 538,500 103.20 55,573 6.85% 215,500 107.26 23,114 7.80% 22,500 105.50 2,374 In April 1997, the Company redeemed the remaining 477,500 shares of 7.80% Series Cumulative Preferred Stock, par value $100, at $105.20 per share. In June 1997, the Company received a $20 million cash capital contribution from its parent which was credited to paid-in capital. 4. CONTINGENCIES Taxes As discussed in Note 9, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of the COLI interest deductions through September 30, 1997 would reduce earnings by approximately $69 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in its 1996 Annual Report. APPALACHIAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Net income remained relatively unchanged for the quarter as a significant increase in operating revenues was offset by increases in operating expenses and interest charges. Net income decreased $19.8 million or 19% for the year-to-date period mainly due to a decline in more profitable retail revenues reflecting milder weather during the first six months of 1997 and an increase in interest charges. Income statement items which changed significantly were: Increase (Decrease) Third Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . $44.7 11 $ 13.4 1 Fuel Expense . . . . . . . 22.1 27 24.8 9 Purchased Power Expense. . 16.2 19 9.6 4 Other Operation Expense. . 7.0 13 8.5 5 Maintenance Expense. . . . (0.7) (2) (8.2) (9) Federal Income Taxes . . . (4.4) (21) (10.6) (19) Interest Charges . . . . . 4.0 15 6.4 8 Retail revenues increased for the quarter and decreased for the year-to-date period, while wholesale revenues increased for both periods. The increase in retail energy sales for the quarter reflects a return to warmer weather. The decrease in retail revenue for the year-to-date period can be attributed to lower rates, while energy sales remained unchanged as milder weather during the first six months of 1997 largely offset the effects of warmer summer weather. The wholesale revenue increase in both periods reflects an increase in less profitable wholesale sales from new power marketing transactions, coal conversion services and related transmission services. New power marketing transactions involve the purchase and sale of electricity outside of AEP's transmission system. Coal conversion service sales are for the conversion of customers' coal to electricity. The increases in fuel expense for the quarter and year-to-date period were primarily due to the operation of the West Virginia power supply cost recovery mechanism as overcollections of fuel cost were deferred for future refund to customers through a charge to fuel expense in accordance with a rate order and increased coal fired generation to meet increased demand for retail energy. Purchased power expense increased as a result of additional energy purchases related to the new power marketing transactions. The effect of recording a gain in 1996 on the disposition of emission allowances accounted for the increase in other operation expense. Maintenance expense decreased as a result of the effect of the recognition in 1996 of deferred incremental storm damage costs in accordance with directions of the Virginia State Corporation Commission and reduced repairs to distribution facilities in 1997. The decrease in federal income tax expense attributable to operations was primarily due to a decrease in pre-tax operating income and for the quarter due to changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes. A January 1997 tender offer that retired $130 million stated value preferred stock on February 28, 1997 and the redemption of $48 million stated value preferred stock in April 1997 are responsible for an increase in the balance of long-term debt outstanding which was issued to finance the reacquisitions resulting in increased interest charges. FINANCIAL CONDITION Total plant and property additions including capital leases for the first nine months of 1997 were $160 million. The Company issued two series of first mortgage bonds of $48 million each with rates of 6.35% and 6.71% due in 2000. The Company also issued $90 million of 8% series Junior Subordinated Deferrable Interest Debentures due in 2027. In March 1997, the Company redeemed $56 million of first mortgage bonds with interest rates of 8.75% and 9.35%. Short-term debt increased by $23 million from year-end balances. In June 1997, the Company received a $20 million cash capital contribution from its parent which was credited to paid-in capital. As part of the January 1997 tender offer for all of the Company's outstanding preferred stock, 1,298,963 shares of $100 stated value preferred stock were reacquired. The total cost of the stock reacquisition was $134 million. At a special meeting of shareholders held on February 28, 1997, the Company's articles of incorporation were amended to remove certain capitalization ratio requirements which restricted the Company's ability to issue debt. As a result unsecured borrowings are now limited only by the Public Utility Holding Company Act of 1935 and the Virginia State Corporation Commission with the current limitation set at $250 million for unsecured short-term borrowings. In April 1997, all remaining shares of the 7.80% Series of Preferred Stock were reacquired for $50 million. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $313,024 $303,270 $841,294 $843,333 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 52,269 47,189 134,198 139,864 Purchased Power. . . . . . . . . . . . 54,444 47,099 138,278 130,539 Other Operation. . . . . . . . . . . . 46,505 55,609 132,256 146,617 Maintenance. . . . . . . . . . . . . . 17,535 17,053 50,602 48,385 Depreciation . . . . . . . . . . . . . 22,784 22,072 67,800 65,829 Amortization of Zimmer Plant Phase-in Costs . . . . . . . . . . . - 9,699 15,744 26,112 Taxes Other Than Federal Income Taxes. 29,861 29,985 89,484 86,180 Federal Income Taxes . . . . . . . . . 24,731 22,159 57,639 51,803 TOTAL OPERATING EXPENSES . . . 248,129 250,865 686,001 695,329 OPERATING INCOME . . . . . . . . . . . . 64,895 52,405 155,293 148,004 NONOPERATING INCOME (LOSS) . . . . . . . 658 1,164 2,018 (1,356) INCOME BEFORE INTEREST CHARGES . . . . . 65,553 53,569 157,311 146,648 INTEREST CHARGES . . . . . . . . . . . . 20,065 18,810 59,069 59,267 NET INCOME . . . . . . . . . . . . . . . 45,488 34,759 98,242 87,381 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 532 1,493 1,909 4,537 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 44,956 $ 33,266 $ 96,333 $ 82,844 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $111,953 $ 86,019 $ 99,582 $ 74,320 NET INCOME . . . . . . . . . . . . . . . 45,488 34,759 98,242 87,381 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 19,671 18,969 59,013 56,907 Cumulative Preferred Stock . . . . . 437 1,422 1,312 4,266 Capital Stock Expense. . . . . . . . . 95 71 261 212 BALANCE AT END OF PERIOD . . . . . . . . $137,238 $100,316 $137,238 $100,316 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)
September 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $1,512,032 $1,503,371 Transmission . . . . . . . . . . . . . . . . . . . . 332,834 326,247 Distribution . . . . . . . . . . . . . . . . . . . . 919,204 885,267 General. . . . . . . . . . . . . . . . . . . . . . . 130,887 130,946 Construction Work in Progress. . . . . . . . . . . . 61,196 54,062 Total Electric Utility Plant . . . . . . . . 2,956,153 2,899,893 Accumulated Depreciation . . . . . . . . . . . . . . 1,058,186 1,016,909 NET ELECTRIC UTILITY PLANT . . . . . . . . . 1,897,967 1,882,984 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 34,652 24,069 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 12,596 9,134 Accounts Receivable (net). . . . . . . . . . . . . . 115,789 63,003 Fuel . . . . . . . . . . . . . . . . . . . . . . . . 17,392 18,278 Materials and Supplies . . . . . . . . . . . . . . . 23,521 23,999 Accrued Utility Revenues . . . . . . . . . . . . . . 45,883 31,826 Prepayments. . . . . . . . . . . . . . . . . . . . . 27,061 32,330 TOTAL CURRENT ASSETS . . . . . . . . . . . . 242,242 178,570 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 357,773 385,689 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 21,950 70,274 TOTAL. . . . . . . . . . . . . . . . . . . $2,554,584 $2,541,586 See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 24,000,000 Shares Outstanding - 16,410,426 Shares. . . . . . . . . . $ 41,026 $ 41,026 Paid-in Capital. . . . . . . . . . . . . . . . . . . 572,017 574,709 Retained Earnings. . . . . . . . . . . . . . . . . . 137,238 99,582 Total Common Shareholder's Equity. . . . . . 750,281 715,317 Cumulative Preferred Stock - Subject to Mandatory Redemption . . . . . . . . . . . . . . . 25,000 25,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 840,002 882,641 TOTAL CAPITALIZATION . . . . . . . . . . . . 1,615,283 1,622,958 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 41,997 40,068 CURRENT LIABILITIES: Preferred Stock Due Within One Year. . . . . . . . . - 50,000 Long-term Debt Due Within One Year . . . . . . . . . 96,390 14,640 Short-term Debt. . . . . . . . . . . . . . . . . . . 94,725 51,800 Accounts Payable . . . . . . . . . . . . . . . . . . 56,836 54,828 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 78,784 129,429 Interest Accrued . . . . . . . . . . . . . . . . . . 26,312 13,605 Other. . . . . . . . . . . . . . . . . . . . . . . . 32,395 32,314 TOTAL CURRENT LIABILITIES. . . . . . . . . . 385,442 346,616 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 432,018 441,477 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 54,396 57,101 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 25,448 33,366 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $2,554,584 $2,541,586 See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 98,242 $ 87,381 Adjustments for Noncash Items: Depreciation . . . . . . . . . . . . . . . . . . . . . . 67,978 65,549 Deferred Federal Income Taxes. . . . . . . . . . . . . . (741) (9,777) Deferred Investment Tax Credits. . . . . . . . . . . . . (2,705) (2,736) Deferred Fuel Cost (net) . . . . . . . . . . . . . . . . (4,089) 6,032 Amortization of Zimmer Plant Operating Expenses and Carrying Charges . . . . . . . . . . . . . . . . . . . 15,936 24,539 Amortization of Deferred Property Taxes. . . . . . . . . 48,601 45,673 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (52,786) (14,750) Fuel, Materials and Supplies . . . . . . . . . . . . . . 1,364 4,531 Accrued Utility Revenues . . . . . . . . . . . . . . . . (14,057) 10,821 Accounts Payable . . . . . . . . . . . . . . . . . . . . 2,008 1,638 Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (50,645) (40,527) Interest Accrued . . . . . . . . . . . . . . . . . . . . 12,707 9,283 Other (net). . . . . . . . . . . . . . . . . . . . . . . . (4,477) 17,432 Net Cash Flows From Operating Activities . . . . . . 117,336 205,089 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (82,696) (61,321) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,586 2,624 Net Cash Flows Used For Investing Activities . . . . (81,110) (58,697) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 38,574 - Change in Short-term Debt (net). . . . . . . . . . . . . . 42,925 24,750 Retirement of Cumulative Preferred Stock . . . . . . . . . (52,953) (7,500) Retirement of Long-term Debt . . . . . . . . . . . . . . . - (99,053) Dividends Paid on Common Stock . . . . . . . . . . . . . . (59,013) (56,907) Dividends Paid on Cumulative Preferred Stock . . . . . . . (2,297) (4,443) Net Cash Flows Used For Financing Activities . . . . (32,764) (143,153) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 3,462 3,239 Cash and Cash Equivalents at Beginning of Period . . . . . . 9,134 10,577 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 12,596 $ 13,816 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $43,341,000 and $47,124,000 and for income taxes was $50,609,000 and $46,943,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $6,583,000 and $9,707,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. 2. FINANCING ACTIVITIES In January 1997 the Company terminated an agreement under which $50 million of undivided interests in designated pools of accounts receivable and accrued utility revenues were sold with limited recourse. In March 1997 the Company redeemed the entire 500,000 shares outstanding of its 7-7/8% Series of Cumulative Preferred Stock, par value $100, at the regular redemption price of $105.25 per share and issued $40 million of 7.92% Junior Subordinated Deferrable Interest Debentures due in 2027. In October 1997 the Company issued $48 million of 6.85% Unsecured Medium Term Notes due 2005. Also the Company redeemed the entire $14.6 million outstanding balance of 6-1/4% First Mortgage Bonds due in 1997. 3. ZIMMER PHASE-IN PLAN In June 1997 the Company completed recovery of its Zimmer Plant phase-in plan deferrals through the cessation of a 3.39% temporary surcharge. The temporary surcharge was placed into effect on February 1, 1994 to allow recovery of a rate phase-in deferral of $93.9 million. The amount of net phase-in deferrals that were collected through the surcharge was $18.5 million in 1994, $28.5 million in 1995, $31.5 million in 1996 and $15.4 million in 1997. The cessation of the surcharge recovery of amounts deferred under the phase-in plan did not affect net income since the deferred costs were amortized commensurate with their recovery. For other information regarding the Zimmer rate case refer to the 1996 Annual Report - Notes to Consolidated Financial Statements - Note 2. 4. CONTINGENCIES Taxes As discussed in Note 8, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of COLI interest deductions through September 30, 1997 would reduce earnings by approximately $38 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in its 1996 Annual Report. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 Net income increased $10.7 million or 31% for the third quarter of 1997 due to an increase in wholesale sales and a decrease in operating expenses. Year-to-date net income increased $10.9 million or 12% as a result of a reduction in operating expenses and an increase in non-operating income. Operating revenues increased 3% for the third quarter and were flat for the year-to-date period. The third quarter increase was primarily due to increased wholesale revenues partially offset by decreased retail revenues. In the year-to-date period the increase in wholesale revenues was offset by a decline in retail revenues. The reduction in retail revenues resulted from the cessation in June 1997 business of a revenue surcharge in connection with the recovery of phase-in deferrals relating to the Zimmer Plant and reduced fuel clause revenues reflecting the refund of previously over collected fuel costs. Under the Public Utilities Commission of Ohio fuel clause adjustment mechanism, over recoveries of fuel costs are deferred as a regulatory liability and subsequently refunded to customers as a reduction to fuel clause revenues. The cessation of the Zimmer revenue surcharge and the refund of previously over collected fuel costs did not affect net income since it was commensurate with the amortization of regulatory costs and liabilities, respectively. Revenues from wholesale customers increased 64% on a 70% increase in sales for the third quarter and increased 23% on a 33% sales increase for the year-to-date period. New power marketing transactions and increased coal conversion service sales, which are for the conversion of customers' coal to electricity, accounted for the increase in wholesale sales. The new power marketing transactions involve the purchase and sale of electricity outside of the AEP transmission system. Income statement lines which changed significantly were: Increase (Decrease) Third Quarter Year-to-Date (in millions) % (in millions) % Fuel Expense. . . . . . . . $ 5.1 11 $ (5.7) (4) Purchased Power Expense . . 7.3 16 7.7 6 Other Operation Expense . . (9.1) (16) (14.4) (10) Amortization of Zimmer Plant Phase-in Costs. . . (9.7) N.M. (10.4) (40) Federal Income Taxes. . . . 2.6 12 5.8 11 Nonoperating Income . . . . (0.5) (43) 3.4 N.M. N.M. = Not Meaningful The increase in fuel expense for the quarter was due to an increase in generation reflecting the increase in demand for electricity. The decline in fuel expense on a year-to-date basis was due to the operation of the fuel clause adjustment mechanism which credited fuel expenses in the current period with the amortization of previously over collected fuel costs deferred as a regulatory liability in the prior period. Purchased power expense increased primarily as a result of the new power marketing transactions. The decrease in other operation expense was mainly due to the recognition of deferred gains on the sale of emission allowances, commensurate with a reduction of customers bills through the fuel clause adjustment mechanism, and a decline in employee pensions and benefits expense. The reduction in the amortization of deferred Zimmer Plant phase-in costs reflects the completion of the amortization. The reduction does not affect net income since the amortization was being fully recovered in revenues through a surcharge which was terminated when the amortization was completed. Federal income taxes attributable to operations increased primarily due to an increase in pre-tax operating income partly offset in the quarter by changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes. The decrease in nonoperating income for the third quarter was due to the cessation of deferred Zimmer Plant carrying charges as a result of the completion of the amortization and surcharge recovery of the deferred Zimmer Plant phase-in revenues in June 1997. As a result net income was unaffected. Nonoperating income for the year-to-date period increased due to the effect of losses recorded in the first quarter of 1996 from certain deferred demand side management program costs and the clean-up of underground fuel storage tanks at one of the Company's facilities. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $362,058 $339,847 $1,023,879 $993,224 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 62,275 59,546 176,051 176,101 Purchased Power. . . . . . . . . . . . 54,043 33,887 124,216 103,203 Other Operation. . . . . . . . . . . . 80,399 74,853 240,310 232,349 Maintenance. . . . . . . . . . . . . . 29,408 28,269 85,103 84,818 Depreciation and Amortization. . . . . 35,271 35,193 105,395 105,171 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals. . . . . . . 2,999 3,911 10,821 11,733 Taxes Other Than Federal Income Taxes. 15,781 19,823 49,657 58,184 Federal Income Taxes . . . . . . . . . 21,433 23,242 61,843 57,094 TOTAL OPERATING EXPENSES . . . 301,609 278,724 853,396 828,653 OPERATING INCOME . . . . . . . . . . . . 60,449 61,123 170,483 164,571 NONOPERATING INCOME (LOSS) . . . . . . . 499 (255) 1,464 (620) INCOME BEFORE INTEREST CHARGES . . . . . 60,948 60,868 171,947 163,951 INTEREST CHARGES . . . . . . . . . . . . 15,857 16,322 48,689 50,131 NET INCOME . . . . . . . . . . . . . . . 45,091 44,546 123,258 113,820 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 1,219 2,406 4,544 8,264 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 43,872 $ 42,140 $ 118,714 $105,556 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $285,783 $242,269 $269,071 $235,107 NET INCOME . . . . . . . . . . . . . . . 45,091 44,546 123,258 113,820 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 44,066 28,127 102,196 84,381 Cumulative Preferred Stock . . . . . 1,186 2,359 3,573 7,608 Capital Stock Expense. . . . . . . . . 33 47 971 656 BALANCE AT END OF PERIOD . . . . . . . . $285,589 $256,282 $285,589 $256,282 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)
September 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $2,536,799 $2,525,969 Transmission . . . . . . . . . . . . . . . . . . . . 884,842 881,407 Distribution . . . . . . . . . . . . . . . . . . . . 717,222 696,069 General (including nuclear fuel) . . . . . . . . . . 209,412 189,619 Construction Work in Progress. . . . . . . . . . . . 107,721 84,605 Total Electric Utility Plant . . . . . . . . 4,455,996 4,377,669 Accumulated Depreciation and Amortization. . . . . . 1,947,158 1,861,893 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,508,838 2,515,776 NUCLEAR DECOMMISSIONING AND SPENT NUCLEAR FUEL DISPOSAL TRUST FUNDS. . . . . . . . . . . . . . . . . 548,614 490,778 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 166,324 154,265 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 8,275 8,233 Accounts Receivable. . . . . . . . . . . . . . . . . 119,700 125,822 Allowance For Uncollectible Accounts . . . . . . . . (1,063) (156) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 18,865 23,977 Materials and Supplies . . . . . . . . . . . . . . . 73,481 77,074 Accrued Utility Revenues . . . . . . . . . . . . . . 31,011 38,295 Prepayments. . . . . . . . . . . . . . . . . . . . . 4,904 10,271 TOTAL CURRENT ASSETS . . . . . . . . . . . . 255,173 283,516 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 406,214 421,692 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 22,754 31,457 TOTAL. . . . . . . . . . . . . . . . . . . $3,907,917 $3,897,484 See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 2,500,000 Shares Outstanding - 1,400,000 Shares . . . . . . . . . . $ 56,584 $ 56,584 Paid-in Capital. . . . . . . . . . . . . . . . . . . 732,439 731,272 Retained Earnings. . . . . . . . . . . . . . . . . . 285,589 269,071 Total Common Shareholder's Equity. . . . . . 1,074,612 1,056,927 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 9,499 21,977 Subject to Mandatory Redemption. . . . . . . . . . 68,445 135,000 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,012,162 1,042,104 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,164,718 2,256,008 OTHER NONCURRENT LIABILITIES: Nuclear Decommissioning. . . . . . . . . . . . . . . 363,296 313,845 Other. . . . . . . . . . . . . . . . . . . . . . . . 208,440 174,903 TOTAL OTHER NONCURRENT LIABILITIES . . . . . 571,736 488,748 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 35,000 - Short-term Debt. . . . . . . . . . . . . . . . . . . 57,850 43,500 Accounts Payable . . . . . . . . . . . . . . . . . . 25,430 61,892 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 51,785 65,400 Interest Accrued . . . . . . . . . . . . . . . . . . 17,337 15,281 Rent Accrued - Rockport Plant Unit 2 . . . . . . . . 23,427 4,963 Obligations Under Capital Leases . . . . . . . . . . 32,891 29,740 Dividends Declared . . . . . . . . . . . . . . . . . 16,185 2,359 Other. . . . . . . . . . . . . . . . . . . . . . . . 65,231 59,114 TOTAL CURRENT LIABILITIES. . . . . . . . . . 325,136 282,249 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 575,529 594,879 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 140,567 146,473 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2. . . . . . . . . . . . . . . . 93,346 96,125 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 36,885 33,002 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $3,907,917 $3,897,484 See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 123,258 $ 113,820 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 111,176 110,934 Amortization of Rockport Plant Unit 1 Phase-in Plan Deferrals. . . . . . . . . . . . . . . . 10,821 11,733 Deferred Federal Income Taxes. . . . . . . . . . . . . . (9,753) (19,438) Deferred Investment Tax Credits. . . . . . . . . . . . . (5,906) (5,945) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . 7,029 (10,422) Fuel, Materials and Supplies . . . . . . . . . . . . . . 8,705 (49) Accrued Utility Revenues . . . . . . . . . . . . . . . . 7,284 13,590 Accounts Payable . . . . . . . . . . . . . . . . . . . . (36,462) (25,712) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (13,615) (6,798) Rent Accrued - Rockport Plant Unit 2 . . . . . . . . . . 18,464 18,464 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 15,010 31,674 Net Cash Flows From Operating Activities . . . . . . 236,011 231,851 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (79,066) (58,283) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,798 979 Net Cash Flows Used For Investing Activities . . . . (77,268) (57,304) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 47,728 38,579 Retirement of Cumulative Preferred Stock . . . . . . . . . (78,838) (30,568) Retirement of Long-term Debt . . . . . . . . . . . . . . . (50,000) (46,091) Change in Short-term Debt (net). . . . . . . . . . . . . . 14,350 (49,550) Dividends Paid on Common Stock . . . . . . . . . . . . . . (87,195) (84,381) Dividends Paid on Cumulative Preferred Stock . . . . . . . (4,746) (8,139) Net Cash Flows Used For Financing Activities . . . . (158,701) (180,150) Net Increase (Decrease) in Cash and Cash Equivalents . . . . 42 (5,603) Cash and Cash Equivalents at Beginning of Period . . . . . . 8,233 13,723 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 8,275 $ 8,120 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $44,575,000 and $45,635,000 and for income taxes was $83,580,000 and $87,746,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $80,231,000 and $44,848,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. /TABLE INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. Certain prior-period amounts have been reclassified to conform to current-period presentation. 2. FINANCING ACTIVITIES In February 1997, the Company issued $48 million of 6.40% First Mortgage Bonds due 2000. In May 1997, the Company redeemed $50 million of 8.75% First Mortgage Bonds due 2022. In March 1997, the Company, as part of a tender offer, reacquired and retired the following shares of Cumulative Preferred Stock at the prices listed plus an amount equal to accrued dividends: Number Price Total of Shares Paid Per Reacquisition Series Retired Share Price (in thousands) 4.12% 20,669 $ 64.17 $ 1,326 4-1/8% 59,325 62.31 3,697 4.56% 28,525 69.94 1,995 5.90% 233,000 101.83 23,726 6-1/4% 97,500 103.79 10,120 6.30% 217,550 103.71 22,562 6-7/8% 117,500 106.45 12,508 3. NUCLEAR DECOMMISSIONING AND RATE PHASE-IN PLANS Decommissioning and Low Level Waste Accumulation Disposal Costs A 1997 nuclear decommissioning study has been completed. The estimated cost of decommissioning at the Company's Donald C. Cook Nuclear Plant ranges from $700 million to $1,152 million in 1997 nondiscounted dollars. The previous estimated costs including low level radioactive waste accumulation disposal ranged from $634 million to $988 million in 1993 nondiscounted dollars. See Note 3 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements in the 1996 Annual Report for further discussion of decommissioning. Rate Phase-in Plans A rate phase-in plan in the Indiana jurisdiction provides for the recovery and straight-line amortization of deferred Rockport Plant Unit 1 costs over ten years beginning in August 1987. In August 1997 the amortization of the deferred Rockport Plant Unit 1 Phase-in Plan costs attributable to the Indiana jurisdiction was completed. In an effort to accelerate the recovery of the Cook Nuclear Plant's decommissioning cost, on September 9, 1997 the Company filed a petition with the Indiana Utility Regulatory Commission requesting authority to increase accrual of its nuclear decommissioning expense in an amount equal to the expired Rockport Plant Unit 1 Phase-in Plan amortization expense, with no effect on customers' rates and net income. The matter is pending. 4. COMMITMENTS AND CONTINGENCIES Taxes As discussed in Note 7, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) claimed on Federal income tax returns should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of the COLI interest deductions through September 30, 1997 would reduce earnings by approximately $57 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. Cook Plant Shutdown On September 9 and 10, 1997, during a Nuclear Regulatory Commission (NRC) architect engineer design inspection, questions regarding the operability of certain safety systems caused Company operations personnel to shut down Units 1 and 2 of the Cook Nuclear Plant. On September 19, 1997, the NRC issued a Confirmatory Action Letter requiring the Company to address certain issues identified in the letter. The Company is working with the NRC to resolve this matter. At this time management is unable to determine when the units will be returned to service. If the units are not returned to service in a timely manner, it could have an adverse impact on results of operations and possibly financial condition. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Net income increased slightly for the quarter and increased 8% or $9.4 million for the year-to-date period due primarily to increased revenues and a reduction in taxes other than federal income taxes. Income statement line items which changed significantly were: Increase (Decrease) Third Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues . . . . . $22.2 7 $30.7 3 Fuel Expense . . . . . . . . 2.7 5 (.1) - Purchased Power Expense. . . 20.2 59 21.0 20 Other Operation Expense. . . 5.5 7 8.0 3 Taxes Other Than Federal Income Taxes. . . . . . . . (4.0) (20) (8.5) (15) Federal Income Taxes . . . . (1.8) (8) 4.7 8 Operating revenues increased for both periods due predominantly to an increase in sales to wholesale customers largely as a result of new power marketing transactions which began in July 1997. The new power marketing transactions involve the purchase and sale of electricity outside of AEP's transmission system. The increase in wholesale sales for the year-to-date period is also due to increased coal conversion and transmission services. The increase for the year-to-date period can be attributed to an increase in retail revenues reflecting an increase in revenues under a fuel cost recovery mechanism and an increase in sales to industrial customers due to increased usage. Under the fuel cost recovery mechanism, fuel and purchased power costs not reflected in rates are deferred for future recovery. Fuel expense increased for the quarter due to increased utilization of higher cost coal-fired generation due to reduced nuclear generation. The Donald C. Cook Nuclear Plant (Cook Nuclear Plant) Units 1 and 2 were taken out of service in early September to resolve concerns regarding the documentation of safety systems. See discussion below of Cook Plant Shutdown. Cook Nuclear Plant Unit 2 began a refueling, inspection and general maintenance process on October 13, 1997. The increase in purchased power expense for both periods was the result of the new power marketing transactions and additional energy purchases from the Power Pool due to the unavailability of the nuclear units. Other operation expense increased for both periods as a result of the effect of recording a gain in 1996 on the disposition of emission allowances and, for the year-to-date period, increased administrative and general expenses and uncollectible accounts receivable expense. The decrease in taxes other than federal income taxes for both periods was the result of lower Indiana and Michigan real and personal property tax accruals. Federal income taxes attributable to operations decreased for the quarter due to changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes. The increase in federal income taxes for the year-to-date period resulted from an increase in pre-tax operating income. FINANCIAL CONDITION Total plant and property additions including capital leases for the year-to-date period were $160 million. During the first nine months of 1997 short-term debt outstanding increased by $14 million. In February 1997 the Company issued $48 million of 6.40% First Mortage Bonds due in 2000. In May 1997 the Company redeemed $50 million of 8.75% First Mortgage Bonds due in 2022. As part of a January 1997 tender offer for all of the Company's outstanding preferred stock, 774,069 shares of $100 par value preferred stock were reacquired. The total cost of the stock reacquisition was $78 million. At a special meeting of shareholders held on February 28, 1997, the Company's articles of incorporation were amended to remove certain capitalization ratio requirements which restricted the Company's ability to issue unsecured debt. As a result, unsecured borrowings are now limited only by the Public Utility Holding Company Act of 1935 with the current limitation set at $175 million for unsecured short-term borrowings. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. COOK PLANT SHUTDOWN On September 9 and 10, 1997, during a Nuclear Regulatory Commission (NRC) architect engineer design inspection, questions regarding the operability of certain safety systems caused Company operations personnel to shut down Units 1 and 2 of the Cook Nuclear Plant. On September 19, 1997, the NRC issued a Confirmatory Action Letter requiring the Company to address certain issues identified in the letter. The Company is working with the NRC to resolve this matter. At this time management is unable to determine when the units will be returned to service. If the units are not returned to service in a timely manner, it could have an adverse impact on results of operations and possibly financial condition. KENTUCKY POWER COMPANY STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . . $89,791 $78,499 $256,472 $245,818 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . 20,020 16,821 58,647 58,611 Purchased Power. . . . . . . . . . . . . 28,632 23,643 73,775 68,264 Other Operation. . . . . . . . . . . . . 13,241 9,774 37,130 34,104 Maintenance. . . . . . . . . . . . . . . 6,148 7,485 16,826 22,839 Depreciation and Amortization. . . . . . 6,649 6,288 19,708 18,809 Taxes Other Than Federal Income Taxes. . 2,427 2,246 7,266 6,364 Federal Income Taxes . . . . . . . . . . 1,837 1,849 7,614 4,975 TOTAL OPERATING EXPENSES. . . . . 78,954 68,106 220,966 213,966 OPERATING INCOME . . . . . . . . . . . . . 10,837 10,393 35,506 31,852 NONOPERATING LOSS. . . . . . . . . . . . . (62) (97) (351) (526) INCOME BEFORE INTEREST CHARGES . . . . . . 10,775 10,296 35,155 31,326 INTEREST CHARGES . . . . . . . . . . . . . 6,323 5,855 18,431 17,760 NET INCOME . . . . . . . . . . . . . . . . $ 4,452 $ 4,441 $ 16,724 $ 13,566 STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . . $82,982 $88,374 $84,090 $91,381 NET INCOME . . . . . . . . . . . . . . . . 4,452 4,441 16,724 13,566 CASH DIVIDENDS DECLARED. . . . . . . . . . 6,690 6,066 20,070 18,198 BALANCE AT END OF PERIOD . . . . . . . . . $80,744 $86,749 $80,744 $86,749 The common stock of the Company is wholly owned by American Electric Power Company, Inc. See Notes to Financial Statements. /TABLE KENTUCKY POWER COMPANY BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $247,665 $244,805 Transmission . . . . . . . . . . . . . . . . . . . . 267,281 264,563 Distribution . . . . . . . . . . . . . . . . . . . . 337,797 329,184 General. . . . . . . . . . . . . . . . . . . . . . . 67,187 64,650 Construction Work in Progress. . . . . . . . . . . . 63,959 48,400 Total Electric Utility Plant . . . . . . . . 983,889 951,602 Accumulated Depreciation and Amortization. . . . . . 292,629 286,640 NET ELECTRIC UTILITY PLANT . . . . . . . . . 691,260 664,962 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 6,434 6,452 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 1,477 1,106 Accounts Receivable. . . . . . . . . . . . . . . . . 29,158 28,589 Allowance for Uncollectible Accounts . . . . . . . . (536) (272) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 9,492 9,244 Materials and Supplies . . . . . . . . . . . . . . . 13,040 13,175 Accrued Utility Revenues . . . . . . . . . . . . . . 6,463 8,175 Prepayments. . . . . . . . . . . . . . . . . . . . . 1,809 2,011 TOTAL CURRENT ASSETS . . . . . . . . . . . . 60,903 62,028 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 89,808 88,776 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 6,903 11,361 TOTAL. . . . . . . . . . . . . . . . . . . $855,308 $833,579 See Notes to Financial Statements.
KENTUCKY POWER COMPANY BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - $50 Par Value: Authorized - 2,000,000 Shares Outstanding - 1,009,000 Shares . . . . . . . . . . $ 50,450 $ 50,450 Paid-in Capital. . . . . . . . . . . . . . . . . . . 118,750 108,750 Retained Earnings. . . . . . . . . . . . . . . . . . 80,744 84,090 Total Common Shareholder's Equity. . . . . . 249,944 243,290 First Mortgage Bonds . . . . . . . . . . . . . . . . 179,384 179,305 Notes Payable. . . . . . . . . . . . . . . . . . . . 75,000 75,000 Subordinated Debentures. . . . . . . . . . . . . . . 38,923 38,893 TOTAL CAPITALIZATION . . . . . . . . . . . . 543,251 536,488 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 22,191 19,467 CURRENT LIABILITIES: Short-term Debt. . . . . . . . . . . . . . . . . . . 71,450 51,675 Accounts Payable . . . . . . . . . . . . . . . . . . 22,017 31,057 Customer Deposits. . . . . . . . . . . . . . . . . . 3,580 3,409 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 3,827 5,064 Interest Accrued . . . . . . . . . . . . . . . . . . 6,442 5,217 Other. . . . . . . . . . . . . . . . . . . . . . . . 11,388 9,199 TOTAL CURRENT LIABILITIES. . . . . . . . . . 118,704 105,621 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 154,003 153,538 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 16,083 17,007 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 1,076 1,458 CONTINGENCIES (Note 4) TOTAL. . . . . . . . . . . . . . . . . . . $855,308 $833,579 See Notes to Financial Statements.
KENTUCKY POWER COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 16,724 $ 13,566 Adjustments for Noncash Items: Depreciation and Amortization. . . . . . . . . . . . . . 19,718 18,864 Deferred Federal Income Taxes. . . . . . . . . . . . . . 163 (16) Deferred Investment Tax Credits. . . . . . . . . . . . . (924) (933) Amortization of Deferred Property Taxes. . . . . . . . . 3,690 3,528 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (305) (1,716) Fuel, Materials and Supplies . . . . . . . . . . . . . . (113) (1,087) Accrued Utility Revenues . . . . . . . . . . . . . . . . 1,712 8,441 Accounts Payable . . . . . . . . . . . . . . . . . . . . (9,040) (6,982) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (1,237) 1,232 Other (net). . . . . . . . . . . . . . . . . . . . . . . . 5,301 5,520 Net Cash Flows From Operating Activities . . . . . . 35,689 40,417 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (45,023) (38,561) Proceeds from Sales of Property. . . . . . . . . . . . . . - 250 Net Cash Flows Used For Investing Activities . . . . (45,023) (38,311) FINANCING ACTIVITIES: Capital Contributions from Parent Company. . . . . . . . . 10,000 10,000 Issuance of Long-term Debt . . . . . . . . . . . . . . . . - 74,985 Change in Short-term Debt (net). . . . . . . . . . . . . . 19,775 6,200 Retirement of Long-term Debt . . . . . . . . . . . . . . . - (74,737) Dividends Paid . . . . . . . . . . . . . . . . . . . . . . (20,070) (18,198) Net Cash Flows From (Used For) Financing Activities. 9,705 (1,750) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 371 356 Cash and Cash Equivalents at Beginning of Period . . . . . . 1,106 1,031 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 1,477 $ 1,387 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $16,950,000 and $16,920,000 and for income taxes was $8,115,000 and $4,585,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $3,571,000 and $4,571,000 in 1997 and 1996, respectively. See Notes to Financial Statements.
KENTUCKY POWER COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. 2. FINANCING ACTIVITIES The Company received from its parent a cash capital contribution of $10 million in June 1997 which was credited to paid-in capital. In October 1997 the Company issued $48 million of Unsecured Medium Term Notes at 6.91% due 2007. 3. RATE MATTERS In a May 27, 1997 order the Kentucky Public Service Commission (KPSC) approved the Company's request for a monthly surcharge to recover environmental compliance costs. The surcharge was applied to bills rendered on and after July 7, 1997. However, as part of the May 27, 1997 order the KPSC directed the Company to refund to ratepayers the emission allowance sale proceeds, through a reduction of the first twelve months of environmental surcharge revenues. Management believes the KPSC's order unlawfully requires the Company to refund the allowance sale proceeds and is pursuing a favorable resolution of this matter through the appeals process. The Company believes, based on written advice of outside counsel, that it is probable it will prevail on appeal. No provision for loss has been recorded. At September 30, 1997 the effect on net income should the Company not prevail is $1.7 million ($1.1 million after tax). 4. CONTINGENCIES Taxes As discussed in Note 7, "Federal Income Taxes" of the Notes to Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) claimed by the Company for 1992 and 1993 should be disallowed. The COLI program was established in 1992 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deductions. Although no disallowance has been proposed, a disallowance of COLI interest deductions through September 30, 1997 would reduce earnings by approximately $6 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in its 1996 Annual Report. KENTUCKY POWER COMPANY MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 Net income remained relatively unchanged for the quarter and increased $3.2 million or 23% for the year-to-date period. The increase in net income for the year-to-date period is attributable to an increase in wholesale revenues and a decrease in maintenance expense. Income statement items that changed significantly were: Increase (Decrease) Third Quarter Year-to-Date (in millions) % (in millions) % Operating Revenues. . . . . $11.3 14 $10.7 4 Fuel Expense. . . . . . . . 3.2 19 - - Purchased Power Expense . . 5.0 21 5.5 8 Other Operation Expense . . 3.5 35 3.0 9 Maintenance Expense . . . . (1.3) (18) (6.0) (26) Taxes Other Than Federal Income Taxes. . . . . . . 0.2 8 0.9 14 Federal Income Taxes. . . . - - 2.6 53 The increase in operating revenues for the third quarter and year-to-date periods was due primarily to increased wholesale revenues from new power marketing transactions and increased energy sales to the AEP System Power Pool (Power Pool) due to increased availability of Big Sandy Plant Unit 2 in 1997. The new power marketing transactions involve the purchase and sale of electricity outside of the AEP transmission system. Year-to-date wholesale revenues also rose due to an increase in coal conversion service revenues which are for the conversion of customers' coal to electricity. Fuel expense rose for the quarter due to increased generation reflecting the effect of scheduled maintenance work in 1996 at the Company's Big Sandy Plant Unit 2. The increases in purchased power expense for both periods resulted mainly from the new power marketing transactions. Other operation expense increased for the quarter and year-to-date periods primarily due to the effects of gains on the sale of emission allowances recorded in 1996 and the write-down in 1997 of certain preliminary survey costs related to a future plant site. The significant decrease in maintenance expense in both periods reflects the effects of scheduled steam plant maintenance work in 1996 at the Company's Big Sandy Plant Unit 2 and reduced overhead distribution line maintenance work in 1997. The increase in taxes other than federal income taxes, which was due to an increase in state income taxes, and the increase in federal income taxes resulted from an increase in pre-tax operating income. OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) OPERATING REVENUES . . . . . . . . . . . $486,398 $483,957 $1,417,845 $1,438,081 OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . 156,482 162,606 462,720 485,358 Purchased Power. . . . . . . . . . . . 37,270 17,086 69,738 48,326 Other Operation. . . . . . . . . . . . 78,623 83,518 240,182 245,394 Maintenance. . . . . . . . . . . . . . 39,443 43,645 102,292 114,795 Depreciation and Amortization. . . . . 35,323 34,499 105,351 103,142 Taxes Other Than Federal Income Taxes. 42,938 43,214 126,801 125,949 Federal Income Taxes . . . . . . . . . 27,203 30,137 92,022 90,738 TOTAL OPERATING EXPENSES . . . 417,282 414,705 1,199,106 1,213,702 OPERATING INCOME . . . . . . . . . . . . 69,116 69,252 218,739 224,379 NONOPERATING INCOME. . . . . . . . . . . 2,273 4,338 9,803 6,600 INCOME BEFORE INTEREST CHARGES . . . . . 71,389 73,590 228,542 230,979 INTEREST CHARGES . . . . . . . . . . . . 20,718 18,670 61,961 65,574 NET INCOME . . . . . . . . . . . . . . . 50,671 54,920 166,581 165,405 PREFERRED STOCK DIVIDEND REQUIREMENTS. . 370 2,201 2,278 6,681 EARNINGS APPLICABLE TO COMMON STOCK. . . $ 50,301 $ 52,719 $ 164,303 $ 158,724 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (in thousands) BALANCE AT BEGINNING OF PERIOD . . . . . $573,236 $552,605 $584,015 $518,029 NET INCOME . . . . . . . . . . . . . . . 50,671 54,920 166,581 165,405 DEDUCTIONS: Cash Dividends Declared: Common Stock . . . . . . . . . . . . 37,562 35,714 161,771 107,142 Cumulative Preferred Stock . . . . . 370 2,167 2,829 6,555 Capital Stock Expense. . . . . . . . . - 43 21 136 BALANCE AT END OF PERIOD . . . . . . . . $585,975 $569,601 $585,975 $569,601 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)
September 30, December 31, 1997 1996 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production . . . . . . . . . . . . . . . . . . . . . $2,585,787 $2,556,507 Transmission . . . . . . . . . . . . . . . . . . . . 831,336 820,636 Distribution . . . . . . . . . . . . . . . . . . . . 893,807 872,936 General (including mining assets). . . . . . . . . . 699,169 680,443 Construction Work in Progress. . . . . . . . . . . . 85,651 66,099 Total Electric Utility Plant . . . . . . . . 5,095,750 4,996,621 Accumulated Depreciation and Amortization. . . . . . 2,319,694 2,216,534 NET ELECTRIC UTILITY PLANT . . . . . . . . . 2,776,056 2,780,087 OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . . 118,563 106,485 CURRENT ASSETS: Cash and Cash Equivalents. . . . . . . . . . . . . . 38,826 24,003 Accounts Receivable. . . . . . . . . . . . . . . . . 243,760 232,734 Allowance for Uncollectible Accounts . . . . . . . . (2,567) (1,433) Fuel . . . . . . . . . . . . . . . . . . . . . . . . 120,723 113,361 Materials and Supplies . . . . . . . . . . . . . . . 73,658 75,908 Accrued Utility Revenues . . . . . . . . . . . . . . 28,808 38,852 Prepayments. . . . . . . . . . . . . . . . . . . . . 36,282 44,203 TOTAL CURRENT ASSETS . . . . . . . . . . . . 539,490 527,628 REGULATORY ASSETS. . . . . . . . . . . . . . . . . . . 541,358 540,123 DEFERRED CHARGES . . . . . . . . . . . . . . . . . . . 78,350 137,843 TOTAL. . . . . . . . . . . . . . . . . . . $4,053,817 $4,092,166 See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 40,000,000 Shares Outstanding - 27,952,473 Shares. . . . . . . . . . $ 321,201 $ 321,201 Paid-in Capital. . . . . . . . . . . . . . . . . . . 462,285 460,662 Retained Earnings. . . . . . . . . . . . . . . . . . 585,975 584,015 Total Common Shareholder's Equity. . . . . . 1,369,461 1,365,878 Cumulative Preferred Stock: Not Subject to Mandatory Redemption. . . . . . . . 17,575 38,532 Subject to Mandatory Redemption. . . . . . . . . . 11,850 109,900 Long-term Debt . . . . . . . . . . . . . . . . . . . 1,014,661 1,002,436 TOTAL CAPITALIZATION . . . . . . . . . . . . 2,413,547 2,516,746 OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . 286,037 245,032 CURRENT LIABILITIES: Long-term Debt Due Within One Year . . . . . . . . . 83,024 67,293 Short-term Debt. . . . . . . . . . . . . . . . . . . 94,425 41,302 Accounts Payable . . . . . . . . . . . . . . . . . . 124,111 89,399 Taxes Accrued. . . . . . . . . . . . . . . . . . . . 82,687 162,798 Interest Accrued . . . . . . . . . . . . . . . . . . 23,997 18,094 Obligations Under Capital Leases . . . . . . . . . . 28,980 24,153 Other. . . . . . . . . . . . . . . . . . . . . . . . 97,001 84,385 TOTAL CURRENT LIABILITIES. . . . . . . . . . 534,225 487,424 DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 726,664 738,626 DEFERRED INVESTMENT TAX CREDITS. . . . . . . . . . . . 43,774 46,308 DEFERRED CREDITS . . . . . . . . . . . . . . . . . . . 49,570 58,030 CONTINGENCIES (Note 3) TOTAL. . . . . . . . . . . . . . . . . . . $4,053,817 $4,092,166 See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 166,581 $ 165,405 Adjustments for Noncash Items: Depreciation, Depletion and Amortization . . . . . . . . 129,597 123,326 Deferred Federal Income Taxes. . . . . . . . . . . . . . 85 14,291 Deferred Fuel Costs (net). . . . . . . . . . . . . . . . (22,257) (8,933) Amortization of Deferred Property Taxes. . . . . . . . . 57,646 59,738 Changes in Certain Current Assets and Liabilities: Accounts Receivable (net). . . . . . . . . . . . . . . . (9,892) (12,715) Fuel, Materials and Supplies . . . . . . . . . . . . . . (5,112) 8,787 Accrued Utility Revenues . . . . . . . . . . . . . . . . 10,044 7,578 Prepayments. . . . . . . . . . . . . . . . . . . . . . . 7,921 (2,187) Accounts Payable . . . . . . . . . . . . . . . . . . . . 34,712 (1,904) Taxes Accrued. . . . . . . . . . . . . . . . . . . . . . (80,111) (77,402) Other (net). . . . . . . . . . . . . . . . . . . . . . . . 21,556 18,488 Net Cash Flows From Operating Activities . . . . . . 310,770 294,472 INVESTING ACTIVITIES: Construction Expenditures. . . . . . . . . . . . . . . . . (102,469) (72,288) Proceeds from Sale of Property and Other . . . . . . . . . 8,553 7,113 Net Cash Flows Used For Investing Activities . . . . (93,916) (65,175) FINANCING ACTIVITIES: Issuance of Long-term Debt . . . . . . . . . . . . . . . . 146,589 - Change in Short-term Debt (net). . . . . . . . . . . . . . 53,123 73,937 Retirement of Cumulative Preferred Stock . . . . . . . . . (117,601) (1,752) Retirement of Long-term Debt . . . . . . . . . . . . . . . (119,542) (158,818) Dividends Paid on Common Stock . . . . . . . . . . . . . . (161,771) (107,142) Dividends Paid on Cumulative Preferred Stock . . . . . . . (2,829) (6,555) Net Cash Flows Used For Financing Activities . . . . (202,031) (200,330) Net Increase in Cash and Cash Equivalents. . . . . . . . . . 14,823 28,967 Cash and Cash Equivalents at Beginning of Period . . . . . . 24,003 44,000 Cash and Cash Equivalents at End of Period . . . . . . . . . $ 38,826 $ 72,967 Supplemental Disclosure: Cash paid for interest net of capitalized amounts was $54,010,000 and $57,949,000 and for income taxes was $98,341,000 and $79,932,000 in 1997 and 1996, respectively. Noncash acquisitions under capital leases were $41,667,000 and $19,903,000 in 1997 and 1996, respectively. See Notes to Consolidated Financial Statements.
OHIO POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) 1. GENERAL The accompanying unaudited consolidated financial state-ments should be read in conjunction with the 1996 Annual Report as incorporated in and filed with the Form 10-K. 2. FINANCING ACTIVITY During the first nine months of 1997 the Company issued $50 million of 7.92% Junior Subordinated Deferrable Interest Debentures due 2027, $48 million of 6.73% Unsecured Medium Term Notes due 2004 and a coal mining subsidiary received $50 million under a sale-leaseback agreement accounted for as a financing transaction. Under this accounting the assets sold remain on the books and the seller recognizes a financing liability as part of long-term debt. The Company and a subsidiary also retired $117 million of long-term debt: $50 million of 8.75% Series First Mortgage Bonds due in 2022 under maintenance provisions at 100%, $47 million of 6-1/2% Series First Mortgage Bonds and $20 million of 7.19% Notes Payable at maturity. As a result of the redemption at maturity of the 6-1/2% Series First Mortgage Bonds due in 1997, the restriction on the use of retained earnings for the payment of common stock dividends was reduced to $20.8 million. In March 1997 the Company, as part of a tender offer, reacquired and retired the following shares of cumulative preferred stock at the prices listed plus an amount equal to accrued dividends: Number Price Total of Shares Paid Per Reacquisition Series Retired Share Price (in thousands) 4.08% 27,182 $ 64.56 $ 1,755 4.20% 28,875 66.46 1,919 4.40% 55,889 69.62 3,891 4-1/2% 97,616 69.02 6,737 5.90% 321,500 103.09 33,143 6.02% 364,000 103.71 37,750 6.35% 295,000 105.14 31,016 3. CONTINGENCIES Taxes As discussed in Note 8, "Federal Income Taxes" of the Notes to Consolidated Financial Statements in the 1996 Annual Report, the Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 through 1993 requested a ruling from their National Office as to whether certain interest deductions relating to corporate owned life insurance (COLI) should be disallowed. The COLI program was established in 1990 as part of the Company's strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office defending the subject deduction. Although no disallowance has been proposed, a disallowance of COLI interest deductions through September 30, 1997 would reduce earnings by approximately $103 million inclusive of interest. Management believes it will ultimately prevail on this issue and will vigorously contest any disallowance that may be proposed. Revised Air Quality Standards On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. Other The Company continues to be involved in certain other matters discussed in the 1996 Annual Report. OHIO POWER COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Although energy sales increased slightly for the third quarter, net income decreased $4.3 million or 8% primarily due to an increase in purchased power expense, a decrease in nonoperating income and an increase in interest charges. Net income increased $1.2 million for the year-to-date period reflecting an increase in nonoperating income and a reduction in interest charges. Operating revenues increased slightly for the third quarter due predominantly to a 3% increase in sales to wholesale customers largely as a result of new power marketing transactions. Although total energy sales increased for the quarter, sales to retail customers decreased 1% as usage by weather-sensitive residential customers declined by 1% reflecting the mild summer weather and consumption by industrial customers decreased by 1% due to a major industrial customer's labor strike. Year-to-date operating revenues declined $20 million or 1% predominantly due a reduction in retail revenues reflecting a 4% decrease in energy sales to weather-sensitive residential customers and decreased industrial sales due to the labor strike and the negative effect on revenues of a contract price reduction for another major industrial customer. Although sales to retail customers declined, total energy sales for the year-to-date period increased 3% primarily as a result of an 11% increase in energy sales to wholesale customers. The significant rise in wholesale sales reflects the new power marketing transactions and an increase in coal conversion service sales, which are for the conversion of customers' coal to electricity. The new power marketing transactions involve the purchase and sale of electricity outside of the AEP transmission system. Income statement lines which changed significantly were: Increase (Decrease) Third Quarter Year-to-Date (in millions) % (in millions) % Fuel Expense. . . . . . . . $(6.1) (4) $(22.6) (5) Purchased Power . . . . . . 20.2 118 21.4 44 Other Operation Expense . . (4.9) (6) (5.2) (2) Maintenance Expense . . . . (4.2) (10) (12.5) (11) Federal Income Taxes. . . . (2.9) (10) 1.3 1 Nonoperating Income . . . . (2.1) (48) 3.2 49 Interest Charges. . . . . . 2.0 11 (3.6) (6) The decreases in fuel expense for the third quarter and year-to-date periods were mainly due to a reduction in generation attributable to the decrease in energy demand by retail customers. Purchased power expense increased for both periods primarily due to the new power marketing transactions which began in July 1997. Other operation expense declined in the third quarter primarily due to decreased employee pension and benefit costs. The decreases in maintenance expense for both periods were mainly due to decreased boiler plant maintenance reflecting a reduction in planned maintenance work on the Company's generating units. Federal income tax expense attributable to operations decreased in the third quarter due to a decrease in pre-tax operating income and changes in certain book/tax differences accounted for on a flow-through basis for rate-making and financial reporting purposes. The decrease in nonoperating income for the quarter was due to the effect of adjustments recorded in 1996 related to emission allowance transactions. On a year-to-date basis nonoperating income increased as a result of the effect of losses recorded in 1996 related to emission allowance transactions. Interest charges increased in the third quarter due to the effect of a September 1996 adjustment to commission authorized carrying charges recorded on deferred gains from the sale of emission allowances. The decrease in interest charges for the year-to-date period was due to a reduction in the average levels of long-term debt outstanding resulting from the redemption of long-term debt. FINANCIAL CONDITION Total plant and property additions including capital leases for the first nine months of 1997 were $144 million. During the first nine months of 1997, the Company and a subsidiary retired $117 million principal amount of long-term debt with interest rates ranging from 6-1/2% to 8.75%, issued $148 million of long-term obligations at interest rates ranging from 6.73% to 7.92% and increased short-term debt by $53 million. As part of the January 1997 tender offer for all of the Company's outstanding preferred stock, 1,190,062 shares of $100 par value preferred stock were reacquired. The total cost of the stock reacquisition was $118 million. At a special meeting of shareholders held on February 28, 1997 the Company's articles of incorporation were amended to remove certain capitalization ratio requirements which restricted the Company's ability to issue unsecured debt. As a result unsecured borrowings are now limited only by the Public Utility Holding Company Act of 1935 with the current limitation set at $250 million for unsecured short-term borrowings. As a result of the redemption at maturity of the 6-1/2% Series First Mortgage Bonds due in 1997, the restriction on the use of retained earnings for the payment of common stock dividends was reduced to $20.8 million. REVISED AIR QUALITY STANDARDS On July 18, 1997, the United States Environmental Protection Agency published a revised National Ambient Air Quality Standard (NAAQS) for ozone and a new NAAQS for fine particulate matter (less than 2.5 microns in size). The new ozone standard is expected to result in redesignation of a number of areas of the country that are currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP System generating units. New stringent emission restrictions on AEP System generating units to achieve attainment of the fine particulate matter standard could also be imposed. The AEP System operating companies joined with other utilities to appeal the revised NAAQS and filed petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. Management is unable to estimate compliance costs without knowledge of the reductions that may be necessary to meet the new standards. If such costs are significant, it could have a material adverse effect on results of operations and possibly financial condition unless such costs are recovered. PART II. OTHER INFORMATION Item 5. Other Information. American Electric Power Company, Inc. ("AEP") and Appalachian Power Company ("APCo") Reference is made to page 12 of the Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 10-K") for a discussion of APCo's proposed transmission facilities. On September 30, 1997, APCo filed applications for certificates to build its 765,000-volt line from its Wyoming station to its Cloverdale station, at a cost estimated to be $263,000,000, with the Virginia State Corporation Commission and Public Service Commission of West Virginia. AEP, AEP Generating Company ("AEGCo"), APCo, Columbus Southern Power Company ("CSPCo"), Indiana Michigan Power Company ("I&M"), Kentucky Power Company ("KEPCo") and Ohio Power Company ("OPCo") Reference is made to page 22 of the 1996 10-K and page II-4 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 for a discussion of the assessment of long range transport of ozone precursors. On or about August 14, 1997, eight northeast states filed petitions with the United States Environmental Protection Agency ("Federal EPA") under Section 126 of the Clean Air Act alleging that nitrogen oxides ("NOx") emissions from sources in upwind midwestern states are significantly contributing to non-attainment of the ambient air quality standard for ozone in the petitioning states. These petitions seek the development of controls for the upwind sources in a rulemaking to be undertaken by Federal EPA. AEP System coal-fired generating plants are included (directly or indirectly) as sources in each of these petitions and the rulemaking could require significant reductions of NOx emissions at such AEP plants. AEP System operating companies have joined with other unaffiliated utilities in the filing of a petition for review in October 1997 in the U.S. Court of Appeals for the District of Columbia Circuit of actions outlined in an August 8, 1997 letter from Federal EPA to the State of New Hampshire with regard to the filing of, and standard of review for, these petitions. In a separate related proceeding, on November 7, 1997, Federal EPA published in the Federal Register a proposed rulemaking under Section 110 of the Clean Air Act requiring the revision of state implementation plans in 22 eastern states, including those states in which the operating companies of the AEP System have coal-fired generating plants. The proposed rule, if finalized in its current form, will require reductions in NOx emissions from utility sources of approximately 85% below 1990 levels and entail very substantial capital and operating expenditures by AEP System operating companies. Pollution controls to meet the proposed revised NOx emission limits would have to be in place by 2002. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: AEP Exhibit 3(a) - Restated Certificate of Incorporation of AEP, dated October 29, 1997. AEP, APCo and OPCo Exhibit 10 - American Electric Power System Excess Benefit Plan as Amended through August 25, 1997. 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 Item Reported AEP July 2, 1997 Item 5. Other Events AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo No reports on Form 8-K were filed during the quarter ended September 30, 1997. In the opinion of the companies, the financial statements contained herein reflect all adjustments (consisting of only normal recurring accruals) which are necessary to a fair presentation of the results of operations for the interim periods. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signatures for each undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. AMERICAN ELECTRIC POWER COMPANY, INC. G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Controller and Secretary AEP GENERATING COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller APPALACHIAN POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller COLUMBUS SOUTHERN POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller INDIANA MICHIGAN POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller KENTUCKY POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller OHIO POWER COMPANY G.P. Maloney P.J. DeMaria G.P. Maloney, Vice President P.J. DeMaria, Vice President and Controller Date: November 12, 1997 II-2 EX-10 2 Exhibit 10 American Electric Power System Excess Benefit Plan As Amended through August 25, 1997 ARTICLE I Purposes and Effective Date Section 1.1 The American Electric Power System Excess Benefit Plan is established to provide benefits for certain employees in excess of the limitations on benefits imposed by provisions of the Internal Revenue Code of 1986, as amended from time to time. Section 1.2 The effective date of the Excess Plan is January 1, 1990. ARTICLE II Definitions Section 2.1 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. Section 2.2 "Committee" shall mean the Employee Benefits Trust Committee established pursuant to a resolution adopted by the American Electric Power Service Corporation Board of Directors as in effect from time to time. Section 2.3 "Company" shall mean American Electric Power Service Corporation. Section 2.4 "ERISA" shall mean the Employee Retirement Income Security Act of 1974 as amended from time to time. Section 2.5 "Maximum Benefit" shall mean the monthly equivalent of the maximum benefit permitted by the Code to be paid to a Participant or the Participant's Surviving Spouse from the Retirement Plan. Section 2.6 "Participant" shall mean any exempt salaried employee of the Company, who is an active Participant in the Retirement Plan on or after the Effective Date, whose Unrestricted Benefit, calculated on a basis which excludes the effects of earned Management Incentive Compensation Plan and Senior Officer Annual Incentive Compensation Plan awards, exceeds the Maximum Benefit and who either is an officer of the Company or has been designated and confirmed by the Committee as eligible to participate in the Plan. Section 2.7 "Plan" shall mean the American Electric Power System Excess Benefit Plan, as from time to time amended or restated. Section 2.8 "QDRO" shall mean a qualified domestic relations order as defined in section 414(p) of the Code or section 206(d) of ERISA. Section 2.9 "Retirement Plan" shall mean the American Electric Power System Retirement Plan, as amended from time to time. Section 2.10 "Supplemental Retirement Benefit" shall mean any supplemental retirement benefit payable to a Participant or a Participant's spouse pursuant to the terms of an employment agreement entered into between the Participant and the Company. The term Supplemental Retirement Benefit shall not include deferred compensation payable to a Participant pursuant to a Participant's participation in a deferred compensation arrangement entered into prior to January 1, 1987 or deferred compensation payable to the Participant pursuant to the terms and conditions of the Management Incentive Compensation Plan or the Senior Officer Annual Incentive Compensation Plan. Section 2.11 "Surviving Spouse" shall mean the spouse of a Participant who is legally married to the Participant and whose marriage to the Participant occurred at least one year prior to the earlier of the Participant's termination of employment or death. Section 2.12 "Unrestricted Benefit" shall mean either (a) the monthly Normal, Early, or Deferred Vested retirement benefit payable to the Participant, whichever is applicable, or (b) the pre-retirement or post-retirement surviving spouse's benefit payable to the Participant's Surviving Spouse, whichever is applicable, determined under the provisions of the Retirement Plan without regard to the limitation imposed by the Code and based upon Participant earnings that, for each plan year, are the total of: (1) the Participant's Retirement Plan Earnings, (2) the Participant's contributions to the American Electric Power System Supplemental Savings Plan, (3) for Participants who terminate employment after December 31, 1995, Management Incentive Compensation Plan ("MICP") awards earned, but not necessarily paid, in the plan year, including MICP awards earned prior to January 1, 1996, and (4) Senior Officer Annual Incentive Compensation Plan awards earned, but not necessarily paid, in the plan year. ARTICLE III Benefits Section 3.1 Upon the Normal Retirement of a Participant,as provided under the Retirement Plan, the Participant shall be entitled to a monthly benefit equal in amount to the Participant's Unrestricted Benefit less the Maximum Benefit and less any Supplemental Retirement Benefit. Section 3.2 Upon the Early Retirement of a Participant, as provided under the Retirement Plan, the Participant shall be entitled to a monthly benefit equal to the Participant's Unrestricted Benefit less the Maximum Benefit and less any Supplemental Retirement Benefit. Section 3.3 If a Participant terminates employment with the Company and is entitled to a Deferred Vested Retirement Benefit provided under the Retirement Plan, the Participant shall be entitled to a monthly benefit equal to the Participant's Unrestricted Benefit less the Maximum Benefit and less any Supplemental Retirement Benefit. Section 3.4 Supplemental Retirement Benefits accrued as of December 31, 1993 shall be vested as of December 31, 1993. Supplemental Retirement Benefits accrued after 1993 shall vest when the Participant terminates employment. ARTICLE IV Spousal Benefit Section 4.1 Upon the death of a Participant whose spouse is entitled to a pre-retirement or a post-retirement surviving spouse's benefit from the Retirement Plan, the Participant's Surviving Spouse shall be entitled to receive a monthly benefit equal in amount to the Surviving Spouse's pre-retirement or post-retirement Unrestricted Benefit less the Maximum Benefit and less any Supplemental Retirement Benefit. ARTICLE V Benefit Payments Section 5.1 Payment of retirement benefits under Article 3 or 4 shall commence at the same time Retirement Plan benefits are paid. Section 5.2 The Plan benefit payable to a Participant shall be paid in the same form in which the Retirement Plan benefit is payable to the Participant. The Participant's election under the Retirement Plan of an optional form of payment (with the valid consent of the Participant's Spouse where required under the Retirement Plan) shall be deemed to be the form of payment elected for the payment of benefits from this Plan. Retirement Plan benefit payments subject to an assignment pursuant to the terms of a QDRO shall not be treated as a form of benefit payment selected by the Participant under the terms of the Retirement Plan. ARTICLE VI Administration Section 6.1 The Company shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. Section 6.2 All provisions set forth in the Retirement Plan with respect to the administrative powers and duties of the Company, expenses of administration and procedures for filing claims shall also be applicable with respect to the Plan. The Company shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan or with respect to any Supplemental Retirement Benefit. Section 6.3 The Company shall provide a retired Participant, at the time of retirement or as soon thereafter as practicable, with a copy of the Plan and a certificate stating that the retired Participant is entitled to benefits under the Plan and the amount thereof. ARTICLE VII Amendment or Termination Section 7.1 The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date of such resolution. Section 7.2 No amendment or termination of the Plan shall directly or indirectly deprive any current or former Participant or Surviving Spouse of all or any portion of any retirement benefit or surviving spouse benefit payment which commenced prior to the effective date of such amendment or termination or which would be payable if the Participant terminated employment for any reason, including death, on such effective date. ARTICLE VIII General Provisions Section 8.1 Except as otherwise expressly provided herein, all terms and conditions of the Retirement Plan applicable to a retirement benefit or a surviving spouse benefit shall also be applicable to a retirement benefit or a surviving spouse benefit payable hereunder. Any Plan retirement benefit or surviving spouse benefit, or any other benefit payable under the Plan, shall be paid solely in accordance with the terms and conditions of the Retirement Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Retirement Plan. Section 8.2 Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. The benefits under this Plan shall not be funded, but shall constitute liabilities of the Company payable when due. Section 8.3 No Participant or Surviving Spouse shall have any right to a benefit under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company. Section 8.4 No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. Section 8.5 The Plan shall be construed and administered under the laws of the State of Ohio. Section 8.6 If the actuarial value of any retirement benefit or surviving spouse benefit is less than $3,500, the Company may pay the actuarial value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder. Section 8.7 If any person entitled to a benefit payment under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor. Section 8.8 The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Excess Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 7.2. Section 8.9 Each Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's retirement benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited. Section 8.10 Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with the Plan. Section 8.11 An assignment of part or all of a Participant's Maximum Benefit pursuant to the terms of a QDRO shall not reduce the Participant's Maximum Benefit for the purpose of determining the benefit, if any, to be paid pursuant to the provisions of this Plan. Section 8.12 The benefits paid by this Plan shall not duplicate benefits being paid or to be paid by the Retirement Plan or any Supplemental Retirement Benefit the Participant or Participant's spouse is receiving or may be entitled to receive. Section 8.13 In the event a Participant's claim for Plan benefits is denied or in the event the Participant disputes the computation of the benefit amount, the Participant shall be entitled to the same claims appeal procedure that is available to the Participant under the terms of the Retirement Plan. EX-12 3 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 1992 1993 1994 1995 1996 9/30/97 Fixed Charges: Interest on First Mortgage Bonds. . . . . . . . $ 83,572 $ 74,121 $ 63,805 $ 61,836 $ 52,147 $ 47,400 Interest on Other Long-term Debt. . . . . . . . 26,611 24,510 21,453 23,193 27,045 28,171 Interest on Short-term Debt . . . . . . . . . . 2,711 1,122 992 2,658 4,006 3,949 Miscellaneous Interest Charges. . . . . . . . . 2,800 2,958 5,140 7,126 3,705 4,152 Estimated Interest Element in Lease Rentals . . 22,800 15,300 13,900 50,700 53,200 53,200 Total Fixed Charges. . . . . . . . . . . . $138,494 $118,011 $105,290 $145,513 $140,103 $136,872 Earnings: Net Income. . . . . . . . . . . . . . . . . . . $160,553 $185,770 $162,626 $189,447 $217,655 $218,831 Plus Federal Income Taxes . . . . . . . . . . . 75,783 64,244 74,822 93,699 117,243 120,048 Plus State Income Taxes . . . . . . . . . . . . 1,082 2,626 3,375 1,618 2,252 2,779 Plus Fixed Charges (as above) . . . . . . . . . 138,494 118,011 105,290 145,513 140,103 136,872 Total Earnings . . . . . . . . . . . . . . $375,912 $370,651 $346,113 $430,277 $477,253 $478,530 Ratio of Earnings to Fixed Charges. . . . . . . . 2.71 3.14 3.28 2.95 3.40 3.49
EX-27 4 ARTICLE UT FIN. DATA SCH. FOR 10-Q
UT 0000073986 OHIO POWER COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 2,776,056 118,563 539,490 78,350 541,358 4,053,817 321,201 462,285 585,975 1,369,461 11,850 17,575 1,014,661 11,900 0 82,525 83,024 0 121,599 28,980 1,312,242 4,053,817 1,417,845 94,319 1,104,787 1,199,106 218,739 9,803 228,542 61,961 166,581 2,278 164,303 161,771 35,107 310,770 0 0 All common stock owned by parent company; no EPS required.
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