-----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, NLsshxZbzsARcKveXV+cyz8sKtZYcdkwQ2xcII8jhd3SoPxynwoXYtdQ3XsjEhlr Dh5lRHZnXTFLuDWXz0PCTQ== 0000004904-98-000024.txt : 19980330 0000004904-98-000024.hdr.sgml : 19980330 ACCESSION NUMBER: 0000004904-98-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ELECTRIC POWER COMPANY INC CENTRAL INDEX KEY: 0000004904 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 134922640 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03525 FILM NUMBER: 98576043 BUSINESS ADDRESS: STREET 1: 1 RIVERSIDE PLZ CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142231000 FORMER COMPANY: FORMER CONFORMED NAME: KINGSPORT UTILITIES INC DATE OF NAME CHANGE: 19660906 10-K 1 AEP FORM 10-K FOR 1997 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 31-1033833 (An Ohio Corporation) 1 Riverside Plaza Columbus, Ohio 43215 Telephone (614) 223-1000 1-3457 Appalachian Power Company 54-0124790 (A Virginia Corporation) 40 Franklin Road, S.W. Roanoke, Virginia 24011 Telephone (540) 985-2300 1-2680 Columbus Southern Power Company 31-4154203 (An Ohio Corporation) 215 North Front Street Columbus, Ohio 43215 Telephone (614) 464-7700 1-3570 Indiana Michigan Power Company 35-0410455 (An Indiana Corporation) One Summit Square P. O. Box 60 Fort Wayne, Indiana 46801 Telephone (219) 425-2111 1-6858 Kentucky Power Company 61-0247775 (A Kentucky Corporation) 1701 Central Avenue Ashland, Kentucky 41101 Telephone (800) 572-1141 1-6543 Ohio Power Company 31-4271000 (An Ohio Corporation) 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 I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2) to such Form 10-K. Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 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 (check mark) No Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Registrant Title of each class on which registered AEP Generating Company None American Electric Power Common Stock, Company, Inc. $6.50 par value New York Stock Exchange Appalachian Power Cumulative Preferred Stock, Company Voting, no par value: 4-1/2% Philadelphia Stock Exchange 8-1/4% Junior Subordinated Deferrable Interest Debentures, Series A, Due 2026 New York Stock Exchange 8% Junior Subordinated Deferrable Interest Debentures, Series B, Due 2027 New York Stock Exchange 7.20% Senior Notes, Series A, Due 2038 New York Stock Exchange Columbus Southern 8-3/8% Junior Subordinated Deferrable Power Company Interest Debentures, Series A, Due 2025 New York Stock Exchange 7.92% Junior Subordinated Deferrable Interest Debentures, Series B, Due 2027 New York Stock Exchange Indiana Michigan 8% Junior Subordinated Deferrable Power Company Interest Debentures, Series A, Due 2026 New York Stock Exchange Kentucky Power Company 8.72% Junior Subordinated Deferrable Interest Debentures, Series A, Due 2025 New York Stock Exchange Ohio Power Company 8.16% Junior Subordinated Deferrable Interest Debentures, Series A, Due 2025 New York Stock Exchange 7.92% Junior Subordinated Deferrable Interest Debentures, Series B, Due 2027 New York Stock Exchange Indicate by check mark if disclosure of delinquent filers with respect to American Electric Power Company, Inc. pursuant to Item 405 of Regulation S- K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement of American Electric Power Company, Inc. incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ Indicate by check mark if disclosure of delinquent filers with respect to Appalachian Power Company, Indiana Michigan Power Company or Ohio Power Company pursuant to Item 405 of Regulation S-K (Section 229.405 of this chap- ter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive information statements of Appalachian Power Company or Ohio Power Company incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (check mark) Securities registered pursuant to Section 12(g) of the Act: Registrant Title of each class AEP Generating Company None American Electric Power Company, Inc. None Appalachian Power Company None Columbus Southern Power Company None Indiana Michigan Power Company 4-1/8% Cumulative Preferred Stock, Non-Voting, $100 par value Kentucky Power Company None Ohio Power Company 4-1/2% Cumulative Preferred Stock, Voting, $100 par value Aggregate market value of voting and non-voting Number of shares common equity held of common stock by non-affiliates of outstanding of the registrants at the registrants at February 13, 1998 February 13, 1998 AEP Generating Company None 1,000 ($1,000 par value) American Electric Power Company, Inc. $9,333,250,000 189,989,989 ($6.50 par value) Appalachian Power Company None 13,499,500 (no par value) Columbus Southern Power Company None 16,410,426 (no par value) Indiana Michigan Power Company None 1,400,000 (no par value) Kentucky Power Company None 1,009,000 ($50 par value) Ohio Power Company None 27,952,473 (no par value) NOTE ON MARKET VALUE OF COMMON EQUITY HELD BY NON-AFFILIATES All of the common stock of AEP Generating Company, Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company and Ohio Power Company is owned by American Electric Power Company, Inc. (see Item 12 herein). DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Into Which Document Description Is Incorporated Portions of Annual Reports of the following companies for the fiscal year ended December 31, 1997: Part II AEP Generating Company American Electric Power Company, Inc. Appalachian Power Company Columbus Southern Power Company Indiana Michigan Power Company Kentucky Power Company Ohio Power Company Portions of Proxy Statement of American Electric Power Company, Inc. for 1998 Annual Meeting of Shareholders, to be filed within 120 days after December 31, 1997 Part III Portions of Information Statements of the following companies for 1998 Annual Meeting of Shareholders, to be filed within 120 days after December 31, 1997: Part III Appalachian Power Company Ohio Power Company This combined Form 10-K is separately filed by AEP Generating Company, American Electric Power Company, Inc., 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. Except for American Electric Power Company, Inc., each registrant makes no representation as to information relating to the other registrants. TABLE OF CONTENTS Page Number Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 27 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 31 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 32 Executive Officers of the Registrants . . . . . . . . . . . . . . . 32 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . 34 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 34 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35 Item 8. Financial Statements and Supplementary Data . . . . . . 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . 36 PART III Item 10. Directors and Executive Officers of the Registrants . . . 36 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 38 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 41 Item 13. Certain Relationships and Related Transactions . . . . . 42 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 42 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Index to Financial Statement Schedules . . . . . . . . . . . . . . . . . S-1 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . S-2 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1 GLOSSARY OF TERMS When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below. Term Meaning AEGCo AEP Generating Company, an electric utility subsidiary of AEP. AEP American Electric Power Company, Inc. AEP System or the System The American Electric Power System, an integrated electric utility system, owned and operated by AEP's electric utility subsidiaries. AFUDC Allowance for funds used during construction. Defined in regulatory systems of accounts as the net cost of borrowed funds used for construction and a reasonable rate of return on other funds when so used. APCo Appalachian Power Company, an electric utility subsidiary of AEP. Buckeye Buckeye Power, Inc., an unaffiliated corporation. CCD Group CSPCo, CG&E and DP&L. CG&E The Cincinnati Gas & Electric Company, an unaffiliated utility company. Cook Plant The Donald C. Cook Nuclear Plant, owned by I&M. CSPCo Columbus Southern Power Company, an electric utility subsidiary of AEP. CSW Central and South West Corporation. DOE United States Department of Energy. DP&L The Dayton Power and Light Company, an unaffiliated utility company. Federal EPA United States Environmental Protection Agency. FERC Federal Energy Regulatory Commission (an independent commission within the DOE). I&M Indiana Michigan Power Company, an electric utility subsidiary of AEP. IURC Indiana Utility Regulatory Commission. KEPCo Kentucky Power Company, an electric utility subsidiary of AEP. KPSC Kentucky Public Service Commission. MPSC Michigan Public Service Commission. NEIL Nuclear Electric Insurance Limited. NPDES National Pollutant Discharge Elimination System. NRC Nuclear Regulatory Commission. Ohio EPA Ohio Environmental Protection Agency. OPCo Ohio Power Company, an electric utility subsidiary of AEP. OVEC Ohio Valley Electric Corporation, an electric utility company in which AEP and CSPCo own a 44.2% equity interest. PCBs Polychlorinated biphenyls. PUCO The Public Utilities Commission of Ohio. PUHCA Public Utility Holding Company Act of 1935, as amended. RCRA Resource Conservation and Recovery Act of 1976, as amended. Rockport Plant A generating plant, consisting of two 1,300,000- kilowatt coal-fired generating units, near Rockport, Indiana. SEC Securities and Exchange Commission. Service Corporation American Electric Power Service Corporation, a service subsidiary of AEP. SO2 Allowance An allowance to emit one ton of sulfur dioxide granted under the Clean Air Act Amendments of 1990. TVA Tennessee Valley Authority. VEPCo Virginia Electric and Power Company, an unaffiliated utility company. Virginia SCC State Corporation Commission of Virginia. West Virginia PSC Public Service Commission of West Virginia. Zimmer or Zimmer Plant Wm. H. Zimmer Generating Station, commonly owned by CSPCo, CG&E and DP&L. PART I Item 1. Business General AEP was incorporated under the laws of the State of New York in 1906 and reorganized in 1925. It is a public utility holding company which owns, directly or indirectly, all of the outstanding common stock of its domestic electric utility subsidiaries and varying percentages of other subsidiaries. Substantially all of the operating revenues of AEP and its subsidiaries are derived from the furnishing of electric service. In addition, in recent years AEP has been pursuing various unregulated business opportunities in the U.S. and worldwide as discussed in New Business Development. The service area of AEP's electric utility subsidiaries covers portions of the states of Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West Virginia. The generating and transmission facilities of AEP's subsidiar- ies are physically interconnected, and their operations are coordinated, as a single integrated electric utility system. Transmission networks are interconnected with extensive distribution facilities in the territories served. The electric utility subsidiaries of AEP have traditionally provided electric service, consisting of generation, transmission and distribution, on an integrated basis to their retail customers. As a result of the changing nature of the electric business (see Competition and Business Change), effective January 1, 1996, AEP's subsidiaries realigned into four functional business units: Power Generation; Nuclear Generation; Energy Delivery; and Corporate Development. In addition, the electric utility subsidiaries began to do business as "American Electric Power." The legal and financial structure of AEP and its subsidiaries, however, did not change. At December 31, 1997, the subsidiaries of AEP had a total of 17,844 employees. AEP, as such, has no employees. The operating subsidiaries of AEP are: APCo (organized in Virginia in 1926) is engaged in the generation, sale, purchase, transmission and distribution of electric power to approximately 877,000 retail customers in the southwestern portion of Virginia and southern West Virginia, and in supplying electric power at wholesale to other electric utility companies and municipalities in those states and in Tennessee. At December 31, 1997, APCo and its wholly owned subsidiaries had 3,877 employees. Among the principal industries served by APCo are coal mining, primary metals, chemicals and textile mill products. In addition to its AEP System interconnections, APCo also is interconnected with the following unaffiliated utility companies: Carolina Power & Light Company, Duke Energy Corporation and VEPCo. A comparatively small part of the properties and business of APCo is located in the northeastern end of the Tennessee Valley. APCo has several points of interconnection with TVA and has entered into agreements with TVA under which APCo and TVA interchange and transfer electric power over portions of their respective systems. CSPCo (organized in Ohio in 1937, the earliest direct predecessor company having been organized in 1883) is engaged in the generation, sale, purchase, transmission and distribution of electric power to approximately 621,000 customers in Ohio, and in supplying electric power at wholesale to other electric utilities and to municipally owned distribution systems within its service area. At December 31, 1997, CSPCo had 1,802 employees. CSPCo's service area is comprised of two areas in Ohio, which include portions of twenty-five counties. One area includes the City of Columbus and the other is a predominantly rural area in south central Ohio. Approximately 80% of CSPCo's retail revenues are derived from the Columbus area. Among the principal industries served are food processing, chemicals, primary metals, electronic machinery and paper products. In addition to its AEP System interconnections, CSPCo also is interconnected with the following unaffiliated utility companies: CG&E, DP&L and Ohio Edison Company. I&M (organized in Indiana in 1925) is engaged in the generation, sale, purchase, transmission and distribution of electric power to approximately 549,000 customers in northern and eastern Indiana and southwestern Michigan, and in supplying electric power at wholesale to other electric utility companies, rural electric cooperatives and municipalities. At December 31, 1997, I&M had 3,306 employees. Among the principal industries served are primary metals, transportation equipment, electrical and electronic machinery, fabricated metal products, rubber and miscellaneous plastic products and chemicals and allied products. Since 1975, I&M has leased and operated the assets of the municipal system of the City of Fort Wayne, Indiana. In addition to its AEP System interconnections, I&M also is interconnected with the following unaffiliated utility companies: Central Illinois Public Service Company, CG&E, Commonwealth Edison Company, Consumers Energy Company, Illinois Power Company, Indianapolis Power & Light Company, Louisville Gas and Electric Company, Northern Indiana Public Service Company, PSI Energy Inc. and Richmond Power & Light Company. KEPCo (organized in Kentucky in 1919) is engaged in the generation, sale, purchase, transmission and distribution of electric power to approximately 168,000 customers in an area in eastern Kentucky, and in supplying electric power at wholesale to other utilities and municipalities in Kentucky. At December 31, 1997, KEPCo had 731 employees. In addition to its AEP System interconnections, KEPCo also is interconnected with the following unaffiliated utility companies: Kentucky Utilities Company and East Kentucky Power Cooperative Inc. KEPCo is also interconnected with TVA. Kingsport Power Company (organized in Virginia in 1917) provides electric service to approximately 43,000 customers in Kingsport and eight neighboring communities in northeastern Tennessee. Kingsport Power Company has no generating facilities of its own. It purchases electric power distributed to its customers from APCo. At December 31, 1997, Kingsport Power Company had 85 employees. OPCo (organized in Ohio in 1907 and reincorporated in 1924) is engaged in the generation, sale, purchase, transmission and distribution of electric power to approximately 679,000 customers in the northwestern, east central, eastern and southern sections of Ohio, and in supplying electric power at wholesale to other electric utility companies and municipalities. At December 31, 1997, OPCo and its wholly owned subsidiaries had 4,376 employees. Among the principal industries served by OPCo are primary metals, rubber and plastic products, stone, clay, glass and concrete products, petroleum refining and chemicals. In addition to its AEP System interconnections, OPCo also is interconnected with the following unaffiliated utility companies: CG&E, The Cleveland Electric Illuminating Company, DP&L, Duquesne Light Company, Kentucky Utilities Company, Monongahela Power Company, Ohio Edison Company, The Toledo Edison Company and West Penn Power Company. Wheeling Power Company (organized in West Virginia in 1883 and reincorporated in 1911) provides electric service to approximately 43,000 customers in northern West Virginia. Wheeling Power Company has no generating facilities of its own. It purchases electric power distributed to its customers from OPCo. At December 31, 1997, Wheeling Power Company had 94 employees. Another principal electric utility subsidiary of AEP is AEGCo, which was organized in Ohio in 1982 as an electric generating company. AEGCo sells power at wholesale to I&M, KEPCo and VEPCo. AEGCo has no employees. See Item 2 for information concerning the properties of the subsidiaries of AEP. The Service Corporation provides accounting, administrative, information systems, engineering, financial, legal, maintenance and other services at cost to the AEP System companies. The executive officers of AEP and its public utility subsidiaries are all employees of the Service Corporation. Regulation General AEP and its subsidiaries are subject to the broad regulatory provisions of PUHCA administered by the SEC. The public utility subsidiaries' retail rates and certain other matters are subject to regulation by the public utility commissions of the states in which they operate. Such subsidiaries are also subject to regulation by the FERC under the Federal Power Act in respect of rates for interstate sale at wholesale and transmission of electric power, accounting and other matters and construction and operation of hydroelectric projects. I&M is subject to regulation by the NRC under the Atomic Energy Act of 1954, as amended, with respect to the operation of the Cook Plant. Possible Change to PUHCA The provisions of PUHCA, administered by the SEC, regulate all aspects of a registered holding company system, such as the AEP System. PUHCA requires that the operations of a registered holding company system be limited to a single integrated public utility system and such other businesses as are incidental or necessary to the operations of the system. In addition, PUHCA governs, among other things, financings, sales or acquisitions of assets and intra-system transactions. On June 20, 1995, the SEC released a report from its Division of Investment Management recommending a conditional repeal of PUHCA, including its limits on financing and on geographic and business diversification. Specific federal authority, however, would be preserved over access to the books and records of registered holding company systems, audit authority over registered holding companies and their subsidiaries and oversight over affili- ate transactions. This authority would be transferred to the FERC. Legislation was introduced in Congress in 1997 that would repeal PUHCA and transfer certain federal authority to the FERC as recommended in the SEC report as part of broader legislation regarding changes in the electric industry. It is expected that a number of bills contemplating the restructuring of the electric utility industry will be introduced in the cur- rent Congress. See Competition and Business Change. If PUHCA is repealed, registered holding company systems, including the AEP System, will be able to compete in the changing industry without the constraints of PUHCA. Management of AEP believes that removal of these constraints would be beneficial to the AEP System. PUHCA and the rules and orders of the SEC currently require that transactions between associated companies in a registered holding company system be performed at cost with limited exceptions. Over the years, the AEP System has developed numerous affiliated service, sales and construction relationships and, in some cases, invested significant capital and developed significant operations in reliance upon the ability to recover its full costs under these provisions. Legislation has been introduced in Congress to repeal PUHCA or modify its provisions governing intra-system transactions. The effect of repeal or amendment of PUHCA on AEP's intra-system transactions depends on whether the assurance of full cost recovery is eliminated immediately or phased-in and whether it is eliminated for all intra-system transactions or only some. If the cost recovery assurance is eliminated immediately for all intra-system transactions, it could have a material adverse effect on results of operations and financial condition of AEP and OPCo. Conflict of Regulation Public utility subsidiaries of AEP can be subject to regulation of the same subject matter by two or more jurisdictions. In such situations, it is possible that the decisions of such regulatory bodies may conflict or that the decision of one such body may affect the cost of providing service and so the rates in another jurisdiction. In a case involving OPCo, the U.S. Court of Appeals for the District of Columbia held that the determination of costs to be charged to associated companies by the SEC under PUHCA precluded the FERC from determining that such costs were unreasonable for ratemaking purposes. The U.S. Supreme Court also has held that a state commission may not conclude that a FERC approved wholesale power agreement is unreasonable for state ratemaking purposes. Certain actions that would overturn these decisions or otherwise affect the jurisdiction of the SEC and FERC are under consideration by the U.S. Congress and these regulatory bodies. Such conflicts of jurisdiction often result in litigation and, if resolved adversely to a public utility subsidiary of AEP, could have a material adverse effect on the results of operations or financial condition of such subsidiary or AEP. Classes of Service The principal classes of service from which the major electric utility subsidiaries of AEP derive revenues and the amount of such revenues (from kilowatt-hour sales) during the year ended December 31, 1997 are as follows:
AEP AEGCo APCo CSPCo I&M KEPCo OPCo System (a) (in thousands) Retail Residential Without Electric Heating . . . . $ 0 $ 227,457 $ 317,341 $ 237,475 $ 40,395 $ 274,680 $1,117,740 With Electric Heating . . . . . 0 336,395 110,385 110,547 65,522 147,503 806,095 Total Residential . . . . . . . 0 563,852 427,726 348,022 105,917 422,183 1,923,835 Commercial . . . . . . . . . . . 0 281,939 381,368 264,031 56,680 263,212 1,286,452 Industrial . . . . . . . . . . . 0 382,056 147,367 332,218 94,645 618,548 1,637,058 Miscellaneous . . . . . . . . . 0 32,271 16,170 6,465 863 8,109 67,387 Total Retail . . . . . . . . . 0 1,260,118 972,631 950,736 260,105 1,312,052 4,914,732 Wholesale (sales for resale) . . 227,803 410,813 141,769 415,077 89,337 597,133 1,080,190 Total from KWH Sales . . . . . 227,803 1,670,931 1,114,400 1,365,813 349,442 1,909,185 5,994,922 Provision for Revenue Refunds . . 0 (250) 0 0 0 0 (250) Total Net of Provision for Revenue Refunds . . . . . . . . . 227,803 1,670,681 1,114,400 1,365,813 349,442 1,909,185 5,994,672 65 49,329 25,204 26,104 10,101 56,633 166,696 $227,868 $1,720,010 $1,139,604 $1,391,917 $359,543 $1,965,818 $6,161,368
__________ (a) Includes revenues of other subsidiaries not shown and reflects elimination of intercompany transactions. Sale of Power AEP's electric utility subsidiaries own or lease generating stations with total generating capacity of 23,759 megawatts. See Item 2 for more information regarding the generating stations. They operate their generating plants as a single interconnected and coordinated electric utility system and share the costs and benefits in the AEP System Power Pool. Most of the electric power generated at these stations is sold, in combination with transmission and distribution services, to retail customers of AEP's utility subsidiaries in their service territories. These sales are made at rates that are established by the public utility commissions of the state in which they operate. See Rates and Regulation. Some of the electric power is sold at wholesale to non-affiliated companies. AEP System Power Pool APCo, CSPCo, I&M, KEPCo and OPCo are parties to the Interconnection Agreement, dated July 6, 1951, as amended (the Interconnection Agreement), defining how they share the costs and benefits associated with the System's generating plants. This sharing is based upon each company's "member-load- ratio," which is calculated monthly on the basis of each company's maximum peak demand in relation to the sum of the maximum peak demands of all five companies during the preceding 12 months. In addition, since 1995, APCo, CSPCo, I&M, KEPCo and OPCo have been parties to the AEP System Interim Allowance Agreement which provides, among other things, for the transfer of SO2 Allowances associated with transactions under the Interconnection Agreement. The following table shows the net credits or (charges) allocated among the parties under the Interconnection Agreement and Interim Allowance Agreement during the years ended December 31, 1995, 1996 and 1997:
1995 1996 1997(a) (in thousands) APCo . . . . . . $(252,000) $(258,000) $(237,000) CSPCo . . . . . . (143,000) (145,000) (138,000) I&M . . . . . . . 118,000 121,000 67,000 KEPCo . . . . . . 23,000 2,000 20,000 OPCo . . . . . . 254,000 280,000 288,000
__________ (a) Includes credits and charges from allowance transfers related to the transactions. Wholesale Sales of Power to Non-Affiliates AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo also sell electric power on a wholesale basis to non-affiliated electric utilities and power marketers. Such sales are either made by the AEP System and then allocated among APCo, CSPCo, I&M, KEPCo and OPCo based on member-load-ratios or made by individual companies pursuant to various long-term power agreements. The following table shows the net realization (revenue less operating, maintenance, fuel and federal income tax expenses) of the various companies from such sales during the years ended December 31, 1995, 1996 and 1997:
1995(a) 1996(a) 1997(a) (in thousands) AEGCo(b) . . . . $ 29,200 $ 26,300 $ 26,200 APCo(c) . . . . . 24,100 36,800 37,500 CSPCo(c) . . . . 12,000 18,100 18,300 I&M(c)(d) . . . . 34,700 43,000 42,400 KEPCo(c) . . . . 5,000 7,600 7,700 OPCo(c) . . . . . 20,200 30,200 30,200 Total System . $125,200 $162,000 $162,300
__________ (a) Such sales do not include wholesale sales to full/partial requirement customers of AEP System companies. See the discussion below. (b) All amounts for AEGCo are from sales made pursuant to a long-term power agreement. See AEGCo - Unit Power Agreements. (c) All amounts, except for I&M, are from System sales which are allocated among APCo, CSPCo, I&M, KEPCo and OPCo based upon member-load-ratio. All System sales made in 1995, 1996 and 1997 were made on a short-term basis, except that $22,500,000, $33,300,000 and $25,900,000 respectively, of the contribution to operating income for the total System were from long-term System sales. (d) In addition to its allocation of System sales, the 1995, 1996 and 1997 amounts for I&M include $21,000,000, $20,900,000 and $21,100,000 from a long-term agreement to sell 250 megawatts of power scheduled to terminate in 2009. The AEP System has long-term system agreements to sell the following to unaffiliated utilities: (1) 205 megawatts of electric power through August 2010; and (2) 50 megawatts of electric power through August 2001. In addition to long-term and short-term sales, APCo, CSPCo, I&M, KEPCo and OPCo serve unaffiliated wholesale customers that are full/partial requirement customers. The aggregate maximum demand for these customers in 1997 was 611, 109, 451, 18 and 140 megawatts for APCo, CSPCo, I&M, KEPCo and OPCo, respectively. Although the terms of the contracts with these customers vary, they generally can be terminated by the customer upon one to four years' notice. Since 1995, customers have given notices of termination, effective in 1998 and 1999, for 405, 63 and 131 megawatts for APCo, I&M and OPCo, respectively. Several wholesale customers, some of whom had previously given notice of termination, have entered into long-term contracts, ranging from five to seven years, with the AEP System. The expected demand under these contracts aggregates approximately 450 megawatts. In June 1993, certain municipal customers of APCo, who have since given APCo notice to terminate their contracts in 1998, filed an application with the FERC for transmission service in order to reduce by 50 megawatts the power these customers then purchased under existing Electric Service Agreements (ESAs) and to purchase power from a third party. APCo maintains that its agreements with these customers are full-requirements contracts which preclude the customers from purchasing power from third parties. On February 10, 1994, the FERC issued an order finding that the ESAs are not full requirements contracts and that the ESAs give these municipal wholesale customers the option of substituting alternative sources of power for energy purchased from APCo. On May 24, 1994, APCo appealed the February 10, 1994 order of the FERC to the U.S. Court of Appeals for the District of Columbia Circuit. On July 1, 1994, the FERC ordered the requested transmission service and granted a complaint filed by the municipal customers directing certain modifications to the ESAs in order to accommodate their power purchases from the third party. Following FERC's denial of APCo's requests for rehearing, on December 20, 1995, APCo appealed the July 1, 1994 orders to the U.S. Court of Appeals for the District of Columbia. Effective August 1994, these municipal customers reduced their purchases by 40 megawatts. Certain of these customers further reduced their purchases by an additional 21 megawatts effective February 1996. On December 17, 1996, the U.S. Court of Appeals reversed the FERC's order directing APCo to provide transmission service and remanded the case to the FERC, where it remains pending. Transmission Services AEP's electric utility subsidiaries own and operate transmission and distribution lines and other facilities to deliver electric power. See Item 2 for more information regarding the transmission and distribution lines. AEP's electric utility subsidiaries operate their transmission lines as a single interconnected and coordinated system and share the cost and benefits in the AEP System Transmission Pool. Most of the transmission and distribution services is sold, in combination with electric power, to retail customers of AEP's utility subsidiaries in their service territories. These sales are made at rates that are established by the public utility commissions of the state in which they operate. See Rates and Regulations. Some transmission services also are separately sold to non-affiliated companies. AEP System Transmission Pool APCo, CSPCo, I&M, KEPCo and OPCo are parties to the Transmission Agreement, dated April 1, 1984, as amended (the Transmission Agreement), defining how they share the costs associated with their relative ownership of the extra-high-voltage transmission system (facilities rated 345 kv and above) and certain facilities operated at lower voltages (138 kv and above). Like the Interconnection Agreement, this sharing is based upon each company's "member-load-ratio." See Sale of Power. The following table shows the net credits or (charges) allocated among the parties to the Transmission Agreement during the years ended December 31, 1995, 1996 and 1997:
1995 1996 1997 (in thousands) APCo . . . . . . $( 5,400) $( 6,500) $( 8,400) CSPCo . . . . . . ( 31,100) ( 30,600) ( 29,900) I&M . . . . . . . 46,700 46,300 46,100 KEPCo . . . . . . 3,500 3,300 2,700 OPCo . . . . . . ( 13,700) ( 12,500) ( 10,500)
Transmission Services for Non-Affiliates APCo, CSPCo, I&M, KEPCo, OPCo and other System companies also provide transmission services for non-affiliated companies. The following table shows the revenues net of federal income tax expenses of the various companies from such services during the years ended December 31, 1995, 1996 and 1997:
1995 1996 1997 (in thousands) APCo . . . . . . $ 6,000 $ 13,800 $ 18,000 CSPCo . . . . . . 4,200 8,000 10,200 I&M . . . . . . . 4,800 7,700 10,500 KEPCo . . . . . . 1,200 2,800 3,900 OPCo . . . . . . 17,800 17,800 27,200 $ 34,000 $ 50,100 $ 69,800
The AEP System has contracts with non-affiliated companies for transmission of approximately 5,000 megawatts of electric power on an annual or longer basis. On April 24, 1996, the FERC issued orders 888 and 889. These orders require each public utility that owns or controls interstate transmission facilities to file an open access network and point-to-point transmission tariff that offers services comparable to the utility's own uses of its trans- mission system. The orders also require utilities to functionally unbundle their services, by requiring them to use their own tariffs in making off- system and third-party sales. As part of the orders, the FERC issued a pro- forma tariff which reflects the Commission's views on the minimum non-price terms and conditions for non-discriminatory transmission service. In addition, the orders require all transmitting utilities to establish an Open Access Same-time Information System ("OASIS") which electronically posts transmission information such as available capacity and prices, and require utilities to comply with Standards of Conduct which prohibit utilities' system operators from providing non-public transmission information to the utility's merchant employees. The orders also allow a utility to seek recovery of certain prudently-incurred stranded costs that result from unbundled transmis- sion service. On July 9, 1996, the AEP System companies filed a tariff conforming with the FERC's pro-forma transmission tariff, subject to the resolution of certain pricing issues, which are still pending before FERC. During 1996 and 1997 AEP engaged in discussions with several utilities regarding the creation of an independent system operator to operate the transmission system in the Midwestern region of the United States. On January 15, 1998, nine utilities or utility systems filed with the FERC a proposal to form the Midwest Independent Transmission System Operator, Inc. ("Midwest ISO"). AEP was not a participant in that filing, but supports the formation of voluntary ISOs, and is currently examining its options, which include, among others, participation in the Midwest ISO. See Competition and Business Change - AEP Position on Competition. OVEC AEP, CSPCo and several unaffiliated utility companies jointly own OVEC, which supplies the power requirements of a uranium enrichment plant near Portsmouth, Ohio owned by the DOE. The aggregate equity participation of AEP and CSPCo in OVEC is 44.2%. The DOE demand under OVEC's power agreement, which is subject to change from time to time, is 945,000 kilowatts. On March 1, 1998, it is scheduled to increase to approximately 1,900,000 kilowatts. The proceeds from the sale of power by OVEC are designed to be sufficient for OVEC to meet its operating expenses and fixed costs and to provide a return on its equity capital. APCo, CSPCo, I&M and OPCo, as sponsoring companies, are entitled to receive from OVEC, and are obligated to pay for, the power not required by DOE in proportion to their power participation ratios, which averaged 42.1% in 1997. The power agreement with DOE terminates on December 31, 2005, subject to early termination by DOE on not less than three years notice. The power agreement among OVEC and the sponsoring companies expires by its terms on March 12, 2006. Buckeye Contractual arrangements among OPCo, Buckeye and other investor-owned electric utility companies in Ohio provide for the transmission and delivery, over facilities of OPCo and of other investor-owned utility companies, of power generated by the two units at the Cardinal Station owned by Buckeye and back-up power to which Buckeye is entitled from OPCo under such contractual arrangements, to facilities owned by 27 of the rural electric cooperatives which operate in the State of Ohio at 306 delivery points. Buckeye is entitled under such arrangements to receive, and is obligated to pay for, the excess of its maximum one-hour coincident peak demand plus a 15% reserve margin over the 1,226,500 kilowatts of capacity of the generating units which Buckeye currently owns in the Cardinal Station. Such demand, which occurred on January 16, 1997, was recorded at 1,178,460 kilowatts. Certain Industrial Customers Century Aluminum of West Virginia, Inc. (formerly Ravenswood Aluminum Corporation), and Ormet Corporation operate major aluminum reduction plants in the Ohio River Valley at Ravenswood, West Virginia, and in the vicinity of Hannibal, Ohio, respectively. The power requirements of such plants presently are approximately 357,000 kilowatts for Century and 537,000 kilowatts for Ormet. On October 3, 1996, the PUCO approved, with some exceptions, a contract pursuant to which OPCo will continue to provide electric service to Ravenswood for the period July 1, 1996 through July 31, 2003. On February 6, 1997, the PUCO approved an amendment to the contract addressing these exceptions and the amended contract is now in effect. On November 14, 1996, the PUCO approved (1) an interim agreement pursuant to which OPCo will continue to provide electric service to Ormet for the period December 1, 1997 through December 31, 1999 and (2) a joint petition with an electric cooperative to transfer the right to serve Ormet to the electric cooperative after December 31, 1999. As part of the territorial transfer, OPCo and Ormet entered into an agreement which contains penalties and other provisions designed to avoid having OPCo provide involuntary back-up power to Ormet. See Legal Proceedings for a discussion of litigation involving Ormet. AEGCo Since its formation in 1982, AEGCo's business has consisted of the ownership and financing of its 50% interest in the Rockport Plant and, since 1989, leasing of its 50% interest in Unit 2 of the Rockport Plant. The operating revenues of AEGCo are derived from the sale of capacity and energy associated with its interest in the Rockport Plant to I&M, KEPCo and VEPCo, pursuant to unit power agreements. Pursuant to these unit power agreements, AEGCo is entitled to recover its full cost of service from the purchasers and will be entitled to recover future increases in such costs, including increases in fuel and capital costs. See Unit Power Agreements. Pursuant to a capital funds agreement, AEP has agreed to provide cash capital contributions, or in certain circumstances subordinated loans, to AEGCo, to the extent necessary to enable AEGCo, among other things, to provide its pro- portionate share of funds required to permit continuation of the commercial operation of the Rockport Plant and to perform all of its obligations, covenants and agreements under, among other things, all loan agreements, leases and related documents to which AEGCo is or becomes a party. See Capital Funds Agreement. Unit Power Agreements A unit power agreement between AEGCo and I&M (the I&M Power Agreement) provides for the sale by AEGCo to I&M of all the power (and the energy asso- ciated therewith) available to AEGCo at the Rockport Plant. I&M is obligated, whether or not power is available from AEGCo, to pay as a demand charge for the right to receive such power (and as an energy charge for any associated energy taken by I&M) such amounts, as when added to amounts received by AEGCo from any other sources, will be at least sufficient to enable AEGCo to pay all its operating and other expenses, including a rate of return on the common equity of AEGCo as approved by FERC, currently 12.16%. The I&M Power Agree- ment will continue in effect until the date that the last of the lease terms of Unit 2 of the Rockport Plant has expired unless extended in specified circumstances. Pursuant to an assignment between I&M and KEPCo, and a unit power agreement between KEPCo and AEGCo, AEGCo sells KEPCo 30% of the power (and the energy associated therewith) available to AEGCo from both units of the Rockport Plant. KEPCo has agreed to pay to AEGCo in consideration for the right to receive such power the same amounts which I&M would have paid AEGCo under the terms of the I&M Power Agreement for such entitlement. The KEPCo unit power agreement expires on December 31, 1999, unless extended to December 31, 2004. A unit power agreement among AEGCo, I&M, VEPCo, and APCo provides for, among other things, the sale of 70% of the power and energy available to AEGCo from Unit 1 of the Rockport Plant to VEPCo by AEGCo from January 1, 1987 through December 31, 1999. VEPCo has agreed to pay to AEGCo in consideration for the right to receive such power those amounts which I&M would have paid AEGCo under the terms of the I&M Power Agreement for such entitlement. Approximately 32% of AEGCo's operating revenue in 1997 was derived from its sales to VEPCo. Capital Funds Agreement AEGCo and AEP have entered into a capital funds agreement pursuant to which, among other things, AEP has unconditionally agreed to make cash capital contributions, or in certain circumstances subordinated loans, to AEGCo to the extent necessary to enable AEGCo to (i) maintain such an equity component of capitalization as required by governmental regulatory authorities, (ii) pro- vide its proportionate share of the funds required to permit commercial operation of the Rockport Plant, (iii) enable AEGCo to perform all of its obligations, covenants and agreements under, among other things, all loan agreements, leases and related documents to which AEGCo is or becomes a party (AEGCo Agreements), and (iv) pay all indebtedness, obligations and liabilities of AEGCo (AEGCo Obligations) under the AEGCo Agreements, other than indebtedness, obligations or liabilities owing to AEP. The Capital Funds Agreement will terminate after all AEGCo Obligations have been paid in full. Industry Problems The electric utility industry, including the operating subsidiaries of AEP, has encountered at various times in the last 15 years significant problems in a number of areas, including: delays in and limitations on the recovery of fuel costs from customers; proposed legislation, initiative measures and other actions designed to prohibit construction and operation of certain types of power plants under certain conditions and to eliminate or reduce the extent of the coverage of fuel adjustment clauses; inadequate rate increases and delays in obtaining rate increases; jurisdictional disputes with state public utilities commissions regarding the interstate operations of integrated electric systems; requirements for additional expenditures for pollution control facilities; increased capital and operating costs; construction delays due, among other factors, to pollution control and environmental considerations and to material, equipment and fuel shortages; the economic effects on net income (which when combined with other factors may be immediate and adverse) associated with placing large generating units and related facilities in commercial operation, including the commencement at that time of substantial charges for depreciation, taxes, maintenance and other operating expenses, and the cessation of AFUDC with respect to such units; uncertainties as to conservation efforts by customers and the effects of such efforts on load growth; depressed economic conditions in certain regions of the United States; increasingly competitive conditions in the wholesale and retail markets; proposals to deregulate certain portions of the industry and revise the rules and responsibilities under which new generating capacity is supplied; and substantial increases in construction costs and difficulties in financing due to high costs of capital, uncertain capital markets, charter and indenture limitations restricting conventional financing, and shortages of cash for construction and other purposes. Seasonality Sales of electricity by the AEP System tend to increase and decrease because of the use of electricity by residential and commercial customers for cooling and heating and relative changes in temperature. Franchises The operating companies of the AEP System hold franchises to provide electric service in various municipalities in their service areas. These franchises have varying provisions and expiration dates. In general, the operating companies consider their franchises to be adequate for the conduct of their business. Competition and Business Change General The public utility subsidiaries of AEP, like other electric utilities, have traditionally provided electric generation and energy delivery, consisting of transmission and distribution services, as a single product to their retail customers. FERC has required utilities to sell transmission services separately from their other services. Proposals are being made that would also require electric utilities to sell distribution services separately. These proposals generally allow competition in the generation and sale of electric power, but not in its transmission and distribution. Competition in the generation and sale of electric power will require resolution of complex issues, including who will pay for the unused generating plant of, and other stranded costs incurred by, the utility when a customer stops buying power from the utility; will all customers have access to the benefits of competition; how will the rules of competition be established; what will happen to conservation and other regulatory-imposed programs; how will the reliability of the transmission system be ensured; and how will the utility's obligation to serve be changed. As a result, it is not clear how or when competition in generation and sale of electric power will be instituted. However, if competition in generation and sale of electric power is instituted, the public utility subsidiaries of AEP believe that they have a favorable competitive position because of their relatively low costs. If stranded costs are not recovered from customers, however, the public utility subsidiaries of AEP, like all electric utilities, will be required by existing accounting standards to recognize stranded investment losses. Wholesale The public utility subsidiaries of AEP, like the electric industry generally, face increasing competition to sell available power on a wholesale basis, primarily to other public utilities and also to power marketers. The Energy Policy Act of 1992 was designed, among other things, to foster competition in the wholesale market (a) through amendments to PUHCA, facilitating the ownership and operation of generating facilities by "exempt wholesale generators" (which may include independent power producers as well as affiliates of electric utilities) and (b) through amendments to the Federal Power Act, authorizing the FERC under certain conditions to order utilities which own transmission facilities to provide wholesale transmission services for other utilities and entities generating electric power. The principal factors in competing for such sales are price (including fuel costs), availability of capacity and reliability of service. The public utility subsidiaries of AEP believe that they maintain a favorable competitive position on the basis of all of these factors. However, because of the availability of capacity of other utilities and the lower fuel prices in recent years, price competition has been, and is expected for the next few years to be, particularly important. FERC orders 888 and 889, issued in April 1996, provide that utilities must functionally unbundle their transmission services, by requiring them to use their own tariffs in making off-system and third-party sales. See Transmission Services. The public utility subsidiaries of AEP have functionally separated their wholesale power sales from their transmission functions, as required by orders 888 and 889. Retail The public utility subsidiaries of AEP generally have the exclusive right to sell electric power at retail within their service areas. However, they do compete with self-generation and with distributors of other energy sources, such as natural gas, fuel oil and coal, within their service areas. The primary factors in such competition are price, reliability of service and the capability of customers to utilize sources of energy other than electric power. With respect to self-generation, the public utility subsidiaries of AEP believe that they maintain a favorable competitive position on the basis of all of these factors. With respect to alternative sources of energy, the public utility subsidiaries of AEP believe that the reliability of their service and the limited ability of customers to substitute other cost- effective sources for electric power place them in a favorable competitive position, even though their prices may be higher than the costs of some other sources of energy. Significant changes in the global economy in recent years have led to increased price competition for industrial companies in the United States, including those served by the AEP System. Such industrial companies have requested price reductions from their suppliers, including their suppliers of electric power. In addition, industrial companies which are downsizing or reorganizing often close a facility based upon its costs, which may include, among other things, the cost of electric power. The public utility subsidiaries of AEP cooperate with such customers to meet their business needs through, for example, various off-peak or interruptible supply options and believe that, as low cost suppliers of electric power, they should be less likely to be materially adversely affected by this competition and may be benefitted by attracting new industrial customers to their service territories. The legislatures and/or the regulatory commissions in many states are considering or have adopted "retail customer choice" which, in general terms, means the transmission by an electric utility of electric power generated by an entity of the customer's choice over its transmission and distribution system to a retail customer in such utility's service territory. A require- ment to transmit directly to retail customers would have the result of permitting retail customers to purchase electric power, at the election of such customers, not only from the electric utility in whose service area they are located but from another electric utility, an independent power producer or an intermediary, such as a power marketer. Although AEP's power generation would have competitors under some of these proposals, its transmission and distribution would not. If competition develops in retail power generation, the public utility subsidiaries of AEP believe that they have a favorable competitive position because of their relatively low costs. Federal: Legislation to provide for retail competition among electric energy suppliers has been introduced in both the U.S. Senate and House of Representatives. Indiana: In January 1998, S.B. 431 was introduced in the Indiana Senate. The bill contained provisions allowing all customers the unrestricted right to choose their generator of electricity by July 1, 2004. Under the bill, customers could have chosen their power supplier after October 1, 1999, by paying an access charge, while transmission and distribution services would have continued to be regulated at the federal and state levels, respectively. Prior to the full vote on the bill, S.B. 431 was amended on the Senate floor to remove these restructuring provisions. Michigan: In June 1995, the MPSC issued an order approving an experimental five-year retail wheeling program and ordered Consumers Energy Company (Consumers) and Detroit Edison Company (Detroit Edison), unaffiliated utilities, to make retail delivery services available to a group of industrial customers, in the amount of 60 megawatts and 90 megawatts, respectively. The experiment, which commences when each utility needs new capacity, seeks to determine whether a retail wheeling program best serves the public interest. During the experiment, the MPSC will collect information regarding the effects of retail wheeling. Consumers, Detroit Edison and other parties have appealed the MPSC's order to the Michigan Supreme Court. In January 1996, the Governor of Michigan endorsed a proposal of the Michigan Jobs Commission to promote competition and customer choice in energy and requested that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry. In December 1996, the MPSC staff issued a report on electric industry restructuring which recommended a phase-in program from 1997 through 2004 of direct access to electricity suppliers applicable to all customers. On June 5, 1997, the MPSC entered an order requiring electric utilities (including I&M) to phase in retail open access for customers, with full customer choice by 2002 (MPSC Order). Under the MPSC Order, customer choice is phased in from 1997 through 2001, at the rate of 2.5% of each utility's customer load per year, with all customers becoming eligible to choose their electric supplier effective January 1, 2002. The MPSC Order essentially adopted the December 1996 MPSC staff report that recommended full recovery of stranded costs of utilities, including nuclear generating investment, through the use of a transition charge applicable to customers exercising choice. While concluding that securitization of stranded costs would be feasible, the MPSC Order stated that legislative guidance is required prior to the implementation of any securitization program. As required by the MPSC Order, in July 1997, I&M filed a proposed open access distribution tariff phasing-in customer choice for all customer classes. The MPSC has not yet acted on I&M's filing. The MPSC has approved, by orders dated January 14, 1998 and February 11, 1998, after contested proceedings and with modifications, filings made by Consumers and Detroit Edison. Detroit Edison, the Michigan Attorney General and other parties have appealed the MPSC's orders to the Michigan Court of Appeals. Ohio: On April 15, 1994, the Ohio Energy Strategy Task Force released its final report. The report contained seven broad implementation strategies along with 53 specific initiatives to be undertaken by government and the private sector. One strategy recommended continuing to encourage competition in the electric utility industry in a manner which maximizes benefits and efficiencies for all customers. An initiative under this strategy recommends facilitating informal roundtable discussions on issues concerning competition in the electric utility industry and promoting increased competitive options for Ohio businesses that do not unduly harm the interests of utility company shareholders or ratepayers. The PUCO has begun such discussions. As a result, on February 15, 1996, the PUCO adopted guidelines for interruptible electric service, including a buy-through provision that will enable customers to avoid being interrupted during utility capacity deficiencies by having the utility purchase off-system replacement power for the customer. On February 28, 1997, CSPCo and OPCo implemented four new interruptible electric services in conformance with the PUCO guidelines. Also stemming from the roundtable discussions, on December 24, 1996, the PUCO issued conjunctive electric service guidelines under which customers may be aggregated for cost-of-service, rate design, rate eligibility and billing purposes. Pursuant to a PUCO order, all Ohio electric utilities made conjunctive electric service filings on March 31, 1997. Six unaffiliated utilities have appealed these guidelines to the Ohio Supreme Court. In February 1997, the Ohio General Assembly formed the Joint Committee on Electric Utility Deregulation to study and report to the General Assembly concerning deregulation of the electric utility industry in Ohio. The co- chairs of the Joint Committee issued their report on January 6, 1998, which described plans for introducing electric retail competition to Ohio consumers. On February 18, 1998, the General Assembly's Joint Committee forwarded its report to the House Speaker and Senate President. The report contains the co-chairs report and the comments of other Committee members. The co-chairs report proposes the establishment of a fully competitive marketplace by the year 2000 and utility tax reform intended to place Ohio's utilities on a level playing field with out-of-state suppliers. One of the co-chairs has indicated her intention to introduce legislation based on the co-chairs report's recommendations. However, there are a number of other bills pending which could be used to enact deregulation. Virginia: Pursuant to a resolution of the Virginia legislature, in November 1997 the staff of the Virginia SCC provided its draft of a working model of a restructured electric utility industry for Virginia to the joint subcommittee of the legislature studying restructuring of the electric utility industry. Two major bills providing for the restructuring of the electric utility industry were acted on by the Virginia General Assembly. One bill, introduced by the chairman of the joint subcommittee, was "carried over" to serve as a framework for study and debate over the balance of 1998, with oversight provided by the joint subcommittee. The second bill, passed by the Virginia General Assembly in March 1998, provides a general timetable for the transition to retail competition by January 1, 2004, but leaves the details to be decided in subsequent legislation. West Virginia: In December 1996, the West Virginia PSC issued an order initiating a general investigation into the restructuring of the regulated electric industry. The Task Force established by the West Virginia PSC to study electric industry restructuring issued its Initial Report in October 1997 and Supplemental Report on Recommended Legislation in January 1998. On March 14, 1998, the West Virginia Legislature passed restructuring legislation. If signed into law, the bill would authorize the West Virginia PSC to proceed with the development of a plan for electric industry restructuring in West Virginia, if restructuring is determined by the West Virginia PSC to be in the public interest. Any plan developed and proposed by the West Virginia PSC must be approved by the West Virginia Legislature before such plan can be made effective. AEP Position on Competition In October 1995, AEP announced that it favored freedom for customers to purchase electric power from anyone that they choose. Generation and sale of electric power would be in the competitive marketplace. To facilitate reliable, safe and efficient service, AEP supports creation of independent system operators to operate the transmission system in a region of the United States. In addition, AEP supports the evolution of regional power exchanges which would establish a competitive marketplace for the sale of electric power. Transmission and distribution would remain monopolies and subject to regulation with respect to terms and price. Regulators would be able to establish distribution service charges which would provide, as appropriate, for recovery of stranded costs and regulatory assets. AEP's working model for industry restructuring envisions a progressive transition to full customer choice. Implementation of these measures would require legislative changes and regulatory approvals. Possible Strategic Responses In response to the competitive forces and regulatory changes being faced by AEP and its public utility subsidiaries, as discussed under this heading and under Regulation, AEP and its public utility subsidiaries have from time to time considered, and expect to continue to consider, various strategies designed to enhance their competitive position and to increase their ability to adapt to and anticipate changes in their utility business. These strategies may include business combinations with other companies, internal restructurings involving the complete or partial separation of their generation, transmission and distribution businesses, acquisitions of related or unrelated businesses, and additions to or dispositions of portions of their franchised service territories. AEP and its public utility subsidiaries may from time to time be engaged in preliminary discussions, either internally or with third parties, regarding one or more of these potential strategies. No assurances can be given as to whether any potential transaction of the type described above may actually occur, or as to its ultimate effect on the financial condition or competitive position of AEP and its public utility subsidiaries. New Business Development AEP continues to consider new business opportunities, particularly those which allow use of its expertise. These endeavors began in 1982 and are conducted through AEP Resources, Inc. (Resources), AEP Resources Service Company (formerly AEP Energy Services, Inc.) (AEPRESC) and AEP Energy Services, Inc. (formerly AEP Energy Solutions, Inc.) (AEPES). Resources' primary business is development of, and investment in, exempt wholesale generators, foreign utility companies, qualifying cogeneration facilities and other energy-related domestic and international investment opportunities and projects. On February 24, 1997, AEP and Public Service Company of Colorado (PSCo) jointly agreed with the Board of Directors of Yorkshire Electricity Group plc (Yorkshire Electricity) in the United Kingdom to make a cash tender offer (the Tender Offer) for Yorkshire Electricity. The Tender Offer valued Yorkshire Electricity at U.S. $2.4 billion. The Tender Offer was effected by Yorkshire Holdings plc, a holding company owned by Yorkshire Power Group Limited, which is equally owned and controlled by Resources and New Century International Inc. (NCII), a wholly-owned subsidiary of PSCo, which is a wholly-owned subsidiary of New Century Energies, Inc. Resources and NCII each contributed U.S. $360 million toward the Tender Offer with the remaining U.S. $1.7 billion funded through a non-recourse loan to Yorkshire Power Group Limited. Yorkshire Power Group gained effective control of Yorkshire Electricity on April 1, 1997. Yorkshire Electricity is an English independent regional electricity company. It is principally engaged in the distribution of elec- tricity to 2.1 million customers in its authorized service territory which is comprised of 3,860 square miles and located centrally in the east coast of England. Resources' indirect subsidiary, AEP Pushan Power LDC, has a 70% interest in Nanyang General Light Electric Co., Ltd. (Nanyang Electric), a joint venture organized to develop and build two 125 megawatt coal-fired generating units near Nanyang City in the Henan Province of The Peoples Republic of China. Nanyang Electric was established in 1996 by AEP Pushan Power LDC, Henan Electric Power Development Co. (15% interest) and Nanyang City Hengsheng Energy Development Company Limited (formerly Nanyang Municipal Finance Development Co.) (15% interest). Funding for the construction of the generating units has commenced and will continue through completion which is expected to occur by 1999. Resources' share of the total cost of the project of $190 million is estimated to be approximately $110 million. On October 2, 1997, Resources, DuPont 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 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. Resources and DuPont will each invest approximately $125 million in equity in the joint ventures with the remainder to be financed through non-recourse debt. AEPRESC offers engineering, construction, project management and other consulting services for projects involving transmission, distribution or generation of electric power both domestically and internationally. AEP Communications, LLC (Communications) was formed in 1997 to pursue opportunities in the telecommunications field. Communications is currently constructing a fiber optic line that stretches between Kentucky, Ohio, Virginia and West Virginia. This fiber optic line will be capable of providing high speed telecommunications capacity to other telecommunications companies. In addition to establishing and providing fiber optic services, Communications also made investments in two companies engaged in providing digital personal communications services, the West Virginia PCS Alliance, LC and the Virginia PCS Alliance, LC. AEP has received approval from the SEC under PUHCA to issue and sell securities in an amount up to 50%, and is seeking approval to finance up to 100%, of its consolidated retained earnings (approximately $1,600,000,000 at December 31, 1997), for investment in exempt wholesale generators and foreign utility companies. Resources expects to investigate opportunities to develop and invest in new, and invest in existing, generation projects worldwide. The SEC adopted Rule 58, effective March 24, 1997, which permits AEP and other registered holding companies to invest up to 15% of consolidated capitalization in energy-related companies. AEPES, an energy-related company under Rule 58, is authorized to engage in energy-related activities, including marketing electricity, gas and other energy commodities. In July 1996, AEP Power Marketing, Inc. (AEPPM), a wholly-owned subsidiary of AEP, requested authority from FERC to market electric power at wholesale at market-based rates. In September 1996, the FERC accepted the filing, conditioned upon, among other things, the utility subsidiaries of AEP refraining from (1) selling nonpower goods or services to any affiliate at a price below its cost or market price, whichever is higher, and (2) purchasing nonpower goods or services from any affiliate at a price above market price. AEPPM has requested FERC to clarify that the applicability of this condition relates only to transactions between AEP utility subsidiaries and AEPPM. AEPPM is inactive pending FERC's decision. These continuing efforts to invest in and develop new business opportunities offer the potential of earning returns which may exceed those of rate-regulated operations. However, they also involve a higher degree of risk which must be carefully considered and assessed. AEP may make substantial investments in these and other new businesses. Proposed AEP-CSW Merger AEP and CSW entered into an Agreement and Plan of Merger, dated as of December 21, 1997, pursuant to which CSW would, on the closing date, merge with and into a wholly owned merger subsidiary of AEP with CSW being the surviving corporation. As a result of the merger, each outstanding share of common stock, par value $3.50 per share, of CSW (other than shares owned by AEP or CSW) shall be converted into the right to receive 0.6 of a share of common stock, par value $6.50 per share, of AEP. Based on the price of AEP's common stock on December 19, 1997, the transaction would be valued at $6.6 billion. The combined company will be named American Electric Power Company, Inc. and will be based in Columbus, Ohio. Consummation of the merger is subject to certain conditions, including receipt of approval of the merger and the transactions contemplated thereby by the shareholders of AEP and CSW and the receipt of the required regulatory approvals. Assuming the receipt of all required approvals, completion of the merger is anticipated to occur in the first half of 1999. CSW is a global, diversified public utility holding company based in Dallas, Texas. CSW owns four domestic electric utility subsidiaries serving 1.7 million customers in portions of the states of Texas, Oklahoma, Louisiana and Arkansas and a regional electricity company in the United Kingdom. CSW owns other international energy operations and non-utility subsidiaries involved in energy-related investments, telecommunications, energy efficiency services and financial transactions. Construction Program New Generation The AEP System companies are continuously involved in an assessment of the adequacy of its generation, transmission, distribution and other facilities necessary to provide for the reliable supply of electric power and energy to its customers. In this assessment and planning process, assumptions are continually being reviewed as new information becomes available, and assessments and plans are modified accordingly, as appropriate. Thus, system reinforcement plans are subject to change, particularly with the anticipated restructuring of the electric utility industry and the move to increasing competition in the marketplace. See Competition and Business Change. Committed or anticipated capability changes to the AEP System generation resources through the year 2001 include: a purchase from an independent power producer's hydro project with an expected capacity value of 28 megawatts, reratings of several existing AEP System generating units, and the expiration of the Rockport Unit 1 sale of 455 megawatts to VEPCo on December 31, 1999 (see AEGCo). Beyond these changes, there are no specific commitments for additions of new generation resources on the AEP System. In this regard, the most recent resource plan filed by AEP's electric utility subsidiaries with various state commissions indicates no need for new generation resources until beyond the year 2002. When the time for commitment to additional generation resources approaches, all means for adding such resources, including self- build and external resource options, will be considered. However, given the restructuring that is expected to take place in the industry, the need of AEP's operating companies for any additional generation resources in the fore- seeable future is highly uncertain. Proposed Transmission Facilities APCo: On September 30, 1997, APCo refiled applications in Virginia and West Virginia for certificates to build the Wyoming-Cloverdale 765,000-volt line. The preferred route for this line is approximately 132 miles in length, connecting APCo's Wyoming Station in southern West Virginia to APCo's Cloverdale Station near Roanoke, Virginia. APCo's estimated cost is $263,300,000. APCo announced this project in 1990. Since then it has been in the process of trying to obtain federal permits and state certificates. At the federal level, the U.S. Forest Service (Forest Service) is directing the preparation of an Environmental Impact Statement (EIS), which is required prior to granting permits for crossing lands under federal jurisdiction. Permits are needed from the (i) Forest Service to cross federal forests, (ii) Army Corps of Engineers to cross the New River and a watershed near the Wyoming Station, and (iii) National Park Service or Forest Service to cross the Appalachian National Scenic Trail. In June 1996, the Forest Service released a Draft EIS and preliminarily identified a "No Action Alternative" as its preferred alternative. If this alternative were incorporated into the Final EIS, APCo would not be authorized to cross federal forests administered by the Forest Service. The Forest Service stated that it would not prepare the Final EIS until after Virginia and West Virginia determined need and routing issues. In an interim order issued in 1995, the Virginia SCC found, based on the record before it, that there is a compelling need for additional electric capacity to serve APCo's Central and Eastern regions and that the proposed transmission line may be the best possible solution. In December 1996, APCo filed a report with the Virginia SCC reviewing the need for the project. Based on that review and after considering all other feasible alternatives, APCo concluded that the need for reinforcement of the transmission system serving its Central and Eastern areas remains compelling and the proposed project is the best alternative for addressing the need. Procedural schedules have been issued in each state. In Virginia, five public hearings will be held in March and April and an evidentiary hearing will be held in July. In West Virginia, three public meetings will be held in early May, followed by an evidentiary hearing. By statute, the West Virginia PSC has 400 days from the filing date, or November 4, 1998, to issue the certificate. If it fails to act, APCo receives the certificate automatically. Virginia does not have such a time constraint. If Virginia and West Virginia issue the required certificates, APCo will cooperate with the Forest Service to complete the EIS process and obtain the federal permits. Management estimates that the project cannot be completed before the winter of 2002-2003. However, given the findings in the Draft EIS, APCo cannot presently predict the schedule for completion of the state and federal permitting process. APCo and KEPCo: APCo and KEPCo have announced an improvement plan to be implemented during a four-year period (1996-1999) to reinforce their 138,000- volt transmission system. Included in this plan is a new transmission line to link KEPCo's Big Sandy Plant to communities in eastern Kentucky. APCo's and KEPCo's estimated project costs are $5,800,000 and $81,600,000, respectively. The KPSC approved the project in its order dated June 11, 1996. Construction commenced in late 1996. Construction Expenditures The following table shows the construction expenditures by AEGCo, APCo, CSPCo, I&M, KEPCo, OPCo and the AEP System and their respective consolidated subsidiaries during 1995, 1996 and 1997 and their current estimate of 1998 construction expenditures, in each case including AFUDC but excluding nuclear fuel and other assets acquired under leases. The construction expenditures for the years 1995-1997 were, and it is anticipated that the estimated construction expenditures for 1998 will be, approximately:
1995 1996 1997 1998 Actual Actual Actual Estimate (in thousands) AEGCo . . . . . . . . . . . $ 4,000 $ 2,200 $ 3,900 $ 4,200 APCo . . . . . . . . . . . 217,600 192,900 218,100 205,600 CSPCo . . . . . . . . . . . 99,500 93,600 108,900 117,900 I&M . . . . . . . . . . . . 113,000 90,500 123,400 169,100 KEPCo . . . . . . . . . . . 39,300 75,800 66,700 53,800 OPCo . . . . . . . . . . . 116,900 113,800 172,700 187,700 AEP System (a) . . . . . $601,200 $578,000 $762,000 $847,000
__________ (a) Includes expenditures of other subsidiaries not shown. Reference is made to the footnotes to the financial statements entitled Commitments and Contingencies incorporated by reference in Item 8, for further information with respect to the construction plans of AEP and its operating subsidiaries for the next three years. The System construction program is reviewed continuously and is revised from time to time in response to changes in estimates of customer demand, business and economic conditions, the cost and availability of capital, en- vironmental requirements and other factors. Changes in construction schedules and costs, and in estimates and projections of needs for additional facilities, as well as variations from currently anticipated levels of net earnings, Federal income and other taxes, and other factors affecting cash requirements, may increase or decrease the estimated capital requirements for the System's construction program. From time to time, as the System companies have encountered the industry problems described above, such companies also have encountered limitations on their ability to secure the capital necessary to finance construction expenditures. Environmental Expenditures: Expenditures related to compliance with air and water quality standards, included in the gross additions to plant of the System, during 1995, 1996 and 1997 and the current estimate for 1998 are shown below. Substantial expenditures in addition to the amounts set forth below may be required by the System in future years in connection with the modification and addition of facilities at generating plants for environmental quality controls in order to comply with air and water quality standards which have been or may be adopted.
1995 1996 1997 1998 Actual Actual Actual Estimate (in thousands) AEGCo . . . . . . . . . . . $ 0 $ 0 $ 0 $ 0 APCo . . . . . . . . . . . 7,800 10,500 9,100 11,500 CSPCo . . . . . . . . . . . 10,000 1,800 1,300 4,500 I&M . . . . . . . . . . . . 0 0 0 3,200 KEPCo . . . . . . . . . . . 600 0 0 4,000 OPCo . . . . . . . . . . . 3,100 1,600 1,800 32,800 AEP System . . . . . . . $ 21,500 $ 13,900 $ 12,200 $ 56,000
Financing It has been the practice of AEP's operating subsidiaries to finance current construction expenditures in excess of available internally generated funds by initially issuing unsecured short-term debt, principally commercial paper and bank loans, at times up to levels authorized by regulatory agencies, and then to reduce the short-term debt with the proceeds of subsequent sales by such subsidiaries of long-term debt securities and preferred stock, and cash capital contributions by AEP. It has been the practice of AEP, in turn, to finance cash capital contributions to the common stock equities of its subsidiaries by issuing unsecured short-term debt, principally commercial paper, and then to sell additional shares of Common Stock of AEP for the pur- pose of retiring the short-term debt previously incurred. In 1997, AEP issued approximately 1,755,000 shares of Common Stock pursuant to its Dividend Reinvestment and Stock Purchase Plan. Although prevailing interest costs of short-term bank debt and commercial paper generally have been lower than prevailing interest costs of long-term debt securities, whenever interest costs of short-term debt exceed costs of long-term debt, the companies might be adversely affected by reliance on the use of short-term debt to finance their construction and other capital requirements. During the period 1995-1997, external funds from financings and capital contributions by AEP amounted, with respect to APCo and KEPCo, to approximate- ly 28% and 70%, respectively, of the aggregate construction expenditures shown above. During this same period, the amount of funds used to retire long-term and short-term debt and preferred stock of AEGCo, CSPCo, I&M and OPCo exceeded the amount of funds from financings and capital contributions by AEP. The ability of AEP and its subsidiaries to issue short-term debt is limited by regulatory restrictions and, in the case of most of the operating subsidiaries, by provisions contained in certain debt and other instruments. The approximate amounts of short-term debt which the companies estimate that they were permitted to issue under the most restrictive such restriction, at January 1, 1998, and the respective amounts of short-term debt outstanding on that date, on a corporate basis, are shown in the following tabulation:
Total AEP Short-Term Debt AEP AEGCo APCo CSPCo I&M KEPCo OPCo System(a) (in millions) Amount authorized . . . . . . . . . . . $150 $ 80 $250 $175 $175 $150 $250 $1,230 Amount outstanding: Notes payable . . . . . . . . . . . . $ 24 $ 12 $ 34 $ 4 $ 57 -- $ 11 $ 199 Commercial paper . . . . . . . . . . 29 -- 96 63 63 37 68 356 $ 53 $ 12 $130 $ 67 $120 $ 37 $ 79 $ 555
__________ (a) Includes short-term debt of other subsidiaries not shown. Reference is made to the footnotes to the financial statements incorporated by reference in Item 8 for further information with respect to unused short-term bank lines of credit. In order to issue additional first mortgage bonds and preferred stock, it is necessary for APCo, CSPCo, I&M, KEPCo and OPCo to comply with earnings coverage requirements contained in their respective mortgages and charters. The most restrictive of these provisions in each instance generally requires (1) for the issuance of first mortgage bonds for purposes other than the refunding of outstanding first mortgage bonds, a minimum, before income tax, earnings coverage of twice the pro forma annual interest charges on first mortgage bonds and (2) for the issuance of additional preferred stock by APCo, I&M and OPCo, a minimum, after income tax, gross income coverage of one and one-half times pro forma annual interest charges and preferred stock dividends, in each case for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the proposed new issue. In computing such coverages, the companies include as a component of earnings revenues collected subject to refund (where applicable) and, to the extent not limited by the instrument under which the computation is made, AFUDC, including amounts positioned and classified as an allowance for borrowed funds used during construction. These coverage provisions have from time to time restricted the ability of one or more of the above subsidiaries of AEP to issue senior securities. The respective mortgage and preferred stock coverages of APCo, CSPCo, I&M, KEPCo and OPCo under their respective mortgage and charter provisions, calculated on the foregoing basis and in accordance with the respective amounts then recorded in the accounts of the companies, assuming, with respect to the preferred stock coverages, that the respective short-term debt of the companies at those dates were to remain outstanding for a twelve-month period at the respective rates of interest prevailing at those dates, were at least those stated in the following table:
December 31, 1995 1996 1997 APCo Mortgage coverage . . . . . . . 3.47 3.98 3.72 Preferred stock coverage . . . 1.78 1.99 1.92 CSPCo Mortgage coverage . . . . . . . 3.90 4.44 4.95 I&M Mortgage coverage . . . . . . . 6.25 6.66 7.57 Preferred stock coverage . . . 2.63 3.07 2.88 KEPCo Mortgage coverage . . . . . . . 2.86 3.22 4.23 OPCo Mortgage coverage . . . . . . . 6.17 8.27 9.74 Preferred stock coverage . . . 3.04 3.63 3.67
Although certain other subsidiaries of AEP either are not subject to any coverage restrictions or are not subject to restrictions as constraining as those to which APCo, CSPCo, I&M, KEPCo and OPCo are subject, their ability to finance substantial portions of their construction programs may be subject to market limitations and other constraints unless other assurances are furnished. AEP believes that the ability of some of its subsidiaries to issue short- and long-term debt securities and preferred stock in the amounts required to finance their business may depend upon the timely approval of rate increase applications. If one or more of the subsidiaries are unable to continue the issuance and sale of securities on an orderly basis, such company or companies will be required to consider the curtailment of construction and other outlays or the use of alternative financing arrangements, if available, which may be more costly. AEP's subsidiaries have also utilized, and expect to continue to utilize, additional financing arrangements, such as leasing arrangements, including the leasing of utility assets, coal mining and transportation equipment and facilities and nuclear fuel. Pollution control revenue bonds have been used in the past and may be used in the future in connection with the construction of pollution control facilities; however, Federal tax law has limited the utilization of this type of financing except for purposes of certain financing of solid waste disposal facilities and of certain refunding of outstanding pollution control revenue bonds issued before August 16, 1986. Rates and Regulation General The rates charged by the electric utility subsidiaries of AEP are approved by the FERC or one of the state utility commissions as applicable. The FERC regulates wholesale rates and the state commissions regulate retail rates. In recent years the number of rate increase applications filed by the operating subsidiaries of AEP with their respective state commissions and the FERC has decreased. Under current rate regulation, if increases in operating, construction and capital costs exceed increases in revenues resulting from previously granted rate increases and increased customer demand, then it may be appropriate for certain of AEP's electric utility subsidiaries to file rate increase applications in the future. Generally the rates of AEP's operating subsidiaries are determined based upon the cost of providing service including a reasonable return on investment. Certain states served by the AEP System allow alternative forms of rate regulation in addition to the traditional cost-of-service approach. The IURC may approve alternative regulatory plans which could include setting customer rates based on market or average prices, price caps, index-based prices and prices based on performance and efficiency. The Virginia SCC may approve (i) special rates, contracts or incentives to individual customers or classes of customers and (ii) alternative forms of regulation including, but not limited to, the use of price regulation, ranges of authorized returns, categories of services and price indexing. All of the seven states served by the AEP System, as well as the FERC, either permit the incorporation of fuel adjustment clauses in a utility company's rates and tariffs, which are designed to permit upward or downward adjustments in revenues to reflect increases or decreases in fuel costs above or below the designated base cost of fuel set forth in the particular rate or tariff, or permit the inclusion of specified levels of fuel costs as part of such rate or tariff. AEP cannot predict the timing or probability of approvals regarding applications for additional rate changes, the outcome of action by regulatory commissions or courts with respect to such matters, or the effect thereof on the earnings and business of the AEP System. See Competition and Business Change. APCo FERC: On February 14, 1992, APCo filed with the FERC applications for an increase in its wholesale rates to Kingsport Power Company and non- affiliated customers in the amounts of approximately $3,933,000 and $4,759,000, respectively. APCo began collecting the rate increases, subject to refund, on September 15, 1992. In addition, the Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (SFAS 106), which requires employers, beginning in 1993, to accrue for the costs of retiree benefits other than pensions. These rates include the higher level of SFAS 106 costs. On November 9, 1993, the administrative law judge issued an initial decision recommending, among other things, the higher level of postretirement benefits other than pensions under SFAS 106. FERC action on APCo's applications is pending. Virginia: In June 1997, APCo filed an application with the Virginia SCC for approval of an alternative regulatory plan (Plan) and proposed, among other things, an increase of $30,500,000 in base rates on an annual basis to be effective July 13, 1997. APCo's Plan would institute a moratorium period during which no changes from the rate levels (including APCo's current 1.482 cents/kwh fuel factor) proposed by APCo would be made prior to January 1, 2001. In addition, the Plan includes a sharing of earnings above certain levels between APCo and its customers, and acceleration of the recovery of generation-related regulatory assets. On July 10, 1997, the Virginia SCC issued an order suspending implementation of the proposed rates until November 11, 1997 when these rates were placed into effect subject to refund. A hearing has been scheduled for July 6, 1998 to consider APCo's proposal. West Virginia: On December 27, 1996, the West Virginia PSC approved a settlement agreement among APCo and other parties. In accordance with that agreement, the West Virginia PSC reduced APCo's base rates and Expanded Net Energy Cost (ENEC) rates by $5,000,000 and $28,000,000, respectively, on a one-time annual basis, effective November 1, 1996. Under the terms of the agreement, APCo's rates would not increase prior to January 1, 2000 and, through this date, ENEC cost variances will be subject to deferred accounting and a cumulative ENEC recovery balance will be maintained. Regardless of the actual cumulative ENEC recovery balance at December 31, 1999, ratepayers will not be responsible for any cumulative underrecovery and any cumulative overre- coveries will be treated in a manner to be determined by the West Virginia PSC, except that ENEC overrecoveries during each calendar year through December 31, 1999, in excess of $10,000,000 per period, will be accumulated and shared equally between APCo and its ratepayers. CSPCo Zimmer Plant: The Zimmer Plant was placed in commercial operation as a 1,300-megawatt coal-fired plant on March 30, 1991. CSPCo owns 25.4% of the Zimmer Plant with the remainder owned by two unaffiliated companies, CG&E (46.5%) and DP&L (28.1%). From the in-service date of March 1991 until rates went into effect in May 1992, deferred carrying charges of $43,000,000 were recorded on the Zimmer Plant investment. Recovery of the deferred carrying charges will be sought in the next PUCO base rate proceeding in accordance with the PUCO accounting order that authorized the deferral. I&M On September 9, 1997, I&M filed a petition with the IURC requesting approval of accounting authority to increase nuclear decommissioning expense in an amount equal to the expiring Rockport phase-in plan amortization expense. The petition would increase I&M's Indiana jurisdictional nuclear decommissioning provision by $10,900,000 annually, effective September 1, 1997. A hearing on I&M's petition was held on February 3, 1998, and an order is awaited from the IURC. I&M has recorded the requested increased nuclear decommissioning expense provision, but has not deposited the increased provision into its nuclear decommissioning trust funds pending IURC approval. OPCo Under the terms of a stipulation agreement approved by the PUCO in November 1992, beginning December 1, 1994, the cost of coal burned at the Gavin Plant is subject to a 15-year predetermined price of $1.575 per million Btus with quarterly escalation adjustments. A 1995 PUCO-approved settlement agreement fixes the EFC factor at 1.465 cents per kwh for the period June 1995 through November 1998. After the first to occur of either full recovery of these costs or November 2009, the price that OPCo can recover for coal from its affiliated Meigs mine which supplies the Gavin Plant will be limited to the lower of cost or the then-current market price. The agreements provide OPCo with the opportunity to recover any operating losses incurred under the predetermined or fixed price, as well as its investment in, and liabilities and closing costs associated with, its affiliated mining operations attributable to its Ohio jurisdiction, to the extent the actual cost of coal burned at the Gavin Plant is below the predetermined price. Based on the estimated future cost of coal burned at Gavin Plant, management believes that the Ohio jurisdictional portion of the investment in, and liabilities and closing costs of, the affiliated mining operations, including deferred amounts, will be recovered under the terms of the pre- determined price agreement. Management intends to seek from non-Ohio jurisdictional ratepayers recovery of the non-Ohio jurisdictional portion of the investment in, and the liabilities and closing costs of, OPCo's Meigs, Muskingum and Windsor mines, but there can be no assurance that such recovery will be approved. The non-Ohio jurisdictional portion of shutdown costs for these mines, which includes the investment in the mines, leased asset buy- outs, reclamation costs and employee benefits, is estimated to be approximately $53,000,000 for Meigs, $37,000,000 for Muskingum and $12,000,000 for Windsor, after tax at December 31, 1997. OPCo's Muskingum and Windsor mines may have to close by January 2000 as a result of compliance by the Muskingum River Plant and Cardinal Unit 1 with the Phase II requirements of the Clean Air Act Amendments of 1990 (see Environmental and Other Matters - Air Pollution Control - Acid Rain). The Muskingum and Windsor mines supply coal to Muskingum River Plant and Cardinal Plant, respectively. The Muskingum and/or Windsor mines could close prior to January 2000 depending on the economics of continued operation under the terms of the 1995 settlement agreement. Unless future shutdown costs and/or the cost of coal production of OPCo's Meigs, Muskingum and Windsor mines can be recovered, AEP's and OPCo's results of operations would be adversely affected. Management anticipates closing the Muskingum mine in 1999, Windsor mine in 2000 and Meigs mine in 2001. Management, however, in making such a determination, will consider certain factors, including the competitiveness of the price of the coal extracted from the mine and the value of SO2 Allowances after the accelerated amortization of mine closure and the recovery of other costs. In November 1992, the municipal wholesale customers of OPCo filed a complaint with the SEC requesting an investigation of the sale of the Martinka mining operation to an unaffiliated company and an investigation into the pricing of OPCo's affiliated coal purchases back to 1986. OPCo has filed a response with the SEC seeking to dismiss this complaint. These customers also sought to intervene in three proceedings before the SEC. In September 1996, the SEC denied two requests to intervene, but has not ruled on the complaint. Fuel Supply The following table shows the sources of power generated by the AEP System:
1993 1994 1995 1996 1997 Coal . . . . . . . . . . . 86% 91% 88% 87% 92% Nuclear . . . . . . . . . . 13% 8% 11% 12% 7% Hydroelectric and other . . 1% 1% 1% 1% 1%
Variations in the generation of nuclear power are primarily related to refueling outages and, in 1997, the shutdown of the Cook Plant to respond to issues raised by the NRC. See Cook Plant Shutdown. Coal The Clean Air Act Amendments of 1990 provide for the issuance of annual allowance allocations covering sulfur dioxide emissions at levels below historic emission levels for many coal-fired generating units of the AEP System. Phase I of this program began in 1995 and Phase II begins in 2000, with both phases requiring significant changes in coal supplies and suppliers. The full extent of such changes, particularly in regard to Phase II, however, has not been determined. See Environmental and Other Matters - Air Pollution Control - Acid Rain for the current compliance plan. In order to meet emission standards for existing and new emission sources, the AEP System companies will, in any event, have to obtain coal supplies, in addition to coal reserves now owned by System companies, through the acquisition of additional coal reserves and/or by entering into additional supply agreements, either on a long-term or spot basis, at prices and upon terms which cannot now be predicted. No representation is made that any of the coal rights owned or controlled by the System will, in future years, produce for the System any major portion of the overall coal supply needed for consumption at the coal- fired generating units of the System. Although AEP believes that in the long run it will be able to secure coal of adequate quality and in adequate quantities to enable existing and new units to comply with emission standards applicable to such sources, no assurance can be given that coal of such quality and quantity will in fact be available. No assurance can be given either that statutes or regulations limiting emissions from existing and new sources will not be further revised in future years to specify lower sulfur contents than now in effect or other restrictions. See Environmental and Other Matters herein. The FERC has adopted regulations relating, among other things, to the circumstances under which, in the event of fuel emergencies or shortages, it might order electric utilities to generate and transmit electric power to other regions or systems experiencing fuel shortages, and to rate-making principles by which such electric utilities would be compensated. In addition, the Federal Government is authorized, under prescribed conditions, to allocate coal and to require the transportation thereof, for the use of power plants or major fuel-burning installations. System companies have developed programs to conserve coal supplies at System plants which involve, on a progressive basis, limitations on sales of power and energy to neighboring utilities, appeals to customers for voluntary limitations of electric usage to essential needs, curtailment of sales to certain industrial customers, voltage reductions and, finally, mandatory reductions in cases where current coal supplies fall below minimum levels. Such programs have been filed and reviewed with officials of Federal and state agencies and, in some cases, the state regulatory agency has prescribed actions to be taken under specified circumstances by System companies, subject to the jurisdiction of such agencies. The mining of coal reserves is subject to Federal requirements with respect to the development and operation of coal mines, and to state and Federal regulations relating to land reclamation and environmental protection, including Federal strip mining legislation enacted in August 1977. Continual evaluation and study is given to possible closure of existing coal mines and divestiture or acquisition of coal properties in light of Federal and state environmental and mining laws and regulations which may affect the System's need for or ability to mine such coal. Western coal purchased by System companies is transported by rail to a terminal on the Ohio River for transloading to barges for delivery to generating stations on the river. Subsidiaries of AEP lease approximately 3,460 coal hopper cars to be used in unit train movements, as well as 13 towboats, 307 jumbo barges and 183 standard barges. Subsidiaries of AEP also own or lease coal transfer facilities at various other locations. The System generating companies procure coal from coal reserves which are owned or mined by subsidiaries of AEP, and through purchases pursuant to long-term contracts, or on a spot purchase basis, from unaffiliated producers. The following table shows the amount of coal delivered to the AEP System during the past five years, the proportion of such coal which was obtained either from coal-mining subsidiaries, from unaffiliated suppliers under long- term contracts or through spot or short-term purchases, and the average delivered price of spot coal purchased by System companies:
1993 1994 1995 1996 1997 Total coal delivered to AEP operated plants (thousands of tons) . . . . . 40,561 49,024 46,867 51,030 54,292 Sources (percentage): Subsidiaries . . . . . . . . . . . . . . . . . . . 20% 15% 14% 13% 14% Long-term contracts . . . . . . . . . . . . . . . 66% 65% 75% 71% 66% Spot or short-term purchases . . . . . . . . . . . 14% 20% 11% 16% 20% Average price per ton of spot-purchased coal . . . $23.55 $23.00 $25.15 $23.85 $24.38
The average cost of coal consumed during the past five years by all AEP System companies, AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo is shown in the following tables:
1993 1994 1995 1996 1997 Dollars per ton AEP System Companies . . . . . 33.57 33.95 32.52 31.70 31.77 AEGCo . . . . . . . . . . . . . 17.74 18.59 18.80 18.22 19.30 APCo . . . . . . . . . . . . . 42.65 39.89 38.86 37.60 36.09 CSPCo . . . . . . . . . . . . . 33.87 32.80 33.23 31.70 31.69 I&M . . . . . . . . . . . . . . 23.80 22.85 23.25 22.99 23.68 KEPCo . . . . . . . . . . . . . 27.08 26.83 26.91 27.25 26.76 OPCo . . . . . . . . . . . . . 38.12 41.10 37.58 35.96 36.00 Cost per Million Btu's AEP System Companies . . . . . 150.89 152.41 145.26 140.48 140.23 AEGCo . . . . . . . . . . . . . 107.71 112.06 112.87 109.25 115.21 APCo . . . . . . . . . . . . . 173.32 161.37 156.96 152.54 146.54 CSPCo . . . . . . . . . . . . . 143.66 140.45 140.79 134.60 134.44 I&M . . . . . . . . . . . . . . 129.39 123.62 125.50 121.16 123.36 KEPCo . . . . . . . . . . . . . 113.90 113.40 114.77 114.42 110.37 OPCo . . . . . . . . . . . . . 161.25 173.51 157.62 151.55 151.66
The coal supplies at AEP System plants vary from time to time depending on various factors, including customers' usage of electric power, space limitations, the rate of consumption at particular plants, labor unrest and weather conditions which may interrupt deliveries. At December 31, 1997, the System's coal inventory was approximately 43 days of normal System usage. This estimate assumes that the total supply would be utilized by increasing or decreasing generation at particular plants. The following tabulation shows the total consumption during 1997 of the coal-fired generating units of AEP's principal electric utility subsidiaries, coal requirements of these units over the remainder of their useful lives and the average sulfur content of coal delivered in 1997 to these units. Reference is made to Environmental and Other Matters for information concerning current emissions limitations in the AEP System's various jurisdictions and the effects of the Clean Air Act Amendments.
Average Sulfur Content of Delivered Coal Estimated Require- Total Consumption ments for Remainder During 1997 of Useful Lives Pounds of SO2 (In Thousands of Tons) (In Millions of Tons) By Weight Per Million Btu's AEGCo(a) . . . . 5,043 251 0.3% 0.7 APCo . . . . . . 11,682 446 0.8% 1.3 CSPCo . . . . . . 6,082(b) 236(b) 2.8% 4.7 I&M(c) . . . . . 7,304 294 0.7% 1.4 KEPCo . . . . . . 2,909 91 1.3% 2.1 OPCo . . . . . . 20,493 642 2.1% 3.5
(a) Reflects AEGCo's 50% interest in the Rockport Plant. (b) Includes coal requirements for CSPCo's interest in Beckjord, Stuart and Zimmer Plants. (c) Includes I&M's 50% interest in the Rockport Plant. AEGCo: See Fuel Supply - I&M for a discussion of the coal supply for the Rockport Plant. APCo: Substantially all of the coal consumed at APCo's generating plants is obtained from unaffiliated suppliers under long-term contracts and/or on a spot purchase basis. The average sulfur content by weight of the coal received by APCo at its generating stations approximated 0.8% during 1997, whereas the maximum sulfur content permitted, for emission standard purposes, for existing plants in the regions in which APCo's generating stations are located ranged between 0.78% and 2% by weight depending in some circumstances on the calorific value of the coal which can be obtained for some generating stations. CSPCo: CSPCo has coal supply agreements with unaffiliated suppliers for the delivery of approximately 3,400,000 tons per year through 1998. Some of this coal is washed to improve its quality and consistency for use principally at Unit 4 of the Conesville Plant. CSPCo has been informed by CG&E and DP&L that, with respect to the CCD Group units partly owned but not operated by CSPCo, sufficient coal has been contracted for or is believed to be available for the approximate lives of the respective units operated by them. Under the terms of the operating agreements with respect to CCD Group units, each operating company is contractually responsible for obtaining the needed fuel. I&M: I&M has two coal supply agreements with unaffiliated suppliers pursuant to which the suppliers are delivering low sulfur coal from surface mines in Wyoming, principally for consumption by the Rockport Plant. Under these agreements, the suppliers will sell to I&M, for consumption by I&M at the Rockport Plant or consignment to other System companies, coal with an average sulfur content not exceeding 1.2 pounds of sulfur dioxide per million Btu's of heat input. One contract with remaining deliveries of 52,010,543 tons expires on December 31, 2014 and another contract with remaining deliv- eries of 43,395,000 tons expires on December 31, 2004. All of the coal consumed at I&M's Tanners Creek Plant is obtained from unaffiliated suppliers under long-term contracts and/or on a spot purchase basis. KEPCo: Substantially all of the coal consumed at KEPCo's Big Sandy Plant is obtained from unaffiliated suppliers under long-term contracts and/or on a spot purchase basis. KEPCo has coal supply agreements with unaffiliated suppliers pursuant to which KEPCo will receive approximately 2,300,000 tons of coal in 1998. To the extent that KEPCo has additional coal requirements, it may purchase coal from the spot market and/or suppliers under contract to supply other System companies. OPCo: The coal consumed at OPCo's generating plants is obtained from both affiliated and unaffiliated suppliers. The coal obtained from unaffiliated suppliers is purchased under long-term contracts and/or on a spot purchase basis. OPCo and certain of its coal-mining subsidiaries own or control coal reserves in the State of Ohio which contain approximately 200,000,000 tons of clean recoverable coal, which ranges in sulfur content between 3.4% and 4.5% sulfur by weight (weighted average, 3.8%), which can be recovered based upon existing mining plans and projections and employing current mining practices and techniques. OPCo and certain of its mining subsidiaries own an additional 113,000,000 tons of clean recoverable coal in Ohio which ranges in sulfur content between 2.4% and 3.4% sulfur by weight (weighted average 2.6%). Recovery of this coal would require substantial development. OPCo and certain of its coal-mining subsidiaries also own or control coal reserves in the State of West Virginia which contain approximately 103,000,000 tons of clean recoverable coal ranging in sulfur content between 1.4% and 4.0% sulfur by weight (weighted average, 2.2%) of which approximately 26,000,000 tons can be recovered based upon existing mining plans and projections and employing current mining practices and techniques. Nuclear I&M has made commitments to meet certain of the nuclear fuel requirements of the Cook Plant. The nuclear fuel cycle consists of the mining and milling of uranium ore to uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride; the enrichment of uranium hexafluoride; the fabrication of fuel assemblies; the utilization of nuclear fuel in the reactor; and the reprocessing or other disposition of spent fuel. Steps cur- rently are being taken, based upon the planned fuel cycles for the Cook Plant, to review and evaluate I&M's requirements for the supply of nuclear fuel. I&M has made and will make purchases of uranium in various forms in the spot, short-term, and mid-term markets until it decides that deliveries under long- term supply contracts are warranted. For purposes of the storage of high-level radioactive waste in the form of spent nuclear fuel, I&M has completed modifications to its spent nuclear fuel storage pool to permit normal operations through 2010. I&M's costs of nuclear fuel consumed do not assume any residual or salvage value for residual plutonium and uranium. Nuclear Waste and Decommissioning The Nuclear Waste Policy Act of 1982, as amended, establishes Federal responsibility for the permanent off-site disposal of spent nuclear fuel and high-level radioactive waste. Disposal costs are paid by fees assessed against owners of nuclear plants and deposited into the Nuclear Waste Fund created by the Act. In 1983, I&M entered into a contract with DOE for the disposal of spent nuclear fuel. Under terms of the contract, for the disposal of nuclear fuel consumed after April 6, 1983 by I&M's Cook Plant, I&M is paying to the fund a fee of one mill per kilowatt-hour, which I&M is currently recovering from customers. For the disposal of nuclear fuel consumed prior to April 7, 1983, I&M must pay the U.S. Treasury a fee estimated at approximately $71,964,000, exclusive of interest of $108,873,000 at December 31, 1997. The aggregate amount has been recorded as long-term debt. Because of the current uncertainties surrounding DOE's program to provide for permanent disposal of spent nuclear fuel, I&M has not yet paid any of the pre-April 1983 fee. At December 31, 1996, funds collected from customers to pay the pre-April 1983 fee and accrued interest approximated the long-term liability. In November 1996, the IURC and MPSC issued orders approving flexible funding procedures in which any excess funds collected for pre-April 7, 1983 spent nuclear fuel dis- posal would be deposited into I&M's nuclear decommissioning trust funds. On May 30, 1995, I&M and a group of unaffiliated utilities owning and operating nuclear plants filed a petition for review in the U.S. Court of Appeals for the District of Columbia Circuit requesting that the court issue a declaration that the Nuclear Waste Policy Act of 1982 (NWPA) imposes on DOE an unconditional obligation to begin acceptance of spent nuclear fuel and high level radioactive waste by January 31, 1998. On July 23, 1996, the court ruled that the NWPA creates an obligation in DOE, reciprocal to the utilities' obligation to pay, to start disposing of the spent nuclear fuel and high level radioactive waste no later than January 31, 1998. The court remanded the case to DOE, holding that determination of a remedy was premature, since DOE had not yet defaulted on its obligations. In December 1996, I&M received a letter from DOE advising that DOE anticipates that it will be unable to begin acceptance of spent nuclear fuel and high level radioactive waste for disposal in a repository or interim storage facility by January 31, 1998. On January 31, 1997, in anticipation of DOE's breach of their statutory and contractual obligations, I&M along with 35 unaffiliated utilities and 33 states filed joint petitions for review in the U.S. Court of Appeals for the District of Columbia Circuit requesting that the court permit the utilities to suspend further payments into the nuclear waste fund, authorize escrow of the payments, and order further action on the part of DOE to meet its obligations under the NWPA. On November 12, 1997, the Court of Appeals issued a decision granting in part and denying in part the utilities' request for relief. The court ordered DOE to proceed with contractual remedies and to refrain from concluding that DOE's delay is unavoidable due to the lack of a repository or the lack of interim storage authority. The court, however, declined to order DOE to begin disposing of fuel. On January 31, 1998, the deadline for DOE's performance, the DOE failed to begin disposing of the utilities' spent nuclear fuel. In February 1998, the states and the utilities filed with the Court of Appeals for additional relief in connection with DOE's failure to meet the January 31, 1998 deadline. Studies completed in 1997 estimate decommissioning and low-level radioactive waste disposal costs for the Cook Plant to range from $700,000,000 to $1.152 billion in 1997 nondiscounted dollars. The wide range is caused by variables in assumptions, including the estimated length of time spent nuclear fuel must be stored at the Cook Plant subsequent to ceasing operations, which depends on future developments in the federal government's spent nuclear fuel disposal program. Continued delays in the federal fuel disposal program can result in increased decommissioning costs. I&M is recovering decommissioning costs in its three rate-making jurisdictions based on at least the lower end of the range in the most recent respective decommissioning study available at the time of the rate proceeding (the study range utilized in the Indiana rate case, I&M's primary jurisdiction, was $588,000,000 to $1.102 billion in 1991 dollars). I&M records decommissioning costs in other operation expense and records a noncurrent liability equal to the decommissioning cost recovered in rates which was $28,000,000 in 1997, $27,000,000 in 1996 and $30,000,000 in 1995 (including $4,000,000 in special deposits). At December 31, 1997, I&M had recognized a decommissioning liability of $381,000,000. I&M will continue to reevaluate periodically the cost of decommissioning and to seek regulatory approval to revise its rates as necessary. Funds recovered through the rate-making process for disposal of spent nuclear fuel consumed prior to April 7, 1983 and for nuclear decommissioning have been segregated and deposited in external funds for the future payment of such costs. Trust fund earnings decrease the amount to be recovered from ratepayers. The ultimate cost of retiring I&M's Cook Plant may be materially different from the estimates contained in the site-specific study and the funding targets as a result of (a) the type of decommissioning plan selected, (b) the escalation of various cost elements (including, but not limited to, general inflation), (c) the further development of regulatory requirements governing decommissioning, (d) the limited availability to date of significant experience in decommissioning such facilities, (e) the technology available at the time of decommissioning differing significantly from that assumed in these studies and (f) the availability of nuclear waste disposal facilities. Accordingly, management is unable to provide assurance that the ultimate cost of decommissioning the Cook Plant will not be significantly greater than current projections. The Low-Level Waste Policy Act of 1980 (LLWPA) mandates that the responsibility for the disposal of low-level waste rests with the individual states. Low-level radioactive waste consists largely of ordinary refuse and other items that have come in contact with radioactive materials. To facilitate this approach, the LLWPA authorized states to enter into regional compacts for low-level waste disposal subject to Congressional approval. The LLWPA also specified that, beginning in 1986, approved compacts may prohibit the importation of low-level waste from other regions, thereby providing a strong incentive for states to enter into compacts. Michigan, the state where the Cook Plant is located, was a member of the Midwest Compact, but its membership was revoked in 1991. Michigan is responsible for developing a disposal site for the low-level waste generated in Michigan. Although Michigan amended its law regarding low-level waste site development in 1994 to allow a volunteer to host a facility, little progress has been made to date. A bill was introduced in 1996 to further address the issue but no action was taken. Development of required legislation and prog- ress with the site selection process has been inhibited by many factors, and management is unable to predict when a new disposal site for Michigan low- level waste will be available. On July 1, 1995, the disposal site in South Carolina reopened to accept waste from most areas of the U.S., including Michigan. This was the first opportunity for the Cook Plant to dispose of low-level waste since 1990. To the extent practicable, the waste formerly placed in storage and the waste presently generated are now being sent to the disposal site. Energy Policy Act - Nuclear Fees The Energy Policy Act of 1992 (Energy Act), contains a provision to fund the decommissioning and decontamination of DOE's existing uranium enrichment facilities from a combination of sources including assessments against electric utilities which purchased enrichment services from DOE facilities. I&M's remaining estimated liability is $39,325,000, subject to inflation adjustments, and is payable in annual assessments over the next nine years. I&M recorded a regulatory asset concurrent with the recording of the liability. The payments are being recorded and recovered as fuel expense. These assessments were held to be unlawful in a June 1995 decision of the U.S. Court of Federal Claims in a case involving an unaffiliated utility. Based upon that decision I&M filed a complaint in the same court seeking refunds of the assessments levied with respect to its enrichment services contracts. In May 1997 the U.S. Court of Appeals for the Federal Circuit reversed the lower court's 1995 decision. The utility has petitioned the U.S. Supreme Court for review of the decision. I&M's complaint has been stayed pending a final decision in this case. Environmental and Other Matters AEP's subsidiaries are subject to regulation by federal, state and local authorities with regard to air and water-quality control and other environmental matters, and are subject to zoning and other regulation by local authorities. It is expected that costs related to environmental requirements will eventually be reflected in the rates of AEP's electric utility subsidiaries and that AEP's electric utility subsidiaries will be able to provide for required environmental controls. However, some customers may curtail or cease operations as a consequence of higher energy costs. There can be no assurance that all such costs will be recovered. Moreover, legislation currently being proposed at the state and federal levels governing restructuring of the electric utility industry may also affect the recovery of certain costs. See Competition and Business Change. Except as noted herein, AEP's subsidiaries which own or operate generating, transmission and distribution facilities are in substantial compliance with pollution control laws and regulations. Air Pollution Control For the AEP System, compliance with the Clean Air Act (CAA) is requiring substantial expenditures that generally are being recovered through increases in the rates of AEP's operating subsidiaries. However, there can be no assurance that all such costs will be recovered. See Construction Program - Construction Expenditures. Acid Rain: The Acid Rain Program (Title IV) of the Clean Air Act Amendments of 1990 (CAAA) created an emission allowance program pursuant to which utilities are authorized to emit a designated quantity of sulfur dioxide (SO2), measured in tons per year, on a system wide or aggregate basis. Emission reductions are required by virtue of the establishment of annual allowance allocations at levels substantially below historical emission levels for most utility units. There are two phases of SO2 control under the Acid Rain Program. Phase I, effective January 1, 1995, requires SO2 emission reductions from certain units that emitted SO2 above a rate of 2.5 pounds per million Btu heat input in 1985. Phase I unit allowance allocations were calculated based on 1985 utilization rates and an emission rate of 2.5 pounds of SO2 per million Btu heat input. Phase I permits have been issued for all Phase I affected units in the AEP System. Phase II, which affects all fossil fuel-fired steam generating units with capacity greater than 25 megawatts imposes more stringent SO2 emission control requirements beginning January 1, 2000. If a unit emitted SO2 in 1985 at a rate in excess of 1.2 pounds per million Btu heat input, the Phase II allowance allocation is premised upon an emission rate of 1.2 pounds at 1985 utilization levels. If actual SO2 emissions for a Phase II affected unit in 1985 were less than 1.2 pounds per million Btu, the allowance allocation is, in most instances, based on the actual 1985 emission rate. In addition to regulating SO2 emissions, Title IV of the CAAA contains provisions regulating emissions of nitrogen oxides (NOx). In April 1995, Federal EPA promulgated NOx emission limitations for tangentially fired boilers and dry bottom wall-fired boilers for Phase I and Phase II units. In addition, on December 19, 1996, Federal EPA published final NOx emission limitations for wet bottom wall-fired boilers, cyclone boilers, units applying cell burner technology and all other types of boilers. The regulations also revised downward the NOx limitations applicable to tangentially fired and wall-fired boilers in Phase II. These emission limitations are to be achieved by January 1, 2000. On February 13, 1998, the U.S. Court of Appeals for the District of Columbia Circuit, in an appeal in which the AEP System operating companies participated, upheld the emission limitations. Title I National Ambient Air Quality Standards Attainment: The CAA contains additional provisions, other than the Acid Rain Program, which could require reductions in emissions of NOx and other pollutants from fossil fuel- fired power plants. Title I, dealing generally with attainment of federally set National Ambient Air Quality Standards (NAAQS), establishes a tiered system for classifying degrees of nonattainment with the one-hour NAAQS for ozone. Depending upon the severity of non-attainment within a given non- attainment area, reductions in NOx emissions from fossil fuel-fired power plants may be required as part of a state's plan for achieving attainment with the one-hour ozone NAAQS. While one-hour ozone NAAQS non-attainment is largely restricted to urban areas, AEP System generating units could be determined to be affecting downwind urban ozone concentrations and may therefore, eventually be required to reduce NOx emissions pursuant to Title I. In July 1997, Federal EPA revised the ozone and particulate matter NAAQS, creating a new eight-hour ozone standard and establishing a new standard for particulate matter less than 2.5 microns in diameter (PM2.5). Both of these new standards have the potential to affect adversely the operation of AEP System generating units. Substantial reductions in NOx emissions from fossil fuel-fired power plants may be required as part of a state's plan to attain the eight-hour ozone standard. The actual implementation of the new PM2.5 NAAQS has been delayed for five years. Substantial reductions in SO2 and/or other emissions from fossil fuel-fired power plants may be required as part of a state's plan to attain the PM2.5 NAAQS. The AEP System operating companies joined with other utilities to appeal the revised NAAQS by filing petitions for review in August and September 1997 in the U.S. Court of Appeals for the District of Columbia Circuit. On July 9, 1997, Federal EPA proposed revisions to the New Source Performance Standards applicable to new and modified fossil fuel-fired power plants. Federal EPA characterized its proposal as "fuel neutral" since it would impose the same stringent NOx emission limit (1.35lb./megawatt-hour net energy output) for coal-fired boilers as for gas-fired boilers. If finalized, the proposal would effectively require costly selective catalytic reduction or comparable technology to control NOx emissions from new or modified coal-fired boilers. NOx SIP Calls and the Ozone Transport Assessment Group: In 1995, the Environmental Council of States formed the Ozone Transport Assessment Group (OTAG) to study the role of transport of ozone and ozone precursor emissions (primarily NOx) in contributing to ozone nonattainment in the Northeast, Chicago, and Atlanta nonattainment areas. OTAG was comprised of the environmental commissioners of 37 eastern states, members of Federal EPA and representatives from environmental and industry groups. OTAG studied the ozone problem for two years, conducting extensive modeling and analysis of ozone levels and the effects of ozone transport. OTAG submitted its final recommendations to Federal EPA in July 1997. After receipt of the OTAG recommendations, Federal EPA in October 1997 issued a notice (NOx transport SIP call) concluding that certain State Implementation Plans are deficient because they allow NOx emissions that contribute excessively to ozone nonattainment in downwind states. Federal EPA's proposed NOx transport SIP call would establish state-by-state NOx emission budgets for the five-month ozone season to be met by the year 2002. The proposed NOx budgets apply to 22 eastern states and are premised mainly on the assumption of controlling power plant NOx emissions to 0.15 lb./MBtu (approximately 85% below 1990 levels). The NOx transport SIP call purports to implement both the new eight-hour ozone standard and the one-hour ozone standard. The NOx reductions called for by Federal EPA are clearly targeted at coal-fired electric utilities and may adversely impact the ability of electric utilities to obtain new and modified source permits. The cost of meeting NOx emissions reduction requirements that might be imposed as a result of the NOx transport SIP call cannot be precisely predicted at this time, but could be significant. Section 126 Petitions: On or about August 14, 1997, eight northeastern states (New York, New Hampshire, Maine, Massachusetts, Rhode Island, Pennsylvania, Connecticut, and Vermont) filed petitions with Federal EPA under Section 126 of the Clean Air Act, claiming that NOx emissions from power plants in midwestern states, including all the coal-fired plants of AEP's operating subsidiaries, prevent the Northeast from attaining the ozone NAAQS. Among other things, the petitioners generally seek NOx emission reductions 85% below 1990 levels from the utility sources in midwestern states. Federal EPA on or about December 19, 1997 entered into a Memorandum of Agreement (MOA) with the petitioning states that establishes a schedule for taking final action on the Section 126 petitions on approximately the same time frame as Federal EPA's final action on the NOx transport SIP call. The MOA calls for a proposed rulemaking on the Section 126 petitions by September 30, 1998 and final action by April 30, 1999 (subject to certain limited exceptions). On January 9, 1998, a number of utilities, including the operating companies of the AEP System, filed a petition in the U.S. Court of Appeals for the District of Columbia Circuit seeking a review of the MOA. On February 25, 1998, the eight northeastern states filed an action in the U.S. District Court for the Southern District of New York seeking an order directing Federal EPA to rule on the Section 126 petitions within 60 days of receipt. SO2 NAAQS: On January 30, 1998, the U.S. Court of Appeals for the District of Columbia Circuit remanded the final rule promulgated in May 1996 by Federal EPA reaffirming the existing primary NAAQS for SO2. The court directed Federal EPA to provide additional justification for the rule but did not specify a schedule for completion. Hazardous Air Pollutants: Hazardous air pollutant emissions from utility boilers are potentially subject to control requirements under Title III of the CAAA. The CAAA specifically directed Federal EPA to study potential public health impacts of hazardous air pollutants emitted from electric utility steam generating units. Federal EPA was required to report the results of this study to Congress by November 1993 and to regulate emissions of these hazardous pollutants if necessary. On February 25, 1998, Federal EPA issued a final report to Congress citing as potential health and environmental threats, mercury and three other hazardous air pollutants present in power plant emissions. Noting uncertainty regarding health effects and the absence of control technology for mercury, no immediate regulatory action was proposed regarding emission reductions. In addition, Federal EPA is required to study the deposition of hazardous pollutants in the Great Lakes, the Chesapeake Bay, Lake Champlain, and other coastal waters. As part of this assessment, Federal EPA is authorized to adopt regulations to prevent serious adverse effects to public health and serious or widespread environmental effects. It is possible that this assessment of water body deposition may result in additional regulation of electric utility steam generating units. Federal EPA was also required to study mercury emissions and report its findings to Congress by 1994. Federal EPA presented that report to Congress in December 1997. The report identifies electric utilities as being the third leading emitter of mercury. Presently, mercury emissions from electric utilities are not regulated under the CAA. However, Federal EPA intends to engage in further studies of mercury emissions, which may lead to additional regulation in the future. Permitting and Enforcement: The CAAA expanded the enforcement authority of the federal government by increasing the range of civil and criminal penalties for violations of the CAA and enhancing administrative civil provisions, adding a citizen suit provision and imposing a national operating permit system, emission fee program and enhanced monitoring, recordkeeping and reporting requirements for existing and new sources. On February 13, 1997, Federal EPA issued the Credible Evidence rule, which allows Federal EPA to use any credible evidence or information in lieu of, or in addition to, the test methods prescribed by the regulation for determining compliance with emission limits. This rule has the potential to expand significantly Federal EPA's ability to bring enforcement actions and to increase the stringency of the emission limits to which AEP System plants are subject. On March 10, 1997, a number of industries, including AEP System operating companies, filed petitions for review of the Credible Evidence Rule with the U.S. Court of Appeals for the District of Columbia Circuit. Oral argument in that case is scheduled to be heard on April 21, 1998. Global Climate Change: In December 1997, delegates from 167 nations, including the United States, agreed to a treaty, known as the "Kyoto Protocol," establishing legally-binding emission reductions for gases suspected of causing climate change. If the U.S. becomes a party to the treaty it will be bound to reduce emissions of carbon dioxide (CO2), methane and nitrous oxides by 7% below 1990 levels and emissions of hydrofluorcarbons, perfluorocarbons and sulphur hexafluoride 7% below 1995 levels in the years 2008-2012. The Protocol will be available for signature from March 1998 to March 1999 and requires ratification by at least 55 nations that account for at least 55% of developed countries' 1990 emissions of CO2 to enter into force. The agreement is not expected to be sent to the U.S. Senate for ratification before 1999. Since the AEP System is a significant emitter of carbon dioxide, its financial condition could be adversely affected by the imposition of limitations on CO2 emissions if compliance costs cannot be fully recovered from customers. In addition, any such severe program to reduce CO2 emissions could impose substantial costs on industry and society and erode the economic base that AEP's operations serve. West Virginia SO2 Limits: West Virginia promulgated SO2 limitations which Federal EPA approved in February 1978. The emission limitations for the Mitchell Plant have been approved by Federal EPA for primary ambient air quality (health-related) standards only. West Virginia is obligated to reanalyze SO2 emission limits for the Mitchell Plant with respect to secondary ambient air quality (welfare-related) standards. Because the CAA provides no specific deadline for approval of emission limits to achieve secondary ambient air quality standards, it is not certain when Federal EPA will take dispositive action regarding the Mitchell Plant. West Virginia has had a request to increase the SO2 emission limitation for Kammer pending before Federal EPA for many years, although the change has not been acted upon by Federal EPA. On August 4, 1994, however, Federal EPA issued a Notice of Violation to OPCo alleging that Kammer Plant was operating in violation of the applicable federally enforceable SO2 emission limit. On May 20, 1996, the Notice of Violation and an enforcement action subsequently filed by Federal EPA were resolved through the entry of a consent decree in the U.S. District Court for the Northern District of West Virginia. The decree provides for compliance with an interim emission limit of 6.5 pounds of SO2 per million Btu actual heat input on a three-hour basis and 5.8 pounds of SO2 per million Btu on an annual basis. West Virginia and industrial sources in the area of the Kammer Plant are developing a revision to the state implementation plan with respect to SO2 emission limitations which is to be submitted no later than November 1998. The interim emission limit for Kammer will remain in effect until after that time. Short Term SO2 Limits: On January 2, 1997, Federal EPA proposed a new intervention level program under the authority of Section 303 of the CAA to address five minute peak SO2 concentrations believed to pose a health risk to certain segments of the population. The proposal establishes a "concern" level and an "endangerment" level. States must investigate exceedances of the concern level and decide whether to take corrective action. If the endangerment level is exceeded, the state must take action to reduce SO2 levels. The effects of this proposed intervention program on AEP operations cannot be predicted at this time. Regional Haze: On July 31, 1997, Federal EPA proposed new rules to regulate regional haze attributable to anthropogenic emissions. The primary goal of the new regional haze program is to address visibility impairment in and around "Class I" protected areas, such as national parks and wilderness areas. Because regional haze precursor emissions are believed by Federal EPA to travel long distances, Federal EPA proposes to regulate such precursor emissions in every state. Under the proposal, each state must develop a regional haze control program that imposes controls necessary to steadily reduce visibility impairment in Class I areas on the worst days and that ensures that visibility remains good on the best days. This is accomplished using a unit of measurement known as a "deciview." The plan's goal is to reduce visibility impairment by one deciview or more over each 10-15 year period. The final time period will be set as part of the final rulemaking. The AEP System is a significant emitter of fine particulate matter and its precursors that could be linked to the creation of regional haze. The finalization of Federal EPA's proposed rule to control regional haze may have an adverse financial impact on AEP as it may trigger the requirement to install costly new pollution control devices to control emissions of fine particulate matter and its precursors (including SO2 and NOx). The actual impact of the regional haze regulations cannot be determined at this time. Life Extension: On July 21, 1992, Federal EPA published final regulations in the Federal Register governing application of new source rules to generating plant repairs and pollution control projects undertaken to comply with the CAA. Generally, the rule provides that plants undertaking pollution control projects will not trigger new source review requirements. The Natural Resources Defense Council and a group of utilities, including five AEP System companies, have filed petitions in the U.S. Court of Appeals for the District of Columbia Circuit seeking a review of the regulations. The court recently requested that the parties submit proposed briefing schedules. Water Pollution Control The Clean Water Act prohibits the discharge of pollutants to waters of the United States from point sources except pursuant to an NPDES permit issued by Federal EPA or a state under a federally authorized state program. Under the Clean Water Act, effluent limitations requiring application of the best available technology economically achievable are to be applied, and those limitations require that no pollutants be discharged if Federal EPA finds elimination of such discharges is technologically and economically achievable. The Clean Water Act provides citizens with a cause of action to enforce compliance with its pollution control requirements. Since 1982, many such actions against NPDES permit holders have been filed. To date, no AEP System plants have been named in such actions. All System Plants are operating with NPDES permits. Under EPA's regulations, operation under an expired NPDES permit is authorized provided an application is filed at least 180 days prior to expiration. Renewal applica- tions are being prepared or have been filed for renewal of NPDES permits which expire in 1998. The NPDES permits generally require that certain thermal impact study programs be undertaken. These studies have been completed for all System plants. Thermal variances are in effect for all plants with once-through cooling water. The thermal variances for Conesville and Muskingum River plants impose thermal management conditions that could result in load curtail- ment under certain conditions, but the cost impacts are not expected to be significant. Based on favorable results of in-stream biological studies, the thermal temperature limits for both Conesville and Muskingum River plants were raised in the renewed permits issued in 1996. Consequently, the potential for load curtailment and adverse cost impacts is further reduced. Certain mining operations conducted by System companies as discussed under Fuel Supply are also subject to Federal and state water pollution control requirements, which may entail substantial expenditures for control facilities, not included at present in the System's construction cost estimates set forth herein. The Federal Water Quality Act of 1987 requires states to adopt stringent water quality standards for a large category of toxic pollutants and to identify specialized control measures for dischargers to waters where it is shown through the use of total maximum daily loads (TMDLs) that water quality standards are not being met. Implementation of these provisions could result in significant costs to the AEP System if biological monitoring requirements and water quality-based effluent limits are placed in NPDES permits. In March 1995, Federal EPA finalized a set of rules which establish minimum water quality standards, anti-degradation policies and implementation procedures for more stringently controlling releases of toxic pollutants into the Great Lakes system. This regulatory package is called the Great Lakes Water Quality Initiative (GLWQI). The most direct compliance cost impact could be related to I&M's Cook Plant. Management cannot presently determine whether the GLWQI would have a significant adverse impact on AEP operations. The significance of such impact will depend on the outcome of Federal EPA's policy on intake credits and site specific variables as well as Michigan's implementation strategy. Federal EPA's rule is presently under review by the District of Columbia Circuit Court of Appeals in litigation initiated by several industry groups. If Indiana and Ohio eventually adopt the GLWQI criteria for statewide application, AEP System plants located in those states could also be affected. Solid and Hazardous Waste Section 311 of the Clean Water Act imposes substantial penalties for spills of Federal EPA-listed hazardous substances into water and for failure to report such spills. The Comprehensive Environmental Response, Compensa- tion, and Liability Act (CERCLA) expanded the reporting requirements to cover the release of hazardous substances generally into the environment, including water, land and air. AEP's subsidiaries store and use some of these hazardous substances, including PCBs contained in certain capacitors and transformers, but the occurrence and ramifications of a spill or release of such substances cannot be predicted. CERCLA and similar state law provide governmental agencies with the authority to require clean-up of hazardous waste sites and releases of hazardous substances into the environment and to seek compensation for damages to natural resources. Since liability under CERCLA is strict and can be applied retroactively, AEP System companies which previously disposed of PCB- containing electrical equipment and other hazardous substances may be required to participate in remedial activities at such disposal sites should environ- mental problems result. AEP System companies are presently defendants in five cases involving cost-recovery lawsuits at Federal EPA-identified CERCLA sites. OPCo is involved at three of these sites and I&M at the two other sites. AEP System companies are identified as Potentially Responsible Parties (PRPs) for seven additional federal sites, including CSPCo, KEPCo and Wheeling Power Company at one site each, I&M at three sites, and OPCo at two sites. I&M has been named as a PRP at one state remediation site. Management's present estimates do not anticipate material cleanup costs for identified sites for which AEP subsidiaries have been declared PRPs or are defendants in CERCLA cost recovery litigation. However, if for reasons not currently identified significant costs are incurred for cleanup, future results of operations and possibly financial condition would be adversely affected unless the costs can be recovered through rates. Regulations issued by Federal EPA under the Toxic Substances Control Act govern the use, distribution and disposal of PCBs, including PCBs in electrical equipment. Deadlines for removing certain PCB-containing electrical equipment from service have been met. In addition to handling hazardous substances, the System companies generate solid waste associated with the combustion of coal, the vast majority of which is fly ash, bottom ash and flue gas desulfurization wastes. These wastes presently are considered to be non-hazardous under RCRA and applicable state law and the wastes are treated and disposed in surface impoundments or landfills in accordance with state permits or authorization or beneficially utilized. As required by RCRA, EPA evaluated whether high volume coal combustion wastes (such as fly ash, bottom ash and flue gas desulfurization wastes) should be regulated as hazardous waste. In August, 1993 EPA issued a regulatory determination that such high volume coal combustion wastes should not be regulated as hazardous waste. For low volume coal combustion wastes, such as metal and boiler cleaning wastes, Federal EPA will gather additional information and make a regulatory determination by April 1999. Until that time, these low volume wastes are provisionally excluded from regulation under the hazardous waste provisions of RCRA. All presently generated hazardous waste is being disposed of at permitted off-site facilities in compliance with applicable Federal and state laws and regulations. For System facilities which generate such wastes, System companies have filed the requisite notices and are complying with RCRA and applicable state regulations for generators. Nuclear waste produced at the Cook Plant regulated under the Atomic Energy Act is excluded from regulation under RCRA. Federal EPA's technical requirements for underground storage tanks containing petroleum will require retrofitting or replacement of an appreciable number of tanks. Compliance costs for tank replacement and site remediation have not been significant to date. Electric and Magnetic Fields (EMF) EMF is found everywhere there is electricity. Electric fields are created by the presence of electric charges. Magnetic fields are produced by the flow of those charges. This means that EMF is created by electricity flowing in transmission and distribution lines, household wiring, and appliances. A number of studies in the past several years have examined the possibility of adverse health effects from EMF. While some of the epidemiological studies have indicated some association between exposure to EMF and health effects, the majority of studies have indicated no such association. On October 31, 1996, the National Academy of Sciences (NAS) released a report, based on a review of over 500 studies spanning 17 years of research, which contained the following summary statement: "... the con- clusion of the committee is that the current body of evidence does not show that exposure to these fields presents a human health hazard..." The epidemi- ological studies that have received the most public attention, including the NAS report, reflect a weak correlation between surrogate or indirect estimates of EMF exposure and certain cancers. Studies using direct measurements of EMF exposure show no such association. On July 3, 1997, the results of a five-year study by the National Cancer Institute (NCI) were released. The NCI researchers found no evidence that EMF in the home increases the risk of childhood cancer. The Energy Policy Act of 1992 established a coordinated Federal EMF research program which will end in 1998. The program funding is $65,000,000, half of which was provided by private parties including utilities. AEP has contributed over $400,000 to this program. AEP has also supported an extensive EMF research program coordinated by the Electric Power Research Institute, working closely with its staff and contributing more than $500,000 to this effort in 1997. See Research and Development. AEP's participation in the programs is a continuation of its efforts to monitor and support further research and to communicate with its customers and employees about this issue. Its operating company subsidiaries provide their residential customers with information and field measurements on request, although there is no scientific basis for interpreting such measurements. A number of lawsuits based on EMF-related grounds have been filed in recent years against electric utilities. A suit was filed on May 23, 1990 against I&M involving claims that EMF from a 345 KV transmission line caused adverse health effects. No specific amount has been requested for damages in this case and no trial date has been set. Some states have enacted regulations to limit the strength of magnetic fields at the edge of transmission line rights-of-way. No state which the AEP System serves has done so. In March 1993, The Ohio Power Siting Board issued its amended rules providing for additional consideration of the possible effects of EMF in the certification of electric transmission facilities. Applicants are required to address possible health effects and discuss the consideration of design alternatives with respect to estimates of EMF levels. Management cannot predict the ultimate impact of the question of EMF exposure and adverse health effects. If further research shows that EMF exposure contributes to increased risk of cancer or other health problems, or if the courts conclude that EMF exposure harms individuals and that utilities are liable for damages, or if states limit the strength of magnetic fields to such a level that the current electricity delivery system must be significantly changed, then the results of operations and financial condition of AEP and its operating subsidiaries could be materially adversely affected unless these costs can be recovered from ratepayers. Research and Development AEP and its subsidiaries are involved in a number of research projects which are directed toward developing more efficient methods of burning coal, reducing the contaminants resulting from combustion of coal, and improving the efficiency and reliability of power transmission, distribution and utilization. AEP System operating companies are members of the Electric Power Research Institute (EPRI), an organization that manages research and development on behalf of the U.S. electric utility industry. EPRI, founded in 1973, manages technical research and development programs for its members to improve power production, delivery and use. Approximately 700 utilities are members. Total AEP dues to EPRI were $15,300,000 for 1997, $9,900,000 for 1996 and $9,600,000 for 1995. Total research and development expenditures by AEP and its subsidiaries, including EPRI dues, were approximately $23,600,000 for the year ended December 31, 1997, $16,400,000 for the year ended December 31, 1996 and $13,600,000 for the year ended December 31, 1995. This includes expenditures of $4,600,000 for 1997, $3,300,000 for 1996 and $1,100,000 for 1995 related to pressurized fluidized-bed combustion, a process in which sulfur is removed during coal combustion and nitrogen oxide formation is minimized. Item 2. Properties At December 31, 1997, subsidiaries of AEP owned (or leased where indicated) generating plants with the net power capabilities (winter rating) shown in the following table:
Net Kilowatt Owner, Plant Type and Name Location (Near) Capability AEP GENERATING COMPANY: Steam--Coal Fired: Rockport Plant (AEGCo share) Rockport, Indiana 1,300,000(a) APPALACHIAN POWER COMPANY: Steam--Coal-Fired: John E. Amos, Units 1 & 2 St. Albans, West Virginia 1,600,000 John E. Amos, Unit 3 (APCo share) St. Albans, West Virginia 433,000(b) Clinch River Carbo, Virginia 705,000 Glen Lyn Glen Lyn, Virginia 335,000 Kanawha River Glasgow, West Virginia 400,000 Mountaineer New Haven, West Virginia 1,300,000 Philip Sporn, Units 1 & 3 New Haven, West Virginia 308,000 Hydroelectric--Conventional: Buck Ivanhoe, Virginia 10,000 Byllesby Byllesby, Virginia 20,000 Claytor Radford, Virginia 76,000 Leesville Leesville, Virginia 40,000 London Montgomery, West Virginia 16,000 Marmet Marmet, West Virginia 16,000 Niagara Roanoke, Virginia 3,000 Reusens Lynchburg, Virginia 12,000 Winfield Winfield, West Virginia 19,000 Hydroelectric--Pumped Storage: Smith Mountain Penhook, Virginia 565,000 5,858,000 COLUMBUS SOUTHERN POWER COMPANY: Steam--Coal-Fired: Beckjord, Unit 6 New Richmond, Ohio 53,000(c) Conesville, Units 1-3, 5 & 6 Coshocton, Ohio 1,165,000 Conesville, Unit 4 Coshocton, Ohio 339,000(c) Picway, Unit 5 Columbus, Ohio 100,000 Stuart, Units 1-4 Aberdeen, Ohio 608,000(c) Zimmer Moscow, Ohio 330,000(c) 2,595,000 INDIANA MICHIGAN POWER COMPANY: Steam--Coal-Fired: Rockport Plant (I&M share) Rockport, Indiana 1,300,000(a) Tanners Creek Lawrenceburg, Indiana 995,000 Steam--Nuclear: Donald C. Cook Bridgman, Michigan 2,110,000 Gas Turbine: Fourth Street Fort Wayne, Indiana 18,000(d) Hydroelectric--Conventional: Berrien Springs Berrien Springs, Michigan 3,000 Buchanan Buchanan, Michigan 2,000 Constantine Constantine, Michigan 1,000 Elkhart Elkhart, Indiana 1,000 Mottville Mottville, Michigan 1,000 Twin Branch Mishawaka, Indiana 3,000 4,434,000 KENTUCKY POWER COMPANY: Steam--Coal-Fired: Big Sandy Louisa, Kentucky 1,060,000 OHIO POWER COMPANY: Steam--Coal Fired: John E. Amos, Unit 3 (OPCo share) St. Albans, West Virginia 867,000(b) Cardinal, Unit 1 Brilliant, Ohio 600,000 General James M. Gavin Cheshire, Ohio 2,600,000(e) Kammer Captina, West Virginia 630,000 Mitchell Captina, West Virginia 1,600,000 Muskingum Beverly, Ohio 1,425,000 Philip Sporn, Units 2, 4 & 5 New Haven, West Virginia 742,000 Hydroelectric--Conventional: Racine Racine, Ohio 48,000 8,512,000 Total Generating Capability . . . . . 23,759,000 SUMMARY: Total Steam-- Coal-Fired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,795,000 Nuclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,110,000 Total Hydroelectric-- Conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,000 Pumped Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565,000 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 Total Generating Capability . . . . . . . . 23,759,000
__________ (a) Unit 1 of the Rockport Plant is owned one-half by AEGCo and one-half by I&M. Unit 2 of the Rockport Plant is leased one-half by AEGCo and one- half by I&M. The leases terminate in 2022 unless extended. (b) Unit 3 of the John E. Amos Plant is owned one-third by APCo and two- thirds by OPCo. (c) Represents CSPCo's ownership interest in generating units owned in common with CG&E and DP&L. (d) Leased from the City of Fort Wayne, Indiana. Since 1975, I&M has leased and operated the assets of the municipal system of the City of Fort Wayne, Indiana under a 35-year lease with a provision for an additional 15-year extension at the election of I&M. (e) The scrubber facilities at the Gavin Plant are leased. The lease terminates in 2010 unless extended. See Item 1 under Fuel Supply, for information concerning coal reserves owned or controlled by subsidiaries of AEP. The following table sets forth the total overhead circuit miles of transmission and distribution lines of the AEP System, APCo, CSPCo, I&M, KEPCo and OPCo and that portion of the total representing 765,000-volt lines:
Total Overhead Circuit Miles of Transmission and Circuit Miles of Distribution Lines 765,000-volt Lines AEP System(a) . . . . . 127,864(b) 2,022 APCo . . . . . . . . . 49,534 641 CSPCo(a) . . . . . . . 14,820 -- I&M . . . . . . . . . . 20,855 614 KEPCo . . . . . . . . . 10,136 258 OPCo . . . . . . . . . 29,448 509
__________ (a) Includes 766 miles of 345,000-volt jointly owned lines. (b) Includes lines of other AEP System companies not shown. Titles The AEP System's electric generating stations are generally located on lands owned in fee simple. The greater portion of the transmission and distribution lines of the System has been constructed over lands of private owners pursuant to easements or along public highways and streets pursuant to appropriate statutory authority. The rights of the System in the realty on which its facilities are located are considered by it to be adequate for its use in the conduct of its business. Minor defects and irregularities customarily found in title to properties of like size and character may exist, but such defects and irregularities do not materially impair the use of the properties affected thereby. System companies generally have the right of eminent domain whereby they may, if necessary, acquire, perfect or secure titles to or easements on privately-held lands used or to be used in their utility operations. Substantially all the physical properties of APCo, CSPCo, I&M, KEPCo and OPCo are subject to the lien of the mortgage and deed of trust securing the first mortgage bonds of each such company. System Transmission Lines and Facility Siting Legislation in the states of Indiana, Kentucky, Michigan, Ohio, Virginia, and West Virginia requires prior approval of sites of generating facilities and/or routes of high-voltage transmission lines. Delays and additional costs in constructing facilities have been experienced as a result of proceedings conducted pursuant to such statutes, as well as in proceedings in which operating companies have sought to acquire rights-of-way through condemnation, and such proceedings may result in additional delays and costs in future years. Peak Demand The AEP System is interconnected through 120 high-voltage transmission interconnections with 26 neighboring electric utility systems. The all-time and 1997 one-hour peak System demands were 25,940,000 and 24,485,000 kilo- watts, respectively (which included 7,314,000 and 4,400,000 kilowatts, respectively, of scheduled deliveries to unaffiliated systems which the System might, on appropriate notice, have elected not to schedule for delivery) and occurred on June 17, 1994 and January 17, 1997, respectively. The net dependable capacity to serve the System load on such date, including power available under contractual obligations, was 23,457,000 and 23,669,000 kilo- watts, respectively. The all-time and 1997 one-hour internal peak demands were 19,557,000 and 19,381,000 kilowatts, respectively, and occurred on February 5, 1996 and January 17, 1997, respectively. The net dependable capacity to serve the System load on such date, including power dedicated under contractual arrangements, was 23,765,000 and 23,669,000 kilowatts, respectively. The all-time one-hour integrated and internal net system peak demands and 1997 peak demands for AEP's generating subsidiaries are shown in the following tabulation:
All-time one-hour integrated 1997 one-hour integrated net system peak demand net system peak demand (in thousands) Number of Number of Kilowatts Date Kilowatts Date APCo 8,303 January 17, 1997 8,303 January 17, 1997 CSPCo 4,172 June 17, 1994 3,910 July 2, 1997 I&M 5,027 June 17, 1994 4,681 July 2, 1997 KEPCo 1,711 January 17, 1997 1,711 January 17, 1997 OPCo 7,291 June 17, 1994 6,450 January 17, 1997
All-time one-hour integrated 1997 one-hour integrated net internal peak demand net internal peak demand (in thousands) Number of Number of Kilowatts Date Kilowatts Date APCo 6,903 February 5, 1996 6,857 January 17, 1997 CSPCo 3,378 August 14, 1995 3,354 June 25, 1997 I&M 3,926 July 14, 1997 3,926 July 14, 1997 KEPCo 1,418 February 5, 1996 1,417 January 17, 1997 OPCo 5,641 August 14, 1995 5,519 July 14, 1997
Hydroelectric Plants AEP has 17 facilities, of which 16 are licensed through FERC. Licenses for six System hydroelectric plants expired in 1993. Four new licenses were issued in 1994 and two were issued in 1996. The license for the hydroelectric plant at Elkhart, Indiana expires in 2000. In 1995, a notice of intent to relicense the Elkhart project was filed. The application will be filed in 1998. The license for Mottville expires in 2003. A notice of intent to relicense will be filed in 1998. Cook Nuclear Plant Unit 1 of the Cook Plant, which was placed in commercial operation in 1975, has a nominal net electric rating of 1,020,000 kilowatts. Unit 1's availability factor was 52.6% during 1997 and 97.6% during 1996. Unit 2, of slightly different design, has a nominal net electrical rating of 1,090,000 kilowatts and was placed in commercial operation in 1978. Unit 2's availability factor was 65.1% during 1997 and 87.0% during 1996. The Cook Plant was shut down in September 1997 to respond to issues raised by the NRC. See Cook Plant Shutdown. Units 1 and 2 are licensed by the NRC to operate at 100% of rated thermal power to October 25, 2014 and December 23, 2017, respectively. Costs associated with the operation, maintenance and retirement of nuclear plants continue to be significant and less predictable than costs associated with other sources of generation, in large part due to changing regulatory requirements and safety standards, availability of nuclear waste disposal facilities and experience gained in the construction and operation of nuclear facilities. I&M may also incur costs and experience reduced output at its Cook Plant because of the design criteria prevailing at the time of construction and the age of the plant's systems and equipment. In addition, for economic or other reasons, operation of the Cook Plant for the full term of its now assumed life cannot be assured. Nuclear industry-wide and Cook Plant initiatives have contributed to slowing the growth of operating and maintenance costs. However, the ability of I&M to obtain adequate and timely recovery of costs associated with the Cook Plant, including replacement power and retirement costs, is not assured. Cook Plant Shutdown On September 9 and 10, 1997, during a NRC architect engineer design inspection, questions regarding the operability of certain safety systems caused AEP operations personnel to shut down Units 1 and 2 of the Cook Plant. On September 19, 1997, the NRC issued a Confirmatory Action Letter requiring AEP to address the issues identified in the letter. AEP is working with the NRC to resolve these issues and other issues related to restart of the units. Certain issues identified in the letter have been addressed. At this time management is unable to determine when the units will be returned to service. If the units are not returned to service in a reasonable period of time, it could have a materially adverse impact on results of operations and possibly financial condition. Nuclear Incident Liability The Price-Anderson Act limits public liability for a nuclear incident at any licensed reactor in the United States to $8.9 billion. I&M has insurance coverage for liability from a nuclear incident at its Cook Plant. Such coverage is provided through a combination of private liability insurance, with the maximum amount available of $200,000,000, and mandatory participation for the remainder of the $8.9 billion liability, in an industry retrospective deferred premium plan which would, in case of a nuclear incident, assess all licensees of nuclear plants in the U.S. Under the deferred premium plan, I&M could be assessed up to $158,600,000 payable in annual installments of $20,000,000 in the event of a nuclear incident at Cook or any other nuclear plant in the U.S. There is no limit on the number of incidents for which I&M could be assessed these sums. I&M also has property damage, decontamination and decommissioning insurance for loss resulting from damage to the Cook Plant facilities in the amount of $3.0 billion. Coverage is provided by Energy Insurance Bermuda (EIB), Nuclear Mutual Limited (NML) and Nuclear Electric Insurance Limited (NEIL). If EIB's, NML's and NEIL's losses exceed their available resources, I&M would be subject to a total retrospective premium assessment of up to $20,900,000. NRC regulations require that, in the event of an accident, whenever the estimated costs of reactor stabilization and site decontamination exceed $100,000,000, the insurance proceeds must be used, first, to return the reactor to, and maintain it in, a safe and stable condition and, second, to decontaminate the reactor and reactor station site in accordance with a plan approved by the NRC. The insurers then would indemnify I&M for decommissioning costs in excess of funds already collected for decommissioning and for property damage up to $3.0 billion less any amounts used for stabilization and decontamination. See Fuel Supply - Nuclear Waste. The NML and NEIL extra-expense programs provide insurance to cover extra costs resulting from a prolonged accidental outage of a nuclear unit. I&M's policy insures against such increased costs up to approximately $3,500,000 per week (starting 17 weeks after the outage) for one year, $2,800,000 per week for the second and third years, or 80% of those amounts per unit if both units are down for the same reason. If NEIL's losses exceed its available resources, I&M would be subject to a total retrospective premium assessment of up to $7,125,000. Potential Uninsured Losses Some potential losses or liabilities may not be insurable or the amount of insurance carried may not be sufficient to meet potential losses and liabilities, including liabilities relating to damage to the Cook Plant and costs of replacement power in the event of a nuclear incident at the Cook Plant. Future losses or liabilities which are not completely insured, unless allowed to be recovered through rates, could have a material adverse effect on results of operations and the financial condition of AEP, I&M and other AEP System companies. Item 3. Legal Proceedings On April 4, 1991, then Secretary of Labor Lynn Martin announced that the U.S. Department of Labor (DOL) had issued a total of 4,710 citations to opera- tors of 847 coal mines who allegedly submitted respirable dust sampling cassettes that had been altered so as to remove a portion of the dust. The cassettes were submitted in compliance with DOL regulations which require systematic sampling of airborne dust in coal mines and submission of the entire cassettes (which include filters for collecting dust particulates) to the Mine Safety and Health Administration (MSHA) for analysis. The amount of dust contained on the cassette's filter determines an operator's compliance with respirable dust standards under the law. OPCo's Meigs No. 2, Meigs No. 31, Martinka, and Windsor Coal mines received 16, 3, 15 and 2 citations, respectively. MSHA has assessed civil penalties totalling $56,900 for all these citations. OPCo's samples in question involve about 1 percent of the 2,500 air samples that OPCo submitted over a 20-month period from 1989 through 1991 to the DOL. OPCo is contesting the citations before the Federal Mine Safety and Health Review Commission. An administrative hearing was held before an administrative law judge with respect to all affected coal operators. On July 20, 1993, the administrative law judge rendered a decision in this case holding that the Secretary of Labor failed to establish that the presence of a "white center" on the dust sampling filter indicated intentional alteration. In the case of an unaffiliated mine, the administrative law judge ruled on April 20, 1994, that there was not an intentional alteration of the dust sampling filter. The Secretary of Labor appealed to the Federal Mine Safety and Health Review Commission the July 20, 1993 and April 20, 1994 administrative law judge decisions and in November 1995 the Commission affirmed these decisions. The Secretary of Labor has appealed the Com- mission's decision to the U.S. Court of Appeals for the District of Columbia Circuit. All remaining cases, including the citations involving OPCo's mines, have been stayed. On February 28, 1994, Ormet Corporation filed a complaint in the U.S. District Court, Northern District of West Virginia, against AEP, OPCo, the Service Corporation and two of its employees, Federal EPA and the Administrator of Federal EPA. Ormet is the operator of a major aluminum reduction plant in Ohio and is a customer of OPCo. See Certain Industrial Customers. Pursuant to the Clean Air Act Amendments of 1990, OPCo received SO2 Allowances for its Kammer Plant. See Environmental and Other Matters. Ormet's complaint sought a declaration that it is the owner of approximately 89% of the Phase I and Phase II SO2 allowances issued for use by the Kammer Plant. On March 31, 1995, the District Court issued an opinion and order dismissing Ormet's claims based on a lack of jurisdiction. On April 11, 1995, Ormet appealed the District Court's decision to the U.S. Court of Appeals for the Fourth Circuit with respect to the Service Corporation and OPCo only. On October 23, 1996, the Court of Appeals issued an opinion reversing the District Court. On January 10, 1997, OPCo and the Service Corporation filed their answer and counterclaims in the District Court. A trial date in late 1998 is anticipated. See Item 1 for a discussion of certain environmental and rate matters. Item 4. Submission of Matters to a Vote of Security Holders AEP, APCo, I&M and OPCo. None. AEGCo, CSPCo and KEPCo. Omitted pursuant to Instruction I(2)(c). Executive Officers of the Registrants AEP. The following persons are, or may be deemed, executive officers of AEP. Their ages are given as of March 1, 1998. Name Age Office (a) E. Linn Draper, Jr. 56 Chairman of the Board, President and Chief Executive Officer of AEP and of the Service Corporation Peter J. DeMaria 63 Controller of AEP; Vice Chairman of the Board of the Service Corporation Gerald P. Maloney 64 Vice President and Secretary of AEP; Vice Chairman of the Board of the Service Corporation Paul D. Addis 44 Executive Vice President of the Service Corporation Donald M. Clements, Jr. 48 Executive Vice President-Corporate Development of the Service Corporation Henry Fayne 51 Executive Vice President-Financial Services of the Service Corporation William J. Lhota 58 Executive Vice President of the Service Corporation James J. Markowsky 53 Executive Vice President-Power Generation of the Service Corporation J. H. Vipperman 57 Executive Vice President-Corporate Services of the Service Corporation __________ (a) All of the executive officers listed above have been employed by the Service Corporation or System companies in various capacities (AEP, as such, has no employees) during the past five years, except for Messrs. Addis and Clements. Prior to joining the Service Corporation in February 1997 in his present position, Mr. Addis was Executive Vice President (1992-1993) and President (1993-January 1997) of Louis Dreyfus Electric Power Inc. and President of Duke/Louis Dreyfus LLC (1995- January 1997). Prior to joining the Service Corporation in 1994 as Senior Vice President-Corporate Development, Mr. Clements was Senior Vice President of External Affairs of Gulf States Utilities Company (1993-1994). All of the above officers are appointed annually for a one-year term by the board of directors of AEP, the board of directors of the Service Corporation, or both, as the case may be. APCo. The names of the executive officers of APCo, the positions they hold with APCo, their ages as of March 1, 1998, and a brief account of their business experience during the past five years appears below. The directors and executive officers of APCo are elected annually to serve a one-year term. Name Age Position (a) Period E. Linn Draper, Jr. 56 Director 1992-Present Chairman of the Board and Chief Executive Officer 1993-Present Vice President 1992-1993 Chairman of the Board, President and Chief Executive Officer of AEP and the Service Corporation 1993-Present President of AEP 1992-1993 President and Chief Operating Officer of the Service Corporation 1992-1993 Peter J. DeMaria 63 Director 1988-Present Vice President 1991-Present Controller 1995-Present Treasurer 1978-1995 Controller of AEP 1995-Present Treasurer of AEP 1978-1995 Vice Chairman of the Board of the Service Corporation 1998-Present Executive Vice President- Administration and Chief Accounting Officer of the Service Corporation 1984-1997 William J. Lhota 58 Director 1990-Present President and Chief Operating Officer 1996-Present Vice President 1989-1995 Executive Vice President of the Service Corporation 1993-Present Executive Vice President-Operations of the Service Corporation 1989-1993 Gerald P. Maloney 64 Director and Vice President 1970-Present Vice President of AEP 1974-Present Secretary of AEP 1994-Present Vice Chairman of the Board of the Service Corporation 1998-Present Executive Vice President- Chief Financial Officer of the Service Corporation 1991-1997 James J. Markowsky 53 Director 1993-Present Vice President 1995-Present Executive Vice President- Power Generation of the Service Corporation 1996-Present Executive Vice President- Engineering and Construction of the Service Corporation 1993-1996 Senior Vice President and Chief Engineer of the Service Corporation 1988-1993 __________ (a) Positions are with APCo unless otherwise indicated. OPCo. The names of the executive officers of OPCo, the positions they hold with OPCo, their ages as of March 1, 1998, and a brief account of their business experience during the past five years appear below. The directors and executive officers of OPCo are elected annually to serve a one-year term. Name Age Position (a) Period E. Linn Draper, Jr. 56 Director 1992-Present Chairman of the Board and Chief Executive Officer 1993-Present Vice President 1992-1993 Chairman of the Board, President and Chief Executive Officer of AEP and the Service Corporation 1993-Present President of AEP 1992-1993 President and Chief Operating Officer of the Service Corporation 1992-1993 Peter J. DeMaria 63 Director 1978-Present Vice President 1991-Present Controller 1995-Present Treasurer 1978-1995 Controller of AEP 1995-Present Treasurer of AEP 1978-1995 Vice Chairman of the Board of the Service Corporation 1998-Present Executive Vice President- Administration and Chief Accounting Officer of the Service Corporation 1984-1997 William J. Lhota 58 Director 1989-Present President and Chief Operating Officer 1996-Present Vice President 1989-1995 Executive Vice President of the Service Corporation 1993-Present Executive Vice President-Operations of the Service Corporation 1989-1993 Gerald P. Maloney 64 Director 1973-Present Vice President 1970-Present Vice President of AEP 1974-Present Secretary of AEP 1994-Present Vice Chairman of the Board of the Service Corporation 1998-Present Executive Vice President- Chief Financial Officer of the Service Corporation 1991-1997 James J. Markowsky 53 Director 1989-Present Vice President 1995-Present Executive Vice President- Power Generation of the Service Corporation 1996-Present Executive Vice President- Engineering and Construction of the Service Corporation 1993-1996 Senior Vice President and Chief Engineer of the Service Corporation 1988-1993 __________ (a) Positions are with OPCo unless otherwise indicated. PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters AEP. AEP Common Stock is traded principally on the New York Stock Exchange. The following table sets forth for the calendar periods indicated the high and low sales prices for the Common Stock as reported on the New York Stock Exchange Composite Tape and the amount of cash dividends paid per share of Common Stock.
Per Share Market Price Quarter Ended High Low Dividend(1) March 1996 . . . . . $44-3/4 $40-1/8 $.60 June 1996 . . . . . . 42-3/4 38-5/8 .60 September 1996 . . . 43-1/8 40 .60 December 1996 . . . . 42-1/2 39-1/2 .60 March 1997 . . . . . 43-3/16 40 .60 June 1997 . . . . . . 42-1/2 39-1/8 .60 September 1997 . . . 46-5/8 41-1/2 .60 December 1997 . . . . 52 45-1/4 .60
(1) See Note 5 of the Notes to the Consolidated Financial Statements of AEP for information regarding restrictions on payment of dividends. At December 31, 1997, AEP had approximately 145,000 shareholders of record. AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo. The information required by this item is not applicable as the common stock of all these companies is held solely by AEP. Item 6. Selected Financial Data AEGCo. Omitted pursuant to Instruction I(2)(a). AEP. The information required by this item is incorporated herein by reference to the material under Selected Consolidated Financial Data in the AEP 1997 Annual Report (for the fiscal year ended December 31, 1997). APCo. The information required by this item is incorporated herein by reference to the material under Selected Consolidated Financial Data in the APCo 1997 Annual Report (for the fiscal year ended December 31, 1997). CSPCo. Omitted pursuant to Instruction I(2)(a). I&M. The information required by this item is incorporated herein by reference to the material under Selected Consolidated Financial Data in the I&M 1997 Annual Report (for the fiscal year ended December 31, 1997). KEPCo. Omitted pursuant to Instruction I(2)(a). OPCo. The information required by this item is incorporated herein by reference to the material under Selected Consolidated Financial Data in the OPCo 1997 Annual Report (for the fiscal year ended December 31, 1997). Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition AEGCo. Omitted pursuant to Instruction I(2)(a). Management's narrative analysis of the results of operations and other information required by Instruction I(2)(a) is incorporated herein by reference to the material under Management's Narrative Analysis of Results of Operations in the AEGCo 1997 Annual Report (for the fiscal year ended December 31, 1997). AEP. The information required by this item is incorporated herein by reference to the material under Management's Discussion and Analysis of Results of Operations and Financial Condition in the AEP 1997 Annual Report (for the fiscal year ended December 31, 1997). APCo. The information required by this item is incorporated herein by reference to the material under Management's Discussion and Analysis of Results of Operations and Financial Condition in the APCo 1997 Annual Report (for the fiscal year ended December 31, 1997). CSPCo. Omitted pursuant to Instruction I(2)(a). Management's narrative analysis of the results of operations and other information required by Instruction I(2)(a) is incorporated herein by reference to the material under Management's Narrative Analysis of Results of Operations in the CSPCo 1997 Annual Report (for the fiscal year ended December 31, 1997). I&M. The information required by this item is incorporated herein by reference to the material under Management's Discussion and Analysis of Results of Operations and Financial Condition in the I&M 1997 Annual Report (for the fiscal year ended December 31, 1997). KEPCo. Omitted pursuant to Instruction I(2)(a). Management's narrative analysis of the results of operations and other information required by Instruction I(2)(a) is incorporated herein by reference to the material under Management's Narrative Analysis of Results of Operations in the KEPCo 1997 Annual Report (for the fiscal year ended December 31, 1997). OPCo. The information required by this item is incorporated herein by reference to the material under Management's Discussion and Analysis of Results of Operations and Financial Condition in the OPCo 1997 Annual Report (for the fiscal year ended December 31, 1997). Item 7A. Quantitative and Qualitative Disclosures About Market Risk AEP. The information required by this item is incorporated herein by reference to the material under Management's Discussion and Analysis of Results of Operations and Financial Condition in the AEP 1997 Annual Report (for the fiscal year ended December 31, 1997). AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo. Not applicable. Item 8. Financial Statements and Supplementary Data AEGCo. The information required by this item is incorporated herein by reference to the financial statements and supplementary data described under Item 14 herein. AEP. The information required by this item is incorporated herein by reference to the financial statements and supplementary data described under Item 14 herein. APCo. The information required by this item is incorporated herein by reference to the financial statements and supplementary data described under Item 14 herein. CSPCo. The information required by this item is incorporated herein by reference to the financial statements and supplementary data described under Item 14 herein. I&M. The information required by this item is incorporated herein by reference to the financial statements and supplementary data described under Item 14 herein. KEPCo. The information required by this item is incorporated herein by reference to the financial statements and supplementary data described under Item 14 herein. OPCo. The information required by this item is incorporated herein by reference to the financial statements and supplementary data described under Item 14 herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure AEGCo, AEP, APCo, CSPCo, I&M, KEPCo and OPCo. None. PART III Item 10. Directors and Executive Officers of the Registrants AEGCo. Omitted pursuant to Instruction I(2)(c). AEP. The information required by this item is incorporated herein by reference to the material under Nominees for Director and Section 16(a) Beneficial Ownership Reporting Compliance of the definitive proxy statement of AEP for the 1998 annual meeting of shareholders, to be filed within 120 days after December 31, 1997. Reference also is made to the information under the caption Executive Officers of the Registrants in Part I of this report. APCo. The information required by this item is incorporated herein by reference to the material under Election of Directors of the definitive information statement of APCo for the 1998 annual meeting of stockholders, to be filed within 120 days after December 31, 1997. Reference also is made to the information under the caption Executive Officers of the Registrants in Part I of this report. CSPCo. Omitted pursuant to Instruction I(2)(c). I&M. The names of the directors and executive officers of I&M, the positions they hold with I&M, their ages as of March 1, 1998, and a brief account of their business experience during the past five years appear below. The directors and executive officers of I&M are elected annually to serve a one-year term. Name Age Position (a)(b)(c) Period E. Linn Draper, Jr. 56 Director 1992-Present Chairman of the Board and Chief Executive Officer 1993-Present Vice President 1992-1993 Chairman of the Board, President and Chief Executive Officer of AEP and the Service Corporation 1993-Present President of AEP 1992-1993 President and Chief Operating Officer of the Service Corporation 1992-1993 Peter J. DeMaria 63 Director 1992-Present Vice President 1991-Present Controller 1995-Present Treasurer 1978-1995 Controller of AEP 1995-Present Treasurer of AEP 1978-1995 Vice Chairman of the Board of the Service Corporation 1998-Present Executive Vice President- Administration and Chief Accounting Officer of the Service Corporation 1984-1997 William J. Lhota 58 Director 1990-Present President and Chief Operating Officer 1996-Present Vice President 1989-1995 Executive Vice President of the Service Corporation 1993-Present Executive Vice President-Operations of the Service Corporation 1989-1993 Gerald P. Maloney 64 Director 1978-Present Vice President 1970-Present Vice President of AEP 1974-Present Secretary of AEP 1994-Present Vice Chairman of the Board of the Service Corporation 1998-Present Executive Vice President- Chief Financial Officer of the Service Corporation 1991-1997 James J. Markowsky 53 Director 1995-Present Vice President 1993-Present Executive Vice President- Power Generation of the Service Corporation 1996-Present Executive Vice President- Engineering and Construction of the Service Corporation 1993-1996 Senior Vice President and Chief Engineer of the Service Corporation 1988-1993 J. H. Vipperman 57 Director and Vice President 1996-Present Executive Vice President- Corporate Services of the Service Corporation 1998-Present Executive Vice President- Energy Delivery of the Service Corporation 1996-1998 K. G. Boyd 46 Director 1997-Present Indiana Region Manager 1997-Present Fort Wayne District Manager 1994-1997 C. R. Boyle, III 49 Director and Vice President 1996-Present President and Chief Operating Officer of KEPCo 1990-1995 J. A. Kobyra 45 Director 1998-Present Cook Plant Steam Generator Project Manager 1998-Present D. B. Synowiec 54 Director 1995-Present Plant Manager 1990-Present W. E. Walters 50 Director 1991-Present Michiana Region Manager 1994-Present Executive Assistant to President 1987-1994 E. H. Wittkamper 59 Director 1996-Present Director of System Operations (Fort Wayne) 1996 System Operations Manager (Fort Wayne) 1990-1996 __________ (a) Positions are with I&M unless otherwise indicated. (b) Dr. Draper is a director of BCP Management, Inc., which is the general partner of Borden Chemicals and Plastics L.P., and CellNet Data Systems, Inc. and Mr. Lhota is a director of Huntington Bancshares Incorporated and State Auto Financial Corporation. (c) Drs. Draper and Markowsky and Messrs. DeMaria, Lhota and Maloney are directors of AEGCo, APCo, CSPCo, KEPCo and OPCo. Dr. Draper and Messrs. DeMaria and Maloney are also directors of AEP. Mr. Vipperman is a director of APCo, CSPCo, KEPCo and OPCo. KEPCo. Omitted pursuant to Instruction I(2)(c). OPCo. The information required by this item is incorporated herein by reference to the material under the heading Election of Directors of the definitive information statement of OPCo for the 1997 annual meeting of shareholders, to be filed within 120 days after December 31, 1997. Reference also is made to the information under the caption Executive Officers of the Registrants in Part I of this report. Item 11. Executive Compensation AEGCo. Omitted pursuant to Instruction I(2)(c). AEP. The information required by this item is incorporated herein by reference to the material under Directors Compensation and Stock Ownership Guidelines, Executive Compensation and the performance graph of the definitive proxy statement of AEP for the 1998 annual meeting of shareholders to be filed within 120 days after December 31, 1997. APCo. The information required by this item is incorporated herein by reference to the material under Executive Compensation of the definitive information statement of APCo for the 1998 annual meeting of stockholders, to be filed within 120 days after December 31, 1997. CSPCo. Omitted pursuant to Instruction I(2)(c). KEPCo. Omitted pursuant to Instruction I(2)(c). OPCo. The information required by this item is incorporated herein by reference to the material under Executive Compensation of the definitive information statement of OPCo for the 1998 annual meeting of shareholders, to be filed within 120 days after December 31, 1997. I&M. Certain executive officers of I&M are employees of the Service Corporation. The salaries of these executive officers are paid by the Service Corporation and a portion of their salaries has been allocated and charged to I&M. The following table shows for 1997, 1996 and 1995 the compensation earned from all AEP System companies by the chief executive officer and four other most highly compensated executive officers (as defined by regulations of the SEC) of I&M at December 31, 1997.
Summary Compensation Table Long-Term Annual Compensation Compensation Payouts All Other Salary Bonus Compensation Name and Principal Position Year ($) ($)(1) LTIP Payouts($)(1) ($)(2) E. Linn Draper, Jr. - 1997 720,000 327,744 951,132 31,620 Chairman of the board and 1996 720,000 281,664 675,903 31,990 chief executive officer of 1995 685,000 236,325 334,851 30,790 the Company; chairman of the board, president and chief executive officer of AEP and the Service Corporation; chairman of the board and chief executive officer of other AEP System companies Peter J. DeMaria - Vice 1997 385,000 153,345 391,793 21,570 president, controller and 1996 360,000 140,832 290,825 21,190 director of the Company; 1995 330,000 113,850 143,829 20,050 controller and director of AEP; vice chairman and director of the Service Corporation; vice president, controller and director of other AEP System companies G. P. Maloney - Vice 1997 385,000 153,345 391,793 21,570 president and director of the 1996 360,000 140,832 286,288 21,190 Company; vice president, 1995 330,000 113,850 141,582 20,060 secretary and director of AEP; vice chairman and director of the Service Corporation; vice president and director of other AEP System companies William J. Lhota - President, 1997 355,000 141,396 364,436 20,570 chief operating officer and 1996 320,000 125,184 263,114 19,690 director of the Company; 1995 300,000 103,500 132,592 19,140 executive vice president and director of the Service Corporation; president, chief operating officer and director of other AEP System companies James J. Markowsky - Vice 1997 325,000 129,447 338,382 18,020 president and director of the 1996 303,000 118,534 254,535 19,480 Company; executive vice 1995 285,000 98,325 126,599 17,515 president-power generation and director of the Service Corporation; vice president and director of other AEP System companies
___________ (1) Amounts in the "Bonus" column reflect payments under the Senior Officer Annual Incentive Compensation Plan (and predecessor Management Incentive Compensation Plan) for performance measured for each of the years ended December 31, 1995, 1996 and 1997. Payments are made in March of the subsequent year. Amounts for 1997 are estimates but should not change significantly. Amounts in the "Long-Term Compensation" column reflect performance share unit targets earned under the Performance Share Incentive Plan (which became effective January 1, 1994) for the two-, three- and three-year performance periods ending December 31, 1995, 1996 and 1997, respectively. The two-year performance period was a transition performance period. See below under "Long-Term Incentive Plans - Awards in 1997" and page 10 for additional information. (2) For 1997, includes (i) employer matching contributions under the AEP System Employees Savings Plan: Dr. Draper, $3,400; Mr. DeMaria, $3,306; Mr. Maloney, $4,800; Mr. Lhota, $4,800; and Dr. Markowsky, $3,250; (ii) employer matching contributions under the AEP System Supplemental Savings Plan, a non-qualified plan designed to supplement the AEP Savings Plan: Dr. Draper, $18,200; Mr. DeMaria, $8,244; Mr. Maloney, $6,750; Mr. Lhota, $5,850; and Dr. Markowsky, $6,500; and (iii) subsidiary companies director fees: Dr. Draper and Messrs. DeMaria and Maloney, $10,020; Mr. Lhota, $9,920; and Dr. Markowsky, $8,270. Long-Term Incentive Plans - Awards In 1997 Each of the awards set forth below establishes performance share unit targets, which represent units equivalent to shares of Common Stock, pursuant to the Company's Performance Share Incentive Plan. Since it is not possible to predict future dividends and the price of AEP Common Stock, credits of performance share units in amounts equal to the dividends that would have been paid if the performance share unit targets were established in the form of shares of Common Stock are not included in the table. The ability to earn performance share unit targets is tied to achieving specified levels of total shareholder return ("TSR") relative to the S&P Electric Utility Index. Notwithstanding AEP's TSR ranking, no performance share unit targets are earned unless AEP shareholders realize a positive TSR over the relevant three-year performance period. The Human Resources Committee may, at its discretion, reduce the number of performance share unit targets otherwise earned. In accordance with the performance goals established for the periods set forth below, the threshold, target and maximum awards are equal to 25%, 100% and 200%, respectively, of the performance share unit targets. No payment will be made for performance below the threshold. Payments of earned awards are deferred in the form of restricted stock units (equivalent to shares of AEP Common Stock) until the officer has met the equivalent stock ownership target discussed in the Human Resources Committee Report. Once officers meet and maintain their respective targets, they may elect either to continue to defer or to receive further earned awards in cash and/or Common Stock.
Estimated Future Payouts of Performance Share Units Under Non-Stock Price-Based Plan Performance Number of Period Until Performance Maturation Threshold Target Maximum Name Share Units or Payout (#) (#) (#) E. L. Draper, Jr. 7,111 1997-1999 1,778 7,111 14,222 P. J. DeMaria 3,327 1997-1999 832 3,327 6,654 G. P. Maloney 3,327 1997-1999 832 3,327 6,654 W. J. Lhota 3,068 1997-1999 767 3,068 6,136 J. J. Markowsky 2,809 1997-1999 702 2,809 5,618
Retirement Benefits The American Electric Power System Retirement Plan provides pensions for all employees of AEP System companies (except for employees covered by certain collective bargaining agreements), including the executive officers of the Company. The Retirement Plan is a noncontributory defined benefit plan. The following table shows the approximate annual annuities under the Retirement Plan that would be payable to employees in certain higher salary classifications, assuming retirement at age 65 after various periods of service.
Pension Plan Table Years of Accredited Service Highest Average Annual Earnings 15 20 25 30 35 40 45 $ 400,000 $ 93,660 $124,880 $156,100 $187,320 $218,540 $245,140 $271,740 500,000 117,660 156,880 196,100 235,320 274,540 307,790 341,040 600,000 141,660 188,880 236,110 283,320 330,540 370,440 410,340 700,000 165,660 220,880 276,100 331,320 386,540 433,090 479,640 900,000 213,660 284,880 356,100 427,320 498,540 588,390 618,240 1,100,000 261,660 348,880 436,100 523,320 610,540 683,390 756,840 1,300,000 309,660 412,880 516,100 619,320 722,540 808,990 895,440
The amounts shown in the table are the straight life annuities payable under the Retirement Plan without reduction for the joint and survivor annuity. Retirement benefits listed in the table are not subject to any deduction for Social Security or other offset amounts. The retirement annuity is reduced 3% per year in the case of retirement between ages 60 and 62 and further reduced 6% per year in the case of retirement between ages 55 and 60. If an employee retires after age 62, there is no reduction in the retirement annuity. The Company maintains a supplemental retirement plan which provides for the payment of benefits that are not payable under the Retirement Plan due primarily to limitations imposed by Federal tax law on benefits paid by qualified plans. The table includes supplemental retirement benefits. Compensation upon which retirement benefits are based, for the executive officers named in the Summary Compensation Table above, consists of the average of the 36 consecutive months of the officer's highest aggregate salary and Management Incentive Compensation Plan awards, shown in the "Salary" and "Bonus" columns, respectively, of the Summary Compensation Table, out of the officer's most recent 10 years of service. As of December 31, 1997, the number of full years of service applicable for retirement benefit calculation purposes for such officers were as follows: Dr. Draper, five years; Mr. DeMaria, 38 years; Mr. Maloney, 42 years; Mr. Lhota, 33 years; and Dr. Markowsky, 26 years. Dr. Draper has a contract with the Company and AEP Service Corporation which provides him with a supplemental retirement annuity that credits him with 24 years of service in addition to his years of service credited under the Retirement Plan less his actual pension entitlement under the Retirement Plan and any pension entitlement from the Gulf States Utilities Company Trusteed Retirement Plan, a plan sponsored by his prior employer. Fourteen AEP System employees (including Messrs. DeMaria, Maloney and Lhota and Dr. Markowsky) whose pensions may be adversely affected by amendments to the Retirement Plan made as a result of the Tax Reform Act of 1986 are eligible for certain supplemental retirement benefits. Such payments, if any, will be equal to any reduction occurring because of such amendments. Assuming retirement in 1998 of the executive officers named in the Summary Compensation Table, only Messrs. DeMaria and Maloney would be affected and their annual supplemental benefit would be $491 and $3,847, respectively. The Company made available a voluntary deferred-compensation program in 1982 and 1986, which permitted certain members of AEP System management to defer receipt of a portion of their salaries. Under this program, a par- ticipant was able to defer up to 10% or 15% annually (depending on the terms of the program offered), over a four-year period, of his or her salary, and receive supplemental retirement or survivor benefit payments over a 15-year period. The amount of supplemental retirement payments received is dependent upon the amount deferred, age at the time the deferral election was made, and number of years until the participant retires. The following table sets forth, for the executive officers named in the Summary Compensation Table, the amounts of annual deferrals and, assuming payments commencing at age 65, annual supplemental retirement payments under the 1982 and 1986 programs.
1982 Program 1986 Program Annual Amount Annual Amount of of Annual Supplemental Annual Supplemental Amount Retirement Amount Retirement Deferred Payment Deferred Payment (4-Year (15-Year (4-Year (15-Year Name Period) Period) Period) Period) P. J. DeMaria . $10,000 $52,000 $13,000 $53,300 G. P. Maloney . 15,000 67,500 16,000 56,400
Directors of I&M receive a fee of $100 for each meeting of the Board of Directors attended in addition to their salaries. The AEP System is an integrated electric utility system and, as a result, the member companies of the AEP System have contractual, financial and other business relationships with the other member companies, such as participation in the AEP System savings and retirement plans and tax returns, sales of electricity, transportation and handling of fuel, sales or rentals of property and interest or dividend payments on the securities held by the companies' respective parents. Item 12. Security Ownership of Certain Beneficial Owners and Management AEGCo. Omitted pursuant to Instruction I(2)(c). AEP. The information required by this item is incorporated herein by reference to the material under Share Ownership of Directors and Executive Officers of the definitive proxy statement of AEP for the 1998 annual meeting of shareholders to be filed within 120 days after December 31, 1997. APCo. The information required by this item is incorporated herein by reference to the material under Share Ownership of Directors and Executive Officers in the definitive information statement of APCo for the 1998 annual meeting of stockholders, to be filed within 120 days after December 31, 1997. CSPCo. Omitted pursuant to Instruction I(2)(c). I&M. All 1,400,000 outstanding shares of Common Stock, no par value, of I&M are directly and beneficially held by AEP. Holders of the Cumulative Preferred Stock of I&M generally have no voting rights, except with respect to certain corporate actions and in the event of certain defaults in the payment of dividends on such shares. The table below shows the number of shares of AEP Common Stock and stock-based units that were beneficially owned, directly or indirectly, as of January 1, 1998, by each director and nominee of I&M and each of the executive officers of I&M named in the summary compensation table, and by all directors and executive officers of I&M as a group. It is based on information provided to I&M by such persons. No such person owns any shares of any series of the Cumulative Preferred Stock of I&M. Unless otherwise noted, each person has sole voting power and investment power over the number of shares of AEP Common Stock and stock-based units set forth opposite his name. Fractions of shares and units have been rounded to the nearest whole number.
Stock Name Shares Units(a) Total Karl G. Boyd . . . . . . 1,534(b) 81 1,615 Coulter R. Boyle, III . . 3,702(b) 745 4,447 Gregory A. Clark . . . . 1,066(b) 106 1,172 P. J. DeMaria . . . . . . 7,754(b)(c)(d)(e) 15,932 23,686 E. L. Draper, Jr. . . . . 7,373(b)(d) 62,857 70,230 James A. Kobyra . . . . . 3,188(b)(d) 520 3,708 W. J. Lhota . . . . . . . 15,056(b)(c)(d) 14,827 29,883 G. P. Maloney . . . . . . 5,803(b)(c)(d) 12,715 18,518 J. J. Markowsky . . . . . 5,126(b)(e) 12,417 17,543 David B. Synowiec . . . . 993(b) 124 1,117 J. H. Vipperman . . . . . 5,837(b)(d) 7,676 13,513 William E. Walters . . . 5,655(b) 317 5,972 Earl H. Wittkamper . . . 2,983(b) 315 3,298 All directors and executive officers . . . 151,301(d)(f) 128,632 279,933
(a) This column includes amounts deferred in stock units and held under the Management Incentive Compensation Plan, Senior Officer Annual Incentive Compensation Plan and Performance Share Incentive Plan. (b) Includes share equivalents held in the AEP Employees Savings Plan in the amounts listed below: AEP Employees Savings Plan (Share Equivalents) Mr. Boyd 1,524 Mr. Boyle 3,702 Mr. Clark 1,066 Mr. DeMaria 3,187 Dr. Draper 2,716 Mr. Kobyra 2,380 Mr. Lhota 12,876 Mr. Maloney 3,436 Dr. Markowsky 5,074 Mr. Synowiec 993 Mr. Vipperman 5,142 Mr. Walters 5,655 Mr. Wittkamper 1,653 All Directors and Executive Officers 49,404 With respect to the share equivalents held in the AEP Employees Savings Plan, such persons have sole voting power, but the investment/disposition power is subject to the terms of the Plan. (c) Does not include, for Messrs. DeMaria, Lhota and Maloney, 85,231 shares in the American Electric Power System Educational Trust Fund over which Messrs. DeMaria, Lhota and Maloney share voting and investment power as trustees (they disclaim beneficial ownership). The amount of shares shown for all directors and executive officers as a group includes these shares. (d) Includes the following numbers of shares held in joint tenancy with a family member: Mr. DeMaria, 462; Dr. Draper, 2,200; Mr. Kobyra, 808; Mr. Lhota, 2,180; Mr. Maloney, 2,367; and Mr. Vipperman, 64. (e) Includes the following numbers of shares held by family members over which beneficial ownership is disclaimed: Mr. DeMaria, 3,192; and Dr. Markowsky, 19. (f) Represents less than 1% of the total number of shares outstanding. KEPCo. Omitted pursuant to Instruction I(2)(c). OPCo. The information required by this item is incorporated herein by reference to the material under Share Ownership of Directors and Executive Officers in the definitive information statement of OPCo for the 1998 annual meeting of shareholders, to be filed within 120 days after December 31, 1997. Item 13. Certain Relationships and Related Transactions AEP, APCo, I&M and OPCo. None. AEGCo, CSPCo, and KEPCo. Omitted pursuant to Instruction I(2)(c). PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this report: 1. Financial Statements: Page The following financial statements have been incorporated herein by reference pursuant to Item 8. AEGCo: Independent Auditors' Report; Statements of Income for the years ended December 31, 1997, 1996 and 1995; Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995; Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; Balance Sheets as of December 31, 1997 and 1996; Notes to Financial Statements. AEP and its subsidiaries consolidated: Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995; Consolidated Balance Sheets as of December 31, 1997 and 1996; Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; Notes to Consolidated Financial Statements; Schedule of Consolidated Cumulative Preferred Stocks of Subsidiaries at December 31, 1997 and 1996; Schedule of Consolidated Long-term Debt of Subsidiaries at December 31, 1997 and 1996; Independent Auditors' Report. APCo: Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995; Consolidated Balance Sheets as of December 31, 1997 and 1996; Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995; Notes to Consolidated Financial Statements; Independent Auditors' Report. CSPCo: Independent Auditors' Report; Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995; Consolidated Balance Sheets as of December 31, 1997 and 1996; Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995; Notes to Consolidated Financial Statements. I&M: Independent Auditors' Report; Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; Consolidated Balance Sheets as of December 31, 1997 and 1996; Consolidated Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995; Notes to Consolidated Financial Statements. KEPCo: Independent Auditors' Report; Statements of Income for the years ended December 31, 1997, 1996 and 1995; Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995; Balance Sheets as of December 31, 1997 and 1996; Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; Notes to Financial Statements. OPCo: Independent Auditors' Report; Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; Consolidated Balance Sheets as of December 31, 1997 and 1996; Consolidated Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995; Notes to Consolidated Financial Statements. 2. Financial Statement Schedules: Financial Statement Schedules are listed in the Index to Financial Statement Schedules (Certain schedules have been omitted because the required information is contained in the notes to financial statements or because such schedules are not required or are not applicable.) S-1 Independent Auditors' Report S-2 3. Exhibits: Exhibits for AEGCo, AEP, APCo, CSPCo, I&M, KEPCo and OPCo are listed in the Exhibit Index and are incorporated herein by reference E-1 (b) Reports on Form 8-K: Company Reporting Date of Report Items Reported AEGCo, AEP, APCo, CSPCo, I&M, KEPCo and OPCo December 21, 1997 Item 5. Other Events Item 7. Financial Statements and Exhibits SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. AEP GENERATING COMPANY By:__/s/ G. P. Maloney__ (G. P. Maloney, Vice President) Date: March 16, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Signature Title Date (i) Principal Executive Officer: *E. Linn Draper, Jr. President, Chief Executive Officer and Director (ii) Principal Financial Officer: __/s/ G. P. Maloney__ Vice President March 16, 1998 (G. P. Maloney) and Director (iii) Principal Accounting Officer: __/s/ P. J. DeMaria__ Vice President, Controller March 16, 1998 (P. J. DeMaria) and Director (iv) A Majority of the Directors: *Henry Fayne *John R. Jones, III *Wm. J. Lhota *James J. Markowsky *By:__/s/ G. P. Maloney__ March 16, 1998 (G. P. Maloney, Attorney-in-Fact) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. AMERICAN ELECTRIC POWER COMPANY, INC. By:__/s/ G. P. Maloney__ (G. P. Maloney, Vice President) Date: March 16, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date (i) Principal Executive Officer: *E. Linn Draper, Jr. Chairman of the Board, President, Chief Executive Officer and Director (ii) Principal Financial Officer: __/s/ G. P. Maloney__ Vice President, Secretary March 16, 1998 (G. P. Maloney) and Director (iii) Principal Accounting Officer: __/s/ P. J. DeMaria__ Controller and Director March 16, 1998 (P. J. DeMaria) (iv) A Majority of the Directors: *John P. DesBarres *Robert M. Duncan *Robert W. Fri *Lester A. Hudson, Jr. *Leonard J. Kujawa *Angus E. Peyton *Donald G. Smith *Linda Gillespie Stuntz *Kathryn D. Sullivan *Morris Tanenbaum *By:__/s/ G. P. Maloney__ March 16, 1998 (G. P. Maloney, Attorney-in-Fact) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. APPALACHIAN POWER COMPANY By:__/s/ G. P. Maloney__ (G. P. Maloney, Vice President) Date: March 16, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Signature Title Date (i) Principal Executive Officer: *E. Linn Draper, Jr. Chairman of the Board, Chief Executive Officer and Director (ii) Principal Financial Officer: __/s/ G. P. Maloney__ Vice President March 16, 1998 (G. P. Maloney) and Director (iii) Principal Accounting Officer: __/s/ P. J. DeMaria__ Vice President, Controller March 16, 1998 (P. J. DeMaria) and Director (iv) A Majority of the Directors: *Henry Fayne *Wm. J. Lhota *James J. Markowsky *J. H. Vipperman *By:__/s/ G. P. Maloney__ March 16, 1998 (G. P. Maloney, Attorney-in-Fact) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. COLUMBUS SOUTHERN POWER COMPANY By:__/s/ G. P. Maloney__ (G. P. Maloney, Vice President) Date: March 16, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Signature Title Date (i) Principal Executive Officer: *E. Linn Draper, Jr. Chairman of the Board, Chief Executive Officer and Director (ii) Principal Financial Officer: __/s/ G. P. Maloney__ Vice President March 16, 1998 (G. P. Maloney) and Director (iii) Principal Accounting Officer: __/s/ P. J. DeMaria__ Vice President, Controller March 16, 1998 (P. J. DeMaria) and Director (iv) A Majority of the Directors: *Henry Fayne *Wm. J. Lhota *James J. Markowsky *J. H. Vipperman *By:__/s/ G. P. Maloney__ March 16, 1998 (G. P. Maloney, Attorney-in-Fact) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. INDIANA MICHIGAN POWER COMPANY By:__/s/ G. P. Maloney__ (G. P. Maloney, Vice President) Date: March 16, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Signature Title Date (i) Principal Executive Officer: *E. Linn Draper, Jr. Chairman of the Board, Chief Executive Officer and Director (ii) Principal Financial Officer: __/s/ G. P. Maloney__ Vice President March 16, 1998 (G. P. Maloney) and Director (iii) Principal Accounting Officer: __/s/ P. J. DeMaria__ Vice President, Controller March 16, 1998 (P. J. DeMaria) and Director (iv) A Majority of the Directors: *K. G. Boyd *C. R. Boyle, III *G. A. Clark *James A. Kobyra *Wm. J. Lhota *James J. Markowsky *D. B. Synowiec *J. H. Vipperman *W. E. Walters *E. H. Wittkamper *By:__/s/ G. P. Maloney__ March 16, 1998 (G. P. Maloney, Attorney-in-Fact) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. KENTUCKY POWER COMPANY By:__/s/ G. P. Maloney__ (G. P. Maloney, Vice President) Date: March 16, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Signature Title Date (i) Principal Executive Officer: *E. Linn Draper, Jr. Chairman of the Board, Chief Executive Officer and Director (ii) Principal Financial Officer: __/s/ G. P. Maloney__ Vice President March 16, 1998 (G. P. Maloney) and Director (iii) Principal Accounting Officer: __/s/ P. J. DeMaria__ Vice President, Controller March 16, 1998 (P. J. DeMaria) and Director (iv) A Majority of the Directors: *Henry Fayne *Wm. J. Lhota *James J. Markowsky *J. H. Vipperman *By:__/s/ G. P. Maloney__ March 16, 1998 (G. P. Maloney, Attorney-in-Fact) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. OHIO POWER COMPANY By:__/s/ G. P. Maloney__ (G. P. Maloney, Vice President) Date: March 16, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Signature Title Date (i) Principal Executive Officer: *E. Linn Draper, Jr. Chairman of the Board, Chief Executive Officer and Director (ii) Principal Financial Officer: __/s/ G. P. Maloney__ Vice President March 16, 1998 (G. P. Maloney) and Director (iii) Principal Accounting Officer: __/s/ P. J. DeMaria__ Vice President, Controller March 16, 1998 (P. J. DeMaria) and Director (iv) A Majority of the Directors: *Henry Fayne *Wm. J. Lhota *James J. Markowsky *J. H. Vipperman *By:__/s/ G. P. Maloney__ March 16, 1998 (G. P. Maloney, Attorney-in-Fact) INDEX TO FINANCIAL STATEMENT SCHEDULES Page INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . S-2 The following financial statement schedules for the years ended December 31, 1997, 1996 and 1995 are included in this report on the pages indicated. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . S-3 APPALACHIAN POWER COMPANY AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . S-3 COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . S-3 INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . S-4 KENTUCKY POWER COMPANY Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . S-4 OHIO POWER COMPANY AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . S-4 INDEPENDENT AUDITORS' REPORT American Electric Power Company, Inc. and Subsidiaries: We have audited the consolidated financial statements of American Electric Power Company, Inc. and its subsidiaries and the financial statements of certain of its subsidiaries, listed in Item 14 herein, as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our reports thereon dated February 24, 1998; such financial statements and reports are included in your respective 1997 Annual Report and are incorporated herein by reference. Our audits also included the financial statement schedules of American Electric Power Company, Inc. and its subsidiaries and of certain of its subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the respective Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the corresponding basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Columbus, Ohio February 24, 1998 AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period (in thousands) Deducted from Assets: Accumulated Provision for Uncollectible Accounts: Year Ended December 31, 1997 . . $3,692 $20,650 $ 8,953(a) $26,535(b) $6,760 Year Ended December 31, 1996 . . $5,430 $16,382 $ 7,224(a) $25,344(b) $3,692 Year Ended December 31, 1995 . . $4,056 $12,907 $ 5,927(a) $17,460(b) $5,430
(a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. APPALACHIAN POWER COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period (in thousands) Deducted from Assets: Accumulated Provision for Uncollectible Accounts: Year Ended December 31, 1997 . . $ 687 $ 3,621 $ 666(a) $ 3,641(b) $1,333 Year Ended December 31, 1996 . . $2,253 $ 1,748 $ 779(a) $ 4,093(b) $ 687 Year Ended December 31, 1995 . . $ 830 $ 3,442 $ 963(a) $ 2,982(b) $2,253
(a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period (in thousands) Deducted from Assets: Accumulated Provision for Uncollectible Accounts: Year Ended December 31, 1997 . . $1,032 $ 6,815 $ 6,380(a) $13,169(b) $1,058 Year Ended December 31, 1996 . . $1,061 $ 7,720 $ 3,978(a) $11,727(b) $1,032 Year Ended December 31, 1995 . . $1,768 $ 4,873 $ 3,531(a) $ 9,111(b) $1,061
(a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period (in thousands) Deducted from Assets: Accumulated Provision for Uncollectible Accounts: Year Ended December 31, 1997 . . $ 156 $ 4,411 $ 798(a) $ 4,177(b) $1,188 Year Ended December 31, 1996 . . $ 334 $ 2,208 $ 791(a) $ 3,177(b) $ 156 Year Ended December 31, 1995 . . $ 121 $ 1,506 $ 632(a) $ 1,925(b) $ 334
(a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. KENTUCKY POWER COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period (in thousands) Deducted from Assets: Accumulated Provision for Uncollectible Accounts: Year Ended December 31, 1997 . . $ 272 $ 1,482 $ 347(a) $ 1,576(b) $ 525 Year Ended December 31, 1996 . . $ 259 $ 1,507 $ 311(a) $ 1,805(b) $ 272 Year Ended December 31, 1995 . . $ 260 $ 925 $ 234(a) $ 1,160(b) $ 259
(a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. OHIO POWER COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period (in thousands) Deducted from Assets: Accumulated Provision for Uncollectible Accounts: Year Ended December 31, 1997 . . $1,433 $ 4,008 $ 675(a) $ 3,615(b) $2,501 Year Ended December 31, 1996 . . $1,424 $ 2,874 $ 532(a) $ 3,397(b) $1,433 Year Ended December 31, 1995 . . $1,019 $ 1,952 $ 472(a) $ 2,019(b) $1,424
(a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk(*), are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and, pursuant to 17 C.F.R. Sections 229.10(d) and 240.12b- 32, are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits. Exhibits, designated with a dagger (!), are management contracts or compensatory plans or arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. Exhibit Number Description AEGCo 3(a) Copy of Articles of Incorporation of AEGCo [Registration Statement on Form 10 for the Common Shares of AEGCo, File No. 0-18135, Exhibit 3(a)]. 3(b) Copy of the Code of Regulations of AEGCo [Registration Statement on Form 10 for the Common Shares of AEGCo, File No. 0-18135, Exhibit 3(b)]. 10(a) Copy of Capital Funds Agreement dated as of December 30, 1988 between AEGCo and AEP [Registration Statement No. 33- 32752, Exhibit 28(a)]. 10(b)(1) Copy of Unit Power Agreement dated as of March 31, 1982 between AEGCo and I&M, as amended [Registration Statement No. 33-32752, Exhibits 28(b)(1)(A) and 28(b)(1)(B)]. 10(b)(2) Copy of Unit Power Agreement, dated as of August 1, 1984, among AEGCo, I&M and KEPCo [Registration Statement No. 33- 32752, Exhibit 28(b)(2)]. 10(b)(3) Copy of Agreement, dated as of October 1, 1984, among AEGCo, I&M, APCo and Virginia Electric and Power Company [Registration Statement No. 33-32752, Exhibit 28(b)(3)]. 10(c) Copy of Lease Agreements, dated as of December 1, 1989, between AEGCo and Wilmington Trust Company, as amended [Registration Statement No. 33-32752, Exhibits 28(c)(1)(C), 28(c)(2)(C), 28(c)(3)(C), 28(c)(4)(C), 28(c)(5)(C) and 28(c)(6)(C); Annual Report on Form 10-K of AEGCo for the fiscal year ended December 31, 1993, File No. 0-18135, Exhibits 10(c)(1)(B), 10(c)(2)(B), 10(c)(3)(B), 10(c)(4)(B), 10(c)(5)(B) and 10(c)(6)(B)]. * 13 Copy of those portions of the AEGCo 1997 Annual Report (for the fiscal year ended December 31, 1997) which are incorporated by reference in this filing. * 24 Power of Attorney. * 27 Financial Data Schedules. AEP!! 3(a) Copy of Restated Certificate of Incorporation of AEP, dated October 29, 1997 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1997, Exhibit 3(a)]. * 3(b) Copy of By-Laws of AEP, as amended through January 28, 1998. 10(a) Interconnection Agreement, dated July 6, 1951, among APCo, CSPCo, KEPCo, OPCo and I&M and with the Service Corporation, as amended [Registration Statement No. 2-52910, Exhibit 5(a); Registration Statement No. 2-61009, Exhibit 5(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1990, File No. 1-3525, Exhibit 10(a)(3)]. 10(b) Copy of Transmission Agreement, dated April 1, 1984, among APCo, CSPCo, I&M, KEPCo, OPCo and with the Service Corporation as agent, as amended [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1988, File No. 1- 3525, Exhibit 10(b)(2)]. 10(c) Copy of Lease Agreements, dated as of December 1, 1989, between AEGCo or I&M and Wilmington Trust Company, as amended [Registration Statement No. 33-32752, Exhibits 28(c)(1)(C), 28(c)(2)(C), 28(c)(3)(C), 28(c)(4)(C), 28(c)(5)(C) and 28(c)(6)(C); Registration Statement No. 33- 32753, Exhibits 28(a)(1)(C), 28(a)(2)(C), 28(a)(3)(C), 28(a)(4)(C), 28(a)(5)(C) and 28(a)(6)(C); and Annual Report on Form 10-K of AEGCo for the fiscal year ended December 31, 1993, File No. 0-18135, Exhibits 10(c)(1)(B), 10(c)(2)(B), 10(c)(3)(B), 10(c)(4)(B), 10(c)(5)(B) and 10(c)(6)(B); Annual Report on Form 10-K of I&M for the fiscal year ended December 31, 1993, File No. 1-3570, Exhibits 10(e)(1)(B), 10(e)(2)(B), 10(e)(3)(B), 10(e)(4)(B), 10(e)(5)(B) and 10(e)(6)(B)]. 10(d) Lease Agreement dated January 20, 1995 between OPCo and JMG Funding, Limited Partnership, and amendment thereto (confidential treatment requested) [Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1994, File No. 1-6543, Exhibit 10(l)(2)]. 10(e) Modification No. 1 to the AEP System Interim Allowance Agreement, dated July 28, 1994, among APCo, CSPCo, I&M, KEPCo, OPCo and the Service Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(l)]. * 10(f) Agreement and Plan of Merger, dated as of December 21, 1997, By and Among American Electric Power Company, Inc., Augusta Acquisition Corporation and Central and South West Corporation. !10(g)(1) AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(e)]. !10(g)(2) Amendment to AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1986, File No. 1-3525, Exhibit 10(d)(2)]. !10(h) AEP Accident Coverage Insurance Plan for directors [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(g)]. !10(i)(1) AEP Deferred Compensation and Stock Plan for Non-Employee Directors [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(f)(1)]. !10(i)(2) AEP Stock Unit Accumulation Plan for Non-Employee Directors [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(f)(2)]. !10(j)(1)(A) AEP Excess Benefit Plan, as amended through August 25, 1997 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1997, File No. 1-3525, Exhibit 10]. !10(j)(1)(B) Guaranty by AEP of the Service Corporation Excess Benefits Plan [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1990, File No. 1-3525, Exhibit 10(h)(1)(B)]. !10(j)(2) AEP System Supplemental Savings Plan, as amended through November 15, 1995 (Non-Qualified) [Annual Report on Form 10- K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(g)(2)]. !10(j)(3) Service Corporation Umbrella Trust for Executives [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1993, File No. 1-3525, Exhibit 10(g)(3)]. !10(k) Employment Agreement between E. Linn Draper, Jr. and AEP and the Service Corporation [Annual Report on Form 10-K of AEGCo for the fiscal year ended December 31, 1991, File No. 0- 18135, Exhibit 10(g)(3)]. !10(l)(1) AEP System Senior Officer Annual Incentive Compensation Plan [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(i)(1)]. !10(l)(2) American Electric Power System Performance Share Incentive Plan, as Amended and Restated through February 26, 1997 [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(i)(2)]. * 13 Copy of those portions of the AEP 1997 Annual Report (for the fiscal year ended December 31, 1997) which are incorporated by reference in this filing. * 21 List of subsidiaries of AEP. * 23 Consent of Deloitte & Touche LLP. * 24 Power of Attorney. * 27 Financial Data Schedules. APCo!! 3(a) Copy of Restated Articles of Incorporation of APCo, and amendments thereto to November 4, 1993 [Registration Statement No. 33-50163, Exhibit 4(a); Registration Statement No. 33-53805, Exhibits 4(b) and 4(c)]. 3(b) Copy of Articles of Amendment to the Restated Articles of Incorporation of APCo, dated June 6, 1994 [Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1994, File No. 1-3457, Exhibit 3(b)]. 3(c) Copy of Articles of Amendment to the Restated Articles of Incorporation of APCo, dated March 6, 1997 [Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1996, File No. 1-3457, Exhibit 3(c)]. 3(d) Composite copy of the Restated Articles of Incorporation of APCo (amended as of March 7, 1997) [Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1996, File No. 1-3457, Exhibit 3(d)]. 3(e) Copy of By-Laws of APCo (amended as of January 1, 1996) [Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1995, File No. 1-3457, Exhibit 3(d)]. 4(a) Copy of Mortgage and Deed of Trust, dated as of December 1, 1940, between APCo and Bankers Trust Company and R. Gregory Page, as Trustees, as amended and supplemented [Registration Statement No. 2-7289, Exhibit 7(b); Registration Statement No. 2-19884, Exhibit 2(1); Registration Statement No. 2- 24453, Exhibit 2(n); Registration Statement No. 2-60015, Exhibits 2(b)(2), 2(b)(3), 2(b)(4), 2(b)(5), 2(b)(6), 2(b)(7), 2(b)(8), 2(b)(9), 2(b)(10), 2(b)(12), 2(b)(14), 2(b)(15), 2(b)(16), 2(b)(17), 2(b)(18), 2(b)(19), 2(b)(20), 2(b)(21), 2(b)(22), 2(b)(23), 2(b)(24), 2(b)(25), 2(b)(26), 2(b)(27) and 2(b)(28); Registration Statement No. 2-64102, Exhibit 2(b)(29); Registration Statement No. 2-66457, Exhibits (2)(b)(30) and 2(b)(31); Registration Statement No. 2-69217, Exhibit 2(b)(32); Registration Statement No. 2- 86237, Exhibit 4(b); Registration Statement No. 33-11723, Exhibit 4(b); Registration Statement No. 33-17003, Exhibit 4(a)(ii), Registration Statement No. 33-30964, Exhibit 4(b); Registration Statement No. 33-40720, Exhibit 4(b); Registration Statement No. 33-45219, Exhibit 4(b); Registration Statement No. 33-46128, Exhibits 4(b) and 4(c); Registration Statement No. 33-53410, Exhibit 4(b); Registration Statement No. 33-59834, Exhibit 4(b); Registration Statement No. 33-50229, Exhibits 4(b) and 4(c); Registration Statement No. 33-58431, Exhibits 4(b), 4(c), 4(d) and 4(e); Registration Statement No. 333-01049, Exhibits 4(b) and 4(c); Registration Statement No. 333- 20305, Exhibits 4(b) and 4(c); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1996, File No. 1-3457, Exhibit 4(b)]. * 4(b) Copy of Indenture Supplemental, dated as of May 1, 1997, to Mortgage and Deed of Trust. 4(c) Indenture (for unsecured debt securities), dated as of January 1, 1998, between APCo and The Bank of New York, As Trustee [Registration Statement No. 333-45927, Exhibits 4(a) and 4(b)]. * 4(d) Company Order and Officers' Certificate, dated March 3, 1998, establishing certain terms of the 7.20% Senior Notes, Series A, due 2038. 10(a)(1) Copy of Power Agreement, dated October 15, 1952, between OVEC and United States of America, acting by and through the United States Atomic Energy Commission, and, subsequent to January 18, 1975, the Administrator of the Energy Research and Development Administration, as amended [Registration Statement No. 2-60015, Exhibit 5(a); Registration Statement No. 2-63234, Exhibit 5(a)(1)(B); Registration Statement No. 2-66301, Exhibit 5(a)(1)(C); Registration Statement No. 2- 67728, Exhibit 5(a)(1)(D); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1989, File No. 1-3457, Exhibit 10(a)(1)(F); and Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(1)(B)]. 10(a)(2) Copy of Inter-Company Power Agreement, dated as of July 10, 1953, among OVEC and the Sponsoring Companies, as amended [Registration Statement No. 2-60015, Exhibit 5(c); Registration Statement No. 2-67728, Exhibit 5(a)(3)(B); and Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(2)(B)]. 10(a)(3) Copy of Power Agreement, dated July 10, 1953, between OVEC and Indiana-Kentucky Electric Corporation, as amended [Registration Statement No. 2-60015, Exhibit 5(e)]. 10(b) Copy of Interconnection Agreement, dated July 6, 1951, among APCo, CSPCo, KEPCo, OPCo and I&M and with the Service Corporation, as amended [Registration Statement No. 2-52910, Exhibit 5(a); Registration Statement No. 2-61009, Exhibit 5(b); Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1990, File No. 1-3525, Exhibit 10(a)(3)]. 10(c) Copy of Transmission Agreement, dated April 1, 1984, among APCo, CSPCo, I&M, KEPCo, OPCo and with the Service Corporation as agent, as amended [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(b); Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1988, File No. 1-3525, Exhibit 10(b)(2)]. 10(d) Copy of Modification No. 1 to the AEP System Interim Allowance Agreement, dated July 28, 1994, among APCo, CSPCo, I&M, KEPCo, OPCo and the Service Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(l)]. 10(e) Agreement and Plan of Merger, dated as of December 21, 1997, By and Among American Electric Power Company, Inc., Augusta Acquisition Corporation and Central and South West Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1-3525, Exhibit 10(f)]. !10(f)(1) AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(e)]. !10(f)(2) Amendment to AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1986, File No. 1-3525, Exhibit 10(d)(2)]. !10(g)(1) AEP System Senior Officer Annual Incentive Compensation Plan [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(i)(1)]. !10(g)(2) American Electric Power System Performance Share Incentive Plan as Amended and Restated through February 26, 1997 [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(i)(2)]. !10(h)(1) Excess Benefits Plan [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1997, File No. 1-3525, Exhibit 10]. !10(h)(2) AEP System Supplemental Savings Plan (Non-Qualified) [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(g)(2)]. !10(h)(3) Umbrella Trust for Executives [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1993, File No. 1-3525, Exhibit 10(g)(3)]. !10(i) Employment Agreement between E. Linn Draper, Jr. and AEP and the Service Corporation [Annual Report on Form 10-K of AEGCo for the fiscal year ended December 31, 1991, File No. 0- 18135, Exhibit 10(g)(3)]. * 12 Statement re: Computation of Ratios. * 13 Copy of those portions of the APCo 1997 Annual Report (for the fiscal year ended December 31, 1997) which are incorporated by reference in this filing. 21 List of subsidiaries of APCo [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1- 3525, Exhibit 21]. * 23 Consent of Deloitte & Touche LLP. * 24 Power of Attorney. * 27 Financial Data Schedules. CSPCo!! 3(a) Copy of Amended Articles of Incorporation of CSPCo, as amended to March 6, 1992 [Registration Statement No. 33- 53377, Exhibit 4(a)]. 3(b) Copy of Certificate of Amendment to Amended Articles of Incorporation of CSPCo, dated May 19, 1994 [Annual Report on Form 10-K of CSPCo for the fiscal year ended December 31, 1994, File No. 1-2680, Exhibit 3(b)]. 3(c) Composite copy of Amended Articles of Incorporation of CSPCo, as amended [Annual Report on Form 10-K of CSPCo for the fiscal year ended December 31, 1994, File No. 1-2680, Exhibit 3(c)]. 3(d) Copy of Code of Regulations and By-Laws of CSPCo [Annual Report on Form 10-K of CSPCo for the fiscal year ended December 31, 1987, File No. 1-2680, Exhibit 3(d)]. 4(a) Copy of Indenture of Mortgage and Deed of Trust, dated September 1, 1940, between CSPCo and City Bank Farmers Trust Company (now Citibank, N.A.), as trustee, as supplemented and amended [Registration Statement No. 2-59411, Exhibits 2(B) and 2(C); Registration Statement No. 2-80535, Exhibit 4(b); Registration Statement No. 2-87091, Exhibit 4(b); Registration Statement No. 2-93208, Exhibit 4(b); Registration Statement No. 2-97652, Exhibit 4(b); Registration Statement No. 33-7081, Exhibit 4(b); Registration Statement No. 33-12389, Exhibit 4(b); Registration Statement No. 33-19227, Exhibits 4(b), 4(e), 4(f), 4(g) and 4(h); Registration Statement No. 33-35651, Exhibit 4(b); Registration Statement No. 33-46859, Exhibits 4(b) and 4(c); Registration Statement No. 33-50316, Exhibits 4(b) and 4(c); Registration Statement No. 33-60336, Exhibits 4(b), 4(c) and 4(d); Registration Statement No. 33-50447, Exhibits 4(b) and 4(c); Annual Report on Form 10-K of CSPCo for the fiscal year ended December 31, 1993, File No. 1- 2680, Exhibit 4(b)]. * 4(b) Copy of Indenture (for unsecured debt securities), dated as of September 1, 1997, between CSPCo and Bankers Trust Company, as Trustee. * 4(c) Copy of Company Order and Officers' Certificate, dated September 29, 1997, establishing certain terms of the Unsecured Medium Term Notes, Series A. * 4(d) Copy of Instructions, dated September 30, 1997, from CSPCo to Bankers Trust Company, establishing certain terms of the 6.85% Unsecured Medium Term Notes, Series A, due 2005. * 4(e) Copy of Instructions, dated February 5, 1998, from CSPCo to Bankers Trust Company, establishing certain terms of the 6.51% Unsecured Medium Term Notes, Series A, due 2008. 10(a)(1) Copy of Power Agreement, dated October 15, 1952, between OVEC and United States of America, acting by and through the United States Atomic Energy Commission, and, subsequent to January 18, 1975, the Administrator of the Energy Research and Development Administration, as amended [Registration Statement No. 2-60015, Exhibit 5(a); Registration Statement No. 2-63234, Exhibit 5(a)(1)(B); Registration Statement No. 2-66301, Exhibit 5(a)(1)(C); Registration Statement No. 2- 67728, Exhibit 5(a)(1)(B); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1989, File No. 1-3457, Exhibit 10(a)(1)(F); and Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(1)(B)]. 10(a)(2) Copy of Inter-Company Power Agreement, dated July 10, 1953, among OVEC and the Sponsoring Companies, as amended [Registration Statement No. 2-60015, Exhibit 5(c); Registration Statement No. 2-67728, Exhibit 5(a)(3)(B); and Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(2)(B)]. 10(a)(3) Copy of Power Agreement, dated July 10, 1953, between OVEC and Indiana-Kentucky Electric Corporation, as amended [Registration Statement No. 2-60015, Exhibit 5(e)]. 10(b) Copy of Interconnection Agreement, dated July 6, 1951, among APCo, CSPCo, KEPCo, OPCo and I&M and the Service Corporation, as amended [Registration Statement No. 2-52910, Exhibit 5(a); Registration Statement No. 2-61009, Exhibit 5(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1990, File No. 1-3525, Exhibit 10(a)(3)]. 10(c) Copy of Transmission Agreement, dated April 1, 1984, among APCo, CSPCo, I&M, KEPCo, OPCo, and with the Service Corporation as agent, as amended [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1988, File No. 1- 3525, Exhibit 10(b)(2)]. 10(d) Copy of Modification No. 1 to the AEP System Interim Allowance Agreement, dated July 28, 1994, among APCo, CSPCo, I&M, KEPCo, OPCo and the Service Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(l)]. 10(e) Agreement and Plan of Merger, dated as of December 21, 1997, By and Among American Electric Power Company, Inc., Augusta Acquisition Corporation and Central and South West Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1-3525, Exhibit 10(f)]. * 12 Statement re: Computation of Ratios. * 13 Copy of those portions of the CSPCo 1997 Annual Report (for the fiscal year ended December 31, 1997) which are incorporated by reference in this filing. * 23 Consent of Deloitte & Touche LLP. * 24 Power of Attorney. * 27 Financial Data Schedules. I&M!! 3(a) Copy of the Amended Articles of Acceptance of I&M and amendments thereto [Annual Report on Form 10-K of I&M for fiscal year ended December 31, 1993, File No. 1-3570, Exhibit 3(a)]. 3(b) Copy of Articles of Amendment to the Amended Articles of Acceptance of I&M, dated March 6, 1997 [Annual Report on Form 10-K of I&M for fiscal year ended December 31, 1996, File No. 1-3570, Exhibit 3(b)]. 3(c) Composite Copy of the Amended Articles of Acceptance of I&M (amended as of March 7, 1997) [Annual Report on Form 10-K of I&M for fiscal year ended December 31, 1996, File No. 1- 3570, Exhibit 3(c)]. 3(d) Copy of the By-Laws of I&M (amended as of January 1, 1996) [Annual Report on Form 10-K of I&M for fiscal year ended December 31, 1995, File No. 1-3570, Exhibit 3(c)]. 4(a) Copy of Mortgage and Deed of Trust, dated as of June 1, 1939, between I&M and Irving Trust Company (now The Bank of New York) and various individuals, as Trustees, as amended and supplemented [Registration Statement No. 2-7597, Exhibit 7(a); Registration Statement No. 2-60665, Exhibits 2(c)(2), 2(c)(3), 2(c)(4), 2(c)(5), 2(c)(6), 2(c)(7), 2(c)(8), 2(c)(9), 2(c)(10), 2(c)(11), 2(c)(12), 2(c)(13), 2(c)(14), 2(c)(15), (2)(c)(16), and 2(c)(17); Registration Statement No. 2-63234, Exhibit 2(b)(18); Registration Statement No. 2- 65389, Exhibit 2(a)(19); Registration Statement No. 2-67728, Exhibit 2(b)(20); Registration Statement No. 2-85016, Exhibit 4(b); Registration Statement No. 33-5728, Exhibit 4(c); Registration Statement No. 33-9280, Exhibit 4(b); Registration Statement No. 33-11230, Exhibit 4(b); Registration Statement No. 33-19620, Exhibits 4(a)(ii), 4(a)(iii), 4(a)(iv) and 4(a)(v); Registration Statement No. 33-46851, Exhibits 4(b)(i), 4(b)(ii) and 4(b)(iii); Registration Statement No. 33-54480, Exhibits 4(b)(i) and 4(b)(ii); Registration Statement No. 33-60886, Exhibit 4(b)(i); Registration Statement No. 33-50521, Exhibits 4(b)(i), 4(b)(ii) and 4(b)(iii); Annual Report on Form 10-K of I&M for fiscal year ended December 31, 1993, File No. 1- 3570, Exhibit 4(b); Annual Report on Form 10-K of I&M for fiscal year ended December 31, 1994, File No. 1-3570, Exhibit 4(b); Annual Report on Form 10-K of I&M for fiscal year ended December 31, 1996, File No. 1-3570, Exhibit 4(b)]. 10(a)(1) Copy of Power Agreement, dated October 15, 1952, between OVEC and United States of America, acting by and through the United States Atomic Energy Commission, and, subsequent to January 18, 1975, the Administrator of the Energy Research and Development Administration, as amended [Registration Statement No. 2-60015, Exhibit 5(a); Registration Statement No. 2-63234, Exhibit 5(a)(1)(B); Registration Statement No. 2-66301, Exhibit 5(a)(1)(C); Registration Statement No. 2- 67728, Exhibit 5(a)(1)(D); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1989, File No. 1-3457, Exhibit 10(a)(1)(F); and Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(1)(B)]. 10(a)(2) Copy of Inter-Company Power Agreement, dated as of July 10, 1953, among OVEC and the Sponsoring Companies, as amended [Registration Statement No. 2-60015, Exhibit 5(c); Registration Statement No. 2-67728, Exhibit 5(a)(3)(B); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(2)(B)]. 10(a)(3) Copy of Power Agreement, dated July 10, 1953, between OVEC and Indiana-Kentucky Electric Corporation, as amended [Registration Statement No. 2-60015, Exhibit 5(e)]. 10(a)(2) Copy of Inter-Company Power Agreement, dated as of July 10, 1953, among OVEC and the Sponsoring Companies, as amended [Registration Statement No. 2-60015, Exhibit 5(c); Registration Statement No. 2-67728, Exhibit 5(a)(3)(B); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(2)(B)]. 10(a)(3) Copy of Power Agreement, dated July 10, 1953, between OVEC and Indiana-Kentucky Electric Corporation, as amended [Registration Statement No. 2-60015, Exhibit 5(e)]. 10(b) Copy of Interconnection Agreement, dated July 6, 1951, between APCo, CSPCo, KEPCo, I&M, and OPCo and with the Service Corporation, as amended [Registration Statement No. 2-52910, Exhibit 5(a); Registration Statement No. 2-61009, Exhibit 5(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1990, File No. 1-3525, Exhibit 10(a)(3)]. 10(c) Copy of Transmission Agreement, dated April 1, 1984, among APCo, CSPCo, I&M, KEPCo, OPCo and with the Service Corporation as agent, as amended [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1988, File No. 1- 3525, Exhibit 10(b)(2)]. 10(d) Copy of Modification No. 1 to the AEP System Interim Allowance Agreement, dated July 28, 1994, among APCo, CSPCo, I&M, KEPCo, OPCo and the Service Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(l)]. 10(e) Copy of Nuclear Material Lease Agreement, dated as of December 1, 1990, between I&M and DCC Fuel Corporation [Annual Report on Form 10-K of I&M for the fiscal year ended December 31, 1993, File No. 1-3570, Exhibit 10(d)]. 10(f) Copy of Lease Agreements, dated as of December 1, 1989, between I&M and Wilmington Trust Company, as amended [Registration Statement No. 33-32753, Exhibits 28(a)(1)(C), 28(a)(2)(C), 28(a)(3)(C), 28(a)(4)(C), 28(a)(5)(C) and 28(a)(6)(C); Annual Report on Form 10-K of I&M for the fiscal year ended December 31, 1993, File No. 1-3570, Exhibits 10(e)(1)(B), 10(e)(2)(B), 10(e)(3)(B), 10(e)(4)(B), 10(e)(5)(B) and 10(e)(6)(B)]. 10(g) Agreement and Plan of Merger, dated as of December 21, 1997, By and Among American Electric Power Company, Inc., Augusta Acquisition Corporation and Central and South West Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1-3525, Exhibit 10(f)]. * 12 Statement re: Computation of Ratios * 13 Copy of those portions of the I&M 1997 Annual Report (for the fiscal year ended December 31, 1997) which are incorporated by reference in this filing. 21 List of subsidiaries of I&M [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1- 3525, Exhibit 21]. * 23 Consent of Deloitte & Touche LLP. * 24 Power of Attorney. * 27 Financial Data Schedules. KEPCo!! 3(a) Copy of Restated Articles of Incorporation of KEPCo [Annual Report on Form 10-K of KEPCo for the fiscal year ended December 31, 1991, File No. 1-6858, Exhibit 3(a)]. 3(b) Copy of By-Laws of KEPCo (amended as of January 1, 1996) [Annual Report on Form 10-K of KEPCo for the fiscal year ended December 31, 1995, File No. 1-6858, Exhibit 3(b)]. 4(a) Copy of Mortgage and Deed of Trust, dated May 1, 1949, between KEPCo and Bankers Trust Company, as supplemented and amended [Registration Statement No. 2-65820, Exhibits 2(b)(1), 2(b)(2), 2(b)(3), 2(b)(4), 2(b)(5), and 2(b)(6); Registration Statement No. 33-39394, Exhibits 4(b) and 4(c); Registration Statement No. 33-53226, Exhibits 4(b) and 4(c); Registration Statement No. 33-61808, Exhibits 4(b) and 4(c), Registration Statement No. 33-53007, Exhibits 4(b), 4(c) and 4(d)]. * 4(b) Copy of Indenture (for unsecured debt securities), dated as of September 1, 1997, between KEPCo and Bankers Trust Company, as Trustee. * 4(c) Copy of Company Order and Officers' Certificate, dated September 24, 1997, establishing certain terms of the Unsecured Medium Term Notes, Series A. * 4(d) Copy of Instructions, dated September 26, 1997, from KEPCo to Bankers Trust Company, establishing certain terms of the 6.91% Unsecured Medium Term Notes, Series A, due 2007. 10(a) Copy of Interconnection Agreement, dated July 6, 1951, among APCo, CSPCo, KEPCo, I&M and OPCo and with the Service Corporation, as amended [Registration Statement No. 2-52910, Exhibit 5(a);Registration Statement No. 2-61009, Exhibit 5(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1990, File No. 1-3525, Exhibit 10(a)(3)]. 10(b) Copy of Transmission Agreement, dated April 1, 1984, among APCo, CSPCo, I&M, KEPCo, OPCo and with the Service Corporation as agent, as amended [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(b); and Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1988, File No. 1- 3525, Exhibit 10(b)(2)]. 10(c) Copy of Modification No. 1 to the AEP System Interim Allowance Agreement, dated July 28, 1994, among APCo, CSPCo, I&M, KEPCo, OPCo and the Service Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(l)]. 10(d) Agreement and Plan of Merger, dated as of December 21, 1997, By and Among American Electric Power Company, Inc., Augusta Acquisition Corporation and Central and South West Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1-3525, Exhibit 10(f)]. * 12 Statement re: Computation of Ratios. * 13 Copy those portions of the KEPCo 1997 Annual Report (for the fiscal year ended December 31, 1997) which are incorporated by reference in this filing. * 23 Consent of Deloitte & Touche LLP. * 24 Power of Attorney. * 27 Financial Data Schedules. OPCo!! 3(a) Copy of Amended Articles of Incorporation of OPCo, and amendments thereto to December 31, 1993 [Registration Statement No. 33-50139, Exhibit 4(a); Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1993, File No. 1-6543, Exhibit 3(b)]. 3(b) Certificate of Amendment to Amended Articles of Incorporation of OPCo, dated May 3, 1994 [Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1994, File No. 1-6543, Exhibit 3(b)]. 3(c) Copy of Certificate of Amendment to Amended Articles of Incorporation of OPCo, dated March 6, 1997 [Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1996, File No. 1-6543, Exhibit 3(c)]. 3(d) Composite copy of the Amended Articles of Incorporation of OPCo (amended as of March 7, 1997) [Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1996, File No. 1-6543, Exhibit 3(d)]. 3(e) Copy of Code of Regulations of OPCo [Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1990, File No. 1-6543, Exhibit 3(d)]. 4(a) Copy of Mortgage and Deed of Trust, dated as of October 1, 1938, between OPCo and Manufacturers Hanover Trust Company (now Chemical Bank), as Trustee, as amended and supplemented [Registration Statement No. 2-3828, Exhibit B-4; Registration Statement No. 2-60721, Exhibits 2(c)(2), 2(c)(3), 2(c)(4), 2(c)(5), 2(c)(6), 2(c)(7), 2(c)(8), 2(c)(9), 2(c)(10), 2(c)(11), 2(c)(12), 2(c)(13), 2(c)(14), 2(c)(15), 2(c)(16), 2(c)(17), 2(c)(18), 2(c)(19), 2(c)(20), 2(c)(21), 2(c)(22), 2(c)(23), 2(c)(24), 2(c)(25), 2(c)(26), 2(c)(27), 2(c)(28), 2(c)(29), 2(c)(30), and 2(c)(31); Registration Statement No. 2-83591, Exhibit 4(b); Registration Statement No. 33-21208, Exhibits 4(a)(ii), 4(a)(iii) and 4(a)(vi); Registration Statement No. 33-31069, Exhibit 4(a)(ii); Registration Statement No. 33-44995, Exhibit 4(a)(ii); Registration Statement No. 33-59006, Exhibits 4(a)(ii), 4(a)(iii) and 4(a)(iv); Registration Statement No. 33-50373, Exhibits 4(a)(ii), 4(a)(iii) and 4(a)(iv); Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1993, File No. 1-6543, Exhibit 4(b)]. * 4(b) Copy of Indenture (for unsecured debt securities), dated as of September 1, 1997, between OPCo and Bankers Trust Company, as Trustee. * 4(c) Copy of Company Order and Officers' Certificate, dated September 24, 1997, establishing certain terms of the Unsecured Medium Term Notes, Series A. * 4(d) Copy of Instructions, dated September 25, 1997, from OPCo to Bankers Trust Company, establishing certain terms of the 6.73% Unsecured Medium Term Notes, Series A, due 2004. 10(a)(1) Copy of Power Agreement, dated October 15, 1952, between OVEC and United States of America, acting by and through the United States Atomic Energy Commission, and, subsequent to January 18, 1975, the Administrator of the Energy Research and Development Administration, as amended [Registration Statement No. 2-60015, Exhibit 5(a); Registration Statement No. 2-63234, Exhibit 5(a)(1)(B); Registration Statement No. 2-66301, Exhibit 5(a)(1)(C); Registration Statement No. 2- 67728, Exhibit 5(a)(1)(D); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1989, File No. 1-3457, Exhibit 10(a)(1)(F); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(1)(B)]. 10(a)(2) Copy of Inter-Company Power Agreement, dated July 10, 1953, among OVEC and the Sponsoring Companies, as amended [Registration Statement No. 2-60015, Exhibit 5(c); Registration Statement No. 2-67728, Exhibit 5(a)(3)(B); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1992, File No. 1-3457, Exhibit 10(a)(2)(B)]. 10(a)(3) Copy of Power Agreement, dated July 10, 1953, between OVEC and Indiana-Kentucky Electric Corporation, as amended [Registration Statement No. 2-60015, Exhibit 5(e)]. 10(b) Copy of Interconnection Agreement, dated July 6, 1951, between APCo, CSPCo, KEPCo, I&M and OPCo and with the Service Corporation, as amended [Registration Statement No. 2-52910, Exhibit 5(a); Registration Statement No. 2-61009, Exhibit 5(b); Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1990, File 1-3525, Exhibit 10(a)(3)]. 10(c) Copy of Transmission Agreement, dated April 1, 1984, among APCo, CSPCo, I&M, KEPCo, OPCo and with the Service Corporation as agent [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(b); Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1988, File No. 1-3525, Exhibit 10(b)(2)]. 10(d) Copy of Modification No. 1 to the AEP System Interim Allowance Agreement, dated July 28, 1994, among APCo, CSPCo, I&M, KEPCo, OPCo and the Service Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(l)]. 10(e) Copy of Amendment No. 1, dated October 1, 1973, to Station Agreement dated January 1, 1968, among OPCo, Buckeye and Cardinal Operating Company, and amendments thereto [Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1993, File No. 1-6543, Exhibit 10(f)]. 10(f) Lease Agreement dated January 20, 1995 between OPCo and JMG Funding, Limited Partnership, and amendment thereto (confidential treatment requested) [Annual Report on Form 10-K of OPCo for the fiscal year ended December 31, 1994, File No. 1-6543, Exhibit 10(l)(2)]. 10(g) Agreement and Plan of Merger, dated as of December 21, 1997, By and Among American Electric Power Company, Inc., Augusta Acquisition Corporation and Central and South West Corporation [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1-3525, Exhibit 10(f)]. !10(h)(1) AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(e)]. !10(h)(2) Amendment to AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1986, File No. 1-3525, Exhibit 10(d)(2)]. !10(i)(1) AEP System Senior Officer Annual Incentive Compensation Plan [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(i)(1)]. !10(i)(2) American Electric Power System Performance Share Incentive Plan, as Amended and Restated through February 26, 1997 [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(i)(2)]. !10(j)(1) Excess Benefits Plan [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1997, File No. 1-3525, Exhibit 10]. !10(j)(2) AEP System Supplemental Savings Plan (Non-Qualified) [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(g)(2)]. !10(j)(3) Umbrella Trust for Executives [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1993, File No. 1-3525, Exhibit 10(g)(3)]. !10(k) Employment Agreement between E. Linn Draper, Jr. and AEP and the Service Corporation [Annual Report on Form 10-K of AEGCo for the fiscal year ended December 31, 1991, File No. 0- 18135, Exhibit 10(g)(3)]. * 12 Statement re: Computation of Ratios. * 13 Copy of those portions of the OPCo 1997 Annual Report (for the fiscal year ended December 31, 1997) which are incorporated by reference in this filing. 21 List of subsidiaries of OPCo [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1- 3525, Exhibit 21]. * 23 Consent of Deloitte & Touche LLP. * 24 Power of Attorney. * 27 Financial Data Schedules. !! Certain instruments defining the rights of holders of long-term debt of the registrants included in the financial statements of registrants filed herewith have been omitted because the total amount of securities authorized thereunder does not exceed 10% of the total assets of registrants. The registrants hereby agree to furnish a copy of any such omitted instrument to the SEC upon request. EX-3 2 EX 3B AEP AMENDED BYLAWS Exhibit 3(b) As of 1/28/98 AMERICAN ELECTRIC POWER COMPANY, INC. (Formerly American Gas and Electric Company) BY-LAWS Section 1. The annual meeting of the stockholders of the Company shall be held on the fourth Wednesday of April in each year, or on such other date as determined by the Board of Directors, at an hour and place within or without the State of New York designated by the Board of Directors. (As amended January 28, 1998.) Section 2. Special meetings of the stockholders of the Company may be held upon call of the Board of Directors or of the Executive Committee, or of stockholders holding one-fourth of the capital stock, at such time and at such place within or without the State of New York as may be stated in the call and notice. (As amended July 26, 1989.) Section 3. Notice of time and place of every meeting of stockholders shall be mailed at least ten days previous thereto to each stockholder of record who shall have furnished a written address to the Secretary of the Company for the purpose. Such further notice shall be given as may be required by law. But meetings may be held without notice if all stockholders are present, or if notice is waived by those not present. Section 4. Except as otherwise provided by law, the holders of a majority of the outstanding capital stock of the Company entitled to vote at any meeting of the stockholders of the Company must be present in person or by proxy at such meeting of the stockholders of the Company to constitute a quorum. If, however, such majority shall not be represented at any meeting of the stockholders of the Company regularly called, the holders of a majority of the shares present or represented and entitled to vote thereat shall have power to adjourn such meeting to another time without notice other than announcement of adjournment at the meeting, and there may be successive adjournments for like cause and in like manner until the requisite amount of shares entitled to vote at such meeting shall be represented. (As amended May 20, 1952.) Section 5. As soon as may be after their election in each year, the Board of Directors or the Executive Committee shall appoint three inspectors of stockholders' votes and elections to serve until the final adjournment of the next annual stockholders' meeting. If they fail to make such appointment, or if their appointees, or any of them, fail to appear at any meeting of stockholders, the Chairman of the meeting may appoint inspectors, or an inspector, to act at that meeting. Section 6. Meetings of the stockholders shall be presided over by the Chairman of the Board, or if he is not present, by the President, or, if neither the Chairman of the Board nor the President is present, by a Vice President, and in his absence, by a Chairman to be elected at the meeting. The Secretary of the Company shall act as Secretary of such meetings, if present. (As amended January 23, 1979.) Section 7. The Board of Directors shall consist of such number of directors, not less than nine (9) nor more than seventeen (17), as shall be determined from time to time as herein provided. Directors shall be elected at each annual meeting of stockholders and each director so elected shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified. The number of directors to be elected at any annual meeting of stockholders shall, except as otherwise provided herein, be the number fixed in the latest resolution of the Board of Directors adopted pursuant to the authority contained in the next succeeding sentence and not subsequently rescinded. The Board of Directors shall have power from time to time and at any time when the stockholders are not assembled as such in an annual or special meeting, by resolution adopted by a majority of the directors then in office, or such greater number required by law, to fix, within the limits prescribed by this Section 7, the number of directors of the Company. If the number of directors is increased, the additional directors may, to the extent permitted by law, be elected by a majority of the directors in office at the time of the increase, or, if not so elected prior to the next annual meeting of stockholders, such additional directors shall be elected at such annual meeting. If the number of directors is decreased, then to the extent that the decrease does not exceed the number of vacancies in the Board then existing, such resolu- tion may provide that it shall become effective forthwith, and to the extent that the decrease exceeds such number of vacancies such resolution shall provide that it shall not become effective until the next election of directors by the stockholders. If the Board of Directors shall fail to adopt a resolution which fixes initially the number of directors, the number of directors shall be twelve (12). If, after the number of directors shall have been fixed by such resolution, such resolution shall cease to be in effect other than by being superseded by another such resolution, or it shall become necessary that the number of directors be fixed by these By-Laws, the number of directors shall be that number specified in the latest of such resolutions, whether or not such resolution continues in effect. (As amended April 23, 1997.) Section 8. Vacancies in the Board of Directors may be filled by the Board at any meeting. Section 9. Meetings of the Board of Directors shall be held at times fixed by resolution of the Board, or upon the call of the Executive Committee, the Chairman of the Board, or the President, and the Secretary or officer performing his duties shall give reasonable notice of all meetings of directors; provided, that a meeting may be held without notice immediately after the annual election at the same place, and notice need not be given of regular meetings held at times fixed by resolution of the Board. Meetings may be held at any time without notice if all the directors are present, or if those not present waive notice either before or after the meeting. The number of directors necessary to constitute a quorum for the transaction of business shall be any number, which may be less than a majority of the Board but not less than one-third of its number, duly assembled at a meeting of such directors. Any one or more members of the Board or of any committee thereof may participate in a meeting of the Board or such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means constitute presence in person at a meeting. (As amended February 26, 1997.) Section 10. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate among its members an Executive Committee and one or more other committees, each consisting of three (3) or more directors, and each of which, to the extent provided in such resolution, shall have all the authority of the Board. However, no such committee shall have authority as to any of the following matters: (a) The submission to shareholders of any action as to which shareholders' authorization is required by law; (b) The filling of vacancies in the Board of Directors or in any committee; (c) The fixing of compensation of any director for serving on the Board or on any committee; (d) The amendment or repeal of these By-Laws or the adoption of new By-Laws; or (e) The amendment or repeal of any resolution of the Board which by its terms shall not be so amendable or repealable. The Board of Directors shall have the power at any time to increase or decrease the number of members of any committee (provided that no such decrease shall reduce the number of members to less than three), to fill vacancies on it, to remove any member of it, and to change its functions or terminate its existence. Each committee may make such rules for the conduct of its business as it may deem necessary. A majority of the members of a committee shall constitute a quorum. The Board of Directors shall also have the power to designate or appoint at any time and from time to time one or more individuals who have acquired as a former director or officer of the Company substantial experience with the Company's affairs as an Honorary Director, such individual or individuals to meet with the Board of Directors, or certain of the directors, at the invitation of the Chairman of the Board, from time to time for the purpose of rendering advice to the Board of Directors or such directors with respect to the Company's affairs for such compensa- tion as shall be payable to directors of the Company who are not serving, at the time in question, as officers or employees of the Company or of American Electric Power Service Corporation; provided, however, that under no circumstances shall such individ- ual or individuals be authorized or empowered to participate in the management or direction of the affairs of the Company or to perform the functions of a director or officer of the Company (as each such term is defined by the provisions of Rule 70 promulgated by the Securities and Exchange Commission under the provisions of Section 17(c) of the Public Utility Holding Company Act of 1935, as such definition shall be in effect at any time in question) or any similar function. (As amended April 26, 1978.) Section 11. The Board of Directors, as soon as may be after the election each year, shall appoint one of their number Chairman of the Board and one of their number President of the Company, and shall appoint one or more Vice Presidents, a Secretary and a Treasurer, and from time to time shall appoint such other officers as they deem proper. The same person may be appointed to more than one office. (As amended January 23, 1979.) Section 12. The term of office of all officers shall be one year, or until their respective successors are elected but any officer may be removed from office at any time by the Board of Directors, unless otherwise agreed by agreement in writing duly authorized by the Board of Directors; and no agreement for the employment of any officer for a longer period than one year shall be so authorized. Section 13. The officers of the Company shall have such powers and duties as generally pertain to their offices, respec- tively, as well as such powers and duties as from time to time shall be conferred by the Board of Directors or the Executive Committee. Section 14. The stock of the Company shall be transferable or assignable only on the books of the Company by the holders, in person or by attorney, on the surrender of the certificate therefor. The Board of Directors may appoint such Transfer Agents and Registrars of stock as to them may seem expedient. Section 15. To the fullest extent permitted by law, the Company shall indemnify any person made, or threatened to be made, a party to any action or proceeding (formal or informal), whether civil, criminal, administrative or investigative and whether by or in the right of the Company or otherwise, by reason of the fact that such person, such person's testator or intestate, is or was a director, officer or employee of the Company, or of any subsidiary or affiliate of the Company, or served any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity at the request of the Company, against all loss and expense including, without limiting the generality of the foregoing, judgments, fines (including excise taxes), amounts paid in settlement and attorneys' fees and disbursements actually and necessarily incurred as a result of such action or proceeding, or any appeal therefrom, and all legal fees and expenses incurred in successfully asserting a claim for indemnification pursuant to this Section 15; provided, however, that no indemnification may be made to or on behalf of any director, officer or employee if a judgment or other final adjudication adverse to the director, officer or employee establishes that such person's acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that such person personally gained in fact a financial profit or other advantage to which such person was not legally entitled. In any case in which a director, officer or employee of the Company (or a representative of the estate of such director, officer or employee) requests indemnification, upon such person's request the Board of Directors shall meet within sixty days thereof to determine whether such person is eligible for indemni- fication in accordance with the standard set forth above. Such a person claiming indemnification shall be entitled to indemnifica- tion upon a determination that no judgment or other final adjudi- cation adverse to such person has established that such person's acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that such person personally gained in fact a financial profit or other advantage to which such person was not legally entitled. Such determination shall be made: (a) by the Board of Directors acting by a quorum consisting of directors who are not parties to the action or proceeding in respect of which indemnification is sought; or (b) if such quorum is unobtainable or if directed by such quorum, then by either (i) the Board of Directors upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because such person is eligible for indemnification in accordance with the standard set forth above, or (ii) by the stockholders upon a finding that such person is eligible for indemnification in accordance with the standard set forth above. Notwithstanding the foregoing, a determination of eligibility for indemnification may be made in any manner permitted by law. To the fullest extent permitted by law, the Company shall promptly advance to any person made, or threatened to be made, a party to any action or proceeding (formal or informal), whether civil, criminal, administrative or investigative and whether by or in the right of the Company or otherwise, by reason of the fact that such person, such person's testator or intestate, is or was a director, officer or employee of the Company, or of any subsidiary or affiliate of the Company, or served any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity at the request of the Company, expenses incurred in defending such actions or proceedings, upon request of such person and receipt of an undertaking by or on behalf of such director, officer or employee to repay amounts advanced to the extent that it is ultimately determined that such person was not eligible for indemnification in accordance with the standard set forth above. The foregoing provisions of this Section 15 shall be deemed to be a contract between the Company and each director, officer or employee of the Company, or its subsidiaries or affiliates, and any modification or repeal of this Section 15 or such provisions of the New York Business Corporation Law shall not diminish any rights or obligations existing prior to such modification or repeal with respect to any action or proceeding theretofore or thereafter brought; provided, however, that the right of indemni- fication provided in this Section 15 shall not be deemed exclusive of any other rights to which any director, officer or employee of the Company may now be or hereafter become entitled apart from this Section 15, under any applicable law including the New York Business Corporation Law. Irrespective of the provisions of this Section 15, the Board of Directors may, at any time or from time to time, approve indemnification of directors, officers, employees or agents to the full extent permitted by the New York Business Corporation Law at the time in effect, whether on account of past or future actions or transactions. Notwithstanding the foregoing, the Company shall enter into such additional contracts providing for indemnification and advancement of expenses with directors, officers or employees of the Company or its subsidiaries or affiliates as the Board of Directors shall authorize, provided that the terms of any such contract shall be consistent with the provisions of the New York Business Corporation Law. As used in this Section 15, the term "employee" shall include, without limitation, any employee, including any profes- sionally licensed employee, of the Company. Such term shall also include, without limitation, any employee, including any profes- sionally licensed employee, of a subsidiary or affiliate of the Company who is acting on behalf of the Company. The indemnification provided by this Section 15 shall be limited with respect to directors, officers and controlling persons to the extent provided in any undertaking entered into by the Company or its subsidiaries or affiliates, as required by the Securities and Exchange Commission pursuant to any rule or regulation of the Securities and Exchange Commission now or hereafter in effect. If any action with respect to indemnification of directors or officers is taken by way of amendment to these By-Laws, resolution of the Board of Directors, or by agreement, then the Company shall give such notice to the stockholders as is required by law. The Company may purchase and maintain insurance on behalf of any person described in this Section 15 against any liability which may be asserted against such person whether or not the Company would have the power to indemnify such person against such liability under the provisions of this Section 15 or otherwise. If any provision of this Section 15 shall be found to be invalid or limited in application by reason of any law, regulation or proceeding, it shall not affect any other provision or the validity of the remaining provisions hereof. The provisions of this Section 15 shall be applicable to claims, actions, suits or proceedings made, commenced or pending after the adoption hereof, whether arising from acts or omissions to act occurring before or after the adoption hereof. (As amended October 29, 1986.) Section 16. These By-Laws may be amended or added to at any meeting of the Board of Directors by affirmative vote of a majority of all of the directors, if notice of the proposed change has been delivered or mailed to the directors five days before the meeting, or if all the directors are present, or if all not present assent in writing to such change; provided, however, that the provisions of Section 7 relating to the number of directors constituting the Board of Directors may be amended only by the affirmative vote, in person or by proxy, of the holders of a majority of the outstanding shares of capital stock entitled to vote at any meeting of the stockholders of the Company; and provided further that the provisions of Section 7 other than those relating to the number of directors constituting the Board of Directors, and the provisions of this Section 16 may be amended or added to only by the affirmative vote, in person or by proxy, of the holders of two-thirds of the outstanding shares of capital stock entitled to vote at any meeting of the stockholders of the Company; and provided further, in the event of any such amendment or addition pursuant to vote by the stockholders of the Company, that such amendment or addition, or a summary thereof, shall have been set forth or referred to in the notice of such meeting. (As renumbered and amended October 29, 1986.) EX-10 3 EX 10F AGREEMENT & PLAN OF MERGER ANNEX I AGREEMENT AND PLAN OF MERGER BY AND AMONG AMERICAN ELECTRIC POWER COMPANY, INC., AUGUSTA ACQUISITION CORPORATION AND CENTRAL AND SOUTH WEST CORPORATION TABLE OF CONTENTS
PAGE ----- ARTICLE I DEFINITIONS................................................................................................ 2 SECTION 1.1 Definitions.................................................................................... 2 SECTION 1.2 Rules of Construction.......................................................................... 2 ARTICLE II TERMS OF MERGER............................................................................................ 2 SECTION 2.1 Statutory Merger............................................................................... 2 SECTION 2.2 Effective Time................................................................................. 2 SECTION 2.3 Effect of the Merger........................................................................... 2 SECTION 2.4 Certificate of Incorporation; Bylaws........................................................... 2 SECTION 2.5 Directors and Officers......................................................................... 3 ARTICLE III CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES......................................................... 3 SECTION 3.1 Merger Consideration; Conversion and Cancellation of Securities................................ 3 SECTION 3.2 Exchange of Certificates....................................................................... 4 SECTION 3.3 Closing........................................................................................ 6 SECTION 3.4 Stock Transfer Books........................................................................... 6 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................................. 6 SECTION 4.1 Organization and Qualification; Subsidiaries................................................... 6 SECTION 4.2 Certificate of Incorporation and Bylaws........................................................ 7 SECTION 4.3 Capitalization................................................................................. 7 SECTION 4.4 Authorization of Agreement..................................................................... 8 SECTION 4.5 Regulation and Approvals....................................................................... 8 SECTION 4.6 No Violation................................................................................... 9 SECTION 4.7 Reports........................................................................................ 9 SECTION 4.8 No Material Adverse Effect; Conduct............................................................ 10 SECTION 4.9 Permits; Compliance............................................................................ 11 SECTION 4.10 Litigation; Compliance with Laws.............................................................. 12 SECTION 4.11 Ownership of AEP Common Stock................................................................. 12 SECTION 4.12 Employee Benefit Plans........................................................................ 12 SECTION 4.13 Taxes......................................................................................... 15 SECTION 4.14 Environmental Matters......................................................................... 16 SECTION 4.15 Insurance..................................................................................... 16 SECTION 4.16 Pooling; Tax Matters.......................................................................... 16 SECTION 4.17 Affiliates.................................................................................... 16 SECTION 4.18 Opinion of Financial Advisor.................................................................. 17 SECTION 4.19 Brokers....................................................................................... 17 SECTION 4.20 Vote Required................................................................................. 17
i
PAGE ----- ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE AEP COMPANIES........................................................ 17 SECTION 5.1 Organization and Qualification; Subsidiaries................................................... 17 SECTION 5.2 Certificate of Incorporation and Bylaws........................................................ 18 SECTION 5.3 Capitalization................................................................................. 18 SECTION 5.4 Authorization of Agreement..................................................................... 19 SECTION 5.5 Regulation and Approvals....................................................................... 19 SECTION 5.6 No Violation................................................................................... 20 SECTION 5.7 Reports........................................................................................ 20 SECTION 5.8 No Material Adverse Effect; Conduct............................................................ 21 SECTION 5.9 Permits; Compliance............................................................................ 21 SECTION 5.10 Litigation; Compliance with Laws.............................................................. 22 SECTION 5.11 Ownership of Company Common Stock............................................................. 23 SECTION 5.12 Employee Benefit Plans........................................................................ 23 SECTION 5.13 Taxes......................................................................................... 25 SECTION 5.14 Environmental Matters......................................................................... 26 SECTION 5.15 Insurance..................................................................................... 26 SECTION 5.16 Pooling; Tax Matters.......................................................................... 27 SECTION 5.17 Affiliates.................................................................................... 27 SECTION 5.18 Opinion of Financial Advisor.................................................................. 27 SECTION 5.19 Brokers....................................................................................... 27 SECTION 5.20 Vote Required................................................................................. 27 SECTION 5.21 No Business Activities........................................................................ 27 ARTICLE VI COVENANTS.................................................................................................. 28 SECTION 6.1 Affirmative Covenants.......................................................................... 28 SECTION 6.2 Negative Covenants............................................................................. 28 SECTION 6.3 Access and Information......................................................................... 36 ARTICLE VII ADDITIONAL AGREEMENTS...................................................................................... 36 SECTION 7.1 Meeting of AEP Stockholders.................................................................... 36 SECTION 7.2 Meeting of Company Stockholders................................................................ 36 SECTION 7.3 Registration Statement; Joint Proxy Statement/Prospectus....................................... 36 SECTION 7.4 Appropriate Action; Consents; Filings.......................................................... 38 SECTION 7.5 Affiliates; Pooling; Tax Treatment............................................................. 39 SECTION 7.6 Public Announcements........................................................................... 40 SECTION 7.7 NYSE Listing................................................................................... 40 SECTION 7.8 Company Rights Agreement....................................................................... 40 SECTION 7.9 Comfort Letters................................................................................ 40 SECTION 7.10 Stock Options; Employee Benefit Plans......................................................... 40 SECTION 7.11 Indemnification of Directors and Officers..................................................... 43 SECTION 7.12 Newco......................................................................................... 45 SECTION 7.13 Event Notices................................................................................. 45 SECTION 7.14 Board of Directors............................................................................ 45 SECTION 7.15 Headquarters.................................................................................. 45 SECTION 7.16 Rate Matters.................................................................................. 45 SECTION 7.17 Coordination of Dividends..................................................................... 46 SECTION 7.18 Transition Management......................................................................... 46 SECTION 7.19 Acquisition Proposals......................................................................... 46 SECTION 7.20 Workforce Matters............................................................................. 47
ii
PAGE ----- ARTICLE VIII CLOSING CONDITIONS......................................................................................... 48 SECTION 8.1 Conditions to Obligations of Each Party........................................................ 48 SECTION 8.2 Additional Conditions to Obligations of the AEP Companies...................................... 49 SECTION 8.3 Additional Conditions to Obligations of the Company............................................ 50 ARTICLE IX TERMINATION, AMENDMENT AND WAIVER.......................................................................... 51 SECTION 9.1 Termination.................................................................................... 51 SECTION 9.2 Effect of Termination.......................................................................... 54 SECTION 9.3 Amendment...................................................................................... 54 SECTION 9.4 Waiver......................................................................................... 54 SECTION 9.5 Fees, Expenses and Other Payments.............................................................. 54 SECTION 9.6 Certain Damages, Payments and Expenses......................................................... 54 ARTICLE X GENERAL PROVISIONS......................................................................................... 56 SECTION 10.1 Effectiveness of Representations, Warranties and Agreements................................... 56 SECTION 10.2 Notices....................................................................................... 56 SECTION 10.3 Headings...................................................................................... 57 SECTION 10.4 Severability.................................................................................. 57 SECTION 10.5 Entire Agreement.............................................................................. 57 SECTION 10.6 Assignment.................................................................................... 58 SECTION 10.7 Parties in Interest........................................................................... 58 SECTION 10.8 Failure or Indulgence Not Waiver; Remedies Cumulative......................................... 58 SECTION 10.9 Governing Law................................................................................. 58 SECTION 10.10 Counterparts................................................................................. 58
ANNEXES Annex A Schedule of Defined Terms Annex B Affiliate's Agreement (Company Affiliates) Annex C Affiliate's Agreement (AEP Affiliates)
iii AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of December 21, 1997, is by and among American Electric Power Company, Inc., a New York corporation ("AEP"), Augusta Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of AEP ("Newco"), and Central and South West Corporation, a Delaware corporation (the "Company"). AEP and Newco are sometimes collectively referred to herein as the "AEP Companies." RECITALS: The Board of Directors of the Company has determined that the business combination to be effected by means of the Merger is consistent with and in furtherance of the long-term business strategy of the Company and is fair to, and in the best interests of, the Company and its stockholders and has approved and adopted this Agreement and recommended approval and adoption of this Agreement by the stockholders of the Company. The Board of Directors of AEP has determined that the business combination to be effected by means of the Merger is consistent with and in furtherance of the long-term business strategy of AEP and is fair to, and in the best interests of, AEP and its stockholders and has approved this Agreement, the Charter Amendment and the Share Issuance and recommended approval and adoption of the Charter Amendment and the Share Issuance by the stockholders of AEP. The Board of Directors of Newco has determined that the business combination to be effected by means of the Merger is in the best interests of Newco and its stockholder and has approved and adopted this Agreement and recommended approval and adoption of this Agreement by AEP. To give effect to the transactions contemplated hereby, upon the terms and subject to the conditions of this Agreement and in accordance with the Delaware Law, Newco will merge with and into the Company. For Federal income tax purposes, it is intended that the Merger shall qualify as a reorganization under the provisions of Section 368(a) of the Code. The Merger is intended to be treated as a "pooling of interests" for accounting purposes. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, the parties hereto agree as follows: I-1 ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. Certain capitalized and other terms used in this Agreement are defined in Annex A hereto and are used herein with the meanings ascribed to them therein. SECTION 1.2 RULES OF CONSTRUCTION. Unless the context otherwise requires, as used in this Agreement: (a) a term has the meaning ascribed to it; (b) an accounting term not otherwise defined has the meaning ascribed to it in accordance with GAAP; (c) "or" is not exclusive; (d) "including" shall mean "including, without limitation;" (e) words in the singular include the plural; (f) words in the plural include the singular; (g) words applicable to one gender shall be construed to apply to each gender; (h) the terms "hereof," "herein," "hereby," "hereto" and derivative or similar words refer to this entire Agreement; and (i) the terms "Article" or "SECTION" shall refer to the specified Article or SECTION of this Agreement. ARTICLE II TERMS OF MERGER SECTION 2.1 STATUTORY MERGER. Subject to the terms and conditions and in reliance upon the representations, warranties, covenants and agreements contained herein, Newco shall merge (the "Merger") with and into the Company at the Effective Time. The terms and conditions of the Merger and the mode of carrying the same into effect shall be as set forth in this Agreement. As a result of the Merger, the separate corporate existence of Newco shall cease and the Company shall continue as the Surviving Corporation. SECTION 2.2 EFFECTIVE TIME. As soon as practicable after the satisfaction or, if permissible, waiver of the conditions set forth in Article VIII, the parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, the Delaware Law. SECTION 2.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, except as otherwise provided herein, all the property, rights, privileges, powers and franchises of Newco and the Company shall vest in the Surviving Corporation, and all debts, liabilities and duties of Newco and the Company shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.4 CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective Time, the certificate of incorporation and the bylaws of the Company, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation and the bylaws of the Surviving Corporation. SECTION 2.5 DIRECTORS AND OFFICERS. The directors of Newco immediately prior to the Effective Time shall be the directors of the Surviving Corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. ARTICLE III CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 3.1 MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF SECURITIES. On the date on which the Effective Time occurs, by virtue of the Merger and without any action on the part of the AEP Companies, the Company or any securityholder thereof: I-2 (a) Subject to the other provisions of this Article III, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (exclusive of any shares to be cancelled pursuant to SECTION 3.1(c)) shall be converted into that number of shares of AEP Common Stock equal to the Common Stock Exchange Ratio. If between the date of this Agreement and the Effective Time the outstanding shares of Company Common Stock or AEP Common Stock shall have been changed into a different number of shares or a different class, by reason of any dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or other transaction, the Common Stock Exchange Ratio shall be correspondingly adjusted to reflect such dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or other transaction. (b) All shares of Company Common Stock shall, upon conversion into shares of AEP Common Stock at the Effective Time, cease to be outstanding and shall automatically be cancelled and retired, and each certificate previously evidencing shares of Company Common Stock outstanding immediately prior to the Effective Time (exclusive of any shares to be cancelled pursuant to SECTION 3.1(c)) shall thereafter be deemed, for all purposes other than the payment of dividends or distributions, to represent that number of shares of AEP Common Stock into which such shares of Company Common Stock were converted pursuant to SECTION 3.1(a) and, if applicable, the right to receive cash pursuant to SECTION 3.2(e). The holders of certificates previously evidencing Company Common Stock shall cease to have any rights with respect to such Company Common Stock except as otherwise provided herein or by law. (c) Notwithstanding any provision of this Agreement to the contrary, each share of Company Common Stock held in the treasury of the Company and each share of Company Common Stock, if any, owned by AEP or any direct or indirect wholly owned subsidiary of AEP or of the Company immediately prior to the Effective Time shall be cancelled and extinguished without conversion thereof. (d) Each share of common stock, par value $.01 per share, of Newco issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock, par value $3.50 per share, of the Surviving Corporation. SECTION 3.2 EXCHANGE OF CERTIFICATES. (a) EXCHANGE FUND. On or prior to the day of the Effective Time, AEP shall deposit, or cause to be deposited, with the Exchange Agent, for the benefit of the holders of Company Common Stock, for exchange in accordance with this Article III, through the Exchange Agent, certificates evidencing a number of shares of AEP Common Stock into which the number of shares of Company Common Stock issued and outstanding immediately prior to the Effective Time was converted pursuant to SECTION 3.1(a). The Exchange Agent shall, pursuant to irrevocable instructions from AEP, deliver AEP Common Stock, together with any cash to be paid in lieu of fractional interests in shares of AEP Common Stock pursuant to SECTION 3.2(e) and any dividends or distributions related thereto, in exchange for certificates theretofore evidencing Company Common Stock surrendered to the Exchange Agent pursuant to SECTION 3.2(c). Except as contemplated by SECTION 3.2(f), the Exchange Fund shall not be used for any other purpose. (b) LETTER OF TRANSMITTAL. Promptly after the Effective Time, AEP will cause the Exchange Agent to send to each record holder of Company Common Stock immediately prior to the Effective Time a letter of transmittal and other appropriate materials for use in surrendering to the Exchange Agent certificates that prior to the Effective Time evidenced shares of Company Common Stock. (c) EXCHANGE PROCEDURES. Promptly after the Effective Time, the Exchange Agent shall distribute to each former holder of Company Common Stock, upon surrender to the Exchange Agent for cancellation of one or more certificates that theretofore evidenced shares of Company Common Stock, certificates evidencing the appropriate number of shares of AEP Common Stock into which such shares of Company Common Stock were converted pursuant to the Merger, together with any cash to be paid in lieu of I-3 fractional interests in shares of AEP Common Stock pursuant to SECTION 3.2(e) and any dividends or distributions related thereto. If shares of AEP Common Stock are to be issued to a Person other than the Person in whose name the surrendered certificate or certificates are registered, it shall be a condition of issuance of AEP Common Stock that the surrendered certificate or certificates shall be properly endorsed, with signatures guaranteed, or otherwise in proper form for transfer and that the Person requesting such payment shall pay any transfer or other taxes required by reason of the issuance of AEP Common Stock to a Person other than the registered holder of the surrendered certificate or certificates or such Person shall establish to the satisfaction of AEP that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to any former holder of Company Common Stock for any AEP Common Stock, cash in lieu of fractional interests or dividends or distributions thereon delivered to a public official pursuant to any applicable escheat Law. (d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES OF COMPANY COMMON STOCK. No dividends or other distributions declared or made with respect to AEP Common Stock with a record date after the Effective Time shall be paid to the holder of any certificate that theretofore evidenced shares of Company Common Stock until the holder of such certificate shall surrender such certificate. Subject to the effect of any applicable escheat Laws, following surrender of any such certificate, there shall be paid (i) to the holder of the certificates evidencing whole shares of AEP Common Stock issued in exchange therefor, without interest, (A) promptly, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of AEP Common Stock, and (B) at the appropriate payment date, the amount of dividends or other distributions, with a record date after the Effective Time but prior to surrender and a payment date occurring after surrender, payable with respect to such whole shares of AEP Common Stock and (ii) to the holder of any certificate that theretofore evidenced shares of Company Common Stock, without interest, promptly the amount of any cash payable with respect to a fractional interest in a share of AEP Common Stock to which such holder is entitled pursuant to SECTION 3.2(e). (e) NO FRACTIONAL SHARES. Notwithstanding anything herein to the contrary, no certificates or scrip evidencing fractional interests in shares of AEP Common Stock shall be issued in connection with the Merger, and any such fractional interests to which a holder of record of Company Common Stock at the Effective Time would otherwise be entitled will not entitle such holder to vote or to any rights of a stockholder of AEP. In lieu of any such fractional shares, each holder of record of Company Common Stock at the Effective Time who but for the provisions of this SECTION 3.2(e) would be entitled to receive a fractional interest of a share of AEP Common Stock pursuant to the Merger shall be paid cash, without any interest thereon, as hereinafter provided. AEP shall instruct the Exchange Agent to determine the number of whole shares and fractional shares of AEP Common Stock allocable to each holder of record of Company Common Stock at the Effective Time, to aggregate all such fractional shares into whole shares, to sell the whole shares obtained thereby in the open market at then prevailing prices on behalf of holders who otherwise would be entitled to receive fractional share interests and to distribute to each such holder such holder's ratable share of the total proceeds of such sale, after making appropriate deductions of the amount, if any, required for Federal income tax withholding purposes and after deducting any applicable transfer taxes. All brokers' fees and commissions and fees of the Exchange Agent incurred in connection with such sales shall be paid by AEP. (f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which remains unclaimed by the former holders of Company Common Stock for twelve months after the Effective Time shall be delivered to AEP, upon demand, and any former holders of Company Common Stock who have not theretofore complied with this Article III shall thereafter look only to AEP for AEP Common Stock, any cash to be paid in lieu of fractional interests in shares of AEP Common Stock and any dividends or other distributions to which they are entitled. (g) WITHHOLDING OF TAX. AEP shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any former holder of Company Common Stock such I-4 amounts as AEP (or any affiliate thereof) is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax Law. To the extent that amounts are so withheld by AEP, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Company Common Stock in respect of which such deduction and withholding was made by AEP. (h) LOST CERTIFICATES. If any certificate evidencing shares of Company Common Stock shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed and, if required by AEP, the posting by such Person of a bond, in such reasonable amount as AEP may direct, as indemnity against claims that may be made against it with respect to such certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed certificate a certificate evidencing that number of shares of AEP Common Stock into which the shares of Company Common Stock evidenced by such lost, stolen or destroyed certificate were converted pursuant to SECTION 3.1(a), any cash in lieu of fractional interests in shares of AEP Common Stock to which the holder thereof may be entitled pursuant to SECTION 3.2(e) and any dividends or other distributions to which the holder thereof may be entitled pursuant to SECTION 3.2(d). SECTION 3.3 CLOSING. The Closing shall take place at such time and place as the parties shall mutually agree on the second Business Day immediately following the date on which the last of the conditions set forth in Article VIII (other than conditions that by their nature are required to be performed on the Closing Date) is fulfilled or, if permissible, waived, or at such other place, time and date as the parties hereto may agree. At the conclusion of the Closing on the Closing Date, the parties hereto shall cause the Certificate of Merger relating to the Merger to be filed with the Secretary of State of the State of Delaware. SECTION 3.4 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the AEP Companies that: SECTION 4.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. The Company and each Subsidiary of the Company are legal entities duly organized, validly existing and in good standing under the Laws of their respective jurisdictions of incorporation or organization, have all requisite power and authority to own, lease and operate their respective properties and to carry on their respective businesses as they are now being conducted and are duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by them or the ownership or leasing of their respective properties makes such qualification necessary, other than any matters, including the failure to be so duly qualified and in good standing, that could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.1 of the Company's Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of all the Company's directly or indirectly owned Subsidiaries, together with (A) the jurisdiction of incorporation or formation of each Subsidiary and the percentage of each Subsidiary's outstanding capital stock or other equity interests owned by the Company or another Subsidiary of the Company, and (B) an indication of whether each such Subsidiary is a Significant Subsidiary. Except as set forth in SECTION 4.1 of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries owns an equity interest in any other partnership or joint venture arrangement or other business entity that is Material to the Company. SECTION 4.2 CERTIFICATE OF INCORPORATION AND BYLAWS. The Company has heretofore marked for identification and furnished to AEP complete and correct copies of the certificate of incorporation and the I-5 bylaws or the equivalent organizational documents, in each case as amended or restated to the date hereof, of the Company and each of its Significant Subsidiaries. Neither the Company nor any of its Significant Subsidiaries is in violation of any of the provisions of its certificate of incorporation or bylaws (or equivalent organizational documents). SECTION 4.3 CAPITALIZATION. (a) COMPANY COMMON STOCK. The authorized capital stock of the Company consists of 350,000,000 shares of Company Common Stock of which as of November 7, 1997: (A) 212,235,320 shares were issued and outstanding, all of which are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, the Company's certificate of incorporation or bylaws or any agreement to which the Company is a party or is bound and (B) 10,410,363 shares were reserved for future issuance in the amounts and for the purposes set forth in SECTION 4.3(a) of the Company's Disclosure Letter. Except as set forth in SECTION 4.3(a) of the Company's Disclosure Letter, between November 7, 1997 and the date of this Agreement, no shares of Company Common Stock have been issued by the Company and the Company has not granted any options for, or other rights to purchase, shares of Company Common Stock. (b) RESERVED SHARES. Except for shares to which reference is made in SECTION 4.3(a), no shares of Company Common Stock are reserved for issuance, and, except for the Company's Rights Agreement and stock options shares with respect to which are reserved for issuance as set forth in SECTION 4.3(a) of the Company's Disclosure Letter, there are no contracts, agreements, commitments or arrangements obligating the Company to (i) offer, sell, issue or grant any Equity Securities of the Company, (ii) redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of the Company or (iii) grant any Lien on any shares of capital stock of the Company. (c) SUBSIDIARY STOCK. The authorized, issued and outstanding capital stock of, or other equity interests in, each of the Company's Significant Subsidiaries are set forth in SECTION 4.3(c) of the Company's Disclosure Letter. Except as set forth in SECTION 4.3(c) of the Company's Disclosure Letter, (i) all the issued and outstanding common stock of each of the Company's Significant Subsidiaries is owned, directly or indirectly, by the Company; (ii) all the issued and outstanding shares of each class of capital stock of, or other equity interests in, each of the Significant Subsidiaries of the Company have been duly authorized and are validly issued, and, with respect to capital stock, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights of any past or present equity holder of such Significant Subsidiary; (iii) all such issued and outstanding shares, or other equity interests, that are indicated as owned by the Company or one of its Subsidiaries in SECTION 4.3(c) of the Company's Disclosure Letter are owned (A) beneficially as set forth therein and (B) free and clear of all Liens; (iv) no shares of capital stock of, or other equity interests in, any Significant Subsidiary of the Company are reserved for issuance; and (v) there are no contracts, agreements, commitments or arrangements obligating the Company or any of its Subsidiaries (A) to offer, sell, issue, grant, pledge, dispose of or encumber any Equity Securities of any of the Significant Subsidiaries of the Company, (B) to redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of any of the Significant Subsidiaries of the Company or (C) to grant any Lien on any outstanding shares of capital stock of, or other equity interest in, any of the Significant Subsidiaries of the Company. (d) ADVERSE CLAIMS. Except for the Company's Rights Agreement and stock options shares with respect to which are reserved for issuance as set forth in SECTION 4.3(a) of the Company's Disclosure Letter, there are no voting trusts, proxies or other agreements, commitments or understandings of any character to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound with respect to the voting of any shares of capital stock of the Company or any of its Significant Subsidiaries, with respect to the registration of the offering, sale or delivery of any shares of capital stock of the Company or any of its Significant Subsidiaries under the Securities Act or otherwise relating to any shares of capital stock of the Company or any of its Significant Subsidiaries. I-6 SECTION 4.4 AUTHORIZATION OF AGREEMENT. The Company has all requisite corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it at the Closing and, subject to obtaining the Required Company Vote, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby. The execution and delivery by the Company of this Agreement and each instrument required hereby to be executed and delivered by it at the Closing and the performance of its obligations hereunder and thereunder have been duly and validly authorized by all requisite corporate action on the part of the Company (other than, with respect to the Merger, the Required Company Vote). This Agreement has been duly executed and delivered by the Company and (assuming due authorization, execution and delivery hereof by the other parties hereto) constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. SECTION 4.5 REGULATION AND APPROVALS. (a) UTILITY REGULATION. The Company is a public utility holding company registered under, and subject to the provisions of, the Holding Company Act, and the Company is the parent, owning all the outstanding common stock, of four Domestic Public Utility Companies: (i) CP&L, which provides regulated retail electric service in the State of Texas; (ii) PSO, which provides regulated retail electric service in the State of Oklahoma; (iii) SWEPCO, which provides regulated retail electric service in the States of Texas, Louisiana and Arkansas; and (iv) WTU, which provides regulated retail electric service in the State of Texas. In addition, the Company indirectly owns all of the outstanding stock of Seeboard, a regulated regional electricity company in England and Wales. Seeboard is a Foreign Utility Company. Except as aforesaid and as set forth in SECTION 4.5(a) of the Company's Disclosure Letter, neither the Company nor any of its Subsidiaries is subject to rate regulation as a public utility or public service company (or similar designation) by any state in the United States or any municipality or other political subdivision of any state, by the United States or any Governmental Authority of the United States or by any foreign country. (b) APPROVALS. Except for the applicable requirements set forth in SECTION 4.5(b) of the Company's Disclosure Letter, no declaration, filing or registration with, no waiting period imposed by and no Permit or Order of, any Governmental Authority is required under any Law, Regulation or Order applicable to the Company or any of its Subsidiaries to permit the Company to execute, deliver or perform this Agreement or any instrument required hereby to be executed and delivered by it at the Closing, the failure to obtain which could reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.6 NO VIOLATION. Assuming receipt of all Permits and Orders indicated as required in SECTION 4.5(b) and receipt of the Required Company Vote, neither the execution and delivery by the Company of this Agreement or any instrument required hereby to be executed and delivered by it at the Closing nor the performance by the Company of its obligations hereunder or thereunder will (a) violate or breach the terms of or cause a default under, or result in the termination of, or accelerate the performance required by, or result in a right of termination, cancellation or acceleration of any obligation under, or result in the creation of any lien, security interest, charge or encumbrance upon, any of the properties or assets of the Company or any of its Subsidiaries under (i) any Law, Regulation, Permit or Order applicable to the Company or any of its Subsidiaries, (ii) the certificate of incorporation or bylaws or similar organizational documents of the Company or any of its Subsidiaries or (iii) except as set forth in SECTION 4.6 of the Company's Disclosure Letter, any note, bond, mortgage, indenture, deed of trust, license, franchise, concession, lease, contract or agreement to which the Company or any of its Subsidiaries is a party or by which it or any of its properties or assets is bound, or (c) with the passage of time, the giving of notice or the taking of any action by a third Person, have any of the effects set forth in clause (a) of this SECTION, except in any such case for any matters described in clauses (i) and (iii) of this SECTION that could not reasonably be expected to have a material adverse effect upon the ability of the Company to perform its obligations under this Agreement or a Material Adverse Effect on the Company. Prior to the execution of this Agreement, the Board of Directors of the Company has taken all necessary action to I-7 cause this Agreement and the transactions contemplated hereby to be exempt from the provisions of SECTION 203 of the Delaware Law and to ensure that the execution, delivery and performance of this Agreement by the parties hereto will not cause any rights to be distributed or to become exercisable under the Company's Rights Agreement. SECTION 4.7 REPORTS. (a) REPORTS. Since January 1, 1993, the Company and its Subsidiaries have filed or caused to be filed (i) all SEC Reports of the Company or any of its Subsidiaries required to be filed with the Commission and (ii) all other Reports of the Company or any of its Subsidiaries required to be filed with any Governmental Authorities, including the FERC, the Commission (under the Holding Company Act), the NRC and State Regulatory Commissions, except where the failure to file any such Reports of the Company or any of its Subsidiaries could not reasonably be expected to have a Material Adverse Effect on the Company. The Company has made available to AEP a true and complete copy of each such SEC Report. The Reports of the Company and its Subsidiaries, including all those filed after the date of this Agreement and prior to the Effective Time, (i) were or will be prepared in all material respects in accordance with the requirements of applicable Law and (ii), in the case of the SEC Reports of the Company and its Subsidiaries, did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) FINANCIAL STATEMENTS. The Company's Consolidated Financial Statements and any condensed financial statements of the Company (including any related notes thereto) contained in any SEC Reports of the Company or any of its Subsidiaries filed with the Commission after the date of this Agreement (i) have been or will have been prepared in accordance with the published Regulations of the Commission and in accordance with GAAP (except (A) to the extent required by changes in GAAP, (B) with respect to unaudited financial statements as permitted by Form 10-Q and (C), with respect to SEC Reports of the Company or any of its Subsidiaries filed prior to the date of this Agreement, as may be indicated in the notes thereto) and (ii) fairly present the consolidated financial position of the Company and its Subsidiaries as of the respective dates thereof and the consolidated results of their operations and cash flows for the periods indicated (including, in the case of any unaudited interim financial statements, reasonable estimates of normal and recurring year-end adjustments). (c) NO OMISSIONS. Except for matters disclosed in SECTION 4.7(c) of the Company's Disclosure Letter, or matters disclosed in the Company's SEC Reports filed with the Commission prior to the date hereof, there exist no liabilities or obligations of the Company and its Subsidiaries, whether accrued, absolute, contingent or threatened, that would be required to be reflected, reserved for or disclosed under GAAP in condensed financial statements of the Company as of and for the period ended on the dates on which this representation and warranty is made or deemed to be made, other than (i) liabilities or obligations that are adequately reflected, reserved for or disclosed in the Company's Consolidated Financial Statements, (ii) liabilities or obligations incurred in the ordinary course of business of the Company consistent with past practice since September 30, 1997, (iii) liabilities or obligations the incurrence of which would not have been prohibited by SECTIONs 6.1 or 6.2(a) had such sections been in effect since September 30, 1997 and (iv) other liabilities and obligations that could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.8 NO MATERIAL ADVERSE EFFECT; CONDUCT. (a) MATERIAL ADVERSE CHANGES. Except as set forth in SECTION 4.8(a) of the Company's Disclosure Letter, since September 30, 1997, no event (other than any event that is of general application to the electric utility industry in the United States or the United Kingdom) has occurred that, individually or together with other similar events, has had, and, to the Knowledge of the Company, no fact or condition (other than any fact or condition that is of general application to the electric utility industry in the United States or the United Kingdom) exists that could reasonably be expected to have, a Material Adverse Effect on the Company. I-8 (b) PROSCRIBED CONDUCT. Except as set forth in SECTION 4.8(b) of the Company's Disclosure Letter, during the period from September 30, 1997 to the date of this Agreement, neither the Company nor any of its Subsidiaries has failed to conduct its business in the ordinary course consistent with past practice, other than any conduct that would not have been prohibited by SECTION 6.1 or SECTION 6.2(a) had such sections been in effect since September 30, 1997. SECTION 4.9 PERMITS; COMPLIANCE. (a) GENERAL. The Company and its Subsidiaries have obtained all Orders and Permits that are necessary to carry on their businesses as currently conducted, except for any such Orders or Permits that the failure to possess, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. Except as set forth in SECTION 4.14 of the Company's Disclosure Letter, all such Orders and Permits are in full force and effect, have not been violated in any respect that could reasonably be expected to have a Material Adverse Effect on the Company and no suspension, revocation or cancellation thereof has occurred or, to the Knowledge of the Company, been threatened and there is no action, proceeding or investigation pending or, to the Knowledge of the Company, threatened regarding suspension, revocation or cancellation of any of such Permits or Orders, except where the suspension, revocation or cancellation of such Permits or Orders could not reasonably be expected to have a Material Adverse Effect on the Company. (b) SOUTH TEXAS NUCLEAR FACILITY. CP&L is a co-owner of the South Texas Nuclear Facility, owning an undivided 25.2% interest therein. The operations of the South Texas Nuclear Facility are subject to the control of the STP Nuclear Operating Company (the "Operating Company"), in which the Company owns a like equity interest. Except as set forth in SECTION 4.9(b) of the Company's Disclosure Letter, to the Knowledge of the Company, the operations of the South Texas Nuclear Facility have at all times been conducted in compliance with applicable health, safety, regulatory and other legal requirements, except where the failure to be so in compliance in the aggregate could not reasonably be expected to have a Material Adverse Effect on the Company. Except as set forth in SECTION 4.9(b) of the Company's Disclosure Letter, to the Knowledge of the Company the operations of the South Texas Nuclear Facility are not the subject of any outstanding notices of violation or requests for information from the NRC or any other agency with jurisdiction over such facility. To the Knowledge of the Company, the Operating Company maintains, and is in compliance with, an emergency plan designed to protect the health and safety of the public in the event of an unplanned release of radioactive materials from the South Texas Nuclear Facility, and the NRC has determined that such plan is in compliance with its requirements. To the Knowledge of the Company, liability insurance to the full extent required by Law for operating nuclear facilities remains in full force and effect with respect to the South Texas Nuclear Facility, and the amount of such insurance has been approved by the NRC. To the Knowledge of the Company, plans for the decommissioning of the South Texas Nuclear Facility, and for the storage of spent nuclear fuel, conform with the requirements of applicable Law, and the owners of such facility, including the Company, have funded such plans to the extent required by Law. SECTION 4.10 LITIGATION; COMPLIANCE WITH LAWS. There are no actions, suits, investigations or proceedings (including any proceedings in arbitration) pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries, at law or in equity, in any Court or before or by any Governmental Authority, except actions, suits or proceedings that (a) are fully and accurately disclosed in the Company's SEC Reports filed with the Commission prior to the date hereof, (b) are set forth in SECTION 4.10 or SECTION 4.14 of the Company's Disclosure Letter or (c), individually or, with respect to multiple actions, suits or proceedings that allege similar theories of recovery based on similar facts, in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. Except as set forth in SECTION 4.10 of the Company's Disclosure Letter, there are no Material claims pending or, to the Knowledge of the Company, threatened by any Persons against the Company or any of its Subsidiaries for indemnification pursuant to any statute, organizational document, contract or otherwise with respect to any action, suit, investigation or proceeding pending in any Court or before or by any Governmental Authority. Except as set forth in SECTION 4.10 or SECTION 4.14 of the Company's I-9 Disclosure Letter, the Company and its Subsidiaries are in substantial compliance with all applicable Laws and Regulations and are not in default with respect to any Order applicable to the Company or any of its Subsidiaries, except such events of noncompliance or defaults that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.11 OWNERSHIP OF AEP COMMON STOCK. Neither the Company nor any of its Affiliates "beneficially own" (as such term is defined for purposes of SECTION 13(d) of the Exchange Act) any shares of AEP Common Stock (in whole or in part). SECTION 4.12 EMPLOYEE BENEFIT PLANS. (a) LISTING. Each Company Benefit Plan is listed in SECTION 4.12(a) of the Company's Disclosure Letter, including, with respect to Terminated Company Benefit Plans, the date of termination. True and correct copies of each of the following have been made available to AEP with respect to each Current Company Benefit Plan: (i) the three most recent annual reports (Form 5500) filed with the IRS, (ii) the plan document, (iii) the trust agreement, if any, (iv) the most recent summary plan description if required by ERISA, (v) the three most recent actuarial reports or valuations relating to each Current Company Benefit Plan subject to Title IV of ERISA and (vi) the most recent determination letter, if any, issued by the IRS with respect to any Current Company Benefit Plan intended to be qualified under SECTION 401 of the Code. (b) MATERIAL ADVERSE CHANGES. With respect to each Company Benefit Plan, no event has occurred and, to the Knowledge of the Company, there exists no condition or set of circumstances in connection with which the Company or any of its Subsidiaries could be subject to any liability under the terms of such Company Benefit Plan, ERISA, the Code or any other applicable Law, other than any condition or set of circumstances that could not reasonably be expected to have a Material Adverse Effect on the Company. (c) QUALIFIED STATUS OF CURRENT PLANS. Except as set forth in SECTION 4.12(c) of the Company's Disclosure Letter, each Current Company Benefit Plan intended to be qualified under SECTION 401 of the Code (i) satisfies in form the requirements of such SECTION, (ii) has received a favorable determination letter from the IRS regarding such qualified status, (iii) has not, since receipt of the most recent favorable determination letter, been amended, and, (iv) to the Knowledge of the Company, has not been operated in a way that would adversely affect its qualified status. (d) NO TERMINATIONS OF CURRENT PLANS. There has been no termination or partial termination of any Current Company Benefit Plan within the meaning of SECTION 411(d)(3) of the Code. (e) TERMINATED PLANS. Any Terminated Company Benefit Plan intended to have been qualified under SECTION 401 of the Code received a favorable determination letter from the IRS with respect to its termination. (f) CLAIMS. There are no actions, suits or claims pending (other than routine claims for benefits) or, to the Knowledge of the Company, threatened against, or with respect to, any Company Benefit Plan or its assets that could reasonably be expected to have a Material Adverse Effect on the Company and, to the Knowledge of the Company, no facts or circumstances exist that could give rise to any such actions, suits or claims. (g) PENDING MATTERS. To the Knowledge of the Company, there is no matter pending (other than routine qualification determination filings) with respect to any Company Benefit Plan before the IRS, the Department of Labor, the PBGC or other Governmental Authority. (h) TIMELY CONTRIBUTIONS. Except as set forth in SECTION 4.12(h) of the Company's Disclosure Letter, all contributions required to be made to Company Benefit Plans pursuant to their terms and the provisions of ERISA, the Code or any other applicable Law have been timely made. (i) CURRENT PLANS SUBJECT TO TITLE IV OF ERISA. As to each Current Company Benefit Plan subject to Title IV of ERISA, (i) there has been no event or condition that presents a significant risk of plan termination, (ii) no accumulated funding deficiency, whether or not waived, within the meaning of I-10 SECTION 302 of ERISA or SECTION 412 of the Code has been incurred, (iii) no reportable event within the meaning of SECTION 4043 of ERISA (for which the disclosure requirements of Regulation section 4043.1 et seq. promulgated by the PBGC have not been waived) has occurred within six years prior to the date of this Agreement, (iv) no notice of intent to terminate such Benefit Plan has been given under SECTION 4041 of ERISA, (v) no proceeding has been instituted under SECTION 4042 of ERISA to terminate such Benefit Plan, (vi) no liability to the PBGC has been incurred (other than with respect to required premium payments) and (vii) the assets of such Benefit Plan equal or exceed the actuarial present value of the benefit liabilities, within the meaning of SECTION 4041 of ERISA, under such Benefit Plan, based upon reasonable actuarial assumptions and the asset valuation principles established by the PBGC. (j) EXCESS PARACHUTE PAYMENTS. Except as set forth in SECTION 4.12(j) of the Company's Disclosure Letter and except for any Retention Agreement not prohibited by SECTION 6.2(a), in connection with the consummation of the transactions contemplated by this Agreement, no payments of money or other property, acceleration of benefits or provision of other rights have been or will be made under any Current Company Benefit Plan that could reasonably be expected to be nondeductible under SECTION 280G of the Code, whether or not some other subsequent action or event would be required to cause such payment, acceleration or provision to be triggered. (k) NO REQUIRED INCREASE IN CONTRIBUTIONS. Except as set forth in SECTION 4.12(k) of the Company's Disclosure Letter, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not (i) require the Company or any of its Subsidiaries to make a larger contribution to, or pay greater benefits or provide other rights under, any Current Company Benefit Plan than it otherwise would, whether or not some other subsequent action or event would be required to cause such payment or provision to be triggered or (ii) create or give rise to any additional vested rights or service credits under any Current Company Benefit Plan whether or not some other subsequent action or event would be required to cause such creation or acceleration to be triggered. (l) INTENTIONALLY OMITTED. (m) RETIREE BENEFITS. Except as set forth in SECTION 4.12(m) of the Company's Disclosure Letter, no Current Company Benefit Plan (other than a Company Benefit Plan maintained outside the United States that is either fully insured or fully funded through a retirement plan) provides retiree medical or retiree life insurance benefits to any Person and neither the Company nor any of its Subsidiaries is contractually or otherwise obligated (whether or not in writing) to provide any Person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions of SECTIONs 601 through 608 of ERISA and SECTION 4980B of the Code. (n) MULTIEMPLOYER PLANS. Except as set forth in SECTION 5.1 of AEP's Disclosure Letter, neither the Company nor any member of its Controlled Group contributes or has an obligation to contribute, and has not within six years prior to the date of this Agreement contributed, had an obligation to contribute, or had any other liability to a multiemployer plan within the meaning of SECTION 3(37) of ERISA. (o) COLLECTIVE BARGAINING CONTRACTS. Except as set forth in SECTION 4.12(o) of the Company's Disclosure Schedule, (i) no collective bargaining agreement is being negotiated by the Company or any of its Subsidiaries, (ii) there is no pending or, to the Knowledge of the Company, threatened labor dispute, strike or work stoppage against the Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect on the Company, (iii) to the Knowledge of the Company, neither the Company or any of its Subsidiaries nor any representative or employee of the Company or any of its Subsidiaries has in the United States committed any Material unfair labor practices in connection with the operation of the business of the Company and its Subsidiaries, and (iv) there is no pending or, to the Knowledge of the Company, threatened charge or complaint against the Company or any of its Subsidiaries by the National Labor Relations Board or any comparable agency of any state of the United States. (p) FUNDING OF CERTAIN BENEFITS. Except as set forth in SECTION 4.12(p) of the Company's Disclosure Letter, the Company has not contributed, transferred or otherwise provided any cash, securities or other property to any grantee, trust, escrow or other arrangement that has the effect of providing or setting aside assets for benefits payable pursuant to any termination, severance or other change in control agreement. I-11 SECTION 4.13 TAXES. (a) TAX RETURNS AND TAXES. Except for such matters as could not reasonably be expected to have a Material Adverse Effect on the Company, (i) all Tax Returns that are required to be filed by or with respect to the Company or any of its Subsidiaries on or before the Effective Time have been or will be timely filed, (ii) all Taxes that are due and payable by the Company or any of its Subsidiaries on or before the Effective Time have been or will be timely paid in full or adequate reserves have been established for the payment of such Taxes, (iii) all withholding Tax requirements imposed on or with respect to the Company or any of its Subsidiaries and that are required to be satisfied at or before the Effective Time have been or will be satisfied in full in all respects and (iv) no penalty, interest or other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any Tax by the Company or any of its Subsidiaries. (b) AUDITS. Except as set forth in SECTION 4.13(b) of the Company's Disclosure Letter, all Material Tax Returns required to be filed by the Company or any of its Subsidiaries have been audited (and such audit has become final) by the applicable Governmental Authority or the applicable statute of limitations has expired for the period covered by such Tax Returns. (c) EXTENSIONS OF TIME. Except as set forth in SECTION 4.13(c) of the Company's Disclosure Letter, there is not in force any extension of time with respect to the due date for the filing of any Material Tax Return required to be filed by the Company or any of its Subsidiaries or any waiver or agreement for any extension of time for the assessment or payment of any Tax due with respect to the period covered by any Tax Return filed, or required to be filed, by the Company or any of its Subsidiaries. (d) CLAIMS. No Material issues have been raised by any Taxing authority in connection with the audit or examination of any Tax Return filed, or required to be filed, by the Company or any of its Subsidiaries, and there is no claim against the Company or any of its Subsidiaries for any Taxes, and no assessment, deficiency or adjustment has been asserted or proposed with respect to any Tax Return, that, in either case, could reasonably be expected to have a Material Adverse Effect on the Company. (e) AFFILIATED GROUP. Except as set forth in SECTION 4.13(e) of the Company's Disclosure Letter, none of the Company and its Subsidiaries, during the last ten years, has been a member of an affiliated group filing a consolidated Federal income Tax Return other than an affiliated group of which the Company is the common parent. SECTION 4.14 ENVIRONMENTAL MATTERS. Except for matters disclosed in SECTION 4.14 of the Company's Disclosure Letter, or matters disclosed in the Company's SEC Reports filed with the Commission prior to the date hereof, and except for matters that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company, (a) the properties, operations and activities of the Company and its Subsidiaries are in compliance with all applicable Environmental Laws; (b) the Company and its Subsidiaries and the properties and operations of the Company and its Subsidiaries are not subject to any existing, pending or, to the Knowledge of the Company, threatened action, suit, investigation, inquiry or proceeding by or before any Court or Governmental Authority under any Environmental Law; (c) all Permits, if any, required to be obtained or filed by the Company or any of its Subsidiaries under any Environmental Law in connection with the business of the Company and its Subsidiaries have been obtained or filed and are valid and currently in full force and effect; (d) to the Knowledge of the Company, there has been no release of any hazardous substance, pollutant or contaminant into the environment by the Company or its Subsidiaries or in connection with their properties or operations; (e) to the Knowledge of the Company, there has been no exposure of any Person or property to any hazardous substance, pollutant or contaminant in connection with the properties, operations and activities of the Company and its Subsidiaries; and (f) the Company and its Subsidiaries have made available to AEP all internal and external environmental audits and studies and all correspondence on substantial environmental matters (in each case relevant to the Company or any of its Subsidiaries) in the possession of the Company or its Subsidiaries. I-12 SECTION 4.15 INSURANCE. The Company and its Subsidiaries own and are, and have been continuously since January 1, 1993, beneficiaries under all such insurance policies underwritten by reputable insurers that, as to risks insured, coverages and related limits and deductibles, are customary in the industries in which the Company and its Subsidiaries operate. Except as disclosed in SECTION 4.15 of the Company's Disclosure Letter, neither the Company nor any of it Subsidiaries has received any notice of cancellation or termination of any Material insurance policy as to which it is a named beneficiary. All Material insurance policies of the Company and its Subsidiaries are valid and enforceable against the underwriters thereof in accordance with their terms, except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. SECTION 4.16 POOLING; TAX MATTERS. Neither the Company nor, to the Knowledge of the Company, any of its Affiliates has taken or agreed to take any action that would prevent the Merger from being treated as a "pooling of interests" in accordance with generally accepted accounting principles and the Regulations of the Commission or from constituting a reorganization within the meaning of section 368(a) of the Code. SECTION 4.17 AFFILIATES. SECTION 4.17 of the Company's Disclosure Letter contains a true and complete list of all Persons who, to the Knowledge of the Company, may be deemed to be "affiliates" of the Company as such term is used in Rule 145 under the Securities Act, including all directors and executive officers of the Company. SECTION 4.18 OPINION OF FINANCIAL ADVISOR. The Company has received the opinion of Morgan Stanley & Co. Incorporated on the date of this Agreement to the effect that the consideration to be received by the holders of Company Common Stock in the Merger is fair, from a financial point of view, to such holders. SECTION 4.19 BROKERS. Except as set forth in SECTION 4.19 of the Company's Disclosure Letter, no broker, finder or investment banker (other than Morgan Stanley & Co. Incorporated) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. Prior to the date of this Agreement, the Company has made available to AEP complete and correct copies of all agreements between the Company and Morgan Stanley & Co. Incorporated pursuant to which such firm will be entitled to any payment relating to the transactions contemplated by this Agreement. SECTION 4.20 VOTE REQUIRED. The approval by the holders of a majority of the votes entitled to be cast by holders of the Company Common Stock, with each share of Company Common Stock being entitled to one vote per share, is the only vote of the holders of any class or series of capital stock of the Company or any of its Subsidiaries required to approve the Merger, this Agreement or the transactions contemplated hereby (the "Required Company Vote"). ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE AEP COMPANIES The AEP Companies hereby represent and warrant to the Company that: SECTION 5.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. AEP and each Subsidiary of AEP are legal entities duly organized, validly existing and in good standing under the Laws of their respective jurisdictions of incorporation or organization, have all requisite power and authority to own, lease and operate their respective properties and to carry on their respective businesses as they are now being conducted and are duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by them or the ownership or leasing of their respective properties makes such qualification necessary, other than any matters, including the failure to be so duly qualified and in good standing, that could not reasonably be expected to have a Material Adverse Effect on AEP. SECTION 5.1 of AEP's Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of all of I-13 the directly or indirectly owned Subsidiaries of AEP, together with (A) the jurisdiction of incorporation of each Subsidiary and the percentage of each Subsidiary's outstanding voting securities owned by AEP or another Subsidiary of AEP, and (B) an indication of whether each such Subsidiary is a Significant Subsidiary. Except as set forth in SECTION 5.1 of AEP's Disclosure Letter, neither AEP nor any of its Subsidiaries owns an equity interest in any other partnership or joint venture arrangement or other business entity that is Material to AEP. SECTION 5.2 CERTIFICATE OF INCORPORATION AND BYLAWS. AEP has heretofore marked for identification and furnished to the Company complete and correct copies of the certificate of incorporation and the bylaws or the equivalent organizational documents, in each case as amended or restated to the date hereof, of AEP, Newco and each of AEP's Significant Subsidiaries. Neither AEP, Newco, nor any of AEP's Significant Subsidiaries is in violation of any of the provisions of its certificate of incorporation or bylaws (or equivalent organizational documents). SECTION 5.3 CAPITALIZATION. (a) AEP COMMON STOCK. The authorized capital stock of AEP consists of 300,000,000 shares of AEP Common Stock of which as of the date hereof: (A) 189,989,989 shares were issued and outstanding, all of which are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, AEP's certificate of incorporation or bylaws or any agreement to which AEP is a party or is bound and (B) 51,581,493 shares were reserved for future issuance in the amounts and for the purposes set forth in SECTION 5.3(a) of AEP's Disclosure Letter. (b) RESERVED SHARES. Except for shares to which reference is made in SECTION 5.3(a), no shares of AEP Common Stock are reserved for issuance, and there are no contracts, agreements, commitments or arrangements obligating AEP to (i) offer, sell, issue or grant any Equity Securities of AEP, (ii) to redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of AEP or (iii) grant any Lien on any shares of capital stock of AEP. (c) SUBSIDIARY STOCK. The authorized, issued and outstanding capital stock of, or other equity interests in, each of AEP's Significant Subsidiaries and Newco are set forth in SECTION 5.3(c) of AEP's Disclosure Letter. Except as set forth in SECTION 5.3(c) of AEP's Disclosure Letter, (i) all the issued and outstanding common stock of each of AEP's Significant Subsidiaries and Newco is owned, directly or indirectly, by AEP; (ii) all the issued and outstanding shares of each class of capital stock of, or other equity interests in, each of the Significant Subsidiaries of AEP and Newco have been duly authorized and are validly issued, and, with respect to capital stock, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights of any past or present equity holder of such Significant Subsidiary; (iii) all such issued and outstanding shares, or other equity interests, that are indicated as owned by AEP, Newco or one of its Subsidiaries in SECTION 5.3(c) of AEP's Disclosure Letter are owned (A) beneficially as set forth therein and (B) free and clear of all Liens; (iv) no shares of capital stock of, or other equity interests in, any Significant Subsidiary of AEP or Newco are reserved for issuance; and (v) there are no contracts, agreements, commitments or arrangements obligating AEP or any of its Significant Subsidiaries or Newco (A) to offer, sell, issue, grant, pledge, dispose of or encumber any Equity Securities of any of the Significant Subsidiaries of AEP or Newco or (B) to redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of any of the Significant Subsidiaries of AEP or Newco or (C) to grant any Lien on any outstanding shares of capital stock of, or other equity interest in, any of the Significant Subsidiaries of AEP or Newco. (d) ADVERSE CLAIMS. There are no voting trusts, proxies or other agreements, commitments or understandings of any character to which AEP or any of its Subsidiaries is a party or by which AEP or any of its Subsidiaries is bound with respect to the voting of any shares of capital stock of AEP, any of its Significant Subsidiaries or Newco, with respect to the registration of the offering, sale or delivery of any shares of capital stock of AEP or any of its Significant Subsidiaries or Newco under the Securities Act or otherwise relating to any shares of capital stock of AEP, any of its Significant Subsidiaries or Newco. I-14 SECTION 5.4 AUTHORIZATION OF AGREEMENT. Each of AEP and Newco has all requisite corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it at the Closing and, subject to obtaining the Required AEP Vote, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby. The execution and delivery by each of AEP and Newco of this Agreement and each instrument required hereby to be executed and delivered by it at the Closing and the performance of their respective obligations hereunder and thereunder have been duly and validly authorized by all requisite corporate action on the part of AEP and Newco (other than the Required AEP Vote). This Agreement has been duly executed and delivered by AEP and Newco and (assuming due authorization, execution and delivery hereof by the Company) constitutes a legal, valid and binding obligation of each of AEP and Newco, enforceable against each of them in accordance with its terms, except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. SECTION 5.5 REGULATION AND APPROVALS. (a) UTILITY REGULATION. AEP is a public utility holding company registered under, and subject to the provisions of, the Holding Company Act, and AEP is the parent, owning all the outstanding common stock, of seven Domestic Public Utility Companies: (i) APCo, which provides regulated retail electricity service in the States of Virginia and West Virginia and which is also regulated in the State of Tennessee; (ii) CSPCo, which provides regulated retail electricity service in the State of Ohio; (iii) I&M, which provides regulated retail electricity service in the States of Indiana and Michigan; (iv) KEPCo, which provides regulated retail electricity service in the State of Kentucky; (v) KPC, which provides regulated retail electricity service in the State of Tennessee; (vi) OPCo, which provides regulated retail electricity service in the State of Ohio and which is also regulated in the State of West Virginia and (vii) WPC, which provides regulated retail electricity service in the State of West Virginia. In addition, AEP indirectly owns 50% of Yorkshire Electricity Group plc, a regulated regional electricity company in the United Kingdom ("Yorkshire"). Yorkshire is a Foreign Utility Company. Except for regulation of the aforesaid companies by FERC under the Federal Power Act, by the Commission under the Holding Company Act and by said states and as set forth in SECTION 5.5(a) of AEP's Disclosure Letter, neither AEP nor any of its Subsidiaries is subject to regulation as a public utility or a public service company (or similar designation) by any state in the United States or any municipality or other political subdivision of any state, by the United States or by any Governmental Authority of the United States or by any foreign country. (b) APPROVALS. Except for the applicable requirements set forth in SECTION 5.5(b) of AEP's Disclosure Letter, no declaration, filing or registration with, no waiting period imposed by and no Permit or Order of, any Governmental Authority is required under any Law, Regulation or Order applicable to AEP or any of its Subsidiaries to permit AEP or Newco to execute, deliver or perform this Agreement or any instrument required hereby to be executed and delivered by either of them at the Closing, the failure to obtain which could reasonably be expected to have a Material Adverse Effect on AEP. SECTION 5.6 NO VIOLATION. Assuming receipt of all Permits and Orders indicated as required in SECTION 5.5(b) and receipt of the Required AEP Vote, neither the execution and delivery by AEP or Newco of this Agreement or any instrument required hereby to be executed and delivered by either of them at the Closing nor the performance by AEP or Newco of their respective obligations hereunder or thereunder will (a) violate or breach the terms of or cause a default under, or result in the termination of, or accelerate the performance required by, or result in a right of termination, cancellation or acceleration of any obligation under, or result in the creation of any lien, security interest, charge or encumbrance upon, any of the properties or assets of AEP or any of its Subsidiaries under (i) any Law, Regulation, Permit or Order applicable to AEP or any of its Subsidiaries, (ii) the certificate of incorporation or bylaws or similar organizational documents of AEP or any of its Subsidiaries or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, concession, lease, contract or agreement to which AEP or any of its Subsidiaries is a party or by which it or any of its properties or assets is bound, or (b) with the passage of time, the giving of notice or the taking of any action by a third Person, have any of the effects set forth in I-15 clause (a) of this SECTION, except in any such case for any matters described in clauses (i) and (iii) of this SECTION that could not reasonably be expected to have a material adverse effect upon the ability of AEP or Newco to perform their respective obligations under this Agreement or a Material Adverse Effect on AEP. Prior to the execution of this Agreement, the Board of Directors of AEP has taken all necessary action to cause this Agreement and the transactions contemplated hereby to be exempt from the provisions of SECTION 912 of the New York Law. SECTION 5.7 REPORTS. (a) REPORTS. Since January 1, 1993, AEP and its Subsidiaries have filed or caused to be filed (i) all SEC Reports of AEP or any of its Subsidiaries required to be filed with the Commission and (ii) all other Reports of AEP or any of its Subsidiaries required to be filed with any other Governmental Authorities, including the FERC, the Commission (under the Holding Company Act), the NRC and State Regulatory Commissions, except where the failure to file any such Reports of AEP or any of its Subsidiaries could not reasonably be expected to have a Material Adverse Effect on AEP. AEP has made available to the Company a true and complete copy of each such SEC Report. The Reports of AEP and its Subsidiaries, including all those filed after the date of this Agreement and prior to the Effective Time, (i) were or will be prepared in all material respects in accordance with the requirements of applicable Law and (ii), in the case of the SEC Reports of AEP and its Subsidiaries, did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) FINANCIAL STATEMENTS. The AEP Consolidated Financial Statements and any consolidated financial statements of AEP (including any related notes thereto) contained in any SEC Reports of AEP or any of its Subsidiaries filed with the Commission after the date of this Agreement (i) have been or will have been prepared in accordance with the published Regulations of the Commission and in accordance with GAAP (except (A) to the extent required by changes in GAAP, (B) with respect to unaudited financial statements as permitted by Form 10-Q and (C), with respect to SEC Reports of AEP filed prior to the date of this Agreement, as may be indicated in the notes thereto) and (ii) fairly present the consolidated financial position of AEP and its Subsidiaries as of the respective dates thereof and the consolidated results of their operations and cash flows for the periods indicated (including, in the case of any unaudited interim financial statements, reasonable estimates of normal and recurring year-end adjustments). (c) NO OMISSIONS. Except for matters disclosed in SECTION 5.7(c) of AEP's Disclosure Letter, or matters disclosed in AEP's SEC Reports filed with the Commission prior to the date hereof, there exist no liabilities or obligations of AEP and its Subsidiaries, whether accrued, absolute, contingent or threatened, that would be required to be reflected, reserved for or disclosed under GAAP in consolidated financial statements of AEP as of and for the period ended on the dates on which this representation and warranty is made or deemed to be made, other than (i) liabilities or obligations that are adequately reflected, reserved for or disclosed in AEP's Consolidated Financial Statements, (ii) liabilities or obligations incurred in the ordinary course of business of AEP consistent with past practice since September 30, 1997, (iii) liabilities or obligations the incurrence of which would not have been prohibited by SECTION 6.1 or 6.2(b) had such sections been in effect since September 30, 1997 and (iv) other liabilities and obligations that could not reasonably be expected to have a Material Adverse Effect on AEP. SECTION 5.8 NO MATERIAL ADVERSE EFFECT; CONDUCT. (a) MATERIAL ADVERSE CHANGES. Except as set forth in SECTION 5.8(a) of AEP's Disclosure Letter, since September 30, 1997, no event (other than any event that is of general application to the electric utility industry in the United States or the United Kingdom) has occurred that, individually or together with other similar events, has had, and to the Knowledge of AEP, no fact or condition (other than any fact or condition that is of general application to the electric utility industry in the United States or the United Kingdom) exists that could reasonably be expected to have, a Material Adverse Effect on AEP. I-16 (b) PROSCRIBED CONDUCT. Except as set forth in SECTION 5.8(b) of AEP's Disclosure Letter, during the period from September 30, 1997 to the date of this Agreement, neither AEP nor any of its Subsidiaries has failed to conduct its business in the ordinary course consistent with past practice, other than any conduct that would not have been prohibited by SECTION 6.1 or SECTION 6.2(b) had such sections been in effect since September 30, 1997. SECTION 5.9 PERMITS; COMPLIANCE. (a) GENERAL. To the Knowledge of AEP, AEP and its Subsidiaries have obtained all Orders and Permits that are necessary to carry on their businesses as currently conducted, except for any such Orders or Permits that the failure to possess, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on AEP. All such Orders and Permits are in full force and effect, have not been violated in any respect that could reasonably be expected to have a Material Adverse Effect on AEP and no suspension, revocation or cancellation thereof has occurred or, to the Knowledge of AEP, been threatened and there is no action, proceeding or investigation pending or, to the Knowledge of AEP, threatened regarding suspension, revocation or cancellation of any of such Permits or Orders, except where the suspension, revocation or cancellation of such Permits or Orders could not reasonably be expected to have a Material Adverse Effect on AEP. (b) COOK NUCLEAR PLANT. A Subsidiary of AEP is the owner of the Cook Nuclear Plant. Except as set forth in SECTION 5.9(b) of AEP's Disclosure Letter, to the Knowledge of AEP, the operations of the Cook Nuclear Plant have at all times been conducted in compliance with applicable health, safety, regulatory and other legal requirements, except where the failure to be so in compliance in the aggregate could not reasonably be expected to have a Material Adverse Effect on AEP. Except as set forth in SECTION 5.9(b) of AEP's Disclosure Letter, to the Knowledge of AEP, the operations of the Cook Nuclear Plant are not the subject of any outstanding notices of violation or requests for information from the NRC or any other agency with jurisdiction over such facility. To the Knowledge of AEP, AEP maintains, and is in compliance with, an emergency plan designed to protect the health and safety of the public in the event of an unplanned release of radioactive materials from the Cook Nuclear Plant, and the NRC has determined that such plan is in compliance with its requirements. To the Knowledge of AEP, liability insurance to the full extent required by law for operating nuclear facilities remains in full force and effect with respect to the Cook Nuclear Plant, and the amount of such insurance has been approved by the NRC. To the Knowledge of AEP, plans for the decommissioning of the Cook Nuclear Plant, and for the storage of spent nuclear fuel, conform with the requirements of applicable law, and the owner of such facility has funded such plans to the extent required by Law. SECTION 5.10 LITIGATION; COMPLIANCE WITH LAWS. There are no actions, suits, investigations or proceedings (including any proceedings in arbitration) pending or, to the Knowledge of AEP, threatened against AEP or any of its Subsidiaries, at law or in equity, in any Court or before or by any Governmental Authority, except actions, suits or proceedings that (a) are fully and accurately disclosed in AEP's SEC Reports filed with the Commission prior to the date hereof, (b) are set forth in SECTION 5.10 or SECTION 5.14 of AEP's Disclosure Letter or (c) individually or, with respect to multiple actions, suits or proceedings that allege similar theories of recovery based on similar facts, in the aggregate, could not reasonably be expected to have a Material Adverse Effect on AEP. Except as set forth in SECTION 5.10 of AEP's Disclosure Letter, there are no Material claims pending or, to the Knowledge of AEP, threatened by any Persons against AEP or any of its Subsidiaries for indemnification pursuant to any statute, organizational document, contract or otherwise with respect to any action, suit, investigation or proceeding pending in any Court or before or by any Governmental Authority. Except as set forth in SECTION 5.10 of AEP's Disclosure Letter, AEP and its Subsidiaries are in substantial compliance with all applicable Laws and Regulations and are not in default with respect to any Order applicable to AEP or any of its Subsidiaries, except such events of noncompliance or defaults that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on AEP. I-17 SECTION 5.11 OWNERSHIP OF COMPANY COMMON STOCK. Neither AEP nor any of its Affiliates "beneficially own" (as such term is defined for purposes of SECTION 13(d) of the Exchange Act) any shares of Company Common Stock. SECTION 5.12 EMPLOYEE BENEFIT PLANS. (a) LISTING. Each AEP Benefit Plan is listed in SECTION 5.12(a) of AEP's Disclosure Letter, including, with respect to Terminated AEP Benefit Plans, the date of termination. True and correct copies of each of the following have been made available to the Company with respect to each Current AEP Benefit Plan: (i) the three most recent annual reports (Form 5500) filed with the IRS, (ii) the plan document, (iii) the trust agreement, if any, (iv) the most recent summary plan description if required by ERISA, (v) the three most recent actuarial reports or valuations relating to each Current AEP Benefit Plan subject to Title IV of ERISA and (vi) the most recent determination letter, if any, issued by the IRS with respect to any Current AEP Benefit Plan intended to be qualified under SECTION 401 of the Code. (b) MATERIAL ADVERSE CHANGES. With respect to each AEP Benefit Plan, no event has occurred and, to the Knowledge of AEP, there exists no condition or set of circumstances in connection with which AEP or any of its Subsidiaries could be subject to any liability under the terms of such AEP Benefit Plan, ERISA, the Code or any other applicable Law, other than any condition or set of circumstances that could not reasonably be expected to have a Material Adverse Effect on AEP. (c) QUALIFIED STATUS OF CURRENT PLANS. Except as set forth in SECTION 5.12(c) of AEP's Disclosure Letter, each Current AEP Benefit Plan intended to be qualified under SECTION 401 of the Code (i) satisfies in form the requirements of such SECTION, (ii) has received a favorable determination letter from the IRS regarding such qualified status, (iii) has not, since receipt of the most recent favorable determination letter, been amended, and, (iv) to the Knowledge of AEP, has not been operated in a way that would adversely affect its qualified status. (d) NO TERMINATION OF CURRENT PLANS. Except as set forth in SECTION 5.12(d) of AEP's Disclosure Letter, there has been no termination or partial termination of any Current AEP Benefit Plan within the meaning of SECTION 411(d)(3) of the Code. (e) TERMINATED PLANS. Any Terminated AEP Benefit Plan intended to have been qualified under SECTION 401 of the Code received a favorable determination letter from the IRS with respect to its termination. (f) CLAIMS. There are no actions, suits or claims pending (other than routine claims for benefits) or, to the Knowledge of AEP, threatened against, or with respect to, any AEP Benefit Plan or its assets that could reasonably be expected to have a Material Adverse Effect on AEP and, to the Knowledge of AEP, no facts or circumstances exist that could give rise to any such actions, suits or claims. (g) PENDING MATTERS. To the Knowledge of AEP, there is no matter pending (other than routine qualification determination filings) with respect to any AEP Benefit Plan before the IRS, the Department of Labor, the PBGC or other Government Authority. (h) TIMELY CONTRIBUTIONS. All contributions required to be made to AEP Benefit Plans pursuant to their terms and the provisions of ERISA, the Code or any applicable Law have been timely made. (i) CURRENT PLANS SUBJECT TO TITLE IV OF ERISA. As to each Current AEP Benefit Plan subject to Title IV of ERISA, (i) there has been no event or condition that presents a significant risk of plan termination, (ii) no accumulated funding deficiency, whether or not waived, within the meaning of SECTION 302 of ERISA or SECTION 412 of the Code has been incurred, (iii) no reportable event within the meaning of SECTION 4043 of ERISA (for which the disclosure requirements of Regulation section 4043.1 et seq. promulgated by the PBGC have not been waived) has occurred within six years prior to the date of this Agreement, (iv) no notice of intent to terminate such Benefit Plan has been given under SECTION 4041 of ERISA, (v) no proceeding has been instituted under SECTION 4042 of ERISA to terminate such I-18 Benefit Plan, (vi) no liability to the PBGC has been incurred (other than with respect to required premium payments) and (vii) the assets of such Benefit Plan equal or exceed the actuarial present value of the benefit liabilities, within the meaning of SECTION 4041 of ERISA, under such Benefit Plan, based upon reasonable actuarial assumptions and the asset valuation principles established by the PBGC. (j) EXCESS PARACHUTE PAYMENTS. Except as set forth in SECTION 5.12(j) of AEP's Disclosure Letter, in connection with the consummation of the transactions contemplated by this Agreement, no payments of money or other property, acceleration of benefit or provision of other rights have been or will be made under any Current AEP Benefit Plan that could be reasonably be expected to be nondeductible under SECTION 280G of the Code, whether or not some other subsequent action or event would be required to cause such payment, acceleration or provision to be triggered. (k) NO REQUIRED INCREASE IN CONTRIBUTIONS. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not (i) require AEP or any of its Subsidiaries to make a larger contribution to, or pay greater benefits or provide other rights under, any Current AEP Benefit Plan than it otherwise would, whether or not some other subsequent action or event would be required to cause such payment or provision to be triggered or (ii) create or give rise to any additional vested rights or service credits under any Current AEP Benefit Plan, whether or not some other subsequent action or event would be required to cause such creation or acceleration to be triggered. (l) INTENTIONALLY OMITTED. (m) RETIREE BENEFITS. Except as set forth in SECTION 5.12(m) of AEP's Disclosure Letter, no Current AEP Benefit Plan (other than an AEP Benefit Plan maintained outside the United States that is either fully insured or fully funded through a retirement plan) provides retiree medical or retiree life insurance benefits to any Person and neither AEP nor any of its Subsidiaries is contractually or otherwise obligated (whether or not in writing) to provide any Person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions of SECTIONs 601 through 608 of ERISA and SECTION 4980B of the Code. (n) MULTIEMPLOYER PLANS. Except as set forth in SECTION 5.12(n) of AEP's Disclosure Letter, neither AEP nor any member of its Controlled Group contributes or has an obligation to contribute, and has not within six years prior to the date of this Agreement contributed, had an obligation to contribute, or had any other liability to a multiemployer plan within the meaning of SECTION 3(37) of ERISA. Neither AEP nor any member of its Controlled Group participate in any multiemployer plan with withdrawal liability on the date hereof which could reasonably be expected to have a Material Adverse Effect on AEP. (o) COLLECTIVE BARGAINING CONTRACTS. Except as set forth in SECTION 5.12(o) of AEP's Disclosure Schedule, (i) no collective bargaining agreement is being negotiated by AEP or any of its Subsidiaries, (ii) there is no pending or, to the Knowledge of AEP, threatened labor dispute, strike or work stoppage against AEP or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect on AEP, (iii) to the Knowledge of AEP, neither AEP or any of its Subsidiaries nor any representative or employee of AEP or any of its Subsidiaries has in the United States committed any Material unfair labor practices in connection with the operation of the business of AEP and its Subsidiaries, and (i) there is no pending or, to the Knowledge of AEP, threatened charge or complaint against AEP or any of its Subsidiaries by the National Labor Relations Board or any comparable agency of any state of the United States. SECTION 5.13 TAXES. (a) TAX RETURNS AND TAXES. Except for such matters as could not reasonably be expected to have a Material Adverse Effect on AEP, (i) all Tax Returns that are required to be filed by or with respect to AEP or any of its Subsidiaries on or before the Effective Time have been or will be timely filed, (ii) all Taxes that are due and payable by AEP or any of its Subsidiaries on or before the Effective Time have been or will be timely paid in full or adequate reserves have been established for the payment of such Taxes, (iii) all withholding Tax requirements imposed on or with respect to AEP or any of its I-19 Subsidiaries and that are required to be satisfied at or before the Effective Time have been or will be satisfied in full in all respects and (iv) no penalty, interest or other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any Tax by AEP or any of its Subsidiaries. (b) AUDITS. Except as set forth in SECTION 5.13(b) of AEP's Disclosure Letter, all Material Tax Returns required to be filed by AEP or any of its Subsidiaries have been audited (and such audit has become final) by the applicable Governmental Authority or the applicable statute of limitations has expired for the period covered by such Tax Returns. (c) EXTENSION OF TIME. Except as set forth in SECTION 5.13(c) of AEP's Disclosure Letter, there is not in force any extension of time with respect to the due date for the filing of any Material Tax Return required to be filed by AEP or any of its Subsidiaries or any waiver or agreement for any extension of time for the assessment or payment of any Tax due with respect to the period covered by any Tax Return filed, or required to be filed, by AEP or any of its Subsidiaries. (d) CLAIMS. No Material issues have been raised by any Taxing authority in connection with the audit or examination of any Tax Return filed, or required to be filed, by AEP or any of its Subsidiaries, and there is no claim against AEP or any of its Subsidiaries for any Taxes, and no assessment, deficiency or adjustment has been asserted or proposed with respect to any Tax Return, that, in either case, could reasonably be expected to have a Material Adverse Effect on AEP. (e) AFFILIATED GROUP. Except as set forth in SECTION 5.13(e) of AEP's Disclosure Letter, none of AEP and its Subsidiaries, during the last ten years, has been a member of an affiliated group filing a consolidated Federal income Tax Return other than an affiliated group of which AEP is the common parent. SECTION 5.14 ENVIRONMENTAL MATTERS. Except for matters disclosed in SECTION 5.14 of AEP's Disclosure Letter, or matters disclosed in AEP's SEC Reports filed with the Commission prior to the date hereof, and except for matters that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on AEP, (a) the properties, operations and activities of AEP and its Subsidiaries are in compliance with all applicable Environmental Laws; (b) AEP and its Subsidiaries and the properties and operations of AEP and its Subsidiaries are not subject to any existing, pending or, to the Knowledge of AEP, threatened action, suit, investigation, inquiry or proceeding by or before any Court or Governmental Authority under any Environmental Law; (c) all Permits, if any, required to be obtained or filed by AEP or any of its Subsidiaries under any Environmental Law in connection with the business of AEP and its Subsidiaries have been obtained or filed and are valid and currently in full force and effect; (d) to the Knowledge of AEP, there has been no release of any hazardous substance, pollutant or contaminant into the environment by AEP or its Subsidiaries or in connection with their properties or operations; (e) to the Knowledge of AEP, there has been no exposure of any Person or property to any hazardous substance, pollutant or contaminant in connection with the properties, operations and activities of AEP and its Subsidiaries; and (f) AEP and its Subsidiaries have made available to the Company all internal and external environmental audits and studies and all correspondence on substantial environmental matters (in each case relevant to AEP or any of its Subsidiaries) in the possession of AEP or its Subsidiaries. SECTION 5.15 INSURANCE. AEP and its Subsidiaries own and are, and have been continuously since January 1, 1993, beneficiaries under all such insurance policies underwritten by reputable insurers that, as to risks insured, coverages and related limits and deductibles, are customary in the industries in which AEP and its Subsidiaries operate. Except as disclosed in SECTION 5.15 of AEP's Disclosure Letter, neither AEP nor any of it Subsidiaries has received any notice of cancellation or termination of any Material insurance policy as to which it is a named beneficiary. All Material insurance policies of AEP and its Subsidiaries are valid and enforceable against the underwriters thereof in accordance with their terms, I-20 except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. SECTION 5.16 POOLING; TAX MATTERS. Neither AEP nor, to the Knowledge of AEP, any of its Affiliates has taken or agreed to take any action that would prevent the Merger from being treated as a "pooling of interests" in accordance with generally accepted accounting principles and the Regulations of the Commission or from constituting a reorganization within the meaning of section 368(a) of the Code. SECTION 5.17 AFFILIATES. SECTION 5.17 of AEP's Disclosure Letter contains a true and complete list of all Persons who, to the Knowledge of AEP, may be deemed to be "affiliates" of AEP as such term is used under Rule 145 under the Securities Act, including all directors and executive officers of AEP. SECTION 5.18 OPINION OF FINANCIAL ADVISOR. AEP has received the opinion of Salomon Smith Barney on the date of this Agreement to the effect that the consideration to be paid by AEP in the Merger is fair, from a financial point of view, to AEP. SECTION 5.19 BROKERS. Except as set forth in SECTION 5.19 of AEP's Disclosure Letter, no broker, finder or investment banker (other than Salomon Smith Barney) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of AEP. Prior to the date of this Agreement, AEP has made available to the Company complete and correct copies of all agreements between AEP and Salomon Smith Barney pursuant to which such firm will be entitled to any payment relating to the transactions contemplated by this Agreement. SECTION 5.20 VOTE REQUIRED. The affirmative vote of holders of a majority of the outstanding shares of AEP Common Stock is the only vote of holders of any class or series of capital stock of AEP necessary to approve the amendment to the restated certificate of incorporation of AEP in order to increase the number of authorized shares of AEP Common Stock to be issued in the Merger (the "Charter Amendment"); and the affirmative vote of holders of shares of AEP Common Stock representing a majority of the total votes cast at a meeting of the holders of outstanding shares of AEP Common Stock is the only vote of the holders of any class or series of AEP capital stock necessary under the rules of the NYSE to approve the issuance of shares of AEP Common Stock to be issued in the Merger (the "Share Issuance"). Such votes of the holders of shares of AEP Common Stock necessary to approve the Charter Amendment and the Share Issuance are hereinafter collectively referred to as the "Required AEP Vote" and are the only votes of the holders of any class or series of capital stock of AEP or its Subsidiaries required to approve the Merger, this Agreement or the transactions contemplated hereby, except for the vote of AEP as the sole stockholder of Newco. AEP, in its capacity as sole stockholder of Newco, has approved this Agreement and the transactions contemplated hereby. SECTION 5.21 NO BUSINESS ACTIVITIES. Newco was organized solely for the purpose of the transactions contemplated hereby and has not conducted any activities other than in connection with the organization of Newco, the negotiation and execution of this Agreement and the consummation of the transaction contemplated hereby. Newco has no Subsidiaries. I-21 ARTICLE VI COVENANTS SECTION 6.1 AFFIRMATIVE COVENANTS. Each of the Company and AEP hereby covenants and agrees that, prior to the Effective Time, unless otherwise expressly contemplated by this Agreement or consented to in writing by the other, it will and will cause its Subsidiaries to: (a) operate its business in the ordinary course consistent with past or then current industry practices; (b) use all commercially reasonable efforts to preserve substantially intact its business organization and goodwill, maintain its rights and franchises, retain the services of its respective key employees and maintain its goodwill and relationships with its respective customers and suppliers; (c) maintain and keep its properties and assets in as good repair and condition as at present, ordinary wear and tear excepted, and maintain supplies and inventories in quantities consistent with its customary business practice; (d) use all commercially reasonable efforts to keep in full force and effect insurance and bonds comparable in amount and scope of coverage to that currently maintained; (e) use all commercially reasonable efforts to maintain in effect all existing Orders and Permits pursuant to which such party or its Subsidiaries operate, and timely to apply for and obtain any additional Orders and Permits that are or will be required for the current or currently planned operations of such party or its Subsidiaries; and (f) consult and confer with one another on a frequent and reasonable basis in order to ensure compliance with the covenants contained in this Agreement and otherwise as necessary to consummate and make effective the transactions contemplated by this Agreement, provided, that, except as otherwise expressly set forth herein, AEP and the Company shall each retain discretion and control over its affairs; except for any matters that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company or AEP, as the case may be, provided, that, no action by the Company or its Subsidiaries or AEP or its Subsidiaries, as the case may be, with respect to matters specifically addressed by any provision of Section 6.2 shall be deemed a breach of this Section 6.1 unless such action would constitute a breach of one or more of such provisions of Section 6.2. SECTION 6.2 NEGATIVE COVENANTS. (a) COMPANY COVENANTS. The Company covenants and agrees that, except as expressly otherwise contemplated by this Agreement or Section 6.2(a) of the Company's Disclosure Letter or otherwise consented to in writing by AEP, which consent shall not be unreasonably withheld, from the date of this Agreement until the Closing, it will not do, and will not permit any of its Subsidiaries to do, any of the following: (i) (A) increase the compensation payable to or to become payable to any director or executive officer; (B) grant any severance or termination pay; (C) amend or otherwise modify the terms of any outstanding options, warrants or rights, the effect of which shall be to make such terms more favorable to the holders thereof; (D) take any action to accelerate the vesting of any outstanding Company stock options; (E) amend or take any other actions to increase the amount or accelerate the payment or vesting of any benefit under any Benefit Plan (including the acceleration of vesting, waiving of performance criteria or the adjustment of awards or any other actions permitted upon a change in control of such party or upon a filing under Section 13(d) or 14(d) of the Exchange Act with respect to such party), or (F) contribute, transfer or otherwise provide any cash, securities or other property to any grantee, trust, escrow or other arrangement that has the effect of providing or setting aside assets for benefits payable pursuant to any termination, severance, or other change in control agreement; I-22 except (i) pursuant to any contract, agreement or other legal obligation of the Company or any of its Subsidiaries existing at the date of this Agreement, (ii) increases in salary payable or to become payable upon promotion to an office having greater operational responsibilities, (iii), in the case of severance or termination payments, pursuant to the severance policy of the Company or its Subsidiaries existing at the date of this Agreement, (iv) in the case of options, warrants, rights or Benefit Plans, amendments required by ERISA or other applicable law and (v) except with respect to the management employees of the Company who are parties to Change of Control Agreements with the Company on the date hereof, any such increase, grant, amendment, modification or action in the ordinary course of business consistent with past practice; (ii) (A) enter into any employment or severance agreement with, any director, officer or employee, either individually or as part of a class of similarly situated persons or (B) establish, adopt or enter into any new Benefit Plan; except employment and severance agreements entered into for the benefit of any newly employed or promoted officers or employees, in which case, the terms of such agreements shall be reasonably consistent with those existing at the date of such employment and except for Company Benefit Plans relating to health and life insurance benefits established, adopted or entered into in the ordinary course of business consistent with past practice; (iii) declare or pay any dividend on, or make any other distribution in respect of, outstanding shares of capital stock of the Company or any Significant Subsidiary, except (A) dividends declared and paid by the Company with respect to the outstanding Company Common Stock at approximately the same times and at a rate per share of Company Common Stock not to exceed the rate per share of Company Common Stock as were declared and paid during the year ending December 31, 1997 and (B) dividends and distributions by a wholly owned Subsidiary of the Company to the Company or another wholly owned Subsidiary of the Company and (C) dividends and distributions declared and paid with respect to outstanding shares of preferred stock or similar obligations of the Company's Subsidiaries; (iv) (A) redeem, purchase or acquire any outstanding Equity Securities of the Company or any of its Significant Subsidiaries other than redemptions, repurchases and other acquisitions of Equity Securities in the ordinary course of business consistent with past practice and that will not cause a failure of the condition contained in Section 8.1(e) to be satisfied, including purchases, redemptions and other acquisitions (1) in connection with the administration of employee benefit, direct stock purchase and dividend reinvestment plans as in effect on the date hereof in the ordinary course of the operation of such plans, (2) required by the respective terms of any Equity Security, (3) in connection with the refunding of preferred Equity Securities or through the issuance of additional preferred Equity Securities or indebtedness, as the case may be, at a lower cost of funds (calculating such cost on an aggregate after-tax basis) or through the issuance of indebtedness not prohibited by Section 6.2(a)(xi), (4) of Company Common Stock in the open market to fund up to $10,000,000 in any fiscal year of any acquisitions not prohibited by Section 6.2(a)(vii), (5) in intercompany transactions and (6) by the Company or any of its wholly-owned Subsidiaries directly from any wholly-owned Subsidiary of the Company in exchange for capital contributions or loans to such Subsidiary); or (B) split, combine or reclassify the Company Common Stock or effect any recapitalization of the Company; (v) offer, sell, issue or grant, or authorize the offering, sale, issuance or grant, of any Equity Securities of the Company or any of its Significant Subsidiaries; except issuances of (A) Company Common Stock (1) upon the exercise of Company stock options outstanding at the date of this Agreement in accordance with the terms thereof, (2) upon the expiration of any restrictions upon issuance of any grant existing at the date of this Agreement of restricted stock or stock bonus pursuant to the terms of any Benefit Plans of the Company or any of its Subsidiaries or (3) periodically pursuant to the terms of any Benefit Plans of the Company or any of its Subsidiaries; and (B) preferred stock or similar securities of any Subsidiary for the purpose of financing investments or I-23 capital expenditures not prohibited under this Agreement or refinancing existing indebtedness or preferred stock or similar obligations of such Subsidiary; (vi) grant any Lien (other than Permitted Encumbrances) with respect to any shares of capital stock of, or other equity interests in, any Significant Subsidiary of the Company owned beneficially by the Company or any other Subsidiary of the Company; (vii) acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or in any other manner acquiring, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets of any other Person; except (A) the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past or then standard industry practice, (B) acquisitions of equity interests, assets (excluding the acquisition of assets permitted in clause (A) above) and businesses related to the core domestic and U.K. regulated businesses in which the Company and its Subsidiaries are currently engaged (the "Company Core Businesses") the fair market value of the total consideration (including the value of indebtedness (other than non-recourse indebtedness) or other liability acquired or assumed) for which does not exceed 105% of the amount budgeted by the Company for such acquisitions as set forth in Section 6.2(a)(vii) of the Company's Disclosure Letter and (C) in connection with a Company Permitted Transaction; (viii) except in connection with Company Permitted Transactions or as required by Law, sell, lease, exchange or otherwise dispose of, or grant any Lien (other than a Permitted Encumbrance) with respect to, any of the assets of the Company or any of its Subsidiaries that are Material to the Company, except dispositions of assets other than generation assets and inventories in the ordinary course of business and consistent with past practice; (ix) adopt any amendments to its charter or bylaws or other organizational documents that could reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under this Agreement; (x) (A) change any of its methods of accounting in effect at September 30, 1997, except as may comply with GAAP, (B) make or rescind any election relating to Taxes that are Material to the Company (other than any election that must be made periodically and that is made consistent with past practice) or (C) change any of its methods of reporting income or deductions for Federal income tax purposes from those employed in the preparation of the Federal income tax returns for the taxable year ending December 31, 1996, except, in the case of each of clauses (A), (B) and (C), as may be required by Law and, in the case of clause (C), for matters that could not reasonably be expected to have a Material Adverse Effect on the Company; (xi) except in connection with a Company Permitted Transaction or as required by Law, incur any obligations for borrowed money or purchase money indebtedness that are Material to the Company, whether or not evidenced by a note, bond, debenture or similar instrument, except (A) drawings under credit lines existing at the date of this Agreement or renewals or replacements thereof, (B) obligations evidenced by debt securities issued by a Subsidiary of the Company for the purpose of financing investments or capital expenditures permitted under this Agreement or refinancing existing indebtedness or preferred stock obligations of such Subsidiary and (C) indebtedness incurred in the ordinary course of business consistent with past or then standard industry practice; (xii) unless required by the terms thereof, release any third Person from its obligations under any existing standstill agreement or similar agreement whether included in a confidentiality agreement or otherwise; (xiii) except in connection with a Company Permitted Transaction or as required by Law, enter into any Material Contract with any third Person (other than customers and vendors in the ordinary I-24 course of business) that provides for an exclusive arrangement with that third Person or is substantially more restrictive on the Company or any of its Subsidiaries or substantially less advantageous to the Company or any of its Subsidiaries than Material Contracts existing on the date hereof; (xiv) except in connection with a Company Permitted Transaction or as required by Law, make capital and non-fuel operational and maintenance expenditures relating to the Company Core Businesses in excess of 105% of the amount budgeted by the Company for capital and non-fuel operational and maintenance expenditures as set forth in Section 6.2(a)(vii) of the Company's Disclosure Letter; (xv) except pursuant to any contract, agreement or other legal obligation of the Company or any of its Subsidiaries existing at the date of this Agreement, make, or commit to make, any investments in, or loans or capital contributions to, or to undertake any guarantees or other obligations with respect to, any joint venture (whether organized as a corporation, partnership or other legal entity) in excess of 105% of the amount budgeted by the Company for such investments relating to the Company Core Businesses as set forth in Section 6.2(a)(vii) of the Company's Disclosure Letter or in connection with a Company Permitted Transaction; or (xvi) agree in writing or otherwise to do any of the foregoing. (b) AEP COVENANTS. AEP covenants and agrees that, except as expressly contemplated by this Agreement or Section 6.2(b) of AEP's Disclosure Letter or otherwise consented to in writing by the Company, which consent shall not be unreasonably withheld, from the date of this Agreement until the Effective Time, it will not do, and will not permit any of its Subsidiaries to do, any of the following: (i) (A) increase the compensation payable to or to become payable to any director or executive officer; (B) grant any severance or termination pay; (C) amend or otherwise modify the terms of any outstanding options, warrants or rights, the effect of which shall be to make such terms more favorable to the holders thereof; (D) amend or take any other actions to increase the amount or accelerate the payment or vesting of any benefit under any Benefit Plan (including the acceleration of vesting, waiving of performance criteria or the adjustment of awards or any other actions permitted upon a change in control of such party or upon a filing under Section 13(d) or 14(d) of the Exchange Act with respect to such party); except (i) pursuant to any contract, agreement or other legal obligation of AEP or any of its Subsidiaries existing at the date of this Agreement, (ii) increases in salary payable or to become payable upon promotion to an office having greater operational responsibilities, (iii), in the case of severance or termination payments, pursuant to the severance policy of AEP or its Subsidiaries existing at the date of this Agreement, (iv) in the case of options, warrants, rights or Benefit Plans, amendments required by ERISA or other applicable law and (v) any (including incentive) increase, grant, amendment, modification or action in the ordinary course of business consistent with past practice; (ii) (A) enter into any employment or severance agreement with, any director, officer or employee, either individually or as part of a class of similarly situated persons or (B) establish, adopt or enter into any new Benefit Plan; except (1) employment and severance agreements entered into for the benefit of any newly employed or promoted officers or employees, in which case, the terms of such agreements shall be reasonably consistent with those existing at the date of such employment, (2) that AEP may modify or enter into severance arrangements with management employees, which arrangements provide a level of severance benefits to such management employees generally comparable to the level of severance benefits which are, on the date of this Agreement, provided to similarly situated employees of the Company and (3) for AEP Benefit Plans relating to health and life insurance benefits established, adopted or entered into in the ordinary course of business consistent with past practice; I-25 (iii) declare or pay any dividend on, or to make any other distribution in respect of, outstanding shares of capital stock of AEP or any Significant Subsidiary (other than Yorkshire), except (A) dividends declared and paid by AEP with respect to the outstanding AEP Common Stock at approximately the same times and rates and at a rate per share of AEP Common Stock not less than the rate per share of AEP Common Stock as were declared and paid during the year ended December 31, 1997 and (B) dividends and distributions by a wholly owned Subsidiary of AEP to AEP or another wholly owned Subsidiary of AEP and (C) dividends and distributions declared and paid with respect to outstanding shares of preferred stock or similar obligations of AEP's Subsidiaries. (iv) (A) redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of AEP or any of its Significant Subsidiaries other than redemptions, repurchases and other acquisitions of Equity Securities in the ordinary course of business consistent with past practice which will not cause a failure of the condition contained in Section 8.1(e) to be satisfied, including purchases, redemptions and other acquisitions (1) in connection with the administration of employee benefit; direct stock purchase and dividend reinvestment plans as in effect on the date hereof in the ordinary course of the operation of such plans, (2) required by the respective terms of any Equity Security, (3) in connection with the refunding of preferred Equity Securities or through the issuance of additional preferred Equity Securities or indebtedness, as the case may be, at a lower cost of funds (calculating such cost on an aggregate after-tax basis) or through the issuance of indebtedness not prohibited by Section 6.2(b)(xi), (4) of AEP Common Stock in the open-market to fund up to $10,000,000 in any fiscal year of any acquisitions not prohibited by Section 6.2(b)(vii), (5) in intercompany transactions and (6) by AEP or any of its wholly-owned Subsidiaries directly from any wholly-owned Subsidiary of AEP in exchange for capital contributions or loans to such Subsidiary; or (B) split, combine or reclassify AEP Common Stock or effect any recapitalization of AEP; (v) offer, sell, issue or grant, or authorize the offering, sale, issuance or grant, of any Equity Securities of AEP or any of its Significant Subsidiaries; except issuances of (A) AEP Common Stock (1) upon the expiration of any restrictions upon issuance of any grant existing at the date of this Agreement of restricted stock or stock bonus pursuant to the terms of any Benefit Plans of AEP or any of its Subsidiaries or (2) periodically pursuant to the terms of any Benefit Plans of AEP or any of its Subsidiaries; (B) preferred stock or similar securities of any Subsidiary for the purpose of financing investments or capital expenditures not prohibited under this Agreement or refinancing existing indebtedness or preferred stock or similar obligations of such Subsidiary and (C) issuances of a number of shares of AEP Common Stock not in excess of 10% of the number of shares represented to be outstanding in Section 5.3 hereof; (vi) grant any Lien (other than Permitted Encumbrances) with respect to any shares of capital stock of, or other equity interests in, any Significant Subsidiary of AEP owned beneficially by AEP or any other Subsidiary of AEP; (vii) acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or in any other manner acquiring, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets of any other Person; except (A) the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past or then standard industry practice and (B) acquisitions of equity interests, assets (excluding the acquisition of assets permitted in clause (A) above) and businesses related to the energy sector the fair market value of the total consideration (including the value of indebtedness (other than non-recourse indebtedness) or other liability acquired or assumed) for which does not exceed $2.5 billion in the aggregate (which amount shall be reduced by the amount permitted and expended for (x) capital expenditures (other than relating to the core domestic and United Kingdom regulated utility business in which AEP and its Subsidiaries are currently engaged (the "AEP Core Businesses")) pursuant to Section 6.2(b)(xiv) and (y) joint ventures pursuant to Section 6.2(b)(xv); I-26 (viii) sell, lease, exchange or otherwise dispose of, or grant any Lien (other than a Permitted Encumbrance) with respect to, any of the assets of AEP or any of its Subsidiaries that are Material to AEP, except (A) dispositions of assets other than generation assets and inventories in the ordinary course of business and consistent with past practice, (B) divestitures of non-AEP Core Businesses and (C) except as required by Law; (ix) adopt any amendments to its charter or bylaws or other organizational documents that could reasonably be expected to have a material adverse effect on the ability of AEP to perform its obligations under this Agreement; (x) (A) change any of its methods of accounting in effect at September 30, 1997, except as may be required to comply with GAAP, (B) make or rescind any election relating to Taxes that are Material to AEP (other than any election that must be made periodically and that is made consistent with past practice) or (C) change any of its methods of reporting income or deductions for Federal income tax purposes from those employed in the preparation of the Federal income tax returns for the taxable year ending December 31, 1996, except, in the case of each of clauses (A), (B) and (C), as may be required by Law and, in the case of clause (C), for matters that could not reasonably be expected to have a Material Adverse Effect on AEP; (xi) except as required by Law, incur any obligations for borrowed money or purchase money indebtedness that are Material to AEP, whether or not evidenced by a note, bond, debenture or similar instrument, except (A) drawings under credit lines existing at the date of this Agreement or renewals or replacements thereof, (B) obligations evidenced by debt securities issued by a Subsidiary of AEP for the purpose of financing investments or capital expenditures permitted under this Agreement or refinancing existing indebtedness or preferred stock obligations of such Subsidiary, (C) purchase money indebtedness as to which Liens may be granted as permitted by Section 6.2(b)(vi), (D) indebtedness incurred in the ordinary course of business consistent with past practice and (E) indebtedness not in excess of $2.0 billion in the aggregate (in addition to the aggregate amount budgeted for indebtedness by AEP as set forth in Section 6.2(b)(xi) of AEP's Disclosure Letter); (xii) unless required by the terms thereof, release any third Person from its obligations under any existing standstill agreement or similar agreement whether included in a confidentiality agreement or otherwise; (xiii) except as otherwise required by Law, enter into any Material Contract with any third Person (other than customers and vendors in the ordinary course of business) that provides for an exclusive arrangement with that third Person or is substantially more restrictive on AEP or any of its Subsidiaries or substantially less advantageous to AEP or any of its Subsidiaries than Material Contracts existing on the date hereof; (xiv) other than with respect to the AEP Core Businesses or except as required by Law, make capital expenditures in excess of $2.5 billion less the amounts permitted and expended in connection with acquisitions and joint ventures pursuant to Section 6.2(b)(vii) and Section 6.2(b)(xv); (xv) except pursuant to any contract, agreement or other legal obligation of AEP or its Subsidiaries existing at the date of this Agreement, make or commit to make, any investments in, or loans or capital contributions to, or to undertake any guarantees or other obligations with respect to, any joint venture in excess of $2.5 billion (which amount shall be reduced by any amounts permitted and expended for capital expenditures (other than with respect to the AEP Core Businesses)) and acquisitions as set forth in Section 6.2(b)(xiv) and 6.2(b)(vii); or (xvi) agree in writing or otherwise to do any of the foregoing. I-27 SECTION 6.3 ACCESS AND INFORMATION. AEP and the Company shall each, and shall each cause its Subsidiaries to, (i) afford to the other party and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives (collectively, the "Representatives" of such party) reasonable access at reasonable times upon reasonable prior notice to the officers, employees, agents, properties, offices and other facilities of such party and its Subsidiaries and to their books and records and (ii) furnish promptly to the other party and its Representatives such information concerning the business, properties, contracts, records and personnel of the furnishing party and its Subsidiaries (including financial, operating and other data and information) as may be reasonably requested, from time to time, by or on behalf of the other party. All documents furnished pursuant to this Section 6.3 shall be subject to the Confidentiality Agreement. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.1 MEETING OF AEP STOCKHOLDERS. AEP shall, promptly after the date of this Agreement, take all actions necessary in accordance with Law, the rules of the NYSE and its certificate of incorporation and bylaws to convene a special meeting of AEP's stockholders for the purpose of obtaining the Required AEP Vote (together with any adjournments thereof, the "AEP Stockholders' Meeting"), and AEP shall consult with the Company in connection therewith. Subject to Section 7.19, AEP shall take all commercially reasonable action to solicit from stockholders of AEP proxies in favor of the Share Issuance and the Charter Amendment and to secure the Required AEP Vote and the Board of Directors of AEP shall recommend approval of the Share Issuance and the Charter Amendment by the stockholders of AEP. SECTION 7.2 MEETING OF COMPANY STOCKHOLDERS. The Company shall, promptly after the date of this Agreement, take all actions necessary in accordance with Law, the rules of the NYSE and its certificate of incorporation and bylaws to convene a special meeting of the Company's stockholders to consider approval and adoption of this Agreement and the Merger (together with any adjournments thereof, the "Company Stockholders' Meeting"), and the Company shall consult with AEP in connection therewith. Subject to Section 7.19, the Company shall take all commercially reasonable action to solicit from stockholders of the Company proxies in favor of the approval and adoption of this Agreement and the Merger and to secure the Required Company Vote and the Board of Directors of the Company shall recommend approval of the transactions contemplated by this Agreement by the stockholders of the Company. SECTION 7.3 REGISTRATION STATEMENT; JOINT PROXY STATEMENT/PROSPECTUS. (a) JOINT PROXY STATEMENT/PROSPECTUS. As promptly as practicable after the execution of this Agreement, the parties shall prepare and file with the Commission the registration statement on form S-4 to be filed with the Commission in connection with the issuance of shares of AEP common stock in the Merger (the "Registration Statement") and the joint proxy statement relating to the meetings of AEP's and the Company's stockholders to be held in connection with the Merger (together with any amendments thereof or supplements thereto effected prior to the effective date of the Registration Statement, the "Joint Proxy Statement/Prospectus"). The Joint Proxy Statement/Prospectus shall comply as to form in all material respects with the applicable provisions of the Securities Act and the Exchange Act and the Regulations thereunder. Each of the AEP Companies and the Company shall furnish all information concerning it and the holders of its capital stock as the other may reasonably request in connection with the preparation and filing of the Joint Proxy Statement/Prospectus. Each of the AEP Companies and the Company will use all commercially reasonable efforts to have or cause the Registration Statement to become effective as promptly as practicable, and shall take any action required to be taken under any applicable Federal or state securities Laws in connection with the issuance of shares of AEP Common Stock in the Merger (other than qualifying to do business in any jurisdiction in which they are currently not so qualified). As promptly as practicable after the Registration Statement shall have become effective, (x) AEP shall mail the Joint Proxy Statement/Prospectus to its stockholders entitled to notice of and to vote at the AEP I-28 Stockholders' Meeting and (y) the Company shall mail the Joint Proxy Statement/Prospectus to its stockholders entitled to notice of and to vote at the Company Stockholders' Meeting. (b) COMPANY INFORMATION. The information supplied by the Company for inclusion or incorporation by reference in the Registration Statement shall not, at the time the Registration Statement is declared effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The information supplied by the Company for inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus shall not, at the date of the mailing of the Joint Proxy Statement/Prospectus (or any supplement thereto) and at the time of the AEP Stockholders' Meeting or of the Company Stockholders' Meeting or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time prior to the Effective Time any event or circumstance relating to the Company or any of its Subsidiaries, or its or their respective officers or directors, should be discovered by the Company that should be set forth in an amendment to the Registration Statement or a supplement to the Joint Proxy Statement/Prospectus, the Company shall promptly inform AEP. All documents that the Company is responsible for filing with the Commission in connection with the transactions contemplated herein shall comply as to form in all material respects with the applicable requirements of the Securities Act and the Regulations thereunder and the Exchange Act and the Regulations thereunder. (c) THE AEP COMPANIES INFORMATION. The information supplied by the AEP Companies for inclusion or incorporation by reference in the Registration Statement shall not, at the time the Registration Statement is declared effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The information supplied by AEP for inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus shall not, at the date of the mailing of the Joint Proxy Statement/Prospectus (or any supplement thereto), at the time of the AEP Stockholders' Meeting or the Company Stockholders' Meeting or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event or circumstance relating to AEP or any of its Subsidiaries, or to their respective officers or directors, should be discovered by AEP that should be set forth in an amendment to the Registration Statement or a supplement to the Joint Proxy Statement/Prospectus, AEP shall promptly inform the Company. All documents that the AEP Companies are responsible for filing with the Commission in connection with the transactions contemplated hereby shall comply as to form in all material respects with the applicable requirements of the Securities Act and the Regulations thereunder and the Exchange Act and the Regulations thereunder. SECTION 7.4 APPROPRIATE ACTION; CONSENTS; FILINGS. (a) APPLICATIONS. Each of the Company and AEP shall consult with one another, coordinate with respect to, and use all commercially reasonable efforts (i) subject to Section 7.19, to take, or to cause to be taken, all appropriate action, and to do, or to cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (ii) to obtain from any Governmental Authorities any Permits or Orders required to be obtained by AEP or the Company or any of their Subsidiaries in connection with the authorization, execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, including the Merger, (iii) to make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act, and any other applicable Federal or state securities Laws, (B) the Holding Company Act, (C) the Federal Power Act, (D) the Atomic Energy Act, (E) the applicable State Regulatory Acts, (F) the HSR Act and (G) any other applicable Law; provided that AEP and the Company shall cooperate with each other in connection with I-29 the making of all such filings, including providing copies of all such documents to the nonfiling party and its advisors prior to filings and, if requested, shall accept all reasonable additions, deletions or changes suggested in connection therewith, and provided further that, except as otherwise expressly provided herein, each party shall retain discretion and control over its affairs. The Company and AEP shall furnish all information required for any application or other filing to be made pursuant to any applicable Law or any applicable Regulations of any Governmental Authority in connection with the transactions contemplated by this Agreement. (b) REGULATORY PLANS. The Company and AEP have jointly retained Vinson & Elkins L.L.P. and Simpson Thacher & Bartlett to assist the parties in developing and implementing a collaborative regulatory plan in connection with the transactions contemplated hereby. (c) COOPERATION. AEP and the Company agree to cooperate and use all commercially reasonable efforts to resist or resolve any action including legislative, administrative or judicial action and to have vacated or overturned any Order of any Court or Governmental Authority that is in effect and that prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement; PROVIDED, HOWEVER, that in no event shall either party take, or be required to take, any action that could reasonably be expected to have a Material Adverse Effect on AEP, the Company or the Combined Companies. Both parties shall consult on a reasonable and frequent basis regarding matters relating to the operations of AEP and the Company prior to Closing, provided, that, except as otherwise expressly set forth herein, AEP and the Company shall each retain discretion over their own affairs. (d) THIRD PARTY CONSENTS. (i) Each of the Company and AEP shall give (or shall cause their respective Subsidiaries to give) any notices to third Persons, and use, and cause their respective Subsidiaries to use, all commercially reasonable efforts to obtain any consents from third Persons (A) necessary, proper or advisable to consummate the transactions contemplated by this Agreement, (B) otherwise required under any contracts, licenses, leases or other agreements in connection with the consummation of the transactions contemplated hereby or (C) required to prevent a Material Adverse Effect on the Company or AEP from occurring prior to the Effective Time or a Material Adverse Effect on the Combined Companies from occurring after the Effective Time (the "Third Party Consents"). (ii) If any party shall fail to obtain any consent from a third Person described in subsection (d)(i) above, such party shall use all commercially reasonable efforts, and shall take any such actions reasonably requested by the other parties, to limit the adverse effect upon the Company and AEP, their respective Subsidiaries, and their respective businesses resulting, or which could reasonably be expected to result after the Effective Time, from the failure to obtain such consent. SECTION 7.5 AFFILIATES; POOLING; TAX TREATMENT. (a) AFFILIATES. Each of the Company and AEP shall use all commercially reasonable efforts to cause Persons (other than Subsidiaries) who are, or who become "affiliates," as such term is used in Rule 145 under the Securities Act, of the Company or AEP, as the case may be, after the date of this Agreement but prior to the date of the Company Stockholders' Meeting or the AEP Stockholders' Meeting, as the case may be, to execute and deliver a letter agreement substantially in the form of Annex B or Annex C hereto, as the case may be, not later than 10 days prior to the date of such meeting. (b) EFFECTIVE REGISTRATION STATEMENT. AEP shall not be required to maintain the effectiveness of the Registration Statement for the purpose of resale by stockholders of the Company who may be Affiliates of the Company pursuant to Rule 145 under the Securities Act. (c) POOLING. Each party hereto shall use all commercially reasonable efforts to cause the Merger to be treated for financial accounting purposes as a Pooling Transaction, and shall not take, and shall use all commercially reasonable efforts to prevent any Affiliate of such party from taking, any actions which could prevent the Merger from being treated for financial accounting purposes as a Pooling Transaction. I-30 (d) TAX REORGANIZATION. Each party hereto shall use all commercially reasonable efforts to cause the Merger to qualify, and shall not take, and shall use all commercially reasonable efforts to prevent any Affiliate of such party from taking, any actions which could prevent the Merger from qualifying as a reorganization under the provisions of Section 368(a) of the Code. SECTION 7.6 PUBLIC ANNOUNCEMENTS. AEP and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to such consultation. SECTION 7.7 NYSE LISTING. AEP shall use all commercially reasonable efforts to cause the shares of AEP Common Stock to be issued in the Merger to be approved for listing (subject to official notice of issuance) on the NYSE prior to the Effective Time. SECTION 7.8 COMPANY RIGHTS AGREEMENT. The Company shall take all action (including, if necessary, amending such Rights Agreement) so that the execution, delivery and performance of this Agreement and the consummation of the Merger and the other transactions contemplated hereby do not and will not result in the grant of any rights to any Person under the Company Rights Agreement or enable or require any outstanding rights to be exercised, distributed or triggered. SECTION 7.9 COMFORT LETTERS. (a) AEP LETTER. AEP shall use all commercially reasonable efforts to cause Deloitte & Touche L.L.P. to deliver a letter dated as of the date of mailing of the Joint Proxy Statement/Prospectus, and addressed to AEP and the Company, in form and substance reasonably satisfactory to the Company and customary in scope and substance for agreed upon procedures letters delivered by independent public accounts in connection with registration statements and proxy statements similar to the Joint Proxy Statement/Prospectus. (b) COMPANY LETTER. The Company shall use all commercially reasonable efforts to cause Arthur Andersen LLP to deliver a letter dated as of the date of mailing of the Joint Proxy Statement/Prospectus, and addressed to the Company and AEP, in form and substance reasonably satisfactory to AEP and customary in scope and substance for agreed upon procedures letters delivered by independent public accountants in connection with registration statements and proxy statements similar to the Joint Proxy Statement/Prospectus. SECTION 7.10 STOCK OPTIONS; EMPLOYEE BENEFIT PLANS. (a) STOCK-BASED COMPENSATION. (i) STOCK OPTIONS. AEP agrees to assume, effective as of the Effective Time, each option to purchase shares of Company Common Stock granted under the Company's 1992 Long-term Incentive Plan or Directors' Compensation Plan (an "Outstanding Option") (whether or not vested) which remains as of such time unexercised in whole or in part and to substitute AEP Common Stock as purchasable under such assumed option ("Assumed Option"), with such assumption and substitution to be effected as follows: (A) The Assumed Option shall not give the optionee additional benefits which he did not have under the Outstanding Option before such assumption; (B) The number of shares of AEP Common Stock purchasable under any Assumed Option shall be equal to the number of whole shares of AEP Common Stock that the holder of the Outstanding Option being assumed would have received upon consummation of the Merger had such Outstanding Option been exercised in full prior to the Merger; (C) The per share option price of the Assumed Option shall be equal to the per share option price of the Outstanding Option divided by the Common Stock Exchange Ratio; and (D) The Assumed Option shall provide the optionee with the same benefit rights which he had under the Outstanding Option before such assumption. I-31 Notwithstanding the foregoing, in the case of any Outstanding Option to which section 421 of the Code applies by reason of the qualification under section 422 of the Code, the exercise price, the number of shares purchasable pursuant to such option and the terms and conditions of exercise of such option shall comply with section 424(a) of the Code. As soon as practicable after the Effective Time, AEP shall deliver to the holders of the Outstanding Options appropriate agreements evidencing its assumption of such options. (ii) OTHER STOCK-BASED COMPENSATION. Effective as of the Effective Time, AEP agrees to assume the Company's 1992 Long-Term Incentive Plan and Director's Compensation Plan with respect to any stock-based compensation (other than the Outstanding Options) payable in the form of Company Common Stock as a result of the Merger ("Other Compensation"), and to substitute shares of AEP Common Stock with respect to such assumed Other Compensation. The number of shares of AEP Common Stock issuable with respect to such Other Compensation shall be equal to the number of whole shares of AEP Common Stock that the holder of Other Compensation being assumed would have received upon consummation of the Merger had such Other Compensation been paid in full prior to the Merger. On or prior to the Effective Time, the Company shall take or cause to be taken all such actions, reasonably satisfactory to AEP, as may be necessary or desirable in order to authorize the transactions contemplated by subsections (i) and (ii) above. Further, AEP shall take all corporate actions necessary to reserve for issuance a sufficient number of shares of AEP Common Stock for delivery upon exercise of the Company Outstanding Options or issuance of the Company Other Compensation assumed by AEP pursuant to subsections (i) and (ii) above. Prior to the Effective Time, AEP shall file one or more registration statements on Form S-8 (or any successor or other appropriate forms) with respect to the shares of AEP Common Stock issuable in respect to the Assumed Options or Other Compensation and AEP Common Stock issuable in respect of the Assumed Options or Other Compensation and AEP shall use its commercially reasonable efforts to cause such registration statement to become effective promptly after the Effective Time and to maintain the effectiveness of such registration statement (and maintain the current status of the prospectus or prospectuses contained herein) for so long as any Assumed Options remain outstanding and to comply with applicable state securities and blue sky laws. So long as any holder of an Assumed Options shall be subject to the reporting requirements under Section 16(a) of the Exchange Act, AEP shall have the Company's 1992 Long-Term Incentive Plan and Directors' Compensation Plan to be administered in a manner that complies with Rule 16b-3 promulgated under the Exchange Act. (b) SEPARATE COMPANY PLANS. From and after the Effective Time through July 1, 2002, AEP will continue or cause to be continued, without adverse change to any employee or former employee of the Company or any of its Subsidiaries, the Company Benefit Plans listed in Section 7.10(b) of the Company's Disclosure Letter, except that (i) any Company Common Stock investment fund offered under a Company Benefit Plan will be replaced by an AEP Common Stock investment fund or a traditional investment fund as determined by AEP (ii) premiums charged to participants may be increased under medical, dental, life, accidental death and dismemberment, and disability insurance plans (except that premiums charged to participants who retired from the Company or any of its Subsidiaries prior to 1993 (or survivors of such participants) may not be increased), and (iii) changes required by law, including changes required to maintain the qualified status of any Company Benefit Plan intended to be qualified under Section 401(a) of the Code, may be made. After July 1, 2002, AEP will provide the employees of the Company and its Subsidiaries with benefits that in the aggregate are at least as favorable as the benefits provided to similarly situated employees of AEP and its Subsidiaries. If, after July 1, 2002, an AEP Benefit Plan is made available to employees of the Company or any of its Subsidiaries, all periods of service with the Company and its Subsidiaries will be credited to such employees for all purposes of the AEP Benefit Plan, including the accrual of benefits and eligibility to receive benefits for which a specified period of service is required under the AEP Benefit Plan. No earlier than July 1, 2002, the Company's Cash Balance Retirement Plan shall be merged into a defined benefit pension plan maintained by AEP or one of its I-32 Subsidiaries. The retirement benefit for employees of the Company or its Subsidiaries who become participants in such merged plan will be determined under the AEP pension plan formula for all years of service (including years of service with the Company and its Subsidiaries) but such retirement benefit will not be less than the benefit accrued under the Company's Cash Balance Retirement Plan determined immediately prior to such plan merger plus the benefit determined under the AEP pension plan formula for years of service beginning on the date of such plan merger. If employees of the Company or any of its Subsidiaries become participants in a health plan maintained by AEP or any of its Subsidiaries, all preexisting condition limitations under the AEP health plan for such employees will be waived. In addition, if such AEP health plan participation becomes effective as of any date other than the first day of a calendar year, such employees will receive credit under the AEP health plan for any co-payments and deductibles incurred by such employees in the same calendar year under the Company's Medical Plan. (c) RETIREE AND DISABILITY BENEFITS. From and after July 1, 2002, AEP will provide access to retiree medical and life insurance coverage for any employee or director of the Company or any of its Subsidiaries who retires or becomes disabled prior to July 1, 2002 and who was eligible for such coverage under plans of the Company and its Subsidiaries in effect on the date of such individual's retirement. Further, for any such employees or directors who retired or became disabled prior to 1993, such coverage shall be continued without adverse change to such retired or disables employees or directors. In addition, with respect to any such employee who becomes disabled before July 1, 2002, so long as such employee continues to satisfy the eligibility requirements for disability benefits under the Company's Disability Income Plan in effect on such date AEP will offer such disabled employee medical coverage without charge to such disabled employee. (d) CERTAIN NONQUALIFIED ARRANGEMENTS. From and after the Effective Time through July 1, 2002, AEP will maintain the Company's Supplemental Executive Retirement Plan and Executive Deferred Compensation Plan without adverse change to any employee participating in the Plan until all benefits have been paid in accordance with the terms of the Plan; provided, however, that no deferrals shall be permitted under such plan after the Effective Time. If the Company's Supplemental Executive Retirement Plan or Executive Deferred Savings Plan is terminated or otherwise discontinued after July 1, 2002, AEP will make available to the class of employees of the Company and its Subsidiaries who were eligible to participate in the Company's Supplemental Executive Retirement Plan or Executive Deferred Savings Plan any nonqualified deferred compensation plan or plans it maintains to supplement benefits in the AEP Benefit Plans that are qualified plans. In addition, employees of the Company and its Subsidiaries will be given credit for service with the Company and its Subsidiaries for all purposes of such supplemental plans, and the supplemental plans will assume the obligation of the Supplemental Executive Retirement Plan or the Executive Deferred Savings Plan, as applicable, to pay the benefits that have accrued under the Supplemental Executive Retirement Plan or the Executive Deferred Savings Plan at the time of such termination or discontinuance. (e) MEMORIAL GIFTS PROGRAM. The Company will take all action necessary to terminate the Memorial Gifts Program as of the Effective Time; provided, however, that all then-existing commitments under such Program will not be adversely affected by such termination and will be honored in accordance with their terms. (f) AGREEMENT BY AEP. AEP agrees to honor without modification or contest, and agrees to cause the Surviving Corporation to honor without modification or contest, and to make required payments when due under all Change of Control Agreements and all Retention Agreements, including any modifications to such Change of Control Agreements or Retention Agreements permitted by Section 6.2(a). (g) The provisions of Sections 7.10(d) and (f) are intended to be for the benefit of, and shall be enforceable by, each Person entitled to benefits or payments thereunder and the heirs and representatives of such Person. I-33 SECTION 7.11 INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) Until six years from the Effective Time, the certificate of incorporation and bylaws of the Company as the corporation surviving the Merger (in this Section 7.11 called the "Surviving Corporation") as in effect immediately after the Effective Time shall not be amended to reduce or limit the rights of indemnity afforded to the present and former directors and officers of the Company thereunder or as to the ability of the Company to indemnify such persons or to hinder, delay or make more difficult the exercise of such rights of indemnity or the ability to indemnify. The Surviving Corporation will at all times exercise the powers granted to it by its certificate of incorporation, its bylaws and applicable law to indemnify to the fullest extent possible the present and former directors, officers, employees and agents of the Company against claims made against them arising from their service in such capacities prior to the Effective Time. (b) If any claim or claims shall, subsequent to the Effective Time and within six years thereafter, be made against any present or former director, officer, employee or agent of the Company based on or arising out of the services of such Person prior to the Effective Time in the capacity of such Person as a director, officer, employee or agent of the Company, the provisions of subsection (a) of this Section respecting the certificate of incorporation and bylaws of the Surviving Corporation shall continue in effect until the final disposition of all such claims. (c) AEP hereby agrees after the Effective Time to guarantee the payment of the Surviving Corporation's indemnification obligations described in Section 7.11(a) up to an amount determined as of the Effective Time equal to (i) the fair market value of any assets of the Surviving Corporation or any of its Subsidiaries distributed to AEP or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries), minus (ii) any liabilities of the Surviving Corporation or any of its Subsidiaries assumed by AEP or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries), minus (iii) the fair market value of any assets of AEP or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries) contributed to the Surviving Corporation or any of its Subsidiaries and (iv) plus any liabilities of AEP or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries) assumed by the Surviving Corporation or any of its Subsidiaries. (d) Notwithstanding subsection (a), (b) or (c) of this Section 7.11, AEP and the Surviving Corporation shall be released from the obligations imposed by such subsection if AEP shall assume the obligations of the Surviving Corporation thereunder by operation of Law or otherwise. Notwithstanding anything to the contrary in this Section 7.11, neither AEP nor the Surviving Corporation shall be liable for any settlement effected without its written consent, which shall not be unreasonably withheld. (e) AEP shall cause to be maintained in effect until six years from the Effective Time the current policies of directors' and officers' liability insurance maintained by the Company (or substitute policies providing at least the same coverage and limits and containing terms and conditions that are not materially less advantageous) with respect to claims arising from facts or events which occurred before the Effective Time; PROVIDED, HOWEVER, that in no event shall AEP or the Surviving Corporation be required to expend more than 200 percent of the greater of (i) current annual premiums and (ii) annual premiums for the year in which the Closing occurs paid by the Company for such insurance; PROVIDED, FURTHER, that, if AEP or the Surviving Corporation is unable to obtain insurance for any period for 200 percent of the greater of such annual premiums, then the obligation of AEP and the Surviving Corporation pursuant hereto shall be to obtain the best coverage reasonably available under the circumstances subject to the foregoing limitations on premiums. (f) The provisions of this Section 7.11 are intended to be for the benefit of, and shall be enforceable by, each Person entitled to indemnification hereunder and the heirs and representatives of such Person. (g) AEP shall not permit the Surviving Corporation to merge or consolidate with any other Person unless the Surviving Corporation shall ensure that the surviving or resulting entity assumes the obligations imposed by subsections (a), (b), (c) and (e) of this Section. I-34 SECTION 7.12 NEWCO. Prior to the Effective Time, Newco shall not conduct any business or make any investments other than as specifically contemplated by this Agreement and will not have any assets (other than the minimum amount of cash required to be paid to Newco for the valid issuance of its stock to AEP). SECTION 7.13 EVENT NOTICES. From and after the date of this Agreement until the Effective Time, each party hereto shall promptly notify the other party hereto of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any condition to the obligations of such party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied and (ii) the failure of such party to comply with any covenant or agreement to be complied with by it pursuant to this Agreement which would be likely to result in any condition to the obligations of such party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied. No delivery of any notice pursuant to this Section 7.13 shall cure any breach of any representation or warranty or any failure to comply with any covenant or agreement of such party contained in this Agreement or otherwise limit or affect the remedies available hereunder to the party receiving such notice. SECTION 7.14 BOARD OF DIRECTORS. At the Effective Time, the Board of Directors of AEP shall be expanded to fifteen members and reconstituted to include all then current board members of AEP, the Chairman of the Company on the date hereof, and four additional outside directors of the Company to be nominated by AEP. SECTION 7.15 HEADQUARTERS. At and after the Effective Time, the principal corporate office of the Combined Companies shall be located in Columbus, Ohio; and the Combined Companies shall maintain a significant presence in the states currently served by the Company. SECTION 7.16 RATE MATTERS. Each of the Company and AEP shall, and shall cause its Significant Subsidiaries to, discuss with the other any changes in its or its Significant Subsidiaries' rates or charges (other than automatic cost pass-through rate adjustment clauses), standards of service or accounting from those in effect on the date hereof and consult with the other prior to making any filing (or any amendment thereto), or effecting any agreement, commitment, arrangement or consent with governmental regulators, whether written or oral, formal or informal, with respect thereto (provided that except as otherwise expressly provided herein each party shall retain discretion and control over its affairs), and except as set forth in Section 7.16 of the Company's Disclosure Letter, no party will make any filing to change its rates or charges, standards of service or accounting that could reasonably be expected to have a Material Adverse Effect on the Combined Companies. SECTION 7.17 COORDINATION OF DIVIDENDS. Each of the Company and AEP shall coordinate with the other regarding the declaration and payment of any dividends in respect of the Company Common Stock and AEP Common Stock and the record dates and the payment dates relating thereto, it being the intention of the Company and AEP that holders of the Company Common Stock shall not receive two dividends, or fail to receive one dividend, for any single calendar quarter with respect to their shares of Company Common Stock and/or any shares of AEP Common Stock that any such holder receives in exchange therefor pursuant to the Merger. SECTION 7.18 TRANSITION MANAGEMENT. As soon as practicable after the date hereof, the parties shall create a special transition management task force (the "Task Force"). The Task Force shall examine various alternatives regarding the manner in which to best organize and manage the business of the Combined Companies after the Effective Time, subject to applicable Law. SECTION 7.19 ACQUISITION PROPOSALS. Each of AEP and the Company agrees that neither it nor any of its Subsidiaries nor any of the officers and directors of it or its Subsidiaries shall, and that it shall direct and use its best efforts to cause its and its Subsidiaries' employees, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, I-35 directly or indirectly, initiate, solicit, encourage or otherwise facilitate (including by way of furnishing information) any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving, or any purchase or sale of all or any significant portion of the assets or 10% or more of the equity securities of, it or any of its Subsidiaries that, in any such case, could reasonably be expected to interfere with the completion of the Merger or the other transactions contemplated by this Agreement (any such proposal or offer being hereinafter referred to as an "ACQUISITION PROPOSAL"). Each of AEP and the Company further agrees that neither it nor any of its Subsidiaries nor any of the officers and directors of it or its Subsidiaries shall, and that it shall direct and use its best efforts to cause its and its Subsidiaries' employees, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, have any discussion with or provide any confidential information or data to any Person relating to an Acquisition Proposal, or engage in any negotiations concerning an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal or accept an Acquisition Proposal. Notwithstanding the foregoing, the Board of Directors of AEP or the Company shall be permitted to (A) to the extent applicable, comply with Rule 14e-2(a) promulgated under the Exchange Act with regard to an Acquisition Proposal, (B) in response to an unsolicited bona fide written Acquisition Proposal by any Person, recommend such an unsolicited bona fide written Acquisition Proposal to its stockholders, or withdraw or modify in any adverse manner its approval or recommendation of this Agreement or (C) engage in any discussions or negotiations with, or provide any information to, any Person in response to an unsolicited bona fide written Acquisition Proposal by any such Person, if and only to the extent that, in any such case as is referred to in clause (B) or (C), (i) the Required AEP Vote or the Required Company Vote, as the case may be, shall not have been obtained, (ii) the Board of Directors of AEP or the Company, as the case may be, concludes in good faith that such Acquisition Proposal (x) in the case of clause (B) above would, if consummated, constitute a Superior Proposal or (y) in the case of clause (C) above could reasonably be expected to constitute a Superior Proposal, (iii) the Board of Directors of AEP or the Company, as the case may be, determines in good faith upon the basis of written advice of outside legal counsel that such action is necessary for such Board of Directors to act in a manner consistent with its fiduciary duties under applicable law, (iv) prior to providing any information or data to any Person in connection with an Acquisition Proposal by any such Person, the AEP Board of Directors or the Company Board of Directors, as the case may be, receives from such Person an executed confidentiality agreement containing customary terms and provisions and (v) prior to providing any information or data to any Person or entering into discussions or negotiations with any Person, the Board of Directors of AEP or the Board of Directors of the Company, as the case may be, notifies the other party immediately of such inquiries, proposals or offers received by, any such information requested from, or any such discussions or negotiations sought to be initiated or continued with, any of its representatives indicating, in connection with such notice, the name of such Person and the material terms and conditions of any proposals or offers. AEP and the Company agree that they will keep the other party informed, on a current basis, of the status and terms of any such proposals or offers and the status of any such discussions or negotiations. Each of AEP and the Company agrees that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. Each of AEP and the Company agrees that it will take the necessary steps to promptly inform the individuals or entities referred to in the first sentence of this Section 7.19 of the obligations undertaken in this Section 7.19. Nothing in this Section 7.19 shall (x) permit either AEP or the Company to terminate this Agreement (except as specifically provided in Article IX hereof) or (y) affect any other obligation of AEP or the Company under this Agreement. SECTION 7.20 WORKFORCE MATTERS. Subject to applicable collective bargaining agreements, for a period of 2 years following the Effective Time, any reductions in workforce in respect of employees of the Combined Company and their Subsidiaries shall be made on a fair and equitable basis, in light of the circumstances and the objectives to be achieved, giving consideration to previous work history, job I-36 experience, and qualifications, without regard to whether employment prior to the Effective Time was with the Company or its Subsidiaries or AEP or its Subsidiaries, and any employees whose employment is terminated or jobs are eliminated by AEP or any of its Subsidiaries during such period shall be entitled to participate on a fair and equitable basis in the job opportunity and employment placement programs offered by the Combined Companies or any of their prospective Subsidiaries. Any workforce reductions carried out following the Effective Time by the Combined Companies and their Subsidiaries shall be done in accordance with all applicable collective bargaining agreements, and all laws and regulations governing the employment relationship and termination thereof including, without limitation, the Worker Adjustment and Retraining Notification Act and regulations promulgated thereunder, and any comparable state or local law. As provided generally in Section 10.7, nothing in this Section is intended to confer upon any Person (other than the parties hereto), including any current or future employee of AEP or the Company or any subsidiary of either of them, any right, benefit or remedy of any nature whatsoever. ARTICLE VIII CLOSING CONDITIONS SECTION 8.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective obligations of each party to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived by a party with respect to its obligations, in whole or in part, to the extent permitted by applicable Law: (a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the Commission under the Securities Act; and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and not withdrawn and no proceedings brought by the Commission for that purpose shall be pending. (b) STOCKHOLDER APPROVAL. (i) The Company shall have obtained the Required Company Vote in connection with the adoption of this Agreement by the stockholders of the Company and (ii) AEP shall have obtained the Required AEP Vote in connection with the approval of the Share Issuance and the Charter Amendment by the stockholders of AEP. (c) NO PROHIBITING LAW, REGULATION OR ORDER. No Court or Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law, Regulation or Order (whether temporary, preliminary or permanent) that is in effect and that has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. (d) REQUIRED ORDERS. All Orders necessary for the consummation of the Merger and the other transactions contemplated hereby shall have been obtained at or prior to the Effective Time and such Orders shall have become Final Orders and no Final Orders shall impose terms or conditions or qualifications that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on the Combined Companies. (e) POOLING OF INTERESTS. Each of AEP and the Company shall have received a letter of its independent public accountants, dated the Closing Date, in form and substance reasonably satisfactory, in each case, to AEP and the Company, stating that the transactions effected pursuant to this Agreement will qualify as a pooling of interests transaction under GAAP and applicable Commission Regulations. (f) NYSE LISTING. The shares of AEP Common Stock to be issued pursuant to the Merger shall have been listed, subject to official notice of issuance, on the NYSE. (g) DIVESTITURE EVENT. There shall not have occurred and remain in effect a Divestiture Event with respect to either AEP or the Company. I-37 SECTION 8.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE AEP COMPANIES. The obligations of the AEP Companies to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived by the AEP Companies, in whole or in part, to the extent permitted by applicable Law: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Company contained in this Agreement that is qualified as to materiality shall be true and correct in all respects and each of those that is not so qualified as to materiality shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made again at and as of the Closing (except for representations and warranties that expressly speak only as of a specific date or time other than the date hereof or the Closing Date which need only be true and correct as of such date), provided, that no representation or warranty of the Company shall be deemed to be untrue or incorrect as a result of the occurrence of a Divestiture Event or any change or effect arising out of or resulting from any foreign, federal or state legislative or regulatory action with respect to (i) the regulation or deregulation of the electric utility industry in such jurisdiction, or (ii) health or the environment, including the conservation or protection of the environment. The AEP Companies shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of the Company, dated the Closing Date, to such effect. (b) AGREEMENTS AND COVENANTS. The Company shall have performed or complied with, in all material respects, all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing. The AEP Companies shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of the Company, dated the Closing Date, to such effect. (c) TAX OPINION. AEP shall have received the opinion dated the Closing Date of Simpson Thacher & Bartlett to the effect that (i) the Merger will constitute a reorganization under section 368(a) of the Code, (ii) the Company, AEP and Newco will each be a party to that reorganization, and (iii) no gain or loss will be recognized by the Company, AEP or Newco by reason of the Merger. In rendering their opinion, such counsel may require and rely upon representations, including those contained in certificates of officers of the Company, Newco and AEP. (d) INVESTMENT BANKER'S OPINION. AEP shall have received, on or prior to the date of mailing of the Joint Proxy Statement/Prospectus to the holders of AEP Common Stock, a written opinion from Salomon Smith Barney, dated the date of such mailing, confirming the opinion to which reference is made in Section 5.18. (e) COMPANY REQUIRED CONSENTS. The Company Required Consents shall have been obtained. SECTION 8.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived by the Company, in whole or in part, to the extent permitted by applicable Law: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the AEP Companies contained in this Agreement that is qualified as to materiality shall be true and correct in all respects and each of those that is not so qualified as to materiality shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made again at and as of the Closing (except for representations and warranties that expressly speak only as of a specific date or time other than the date hereof or the Closing Date which need only be true and correct as of such date), provided, that no representation or warranty of AEP shall be deemed to be untrue or incorrect as a result of the occurrence of a Divestiture Event or any change or effect arising out of or resulting from any foreign, federal or sate legislative or regulatory action with respect to (i) the regulation or deregulation of the electric utility industry in such jurisdiction, or (ii) health or the I-38 environment, including the conservation or protection of the environment. The Company shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of AEP, dated the Closing Date to such effect. (b) AGREEMENTS AND COVENANTS. The AEP Companies shall have performed or complied with, in all material respects, all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing. The Company shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of AEP, dated the Closing Date, to such effect. (c) TAX OPINION. The Company shall have received the opinion dated the Closing Date of Christy & Viener to the effect that (i) the Merger will constitute a reorganization under section 368(a) of the Code, (ii) AEP, the Company and Newco will each be a party to that reorganization and (iii) no gain or loss will be recognized by the stockholders of the Company upon the receipt of shares of AEP Common Stock in exchange for shares of Company Common Stock pursuant to the Merger except with respect to any cash received in lieu of fractional interests in shares of AEP Common Stock or cash received pursuant to statutory dissenters rights. In rendering their opinion, such counsel may require and rely upon representations, including those contained in certificates of officers of the Company, Newco and AEP. (d) INVESTMENT BANKER'S OPINION. The Company shall have received, on or prior to the date of mailing of the Joint Proxy Statement/Prospectus to the holders of Company Common Stock, a written opinion from Morgan Stanley & Co. Incorporated, dated the date of such mailing, confirming the opinion to which reference is made in Section 4.18. (e) AEP REQUIRED CONSENTS. The AEP Required Consents shall have been obtained. ARTICLE IX TERMINATION, AMENDMENT AND WAIVER SECTION 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after receipt of the AEP Required Vote or before or after receipt of the Company Required Vote: (a) MUTUAL CONSENT. By mutual written consent of AEP and the Company; (b) TERMINATING COMPANY BREACH. By AEP, upon two Business Days' prior written notice to the Company, upon a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 8.2(a) or Section 8.2(b) would not be satisfied (a "Terminating Company Breach"); PROVIDED THAT, if such Terminating Company Breach is curable by the Company through the exercise of commercially reasonable efforts, for so long as the Company continues to exercise such commercially reasonable efforts AEP may not terminate this Agreement under this Section 9.1(b); (c) TERMINATING AEP BREACH. By the Company, upon two Business Days' prior written notice to AEP, upon breach of any representation, warranty, covenant or agreement on the part of the AEP Companies (or either of them) set forth in this Agreement, or if any representation or warranty of the AEP Companies (or either of them) shall have become untrue, in either case such that the conditions set forth in Section 8.3(a) or Section 8.3(b) would not be satisfied (a "Terminating AEP Breach"); PROVIDED THAT, if such Terminating AEP Breach is curable by the AEP Companies through the exercise of their commercially reasonable efforts, for so long as the AEP Companies continue to exercise such commercially reasonable efforts the Company may not terminate this Agreement under this Section 9.1(c); I-39 (d) DIVESTITURE EVENT. By either AEP or the Company, upon two Business Days' prior written notice to the other, if there shall be any Divestiture Event; provided that, if such Divestiture Event is capable of being vacated, lifted or reversed on or before the Termination Date (as extended pursuant to Section 9.1(f) hereof) through the exercise of commercially reasonable efforts and for so long as the party whose assets are subject to the Divestiture Event continues to exercise such commercially reasonable efforts, such party seeking to terminate may not terminate this Agreement under this Section 9.1(d). (e) LAW, REGULATION OR ORDER. By either AEP or the Company, upon two Business Days' prior written notice to the other, if there shall be any Law or Regulation issued or adopted or any Order which is final and nonappealable preventing the consummation of the Merger, unless the party relying on such Law, Regulation or Order as a basis for termination under this Section 9.1(e) has not complied with its obligations under Section 7.4; (f) TERMINATION DATE. By either AEP or the Company, by written notice to the other, if the Merger shall not have been consummated before December 31, 1999 ("Termination Date"); PROVIDED, HOWEVER, that this Agreement may be extended by written notice of either AEP or the Company to a date not later than June 30, 2000, if the Merger shall not have been consummated as a result of the Company or the AEP Companies having failed by December 31, 1999 to satisfy the conditions set forth in Section 8.1(c) or Section 8.1(d) but all other conditions to the Closing shall be fulfilled; provided further, that, the right to terminate the Agreement under this Section 9.1(f) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date. (g) STOCKHOLDER VOTE. By either AEP or the Company, upon two Business Days' prior written notice to the other, if the transactions contemplated by this Agreement shall fail to receive the Required AEP Vote at the AEP Stockholders' Meeting or if this Agreement shall fail to receive the Required Company Vote at the Company Stockholders' Meeting; (h) AEP FIDUCIARY OUT. By AEP, at any time prior to receipt of the Required AEP Vote, upon two Business Days' prior written notice to the Company, if, the Board of Directors of AEP shall approve a Superior Proposal; provided, however, that (i) AEP shall have complied with Section 7.19, (ii) the Board of Directors of AEP shall have concluded in good faith, after giving effect to all concessions which may be offered by the Company pursuant to clause (iv) below, on the basis of the advice of its financial advisors and outside counsel, that such proposal is a Superior Proposal, (iii) the Board of Directors of AEP shall have concluded in good faith, after receipt of written advice of outside counsel, that notwithstanding all concessions which may be offered by the Company in negotiations entered into pursuant to clause (iv) below, such action is necessary for the AEP Board of Directors to act in a manner consistent with its fiduciary duties under applicable law; and (iv) prior to any such termination, AEP shall, and shall cause its respective financial and legal advisors to, negotiate with the Company to make such adjustments in the terms and conditions of this Agreement as would enable AEP to proceed with the transactions contemplated herein on such adjusted terms; (i) COMPANY FIDUCIARY OUT. By the Company, at any time prior to receipt of the Required Company Vote, upon two Business Days' prior written notice to AEP, if, the Board of Directors of the Company shall approve a Superior Proposal; provided, however, that (i) the Company shall have complied with Section 7.19, (ii) the Board of Directors of the Company shall have concluded in good faith, after giving effect to all concessions which may be offered by AEP pursuant to clause (iv) below, on the basis of the advice of its financial advisors and outside counsel, that such proposal is a Superior Proposal, (iii) the Board of Directors of the Company shall have concluded in good faith, after receipt of the written advice of outside counsel, that notwithstanding all concessions which may be offered by AEP in negotiations entered into pursuant to clause (iv) below, such action is necessary for the Company Board of Directors to act in a manner consistent with its fiduciary duties under applicable I-40 law; and (iv) prior to any such termination, the Company shall, and shall cause its respective financial and legal advisors to, negotiate with AEP to make such adjustments in the terms and conditions of this Agreement as would enable the Company to proceed with the transactions contemplated herein on such adjusted terms; (j) AEP CHANGE OF RECOMMENDATION. By the Company, upon two Business Days' prior written notice to AEP, if the Board of Directors of AEP or any committee thereof (A) shall withdraw or modify in any manner adverse to the Company its approval or recommendation of the Charter Amendment, the Share Issuance, this Agreement or the Merger, (B) shall fail to reaffirm such approval or recommendation upon the Company's request, (C) shall approve or recommend any Superior Proposal or (D) shall resolve to take any of the actions specified in clause (A), (B) or (C); (k) COMPANY CHANGE OF RECOMMENDATION. By AEP, upon two Business Days' prior written notice to the Company, if the Board of Directors of the Company or any committee thereof (A) shall withdraw or modify in any manner adverse to AEP its approval or recommendation of this Agreement or the Merger, (B) shall fail to reaffirm such approval or recommendation upon AEP's request, (C) shall approve or recommend any Superior Proposal or (D) shall resolve to take any of the actions specified in clause (A), (B) or (C); or (l) THIRD PARTY ACQUISITION. By either AEP or the Company, by written notice to the other party, if (A) a third party acquires securities representing greater than 50% of the voting power of the outstanding voting securities of such other party or (B) individuals who as of the date hereof constitute the board of directors of such other party (together with any new directors whose election by such board of directors or whose nomination for election by the stockholders of such party was approved by a vote of a majority of the directors of such party then still in office who are either directors as of the date hereof or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors of such party then in office. The right of any party hereto to terminate this Agreement pursuant to this Section 9.1 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any Person controlling any such party or any of their respective officers, directors, representatives or agents, whether prior to or after the execution of this Agreement. SECTION 9.2 EFFECT OF TERMINATION. Except as provided in Section 9.6 and Section 10.1 of this Agreement, in the event of the termination of this Agreement pursuant to Section 9.1, this Agreement shall forthwith become void, there shall be no liability on the part of the AEP Companies or the Company or any of their respective officers or directors to the other and all rights and obligations of any party hereto shall cease, except that nothing herein shall relieve any party from liability for any breach of this Agreement. SECTION 9.3 AMENDMENT. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; PROVIDED, HOWEVER, that, after receipt of either the AEP Required Vote or the Company Required Vote, no amendment may be made which would reduce the amount or change the type of consideration into which each share of Company Common Stock shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 9.4 WAIVER. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other party hereto, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto and (c) waive compliance by the other party with any of the agreements or, to the extent legally permissible, conditions contained herein. Any such extension or waiver shall be valid only I-41 if set forth in an instrument in writing signed by the party or parties to be bound thereby. For purposes of this Section 9.4, the AEP Companies shall be deemed to be one party. SECTION 9.5 FEES, EXPENSES AND OTHER PAYMENTS. Subject to Section 9.6, all Expenses incurred by the parties hereto shall be borne solely and entirely by the party which has incurred such Expenses; PROVIDED, HOWEVER, that the share of all Expenses related to printing, filing and mailing the Registration Statement and the Joint Proxy Statement/Prospectus and all Commission and other regulatory filing fees incurred in connection with the Registration Statement and the Joint Proxy Statement/Prospectus allocable to the Company and to the AEP Companies as a group shall be 50% each; AND PROVIDED FURTHER that AEP may, at its option and subject to Section 7.5(d), pay any Expenses of the Company. SECTION 9.6 CERTAIN DAMAGES, PAYMENTS AND EXPENSES. (a) DAMAGES PAYABLE UPON TERMINATION FOR BREACH OR WITHDRAWAL OF APPROVAL. If this Agreement is terminated pursuant to Section 9.1(h) or (i) (fiduciary out), Section 9.1(b) or (c) (breach), Section 9.1(j) or (k) (change of recommendation) or Section 9.1 (l) (acquisition of voting power or change of board), then the breaching party or party whose board has exercised its fiduciary out or changed its recommendation or whose voting stock has been acquired or whose board has changed, as the case may be, shall promptly (but not later than five Business Days after receipt of notice that the amount is due from the other party) pay to the other party, as liquidated damages and expense reimbursement, an amount in cash equal to $20 million (the "Termination Fee"). (b) OTHER TERMINATION PAYMENTS. If (i) this Agreement is terminated pursuant to (A) Section 9.1(f) (expiration date), (B) Section 9.1(h) or (i) (fiduciary out), (C) Section 9.1(g) (failure to obtain shareholder approval), (D) Section 9.1(j) or (k) (change of recommendation) or (E) pursuant to Section 9.1(b) or (c) (breach); and (ii) at the time of such termination (or in the case of clause (i)(C) above, prior to the meeting of such party's shareholders) there shall have been an Acquisition Proposal involving the Company or AEP (as the case may be, the "Target Party") or any of its Affiliates which, at the time of such termination (or such meeting, as the case may be), shall not have been (x) rejected by the Target Party and its Board of Directors and (y) withdrawn by the third party; and (iii) within eighteen months of any such termination described in clause (i) above, the Target Party or any of its Affiliates becomes a Subsidiary of such offeror or a Subsidiary of an Affiliate of such offeror or accepts a written offer or enters into a written agreement to consummate or consummates an Acquisition Proposal with such offeror or an Affiliate thereof, then such Target Party (jointly and severally with its Affiliates), upon the signing of a definitive agreement relating to such Acquisition Proposal, or, if no such agreement is signed, then at the closing (and as a condition to the closing) of such Target Party becoming such a subsidiary or of such Acquisition Proposal, shall pay the Company or AEP, as the case may be, a termination fee equal to $225 million (the "Topping Fee") plus Expenses of such party not in excess of $20 million ("Out-of-Pocket Expenses"). If this Agreement is terminated by the Company or AEP pursuant to Section 9.1(l) (third party acquisition of voting power or change of board), then the Company or AEP, as the case may be, shall pay immediately the terminating party the Topping Fee plus Out-of-Pocket Expenses. (c) EXPENSES. The Parties agree that the agreements contained in this Section 9.6 are an integral part of the transactions contemplated by this Agreement and constitute liquidated damages and not a penalty. If one party fails to promptly pay to the other any fee due hereunder, the defaulting party shall pay the costs and expenses (including legal fees and expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken to collect payment, together with interest on the amount of any unpaid fee at the publicly announced prime rate of Citibank, N.A. from the date such fee was required to be paid. (d) LIMITATION OF FEES. Notwithstanding anything herein to the contrary, the aggregate amount payable to AEP and its Affiliates pursuant to Section 9.6(a) and Section 9.6(b) shall not exceed $245 million and the aggregate amount payable to the Company and its Affiliates pursuant to Section 9.6(a) and Section 9.6(b) shall not exceed $245 million. I-42 (e) EXCLUSIVE REMEDY. Subject to the following sentence, the payments required by Sections 9.6(a) and Section 9.6(b) shall constitute liquidated damages in full and complete satisfaction of, and shall be the sole and exclusive remedy for any loss, liability, damage or claim arising out of or in connection with the transactions contemplated by this Agreement, including any termination of this Agreement pursuant to Section 9.1. Notwithstanding the foregoing sentence, in the event of payment of the Termination Fee pursuant to Section 9.6(a), if (i) this Agreement is terminated by a party as a result of a willful breach of representation, warranty, covenant or agreement by the other party, and (ii) the Topping Fee is not paid, the nonbreaching party may pursue any remedies available to it at law or in equity and shall, in addition to the Termination Fee, be entitled to recover such additional amounts as such nonbreaching party may be entitled to receive at law or in equity. ARTICLE X GENERAL PROVISIONS SECTION 10.1 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. (a) EFFECT OF INVESTIGATION. Except as set forth in Section 10.1(b) of this Agreement, the representations, warranties, covenants and agreements of each party hereto shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any other party hereto, any Person controlling any such party or any of their officers, directors, representatives or agents whether prior to or after the execution of this Agreement. (b) TERMINATION. The representations and warranties in this Agreement shall terminate at the Effective Time and the representations, warranties, covenants and agreements shall terminate upon the termination of this Agreement pursuant to Article IX, except that the covenants and agreements set forth in the last sentence of Section 6.3, Sections 9.2, 9.5 and 9.6 and Article X hereof shall survive termination of this Agreement. SECTION 10.2 NOTICES. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given upon receipt, if delivered personally, mailed by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses ( or at such other address for a party as shall be specified by like changes of address) or sent by electronic transmission to the telecopier number specified below: (a) AEP. If to any of the AEP Companies, to: American Electric Power Service Corporation 1 Riverside Plaza Columbus, Ohio 43215 Attention: Donald M. Clements, Jr., Executive Vice President Telecopier No.: 614-223-1552 with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: James M. Cotter Telecopier No.: (212) 455-2502 (b) COMPANY. If to the Company, to: Central and South West Corporation 1616 Woodall Rodgers Freeway Dallas, Texas 75266-0164 I-43 Attention: Thomas V. Shockley, III, President Telecopier No.: (214) 777-1528 with a copy to: Vinson & Elkins L.L.P. 1001 Fannin Houston, Texas 77002-6760 Attention: William E. Joor III Telecopier No.: (713) 758-2346 SECTION 10.3 HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 10.4 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. SECTION 10.5 ENTIRE AGREEMENT. This Agreement (together with the Annexes, the Company's Disclosure Letter and AEP's Disclosure Letter) constitutes the entire agreement of the parties, and supersedes all prior agreements and undertakings, both written and oral, among the parties, with respect to the subject matter hereof, other than the Confidentiality Agreement which shall remain in full force and effect with respect to the subject matter thereof. SECTION 10.6 ASSIGNMENT. This Agreement shall not be assigned by operation of Law or otherwise. SECTION 10.7 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and, except for the beneficiaries of the indemnities and covenants contained in Sections 7.11, 7.10(d) and 7.10(f) herein, nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 10.8 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, covenant or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive to, and not exclusive of, any rights or remedies otherwise available. SECTION 10.9 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Delaware, regardless of the Laws that might otherwise govern under applicable principles of conflicts of law; PROVIDED, HOWEVER, that any matter involving the internal corporate affairs of any party hereto shall be governed by the provisions of the state of its incorporation. SECTION 10.10 COUNTERPARTS. This Agreement may be executed in multiple counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. I-44 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. AMERICAN ELECTRIC POWER COMPANY, INC. By /s/ E. LINN DRAPER, JR. ----------------------------------------- E. Linn Draper, Jr. CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE OFFICER AUGUSTA ACQUISITION CORPORATION By: /s/ DONALD M. CLEMENTS, JR. ----------------------------------------- Donald M. Clements, Jr. PRESIDENT CENTRAL AND SOUTH WEST CORPORATION By: /s/ E.R. BROOKS ----------------------------------------- E.R. Brooks CHAIRMAN AND CHIEF EXECUTIVE OFFICER
I-45 ANNEX A SCHEDULE OF DEFINED TERMS The following terms when used in the Agreement shall have the meanings set forth below unless the context shall otherwise require: "Acquisition Proposal" shall have the meaning ascribed to such term in Section 7.19. "Affiliate" shall, with respect to any Person, mean any other Person that controls, is controlled by or is under common control with the former. "Agreement" shall mean the Agreement and Plan of Merger made and entered into as of December 21, 1997 among AEP, Newco and the Company, including any amendments thereto and each Annex (including this Annex A) and including AEP's Disclosure Letter and the Company's Disclosure Letter. "APCo" shall mean Appalachian Power Company, a Virginia corporation. "Atomic Energy Act" shall mean shall mean the Atomic Energy Act of 1954, as amended, and the Regulations promulgated thereunder. "AEP" shall mean American Electric Power Company, Inc., a New York corporation, and its successors from time to time. "AEP Benefit Plans" shall mean Benefit Plans with respect to AEP and its Subsidiaries. "AEP Common Stock" shall mean the voting common stock, par value $6.50 per share, of AEP. "AEP Companies" shall have the meaning ascribed to such term in the first paragraph of the Agreement. "AEP Required Consents" shall mean any Third Party Consents relating to AEP the failure of which to obtain could reasonably be expected to have a Material Adverse Effect on the Combined Companies. "AEP Stockholders' Meeting" shall have the meaning ascribed to such term in Section 7.1. "AEP's Audited Consolidated Financial Statements" shall mean the condensed balance sheets of AEP and its Subsidiaries as of December 31, 1996, 1995 and 1994 and the related condensed statements of operations and cash flows for each of the three fiscal years in the three-year period ended December 31, 1996, together with the notes thereto, all as audited by Deloitte & Touche L.L.P., independent accountants, under their report with respect thereto dated February 25, 1997 and included in AEP's Annual Report on Form 10-K for the year ended December 31, 1996 filed with the Commission. "AEP's Consolidated Financial Statements" shall mean AEP's Audited Consolidated Financial Statements and AEP's Unaudited Consolidated Financial Statements. "AEP's Disclosure Letter" shall mean a letter of even date herewith delivered by AEP to the Company concurrently with the execution of the Agreement, which, among other things, shall identify exceptions to AEP's representations, warranties and covenants contained in this Agreement by specific section and subsection references. "AEP's Unaudited Consolidated Financial Statements" shall mean the unaudited condensed balance sheet of AEP and its Subsidiaries as of September 30, 1997 and the related condensed statements of operations and cash flows for the three-month periods and nine-month periods ended September 30, 1996 and September 30, 1997, together with the notes thereto, included in AEP's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 filed with the Commission. "Benefit Plans" shall mean, with respect to a specified Person, any employee pension benefit plan (whether or not insured), as defined in Section 3(2) of ERISA, any employee welfare benefit plan (whether A-1 or not insured) as defined in Section 3(1) of ERISA, any plans that would be employee pension benefit plans or employee welfare benefit plans if they were subject to ERISA, such as foreign plans and plans for directors, any stock bonus, stock ownership, stock option, stock purchase, stock appreciation rights, phantom stock, severance, employment, change-in-control, deferred compensation and any bonus or incentive compensation plan, agreement, program or policy (whether qualified or nonqualified, written oral), sponsored, maintained or contributed to by the specified Person or any of its Subsidiaries for the benefit of any of the present or former directors, officers, employees, agents, consultants or other similar representatives providing services to or for the specified Person or any of its Subsidiaries in connection with such services or any such plans which have been so sponsored, maintained, or contributed to within six years prior to the date of the Agreement; PROVIDED, HOWEVER, that such term shall not include (a) routine employment policies and procedures developed and applied in the ordinary course of business and consistent with past practice, including wage, vacation, holiday and sick or other leave policies, (b) workers compensation insurance and (c) directors and officers liability insurance. "Business Day" means any day other than a day on which banks in the State of Texas or the State of New York are authorized or obligated to be closed. "Certificate of Merger" shall have the meaning ascribed to such term in Section 2.2. "Charter Amendment" shall have the meaning ascribed to such term in Section 5.20. "Change of Control Agreements" shall mean the change in control or severance agreements identified as such in Section 4.12(j) of the Company's Disclosure Letter. "Closing" shall mean a meeting, which shall be held in accordance with Section 3.3, of all Persons interested in the transactions contemplated by the Agreement at which all documents deemed necessary by the parties to the Agreement to evidence the fulfillment or waiver of all conditions precedent to the consummation of the transactions contemplated by the Agreement are executed and delivered. "Closing Date" shall mean the date of the Closing as determined pursuant to Section 3.3. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Combined Companies" shall mean, before the Merger, the AEP Companies (together with all of their Subsidiaries) and the Company (together with all of its Subsidiaries) considered as a single business enterprise as if the Merger had been consummated immediately prior to the time of consideration, and after the Merger shall mean AEP (together with its Subsidiaries). "Commission" shall mean the Securities and Exchange Commission, a Governmental Authority of the United States Government, and its successors from time to time. "Common Stock Exchange Ratio" shall mean 0.60, as adjusted pursuant to the second sentence of Section 3.1(a) of the Agreement. "Company" shall mean Central and South West Corporation, a Delaware corporation, and its successors from time to time. "Company Benefit Plans" shall mean Benefit Plans with respect to the Company and its Subsidiaries. "Company Common Stock" shall mean the common stock, par value $3.50 per share, of the Company. "Company Permitted Transactions" shall mean (i) those transactions described in Section 6.1 of the Company's Disclosure Letter and (ii) individual transactions not otherwise permitted by Section 6.2(a) the total investment (including debt and equity and other liability acquired or assumed) with respect to which does not exceed $50 million per annum or $150 million per annum when aggregated with all other such transactions, provided that no transactions entered into in reliance on this clause (ii) shall involve a total A-2 investment (including debt and equity and other liability acquired or assumed) in excess of $75 million per annum in any one country. "Company Required Consents" shall mean any Third Party Consents relating to the Company the failure of which to obtain could reasonably be expected to have a Material Adverse Effect on the Combined Companies. "Company Stockholders' Meeting" shall have the meaning ascribed to such term in Section 7.2. "Company's Audited Consolidated Financial Statements" shall mean the condensed balance sheets of the Company and its Subsidiaries as of December 31, 1996, 1995 and 1994 and the related condensed and combined statements of operations and cash flows for each of the three fiscal years in the three-year period ended December 31, 1996, together with the notes thereto, all as audited by Arthur Andersen LLP, independent accountants, under their report with respect thereto dated February 28, 1997 and included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 filed with the Commission. "Company's Consolidated Financial Statements" shall mean the Company's Audited Consolidated Financial Statements and the Company's Unaudited Consolidated Financial Statements. "Company's Disclosure Letter" shall mean a letter of even date herewith delivered by the Company to the AEP Companies concurrently with the execution of the Agreement, which, among other things, shall identify exceptions to the Company's representations, warranties and covenants contained in this Agreement by specific section and subsection references. "Company's Rights Agreement" shall mean that certain Rights Agreement entered into or to be entered into between the Company and a rights agent, substantially in the form previously filed with the Commission except for any amendments or modifications thereto contemplated in the Agreement. "Company's Unaudited Consolidated Financial Statements" shall mean the unaudited condensed balance sheet of the Company and its Subsidiaries as of September 30, 1997 and the related condensed statements of operations and cash flows for the three-month periods and nine-month periods ended September 30, 1996 and September 30, 1997, together with the notes thereto, included in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 filed with the Commission. "Confidentiality Agreement" shall mean that certain confidentiality agreement between AEP and the Company dated October 17, 1997, as amended. "Control" (including the terms "controlled," "controlled by" and "under common control with") shall mean the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise. "Controlled Group" shall mean any organization which is a member of a controlled group of organizations within the meaning of Code sections 414(b), (c), (m) or (o). "Cook Nuclear Plant" shall mean the Donald C. Cook nuclear plant located in Bridgman, Michigan. "Court" shall mean any court or arbitration tribunal of the United States, any foreign country or any domestic or foreign state, and any political subdivision thereof, and shall include the European Court of Justice. "CP&L" shall mean Central Power and Light Company, a Texas corporation and a Subsidiary of the Company. "CSPCo" shall mean Columbus Southern Power Company, an Ohio corporation. A-3 "Current AEP Benefit Plans" shall mean Benefit Plans that are sponsored, maintained, or contributed to by AEP or any of its Subsidiaries as of the date of the Agreement. "Current Company Benefit Plans" shall mean Benefit Plans that are sponsored, maintained, or contributed to by the Company or any of its Subsidiaries as of the date of the Agreement. "Delaware Law" shall mean the General Corporation Law of the State of Delaware. "Divestiture Event" shall mean any Law, Regulation or Order adopted or issued by a Governmental Authority that requires the divestiture of a substantial portion of the generating assets of the Company and its Subsidiaries, taken as a whole, or AEP and its Subsidiaries, taken as a whole. "Domestic Public Utility Company" shall mean a company that provides electric energy directly to retail customers under rates, terms and conditions determined by a State Regulatory Commission; provided that no company shall be a Domestic Public Utility Company solely by reason of engaging in power marketing or brokering or the wholesale sale of electric energy. "Effective Time" shall mean the date and time of the completion of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with Section 2.2. "Environmental Law or Laws" shall mean any and all laws, statutes, ordinances, rules, regulations, or orders of any Governmental Authority pertaining to health or the environment currently in effect and applicable to a specified Person and its Subsidiaries, including the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, the Oil Pollution Act of 1990, as amended ("OPA"), any state or local Laws implementing the foregoing Federal Laws, and all other environmental conservation or protection Laws. For purposes of the Agreement, the terms "hazardous substance" and "release" have the meanings specified in CERCLA; PROVIDED, HOWEVER, that to the extent the Laws of the state or locality in which the property is located establish a meaning for "hazardous substance" or "release" that is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply, and the term "hazardous substance" shall include all dehydration and treating wastes, waste (or spilled) oil, and waste (or spilled) petroleum products, and (to the extent in excess of background levels) radioactive material, even if such are specifically exempt from classification as hazardous substances pursuant to CERCLA or RCRA or the analogous statutes of any jurisdiction applicable to the specified Person or its Subsidiaries or any of their respective properties or assets. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the Regulations promulgated thereunder. "Equity Securities" shall mean, with respect to a specified Person, any shares of capital stock of, or other equity interests in, or any securities that are convertible into or exchangeable for any shares of capital stock of, or other equity interests in, or any outstanding options, warrants or rights of any kind to acquire any shares of capital stock of, or other equity interests in, such Person. "Exchange Act" shall mean the Securities Exchange Act of 1934 and the Regulations promulgated thereunder. "Exchange Agent" shall mean a bank or trust company having a net worth in excess of $100 million designated and appointed to act in the capacities required thereof under Section 3.2. A-4 "Exchange Fund" shall mean the fund of AEP Common Stock and cash in lieu of fractional interests and dividends and distributions, if any, with respect to such shares of AEP Common Stock established at the Exchange Agent pursuant to Section 3.2. "Expenses" shall mean all reasonable out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of the Agreement, the preparation, printing, filing and mailing of the Registration Statement, Joint Proxy Statement/Prospectus, the solicitation of stockholder approvals and all other matters related to the consummation of the transactions contemplated hereby. "Federal Power Act" shall mean the Federal Power Act, as amended, and the Regulations promulgated thereunder. "FERC" shall mean the Federal Energy Regulatory Commission, a Governmental Authority of the United States Government, and its successors from time to time. "Final Order" shall mean an Order that has not been reversed, stayed, enjoined, set aside, annulled or suspended, with respect to which any waiting period prescribed by Law before the transactions contemplated hereby may be consummated has expired (but without the requirement for expiration of any applicable rehearing or appeal period), and as to which all conditions to the consummation of such transactions prescribed by Law, Regulation or Order have been satisfied. "Foreign Utility Company" shall mean a foreign utility company as defined in section 33(a)(3) of the Holding Company Act. "GAAP" shall mean accounting principles generally accepted in the United States consistently applied by a specified Person. "Governmental Authority" shall mean any governmental or regulatory agency or authority (other than a Court but including a stock exchange or other self-regulatory body) of or within the United States, any foreign country, or any domestic or foreign state, and any political subdivision thereof, and shall include any multinational authority having governmental or quasi-governmental powers. "Holding Company Act" shall mean the Public Utility Holding Company Act of 1935, as amended, and the Regulations promulgated thereunder. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Regulations promulgated thereunder. "I&M" shall mean Indiana Michigan Power Company, an Indiana corporation. "IRS" shall mean the Internal Revenue Service, a Governmental Authority of the United States Government, and its successors from time to time. "Joint Proxy Statement/Prospectus" shall have the meaning ascribed to such term in Section 7.3(a). "KEPCo" shall mean Kentucky Power Company, a Kentucky corporation. "Knowledge" shall mean, with respect to either the Company or AEP, the actual knowledge of any executive officer of such party after reasonable inquiry. "KPC" shall mean Kingsport Power Company, a Virginia corporation. "Law" shall mean all laws, statutes, ordinances, rules and regulations of the United States, any foreign country, or any domestic or foreign state, and any political subdivision or agency thereof, including all decisions of Courts having the effect of law in each such jurisdiction. A-5 "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof or the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Material" shall mean material to the business, condition (financial or otherwise) or results of operations or prospects of a specified Person and its subsidiaries, if any, taken as a whole; PROVIDED, HOWEVER, that, as used in this definition the word "material" shall have the meaning accorded thereto in Section 11 of the Securities Act. "Material Contract" shall mean each contract, lease, indenture, agreement, arrangement or understanding to which a specified Person or any of its Subsidiaries is a party or to which any of the assets or operations of such specified Person or any of its Subsidiaries is subject that is of a type that would be required to be included as an exhibit to a registration statement on Form S-1 pursuant to Paragraph (2), (4) or (10) of Item 601(b) of Regulation S-K under the Securities Act if such a registration statement were to be filed by such Person under the Securities Act on the date of determination. "Material Adverse Effect" shall mean any change or effect that is material and adverse to the business, condition (financial or otherwise) or results of operations or prospects of a specified Person and its subsidiaries, if any, taken as a whole; PROVIDED, HOWEVER, that, as used in this definition the word "material" shall have the meaning accorded thereto in Section 11 of the Securities Act. "Merger" shall have the meaning ascribed to such term in Section 2.1 of the Agreement. "Newco" shall mean Augusta Acquisition Corporation, a Delaware corporation and a wholly-owned Subsidiary of AEP formed for the sole purpose of affecting the Merger. "New York Law" shall mean the New York Business Corporation Law. "NRC" shall mean the Nuclear Regulatory Commission, a Governmental Authority of the United States Government, and its successors from time to time. "NYSE" shall mean the New York Stock Exchange, Inc. "OPCo" shall mean Ohio Power Company, an Ohio corporation. "Operating Company" shall have the meaning ascribed to such term in Section 4.9(b). "Order" shall mean any judgment, order or decree of any Court or Governmental Authority, Federal, foreign, state or local. Any reference in the Agreement to the "receipt" or "obtaining" of any Order shall mean making such declarations, filings or registrations; giving such notices; obtaining such consents or approvals; and having such waiting periods expire as are necessary to avoid a violation of Law. "Out-of-Pocket Expenses" shall have the meaning ascribed to such term in Section 9.6(b). "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Permit" shall mean any and all permits, licenses, authorizations, orders, consents, certificates, registrations or other approvals granted by any Governmental Authority. Any reference in the Agreement to the "receipt" or "obtaining" of any Permit shall mean making such declarations, filings or registrations; giving such notices; obtaining such consents or approvals; and having such waiting periods expire as are necessary to avoid a violation of Law. "Permitted Encumbrances" shall mean the following: (1) liens for taxes, assessments and other governmental charges not delinquent or which are currently being contested in good faith by appropriate proceedings; PROVIDED that, in the latter case, the specified Person or one of its Subsidiaries shall have set aside on its books adequate reserves with respect thereto; A-6 (2) mechanics' and materialmen's liens not filed of record and similar charges not delinquent or which are filed of record but are being contested in good faith by appropriate proceedings; PROVIDED that, in the latter case, the specified Person or one of its Subsidiaries shall have set aside on its books adequate reserves with respect thereto; (3) liens in respect of judgments or awards with respect to which the specified Person or one of its Subsidiaries shall in good faith currently be prosecuting an appeal or other proceeding for review and with respect to which such Person or such Subsidiary shall have secured a stay of execution pending such appeal or such proceeding for review; PROVIDED that such Person or such Subsidiary shall have set aside on its books adequate reserves with respect thereto; (4) easements, leases, reservations or other rights of others in, or minor defects and irregularities in title to, property or assets of a specified Person or any of its Subsidiaries; PROVIDED that such easements, leases, reservations, rights, defects or irregularities do not materially impair the use of such property or assets for the purposes for which they are held; and (5) any lien or privilege vested in any lessor, licensor or permittor for rent or other obligations of a specified Person or any of its Subsidiaries thereunder so long as the payment of such rent or the performance of such obligations is not delinquent. "Person" shall mean an individual, partnership, limited liability company, corporation, joint stock company, trust, estate, joint venture, association or unincorporated organization, or any other form of business or professional entity, but shall not include a Governmental Authority. "Pooling Transaction" shall mean a business combination that qualifies for financial accounting purposes, as a pooling of interests pursuant to Accounting Principles Board Opinion 16 and the interpretations thereof and the Staff Accounting Bulletins of the Commission and the interpretations thereof. "PSO" shall mean Public Service Company of Oklahoma, an Oklahoma corporation. "Registration Statement" shall have the meaning ascribed to such term in Section 7.3(a). "Regulation" shall mean any rule or regulation of any Governmental Authority having the effect of Law. "Representatives" shall have the meaning ascribed to such term in Section 6.3. "Reports" shall mean, with respect to a specified Person, all reports, registrations, filings and other documents and instruments required to be filed by the specified Person or any of its Subsidiaries with any Governmental Authority (other than the Commission). "Required AEP Vote" shall have the meaning ascribed to such term in Section 5.20. "Required Company Vote" shall have the meaning ascribed to such term in Section 4.20. "Retention Agreements" shall mean the retention agreements described in Section 6.2(a) of the Company's Disclosure Letter. "SEC Reports" shall mean (1) all Annual Reports on Form 10-K, (2) all Quarterly Reports on Form 10-Q, (3) all proxy statements relating to meetings of stockholders (whether annual or special), (4) all Current Reports on Form 8-K and (5) all other reports, schedules, registration statements or other documents required to be filed during a specified period by a Person with the Commission pursuant to the Securities Act or the Exchange Act. "Securities Act" shall mean the Securities Act of 1933, as amended, and the Regulations promulgated thereunder. "Seeboard" shall mean SEEBOARD plc, a company incorporated in England and a Subsidiary of the Company. A-7 "Share Issuance" shall have the meaning ascribed to such term in Section 5.20. "Significant Subsidiary" shall mean any subsidiary of the Company or AEP, as the case may be, that would constitute a Significant Subsidiary of such party within the meaning of Rule 1-02 of Regulation S-X of the Commission. "South Texas Nuclear Facility" shall mean the South Texas nuclear project located in Bay City, Texas. "State Regulatory Commissions" shall mean: the Public Utility Commission of the State of Texas; the Public Service Commission of the State of Arkansas; the Corporation Commission of the State of Oklahoma; the Public Service Commission of the State of Louisiana; the Indiana Utility Regulatory Commission; the Kentucky Public Service Commission; the Michigan Public Service Commission; the Ohio Public Utility Commission; the Tennessee Regulatory Commission; the Virginia State Corporation Commission; and the West Virginia Public Service Commission. "State Regulatory Acts" shall mean the utility Laws regulating Domestic Public Utility Companies in the States of Arkansas, Oklahoma, Texas, Louisiana, Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West Virginia; in each case, as amended, and the Regulations promulgated thereunder. A "Subsidiary" of a specified Person shall be any corporation, partnership, limited liability company, joint venture or other legal entity of which the specified Person (either alone or through or together with any other subsidiary) owns, directly or indirectly, over 50% of the stock or other equity or partnership interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. "Superior Proposal" a BONA FIDE written Acquisition Proposal which the Board of Directors of AEP or the Board of Directors of the Company, as the case may be, concludes in good faith (after consultation with its financial advisors and legal counsel), taking into account all legal, financial, regulatory and other aspects of the proposal and the Person making the proposal, (i) would, if consummated, result in a transaction that is more favorable to such party's stockholders, from a strategic and financial point of view, than the transactions contemplated by this Agreement and (ii) is reasonably capable of being completed (PROVIDED that for purposes of this definition the term Acquisition Proposal shall have the meaning assigned to such term in Section 7.19 except that the reference to "10%" in the definition of "Acquisition Proposal" shall be deemed to be a reference to "50%" and "Acquisition Proposal" shall only be deemed to refer to a transaction involving AEP or the Company, as the case may be, or with respect to assets (including the shares of any Subsidiary of AEP or the Company) of AEP or the Company, as the case may be, and its Subsidiaries, taken as a whole, and not any of its Subsidiaries alone). "Surviving Corporation" shall mean the Company as the corporation surviving the Merger. "SWEPCO" shall mean Southwestern Electric Power Company, a Delaware corporation and a Subsidiary of the Company. "Target Party" shall have the meaning ascribed to such term in Section 9.6(b). "Task Force" shall have the meaning ascribed to such term in Section 7.18. "Tax Returns" shall mean all returns, reports or other documents (including information returns) required to be filed by or under any Law with any Governmental Authority with respect to Taxes. "Taxes" shall mean all taxes, charges, imposts, tariffs, fees, levies or other similar assessments or liabilities, including income taxes, ad valorem taxes, excise taxes, withholding taxes, stamp taxes or other taxes of or with respect to gross receipts, premiums, real property, personal property, windfall profits, sales, use, transfers, licensing, employment, payroll and franchises imposed by or under any Law; and such terms shall include any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any such tax or any contest or dispute thereof. A-8 "Terminated AEP Benefit Plans" shall mean Benefit Plans that were sponsored, maintained, or contributed to by AEP or any of its Subsidiaries within six years prior to the date of this Agreement but which have been terminated prior to the date of the Agreement. "Terminated Company Benefit Plans" shall mean Benefit Plans that were sponsored, maintained, or contributed to by the Company or any of its Subsidiaries within six years prior to the date of this Agreement but which have been terminated prior to the date of the Agreement. "Terminating AEP Breach" shall have the meaning ascribed to such term in subsection 9.1(c) of the Agreement. "Terminating Company Breach" shall have the meaning ascribed to such term in subsection 9.1(b) of the Agreement. "Termination Date" shall have the meaning ascribed to such term in Section 9.1(f). "Termination Fee" shall have the meaning ascribed to such term in Section 9.6(a). "Third Party Consents" shall have the meaning ascribed to such term in Section 7.4(d)(i). "Topping Fee" shall have the meaning ascribed to such term in Section 9.6(b). "WPC" shall mean Wheeling Power Company, a West Virginia corporation. "WTU" shall mean West Texas Utilities Company, a Texas corporation and a Subsidiary of the Company. A-9 ANNEX B [Central and South West Corporation Affiliates] AFFILIATE'S AGREEMENT American Electric Power Company, Inc. 1 Riverside Plaza Columbus, Ohio 43215-2373 Central and South West Corporation 1616 Woodall Rodgers Freeway P.O. Box 660164 Dallas, Texas 75266-0164 Ladies and Gentlemen: The undersigned has been advised that, as of the date hereof, the undersigned may be deemed to be an "affiliate" of Central and South West Corporation, a Delaware corporation (the "Company"), as that term is defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to the terms and subject to the conditions of that certain Agreement and Plan of Merger by and among American Electric Power Company, Inc., a New York corporation ("AEP"), Augusta Acquisition Corporation, a newly formed Delaware corporation and a wholly owned Subsidiary of AEP ("Newco"), and the Company dated as of December 21, 1997 (the "Merger Agreement"), providing for, among other things, the merger of Newco with and into the Company (the "Merger"), the undersigned will be entitled to receive shares of common stock, par value $6.50 per share ("AEP Common Stock"), of AEP in exchange for shares of common stock, par value $3.50 per share ("Company Common Stock"), of the Company owned by me at the effective time of the Merger (the "Effective Time") as determined pursuant to the Merger Agreement. The undersigned understands that the Merger will be treated for financial accounting purposes as a "pooling of interests" in accordance with generally accepted accounting principles and that the staff of the SEC has issued certain guidelines that should be followed to ensure the application of pooling of interests accounting to the transaction. In consideration of the agreements contained herein, AEP's and the Company's reliance on this letter in connection with the consummation of the Merger and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby represents, warrants and agrees that the undersigned has not made and will not make any sale, transfer or other disposition of (i) Company Common Stock or AEP Common Stock within the 30 day period prior to the date of the consummation of the Merger or (ii) AEP Common Stock received by the undersigned pursuant to the Merger or otherwise owned by the undersigned until after such time as financial statements of AEP that include at least 30 days of combined operations of the Company and AEP after the Merger shall have been publicly reported, unless the undersigned shall have delivered to AEP, prior to any such sale, transfer or other disposition, a written opinion from Deloitte & Touche L.L.P., independent public accountants for AEP, or a written no-action letter from the accounting staff of the SEC, in either case in form and substance reasonably satisfactory to AEP, to the effect that such sale, transfer or other disposition will not cause the Merger not to be treated as a "pooling of interests" for financial accounting purposes in accordance with generally accepted accounting principles and the rules, regulations and interpretations of the SEC and (iii) AEP Common Stock received by the undersigned pursuant to the Merger in violation of the Securities Act or the Rules and Regulations. The undersigned has been advised that the offering, sale and delivery of the shares of AEP Common Stock pursuant to the Merger will have been registered with B-1 the SEC under the Securities Act on a Registration Statement on Form S-4. The undersigned has also been advised, however, that since the undersigned may be deemed to be an affiliate of the Company at the time the Merger is submitted for a vote of the stockholders of the Company, AEP Common Stock received by the undersigned pursuant to the Merger can be sold by the undersigned only (i) pursuant to an effective registration statement under the Securities Act of 1933 (the "Securities Act"), (ii) in conformity with the volume and other limitations of Rule 145 promulgated by the SEC under the Securities Act, or (iii) in reliance upon an exemption from registration that is available under the Securities Act. The undersigned also understands that instructions will be given to the transfer agent for AEP Common Stock with respect to AEP Common Stock to be received by the undersigned pursuant to the Merger and that there will be placed on the certificates representing such shares of AEP Common Stock, or any substitutions therefor, a legend stating in substance as follows: "These shares were issued in a transaction to which Rule 145 promulgated under the Securities Act of 1933 applies. These shares may only be transferred in accordance with the terms of such Rule and an Affiliate's Agreement between the original holder of such shares and AEP, a copy of which agreement is on file at the principal offices of AEP." It is understood and agreed that the legend set forth above shall be removed upon surrender of certificates bearing such legend by delivery of substitute certificates without such legend if the undersigned shall have delivered to AEP an opinion of counsel, in form and substance reasonably satisfactory to AEP, to the effect that (i) the sale or disposition of the shares represented by the surrendered certificates may be effected without registration of the offering, sale and delivery of such shares under the Securities Act and (ii) the shares to be so transferred may be publicly offered, sold and delivered by the transferee thereof without compliance with the registration provisions of the Securities Act. By its execution hereof, AEP agrees that it will, as long as the undersigned owns any AEP Common Stock to be received by the undersigned pursuant to the Merger, take all reasonable efforts to make timely filings with the SEC of all reports required to be filed by it pursuant to the Securities Exchange Act of 1934, as amended, and will promptly furnish upon written request of the undersigned a written statement confirming that such reports have been so timely filed. B-2 If you are in agreement with the foregoing, please so indicate by signing below and returning a copy of this letter to the undersigned, at which time this letter shall become a binding agreement between us. Very truly yours, By: ----------------------------------------- Name: Title: Date: Address: ACCEPTED this day of , 1998 AMERICAN ELECTRIC POWER COMPANY, INC. By: ----------------------------------------- Name: Title: CENTRAL AND SOUTH WEST CORPORATION By: ----------------------------------------- Name: Title: B-3 ANNEX C [AEP Affiliates] AFFILIATE'S AGREEMENT American Electric Power Company, Inc. 1 Riverside Plaza Columbus, Ohio 43215-2373 Central and South West Corporation 1616 Woodall Rodgers Freeway P.O. Box 660164 Dallas, Texas 75266-0164 Ladies and Gentlemen: The undersigned has been advised that, as of the date hereof, the undersigned may be deemed to be an "affiliate" of American Electric Power Company, Inc., a New York corporation ("AEP"), as that term is defined in the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"). The undertakings contained in this Affiliate's Agreement are being given by the undersigned in connection with that certain Agreement and Plan of Merger by and among AEP, Augusta Acquisition Corporation, a newly formed Delaware corporation and a wholly owned Subsidiary of AEP ("Newco"), and Cypress, a Delaware corporation (the "Company") dated as of December 21, 1997 (the "Merger Agreement"), providing for, among other things, the merger of Newco with and into the Company (the "Merger"). The undersigned understands that the Merger will be treated for financial accounting purposes as a "pooling of interests" in accordance with generally accepted accounting principles and that the staff of the SEC has issued certain guidelines that should be followed to ensure the application of pooling of interests accounting to the transaction. In consideration of the agreements contained herein, AEP's and the Company's reliance on this letter in connection with the consummation of the Merger and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby represents, warrants and agrees that the undersigned has not made and will not make any sale, transfer or other disposition of (i) AEP Common Stock or Company Common Stock within the thirty day period prior to the date of the consummation of the Merger or (ii) AEP Common Stock owned by the undersigned until such time as financial statements that include at least 30 days of combined operations of the Company and AEP after the Merger shall have been publicly reported, unless the undersigned shall have delivered to AEP prior to any such sale, transfer or other disposition, a written opinion from Deloitte & Touche L.L.P., independent public accountants for AEP, or a written no-action letter from the accounting staff of the SEC, in either case in form and substance reasonably satisfactory to AEP, to the effect that such sale, transfer or other disposition will not cause the Merger not to be treated as a "pooling of interests" for financial accounting purposes in accordance with generally accepted accounting principles and the rules, regulations and interpretations of the SEC. C-1 If you are in agreement with the foregoing, please so indicate by signing below and returning a copy of this letter to the undersigned, at which time this letter shall become a binding agreement between us. Very truly yours, By: ----------------------------------------- Name: Title: Date: Address: ACCEPTED this day of , 1998 CENTRAL AND SOUTH WEST CORPORATION By: ----------------------------------------- Name: Title: AMERICAN ELECTRIC POWER COMPANY, INC. By: ----------------------------------------- Name: Title: C-2 EX-13 4 AEPCO 1997 ANNUAL REPORT GLOSSARY OF TERMS When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below. Term Meaning ---- ------- AEPES . . . . . . . AEP Energy Services, a non-regulated subsidiary of AEP. AEGCo or AEPGEN . . AEP Generating Company, a domestic generating subsidiary of AEP. AEP, AEP Co., Inc or the Company. . American Electric Power Company, Inc. AEP System or the System. . . . The American Electric Power System, an integrated electric utility system. AEPR. . . . . . . . AEP Resources, Inc., a non-regulated subsidiary of AEP. AEPSC or the Service Corporation . . . American Electric Power Service Corporation, a service subsidiary of AEP. AFUDC . . . . . . . Allowance for funds used during construction. Defined in regulatory systems of accounts as the net cost of borrowed funds used for construction and a reasonable rate of return on other funds when so used. APCo. . . . . . . . Appalachian Power Company, a domestic electric utility subsidiary of AEP. Btu's . . . . . . . British Thermal Unit CAAA. . . . . . . . The Clean Air Act Amendments of 1990. CERCLA. . . . . . . The Comprehensive Environmental Response, Compensation and Liability Act. Also called Superfund. COLI. . . . . . . . Corporate owned life insurance. Conoco. . . . . . . An energy subsidiary of DuPont. Cook Plant. . . . . The Donald C. Cook Nuclear Plant, owned by I&M. CSPCo . . . . . . . Columbus Southern Power Company, a domestic electric utility subsidiary of AEP. CSW . . . . . . . . Central and South West Corporation, an electric utility holding company based in Dallas, Texas. DOE . . . . . . . . United States Department of Energy. D&P . . . . . . . . Duff & Phelps, LLC. EFC . . . . . . . . Electric Fuel Component, a portion of rates for Ohio companies designed to recover fuel costs. EITF. . . . . . . . Emerging Issues Task Force of the FASB. FASB. . . . . . . . Financial Accounting Standards Board. Federal EPA . . . . United States Environmental Protection Agency. FERC. . . . . . . . Federal Energy Regulatory Commission (an independent commission within the DOE). Gavin Plant . . . . A generating plant, consisting of two 1,300,000-kilowatt coal-fired generating units, near Cheshire, Ohio. I&M . . . . . . . . Indiana Michigan Power Company, a domestic electric utility subsidiary of AEP. IRS . . . . . . . . United States Internal Revenue Service. KEPCo or KPCo . . . Kentucky Power Company, a domestic electric utility subsidiary of AEP. KGPCo . . . . . . . Kingsport Power Company, a domestic electric utility subsidiary of AEP. KPSC. . . . . . . . Kentucky Public Service Commission. Kwh . . . . . . . . Kilowatthour. MW or mw. . . . . . Megawatt, 1000 Kwh. NAAQS . . . . . . . National Ambient Air Quality Standard as published and revised by the Federal EPA. NOx . . . . . . . . Nitrogen Oxide. NRC . . . . . . . . Nuclear Regulatory Commission. OPCo. . . . . . . . Ohio Power Company, a domestic electric utility subsidiary of AEP. OPEB. . . . . . . . Postretirement Benefits Other Than Pensions. OVEC. . . . . . . . Ohio Valley Electric Corporation, an electric utility company in which AEP and CSPCo own a 44.2% equity interest. PCBs. . . . . . . . Polychlorinated biphenyls. PRP . . . . . . . . "Potentially Responsible Parties" as designated by the Federal EPA. PUCO. . . . . . . . The Public Utilities Commission of Ohio. PUHCA or 1935 Act . Public Utility Holding Company Act of 1935, as amended. Rockport Plant. . . A generating plant, consisting of two 1,300,000-kilowatt coal-fired generating units, near Rockport, Indiana. SEC . . . . . . . . Securities and Exchange Commission. SEEBOARD. . . . . . CSW's UK distribution company. SFAS. . . . . . . . Statement of Financial Accounting Standards. SNF . . . . . . . . Spent Nuclear Fuel. S&P . . . . . . . . Standard & Poor's. Superfund . . . . . The Comprehensive Environmental Response, Compensation and Liability Act. Also called CERCLA. UK. . . . . . . . . United Kingdom. UMWA. . . . . . . . United Mine Workers of America. U.S.. . . . . . . . United States of America. VaR . . . . . . . . Value at Risk, a model that measures interest rate market risk exposure. Virginia SCC or VaSCC . . . . . . State Corporation Commission of Virginia. WPCo. . . . . . . . Wheeling Power Company, a domestic electric utility subsidiary of AEP. Yorkshire . . . . . Yorkshire Electricity Group plc, a United Kingdom distribution company of which 50% is indirectly owned by AEP Resources, Inc. Zimmer or Zimmer Plant. . . Wm. H. Zimmer Generating Station, commonly owned by CSPCo, Cincinnati Gas & Electric and Dayton Power & Light. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, 1997 1996 1995 1994 1993 INCOME STATEMENTS DATA (in millions): Operating Revenues $6,161 $5,849 $5,670 $5,505 $5,269 Operating Income 984 1,008 965 932 929 Income Before Extraordinary Item 620 587 530 500 354 Extraordinary Loss - UK Windfall Tax 109 - - - - Net Income 511 587 530 500 354 December 31, 1997 1996 1995 1994 1993 BALANCE SHEETS DATA (in millions): Electric Utility Plant $19,597 $18,970 $18,496 $18,175 $17,712 Accumulated Depreciation and Amortization 7,964 7,550 7,111 6,827 6,612 Net Electric Utility Plant $11,633 $11,420 $11,385 $11,348 $11,100 Total Assets $16,615 $15,883 $15,900 $15,736 $15,359 Common Shareholders' Equity 4,677 4,545 4,340 4,229 4,151 Cumulative Preferred Stocks of Subsidiaries: Not Subject to Mandatory Redemption 47 90 148 233 268 Subject to Mandatory Redemption* 128 510 523 590 501 Long-term Debt* 5,424 4,884 5,057 4,980 4,995 Obligations Under Capital Leases* 538 414 405 400 284 *Including portion due within one year Year Ended December 31, 1997 1996 1995 1994 1993 COMMON STOCK DATA: Earnings per Common Share: Before Extraordinary Item $ 3.28 $3.14 $2.85 $2.71 $1.92 Extraordinary Loss - UK Windfall Tax (0.58) - - - - Net Income $ 2.70 $3.14 $2.85 $2.71 $1.92 Average Number of Shares Outstanding (in thousands) 189,039 187,321 185,847 184,666 184,535 Market Price Range: High $ 52 $44-3/4 $40-5/8 $37-3/8 $40-3/8 Low 39-1/8 38-5/8 31-1/4 27-1/4 32 Year-end Market Price 51-5/8 41-1/8 40-1/2 32-7/8 37-1/8 Cash Dividends Paid $2.40 $2.40 $2.40 $2.40 $2.40 Dividend Payout Ratio 88.7%(a) 76.5% 84.1% 88.6% 125.2% Book Value per Share $24.62 $24.15 $23.25 $22.83 $22.50 (a) Dividend Payout Ratio before Extraordinary Loss - UK Windfall Tax is 73.1%.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect assumptions, and involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are: electric load and customer growth; abnormal weather conditions; available sources and costs of fuels and availability of generating capacity; the speed and degree to which competition is introduced to our power generation business, the terms of the transition to competition, and its impact on rate structures; the ability to recover stranded costs, new legislation and government regulations, the ability of the Company to successfully reduce its costs including synergy estimates; the degree to which the Company develops non-regulated business ventures and their success; the economic climate and growth in our service territory; inflationary trends, interest rates and other risks. In 1997 management took several major steps towards our growth oriented goal of being America's Energy Partner and a global energy and related services company. Construction of a 250-megawatt generating station in China, jointly owned with two Chinese partners, progressed on schedule and within budget. In April, the Company and New Century Energies, Inc. acquired Yorkshire, a UK distribution company. The Yorkshire investment is accounted for using the equity method. A new power marketing business was launched in July contributing significantly to our operating revenues which surpassed $6 billion for the first time. A joint venture with Conoco was announced in October that will provide energy management services as well as financing of steam and electric generation facilities at large commercial and industrial plant sites including initially 16 Conoco and Dupont plant sites. The completion of agreements for the joint venture companies and the commencement of operations are expected in 1998. In December 1997 AEP and Central and South West Corporation agreed to merge. The merger is subject to approval by regulators and shareholders. Completion of the merger is expected to occur in the first half of 1999. CSW, a Dallas-based public utility holding company, owns four domestic electric utility subsidiaries serving 1.7 million customers in portions of Texas, Oklahoma, Louisiana and Arkansas and a regional electricity company in the UK. Other international energy operations and non-utility subsidiaries owned by CSW are involved in energy-related investments, telecommunications, energy efficiency services and financial transactions. Income Before Extraordinary Loss Increases AEP's 1997 income before an extraordinary loss, the one-time UK Windfall Tax, increased 6% to $620 million or $3.28 per share from $587 million or $3.14 per share in 1996. The increase was primarily attributable to increased transmission service revenues, reduced preferred stock dividends due to a redemption program and an increase in nonoperating income from the April 1997 investment in Yorkshire exclusive of the extraordinary loss. Net income inclusive of the $109 million extraordinary loss decreased $76 million or 13% primarily due to the UK one-time windfall tax which was based on a revision or recomputation of the original privatization value of certain privatized utilities, including Yorkshire. For further details regarding changes in operating revenues and expenses, taxes and nonoperating investment earnings in 1997 and 1996 see Results of Operations. Business Outlook The Company's ability to recover its costs as the industry transitions to competition and as customer choice is more broadly available is the most significant factor affecting its future. Competition in the wholesale generation market continues to intensify since the adoption of federal legislation in 1992 which gave wholesale customers the right to choose their energy supplier and the FERC orders issued in 1996 which forced open access transmission. The introduction of competition and customer choice for retail customers has been slow although activity has been increasing. Federal legislation has been proposed to mandate competition and customer choice at the retail level, and several states have introduced or are considering similar legislation. All of our states have initiatives to move to customer choice that will phase-in or allow for a transition to competition, although the timing is uncertain. The Company supports customer choice and is proactively involved in discussions at both the state and federal levels regarding how best to structure and transition to a competitive marketplace. As the cost of generation in the electric energy market evolves from cost-of-service ratemaking to market-based pricing, many complex issues must be resolved, including the recovery of stranded costs. While FERC orders No. 888 and 889 provide, under certain conditions, for recovery of stranded cost at the wholesale level, the issue of stranded cost is unresolved at the much larger retail level. The amount of any stranded costs we may experience depends on the timing and extent to which direct competition is introduced to our business and the then-existing market price of electricity. Under the provisions of SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation," regulatory assets (deferred expenses) and regulatory liabilities (deferred revenues) are included in the consolidated balance sheets of regulated utilities in accordance with regulatory actions and in order to match expenses and revenues with cost-based rates. In order to maintain net regulatory assets (net expense deferrals) on the balance sheet, SFAS No. 71 requires that rates charged to customers be cost-based. In the event a portion of AEP's business no longer meets the requirements of SFAS No. 71, net regulatory assets would have to be written off for that portion of the business. The provisions of SFAS No. 71 and SFAS No. 101 "Accounting for the Discontinuance of Application of Statement No. 71" never anticipated that deregulation would include an extended transition period or that it would provide for recovery of stranded costs after the transition period. In July 1997 the FASB's EITF reached a consensus that the application of SFAS No. 71 to a segment of a regulated electric utility which is subject to a legislative plan to transition to competition in that segment should cease when the legislation is passed or an enabling rate order is issued containing sufficient detail for the utility to reasonably determine what the plan would entail. The EITF indicated that the cessation of application of SFAS 71 would require that regulatory assets and impaired plant be written off unless they are recoverable. Although FERC orders No. 888 and 889 provide for competition in the firm wholesale market, that market is a relatively small part of our business and most of our firm wholesale sales are still under cost-of-service contracts. As a result AEP's generation business is still cost-based regulated and should remain so for the near future pending the passage of enabling state legislation to deregulate the generation business. We believe that enabling state legislation should provide for the recovery of any generation-related net regulatory assets and other reasonable stranded costs from impaired generation assets. We are working with regulators, customers and legislators to provide for recovery of these stranded costs during a transition period in which rates are fixed or frozen and electric utilities would take steps to achieve cost savings which would be used to reduce or eliminate their stranded costs. However, if in the future AEP's generation business were to no longer be cost-based regulated and if it were not possible to demonstrate probability of recovery of resultant stranded costs including regulatory assets, results of operations, cash flows and financial condition would be adversely affected. Cost Containment and Process Improvements Efforts continue by AEP to reduce the costs of its products and services in order to maintain our competitiveness. Prior to 1997, reviews of our major domestic processes led to decisions to consolidate management and certain functions and operations and improve certain major processes. While staff reductions and cost savings resulting from the restructuring and improvements are presently being achieved, expenses for new marketing, customer services and modern efficient management information systems are increasing to prepare for competition. In 1997 the costs of these efforts to prepare for competition offset the savings from restructuring. In 1997, AEP also began installing a new unified customer service system which is designed to support the request for service, billings, accounts receivable, credit and collection functions. AEP's new unified customer service system replaces a 30-year-old customer system and a nine-year-old transmission and distribution work management system. Process improvement efforts and expenditures to develop and implement the new customer service system and similar efforts and expenditures to acquire, install and enhance new client server-based accounting and budgeting/financial planning software should produce further improvements and efficiencies, enabling AEP to continue to offer its customers excellent service at competitive prices. Fuel Costs AEP recognizes that it must continue to manage coal costs to maintain its competitive position. Approximately 90% of AEP's generation is coal fired and approximately 17% of the 53 million tons of coal burned in 1997 were supplied by affiliated mines with the remainder acquired under long-term contracts and purchases in the spot market. As long-term contracts expire we are negotiating with unaffiliated suppliers to lower coal costs. We intend to continue to prudently supplement our long-term coal supplies with spot market purchases as long as favorable spot market prices exist. In prior years we have agreed in our Ohio jurisdiction to certain limitations on the recovery of affiliated coal costs. Our analysis shows that we should be able to recover the Ohio jurisdictional portion of the costs of our affiliated mining operations including future mine closure costs. Management intends to seek recovery of its non-Ohio jurisdictional portion of the investment in and the liabilities and closing costs of our affiliated mines estimated at $102 million after tax. However, should it become apparent that these affiliated mining costs will not be recovered from Ohio and/or non-Ohio jurisdictional customers, the mines may have to be closed and future earnings and possibly financial condition could be adversely affected. In addition compliance with Phase II requirements of the CAAA, which become effective in January 2000, could also cause the mining operations to close. Unless the cost of any mine closure is recovered either in regulated rates or as a stranded cost under a plan to transition the generation business to competition, future earnings, cash flows and possibly financial condition could be adversely affected. Nuclear Costs Significant efforts have been made to enhance our competitiveness in nuclear power generation and to improve our nuclear organizational efficiency. In 1997 we continued to receive the "excellence in performance" award from the Institute of Nuclear Power Operations. Nuclear power plants have a major future financial commitment to safely dispose of SNF and radioactive plant components (i.e. to decommission the plant). It is difficult to reduce nuclear generation costs since certain major cost components are impacted by federal laws and NRC regulations. The Nuclear Waste Policy Act of 1982 established federal responsibility for the permanent off-site disposal of SNF and high-level radioactive waste. By law we participate in the DOE's SNF disposal program which is described in Note 4 of the Notes to Consolidated Financial Statements. Since 1983 our customers have paid $272 million for the disposal of nuclear fuel consumed at the Cook Plant. Under the provisions of the Nuclear Waste Policy Act, collections from customers are to provide the DOE with money to build a repository for spent fuel. To date the federal government has not made sufficient progress towards a permanent repository or otherwise assuming responsibility for SNF. As long as there is a delay in the construction of a government approved storage repository for SNF, the cost of both temporary and permanent storage will continue to increase. The cost to decommission the Cook Plant is affected by both NRC regulations and the DOE's SNF disposal program. Studies completed in 1997 estimate the cost to decommission the Cook Plant range from $700 million to $1.152 billion in 1997 dollars. This estimate could escalate due to uncertainty in the DOE's SNF disposal program and the length of time that SNF may need to be stored at the plant site delaying decommissioning. Presently we are recovering the estimated cost of decommissioning the Cook Plant over its remaining life. However, AEP's future results of operations, cash flows and possibly its financial condition could be adversely affected if the cost of SNF disposal and decommissioning continues to increase and cannot be recovered. On September 9 and 10, 1997, during a 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 Plant. On September 19, 1997, the NRC issued a Confirmatory Action Letter requiring the Company to address the issues identified in the letter. The Company is working with the NRC to resolve these issues and other issues related to restart of the units. Certain issued identified in the letter have been addressed. At this time management is unable to determine when the units will be returned to service. If the units are not returned to service in a reasonable period of time, it could have an adverse impact on results of operations, cash flows and possibly financial condition. Environmental Concerns We take great pride in our efforts to economically produce and deliver electricity while minimizing the impact on the environment. Over the years AEP has spent over a billion dollars to equip our facilities with the latest cost effective clean air and water technologies and to research possible new technologies. We are also proud of our award winning efforts to reclaim our mining properties. We intend to continue in a leadership role fostering economically prudent efforts to protect and preserve the environment. Hazardous Material By-products from the generation of electricity include materials such as ash, slag, sludge, low-level radioactive waste and SNF. Coal combustion by-products, which constitute the overwhelming percentage of these materials, are typically disposed of or treated in captive disposal facilities or are beneficially utilized. In addition, our generating plants and transmission and distribution facilities have used asbestos, PCBs and other hazardous and nonhazardous materials. We are currently incurring costs to safely dispose of such substances. Additional costs could be incurred to comply with new laws and regulations if enacted. CERCLA or Superfund addresses clean-up of hazardous substances at disposal sites and authorized the Federal EPA to administer the clean-up programs. As of year-end 1997, we are involved in litigation with respect to five sites overseen by the Federal EPA and have been named by the Federal EPA as PRPs for seven other sites. There are seven additional sites for which AEP companies have received information requests which could lead to PRP designation. Also, an AEP subsidiary has received an information request with respect to one site administered by state authorities. Our liability has been resolved for a number of sites with no significant effect on results of operations. In those instances where we have been named a PRP or defendant, our disposal or recycling activity was in accordance with the then-applicable laws and regulations. Unfortunately, CERCLA does not recognize compliance as a defense, but imposes strict liability on parties who fall within its broad statutory categories. While the potential liability for each Superfund site must be evaluated separately, several general statements can be made regarding our potential future liability. Disposal at a particular site by AEP is often unsubstantiated; the quantity of material we disposed of at a site was generally small; and the nature of the material we generally disposed of was nonhazardous. Typically, we are one of many parties named as PRPs for a site and, although liability is joint and several, generally some of the other parties are financially sound enterprises. Therefore, our present estimates do not anticipate material cleanup costs for identified sites for which we have been declared PRPs. However, if for reasons not currently identified significant cleanup costs are attributed to AEP in the future, results of operations, cash flows and possibly financial condition would be adversely affected unless the costs can be recovered from customers. Federal EPA Actions Federal EPA is required by the CAAA to issue rules to implement the law. In December 1996 Federal EPA issued final rules governing NOx emissions that must be met after January 1, 2000 (Phase II of the CAAA). The final rules will require substantial reductions in NOx emissions from certain types of boilers including those in AEP's power plants. On February 13, 1998, the United States Court of Appeals for the District of Columbia Circuit, in an appeal in which the AEP System operating companies participated, upheld the emission limitations. In addition in November 1997 the Federal EPA published a proposed rulemaking 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 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. Eight northeast states have petitioned Federal EPA for the imposition of additional NOx controls for upwind industrial and utility sources. The matter is being litigated. The costs to comply with the emission reductions required by the Federal EPA's actions are expected to be substantial and would have a material adverse impact on future results of operations, cash flows and possibly financial condition if the resultant costs are not recovered from customers. In 1997 the Federal EPA published a revised ambient air quality standard for ozone and established a new ambient air quality standard for fine particulate matter. These standards are expected to result in redesignation of a number of areas of the country currently in compliance with the existing standard to nonattainment status which could ultimately dictate more stringent emission restrictions for AEP generating units. Under the new rules the states must first determine whether the standards are being achieved. The states then have three years to submit a compliance plan and up to ten years after designation to come into compliance with the new standards. The compliance deadline could be as late as 2010 for the ozone standard and 2012-2015 for the fine particulate standard. Although we are reviewing the impact of the new rules, we are unable to estimate compliance costs without knowledge of the reductions that will be necessary to meet the new standards. If such reductions are significant and the Company must bear a significant portion of the cost of compliance in a region that is in violation of the revised standards, it would have a material adverse effect on results of operations, cash flows and possibly financial condition unless such costs are recovered from customers. At the global climate conference in Kyoto, Japan in December 1997 more than 160 countries, including the United States, negotiated a treaty limiting emissions of greenhouse gases, chiefly carbon dioxide, which may eventually contribute to global warming. Although there is no clear scientific evidence that carbon dioxide contributes to global warming and damages the environment, the treaty, which requires Congressional approval, calls for a seven percent reduction below the emission levels of greenhouse gases in 1990. We intend to work with Congress to insure that science and reason are introduced to the debate. If approved by Congress the costs to comply with the emission reductions required by the Kyoto treaty is expected to be substantial and would have a material adverse impact on results of operations, cash flows and possibly financial condition if not recovered from customers. Results of Operations Net Income Declines Due to Extraordinary Loss Net income decreased 13% to $511 million primarily due to an extraordinary loss of $109 million from the UK's one-time windfall tax which was based on a retroactive revaluation of the original privatization price of certain privatized utilities, including Yorkshire. Income before the extraordinary loss increased 6% in 1997 to $620 million or $3.28 per share from $587 million or $3.14 per share in 1996. The increase is primarily attributable to increased transmission service sales, reduced preferred stock dividends due to a redemption program and an increase in nonoperating income from the April 1997 investment in Yorkshire exclusive of the extraordinary loss. In 1996 net income increased 11% to $587 million or $3.14 per share from $530 million or $2.85 per share in 1995. The increase was mainly attributable to increased sales of energy and services and reduced interest charges and preferred stock dividends. Sales increased due to increased transmission and other services provided to power marketers and utilities and increased energy sales to non-affiliated utilities and industrial customers. The reduction in interest and preferred stock dividends resulted from the Company's refinancing program. Also contributing to the improvement in net income in 1996 were severance pay charges recorded in 1995 in connection with the restructuring of management and operations and gains recorded in 1996 from emission allowance transactions. Revenues and Sales Increase Operating revenues increased 5% in 1997 and 3% in 1996. Increased wholesale energy sales and transmission and coal conversion service revenues were the primary reasons for the increases in both years. The change in revenues can be analyzed as follows: Increase (Decrease) From Previous Year (Dollars in Millions) 1997 1996 Amount % Amount % Retail: Price Variance $(44.0) $ (42.9) Volume Variance 2.4 63.7 Fuel Cost Recoveries 27.3 15.0 (14.3) (0.3) 35.8 0.7 Wholesale: Price Variance 9.6 (202.0) Volume Variance 269.7 317.3 Fuel Cost Recoveries 8.3 (3.6) 287.6 36.3 111.7 16.4 Other Operating Revenues 38.8 31.4 Total $312.1 5.3 $ 178.9 3.2 The slight decrease in retail revenues in 1997 was largely due to a decline in higher priced sales to weather-sensitive residential customers reflecting mild weather. The decline in residential sales was completely offset by an increase in lower priced sales to industrial customers, reflecting increased usage which resulted in a small increase in total retail energy sales. The negative price variance resulted from the shift from higher priced residential sales to lower priced industrial sales. In 1997 wholesale revenues and sales increased significantly primarily due to new power marketing transactions which began in July 1997 when AEP commenced a power marketing business. The new power marketing transactions involve the substantial purchase and sale of electricity outside of the AEP transmission system. An increase in coal conversion service sales also contributed to the significant increase in wholesale sales and revenues. These sales are for the generation of electricity from the coal of the purchaser. An increase of $33 million in transmission service revenues produced the increase in other operating revenues in 1997. Transmission service revenues are for the transmission of other companies' power through AEP's extensive transmission system. These revenues have increased significantly since the issuance of the FERC's open access transmission rules in 1996. In 1996 retail revenues increased slightly due to growth in the number of customers and the addition of a major new industrial customer in December 1995. Revenues from higher priced sales to residential customers, the most weather-sensitive customer class, were flat, increasing less than one percent, as the effect of cold winter weather in early 1996 was offset by mild summer and December temperatures. Revenues from lower priced commercial and industrial customers increased 1% reflecting growth in the number of customers. The increase in lower priced commercial and industrial sales accounted for the negative price variance in 1996. Wholesale revenues increased 16% in 1996 reflecting a 46% increase in wholesale sales attributable largely to transactions with power marketers and other utilities. During 1996 the Company began providing coal conversion services resulting in 6.8 billion kilowatthours of electricity generated for power marketers and certain other utilities from their coal under a new FERC-approved interruptible, contingent sales tariff. These sales have lower prices because there is no associated fuel cost. As a result the average price per kilowatthour was significantly less in 1996 than in 1995 producing a negative price variance. Also contributing to the increased wholesale sales was a long-term contract with an unaffiliated utility to supply 205 MW of energy for 15 years beginning January 1, 1996. An increased level of activity in the wholesale energy markets, due to FERC's open access rulemaking and AEP's aggressive efforts to provide flexible and competitively priced transmission services led to an increase in transmission service revenues in 1996. As a result transmission service revenues, which are recorded in other operating revenues, increased by approximately $24 million. The level of wholesale sales tends to fluctuate due to the highly competitive nature of the short-term energy market and other factors, such as affiliated and unaffiliated generating plant availability, the weather and the economy. The FERC rules which introduce a greater degree of competition into the wholesale energy market have had the effect of increasing short-term wholesale sales and transmission service revenues. The Company's sales and in turn its results of operations were impacted in 1997 and 1996 by the quantities of energy and services sold to wholesale customers. Future results of operations will be affected by the quantity and price of wholesale transactions which often depend on the level of competition, the weather and power plant availability, both affiliated and non-affiliated, factors the Company does not control. However, we work to take advantage of these factors when they are favorable. Operating Expenses Increase Operating expenses increased 7% in 1997 and 3% in 1996. Increased purchased power expense, mainly from the Company's new power marketing business, was the primary reason for the 1997 increase. New marketing, customer services and software costs to prepare for competition also contributed to the increase. The primary items accounting for the increase in 1996 were increased fuel costs, federal income taxes and expenditures for marketing, information systems and other items necessary to prepare for the transition to competition. Changes in the components of operating expenses were as follows: Increase (Decrease) From Previous Year (Dollars in Millions) 1997 1996 Amount % Amount % Fuel $ 26.4 1.6 $ 63.5 4.1 Purchased Power 330.2 383.5 (2.3) (2.6) Other Operation 17.3 1.4 25.9 2.2 Maintenance (19.6) (3.9) (39.0) (7.2) Depreciation and Amortization (9.7) (1.6) 7.8 1.3 Taxes Other Than Federal Income Taxes (8.0) (1.6) 9.4 1.9 Federal Income Taxes (0.9) (0.3) 70.2 25.8 Total $335.7 6.9 $135.5 2.9 Fuel expense increased in 1997 primarily due to an increase in the average cost of fuel consumed reflecting the reduced availability of lower cost nuclear generation in 1997 due to the unplanned shutdown and maintenance outage of both nuclear units which began on September 10 and continued through year-end. The increase in fuel expense in 1996 was primarily due to an increase in generation to meet the increase in industrial and wholesale customer demand. The effect of increased generation was partially offset by reduced average fossil fuel costs, resulting from increased usage of lower cost spot market coal, and lower cost nuclear fuel. The significant increase in purchased power expense in 1997 was primarily due to purchases of electricity for the new power marketing business. These purchases were made to cover sales made to non-affiliates by the new power marketers. In 1997 restructuring savings in other operation expense were more than offset by additional expenses for marketing, customer service and software costs to prepare for the service demands of competition. Maintenance expense decreased in 1996 due to the deferral of previously expensed storm damage costs commensurate with their recovery over 5-years and reduced nuclear plant maintenance expense due to workforce reductions and the reduction of contract labor at the Cook Nuclear Plant. The increase in federal income tax expense attributable to operations in 1996 was primarily due to an increase in pre-tax operating income and changes in certain book/tax differences accounted for on a flow-through basis and certain permanent differences. Nonoperating Income The increase in nonoperating income in 1997 was mainly due to income from non-regulated operations. The Company's share of earnings from its April 1997 investment in Yorkshire was $34 million which includes $10 million of nonrecurring tax benefits related to a reduction of the UK corporate income tax rate from 33% to 31% effective April 1,1997. The utilization of foreign tax credits also contributed to the increase in nonoperating income. Nonoperating income decreased in 1996 due to the cost of the AEP branding program and the cost of efforts to develop and make investment in new non-regulated business ventures. Interest Charges and Preferred Stock Dividend Requirements In 1997 interest charges on both long-term and short-term debt increased reflecting additional borrowing primarily to fund the Company's non-regulated operations including the investment in Yorkshire. Preferred stock dividend requirements of the subsidiaries decreased in 1997 due to the reacquisition of over 4 million shares of cumulative preferred stock. The decrease in interest charges and preferred stock dividend requirements in 1996 was mainly due to continued refinancing programs of the Company's subsidiaries. The refinancings reduced the average interest rate and the amount of long-term debt and preferred stock outstanding. The cost of short-term borrowings in 1996 increased slightly reflecting an increased average balance of short-term debt outstanding. Financial Condition In 1997 AEP maintained its strong financial condition and performance in shareholder value. The year-end closing stock price of $51-5/8 was 25.5% higher than the prior year and 57% greater than the 1994 closing price. The Company paid a quarterly dividend in 1997 of 60 cents a share maintaining the annual dividend rate at $2.40 per share. The 1997 payout ratio before extraordinary loss at 73% was 3% better than 1996's and 15% better than 1994's. It has been a management objective to reduce the payout ratio through efforts to increase earnings in order to enhance AEP's ability to invest in new business ventures that can complement our core competencies and improve shareholder value. AEP's three-year total shareholder return ranked fourth among the companies in the S&P Electric Utility Index. This marked the fourth straight year in the top quartile of the Index. Management's goal is to maintain our position in the top quartile of the S&P Electric Utility Index for three-year total shareholder return. Capital Investments The total consideration paid in 1997 by a joint venture of AEP and an unaffiliated company to acquire Yorkshire was approximately $2.4 billion which was financed by a combination of equity and non-recourse debt. AEP initially funded its 50% equity investment in the joint venture with $50 million in cash, a $300 million adjustable rate term loan under a long-term revolving credit agreement and $10 million of short-term debt. For more information see Note 7 of the Notes to Consolidated Financial Statements. Also the Company's 70% interest in the construction of two 125 MW units in China will require approximately $110 million of investment. AEP's construction expenditures are expected to be $2.4 billion over the next three years which includes the Cook Plant's Unit 1 steam generator replacement, the China project and the cost of transmission and distribution projects for the improvement of and addition to electric energy delivery facilities. Approximately 90% of domestic construction expenditures, estimated to be $2.3 billion for the next three years, will be financed with internally generated funds. Capital Resources - Structure and Liquidity AEP achieved a year-end ratio of common equity to total capitalization including amounts due within one year of 45.5% for 1997, compared with 45.3% for 1996 and 43.1% for 1995. The Company's goal is to maintain the common equity ratio at a level of at least 40 percent. During 1997 the Company and its subsidiaries continued redefining and improving their debt to equity position. The Company's regulated subsidiaries redeemed 4,258,947 shares of cumulative preferred stock with rates ranging from 4.08% to 7.875% at a total cost of $433 million. The subsidiaries used short-term debt and junior subordinated deferrable interest debentures to pay for the preferred stock tendered and to benefit from the tax deductibility of interest. The Company and its subsidiaries issued $882 million principal amount of long-term obligations in 1997 at interest rates ranging from 5.9% to 8.0%. The companies continued to reduce financing costs by retiring higher-cost bonds and restructuring the long-term debt from senior secured/first mortgage bonds to senior unsecured debt and junior debentures. The principal amount of long-term debt retirements, including maturities, totaled $343 million with interest rates ranging from 6.5% to 9.35%. Our operating subsidiaries senior secured debt/first mortgage bond ratings, which were reaffirmed and improved in 1997, are listed in the following table: Company Moody's S&P Fitch D & P APCo A3 A A A CSPCo A3 A- A- A I&M Baa1 A- BBB+ N/A KPCo Baa1 A BBB+ N/A OPCo A3 A- A- A N/A = Not applicable The operating subsidiaries generally issue short-term debt to provide for interim financing of capital expenditures that exceed internally generated funds. They periodically reduce their outstanding short-term debt through issuances of long-term debt and additional capital contributions by the parent company. The companies formed to pursue non-regulated business opportunities are using short-term debt. Short-term debt increased $235 million from the prior year-end balance and decreased by $45 million in 1996. At December 31, 1997, AEP Co., Inc. (the parent company) and its subsidiaries had unused short-term lines of credit of $442 million, and several of AEP's subsidiaries engaged in non-regulated investments and energy businesses had available $330 million under a $600 million revolving credit agreement which expires in 1999. The sources of funds available to AEP are dividends from its subsidiaries, short-term and long-term borrowings and, when necessary, proceeds from the issuance of common stock. AEP issued 1,755,000 shares in 1997, 1,600,000 shares in 1996 and 1,400,000 shares in 1995 of common stock through a Dividend Reinvestment Program and the Employee Savings Plan raising $77 million, $65 million and $49 million, respectively. The following debt and preferred stock coverages of the principal operating subsidiaries remained strong in 1997: Coverages at December 31, 1997 Preferred Mortgage Stock APCo 3.72 1.92 CSPCo 4.95 N/A I&M 7.57 2.88 KPCo 4.23 N/A OPCo 9.74 3.67 N/A = Not Applicable Unless the subsidiaries meet certain earnings or coverage tests, they cannot issue additional mortgage bonds or preferred stock. In order to issue mortgage bonds (without refunding existing debt), each subsidiary must have pre-tax earnings equal to at least two times the annual interest charges on mortgage bonds after giving effect to the issuance of the new debt. Generally, issuance of additional preferred stock requires after-tax gross income at least equal to one and one-half times annual interest and preferred stock dividend requirements after giving effect to the issuance of the new preferred stock. As the above chart indicates, the subsidiaries presently exceed these minimum coverage requirements. Merger In December 1997 AEP and CSW announced that their boards of directors approved a definitive merger agreement for a tax-free, stock-for-stock business combination transaction which if consummated would bring AEP's total market capitalization to approximately $28 billion. The combination is expected to be accounted for as a pooling of interests. Under the agreement, each common share of CSW will be converted to 0.6 shares of AEP. Based on the number of CSW common shares outstanding at December 31, 1997, AEP will issue approximately 127 million shares to CSW common stockholders (valued at $6.6 billion based on the closing price on the last trading day prior to the announcement of the merger). Under the merger agreement, there will be no changes with respect to the public debt issues or the outstanding preferred stock of AEP, CSW or their subsidiaries. The merger is conditioned, among other things, upon the approval of each company's shareholders and certain state and federal regulatory agencies. The companies anticipate that the required regulatory approvals can be obtained in 12 to 18 months. AEP is requesting regulatory and shareholder approval to increase the number of authorized shares from 300,000,000 to 600,000,000 in connection with the merger. Market Risks The Company as a major power producer and a trader of electricity and gas has certain financial market risks inherent in its routine business activities. The trading of electricity and gas and related future contracts exposes the Company to commodity price fluctuations. Market risk represents the risk of loss that may impact the Company's consolidated financial position, results of operations or cash flows due to adverse changes in market prices and rates. As trading activity increases and the market for power evolves this risk will become much greater. Various policies and procedures have been established to manage market risks exposures including the limited usage of energy related derivatives. In its regular business activities, certain trading positions of the Company for electric and gas creates exposure to price volatility for those products. These commodities are subject to unpredictable price fluctuations due to changing economic and weather conditions. During 1997 the Company initiated a power and gas marketing operation that manages the Company's exposure to future price movements using forwards, futures and options. At December 31, 1997, the exposure for financial derivatives in these marketing activities were not material to the Company's consolidated results of operations, financial position or cash flows. Investment in two foreign currency denominated joint ventures also exposes the Company to currency translation rate risk. At December 31, 1997, the Company's exposure to changes in foreign currency exchange rates related to projects in the UK and China is not material to its consolidated financial position, results of operations or cash flows. The Company does not presently utilize derivatives to manage its exposures to foreign currency exchange rate movements. The Company is exposed to changes in interest rates primarily due to short- and long-term borrowings to fund its business operations. The debt portfolio has both fixed and variable interest rates, terms from one day to thirty years and an average duration of eight years at December 31, 1997. The Company measures interest rate market risk exposure utilizing a VaR model. The model is based on the Monte Carlo method of simulated price movements with a 95% confidence level and a one year holding period. The volatilities and correlations were based on three years of monthly prices. The risk of potential loss in fair value attributable to the Company's exposure to interest rates, primarily related to long-term debt with fixed interest rates, was $501 million at December 31, 1997. A near term change in interest rates would not materially affect the consolidated financial position or results of operations of the Company. The Company is not currently utilizing derivatives to manage its exposure to interest rate fluctuations. The Company has investments in debt and equity securities which are held in trust funds to decommission its nuclear plant. Approximately 85% of the trust fund value is invested in tax exempt and taxable bonds, short-term debt instruments or cash. The trust investments and their fair value are discussed in Note 9 of the Notes to Consolidated Financial Statements. Instruments in the trust funds have not been included in the market risk calculation for interest rates as these instruments are marked-to-market and changes in market value are reflected in a corresponding decommissioning liability. Any differences between trust fund and ultimate liability are recoverable from ratepayers. Inflation affects AEP's cost of replacing utility plant and the cost of operating and maintaining its plant. The rate-making process limits our recovery to the historical cost of assets resulting in economic losses when the effects of inflation are not recovered from customers on a timely basis. However, economic gains that result from the repayment of long-term debt with inflated dollars partly offset such losses. Other Matters Corporate Owned Life Insurance In connection with the audit of AEP's consolidated federal income tax returns the IRS agents sought a ruling from the IRS National Office that certain interest deductions relating to a COLI program should not be allowed. The Company established the COLI program in 1990 as a part of its strategy to fund and reduce the cost of medical benefits for retired employees. AEP filed a brief with the IRS National Office refuting the agents' position. No adjustments have been proposed by the IRS. However, should a full disallowance of COLI interest deductions be proposed it would, if sustained, reduce earnings by approximately $286 million (including interest). AEP believes it has meritorious defenses and will vigorously contest any proposed adjustments. No provisions for this amount have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations and cash flows. Computer Software - Year 2000 Compliance Many existing computer hardware and software programs will not properly recognize calendar dates beginning in the year 2000. Unless corrected, this "Year 2000" problem may cause computer malfunctions, such as system shutdowns or incorrect calculations and system output. The Company is addressing the problem internally by modifying or replacing its computer hardware and software programs to mitigate its risk, minimize technical failures, and repair such failures if they occur. The problem is also being addressed externally with entities that interact electronically with the Company, including but not limited to, suppliers, service providers, government agencies, customers, creditors and financial service organizations. However, due to the complexity of the problem and the interdependent nature of computer systems, if the Company's corrective actions, and/or the actions of other interdependent entities, fail for critical applications, the Company may be adversely impacted in the year 2000. Although significant, the cost of correcting the "Year 2000" problem is not expected to have a material impact on results of operations, cash flows or financial condition. New Accounting Standards In June 1997 the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all other changes in equity except those resulting from investments by shareholders and dispositions to shareholders. SFAS No. 131 initiates standards for reporting information about operating segments in annual and interim financial statements as well as related disclosures about products and services, geographic areas and major customers. AEP's adoption of these new reporting standards in 1998 is not expected to have a material adverse effect on the results of operations, cash flows and/or financial condition. Litigation AEP is involved in a number of legal proceedings and claims. While we are unable to predict the outcome of such litigation, it is not expected that the ultimate resolution of these matters will have a material adverse effect on the results of operations, cash flows and/or financial condition. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME (in thousands - except per share amounts)
Year Ended December 31, 1997 1996 1995 OPERATING REVENUES $6,161,368 $5,849,234 $5,670,330 OPERATING EXPENSES: Fuel 1,627,066 1,600,659 1,537,135 Purchased Power 416,266 86,095 88,396 Other Operation 1,227,368 1,210,027 1,184,158 Maintenance 483,268 502,841 541,825 Depreciation and Amortization 591,071 600,851 593,019 Taxes Other Than Federal Income Taxes 490,595 498,567 489,223 Federal Income Taxes 341,280 342,222 272,027 TOTAL OPERATING EXPENSES 5,176,914 4,841,262 4,705,783 OPERATING INCOME 984,454 1,007,972 964,547 NONOPERATING INCOME (net) 59,572 2,212 20,204 INCOME BEFORE INTEREST CHARGES AND PREFERRED DIVIDENDS 1,044,026 1,010,184 984,751 INTEREST CHARGES 405,815 381,328 400,077 PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES 17,831 41,426 54,771 INCOME BEFORE EXTRAORDINARY ITEM 620,380 587,430 529,903 EXTRAORDINARY LOSS - UK WINDFALL TAX (109,419) - - NET INCOME $ 510,961 $ 587,430 $ 529,903 AVERAGE NUMBER OF SHARES OUTSTANDING 189,039 187,321 185,847 EARNINGS PER SHARE: Before Extraordinary Item $3.28 $3.14 $2.85 Extraordinary Loss (0.58) - - Net Income $2.70 $3.14 $2.85 CASH DIVIDENDS PAID PER SHARE $2.40 $2.40 $2.40 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (in thousands) Year Ended December 31, 1997 1996 1995 RETAINED EARNINGS JANUARY 1 $1,547,746 $1,409,645 $1,325,581 NET INCOME 510,961 587,430 529,903 DEDUCTIONS: Cash Dividends Declared 453,453 449,353 445,831 Other 237 (24) 8 RETAINED EARNINGS DECEMBER 31 $1,605,017 $1,547,746 $1,409,645 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (in thousands - except share data)
December 31, 1997 1996 ASSETS ELECTRIC UTILITY PLANT: Production $ 9,493,158 $ 9,341,849 Transmission 3,501,580 3,380,258 Distribution 4,654,234 4,402,449 General (including mining assets and nuclear fuel) 1,604,671 1,491,781 Construction Work in Progress 342,842 353,832 Total Electric Utility Plant 19,596,485 18,970,169 Accumulated Depreciation and Amortization 7,963,636 7,549,798 NET ELECTRIC UTILITY PLANT 11,632,849 11,420,371 OTHER PROPERTY AND INVESTMENTS 1,358,810 892,674 CURRENT ASSETS: Cash and Cash Equivalents 91,481 57,539 Accounts Receivable: Customers (less allowance for uncollectible accounts of $6,760 in 1997 and $3,692 in 1996) 552,443 415,413 Miscellaneous 115,075 115,919 Fuel - at average cost 224,967 235,257 Materials and Supplies - at average cost 263,613 251,896 Accrued Utility Revenues 189,191 174,966 Prepayments and Other 81,366 103,891 TOTAL CURRENT ASSETS 1,518,136 1,354,881 REGULATORY ASSETS 1,817,540 1,889,482 DEFERRED CHARGES 288,011 325,580 TOTAL $16,615,346 $15,882,988 See Notes to Consolidated Financial Statements.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock-Par Value $6.50: 1997 1996 Shares Authorized. .300,000,000 300,000,000 Shares Issued. . . .198,989,981 197,234,992 (8,999,992 shares were held in treasury) $ 1,293,435 $ 1,282,027 Paid-in Capital 1,778,782 1,715,554 Retained Earnings 1,605,017 1,547,746 Total Common Shareholders' Equity 4,677,234 4,545,327 Cumulative Preferred Stocks of Subsidiaries:* Not Subject to Mandatory Redemption 46,724 90,323 Subject to Mandatory Redemption 127,605 509,900 Long-term Debt* 5,129,463 4,796,768 TOTAL CAPITALIZATION 9,981,026 9,942,318 OTHER NONCURRENT LIABILITIES 1,246,537 1,002,208 CURRENT LIABILITIES: Preferred Stock and Long-term Debt Due Within One Year* 294,454 86,942 Short-term Debt 555,075 319,695 Accounts Payable 353,256 206,227 Taxes Accrued 380,771 414,173 Interest Accrued 76,361 75,124 Obligations Under Capital Leases 101,089 89,553 Other 322,687 304,323 TOTAL CURRENT LIABILITIES 2,083,693 1,496,037 DEFERRED INCOME TAXES 2,560,921 2,643,143 DEFERRED INVESTMENT TAX CREDITS 376,250 401,491 DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2 231,320 240,598 DEFERRED CREDITS 135,599 157,193 COMMITMENTS AND CONTINGENCIES (Note 4 ) TOTAL $16,615,346 $15,882,988 *See Accompanying Schedules.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, 1997 1996 1995 OPERATING ACTIVITIES: Net Income $ 510,961 $ 587,430 $ 529,903 Adjustments for Noncash Items: Depreciation and Amortization 608,217 590,657 578,003 Deferred Federal Income Taxes (6,549) (21,478) 11,916 Deferred Investment Tax Credits (25,241) (25,808) (25,819) Amortization of Operating Expenses and Carrying Charges (net) 12,001 55,458 53,479 Extraordinary Item - UK Windfall Tax 109,419 - - Changes in Certain Current Assets and Liabilities: Accounts Receivable (net) (136,186) (39,049) (71,804) Fuel, Materials and Supplies (1,427) 35,831 457 Accrued Utility Revenues (14,225) 32,953 (40,433) Accounts Payable 147,029 (13,915) (31,044) Taxes Accrued (33,402) (6,019) 37,515 Other (net) 27,325 41,002 14,437 Net Cash Flows From Operating Activities 1,197,922 1,237,062 1,056,610 INVESTING ACTIVITIES: Construction Expenditures (760,394) (577,691) (605,974) Investment in Yorkshire (363,436) - - Proceeds from Sale of Property and Other 2,142 12,283 20,567 Net Cash Flows Used For Investing Activities (1,121,688) (565,408) (585,407) FINANCING ACTIVITIES: Issuance of Common Stock 76,745 65,461 48,707 Issuance of Long-term Debt 880,522 407,291 523,476 Retirement of Cumulative Preferred Stock (433,329) (70,761) (158,839) Retirement of Long-term Debt (348,157) (601,278) (469,767) Change in Short-term Debt (net) 235,380 (45,430) 48,140 Dividends Paid on Common Stock (453,453) (449,353) (445,831) Net Cash Flows Used For Financing Activities (42,292) (694,070) (454,114) Net Increase (Decrease) in Cash and Cash Equivalents 33,942 (22,416) 17,089 Cash and Cash Equivalents January 1 57,539 79,955 62,866 Cash and Cash Equivalents December 31 $ 91,481 $ 57,539 $ 79,955 See Notes to Consolidated Financial Statements. /TABLE AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies: Organization - AEP is one of the U.S.'s largest investor-owned public utility holding companies engaged in the generation, purchase, transmission and distribution of electric power to nearly 3 million retail customers in its seven state service territory which covers portions of Ohio, Michigan, Indiana, Kentucky, West Virginia, Virginia and Tennessee. Electric power is also supplied at wholesale to neighboring utility systems and power marketers. AEP has holdings in the United States, the UK and China. The organization of the AEP System consists of AEP Company, Inc., the parent holding company; seven electric utility operating companies in the U.S. (domestic utility subsidiaries); a domestic generating subsidiary, AEPGEN; a service company, AEPSC; AEPR which pursues energy-related domestic and international investment opportunities and projects; AEPES which markets and trades energy commodities; three active coal-mining companies and a group of subsidiaries that provide power engineering, consulting and management services around the world to complement utility activities. The following domestic utility subsidiaries pool their generating and transmission facilities and operate them as an integrated system: APCo, CSPCo, I&M, KPCo and OPCo. The remaining two domestic utility subsidiaries, KGPCo and WPCo are distribution companies that purchase power from APCo and OPCo, respectively. AEPSC provides management and professional services to the AEP System. The active coal-mining companies are wholly-owned by OPCo and sell most of their production to OPCo. AEPGEN has a 50% interest in the Rockport Plant which is comprised of two of the AEP System's six 1,300 mw generating units. AEPR has investments and projects that include: a 50% interest in Yorkshire, an electric distribution company in the UK (see Note 7); a 70% interest in a project to build two 125 mw coal-fired generating units in China. AEPES currently markets and trades natural gas. The non-regulated subsidiaries that complement utility activities are engaged in providing non-regulated energy and communication services and are seeking and considering new business opportunities domestically and internationally that will permit AEP to utilize its expertise and core competencies. The AEP System's operations are divided into major business units which are managed centrally by AEPSC. Although the seven domestic utility subsidiaries and AEPSC are separate legal entities they operate as American Electric Power. There has been no change to the legal names of these companies. Rate Regulation - The AEP System is subject to regulation by the SEC under the 1935 Act. The rates charged by the domestic utility subsidiaries are approved by the FERC or the state utility commissions as applicable. The FERC regulates wholesale rates and the state commissions regulate retail rates. Principles of Consolidation - The consolidated financial statements include AEP Co., Inc. and its wholly-owned and majority-owned subsidiaries consolidated with their wholly-owned subsidiaries. Significant intercompany items are eliminated in consolidation. Yorkshire is accounted for using the equity method. Basis of Accounting - As the owner of cost-based rate-regulated electric public utility companies, AEP Co., Inc.'s consolidated financial statements reflect the actions of regulators that result in the recognition of revenues and expenses in different time periods than enterprises that are not rate regulated. In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," regulatory assets (deferred expenses) and regulatory liabilities (deferred income) are recorded to reflect the economic effects of regulation and to match expenses with regulated revenues. Use of Estimates - The preparation of these financial statements in conformity with generally accepted accounting principles requires in certain instances the use of estimates. Actual results could differ from those estimates. Utility Plant - Electric utility plant is stated at original cost and is generally subject to first mortgage liens. Additions, major replacements and betterments are added to the plant accounts. Retirements from the plant accounts and associated removal costs, net of salvage, are deducted from accumulated depreciation. The costs of labor, materials and overheads incurred to operate and maintain utility plant are included in operating expenses. AFUDC - AFUDC is a noncash nonoperating income item that is recovered over the service life of utility plant through depreciation and represents the estimated cost of borrowed and equity funds used to finance construction projects. The average rates used to accrue AFUDC were 6%, 6.09%, and 6.91% in 1997, 1996 and 1995, respectively. Depreciation, Depletion and Amortization - Depreciation is provided on a straight-line basis over the estimated useful lives of property other than coal-mining property and is calculated largely through the use of composite rates by functional class as follows: Functional Class Annual Composite of Property Depreciation Rates Production: Steam-Nuclear 3.4% Steam-Fossil-Fired 3.2% to 4.4% Hydroelectric-Conventional and Pumped Storage 2.7% to 3.2% Transmission 1.7% to 2.7% Distribution 3.3% to 4.2% General 2.5% to 3.8% The utility subsidiaries presently recover amounts to be used for demolition and removal of non-nuclear plant through depreciation charges included in rates. Depreciation, depletion and amortization of coal-mining assets is provided over each asset's estimated useful life, ranging up to 30 years, and is calculated using the straight-line method for mining structures and equipment. The units-of-production method is used to amortize coal rights and mine development costs based on estimated recoverable tonnages at a current average rate of $1.91 per ton. These costs are included in the cost of coal charged to fuel expense. Cash and Cash Equivalents - Cash and cash equivalents include temporary cash investments with original maturities of three months or less. Foreign Currency Translation - The financial statements of subsidiaries outside the United States are measured using the local currency as the functional currency. Assets and liabilities are translated to U.S. dollars at year-end rates of exchange and revenues and expenses are translated at monthly average exchange rates throughout the year. Translation adjustments are accumulated as a separate component of shareholders' equity. The accumulated total at December 31, 1997 is not material. Currency transaction gains and losses are recorded in income. Sale of Receivables - Under an agreement that was terminated in January 1997, CSPCo sold $50 million of undivided interests in designated pools of accounts receivable and accrued utility revenues with limited recourse. As collections reduced previously sold pools, interests in new pools were sold. At December 31, 1996, $50 million remained to be collected and remitted to the buyer. Operating Revenues and Fuel Costs - Revenues include the accrual of electricity consumed but unbilled at month-end as well as billed revenues. Fuel costs are matched with revenues in accordance with rate commission orders. Generally in the retail jurisdictions, changes in fuel costs are deferred or revenues accrued until approved by the regulatory commission for billing or refund to customers in later months. Wholesale jurisdictional fuel cost changes are expensed and billed as incurred. Levelization of Nuclear Refueling Outage Costs - Incremental operation and maintenance costs associated with refueling outages at I&M's Cook Plant are deferred and amortized over the period (generally eighteen months) beginning with the commencement of an outage and ending with the beginning of the next outage. Income Taxes - The Company follows the liability method of accounting for income taxes as prescribed by SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes are provided for all temporary differences between the book cost and tax basis of assets and liabilities which will result in a future tax consequence. Where the flow-through method of accounting for temporary differences is reflected in rates, deferred income taxes are recorded with related regulatory assets and liabilities in accordance with SFAS No. 71. Investment Tax Credits - Investment tax credits have been accounted for under the flow-through method except where regulatory commissions have reflected investment tax credits in the rate-making process on a deferral basis. Deferred investment tax credits are being amortized over the life of the related plant investment. Debt and Preferred Stock - Gains and losses on reacquisition of debt are deferred and amortized over the remaining term of the reacquired debt in accordance with rate-making treatment. If the debt is refinanced, the reacquisition costs are deferred and amortized over the term of the replacement debt commensurate with their recovery in rates. Discount or premium and expenses of debt issuances are amortized over the term of the related debt, with the amortization included in interest charges. Redemption premiums paid to reacquire preferred stock are included in paid-in capital and amortized to retained earnings commensurate with their recovery in rates. The excess of par value over costs of preferred stock reacquired is credited to paid-in capital and amortized to retained earnings. Other Property and Investments - Excluding decommissioning and spent nuclear fuel disposal trust funds and the investment in Yorkshire, other property and investments are stated at cost. Securities held in trust funds for decommissioning nuclear facilities and for the disposal of spent nuclear fuel are recorded at market value in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Securities in the trust funds have been classified as available-for-sale due to their long-term purpose. Unrealized gains and losses from securities in these trust funds are not reported in equity but result in adjustments to the liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the spent nuclear fuel disposal trust funds. EPS - The adoption of SFAS No. 128 "Earnings per Share" had no impact on the determination of Earnings per Common Share. 2. Rate Matters: OPCo's Recovery of Fuel Costs - Under the terms of a 1992 stipulation agreement the cost of coal burned at the Gavin Plant is subject to a 15-year predetermined price of $1.575 per million Btu's with quarterly escalation adjustments through November 2009. A 1995 Settlement Agreement set the fuel component of the EFC factor at 1.465 cents per Kwh for the period June 1, 1995 through November 30, 1998. The stipulation and settlement agreements provide OPCo with the opportunity to recover over the term of the stipulation agreement the Ohio jurisdictional share of OPCo's investment in and the liabilities and future shut-down costs of its affiliated mines as well as any fuel costs incurred above the predetermined rate to the extent the actual cost of coal burned at the Gavin Plant is below the predetermined prices. After full recovery of these costs or November 2009, whichever comes first, the price that OPCo can recover for coal from its affiliated Meigs mine which supplies the Gavin Plant will be limited to the lower of cost or the then-current market price. Pursuant to these agreements OPCo has deferred for future recovery $61 million at December 31, 1997. Based on the estimated future cost of coal burned at Gavin Plant, management believes that the Ohio jurisdictional portion of the investment in and liabilities and closing costs of the affiliated mining operations including deferred amounts will be recovered under the terms of the predetermined price agreement. Management intends to seek from non-Ohio jurisdictional ratepayers recovery of the non-Ohio jurisdictional portion of the investment in and the liabilities and closing costs of the affiliated Meigs, Muskingum and Windsor mines. The non-Ohio jurisdictional portion of shutdown costs for these mines which includes the investment in the mines, leased asset buy-outs, reclamation costs and employee benefits is estimated to be approximately $102 million after tax at December 31, 1997. The affiliated Muskingum and Windsor mines may have to close by January 2000 in order to comply with the Phase II requirements of the CAAA. The Muskingum and/or Windsor mines could close prior to January 2000 depending on the economics of continued operation under the terms of the above Settlement Agreement. Unless future shutdown costs and/or the cost of affiliated coal production of the Meigs, Muskingum and Windsor mines can be recovered, results of operations would be adversely affected. 3. Effects of Regulation and Phase-In Plans: In accordance with SFAS No. 71 the consolidated financial statements include assets (deferred expenses) and liabilities (deferred income) recorded in accordance with regulatory actions to match expenses and revenues from cost-based rates. Regulatory assets are expected to be recovered in future periods through the rate-making process and regulatory liabilities are expected to reduce future cost recoveries. The Company has reviewed all the evidence currently available and concluded that it continues to meet the requirements to apply SFAS No. 71. In the event a portion of the Company's business no longer met these requirements, net regulatory assets would have to be written off for that portion of the business and assets attributable to that portion of the business would have to be tested for possible impairment and if required an impairment loss recorded unless the net regulatory assets and impairment losses are recoverable as a stranded investment. Recognized regulatory assets and liabilities are comprised of the following at: December 31, 1997 1996 (In Thousands) Regulatory Assets: Amounts Due From Customers For Future Income Taxes $1,372,926 $1,459,086 Rate Phase-in Plan Deferrals - 27,249 Unamortized Loss on Reacquired Debt 96,793 107,305 Other 347,821 295,842 Total Regulatory Assets $1,817,540 $1,889,482 Regulatory Liabilities: Deferred Investment Tax Credits $376,250 $401,491 Other Regulatory Liabilities* 78,802 86,609 Total Regulatory Liabilities $455,052 $488,100 * Included in Deferred Credits on Consolidated Balance Sheets The rate phase-in plan deferrals are applicable to the Zimmer Plant and Rockport Plant Unit 1. The Zimmer Plant is a 1,300 mw coal-fired plant which commenced commercial operation in 1991. CSPCo owns 25.4% of the plant with the remainder owned by two unaffiliated companies. As a result of an Ohio Supreme Court decision, in January 1994 the PUCO approved a temporary 3.39% surcharge effective February 1, 1994. In June 1997 the Company completed recovery of its Zimmer Plant phase-in plan deferrals and discontinued the 3.39% temporary rate surcharge. In 1997, 1996 and 1995 $15.4 million, $31.5 million and $28.5 million, respectively, of net phase-in deferrals were collected through the surcharge. The deferral balance which was completely recovered and amortized in 1997 was $15.4 million at December 31, 1996. The Rockport Plant consists of two 1,300 mw coal-fired units. I&M and AEPGEN each own 50% of one unit (Rockport 1) and lease a 50% interest in the other unit (Rockport 2) from unaffiliated lessors under an operating lease. The gain on the sale and leaseback of Rockport 2 was deferred and is being amortized, with related taxes, over the initial lease term which expires in 2022. A rate phase-in plan in the Indiana and the FERC jurisdictions provide for the recovery and straight-line amortization of deferred Rockport Plant Unit 1 costs over ten years beginning in 1987. In 1997 the amortization and recovery of the deferred Rockport Plant Unit 1 Phase-in Plan costs were completed. During the recovery period net income was unaffected by the recovery of the phase in deferrals. Amortization was $11.9 million in 1997 and $16 million in 1996 and 1995. 4. Commitments and Contingencies: Construction and Other Commitments - The AEP System has substantial construction commitments to support its utility operations including the replacement of the Cook Plant Unit 1 steam generators. Such commitments do not presently include any expenditures for new generating capacity. Aggregate construction expenditures for 1998-2000 are estimated to be $2.4 billion. Long-term fuel supply contracts contain clauses for periodic price adjustments, and most jurisdictions have fuel clause mechanisms that provide for recovery of changes in the cost of fuel with the regulators' review and approval. The contracts are for various terms, the longest of which extends to the year 2014, and contain various clauses that would release the Company from its obligation under certain force majeure conditions. The AEP System has contracted to sell approximately 1,000 mw of capacity on a long-term basis to unaffiliated utilities. Certain contracts totaling 750 mw of capacity are unit power agreements requiring the delivery of energy only if the unit capacity is available. The power sales contracts expire from 1999 to 2010. Nuclear Plant - I&M owns and operates the two-unit 2,110 mw Cook Plant under licenses granted by the NRC. The operation of a nuclear facility involves special risks, potential liabilities, and specific regulatory and safety requirements. Should a nuclear incident occur at any nuclear power plant facility in the United States, the resultant liability could be substantial. By agreement I&M is partially liable together with all other electric utility companies that own nuclear generating units for a nuclear power plant incident. In the event nuclear losses or liabilities are underinsured or exceed accumulated funds and recovery in rates is not possible, results of operations, cash flows and financial condition could be negatively affected. Nuclear Plant Shutdown - On September 9 and 10, 1997, during a 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 Plant. On September 19, 1997, the NRC issued a Confirmatory Action Letter requiring the Company to address the issues identified in the letter. The Company is working with the NRC to resolve these issues and other issues related to restart of the units. Certain issues identified in the letter have been addressed. At this time management is unable to determine when the units will be returned to service. If the units are not returned to service in a reasonable period of time, it could have an adverse impact on results of operations, cash flows and possibly financial condition. Nuclear Incident Liability - Public liability is limited by law to $8.9 billion should an incident occur at any licensed reactor in the United States. Commercially available insurance provides $200 million of coverage. In the event of a nuclear incident at any nuclear plant in the United States the remainder of the liability would be provided by a deferred premium assessment of $79.3 million on each licensed reactor payable in annual installments of $10 million. As a result, I&M could be assessed $158.6 million per nuclear incident payable in annual installments of $20 million. The number of incidents for which payments could be required is not limited. Nuclear insurance pools and other insurance policies provide $3.6 billion (reduced to $3.0 billion effective January 1, 1998) of property damage, decommissioning and decontamination coverage for the Cook Plant. Additional insurance provides coverage for extra costs resulting from a prolonged accidental Cook Plant outage. Some of the policies have deferred premium provisions which could be triggered by losses in excess of the insurer's resources. The losses could result from claims at the Cook Plant or certain other non-affiliated nuclear units. I&M could be assessed up to $35.8 million under these policies. SNF Disposal - Federal law provides for government responsibility for permanent spent nuclear fuel disposal and assesses nuclear plant owners fees for spent fuel disposal. A fee of one mill per kilowatthour for fuel consumed after April 6, 1983 is being collected from customers and remitted to the U.S. Treasury. Fees and related interest of $181 million for fuel consumed prior to April 7, 1983 have been recorded as long-term debt. I&M has not paid the government the pre-April 1983 fees due to continued delays and uncertainties related to the federal disposal program. At December 31, 1997, funds collected from customers towards payment of the pre-April 1983 fee and related earnings thereon approximate the liability. Decommissioning and Low Level Waste Accumulation Disposal - Decommissioning costs are accrued over the service life of the Cook Plant. The licenses to operate the two nuclear units expire in 2014 and 2017. After expiration of the licenses the plant is expected to be decommissioned through dismantlement. The Company's latest estimate for decommissioning and low level radioactive waste accumulation disposal costs range from $700 million to $1,152 million in 1997 nondiscounted dollars. The wide range is caused by variables in assumptions including the estimated length of time spent nuclear fuel must be stored at the plant subsequent to ceasing operations. This in turn depends on future developments in the federal government's SNF disposal program. Continued delays in the federal fuel disposal program can result in increased decommissioning costs. I&M is recovering estimated decommissioning costs in its three rate-making jurisdictions based on at least the lower end of the range in the most recent decommissioning study at the time of the last rate proceeding. I&M records decommissioning costs in other operation expense and records a noncurrent liability equal to the decommissioning cost recovered in rates; such amounts were $28 million in 1997, $27 million in 1996 and $30 million in 1995 including $4 million of special deposits. Decommissioning costs recovered from customers are deposited in external trusts. Trust fund earnings increase the fund assets and the recorded liability and decrease the amount needed to be recovered from ratepayers. At December 31, 1997, I&M has recognized a decommissioning liability of $381 million which is included in other noncurrent liabilities. Revised Air Quality Standards - On July 18, 1997, the Federal EPA published a revised 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, cash flows and possibly financial condition unless such costs are recovered. Litigation - The Company is involved in a number of legal proceedings and claims. While management is unable to predict the ultimate outcome of litigation, it is not expected that the resolution of these matters will have a material adverse effect on the results of operations, cash flows or financial condition. 5. Dividend Restrictions: Mortgage indentures, charter provisions and orders of regulatory authorities place various restrictions on the use of the subsidiaries' retained earnings for the payment of cash dividends on their common stocks. At December 31, 1997, $27 million of retained earnings were restricted. To pay dividends out of paid-in capital the subsidiaries need regulatory approval. 6. Lines of Credit and Commitment Fees: At December 31, 1997 and 1996, unused short-term bank lines of credit were available in the amounts of $442 million and $409 million, respectively. In addition several of the subsidiaries engaged in providing non-regulated energy services share a line of credit under a revolving credit agreement. The amounts of credit available under the revolving credit agreement were $330 million and $100 million at December 31, 1997 and 1996, respectively. The short-term bank lines of credit and the revolving credit agreement require the payment of facility fees of approximately 1/10 of 1% on the daily amount of such commitments. Outstanding short-term debt consisted of: December 31, (Dollars In Thousands) 1997 1996 Balance Outstanding: Notes Payable $199,285 $ 91,293 Commercial Paper 355,790 228,402 Total $555,075 $319,695 Year-End Weighted Average Interest Rate: Notes Payable 6.3% 6.2% Commercial Paper 6.8% 7.2% Total 6.6% 6.9% 7. Yorkshire Acquisition and UK Windfall Tax In April 1997 the Company and New Century Energies, Inc. through an equally owned joint venture, Yorkshire Power Group Limited (YPG), acquired all of the outstanding shares of Yorkshire, an electric distribution company in the UK. Total consideration paid by the joint venture was approximately $2.4 billion which was financed by a combination of equity and non-recourse debt. The Company uses the equity method of accounting for its investment in YPG. The Company's original investment in the joint venture was $360 million and 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 on certain privatized utilities. The windfall tax is actually an adjustment of the original privatization price by the UK government. The windfall tax liability for Yorkshire Electricity Group plc is estimated to be 134 million pounds sterling ($219 million) and is payable in two equal installments. The first payment was made in December 1997 and the second installment will be due in December 1998. The Company's $109.4 million share of the tax is reported as an extraordinary loss. The equity earnings from the Yorkshire investment, excluding the extraordinary loss, which are included in nonoperating income, are $34 million inclusive of $10 million of nonrecurring tax benefits related to a reduction of the UK corporate income tax rate from 33% to 31% effective April 1, 1997. The following amounts which are not included in AEP's consolidated financial statements represent summarized consolidated financial information of YPG at December 31, 1997 and for the nine-months then ended: Assets: (In Millions) Property, Plant and Equipment $1,644.6 Current Assets 602.2 Other Assets 1,895.4 Total Assets $4,142.2 Capitalization and Liabilities: Common Shareholders' Equity $ 542.1 Long-term Debt 704.3 Other Noncurrent Liabilities 488.7 Current Liabilities 2,407.1 Total Capitalization and Liabilities $4,142.2 Income Statement Data: Operating Revenues $1,492.9 Operating Income 202.3 Income Before Extraordinary Item 67.5 Net Loss (151.3) 8. Benefit Plans: AEP System Pension Plan - The AEP pension plan is a trusteed, noncontributory defined benefit plan covering all employees meeting eligibility requirements, except participants in the UMWA pension plans. Benefits are based on service years and compensation levels. The funding policy is to make annual contributions to a qualified trust fund equal to the net periodic pension cost up to the maximum amount deductible for federal income taxes, but not less than the minimum required contribution in accordance with the Employee Retirement Income Security Act of 1974. Net AEP pension plan costs were computed as follows: Year Ended December 31, 1997 1996 1995 (In Thousands) Service Cost-Benefits Earned During the Year $ 36,000 $ 40,000 $ 30,400 Interest Cost on Projected Benefit Obligation 128,600 119,500 116,700 Actual Return on Plan Assets (462,700) (302,400) (416,800) Net Amortization (Deferral) 307,700 161,800 281,800 Net AEP Pension Plan Costs $ 9,600 $ 18,900 $ 12,100 AEP pension plan assets, actuarially computed benefit obligations and the computation of accrued net pension plan liability are: December 31, 1997 1996 (In Thousands) Actuarial Present Value of Benefit Obligation: Vested Obligation $1,523,200 $1,377,000 Nonvested Obligation 161,000 136,500 Effects of Salary Progression 205,800 162,700 Projected Benefit Obligation 1,890,000 1,676,200 AEP Pension Plan Assets at Fair Value (a) 2,370,300 2,009,500 Funded Status - AEP Pension Plan Assets in Excess of Projected Benefit Obligation 480,300 333,300 Unrecognized Prior Service Cost 119,400 133,200 Unrecognized Net Gain on Assets (640,800) (488,200) Unrecognized Net Transition Assets (Being Amortized Over 17 Years) (59,100) (68,900) Accrued Net AEP Pension Plan Liability $ (100,200) $ (90,600) (a) AEP pension plan assets primarily consist of common stocks, bonds and cash equivalents and are included in a separate entity trust fund. Assumptions used to determine AEP's net pension plan liability were: December 31, 1997 1996 1995 Discount Rate 7.00% 7.75% 7.25% Average Rate of Increase in Compensation Levels 3.2% 3.2% 3.2% Expected Long-Term Rate of Return on Plan Assets 9.0% 9.0% 9.0% OPEB - The AEP System provides certain benefits other than pensions for retired employees. Substantially all non-UMWA employees are eligible for postretirement health care and life insurance if they retire from active service after reaching age 55 and have at least 10 service years. Postretirement medical benefits for UMWA employees at affiliated mining operations who have or will retire after January 1, 1976 are the liability of the OPCo coal-mining subsidiaries and are included in the OPEB net costs and liability. They are eligible for postretirement medical benefits if they retire from active service after reaching age 55 and have at least 10 service years. In addition, non-active UMWA employees will become eligible for postretirement benefits at age 55 if they have had 20 years of service. The funding policy for AEP's OPEB plan is to make contributions to an external Voluntary Employees Beneficiary Association trust fund equal to the incremental OPEB costs (i.e., the amount that the total postretirement benefits cost under SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," exceeds the pay-as-you-go amount). Contributions were $35.2 million in 1997, $45.8 million in 1996 and $53 million in 1995. In several jurisdictions the utility subsidiaries deferred the increased OPEB costs resulting from the SFAS 106 required change from pay-as-you-go to accrual accounting which were not being recovered in rates. No additional deferrals were made in 1997 or 1996. At December 31, 1997 and 1996, $7.9 million and $14.5 million, respectively, of incremental OPEB costs were deferred. Aggregate OPEB costs were computed as follows: Year Ended December 31, 1997 1996 1995 (In Thousands) Service Cost $ 14,000 $ 15,300 $13,500 Interest Cost on Projected Benefit Obligation 55,900 53,500 54,900 Net Amortization of the Transition Obligation 32,000 32,300 32,000 Return on Plan Assets (44,100) (21,100) (25,400) Net Amortization (Deferral) 21,500 9,900 16,800 Net OPEB Costs $ 79,300 $ 89,900 $91,800 OPEB assets, actuarially computed benefit obligations and the computation of the accrued net OPEB liability are: December 31, 1997 1996 (In Thousands) Accumulated Postretirement Benefit Obligation: Active Employees Fully Eligible for Benefits $ 73,800 $ 57,800 Current Retirees 466,900 423,000 Other Active Employees 309,000 245,600 Total Benefit Obligation 849,700 726,400 Fair Market Value of Plan Assets (a) 311,900 232,500 Unfunded Benefit Obligation (537,800) (493,900) Unrecognized Net Loss (Gain) 66,100 (3,300) Unrecognized Net Transition Obligation Being Amortized Over 20 Years 416,400 448,500 Accrued Net OPEB Liability $ (55,300) $(48,700) (a) Plan assets consist of cash surrender value of life insurance contracts on certain employees owned by the trust and short-term tax-exempt municipal bonds. Assumptions used to determine OPEB's funded status were: December 31, 1997 1996 1995 Discount Rate 7.00% 7.75% 7.25% Expected Long-Term Rate of Return on Plan Assets 8.75% 8.75% 8.75% Initial Medical Cost Trend Rate 7.0% 7.5% 8.0% Ultimate Medical Cost Trend Rate 4.25% 4.75% 4.5% Medical Cost Trend Rate Decreases to Ultimate Rate in Year 2005 2005 2005 Assuming a one percent increase in the medical cost trend rate, the 1997 OPEB cost for all employees, both non-UMWA and UMWA, would increase by $10 million and the accumulated benefit obligations would increase by $92 million. AEP System Savings Plan - An employee savings plan is offered to non-UMWA employees which allows participants to contribute up to 17% of their salaries into various investment alternatives, including AEP common stock. An employer matching contribution, equaling one-half of the employees' contribution to the plan up to a maximum of 3% of the employees' base salary, is invested in AEP common stock. The employer's annual contributions totaled $19.6 million in 1997, $19 million in 1996 and $18.8 million in 1995. Other UMWA Benefits - The Company provides UMWA pension, health and welfare benefits for certain employees, retirees, and their survivors who meet eligibility requirements. The benefits are administered by UMWA trustees and contributions are made to their trust funds. Contributions based on hours worked are expensed as paid as part of the cost of active mining operations and were not material in 1997, 1996 and 1995. Based upon the UMWA actuary estimate the Company's share of unfunded pension liability was $6.9 million at June 30, 1997. In the event the Company should significantly reduce or cease mining operations or contributions to the UMWA trust funds, a withdrawal obligation will be triggered for both the pension and health and welfare plans. If the mining operations had been closed on December 31, 1997 the estimated withdrawal liability for all UMWA benefit plans would have been $6.7 million. 9. Fair Value of Financial Instruments: Nuclear Trust Funds Recorded at Market Value - The trust investments, reported in other property and investments, are recorded at market value in accordance with SFAS No. 115 and consist of tax-exempt municipal bonds and other securities. At December 31, 1997 and 1996 the fair values of the trust investments were $566 million and $491 million, respectively. Accumulated gross unrealized holding gains were $41 million and $21.9 million at December 31, 1997 and 1996, respectively and accumulated gross unrealized holding losses were $1.2 million at both year-ends. The change in market value in 1997, 1996, and 1995 was a net unrealized holding gain of $19.1 million, $2.6 million and $24.9 million, respectively. The trust investments' cost basis by security type were: December 31, 1997 1996 (In Thousands) Tax-Exempt Bonds $335,358 $340,290 Equity Securities 74,398 54,389 Treasury Bonds 44,200 26,958 Corporate Bonds 9,167 7,977 Cash, Cash Equivalents and Accrued Interest 63,392 40,430 Total $526,515 $470,044 Proceeds from sales and maturities of securities of $147.3 million during 1997 resulted in $3.9 million of realized gains and $1.4 million of realized losses. Proceeds from sales and maturities of securities of $115.3 million during 1996 resulted in $2.6 million of realized gains and $2.1 million of realized losses. During 1995 proceeds from sales and maturities of securities of $78.2 million resulted in $1.4 million of realized gains and $0.3 million of realized losses. The cost of securities for determining realized gains and losses is original acquisition cost including amortized premiums and discounts. At December 31, 1997, the year of maturity of trust fund investments other than equity securities, was: (In Thousands) 1998 $ 87,063 1999 - 2002 127,575 2003 - 2007 182,873 After 2007 54,606 Total $452,117 Other Financial Instruments Recorded at Historical Cost - The carrying amounts of cash and cash equivalents, accounts receivable, short-term debt, and accounts payable approximate fair value because of the short-term maturity of these instruments. Fair values for preferred stock subject to mandatory redemption were $136 million and $517 million and for long-term debt were $5.7 billion and $5.0 billion at December 31, 1997 and 1996, respectively. The carrying amounts on the financial statements for preferred stock subject to mandatory redemption were $128 million and $510 million and for long-term debt were $5.4 billion and $4.9 billion at December 31, 1997 and 1996, respectively. Fair values are based on quoted market prices for the same or similar issues and the current dividend or interest rates offered for instruments of the same remaining maturities. The carrying amount of the spent nuclear fuel disposal trust funds approximates the Company's best estimate of the fair value of the pre-April 1983 SNF disposal liability. 10. Federal Income Taxes: The details of federal income taxes as reported are as follows: Year Ended December 31, 1997 1996 1995 (In Thousands) Charged (Credited) to Operating Expenses (net): Current $346,290 $375,528 $265,313 Deferred 11,124 (17,008) 22,990 Deferred Investment Tax Credits (16,134) (16,298) (16,276) Total 341,280 342,222 272,027 Charged (Credited) to Nonoperating Income (net): Current (16,038) (5,636) 11,325 Deferred (17,673) (4,470) (11,074) Deferred Investment Tax Credits (9,107) (9,510) (9,543) Total (42,818) (19,616) (9,292) Total Federal Income Tax as Reported $298,462 $322,606 $262,735 The following is a reconciliation of the difference between the amount of federal income taxes computed by multiplying book income before federal income taxes by the statutory tax rate, and the amount of federal income taxes reported. Year Ended December 31, 1997 1996 1995 (In Thousands) Income Before Preferred Stock Dividend Requirements of Subsidiaries $ 638,211 $628,856 $584,674 Extraordinary Loss (Note 7) (109,419) - - Federal Income Taxes 298,462 322,606 262,735 Pre-Tax Book Income $ 827,254 $951,462 $847,409 Federal Income Tax on Pre-Tax Book Income at Statutory Rate (35%) $289,539 $333,012 $296,593 Increase (Decrease) in Federal Income Tax Resulting from the Following Items: Depreciation 53,239 50,537 46,453 Corporate Owned Life Insurance (18,240) (12,009) (25,506) Investment Tax Credits (net) (25,241) (25,813) (26,179) Extraordinary Loss - UK Windfall Tax 38,297 - - Other (39,132) (23,121) (28,626) Total Federal Income Taxes as Reported $298,462 $322,606 $262,735 Effective Federal Income Tax Rate 36.1% 33.9% 31.0% The following tables show the elements of the net deferred tax liability and the significant temporary differences: December 31, 1997 1996 (In Thousands) Deferred Tax Assets $ 807,226 $ 784,349 Deferred Tax Liabilities (3,368,147) (3,427,492) Net Deferred Tax Liabilities $(2,560,921) $(2,643,143) Property Related Temporary Differences $(2,161,484) $(2,162,099) Amounts Due From Customers For Future Federal Income Taxes (410,255) (428,698) Deferred State Income Taxes (201,843) (229,429) All Other (net) 212,661 177,083 Total Net Deferred Tax Liabilities $(2,560,921) $(2,643,143) The Company has settled with the IRS all issues from the audits of the consolidated federal income tax returns for the years prior to 1991. Returns for the years 1991 through 1996 are presently being audited by the IRS. During the audit the IRS agents requested a ruling from their National Office that certain interest deductions relating to COLI claimed by the Company for 1991 through 1993 should not be allowed. The Company filed a brief with the IRS National Office refuting the agents' position. Although no adjustments have been proposed, a disallowance of the COLI interest deductions through December 31, 1997 would reduce earnings by approximately $286 million (including interest). AEP believes it has meritorious defenses and will vigorously contest any proposed adjustments. No provisions for this amount have been recorded. In the event the Company is unsuccessful it could have a material adverse impact on results of operations and cash flows. 11. Leases: Leases of property, plant and equipment are for periods up to 35 years and require payments of related property taxes, maintenance and operating costs. The majority of the leases have purchase or renewal options and will be renewed or replaced by other leases. Lease rentals are primarily charged to operating expenses in accordance with rate-making treatment. The components of rentals are as follows: Year Ended December 31, 1997 1996 1995 (In Thousands) Operating Leases $257,042 $262,451 $259,877 Amortization of Capital Leases 104,732 114,050 101,068 Interest on Capital Leases 31,601 28,696 27,542 Total Rental Payments $393,375 $405,197 $388,487 Properties under capital leases and related obligations on the Consolidated Balance Sheets are as follows: December 31, 1997 1996 (In Thousands) ELECTRIC UTILITY PLANT: Production $ 47,246 $ 44,390 Transmission 3 6 Distribution 14,660 14,699 General: Nuclear Fuel (net of amortization) 103,939 59,681 Mining Plant and Other 516,843 466,797 Total Electric Utility Plant 682,691 585,573 Accumulated Amortization 196,145 200,931 Net Electric Utility Plant 486,546 384,642 OTHER PROPERTY 57,763 33,439 Accumulated Amortization 5,917 3,854 Net Other Property 51,846 29,585 Net Property under Capital Leases $538,392 $414,227 Capital Lease Obligations:* Noncurrent Liability $437,303 $324,674 Liability Due Within One Year 101,089 89,553 Total Capital Lease Obligations $538,392 $414,227 *Represents the present value of future minimum lease payments. The noncurrent portion of capital lease obligations is included in other noncurrent liabilities in the Consolidated Balance Sheet. Properties under operating leases and related obligations are not included in the Consolidated Balance Sheets. Future minimum lease rentals, consisted of the following at December 31, 1997: Noncancelable Capital Operating Leases Leases (In Thousands) 1998 $104,623 $ 243,042 1999 92,740 229,764 2000 79,507 228,044 2001 64,438 225,482 2002 59,400 220,111 Later Years 164,371 3,577,422 Total Future Minimum Lease Rentals 565,079 (a) $4,723,865 Less Estimated Interest Element 130,626 Estimated Present Value of Future Minimum Lease Rentals 434,453 Unamortized Nuclear Fuel 103,939 Total $538,392 (a) Minimum lease rentals do not include nuclear fuel rentals. The rentals are paid in proportion to heat produced and carrying charges on the unamortized nuclear fuel balance. There are no minimum lease payment requirements for leased nuclear fuel. 12. Supplementary Information: Year Ended December 31, 1997 1996 1995 (In Thousands) Purchased Power - OVEC (44.2% owned by AEP System) $29,631 $22,156 $10,546 Cash was paid for: Interest (net of capitalized amounts) $390,491 $373,570 $395,169 Income Taxes $398,833 $404,297 $273,671 Noncash Acquisitions under Capital Leases $234,846 $136,988 $106,256 13. Capital Stocks and Paid-In Capital: Changes in capital stocks and paid-in capital during the period January 1, 1995 through December 31, 1997 were:
Cumulative Preferred Stocks Shares of Subsidiaries Cumulative Not Subject Subject to Common Stock- Preferred Stocks Paid-in To Mandatory Mandatory Par Value $6.50(a) of Subsidiaries Common Stock Capital Redemption Redemption(b) (Dollars in Thousands) January 1, 1995 194,234,992 8,236,251 $1,262,527 $1,640,661 $ 233,240 $590,385 Issuances 1,400,000 - 9,100 39,607 - - Retirements and Other - (1,526,500) - (21,744) (85,000) (67,650) December 31, 1995 195,634,992 6,709,751 1,271,627 1,658,524 148,240 522,735 Issuances 1,600,000 - 10,400 55,061 - - Retirements and Other - (707,518) - 1,969 (57,917) (12,835) December 31, 1996 197,234,992 6,002,233 1,282,027 1,715,554 90,323 509,900 Issuances 1,754,989 - 11,408 65,337 - - Retirements and Other - (4,258,947) - (2,109) (43,599) (382,295) December 31, 1997 198,989,981 1,743,286 $1,293,435 $1,778,782 $ 46,724 $127,605 (a) Includes 8,999,992 shares of treasury stock. (b) Including portion due within one year.
14. Unaudited Quarterly Financial Information: Quarterly Periods Ended 1997 March 31 June 30 Sept. 30 Dec. 31 (In Thousands - Except Per Share Amounts) Operating Revenues $1,492,069 $1,382,158 $1,583,994 $1,703,147 Operating Income 271,978 221,255 275,090 216,131 Net Income Before Extraordinary Item 172,562 121,139 201,746 124,933 Net Income 172,562 121,139 91,181 126,079 Earnings per Share Before Extraordinary Item* 0.92 0.64 1.07 0.66 Earnings per Share 0.92 0.64 0.48 0.66 *Amounts for 1997 do not add to $3.28 earnings per share due to rounding. The third quarter of 1997 includes an extraordinary loss of $110.6 million or $0.59 per share for a UK Windfall Tax which retroactively adjusted upward Yorkshire's privatization price discussed in Note 7. Quarterly Periods Ended 1996 March 31 June 30 Sept. 30 Dec. 31 (In Thousands - Except Per Share Amounts) Operating Revenues $1,517,781 $1,400,941 $1,484,422 $1,446,090 Operating Income 292,122 220,625 259,745 235,480 Net Income 180,012 112,666 162,324 132,428 Earnings per Share 0.96 0.60 0.87 0.71 AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE OF CONSOLIDATED CUMULATIVE PREFERRED STOCKS OF SUBSIDIARIES
December 31, 1997 Call Price per Shares Shares Amount (In Share (a) Authorized(b) Outstanding Thousands) Not Subject to Mandatory Redemption: 4.08% - 4.56% (c) $102-$110 932,403 467,236 $ 46,724 Subject to Mandatory Redemption: 5.90% - 5.92% (c)(d) (e) 1,950,000 388,100 $ 38,810 6.02% - 6-7/8% (c)(d) (f) 1,950,000 637,950 63,795 7% (g) (g) 250,000 250,000 25,000 Total Subject to Mandatory Redemption (d) $127,605 ______________________________________________________________________________________________________ December 31, 1996 Call Price per Shares Shares Amount (In Share (a) Authorized(b) Outstanding Thousands) Not Subject to Mandatory Redemption: 4.08% - 4.56% $102-$110 932,403 903,233 $ 90,323 Subject to Mandatory Redemption (d): 5.90% - 5.92% (e) 1,950,000 1,904,000 $190,400 6.02% - 6-7/8% (f) 1,950,000 1,945,000 194,500 7% - 7-7/8% $107.80-$107.88 1,250,000 1,250,000 125,000 Total Subject to Mandatory Redemption (d) $509,900 NOTES TO SCHEDULE OF CUMULATIVE PREFERRED STOCKS OF SUBSIDIARIES (a) At the option of the subsidiary the shares may be redeemed at the call price plus accrued dividends. The involuntary liquidation preference is $100 per share for all outstanding shares. (b) As of December 31, 1997 the subsidiaries had 7,189,682, 22,200,000 and 7,579,435 shares of $100, $25 and no par value preferred stock, respectively, that were authorized but unissued. (c) During the first quarter of 1997 preferred stock was reacquired in connection with a tender offer. (d) Shares outstanding and related amounts are stated net of applicable retirements through sinking funds (generally at par) and reacquisitions of shares in anticipation of future requirements. The subsidiaries reacquired enough shares in 1997 to meet all sinking fund requirements on certain series until 2008 and on certain series until 2009 when all remaining outstanding shares must be redeemed. The sinking fund provisions of the series subject to mandatory redemption aggregate $5,000,000 each for the years 2000, 2001 and 2002. (e) Not callable prior to 2003; after that the call price is $100 per share. (f) Not callable prior to 2000; after that the call price is $100 per share. (g) With sinking fund. Redemption is restricted prior to 2000.
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE OF CONSOLIDATED LONG-TERM DEBT OF SUBSIDIARIES
Weighted Average Maturity Interest Rate Interest Rates at December 31, December 31, December 31, 1997 1997 1996 1997 1996 (In Thousands) FIRST MORTGAGE BONDS 1997-2000 7.20% 6.35%-9.15% 6-1/4%-9.15% $ 466,411 $ 383,671 2001-2006 7.10% 6%-8.95% 6%-8.95% 1,511,000 1,511,000 2021-2025 7.95% 7.10%-8.80% 7.10%-9.35% 1,120,419 1,276,750 INSTALLMENT PURCHASE CONTRACTS (a) 1998-2002 4.60% 3.70%-7-1/4% 4.10%-7-1/4% 189,500 209,500 2007-2025 6.45% 5.45%-7-7/8% 5.45%-7-7/8% 756,745 756,745 NOTES PAYABLE (b) 1997-2008 6.73% 5.29%-9.60% 5.29%-9.60% 671,681 282,681 JUNIOR DEBENTURES 2025 - 2027 8.17% 7.92%-8.72% 8%-8.72% 495,000 315,000 OTHER LONG-TERM DEBT (c) 250,357 182,943 Unamortized Discount (net) (37,196) (34,580) Total Long-term Debt Outstanding (d) 5,423,917 4,883,710 Less Portion Due Within One Year 294,454 86,942 Long-term Portion $5,129,463 $4,796,768 NOTES TO SCHEDULE OF CONSOLIDATED LONG-TERM DEBT OF SUBSIDIARIES (a) For certain series of installment purchase contracts interest rates are subject to periodic adjustment. Certain series will be purchased on demand at periodic interest-adjustment dates. Letters of credit from banks and standby bond purchase agreements support certain series. (b) Notes payable represent outstanding promissory notes issued under term loan agreements and revolving credit agreements with a number of banks and other financial institutions and unsecured medium term notes issued to the public. At expiration all notes then issued and outstanding are due and payable. Interest rates are both fixed and variable. Variable rates generally relate to specified short-term interest rates. (c) Other long-term debt consists of a liability along with accrued interest for disposal of spent nuclear fuel (see Note 4 of the Notes to Consolidated Financial Statements) and financing obligation under sale lease back agreements. (d) Long-term debt outstanding at December 31, 1997 is payable as follows: Principal Amount (in thousands) 1998 $ 294,454 1999 491,579 2000 321,286 2001 267,040 2002 484,533 Later Years 3,602,221 Total $5,461,113
Management's Responsibility The management of American Electric Power Company, Inc. is responsible for the integrity and objectivity of the information and representations in this annual report, including the consolidated financial statements. These statements have been prepared in conformity with generally accepted accounting principles, using informed estimates where appropriate, to reflect the Company's financial condition and results of operations. The information in other sections of the annual report is consistent with these statements. The Company's Board of Directors has oversight responsibilities for determining that management has fulfilled its obligation in the preparation of the financial statements and in the ongoing examination of the Company's established internal control structure over financial reporting. The Audit Committee, which consists solely of outside directors and which reports directly to the Board of Directors, meets regularly with management, Deloitte & Touche LLP - Certified Public Accountants and the Company's internal audit staff to discuss accounting, auditing and reporting matters. To ensure auditor independence, both Deloitte & Touche LLP and the internal audit staff have unrestricted access to the Audit Committee. The financial statements have been audited by Deloitte & Touche LLP, whose report appears on the next page. The auditors provide an objective, independent review as to management's discharge of its responsibilities insofar as they relate to the fairness of the Company's reported financial condition and results of operations. Their audit includes procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement and includes a review of the Company's internal control structure over financial reporting. Independent Auditors' Report To the Shareholders and Board of Directors of American Electric Power Company, Inc.: We have audited the accompanying consolidated balance sheets of American Electric Power Company, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Electric Power Company, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Columbus, Ohio February 24, 1998 EX-21 5 AEP SUBSIDIARIES EXHIBIT 21 Subsidiaries of American Electric Power Company, Inc. As of January 1, 1997
Percentage of Voting Securities Location of Owned By Name of Company Incorporation Immediate Parent American Electric Power Service Corporation New York 100.0 AEP Communications, Inc. Ohio 100.0 AEP Communications, LLC Virginia 100.0 AEP Energy Services, Inc. Ohio 100.0 AEP Generating Company Ohio 100.0 AEP Investments, Inc. Ohio 100.0 AEP Resources Services Company Ohio 100.0 AEP Resources, Inc. Ohio 100.0 AEP Resources Australia Investment, Limited Cayman Islands 100.0 AEP Resources Australia Pty., Ltd. Australia 100.0 AEP Resources Australia Ventures, Inc. Delaware 100.0 AEP Resources Delaware, Inc. Delaware 100.0 AEP Resources International, Ltd. Cayman Islands 100.0 AEP Resources Mauritius Company Mauritius 99.0 (a) AEP Pushan Power, LDC Cayman Islands 99.0 (a) Nanyang General Light Electric Company, Ltd.People's Republic of China 70.0 (b) AEP Resources Limited Great Britain 100.0 AEP Resources Project Management Company, Ltd. Cayman Islands 100.0 AEP Pushan Power, LDC Cayman Islands 1.0 (a) Nanyang General Light Electric Company, Ltd.People's Republic of China 70.0 (b) AEP Resources Mauritius Company Mauritius 1.0 (a) AEP Resources Global Holland Holding B.V. The Netherlands 100.0 AEP Resources Global Holland Holding B.V. The Netherlands 100.0 AEP Resources Global Ventures B.V.n. The Netherlands 100.0 Australian Energy International Pty. Ltd. Australia 16.4 (a) AEI (Loy Yang) Pty. Ltd. Australia 100.0 Yorkshire Power Group Limited 50.0 (d) Yorkshire Holdings plc 100.0 Yorkshire Electricity Group plc 100.0 Yorkshire Power Finance Limited 100.0 Appalachian Power Company Virginia 98.6 (e) Cedar Coal Co. West Virginia 100.0 Central Appalachian Coal Company West Virginia 100.0 Central Coal Company West Virginia 50.0 (f) Central Operating Company West Virginia 50.0 (g) Southern Appalachian Coal Company West Virginia 100.0 West Virginia Power Company West Virginia 100.0 Columbus Southern Power Company Ohio 100.0 Colomet, Inc. Ohio 100.0 Conesville Coal Preparation Company Ohio 100.0 Simco Inc. Ohio 100.0 Franklin Real Estate Company Pennsylvania 100.0 Indiana Franklin Realty, Inc. Indiana 100.0 Indiana Michigan Power Company Indiana 100.0 Blackhawk Coal Company Utah 100.0 Price River Coal Company Indiana 100.0 Integrated Communications Systems, Inc. Georgia 13.1 (h) Kentucky Power Company Kentucky 100.0 Kingsport Power Company Virginia 100.0 Ohio Power Company Ohio 99.1 (i) Cardinal Operating Company Ohio 50.0 (j) Central Coal Company West Virginia 50.0 (f) Central Ohio Coal Company Ohio 100.0 Central Operating Company West Virginia 50.0 (g) Southern Ohio Coal Company West Virginia 100.0 Windsor Coal Company West Virginia 100.0 Ohio Valley Electric Corporation Ohio 44.2 (k) Indiana-Kentucky Electric Corporation Indiana 100.0 Wheeling Power Company West Virginia 100.0 (a) Owned 99% by AEP Resources International, Ltd. and 1% by AEP Resources Project Management Company, Ltd. (b) AEP Pushan Power LDC owns 70% and the remaining 30% is owned by two unaffiliated companies. (c) 13,499,500 shares of Common Stock, all owned by parent, have one vote each and 197,465 shares of Preferred Stock, all owned by public, have one vote each. (d) Owned 50% by AEP Resources, Inc. And 50% by a corporation not affiliated with American Electric Power. (e) Owned 50% by Appalachian Power Company and 50% by Ohio Power Company. (f) American Electric Power Company, Inc. owns 13.1% of the stock and the remaining 86.9% is owned by unaffiliated companies. (g) Effective as of 12/31/97, Central Operating Company has been dissolved. (h) American Electric Power Company, Inc. owns 13.1% of the stock and the remaining 86.9% is owned by unaffiliated companies. (i) 27,952,473 shares of Common Stock, all owned by parent, have one vote each and 257,921 shares of Preferred Stock, all owned by public, have one vote each. (j) Ohio Power Company owns 50% of the stock; the other 50% is owned by a corporation not affiliated with American Electric Power Company, Inc. (k) American Electric Power Company, Inc. and Columbus Southern Power Company own 39.9% and 4.3% of the stock, respectively, and the remaining 55.8% is owned by unaffiliated companies.
EX-23 6 AEP CONSENT OF DELOITTE & TOUCHE Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post-Effective Amendment No. 3 to Registration Statement No. 33-01052 of American Electric Power Company, Inc. on Form S-8 and Post-Effective Amendment No. 3 to Registration Statement No. 33-01734 of American Electric Power Company, Inc. on Form S-3 of our reports dated February 24, 1998, appearing in and incorporated by reference in this Annual Report on Form 10-K of American Electric Power Company, Inc. for the year ended December 31, 1997. Deloitte & Touche LLP Columbus, Ohio March 25, 1998 EX-24 7 AEP POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY AMERICAN ELECTRIC POWER COMPANY, INC. Annual Report on Form lO-K for the Fiscal Year Ended December 31, 1997 The undersigned directors of AMERICAN ELECTRIC POWER COMPANY, INC., a New York corporation (the "Company"), do hereby constitute and appoint E. LINN DRAPER, JR., G. P. MALONEY and P. J. DeMARIA, and each of them, their attorneys-in-fact and agents, to execute for them, and in their names, and in any and all of their capacities, the Annual Report of the Company on Form lO-K, pursuant to Section 13 of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys- in-fact and agents, and each of them, full power and authority to do and perform every act and thing required or necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have signed these presents this 28th day of January, 1998. /s/ P. J. DeMaria /s/ G. P. Maloney P. J. DeMaria G. P. Maloney /s/ John P. DesBarres /s/ Angus E. Peyton John P. DesBarres Angus E. Peyton /s/ E. Linn Draper, Jr. /s/ Donald G. Smith E. Linn Draper, Jr. Donald G. Smith /s/ Robert M. Duncan /s/ Linda Gillespie Stuntz Robert M. Duncan Linda Gillespie Stuntz /s/ Robert W. Fri /s/ Kathryn D. Sullivan Robert W. Fri Kathryn D. Sullivan /s/ Lester A. Hudson, Jr. /s/ Morris Tanenbaum Lester A. Hudson, Jr. Morris Tanenbaum /s/ Leonard J. Kujawa Leonard J. Kujawa EX-27 8 ARTICLE UT FIN. DATA SCH. FOR 10-K
UT 0000004904 AMERICAN ELECTRIC POWER COMPANY, INC. 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 11,632,849 1,358,810 1,518,136 288,011 1,817,540 16,615,346 1,293,435 1,778,782 1,605,017 4,677,234 127,605 46,724 5,129,463 199,285 0 355,790 294,454 0 437,303 101,089 5,246,399 16,615,346 6,161,368 362,560 4,814,354 5,176,914 984,454 59,572 1,044,026 405,815 510,961 17,831 510,961 453,453 236,250 1,197,922 $2.70 $2.70 Net income includes an extraordinary loss of $(109,419,000) for United Kingdom windfall tax. Represents preferred stock dividend requirements of subsidiaries; deducted before computation of net income. EPS includes an extraordinary loss of $(0.58)for United Kingdom windfall tax.
-----END PRIVACY-ENHANCED MESSAGE-----