-----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, ABHFbPpMiZqV32wNponGiX+aQAg+QjxDDEQefF1KC2srB+kxoZOZ6F1IUh0++RVa MXylmkMGU8sgx0i1QTfZ3A== 0000004904-00-000041.txt : 20000327 0000004904-00-000041.hdr.sgml : 20000327 ACCESSION NUMBER: 0000004904-00-000041 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPALACHIAN POWER CO CENTRAL INDEX KEY: 0000006879 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 540124790 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03457 FILM NUMBER: 577477 BUSINESS ADDRESS: STREET 1: 40 FRANKLIN RD SW CITY: ROANOKE STATE: VA ZIP: 24011 BUSINESS PHONE: 7039852300 MAIL ADDRESS: STREET 1: 1 RIVERSIDE PLAZA CITY: COLUMBUS STATE: OH ZIP: 43215 10-K405 1 APPALACHIAN POWER 1999 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 |_| 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) 1 Riverside Plaza Columbus, Ohio 43215 Telephone (614) 223-1000 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. 2 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 Common Stock, Power 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 7.30% Senior Notes, Series B, 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 7.60% Junior Subordinated Deferrable Interest Debentures, Series B, Due 2038..........................................New York Stock Exchange Kentucky Power 8.72% Junior Subordinated Deferrable Company 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 7 3/8% Senior Notes, Series A, Due 2038........................................ New York Stock Exchange
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 X . No. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- 3 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 1, 2000 FEBRUARY 1, 2000 ------------------------- --------------------- AEP Generating Company None 1,000 ($1,000 par value) American Electric Power Company, Inc $6,538,856,569 194,103,349 ($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). 4 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 Part II ended December 31, 1999: 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 Part III 2000 Annual Meeting of Shareholders, to be filed within 120 days after December 31, 1999 Portions of Information Statements of the following companies for 2000 Part III Annual Meeting of Shareholders, to be filed within 120 days after December 31, 1999 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5 TABLE OF CONTENTS PAGE NUMBER ------ Glossary of Terms........................................................ i Forward-Looking Information.............................................. 1 PART I Item 1. Business............................................. 2 Item 2. Properties........................................... 38 Item 3. Legal Proceedings.................................... 43 Item 4. Submission of Matters to a Vote of Security Holders.. 44 Executive Officers of the Registrants.............................. 44 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 46 Item 6. Selected Financial Data.............................. 47 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition............... 47 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................ 48 Item 8. Financial Statements and Supplementary Data.......... 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 48 PART III Item 10. Directors and Executive Officers of the Registrants.. 48 Item 11. Executive Compensation............................... 50 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 54 Item 13. Certain Relationships and Related Transactions....... 56 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 56 Signatures............................................................... 58 Index to Financial Statement Schedules................................... S-1 Independent Auditors' Report............................................. S-2 Exhibit Index............................................................ E-1 6 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. SO(2) 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....................Virginia State Corporation Commission. 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.
i 7 [THIS PAGE INTENTIONALLY LEFT BLANK] 8 FORWARD-LOOKING INFORMATION - -------------------------------------------------------------------------------- This report made by AEP and certain of its subsidiaries 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 from forward-looking statements are: o Electric load and customer growth. o Abnormal weather conditions. o Available sources and costs of fuels. o Availability of generating capacity. o The impact of the proposed merger with CSW, including any regulatory conditions imposed on the merger and the ability of the combined companies to realize the synergies expected as a result of the proposed combination, or the inability to consummate the merger with CSW. o The speed and degree to which competition is introduced to our power generation business. o The structure and timing of a competitive market and its impact on energy prices or fixed rates. o The ability to recover net regulatory assets and other stranded costs in connection with deregulation of generation. o New legislation and government regulations. o The ability of AEP to successfully control its costs. o The success of new business ventures. o International developments affecting AEP's foreign investments. o The effects of fluctuations in foreign currency exchange rates. o The economic climate and growth in AEP's service territory. o Unforeseen events affecting AEP's efforts to restart its nuclear generating units which are on an extended safety related shutdown. o The ability of AEP to challenge successfully new environmental regulations and to litigate successfully claims that AEP violated the Clean Air Act. o Inflationary trends. o Changes in electricity and gas market prices. o Interest rates. o Other risks and unforeseen events. 1 9 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 worldwide as discussed in New Business Development. The service area of AEP's domestic 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 subsidiaries 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, which do business as "American Electric Power," have traditionally provided electric service, consisting of generation, transmission and distribution, on an integrated basis to their retail customers. At December 31, 1999, the subsidiaries of AEP had a total of 17,306 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 896,000 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, 1999, APCo and its wholly owned subsidiaries had 3,290 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 655,000 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, 1999, CSPCo had 1,466 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 559,000 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, 1999, I&M had 3,130 employees. Among the principal industries 2 10 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 171,000 customers in an area in eastern Kentucky, and in supplying electric power at wholesale to other utilities and municipalities in Kentucky. At December 31, 1999, KEPCo had 501 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 45,000 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, 1999, Kingsport Power Company had 62 employees. OPCo (organized in Ohio in 1907 and re-incorporated in 1924) is engaged in the generation, sale, purchase, transmission and distribution of electric power to approximately 691,000 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, 1999, OPCo and its wholly owned subsidiaries had 3,941 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 42,000 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, 1999, Wheeling Power Company had 74 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 and KEPCo. AEGCo's agreement to sell power to VEPCo expired December 31, 1999. 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 3 11 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 affiliate 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. Such legislation has been reintroduced in 1999. It is expected that a number of bills contemplating the restructuring of the electric utility industry will be introduced in the current 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. 4 12 CLASSES OF SERVICE The principal classes of service from which the domestic electric utility subsidiaries of AEP derive revenues and the amount of such revenues (from kilowatt-hour sales) during the year ended December 31, 1999 are as follows:
AEP AEGCo APCo CSPCo I&M KEPCo OPCo SYSTEM (a) ----- ---- ----- --- ----- ---- ---------- (IN THOUSANDS) Retail Residential Without Electric Heating .... $ 0 $ 232,122 $ 359,319 $ 263,467 $ 39,460 $ 289,705 $1,205,461 With Electric Heating ....... 0 346,040 113,881 114,319 67,196 144,034 822,111 -------- ---------- ---------- ---------- -------- ---------- ---------- Total Residential ....... 0 578,162 473,200 377,786 106,656 433,739 2,027,572 Commercial ..................... 0 301,325 420,612 290,833 62,641 276,539 1,390,453 Industrial ..................... 0 377,373 151,353 364,607 96,660 665,751 1,716,254 Miscellaneous .................. 0 35,378 17,289 6,708 898 8,222 72,211 -------- ---------- ---------- ---------- -------- ---------- ---------- Total Retail ............. 0 1,292,238 1,062,454 1,039,934 266,855 1,384,251 5,206,490 Wholesale (sales for resale) ...... 216,959 269,368 120,374 303,533 80,455 572,136 814,190 -------- ---------- ---------- ---------- -------- ---------- ---------- Total from KWH Sales ..... 216,959 1,561,606 1,182,828 1,343,467 347,310 1,956,387 6,020,680 Provision for Revenue Refunds ..... 0 8,687 0 (1,143) 0 0 8,466 -------- ---------- ---------- ---------- -------- ---------- ---------- Total Net of Provision for Revenue Refunds ...... 216,959 1,570,293 1,182,828 1,342,324 347,310 1,956,387 6,029,146 Other Operating Revenues .......... 230 80,644 47,166 51,795 26,672 82,876 285,517 -------- ---------- ---------- ---------- -------- ---------- ---------- Total Electric Operating Revenues ............. $217,189 $1,650,937 $1,229,994 $1,394,119 $373,982 $2,039,263 $6,314,663 ======== ========== ========== ========== ======== ========== ==========
- ---------------------------- (a) Includes revenues of other subsidiaries not shown and 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 SO(2) Allowances associated with transactions under the Interconnection Agreement. Power marketing and trading transactions (trading activities) are conducted by the AEP Power Pool and shared among the parties under the Interconnection Agreement. Trading activities involve the purchase and sale of electricity under physical forward contracts at fixed and variable prices and the trading of electricity contracts including exchange traded futures and options and over-the-counter options and swaps. The majority of these transactions represent physical forward contracts in the AEP System's traditional marketing area and are typically settled by entering into offsetting contracts. The regulated physical forward contracts are recorded on a net basis in the month when the contract settles. In addition, the AEP Power Pool enters into transactions for the purchase and sale of electricity options, futures and swaps, and for the forward purchase and sale of electricity outside of the AEP System's traditional marketing area. The following table shows the net credits or (charges) allocated among the parties under 5 13 the Interconnection Agreement and Interim Allowance Agreement during the years ended December 31, 1997, 1998 and 1999:
1997(a) 1998(a) 1999(a) ------- ------- ------- (IN THOUSANDS) APCo....... $(237,000) $(142,500) $ (89,100) CSPCo...... (138,000) (146,800) (184,500) I&M........ 67,000 (86,100) (61,700) KEPCo...... 20,000 34,000 23,700 OPCo....... 288,000 341,400 311,600
- ------------------------- (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 Power Pool 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, 1997, 1998 and 1999:
1997(a) 1998(a) 1999(a) ------- ------- ------- (IN THOUSANDS) AEGCo(b)....... $ 26,200 $ 23,500 $ 23,800 APCo(c)........ 37,500 40,700 32,900 CSPCo(c)....... 18,300 23,000 19,700 I&M(c)(d)...... 42,400 47,800 42,300 KEPCo(c)....... 7,700 8,700 7,700 OPCo(c)........ 30,200 36,900 30,500 -------- -------- -------- Total System... $162,300 $180,600 $156,900 ======== ======== ========
- ----------------------- (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 that expired on December 31, 1999. 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 1997, 1998 and 1999 were made on a short-term basis, except that $25,900,000, $38,300,000 and $37,400,000, 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 1997, 1998 and 1999 amounts for I&M include $21,100,000, $21,800,000 and $20,800,000, respectively, 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 June 1993, certain municipal customers of APCo 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 were full-requirements contracts which precluded the customers from purchasing power from third parties until 1998. 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. On April 5, 1999, the FERC found that its previous orders did not violate the Federal Power Act. On February 29, 2000, the FERC denied APCo's request for rehearing. The customers terminated their contracts with APCo in 1998. 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 6 14 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 Regulation. As discussed below, 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, 1997, 1998 and 1999:
1997 1998 1999 ---- ---- ---- (IN THOUSANDS) APCo........ $ 8,400 $ (2,400) $ (8,300) CSPCo....... 29,900 35,600 39,000 I&M......... (46,100) (44,100) (43,900) KEPCo....... (2,700) (6,000) (4,300) OPCo........ 10,500 16,900 17,500
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, 1997, 1998 and 1999:
1997 1998 1999 ---- ---- ---- (IN THOUSANDS) APCo............. $18,000 $ 30,600 $ 28,600 CSPCo............ 10,200 18,100 18,600 I&M.............. 10,500 19,200 19,800 KEPCo............ 3,900 6,400 6,800 OPCo............. 27,200 42,100 38,300 ------- -------- -------- Total System..... $69,800 $116,400 $112,100 ======= ======== ========
The AEP System has contracts with non-affiliated companies for transmission of approximately 5,400 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 transmission 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 transmission service. In December 1999, FERC issued Order 2000, which provides for the voluntary formation of regional transmission organizations (RTOs), entities created to operate, plan and control utility transmission assets. Order 2000 also prescribes certain characteristics and functions of acceptable RTO proposals. The rule requires all public utilities, such as the AEP operating companies, that are members of an approved or conditionally approved transmission entity, to file by January 2001 an explanation of how that entity meets the characteristics and functions specified in the order. 7 15 On July 9, 1996, the AEP System companies filed a tariff conforming with the FERC's pro-forma transmission tariff. During 1998 and 1999 AEP engaged in discussions with Consumers Energy Company, FirstEnergy Corp., Detroit Edison Company and VEPCo regarding the development of the Alliance RTO which may take the form of an independent system operator (ISO) or an independent transmission company (Transco), depending upon the occurrence of certain conditions. The Transco, if formed, would operate transmission assets that it would own, and also would operate other owners' transmission assets on a contractual basis. In 1999, these companies filed with the FERC a proposal to form the RTO. In December 1999, the FERC approved the Alliance RTO, conditioned upon certain changes to the proposal relating to governance of the RTO, resolution of intra-RTO conflicts and establishment of a rate structure. The participants are currently developing a revised proposal to respond to the concerns expressed in the FERC's order. 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 899,000 kilowatts. On March 1, 2000, it is scheduled to increase to approximately 1,249,000 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 1999. 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 26 of the rural electric cooperatives which operate in the State of Ohio at 324 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 July 30, 1999, was recorded at 1,251,946 kilowatts. In January 2000, OPCo and National Power Cooperative, Inc. (NPC), an affiliate of Buckeye, entered into an agreement, subject to specified conditions, relating to construction and operation of a 510 mw gas-fired electric generating peaking facility to be owned by NPC. From the commercial operation date (expected in early 2002) until the end of 2005, OPCo will be entitled to the power generated by the facility, and responsible for the fuel and other costs of the facility. After 2005, NPC and OPCo will be entitled to 80% and 20%, respectively, of the power of the facility, and both parties will generally be responsible for the fuel and other costs of the facility. OPCo will also provide certain back-up power to NPC. AEP Resources Service Company will provide engineering, procurement and construction for the facility. 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. OPCo is providing electric 8 16 service to Century pursuant to a contract approved by the PUCO for the period July 1, 1996 through July 31, 2003. On November 14, 1996, the PUCO approved (1) an interim agreement pursuant to which OPCo would 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. Effective January 1, 2000, OPCo transferred its obligation and right to serve Ormet to the electric cooperative. 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, through December 31, 1999, 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 proportionate 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 associated 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 Agreement 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, 2004. A unit power agreement among AEGCo, I&M, VEPCo, and APCo provided 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 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. With the expiration of the VEPCo agreement on December 31, 1999, I&M increased its purchases of energy from AEGCo to 910 megawatts of Rockport capacity. Approximately 30% of AEGCo's operating revenue in 1999 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 9 17 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) provide 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 and transmission lines 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; availability of capacity; 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 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 many 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. Proposals are being made and legislation has been enacted in Ohio and Virginia that would also require electric utilities to sell distribution services separately. These measures 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 10 18 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, as 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 any stranded investment losses. 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. 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 11 19 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 benefited by attracting new industrial customers to their service territories. The legislatures and/or the regulatory commissions in many states, including some in AEP's service territory, 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 requirement 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 should 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 2000, Senate Bill 450 was introduced in the Indiana Senate on behalf of a group of industrial customers. The bill would have allowed retail electric customers to choose their electricity supply companies. The bill was not reported out of committee prior to legislative adjournment. AEP continues to work with other utilities in Indiana to develop a consensus on customer-choice legislation that can be enacted into law in Indiana. The outcome of this effort is uncertain. Kentucky: During the 1998 Regular Session of the Kentucky legislature, the Electric Utility Restructuring Task Force was established by resolution. The final report of the Task Force issued in December 1999 recommended that, during the 2000 General Assembly, the legislature should not take any action to restructure the electric utility industry and the legislature should reauthorize the Task Force. It is unlikely that comprehensive restructuring legislation will be introduced in Kentucky until the 2002 General Assembly. The KPSC on February 18, 2000, issued an order stating its intent to promulgate regulations governing cost allocation for affiliate transactions and a code of conduct. There may be legislative action in the 2000 General Assembly to codify some or all of the concepts outlined by the KPSC order. The KPSC Chairwoman leads 23 state public utility commissions in a coalition entitled Low Cost States Initiative. The coalition's stated purpose is to ensure that the U.S. Congress gives equal consideration to the issues facing low-cost states. The coalition is focusing on the following five issues: o A National Voice. o Low Rates. o Rural Electricity Rates. o Stranded Costs and Benefits. o Economic Development. 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 12 20 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 appealed the MPSC's order to the Michigan Supreme Court and in June 1999 the Supreme Court ruled that the MPSC lacks the authority to mandate retail wheeling programs, but does have the authority to set transmission rates for wheeled power if a utility voluntarily chooses to offer direct retail access service. In response to the court ruling, Consumers and Detroit Edison committed to participate voluntarily in the MPSC's restructuring program described below. 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 authorization is required prior to the implementation of any securitization program. In January 2000, Senate Bill 937 was introduced in the Michigan Senate, which is an attempt to codify the MPSC's restructuring orders with certain other modifications. The bill provides for: o Phase-in period to begin June 1, 2000. o Three-year rate freeze for customers who choose to remain with their incumbent utility. o Recovery of stranded costs during a transition period extending through 2007. Ohio: In October 1999, electric utility restructuring legislation (Am. Sub. S.B. No. 3) was enacted into law. The law provides for: o Effective January 1, 2001: o Customer choice of electricity supplier. o Residential rate reduction of 5% for the generation portion of rates. o Freezing of generation rates, including fuel. o PUCO Authorization: o To address certain major transition issues, including the unbundling of rates and recovery of transition costs. Transition costs can include regulatory assets, stranded costs such as the impairment of generating assets, employee severance and retraining costs, consumer education and other costs. Stranded generation costs are those costs of generation above the market price for electricity that potentially would not be recoverable in a competitive market. o To approve a transition plan for each electric utility company with a deadline of no later than October 31, 2000 for those approvals. CSPCo and OPCo filed their transition plans with the PUCO on December 30, 1999. Their plans included the following: 13 21 o Rate unbundling plan, including tariff terms and conditions necessary for restructuring. o Corporate separation plan. o Application for transition revenues. o Plan for independent operation of transmission facilities. o Other components for the implementation of restructuring. Virginia: In March 1999, the Virginia Electric Utility Industry Restructuring Act and related tax legislation were enacted into law. The restructuring law requires Virginia utilities to join or establish a regional transmission entity by January 2001, to which such utilities shall transfer the management and control of their transmission systems. The law provides for a transition to retail customer choice from January 1, 2002 through January 1, 2004. The Virginia SCC can delay or accelerate the implementation of choice based on considerations of reliability, safety, communications or market power, but in no event shall any delay extend the implementation of customer choice beyond January 1, 2005. With limited exceptions, the generation of electricity will no longer be subject to regulation. The law provides for capped rates, effective January 1, 2001, for a period of time ending as late as July 1, 2007. The capped rates may be terminated after January 1, 2004, upon petition of the Virginia SCC by the utility and a finding by the Virginia SCC that an effective competitive market exists. If capped rates continue beyond January 1, 2004, the law provides for a one-time change in the non-generation components of such rates upon approval by the Virginia SCC. The Virginia SCC also may adjust the capped rates in connection with the utility's recovery of fuel costs, changes in taxation by Virginia, and any financial distress of the utility beyond the utility's control. The restructuring law provides for recovery of just and reasonable net stranded costs to the extent that such costs exceed zero in total value for any incumbent electric utility through either capped rates or the imposition of a wires charge upon customers who may depart the incumbent in favor of an alternative supplier prior to the termination of the rate cap. A ten-member legislative task force, to serve from July 1, 1999 through July 1, 2005, will monitor the work of the Virginia SCC in implementing the law and review related matters. The task force will report annually to the Governor and legislature. The tax law provides for replacement of gross receipts and certain other taxes by (i) a consumption tax levied upon customers on the basis of kilowatt-hour usage and (ii) a state corporate net income tax. The intention of the tax law is to achieve approximate revenue neutrality for Virginia. West Virginia: On January 28, 2000, the West Virginia PSC issued an order approving an electricity restructuring plan for West Virginia that was supported by a broad range of interested parties, including AEP. Among other provisions, the restructuring plan provides for: o Customer choice to begin on January 1, 2001, or at a later date set by the West Virginia PSC after all necessary rules are in place (the "starting date"). o Deregulation of generation assets occurring on the starting date. o A transition period of up to 13 years, during which an incumbent utility must provide default service for customers who do not change suppliers unless an alternative default supplier is selected through a West Virginia PSC-sponsored bidding process. o Default rates for residential and small commercial customers are capped for four years after the starting date, and then increased at pre- defined levels for the next nine years. o Default rates for industrial and large commercial customers are discounted by 1% for 4.5 years, beginning July 1, 2000, and then increased at pre- defined levels for an additional three years. 14 22 o Metering and billing are deregulated for industrial and large commercial customers on the starting date; metering and billing are deregulated for residential and small commercial customers no later than four years after the starting date. On March 11, 2000, the West Virginia legislature approved the restructuring plan by joint resolution. The joint resolution provides that the West Virginia PSC cannot implement the plan until the legislature makes necessary tax law changes to preserve revenues of state and local governments. 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 has expanded its business to non-regulated energy activities through several subsidiaries, including AEP Energy Services, Inc. (AEPES), AEP Resources, Inc. (Resources), AEP Pro Serv, Inc. (formerly AEP Resources Service Company) (Pro Serv) and AEP Communications, LLC (AEP Communications). AEPES AEPES markets and trades natural gas and provides gas storage and transportation services. Resources 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. Resources has business development offices in London, Beijing, Singapore, Sydney, Washington and Houston. Resources and another AEP subsidiary have a 50% interest in Yorkshire Electric Group plc (Yorkshire Electricity) with an indirect wholly-owned subsidiary of New Century Energies, Inc. Yorkshire Electricity is a United Kingdom independent regional electricity company. It is principally engaged in the supply and distribution of electricity. Yorkshire Electricity has two million distribution customers in its authorized service territory which is comprised of 3,860 square miles and located centrally in the east coast of England. Resources also indirectly owns CitiPower Pty., an electric distribution and retail sales company in Victoria, Australia. CitiPower serves approximately 250,000 customers in the city of Melbourne. With about 3,100 miles of distribution lines in a service area that covers approximately 100 square miles, CitiPower distributes about 4,800 gigawatt-hours annually. 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). Unit 1 went into service in February 1999 and Unit 2 went into service in June 15 23 1999. Resources' share of the total cost of the project of $185,000,000 was approximately $110,000,000. In December 1999, Resources contributed $47,000,000 to acquire a 50% interest in the Bajio power project in Mexico. The Bajio project is a 600 megawatt natural gas-fired, combined cycle plant and related assets located approximately 160 miles from Mexico City. Bechtel Power Corporation, an affiliate of Resources' partner (InterGen), will build the facility, which is estimated to cost $430,000,000. Approximately 80% of the project costs will be provided by third party debt, some of which will be supported by letters of credit issued on behalf of Resources. The facility will be operated and managed by one or more companies jointly owned by Resources and InterGen. Bajio has a 25-year contract to sell 495 megawatts of the plant's output to Mexico's federally owned electric system; the remainder is expected to be sold to industrial customers in the region. Construction is expected to be completed in the fall of 2001. Resources, through AEP Resources Australia Pty., Ltd., a special purpose subsidiary of Resources, owns a 20% interest in Pacific Hydro Limited. Pacific Hydro is principally engaged in the development and operation of, and ownership of interests in, hydroelectric facilities in the Asia Pacific region. Currently, Pacific Hydro has interests in six hydroelectric units that operate or are under construction in Australia and the Philippines. The hydroelectric facilities in which Pacific Hydro had interests as of December 31, 1999 (including those under construction) had total design capacity of approximately 163 megawatts. Resources owns midstream gas assets, including: o A 2,000-mile intrastate pipeline system in Louisiana. o Four natural gas processing plants that straddle the pipeline. o A ten billion cubic foot underground natural gas storage facility directly connected to the Henry Hub, the most active gas trading area in North America. The pipeline and storage facilities are interconnected to 15 interstate and 23 intrastate pipelines. Pro Serv Pro Serv 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 AEP Communications markets energy information, wireless tower infrastructure and fiber optic services. In 1998, AEP Communications launched Datapult(SM), a portfolio of energy information data and analysis tools designed to help customers identify energy- and cost-saving opportunities. AEP Communications also is expanding its fiber optic network and marketing dedicated telecommunications bandwidth to other carriers. SEC Limitations AEP has received approval from the SEC under PUHCA to issue and sell securities in an amount up to 100% of its average quarterly consolidated retained earnings balance (such average balance was approximately $1.7 billion for the twelve months ended December 31, 1999) for investment in exempt wholesale generators and foreign utility companies. Resources expects to continue its pursuit of new and existing energy generation and delivery projects worldwide. SEC Rule 58 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. Risk These continuing efforts to invest in and develop new business opportunities offer the potential of earning returns which may exceed those of traditional AEP rate-regulated operations. However, 16 24 they also involve a higher degree of risk which must be carefully considered and assessed. AEP may make additional substantial investments in these and other new businesses. Reference is made to Market Risks under Item 7A herein for a discussion of certain market risks inherent in AEP business activities. 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. 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 the receipt of required regulatory approvals. Assuming the receipt of all required approvals, completion of the merger is anticipated to occur in the second quarter of 2000. The merger agreement has been extended for six months until June 30, 2000 by both AEP's and CSW's boards of directors. Should the merger approval process extend beyond June, either AEP or CSW could terminate the merger agreement. On March 15, 2000, the FERC conditionally approved the merger. Conditions placed on the merger include: o Transfer operational control of AEP's east and west transmission systems to a fully-functioning, FERC-approved regional transmission organization by December 15, 2001. See Transmission Services for Non-Affiliates. o Two interim transmission-related mitigation measures consisting of market monitoring and independent calculation and posting of available transmission capacity to monitor the operation of AEP's east transmission system. o Divestiture of 550 MW of generating capacity comprised of 300 MW of capacity in the Southwest Power Pool (SPP) and 250 MW of capacity in the Electric Reliability Council of Texas (ERCOT). The FERC will require AEP and CSW to divest their entire ownership interest in the generating facilities that are to be divested. Alternatively, AEP and CSW may choose to divest the same or greater amount of capacity from different generating plants in their entirety. However, such generating plants must be of similar cost, operation and location characteristics as the generating plants AEP and CSW originally proposed. o AEP and CSW must complete divestiture of the ERCOT capacity by March 15, 2001 and divestiture of the SPP capacity by July 1, 2002. The FERC found that certain energy sales of SPP and ERCOT capacity would be reasonable and effective interim mitigation measures until completion of the required SPP and ERCOT divestitures. The FERC will require the proposed interim energy sales to be in effect when the merger is consummated. AEP and CSW must notify the FERC by March 30, 2000 whether they accept the condition that they transfer operational control of their transmission facilities to a fully-functioning, FERC-approved regional transmission organization by December 15, 2001 and the condition requiring the interim mitigation sales measures. If AEP and CSW accept the conditions, then AEP and CSW must make a compliance filing at least 60 days prior to consummation of the merger describing their plan to implement the interim mitigation measures. AEP and CSW intend to make this compliance filing on such date to permit completion of the merger in the second quarter of 2000. AEP and CSW believe they can address the conditions. CSW is a global, diversified public utility holding company based in Dallas, Texas. CSW owns four domestic electric utility subsidiaries serving 1.8 million customers in portions of the states of Texas, Oklahoma, Louisiana and Arkansas and a regional electricity company in the United Kingdom. CSW also owns other international 17 25 energy operations and non-regulated subsidiaries involved in energy-related investments, energy efficiency services and financial transactions. CONSTRUCTION PROGRAM New Generation The AEP System is continuously involved in assessing the adequacy of its generation, transmission, distribution and other facilities to plan and 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, 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's generation resources include: o Purchase from an independent power producer's hydro project with an expected capacity value of 28 megawatts, commencing January 1, 2001. o Expiration of the Rockport Unit 2 sale of 250 megawatts to Carolina Power & Light Company, an unaffiliated company, on December 31, 2009. Apart from these changes and temporary power purchases that can be arranged, 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 about the year 2005. 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 extent of the need of AEP's operating companies for any additional generation resources in the foreseeable future is highly uncertain. Proposed Transmission Facilities 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. West Virginia: On May 27, 1998, the West Virginia PSC issued an order granting APCo's application for a certificate with respect to the preferred route for the Wyoming-Cloverdale 765,000-volt line. Virginia: By Hearing Examiner's Ruling of June 9, 1998, the procedural schedule for the certificate in Virginia was suspended for 90 days to allow APCo to conduct additional studies. On August 21, 1998, APCo filed a report stating that a two-phased alternative project could provide electrical transmission reinforcement comparable to the Wyoming-Cloverdale line. By Hearing Examiner's Ruling of September 22, 1998, the proceeding was continued and APCo was directed to study the first phase of the alternative 18 26 project, involving a line running from Wyoming Station in West Virginia to APCo's existing Jacksons Ferry Station in Virginia or any point on the Jacksons Ferry-Cloverdale 765kV transmission line. APCo estimates that the Wyoming-Jacksons Ferry line would be between 82-100 miles in length, including 32 miles in West Virginia previously certified. The Hearing Examiner also ordered APCo and the Virginia SCC Staff to provide at the evidentiary hearing information on generation alternatives, specifically natural gas generation, to APCo's proposed transmission line. APCo filed its study in May 1999, identifying the Jacksons Ferry Project as an alternative project to Cloverdale. A hearing was to have begun in November 1999, but this has been delayed to May 1, 2000. If the Virginia SCC grants a certificate for the Wyoming-Jacksons Ferry line, APCo will have to amend its certificate from West Virginia. Proposed Completion Schedule: If the Virginia SCC and West Virginia PSC issue the required certificates, APCo will cooperate with the Forest Service to complete the EIS process and obtain the federal permits. Management estimates that neither project can be completed before the summer of 2004. However, given the findings in the Draft EIS, APCo cannot presently predict the schedule for completion of the state and federal permitting process. 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 1997, 1998 and 1999 and their current estimate of 2000 construction expenditures, in each case including AFUDC but excluding nuclear fuel and other assets acquired under leases.
1997 1998 1999 2000 ACTUAL ACTUAL ACTUAL ESTIMATE ------ ------ ------ -------- (IN THOUSANDS) AEP System (a).. $762,000 $792,100 $866,900 $893,900 AEGCo ....... 3,900 6,600 8,300 4,200 APCo ........ 218,100 204,900 211,400 218,500 CSPCo ....... 108,900 115,300 115,300 136,100 I&M ......... 123,400 148,900 165,300 126,100 KEPCo ....... 66,700 43,800 44,300 33,200 OPCo ........ 172,700 185,200 193,900 233,600
- ----------------------- (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, environmental 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 1997, 1998 and 1999 and the current estimate for 2000 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.
1997 1998 1999 2000 ACTUAL ACTUAL ACTUAL ESTIMATE ------ ------ ------ -------- (IN THOUSANDS) AEGCo ........... $ 0 $ 800 $ 8 $ 0 APCo ............ 9,100 25,000 24,500 19,314 CSPCo ........... 1,300 5,300 10,600 13,154 I&M ............. 100 13,000 4,500 731 KEPCo ........... 1,300 4,600 1,900 313 OPCo ............ 11,800 27,100 37,400 70,888 ------- ------- ------- -------- AEP System.... $23,600 $75,800 $78,908 $104,400 ======= ======= ======= ========
19 27 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 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 purpose of retiring the short-term debt previously incurred. In 1999, AEP issued approximately 2,287,000 shares of Common Stock pursuant to its Dividend Reinvestment and Stock Purchase Plan and Employees Savings 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 1997-1999, net external funds from financings and capital contributions by AEP amounted, with respect to APCo, I&M, KEPCo and OPCo, to approximately 48%, 80%, 71% and 20%, 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 and CSPCo exceeded the amount of funds from financings and capital contributions by AEP. The ability of AEP's regulated subsidiaries to issue short-term debt is limited by regulatory restrictions and, in the case of some 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, 2000, 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 ....... $500 $ 80 $325 $350 $500 $150 $450 $2,415 ==== ==== ==== ==== ==== ==== ==== ====== Amount outstanding: Notes payable ..... $ -- $ 25 $ -- $ -- $ -- $ -- $ 5 $ 208 Commercial paper... 57 -- 123 46 224 40 190 680 ---- ---- ---- ---- ---- ---- ---- ------ $ 57 $ 25 $123 $ 46 $224 $ 40 $195 $ 888 ==== ==== ==== ==== ==== ==== ==== ======
- ----------------------- (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. 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 unsecured debt, 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. 20 28 New projects undertaken by Resources and its subsidiaries are generally financed through equity funds provided by AEP, non-recourse debt incurred on a project-specific basis, debt issued by Resources or through a combination thereof. See New Business Development and Item 7 for additional information concerning Resources and its subsidiaries. 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. However, the rates of AEP's operating subsidiaries in those states continue to be cost-based. 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. In addition, current rate regulation may, and in the case of Ohio and Virginia will, be subject to significant revision. See Competition and Business Change. APCo 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. 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. On February 18, 1999, the Virginia SCC approved a stipulation and settlement agreement among APCo, the Virginia SCC Staff and consumer and major industrial customer representatives that provides for the following: o Elimination of the $30,500,000 annual increase in base rates that has been collected subject to refund since mid-November 1997. o During the period January 1, 1998 through December 31, 2000: o Reduction in base rates of $6,000,000 from the level in effect prior to the November 1997 increase, with the expectation that rates would remain at the agreed-upon levels. o APCo's commitment to invest at least $90,000,000 in Virginia distribution facilities to maintain the overall quality and reliability of electric service. 21 29 o Benchmark rate of return on equity of 10.85% with one-third of earnings above that level to be retained by APCo and the remaining two-thirds to be refunded to ratepayers. o Refund with interest of all amounts collected above the approved rates. APCo made the refund with interest as ordered in the amount of $49,628,000. West Virginia: In May 1999, APCo filed with the West Virginia PSC for a base rate increase of $50,000,000 annually and a reduction in Expanded Net Energy Cost (ENEC) rates of $38,000,000 annually. On February 7, 2000, APCo and other parties to the proceeding filed for approval a Joint Stipulation and Agreement for Settlement with the West Virginia PSC that provides for, among other things: o No change in either base or ENEC rates after January 1, 2000 from those that expired on December 31, 1999 that were part of a prior West Virginia PSC-approved settlement. o Annual ENEC recovery proceedings are suspended and deferral accounting for over- or under-recovery is discontinued effective January 1, 2000. o The net cumulative deferred ENEC recovery balance as established by the prior West Virginia PSC order, which is $66,000,000 at December 31, 1999, shall remain as a regulatory liability until generation is deregulated. o APCo's share of any net savings from the pending merger between AEP and Central and South West Corporation prior to December 31, 2004 shall be retained by APCo. 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 is being sought under the transition charge provision of the Ohio electric utility restructuring law discussed in Competition and Business Change--Ohio. I&M Reference is made to Cook Nuclear Plant --Cook Plant Shutdown under Item 2 herein for a discussion of recovery of fuel costs. 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 fixed the electric fuel component 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. As a result of the Ohio electric utility restructuring law discussed in Competition and Business Change--Ohio, beginning in 2001, fuel adjustment proceedings in Ohio cease, thus ending the recovery mechanism in the 1992 and 1995 agreements and specifically ceasing the escalation feature of the Gavin cap. Therefore, OPCo must now rely on the transition charge for recovery of the 22 30 deferred fuel cost regulatory asset balance after December 31, 2000. The Muskingum mine, which supplied coal to the Muskingum River Plant Units 1-4, ceased operation in October 1999 with the exception of a limited amount of economically viable coal production ancillary to the reclamation activities. The Windsor mine, which supplies Cardinal Plant Unit 1, is scheduled to close in April 2000. The Meigs mine is scheduled to close in December 2001. These mines are closing, in part, as a result of compliance with the Phase II requirements of the Clean Air Act Amendments of 1990 (see Environmental and Other Matters -- Air Pollution Control -- Acid Rain). Unless future shutdown costs and/or the cost of coal production of OPCo's Muskingum, Windsor and Meigs mines, including amounts deferred, can be recovered, AEP's and OPCo's results of operations would be adversely affected. FUEL SUPPLY The following table shows the sources of power generated by the AEP System:
1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Coal....................... 88% 87% 92% 99% 99% Nuclear.................... 11% 12% 7% 0% 0% Hydroelectric and other.... 1% 1% 1% 1% 1%
Variations in the generation of nuclear power are primarily related to refueling outages and, for 1997 through 1999, the shutdown of the Cook Plant to respond to issues raised by the NRC. See Cook Nuclear Plant -- 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 23 31 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 divestiture of coal properties in light of Federal and state environmental and mining laws and regulations. Western coal purchased by System companies is transported by rail to an affiliated terminal on the Ohio River for transloading to barges for delivery to generating stations on the river. Subsidiaries of AEP lease approximately 4,055 coal hopper cars to be used in unit train movements, as well as 15 towboats, 451 jumbo barges and 145 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:
1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Total coal delivered to AEP operated plants (thousands of tons)....................... 46,867 51,030 54,292 54,004 54,306 Sources (percentage): Subsidiaries.................................................. 14% 13% 14% 14% 11% Long-term contracts........................................... 75% 71% 66% 66% 64% Spot or short-term purchases.................................. 11% 16% 20% 20% 24% Average price per ton of spot-purchased coal..................... $25.15 $23.85 $24.38 $25.05 $27.18
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:
1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- DOLLARS PER TON --------------- AEP System Companies........................................... $ 32.52 $ 31.70 $ 31.77 $ 32.60 $ 32.94 AEGCo....................................................... 18.80 18.22 19.30 19.37 20.79 APCo........................................................ 38.86 37.60 36.09 34.81 33.29 CSPCo....................................................... 33.23 31.70 31.69 31.63 29.94 I&M......................................................... 23.25 22.99 23.68 22.61 24.54 KEPCo....................................................... 26.91 27.25 26.76 27.42 26.76 OPCo........................................................ 37.58 35.96 36.00 38.94 40.56 CENTS PER MILLION BTU'S ----------------------- AEP System Companies........................................... 145.26 140.48 140.23 143.51 143.07 AEGCo....................................................... 112.87 109.25 115.21 112.63 116.90 APCo........................................................ 156.96 152.54 146.54 141.76 135.40 CSPCo....................................................... 140.79 134.60 134.44 134.15 127.42 I&M......................................................... 125.50 121.16 123.36 118.02 121.90 KEPCo....................................................... 114.77 114.42 110.37 112.15 109.91 OPCo........................................................ 157.62 151.55 151.66 164.44 169.23
24 32 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, 1999, the System's coal inventory was approximately 50 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 1999 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 1999 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 ESTIMATED REQUIRE- OF DELIVERED COAL TOTAL CONSUMPTION MENTS FOR REMAINDER ----------------------------- DURING 1999 OF USEFUL LIVES POUNDS OF SO(2) (IN THOUSANDS OF TONS) (IN MILLIONS OF TONS) BY WEIGHT PER MILLION BTU'S ---------------------- --------------------- --------- ----------------- AEGCo (a)............................... 4,510 225 0.3% 0.7 APCo.................................... 12,206 432 0.8% 1.3 CSPCo................................... 5,849(b) 234(b) 2.7% 4.5 I&M (c)................................. 6,948 254 0.6% 1.2 KEPCo................................... 3,099 93 1.1% 1.8 OPCo.................................... 19,088 623 2.1% 3.6
- ------------------------ (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 1999, 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 3,150,000 tons per year through 2001. 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 46,510,000 tons expires on 25 33 December 31, 2014 and another contract with remaining deliveries of 32,175,000 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 2000. 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 containing approximately 184,000,000 tons of clean recoverable coal and ranging in sulfur content between 3.4% and 4.5% sulfur by weight (weighted average, 3.8%), which reserves are presently being mined. 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 2.7%). 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 100,000,000 tons of clean recoverable coal ranging in sulfur content between 1.4% and 4.0% sulfur by weight (weighted average, 2.1%) of which approximately 23,000,000 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: o Mining and milling of uranium ore to uranium concentrates. o Conversion of uranium concentrates to uranium hexafluoride. o Enrichment of uranium hexafluoride. o Fabrication of fuel assemblies. o Utilization of nuclear fuel in the reactor. o Disposition of spent fuel. Steps currently 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. AEP anticipates that the Cook Plant has storage capacity to permit normal operations through 2012. 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 26 34 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 $72,000,000, exclusive of interest of $127,000,000 at December 31, 1999. 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, 1999, 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 disposal 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 for 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. DOE estimates its planned site for spent nuclear fuel will not be ready until at least 2010. On June 8, 1998, I&M filed a complaint in the U.S. Court of Federal Claims seeking damages in excess of $150,000,000 due to the U.S. Department of Energy's partial material breach of its unconditional contractual deadline to begin disposing of spent nuclear fuel and high level nuclear waste generated by the Cook Nuclear Plant. Similar lawsuits have been filed by other utilities. On April 6, 1999, the court granted DOE's motion to dismiss a lawsuit file by an unaffiliated utility. On May 20, 1999, the other utility appealed this decision to the U.S. Court of Appeals for the Federal Circuit. I&M's case has been stayed pending final resolution of the other utility's appeal. 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 27 35 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 1999, $29,000,000 in 1998, and $28,000,000 in 1997. At December 31, 1999 and 1998, I&M had recognized a decommissioning liability of $501,000,000 and $446,000,000, respectively. 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 the: o Type of decommissioning plan selected. o Escalation of various cost elements (including, but not limited to, general inflation). o Further development of regulatory requirements governing decommissioning. o Limited availability to date of significant experience in decommissioning such facilities. o Technology available at the time of decommissioning differing significantly from that assumed in these studies. o 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. Low-Level Waste: 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. As a result, 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 progress 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 decontamination and decommissioning of uranium enrichment facilities formerly owned by DOE. Funding is to be provided from a combination of sources including assessments against electric utilities which purchased enrichment services from DOE facilities. I&M's remaining estimated liability is $32,000,000, subject to inflation adjustments, and is payable in annual assessments over the next seven years. I&M recorded a regulatory asset concurrent with the 28 36 recording of the liability. The payments are being recorded and recovered as fuel expense over a 15-year period ending in 2007. I&M has joined with 25 other utility plaintiffs in filing a complaint in the U.S. District Court for the Southern District of New York seeking a declaratory judgment that the annual decontamination and decommissioning assessments are unconstitutional. I&M's claims for refund of previously paid assessments remain pending in the U.S. Court of Federal Claims. I&M is seeking to stay the Court of Federal Claims action pending the outcome of the District Court action. 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. In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. 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 recently adopted by certain states and proposed at the state and federal level 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 that 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 (SO(2)), measured in tons per year, on an aggregate basis. There are two phases of SO(2) control under the Acid Rain Program. Phase I, effective January 1, 1995, required SO(2) emission reductions from certain units that emitted SO(2) above a rate of 2.5 pounds per million Btu heat input in 1985. Phase II, which affects all fossil fuel-fired steam generating units with capacity greater than 25 megawatts imposes more stringent SO(2) emission control requirements beginning January 1, 2000. If a unit emitted SO(2) 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. In addition to regulating SO(2) emissions, Title IV of the CAAA regulates emissions of nitrogen oxides (NOx). Federal EPA has promulgated NOx emission limitations for all boiler types in the AEP System at levels significantly below original design. All emission limitations were to be achieved by January 1, 2000 on a unit-by-unit or System-wide average basis. 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. See NOx SIP Call and Section 126 Petitions below. In July 1997, Federal EPA revised the ozone and particulate matter National Ambient Air Quality Standards (NAAQS), creating a new eight-hour ozone standard and establishing a new standard for particulate matter less than 2.5 microns in diameter (PM(2.5)). Both of these new standards have the potential to affect adversely the operation of AEP System generating units. In May 1999, the U.S. 29 37 Court of Appeals for the District of Columbia Circuit remanded the ozone and PM(2.5) NAAQS to Federal EPA. Following denial of a request for rehearing and rehearing en banc by the Circuit Court, Federal EPA and several others filed petitions for a writ of certiorari with the U.S. Supreme Court on January 27, 2000. In September 1998, Federal EPA issued revisions to the New Source Performance Standards applicable to new and modified fossil fuel-fired power plants. The emission limit is set at a level which will require the use of post combustion control equipment. The final rule effectively requires selective catalytic reduction or comparable technology to control NOx emissions from new or modified coal-fired boilers. On September 21, 1999, the U.S. Court of Appeals for the District of Columbia Circuit vacated the standard with respect to modified sources. On December 21, 1999, the court issued an opinion upholding the standard as it applies to new sources. NOx SIP Call: On October 27, 1998, Federal EPA published in the Federal Register a final rule (NOx transport SIP call or NOx SIP Call) concluding that certain State Implementation Plans are deficient because they allow NOx emissions that contribute excessively to ozone non-attainment in downwind states. Federal EPA's NOx transport SIP call establishes state-by-state NOx emission budgets for the five-month ozone season to be met beginning May 1, 2003. The NOx budgets apply to 22 eastern states and the District of Columbia and are premised mainly on the assumption of controlling power plant NOx emissions projected for the year 2007 to 0.15 lb. per million Btu (approximately 85% below 1990 levels), although the reductions could be substantially greater for certain State Implementation Plans. The NOx transport SIP call purported to implement both the new eight-hour ozone standard and the one-hour ozone standard. Federal EPA subsequently stayed its reliance on the eight-hour standard for purposes of the NOx SIP Call. The SIP call was accompanied by a proposed Federal Implementation Plan, which could be implemented in any state that fails to submit an approvable SIP by September 1999. The NOx reductions called for by Federal EPA are targeted at coal-fired electric utilities and may adversely impact the ability of electric utilities to obtain new and modified source permits or to operate affected facilities without making significant capital expenditures. In October 1998, the AEP System operating companies joined with certain other utilities seeking a review of the final NOx SIP Call rule in the U.S. Court of Appeals for the District of Columbia Circuit. In May 1999, the court issued a stay of the September 1999 SIP submittal date. On March 3, 2000, the court issued a decision upholding the major provisions of the NOx SIP Call rule. The court did not take any action to lift the stay of the SIP submittal date. Preliminary estimates indicate that compliance with the revised NOx SIP Call rule could result in required capital expenditures as follows: (IN MILLIONS) AEP System.......................... $1,600 AEGCo............................ 125 APCo............................. 365 CSPCo............................ 136 I&M.............................. 202 KEPCo............................ 106 OPCo............................. 624 Compliance costs cannot be estimated with certainty and the actual costs incurred to comply could be significantly different from this preliminary estimate depending upon the compliance alternatives selected to achieve reductions in NOx emissions. Unless such costs are recovered from customers through regulated rates and/or reflected in the future market price of electricity if generation is deregulated, they could have a material adverse effect on results of operations, cash flows and possibly financial condition. Section 126 Petitions: In August 1997, eight northeastern states (Connecticut, Maine, Massachusetts, New Hampshire, New York, Pennsylvania, Rhode Island, and Vermont) filed petitions with Federal EPA under Section 126 of the CAA, claiming that NOx emissions from certain named sources in midwestern states, including all the coal-fired plants of AEP's operating subsidiaries, prevent those states from attaining the ozone NAAQS. Among other things, the petitioners 30 38 generally seek NOx emission reductions 85% below 1990 levels from the utility sources in midwestern states, as in the NOx SIP Call. On May 25, 1999, Federal EPA published in the Federal Register a final rule, which granted certain of these petitions. On January 18, 2000, Federal EPA revised and limited the rule to implementation of the one-hour ozone standard. The revised rule imposes reduction requirements comparable to the NOx SIP Call beginning May 1, 2003 for most of AEP's coal fired generating units. Certain AEP System companies and other utilities appealed the revised rule to the U.S. Court of Appeals for the District of Columbia Circuit on January 18, 2000. In 1999, Delaware, the District of Columbia, Maryland and New Jersey filed additional Section 126 petitions seeking similar relief. No action has yet been taken on those petitions. 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. In 1998, Federal EPA determined that the CAA, including the provisions discussed in the paragraph above, is adequate to address any adverse public health or environmental effects associated with the atmospheric deposition of hazardous air pollutants in the Great Lakes. 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: o Increasing the range of civil and criminal penalties for violations of the CAA and enhancing administrative civil provisions. o Imposing a national operating permit system, emission fee program and enhanced monitoring, recordkeeping and reporting requirements. Section 103 of the Comprehensive Environmental Response, Compensation, and Liability Act and Section 304 of the Emergency Planning and Community Right-to-Know Act require notification to state and federal authorities of releases of reportable quantities (RQs) of hazardous and extremely hazardous substances. A number of these substances are emitted by AEP's power plants and other sources. Until recently, emissions of these substances, whether expressly limited in a permit or otherwise subject to federal review or waiver (e.g., mercury), were deemed "federally permitted releases" which did not require emergency notification. On December 21, 1999, Federal EPA published interim guidance in the Federal Register, which provides that any hazardous substance or extremely hazardous substance not expressly and individually limited in a permit that is emitted at levels above an RQ must be reported. Specifically, constituents of regulated pollutants (e.g., metals contained in particulate matter) are not deemed to be federally permitted. Recognizing that this interim guidance would cause sources to reevaluate their air releases, Federal EPA issued a memorandum on 31 39 February 15, 2000 announcing its decision to exercise enforcement discretion for facilities that failed to report air releases prior to December 21, 1999. AEP is reevaluating its air releases and will provide supplemental information as appropriate. 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 (CO(2)), methane and nitrous oxides by 7% below 1990 levels and emissions of hydrofluorcarbons, perfluorocarbons and sulfur hexafluoride 7% below 1995 levels in the years 2008-2012. The Protocol was available for signature from March 16, 1998 to March 15, 1999 and requires ratification by at least 55 nations that account for at least 55% of developed countries' 1990 emissions of CO(2) to enter into force. Although the United States has agreed to the treaty and signed it on November 12, 1998, President Clinton has indicated that he will not submit the treaty to the Senate for ratification until it contains requirements for "meaningful participation by key developing countries" and the rules, procedures, methodology and guidelines of the treaty's market-based policy instruments, joint implementation programs and compliance enforcement provisions have been negotiated. At the Fourth Conference of the Parties, held in Buenos Aires, Argentina, in November 1998, the parties agreed to a work plan to complete negotiations on outstanding issues with a view toward approving them at the Sixth Conference of the Parties to be held in November 2000. Since the AEP System is a significant emitter of carbon dioxide, its results of operations, cash flows and financial condition could be adversely affected by the imposition of limitations on CO(2) emissions if compliance costs cannot be fully recovered from customers. In addition, any such severe program to reduce CO(2) emissions could impose substantial costs on industry and society and erode the economic base that AEP's operations serve. However, it is management's belief that the Kyoto Protocol is highly unlikely to be ratified or implemented in the U. S. West Virginia SO(2) Limits: West Virginia promulgated SO(2) 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 SO(2) 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. On August 4, 1994, Federal EPA issued a Notice of Violation to OPCo alleging that Kammer Plant was operating in violation of the applicable federally enforceable SO(2) 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. As of December 31, 1999, Kammer Plant had achieved compliance with an SO(2) emission limit of 2.7 lb. mm/Btu design heat input, pursuant to the provisions of the consent decree and the federally approved West Virginia State Implementation Plan. Short Term SO(2) 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 SO(2) 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 SO(2) levels. The effects of this proposed intervention program on AEP operations cannot be predicted at this time. Regional Haze: On July 1, 1999, Federal EPA finalized rules to regulate regional haze attributable to anthropogenic emissions. The primary goal of 32 40 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. The AEP System is a significant emitter of fine particulate matter and its precursors that could be linked to the creation of regional haze. Federal EPA's regional haze rule 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 SO(2) and NOx). The actual impact of the regional haze regulations cannot be determined at this time. AEP System operating companies and other utilities filed a petition seeking a review of the regional haze rule in the U.S. Court of Appeals for the District of Columbia Circuit on August 30, 1999. New Source Review: 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. In July 1998, Federal EPA requested comment on proposed revisions to the New Source Review rules which would change New Source Review applicability criteria by eliminating exemptions contained in the current regulation. New Source Review Litigation: In February 1999, Federal EPA (Regions III and V) issued a request under Section 114 of the CAA seeking documents and information regarding capital and maintenance expenditures at AEP's Cardinal, Gavin, Mitchell, Muskingum River and Sporn plants. Federal EPA conducted a review of the accounting records of AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo in the summer of 1998. Federal EPA subsequently issued Section 114 requests for Amos, Clinch River, Conesville, Kammer, Kanawha River and Tanners Creek plants. On November 3, 1999, the Department of Justice (DOJ), on Federal EPA's behalf, filed a complaint in the U.S. District Court for the Southern District of Ohio that alleges AEP made modifications to generating units at certain of its coal-fired generating plants over the course of the past 25 years that extend unit operating lives or restore or increase unit generating capacity without a preconstruction permit in violation of the CAA. The complaint named Cardinal, Mitchell, Muskingum River, Sporn and Tanners Creek plants. Federal EPA also issued Notices of Violation to AEP alleging similar violations at certain other AEP plants. A number of unaffiliated utilities (one of which operates a unit which AEP owns a portion of) also received Notices of Violation, complaints or administrative orders. One of the unaffiliated utilities, Tampa Electric Company, has settled its litigation with the federal government. The court has granted the states of Connecticut, New Jersey and New York leave to intervene in Federal EPA's action against AEP under the CAA. On March 17, 2000, the states of Maryland, Massachusetts, New Hampshire, Rhode Island and Vermont petitioned the court for leave to intervene in Federal EPA's action. AEP has not opposed these intervention requests and believes the court will grant them. On November 18, 1999, a number of environmental groups filed a lawsuit against power plants owned by AEP alleging similar violations to those in the Federal EPA complaint and Notices of Violation. On March 1, 2000, DOJ filed an amended complaint that added allegations for certain of the AEP plants previously named in the complaint as well as counts for Amos, Clinch River, Conesville, Kammer and Kanawha River plants. The plants included in the amended complaint are named by the environmental groups plaintiff and, along with 33 41 Gavin, are also named by the intervenor states. In addition to the allegations regarding New Source Review and New Source Performance Standard violations, DOJ included allegations regarding visible particulate emission violations for Cardinal and Muskingum River plants in connection with Notices of Violation issued by Region V, Federal EPA, on November 30, 1999. The CAA authorizes civil penalties of up to $27,500 per day per violation at each generating unit ($25,000 per day prior to January 30, 1997). Civil penalties, if ultimately imposed by the court, and the cost of any required new pollution control equipment, if the court accepts Federal EPA's contentions, could be substantial. In the event AEP does not prevail, any capital and operating costs of additional pollution control equipment that may be required as well as any penalties imposed could materially adversely affect future results of operations, cash flows and possibly financial condition unless such costs can be recovered through regulated rates, and where states are deregulating generation, unbundled transition period generation rates, wires charges and future market prices for energy. 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 generating plants are operating with NPDES permits. Under Federal EPA's regulations, operation under an expired NPDES permit is authorized provided an application is filed at least 180 days prior to expiration. Renewal applications are being prepared or have been filed for renewal of NPDES permits that expire in 2000. 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 curtailment 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. Section 316(b) of the Clean Water Act requires that cooling water intake structures reflect the best technology available (BTA) for minimizing adverse environmental impact. Under a court established schedule, Federal EPA is required to develop regulations defining adverse impacts and BTA by August 2001. As part of the rulemaking, Federal EPA has issued questionnaires to electric generating power plants, including AEP System plants, requesting information on impingement and entrainment of aquatic organisms from existing plant cooling water intakes. Federal EPA's rulemaking could result in a definition of BTA that would require retrofitting of certain plant intake structures. Such changes would involve costs for AEP System companies, but the significance of these costs cannot be determined at this time. 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. 34 42 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 that 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. Based on Federal EPA's current policy on intake credits and site specific variables and Michigan's implementation strategy, management does not presently expect the GLWQI will have a significant adverse impact on Cook Plant operations. If Indiana and Ohio eventually adopt the GLWQI criteria for statewide application, AEP System plants located in those states could be adversely affected, although the significance depends on the implementation strategy of those states. Oil Pollution Act: The Oil Pollution Act of 1990 (OPA) defines certain facilities that, due to oil storage volume and location, could reasonably be expected to cause significant and substantial harm to the environment by discharging oil. Such facilities must operate under approved spill response plans and implement spill response training and drill programs. OPA imposes substantial penalties for failure to comply. AEP companies with oil handling and storage facilities meeting the OPA criteria have in place required response plans, training and drill programs. 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, Compensation, 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, RCRA and similar state laws 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, joint and several, 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 environmental problems result. OPCo is the only AEP System company which is a defendant in a cost-recovery lawsuit related to clean-up liability at a Federal EPA-identified CERCLA site. OPCo settled its alleged liability at this site under terms of a consent decree and is awaiting formal dismissal from the case. AEP System companies are identified as Potentially Responsible Parties (PRPs) for four additional federal sites, including CSPCo at two sites and I&M at two sites. Management's present estimates do not anticipate material clean-up 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 clean-up, future results of operations and possibly financial condition could 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. 35 43 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 of in surface impoundments or landfills in accordance with state permits or authorization or are beneficially utilized. As required by RCRA, Federal 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, Federal 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, which are traditionally co-managed with high volume wastes, Federal EPA will gather additional information and make a regulatory determination by April 2000. Until that time, these low volume wastes are provisionally excluded from regulation under the hazardous waste provisions of RCRA when mixed with and co-managed with high volume coal combustion wastes. If Federal EPA determines that certain low volume coal combustion wastes should be subject to RCRA Subtitle C hazardous waste regulations, AEP System companies may incur additional waste management expenses. The significance of these costs cannot be determined at this time. 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 that 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. Underground Storage Tanks: Federal EPA's technical requirements for underground storage tanks containing petroleum required retrofitting or replacement of an appreciable number of tanks. Compliance costs for tank replacement were not significant. Some limited site remediation associated with tank removal is ongoing, but these costs are not expected to be significant. 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. The Energy Policy Act of 1992 established a coordinated Federal EMF research program which ended in 1998. The program funding was $65,000,000, half of which was provided by private parties including utilities. AEP contributed over $400,000 to this program. In 1999, the National Institute of Environmental Health Sciences (NIEHS), as required by the Act, provided a report to Congress summarizing the results of this program. The report concluded that "the probability that ...EMF is truly a health hazard is currently small" and that the evidence that exists for health effects is "insufficient to warrant aggressive regulatory actions." Nevertheless, the NIEHS identified several areas where further research might be warranted. AEP has supported EMF research through the years and continues to fund the Electric Power Research Institute's EMF research program, contributing over $400,000 to this program in 1999 and intending to contribute a similar amount in 2000. See Research and Development. AEP's participation in these programs is a continuation of its efforts to monitor and support further research and to communicate with its customers and employees about this issue. Residential customers of AEP are provided information and field measurements on request, although there is no scientific basis for interpreting such measurements. 36 44 A number of lawsuits based on EMF-related grounds have been filed 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. On March 23, 1998 the court ruled that the plaintiffs failed to prove that I&M caused any of the injuries claimed by the plaintiffs. This part of the trial court's decision was upheld on appeal. Certain issues unrelated to health effects are pending at the trial court. 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. These rules were reissued in 1998 with no change to EMF language. 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 over 100 research projects which are directed toward: o Developing more efficient methods of burning coal. o Reducing the emissions resulting from the combustion of coal. o Utilizing combustion by-products of coal. o Exploring new methods of generating electricity. o Exploring the application of new electrotechnologies. o 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 founded in 1973 that manages research and development initiatives, primarily on behalf of the U.S. electric utility industry. These initiatives include technical programs to improve power production, delivery and use. EPRI's more than 700 members represent over 90% of the kilowatt sales in the U.S., but also include competitive power producers, international organizations and others. Total AEP dues to EPRI were $14,000,000 for 1999, $15,400,000 for 1998 and $15,300,000 for 1997. Total research and development expenditures by AEP and its subsidiaries, including EPRI dues, were approximately $17,000,000 for the year ended December 31, 1999, $24,100,000 for the year ended December 31, 1998 and $23,600,000 for the year ended December 31, 1997. This includes expenditures of $700,000 for 1999, $3,300,000 for 1998 and $4,600,000 for 1997 related to pressurized fluidized-bed combustion, a process in which sulfur is removed during coal combustion and nitrogen oxide formation is minimized. 37 45 Item 2. PROPERTIES - -------------------------------------------------------------------------------- At December 31, 1999, 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:
38 46
NET KILOWATT OWNER, PLANT TYPE AND NAME LOCATION (NEAR) CAPABILITY -------------------------- --------------- ---------- 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 River 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, 39 47 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).............. 129,106(b) 2,022 APCo..................... 50,008 642 CSPCo (a)................ 14,947 -- I&M...................... 20,938 614 KEPCo.................... 10,352 258 OPCo .................... 29,756 509
- ---------------------- (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 121 high-voltage transmission interconnections with 25 neighboring electric utility systems. The all-time and 1999 one-hour peak System demands were 25,940,000 and 23,392,000 kilowatts, respectively (which included 7,314,000 and 3,408,000 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 June 10, 1999, respectively. The net dependable capacity to serve the System load on such date, including power available under contractual obligations, was 23,457,000 and 23,919,000 kilowatts, respectively. The all-time and 1999 one-hour internal peak demands were 19,557,000 and 19,952,000 kilowatts, respectively, and occurred on February 5, 1996 and July 30, 1999, respectively. The net dependable capacity to serve the System load on such date, including power dedicated under contractual arrangements, was 23,765,000 and 23,829,000 kilowatts, respectively. The all-time one-hour integrated and internal net system peak demands and 1999 peak demands for AEP's generating subsidiaries are shown in the following tabulation:
ALL-TIME ONE-HOUR INTEGRATED 1999 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 6,676 January 5, 1999 CSPCo...... 4,172 June 17, 1994 4,139 July 30, 1999 I&M........ 5,027 June 17, 1994 4,798 June 10, 1999 KEPCo...... 1,711 January 17, 1997 1,561 January 5, 1999 OPCo....... 7,291 June 17, 1994 6,626 June 8, 1999
ALL-TIME ONE-HOUR INTEGRATED 1999 ONE-HOUR INTEGRATED NET INTERNAL PEAK DEMAND NET INTERNAL PEAK DEMAND - ------------------------------ -------------------------- (IN THOUSANDS) NUMBER OF NUMBER OF KILOWATTS DATE KILOWATTS DATE ----------- ------ ----------- ------- APCo ...... 6,908 February 5, 1996 6,070 January 5, 1999 CSPCo...... 3,804 July 30, 1999 3,804 July 30, 1999 I&M........ 4,127 July 30, 1999 4,127 July 30, 1999 KEPCo..... 1,558 January 27, 2000 1,432 January 5, 1999 OPCo....... 5,705 June 11, 1999 5,705 June 11, 1999
40 48 HYDROELECTRIC PLANTS AEP has 17 facilities, of which 16 are licensed through FERC. 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 was filed in 1998. The license for the Mottville hydroelectric plant in Michigan expires in 2003. A notice of intent to relicense was 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 -0-% during 1999 and -0-% during 1998. 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 -0-% during 1999 and -0-% during 1998. The Cook Plant was shut down in September 1997 to respond to issues raised regarding the operability of certain safety systems. 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. However, for economic or other reasons, operation of the Cook Plant for the full term of its operating licenses cannot be assured. Costs associated with the operation, maintenance and retirement of nuclear plants continue to be of greater significance 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. 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, any unamortized investment at the end of the Cook Plant's useful life (whether scheduled or premature), the carrying costs of that investment and retirement costs, is not assured. See Competition and Business Change. 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. In April 1998 the NRC notified I&M that it had convened a Restart Panel for Cook Plant. In July 1998 the NRC provided a list of the required restart activities and in October the NRC expanded the list. In order to identify and resolve the issues necessary to restart the Cook units, AEP has been meeting with the Panel on a regular basis until the units are returned to service. The NRC notified I&M, in a February 2, 2000, letter, that the Confirmatory Action Letter has been closed. Closing of the Confirmatory Action Letter is one of the key approvals needed for restart of the Cook Plant. In July 1998 AEP received an "adverse trend letter" from the NRC indicating that NRC senior managers determined that there had been a slow decline in performance at the Cook Plant during the 18-month period preceding the letter. The letter indicated that the NRC will closely monitor efforts to address issues at Cook Plant through additional inspection activities. In October 1998 the NRC issued AEP a Notice of Violation and proposed a $500,000 civil penalty for alleged violations at the Cook Plant discovered during five inspections conducted between August 1997 and April 1998. AEP paid the penalty. Unit 2 of the Cook Plant is scheduled to restart in April 2000. Unit 1 is currently undergoing steam generator replacement, but restart work has begun 41 49 and will accelerate following Unit 2 start-up. Unit 1 restart is scheduled for September 2000. Any issues or difficulties encountered in the testing of equipment as part of the restart process could delay the scheduled restart dates. When maintenance and other activities required for restart are complete, AEP will seek concurrence from the NRC to return the Cook Plant to service. Costs associated with the steam generator replacement for Unit 1 are estimated to be approximately $165,000,000, which will be accounted for as a capital investment unrelated to the restart. At December 31, 1999, $119,000,000 has been spent on the steam generator replacement. The cost of electricity supplied to retail customers has increased due to the outage of the Cook Plant because higher cost coal-fired generation and coal-based purchased power has been substituted for the unavailable lower cost nuclear generation. With regulator approvals, actual replacement energy fuel costs that exceeded the costs reflected in billings were recorded as a regulatory asset under the Indiana and Michigan retail jurisdictional fuel cost recovery mechanisms. Indiana Settlement: On March 30, 1999, the IURC approved a settlement agreement resolving all matters related to the recovery of replacement energy costs due to the extended Cook Plant outage. The settlement agreement provided for, among other things: o Acredit of $55,000,000, including interest, to Indiana retail customers that was refunded through customer bills during the months of July, August and September 1999. The credit returned to customers Cook replacement fuel costs previously recovered. o Authorization to defer any unrecovered fuel revenues accrued between September 9, 1997 and December 31, 1999, including the $55,000,000 credited to customers. o Authorization to defer up to $150,000,000 in incremental operation and maintenance restart costs for the Cook Plant above the base rate level incurred during 1999. o Amortization of the fuel recoveries and restart cost deferrals over a five-year period ending December 31, 2003. o Subject to certain force majeure provisions, a freeze in base rates through December 31, 2003 and a cap on fuel recovery charges through March 1, 2004. o Incremental nuclear decommissioning trust fund deposits of $2,500,000 annually over a five-year period ending December 31, 2003. Michigan Settlement: On December 16, 1999, the MPSC approved a settlement agreement for two open Michigan power supply cost recovery reconciliation cases that resolves all issues related to the Cook Plant extended outage. The settlement agreement provides for the following: o Limits I&M's ability to increase base rates and freezes the power supply cost recovery factor for five years. o Permits the deferral of up to $50,000,000 in 1999 of jurisdictional non-fuel restart nuclear operation and maintenance expenses. o Authorizes the amortization of power supply cost recovery revenues accrued from September 9, 1997 to December 31, 1999 and non-fuel nuclear operation and maintenance cost deferrals over a five-year period ending December 31, 2003. Expenses to restart the Cook units are estimated to total approximately $574,000,000. Through December 31, 1999, $373,000,000 has been spent. The costs of the Cook outage and restart efforts will have a material adverse effect on future results of operations and possibly financial condition through 2003 and on cash flows through 2000. If the Cook units are not returned to service as scheduled, their continued outage would make the adverse effect greater on future results of operations, cash flows and financial condition. Nuclear Incident Liability The Price-Anderson Act limits public liability for a nuclear incident at any licensed reactor in the 42 50 United States to $9.9 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 $9.9 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 $176,000,000 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 $2.75 billion. Coverage is provided by Energy Insurance Bermuda (EIB) and Nuclear Electric Insurance Limited (NEIL). If EIB's and NEIL's losses exceed their available resources, I&M would be subject to a total retrospective premium assessment of up to $16,704,380. 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 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 12 weeks after the outage) for 52 weeks and $2,800,000 per week for the next 110 weeks, 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 $5,485,760. 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 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 was a customer of OPCo until December 31, 1999. 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. In March 1995, the District Court dismissed the complaint for lack of jurisdiction and, in October 1996, the U.S. Court of Appeals for the Fourth Circuit reversed this decision. In March 1999, the District Court granted the motion of OPCo and the Service Corporation for summary judgment and dismissed the case. Ormet filed an appeal in the U.S. Court of Appeals for the Fourth Circuit in March 1999. On November 30, 1999, the court held oral argument. ------------------------- 43 51 The Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns requested a ruling from their National Office that certain interest deductions claimed by AEP relating to its corporate owned life insurance (COLI) program should not be allowed. As a result of a suit filed in U.S. District Court (discussed below) this request for ruling was withdrawn by the IRS agents. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deductions through December 31, 1999 would reduce earnings (including interest) as follows: (in millions) AEP System........................ $317 APCo........................... 79 CSPCo.......................... 43 I&M............................ 66 KEPCo.......................... 8 OPCo........................... 118 AEP made payments of taxes and interest attributable to COLI interest deductions for taxable years 1991-98 to avoid the potential assessment by the IRS of any additional above- market rate interest on the contested amount. The payments to the IRS are included on the consolidated balance sheet in other assets pending the resolution of this matter. AEP is seeking refund through litigation of all amounts paid plus interest. In order to resolve this issue, AEP filed suit against the U.S. in the U.S. District Court for the Southern District of Ohio in March 1998. In 1999 a U.S. Tax Court judge decided in a case involving an unaffiliated company that a corporate taxpayer's COLI interest deduction should be disallowed. Notwithstanding the decision in this case, management has made no provision for any possible adverse earnings impact from this matter because it believes, and has been advised by outside counsel, that it has a meritorious position. In the event the resolution of this matter is unfavorable, it could have a material adverse impact on results of operations, cash flows and financial condition. ---------------------- 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, 2000.
NAME AGE OFFICE (a) - ---- --- ---------- E. Linn Draper, Jr............ 58 Chairman of the Board, President and Chief Executive Officer of AEP and of the Service Corporation Paul D. Addis................. 46 Executive Vice President of the Service Corporation Donald M. Clements, Jr........ 50 Executive Vice President-Corporate Development of the Service Corporation Henry W. Fayne................ 53 Executive Vice President-Financial Services of the Service Corporation William J. Lhota.............. 60 Executive Vice President of the Service Corporation Susan Tomasky................. 46 Executive Vice President of the Service Corporation J. H. Vipperman............... 59 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 Mr. Addis and Ms. Tomasky. 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). Mr. Addis became an executive officer of AEP effective January 1, 2000. Prior to joining the Service Corporation in July 1998 as Senior Vice President, Ms. Tomasky was a partner with the law firm of Hogan & Hartson (August 1997-July 1998) and General Counsel of the Federal Energy Regulatory Commission (May 1993-August 1997). Ms. Tomasky became an executive officer of AEP effective with her promotion to Executive Vice President on January 26, 2000. 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. 44 52 APCO. The names of the executive officers of APCo, the positions they hold with APCo, their ages as of March 1, 2000, 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............ 58 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 Henry W. Fayne................ 53 Director 1995-Present Vice President 1998-Present Vice President and Chief Financial Officer of AEP 1998-Present Executive Vice President-Financial Services of the Service Corporation 1998-Present Senior Vice President-Corporate Planning & Budgeting of the Service Corporation 1995-1998 Senior Vice President-Controller of the Service Corporation 1993-1995 William J. Lhota.............. 60 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 J. H. Vipperman............... 59 Director 1985-Present Vice President 1996-Present President and Chief Operating Officer 1990-1995 Executive Vice President-Corporate Services of the Service Corporation 1998-Present Executive Vice President-Energy Delivery of the Service Corporation 1996-1997
- ---------------------- (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, 2000, 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.......... 58 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
45 53
NAME AGE POSITION (a) PERIOD - ---- --- ------------ ------ Henry W. Fayne.............. 53 Director 1993-Present Vice President 1998-Present Vice President and Chief Financial Officer of AEP 1998-Present Executive Vice President-Financial Services of the Service Corporation 1998-Present Senior Vice President-Corporate Planning & Budgeting of the Service Corporation 1995-1998 Senior Vice President-Controller of the Service Corporation 1993-1995 William J. Lhota............ 60 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 J. H. Vipperman............. 59 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 1996-1997 President and Chief Operating Officer of APCo 1990-1995
- --------------------- (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 - ------------- ---- --- -------- March 1998............................................ 51-11/16 47-13/16 .60 June 1998............................................. 50-3/4 44-11/16 .60 September 1998........................................ 48-13/16 42-1/16 .60 December 1998......................................... 53-5/16 45-5/16 .60 March 1999............................................ 48-3/16 39-5/16 .60 June 1999............................................. 44-1/16 37-7/16 .60 September 1999........................................ 37-7/8 33-1/2 .60 December 1999......................................... 35-13/16 30-9/16 .60
At December 31, 1999, AEP had approximately 125,000 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. 46 54 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 1999 Annual Report (for the fiscal year ended December 31, 1999). APCO. The information required by this item is incorporated herein by reference to the material under Selected Consolidated Financial Data in the APCo 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 47 55 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- AEGCO. The information required by this item is incorporated herein by reference to the material under Management's Narrative Analysis of Results of Operations in the AEGCo 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). CSPCO. The information required by this item is incorporated herein by reference to the material under Management's Narrative Analysis of Results of Operations in the CSPCo 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). KEPCO. The information required by this item is incorporated herein by reference to the material under Management's Narrative Analysis of Results of Operations in the KEPCo 1999 Annual Report (for the fiscal year ended December 31, 1999). 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 1999 Annual Report (for the fiscal year ended December 31, 1999). Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -------------------------------------------------------------------------------- AEGCO, AEP, APCO, CSPCO, I&M, KEPCO, AND 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 of the definitive proxy statement of AEP for the 2000 annual meeting of shareholders, to be filed within 120 days after December 31, 1999. Reference also is made to the information under the caption Executive Officers of the Registrants in Part I of this report. 48 56 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 2000 annual meeting of stockholders, to be filed within 120 days after December 31, 1999. 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, 2000, 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............ 58 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 of the Service Corporation 1993-Present President of AEP 1992-1993 President and Chief Operating Officer of the Service Corporation 1992-1993 Henry W. Fayne................ 53 Director and Vice President 1998-Present Vice President and Chief Financial Officer of AEP 1998-Present Executive Vice President-Financial Services of the Service Corporation 1998-Present Senior Vice President-Corporate Planning & Budgeting of the Service Corporation 1995-1998 Senior Vice President-Controller of the Service Corporation 1993-1995 William J. Lhota.............. 60 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 Armando A. Pena............... 55 Director, Vice President and Chief Financial Officer 1998-Present Treasurer 1995-Present Chief Financial Officer of the Service Corporation 1998-Present Senior Vice President-Finance of the Service Corporation 1996-Present Treasurer of AEP and the Service Corporation 1995-Present J. H. Vipperman............... 59 Director and Vice President 1996-Present Executive Vice President-Corporate Services of the Service Corporation 1998-Present Executive Vice President-Energy Delivery of the 1996-1997 Service Corporation President and Chief Operating Officer of APCo 1990-1995 K. G. Boyd.................... 48 Director 1997-Present Indiana Region Manager 1997-Present Fort Wayne District Manager 1994-1997
49 57
NAME AGE POSITION (a)(b)(c) PERIOD - ---- --- ------------------ ------ Jeffrey A. Drozda............. 32 Director 1999-Present Governmental Affairs Manager-Indiana 1997-Present Federal Regulatory Affairs Manager 1996-1997 Executive Assistant-Public Utilities Commission of Ohio 1993-1996 Mark W. Marano............... 38 Director 1999-Present Director, Business Services (Cook Nuclear Plant) 1999-Present Director, Nuclear Site & Business Support-Florida Power 1997-1999 Corp. Manager, Corrective Action/Quality Services-Public Service Electric & Gas 1995-1997 John R. Sampson............... 47 Director and Vice President 1999-Present Indiana & Michigan State President 1999-Present Site Vice President, Cook Nuclear Plant 1998-1999 Plant Manager, Cook Nuclear Plant 1996-1998 D. B. Synowiec................ 56 Director 1995-Present Plant Manager, Rockport Plant 1990-Present W. E. Walters................. 52 Director 1991-Present Michiana Region Manager 1994-Present Executive Assistant to President 1987-1994 E. H. Wittkamper.............. 61 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) Dr. Draper and Messrs. Fayne, Lhota and Pena are directors of AEGCo, APCo, CSPCo, KEPCo and OPCo. Dr. Draper is also a director 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 2000 annual meeting of shareholders, to be filed within 120 days after December 31, 1999. 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 2000 annual meeting of shareholders to be filed within 120 days after December 31, 1999. 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 2000 annual meeting of stockholders, to be filed within 120 days after December 31, 1999. CSPCO. Omitted pursuant to Instruction I(2)(c). KEPCO. Omitted pursuant to Instruction I(2)(c). 50 58 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 2000 annual meeting of shareholders, to be filed within 120 days after December 31, 1999. 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 1999, 1998 and 1997 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, 1999. Summary Compensation Table
LONG TERM ANNUAL COMPENSATION COMPENSATION --------------------- ALL OTHER -------------------- PAYOUTS COMPENSATION SALARY BONUS --------------------- ($)(2) NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) LTIP PAYOUTS ($)(1) ---------------------------------- ------- ------- --------- --------------------- ------------ E. LINN DRAPER, JR. - Chairman of the board, 1999 820,000 208,280 -0- 103,218 president and chief executive officer of the 1998 780,000 194,376 345,906 104,941 Company and the Service Corporation; chairman 1997 720,000 327,744 951,132 31,620 and chief executive officer of other subsidiaries WILLIAM J. LHOTA - Executive vice president and 1999 400,000 71,120 -0- 55,690 director of the Service Corporation; 1998 380,000 82,859 134,266 56,493 president, chief operating officer and 1997 355,000 141,396 364,436 20,570 director of other subsidiaries JAMES J. MARKOWSKY - Executive vice president - 1999 370,000 65,786 -0- 51,047 power generation and director of the Service 1998 350,000 76,317 127,115 51,859 Corporation; vice president and director of 1997 325,000 129,447 338,382 18,020 other subsidiaries (3) JOSEPH H. VIPPERMAN - Executive vice president 1999 330,000 58,674 -0- 63,006 -corporate services and director of the 1998 310,000 67,595 82,859 58,435 Service Corporation; vice president and director of other subsidiaries (4) HENRY W. FAYNE - Executive vice president - 1999 315,000 56,007 -0- 34,885 financial services and director of the Service 1998 290,000 63,234 61,555 34,124 Corporation; vice president and director of other subsidiaries (4)
- ------------------------ (1) Amounts in the Bonus column reflect awards under the Senior Officer Annual Incentive Compensation Plan. Payments are made in March of the succeeding fiscal year for performance in the year indicated. Amounts for 1999 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 for three-year performance periods. See below under Long Term Incentive Plans - Awards in 1999. (2) Amounts in the All Other Compensation column include (i) AEP's matching contributions under the AEP Employees Savings Plan and the AEP Supplemental Savings Plan, a non-qualified plan designed to supplement the AEP Savings Plan, and (ii) subsidiary companies director fees. For 1998 and 1999, the amounts also include split-dollar insurance. Split-dollar insurance represents the present value of the interest projected to accrue for the employee's benefit on the current year's insurance premium paid by AEP. Cumulative net life insurance premiums paid are recovered by AEP at the later of retirement or 15 years. Detail of the 1999 amounts in the All Other Compensation column is shown below.
Item Dr. Draper Mr. Lhota Dr. Markowsky Mr. Vipperman Mr. Fayne ---- ---------- --------- ------------- ------------- --------- Savings Plan Matching Contributions $ 3,462 $ 4,800 $ 3,381 $ 3,762 $ 4,800 Supplemental Savings Plan Matching Contributions 21,138 7,200 7,719 6,138 4,650 Split-Dollar Insurance 68,638 33,710 29,967 47,106 17,105 Subsidiaries Directors Fees 9,980 9,980 9,980 6,000 8,330 -------- -------- -------- -------- -------- Total All Other Compensation $103,218 $ 55,690 $ 51,047 $ 63,006 $ 34,885 ======== ======== ======== ======== ========
(3) Dr. Markowsky resigned effective February 1, 2000. (4) No 1997 compensation information is reported for Messrs. Vipperman and Fayne because they were not executive officers in these years. 51 59 Long-Term Incentive Plans -- Awards In 1999 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 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 officers have met the equivalent stock ownership target. 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 PERFORMANCE NON-STOCK PRICE-BASED PLAN NUMBER OF PERIOD UNTIL -------------------------------------------- PERFORMANCE MATURATION THRESHOLD TARGET MAXIMUM NAME SHARE UNITS OR PAYOUT (#) (#) (#) ----------------- --------------- ----------------- ------------- --------- ------------- E. L. Draper, Jr................... 8,728 1999-2001 2,182 8,728 17,456 W. J. Lhota........................ 2,980 1999-2001 745 2,980 5,960 J. J. Markowsky.................... 2,794 1999-2001 698 2,794 5,588 J. H. Vipperman.................... 2,459 1999-2001 615 2,459 4,918 H. W. Fayne........................ 2,347 1999-2001 587 2,347 4,694
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 AVERAG ------------------------------------------------------------------------------------------- ANNUAL EARNINGS 15 20 25 30 35 40 --------------- -------- -------- -------- -------- -------- -------- $ 300,000 $ 69,345 $ 92,460 $115,575 $138,690 $161,805 $181,755 400,000 93,345 124,460 155,575 186,690 217,805 244,405 500,000 117,345 156,460 195,575 234,690 273,805 307,055 700,000 165,345 220,460 275,575 330,690 385,805 432,355 900,000 213,345 284,460 355,575 426,690 497,805 557,655 1,200,000 285,345 380,460 475,575 570,690 665,805 745,605
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 52 60 year in the case of retirement between ages 55 and 62. 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 Senior Officer Annual 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, 1999, the number of full years of service applicable for retirement benefit calculation purposes for such officers were as follows: Dr. Draper, seven years; Mr. Lhota, 34 years; Dr. Markowsky, 28 years; Mr. Vipperman, 37 years; and Mr. Fayne, 24 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. Eight AEP System employees (including Messrs. Fayne, Lhota and Vipperman 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 2000 of the executive officers named in the Summary Compensation Table (including Dr. Markowsky who resigned effective February 1, 2000), none of them would receive any supplemental benefits. AEP 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 participant 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 retirement at age 65, annual supplemental retirement payments under the 1982 and 1986 programs.
1982 PROGRAM 1986 PROGRAM ------------------------------------------- ------------------------------------------- ANNUAL AMOUNT OF ANNUAL AMOUNT OF ANNUAL SUPPLEMENTAL ANNUAL SUPPLEMENTAL AMOUNT RETIREMENT AMOUNT RETIREMENT DEFERRED PAYMENT DEFERRED PAYMENT NAME (4-YEAR PERIOD) (15-YEAR PERIOD) (4-YEAR PERIOD) (15-YEAR PERIOD) -------- ------------------- -------------------- ------------------- -------------------- J. H. Vipperman............... $ 11,000 $ 90,750 $ 10,000 $ 67,500 H. W. Fayne................... $ 0 $ 0 $ 9,000 $ 95,400
Severance Plan and Change-In-Control Agreements SEVERANCE PLAN. In connection with the proposed merger with Central and South West Corporation, AEP's Board of Directors adopted a severance plan on February 24, 1999, effective March 1, 1999, that includes Dr. Markowsky and Messrs. Lhota, Vipperman and Fayne. The severance plan provides for payments and other benefits if, at any time before the second anniversary of the merger consummation date (or, if 53 61 the merger has not occurred, before the expiration of the severance plan which will occur upon the termination of the merger agreement), the officer's employment is terminated (i) by AEP without "cause" or (ii) by the officer because of a detrimental change in responsibilities or a reduction in salary or benefits. Under the severance plan, the officer will receive: o A lump sum payment equal to three times the officer's annual base salary plus target annual incentive under the Senior Officer Annual Incentive Compensation Plan. o Maintenance for a period of three additional years of all medical and dental insurance benefits substantially similar to those benefits to which the officer was entitled immediately prior to termination, reduced to the extent comparable benefits are otherwise received. o Outplacement services not to exceed a cost of $30,000 or use of an office and secretarial services for up to one year. AEP's obligation for the payments and benefits under the severance plan is subject to the waiver by the officer of any other severance benefits that may be provided by AEP. In addition, the officer agrees to refrain from the disclosure of confidential information relating to AEP. Dr. Markowsky resigned effective February 1, 2000 and has received a lump sum payment in accordance with the terms of the severance plan. CHANGE-IN-CONTROL AGREEMENTS. AEP has change-in-control agreements with Dr. Draper and Messrs. Lhota, Vipperman and Fayne. If there is a "change-in-control" of AEP and the employee's employment is terminated by AEP or by the employee for reasons substantially similar to those in the severance plan, these agreements provide for substantially the same payments and benefits as the severance plan with the following additions: o Three years of service credited for purposes of determining non-qualified retirement benefits. o Transfer to the employee of title to AEP's automobile then assigned to the employee. o Payment, if required, to make the employee whole for any excise tax imposed by Section 4999 of the Internal Revenue Code. "Change-in-control" means: o The acquisition by any person of the beneficial ownership of securities representing 25% or more of AEP's voting stock. o A change in the composition of a majority of the Board of Directors under certain circumstances within any two-year period. o Approval by the shareholders of the liquidation of AEP, disposition of all or substantially all of the assets of AEP or, under certain circumstances, a merger of AEP with another corporation. ----------------------------- 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 54 62 for the 2000 annual meeting of shareholders to be filed within 120 days after December 31, 1999. 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 2000 annual meeting of stockholders, to be filed within 120 days after December 31, 1999. 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, 2000, 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(a) UNITS(b) TOTAL - ---- --------- -------- ----- Karl G. Boyd........................................................... 1,897 287 2,184 E. Linn Draper, Jr..................................................... 8,670(c) 89,257 97,927 Jeffrey A. Drozda...................................................... 149(c)(d) -- 149 Henry W. Fayne......................................................... 5,091 10,424 15,515 William J. Lhota....................................................... 17,364(c)(e) 15,174 32,538 Mark W. Marano......................................................... 159 133 292 James J. Markowsky..................................................... 2,871(d) 13,923 16,794 Armando A. Pena........................................................ 5,307 5,239 10,546 John R. Sampson........................................................ 230 315 545 David B. Synowiec...................................................... 171 395 566 Joseph H. Vipperman.................................................... 11,569(c)(e) 4,549 16,118 William E. Walters..................................................... 6,762 312 7,074 Earl H. Wittkamper..................................................... 3,561(c) 315 3,876 All Directors and Executive Officers................................... 149,032(e)(f) 140,323 289,355
- ------------------------- (a) Includes share equivalents held in the AEP Employees Savings Plan in the amounts listed below:
AEP EMPLOYEES SAVINGS AEP EMPLOYEES SAVINGS NAME PLAN (SHARE EQUIVALENTS) NAME PLAN (SHARE EQUIVALENTS) ---- ------------------------ ---- ------------------------ Mr. Boyd............................. 1,897 Mr. Pena................................... 3,792 Dr. Draper........................... 3,449 Mr. Sampson................................ 230 Mr. Drozda........................... 127 Mr. Synowiec............................... 171 Mr. Fayne............................ 4,553 Mr. Vipperman.............................. 10,790 Mr. Lhota............................ 15,184 Mr. Walters................................ 6,762 Mr. Marano........................... 159 Mr. Wittkamper............................. 2,025 Dr. Markowsky........................ 3,888 All Directors and Executive Officers............ 53,027
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. (b) This column includes amounts deferred in stock units and held under AEP's officer benefit plans. (c) Includes the following numbers of shares held in joint tenancy with a family member: Dr. Draper, 5,221; Mr. Drozda, 16; Mr. Lhota, 2,180; Mr. Vipperman, 71; and Mr. Wittkamper, 1,536. (d) Includes 6 and 21 shares held by family members of Mr. Drozda and Dr. Markowsky, respectively, over which beneficial ownership is disclaimed. (e) Does not include, for Messrs. Lhota and Vipperman, 85,231 shares in the American Electric Power System Educational Trust Fund over which Messrs. Lhota and Vipperman 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. (f) Represents less than 1% of the total number of shares outstanding 55 63 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 2000 annual meeting of shareholders, to be filed within 120 days after December 31, 1999 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: The following financial statements have been incorporated herein by reference pursuant to Item 8.
PAGE ---- AEGCo: Independent Auditors' Report; Statements of Income for the years ended December 31, 1999, 1998, and 1997; Statements of Retained Earnings for the years ended December 31, 1999, 1998 and 1997; Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997; Balance Sheets as of December 31, 1999 and 1998; Notes to Financial Statements AEP and its subsidiaries consolidated: Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997; Consolidated Statements of Comprehensive Income for the years ended December 31, 1999, 1998 and 1997; Consolidated Balance Sheets as of December 31, 1999 and 1998; Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997; Consolidated Statements of Common Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997; Notes to Consolidated Financial Statements; Schedule of Consolidated Cumulative Preferred Stocks of Subsidiaries at December 31, 1999 and 1998; Schedule of Consolidated Long-term Debt of Subsidiaries at December 31, 1999 and 1998; Independent Auditors' Report. APCo: Independent Auditors' Report; Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997; Consolidated Balance Sheets as of December 31, 1999 and 1998; Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997; Consolidated Statements of Retained Earnings for the years ended December 31, 1999, 1998 and 1997; Notes to Consolidated Financial Statements. CSPCo: Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997; Consolidated Statements of Retained Earnings for the years ended December 31, 1999, 1998 and 1997; Consolidated Balance Sheets as of December 31, 1999 and 1998; Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997; Notes to Consolidated Financial Statements; Independent Auditors' Report.
56 64
PAGE ---- I&M: Independent Auditors' Report; Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997; Consolidated Balance Sheets as of December 31, 1999 and 1998; Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997; Consolidated Statements of Retained Earnings for the years ended December 31, 1999, 1998 and 1997; Notes to Consolidated Financial Statements. KEPCo: Independent Auditors' Report; Statements of Income for the years ended December 31, 1999, 1998 and 1997; Statements of Retained Earnings for the years ended December 31, 1999, 1998 and 1997; Balance Sheets as of December 31, 1999 and 1998; Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997; Notes to Financial Statements. OPCo: Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997; Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997; Consolidated Balance Sheets as of December 31, 1999 and 1998; Consolidated Statements of Retained Earnings for the years ended December 31, 1999, 1998 and 1997; Notes to Consolidated Financial Statements; Independent Auditors' Report. 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 Item Reported ----------------- -------------- ------------- AEGCo, AEP, APCo, CSPCo, December 15, 1999 Item 5. Other Events I&M, KEPCo and OPCo Item 7. Financial Statements and Exhibits
57 65 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/ A. A. PENA --------------------------------- (A. A. PENA, VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER) Date: March 20, 2000 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/ A. A. PENA Vice President, Treasurer, March 20, 2000 - --------------------------------------------- Chief Financial Officer (A. A. PENA) and Director (III) PRINCIPAL ACCOUNTING OFFICER: /S/ L. V. ASSANTE Controller and March 20, 2000 - --------------------------------------------- Chief Accounting Officer (L. V. ASSANTE) (IV) A MAJORITY OF THE DIRECTORS: *HENRY W. FAYNE *JOHN R. JONES, III *WM. J. LHOTA *By: /S/ A. A. PENA ----------------------------------------- (A. A. PENA, ATTORNEY-IN-FACT) March 20, 2000
58 66 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. AMERICAN ELECTRIC POWER COMPANY, INC. BY: /S/ H. W. FAYNE ---------------------------------- (H. W. FAYNE, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER) Date: March 20, 2000 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/ H. W. FAYNE Vice President and March 20, 2000 - ---------------------------------------------- Chief Financial Officer (H. W. FAYNE) (III) PRINCIPAL ACCOUNTING OFFICER: /S/ L. V. ASSANTE Controller and March 20, 2000 - ---------------------------------------------- Chief Accounting Officer (L. V. ASSANTE) (IV) A MAJORITY OF THE DIRECTORS: *JOHN P. DESBARRES *ROBERT M. DUNCAN *ROBERT W. FRI *LESTER A. HUDSON, JR. *LEONARD J. KUJAWA *DONALD G. SMITH *LINDA GILLESPIE STUNTZ *KATHRYN D. SULLIVAN *MORRIS TANENBAUM *By: /S/ H. W. FAYNE ------------------------------------------ (H. W. FAYNE, ATTORNEY-IN-FACT) March 20, 2000
59 67 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 COLUMBUS SOUTHERN POWER COMPANY KENTUCKY POWER COMPANY OHIO POWER COMPANY BY: /S/ A. A. PENA -------------------------------------- (A. A. PENA, VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER) Date: March 20, 2000 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/ A. A. PENA Vice President, Treasurer, March 20, 2000 - --------------------------------------------- Chief Financial Officer (A. A. PENA) (III) PRINCIPAL ACCOUNTING OFFICER: /S/ L. V. ASSANTE Controller and March 20, 2000 - --------------------------------------------- Chief Accounting Officer (L. V. ASSANTE) (IV) A MAJORITY OF THE DIRECTORS: *HENRY W. FAYNE *WM. J. LHOTA *J. H. VIPPERMAN *By: /S/ A. A. PENA ----------------------------------------- (A. A. PENA, ATTORNEY-IN-FACT) March 20, 2000
60 68 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/ A. A. PENA -------------------------------------- (A. A. PENA, VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER) Date: March 20, 2000 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/ A. A. PENA Vice President, Treasurer, March 20, 2000 - ------------------------------------------------ Chief Financial Officer (A. A. PENA) and Director (III) PRINCIPAL ACCOUNTING OFFICER: /S/ L. V. ASSANTE Controller and March 20, 2000 - ------------------------------------------------ Chief Accounting Officer (L. V. ASSANTE) (IV) A MAJORITY OF THE DIRECTORS: *K. G. BOYD *JEFFREY A. DROZDA *HENRY W. FAYNE *WM. J. LHOTA *MARK W. MARANO *JOHN R. SAMPSON *D. B. SYNOWIEC *J. H. VIPPERMAN *W. E. WALTERS *E. H. WITTKAMPER *By: /s/ A. A. PENA --------------------------------------- (A. A. PENA, ATTORNEY-IN-FACT) March 20, 2000
61 69 INDEX TO FINANCIAL STATEMENT SCHEDULES Page INDEPENDENT AUDITORS' REPORT ........................................... S-2 The following financial statement schedules for the years ended December 31, 1999, 1998 and 1997 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 S-1 70 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, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our reports thereon dated February 22, 2000 (March 3, 2000 as to Note 7 for American Electric Power Company, Inc. and its subsidiaries; Note 6 for Appalachian Power Company and its subsidiaries, Columbus Southern Power Company and its subsidiaries, Indiana Michigan Power Company and its subsidiaries, Kentucky Power Company and Ohio Power Company and its subsidiaries; and Note 3 for AEP Generating Company); such financial statements and reports are included in the respective 1999 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 22, 2000 S-2 71
=========================================================================================================================== 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, 1999....... $11,075 $18,816 $15,746(a) $33,185(b) $12,452 ======= ======= ======= ======= ======= Year Ended December 31, 1998....... $ 6,760 $23,646 $ 8,290(a) $27,621(b) $11,075 ======= ======= ======= ======= ======= Year Ended December 31, 1997....... $ 3,692 $20,650 $ 8,953(a) $26,535(b) $ 6,760 ======= ======= ======= ======= ======= - --------------------- (a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. ===========================================================================================================================
=========================================================================================================================== APPALACHIAN POWER COMPANY AND SUBSIDIARIES 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, 1999....... $2,234 $5,492 $1,995(a) $7,112(b) $2,609 ====== ====== ====== ====== ====== Year Ended December 31, 1998....... $1,333 $5,093 $1,306(a) $5,498(b) $2,234 ====== ====== ====== ====== ====== Year Ended December 31, 1997....... $ 687 $3,621 $ 666(a) $3,641(b) $1,333 ====== ====== ====== ====== ====== - --------------------- (a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. ===========================================================================================================================
========================================================================================================================== COLUMBUS SOUTHERN POWER COMPANY AND SUBSIDIARIES 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, 1999....... $2,598 $3,334 $10,782(a) $13,669(b) $3,045 ====== ====== ======= ======= ====== Year Ended December 31, 1998....... $1,058 $7,551 $ 5,278(a) $11,289(b) $2,598 ====== ====== ======== ======= ====== Year Ended December 31, 1997....... $1,032 $6,815 $ 6,380(a) $13,169(b) $1,058 ====== ====== ======== ======= ====== - --------------------- (a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. ===========================================================================================================================
S-3 72
=========================================================================================================================== INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES 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, 1999......... $2,027 $3,966 $1,367(a) $5,512(b) $1,848 ====== ====== ====== ====== ====== Year Ended December 31, 1998......... $1,188 $4,630 $ 221(a) $4,012(b) $2,027 ====== ====== ====== ====== ====== Year Ended December 31, 1997......... $ 156 $4,411 $ 798(a) $4,177(b) $1,188 ====== ====== ====== ====== ====== - --------------------- (a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. ==========================================================================================================================
========================================================================================================================= KENTUCKY POWER COMPANY 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, 1999......... $848 $1,032 $467(a) $1,710(b) $637 ==== ====== ==== ====== ==== Year Ended December 31, 1998......... $525 $1,280 $392(a) $1,349(b) $848 ==== ====== ==== ====== ==== Year Ended December 31, 1997......... $272 $1,482 $347(a) $1,576(b) $525 ==== ====== ==== ====== ==== - --------------------- (a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. ==========================================================================================================================
=========================================================================================================================== OHIO POWER COMPANY AND SUBSIDIARIES 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, 1999......... $1,678 $4,730 $1,273(a) $5,458(b) $2,223 ====== ====== ====== ====== ====== Year Ended December 31, 1998......... $2,501 $3,255 $ 941(a) $5,019(b) $1,678 ====== ====== ====== ====== ====== Year Ended December 31, 1997......... $1,433 $4,008 $ 675(a) $3,615(b) $2,501 ====== ====== ====== ====== ====== - --------------------- (a) Recoveries on accounts previously written off. (b) Uncollectible accounts written off. ==========================================================================================================================
S-4 73 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. 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 1999 Annual Report (for the fiscal year ended December 31, 1999) 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, File No. 1-3525, Exhibit 3(a)]. 3(b) -- Copy of Certificate of Amendment of the Restated Certificate of Incorporation of AEP, dated January 13, 1999 [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1998, File No. 1-3525, Exhibit 3(b)]. 3(c) -- Composite copy of the Restated Certificate of Incorporation of AEP, as amended [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1998, File No. 1-3525, Exhibit 3(c)]. 3(d) -- Copy of By-Laws of AEP, as amended through January 28, 1998 [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1997, File No. 1-3525, Exhibit 3(b)]. 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)].
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- AEP++ (CONTINUED) 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)(1) -- 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)(2) -- Amendment No. 1, dated as of December 31, 1999, to the Agreement and Plan of Merger [Current Report on Form 8-K of AEP dated December 15, 1999, File No. 1-3525, Exhibit 10]. +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 System Excess Benefit Plan, Amended and Restated as of August 1, 1999 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1999, File No. 1-3525, Exhibit 10(a)]. +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)].
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- AEP++ (CONTINUED) +10(j)(2) -- AEP System Supplemental Savings Plan, Amended and Restated as of November 1, 1999 (Non-Qualified) [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1999, File No. 1-3525, Exhibit 10(b)]. +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)]. +10(m) -- AEP System Survivor Benefit Plan, effective January 27, 1998 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1998, File No. 1-3525, Exhibit 10]. +10(n) -- Letter agreement between AEP and Donald M. Clements, Jr. dated August 19, 1994 [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1998, File No. 1-3525, Exhibit 10(n)]. +10(o) -- AEP Senior Executive Severance Plan for Merger with Central and South West Corporation, effective March 1, 1999 [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1998, File No. 1-3525, Exhibit 10(o)]. +*10(p) -- AEP Change In Control Agreement. *13 -- Copy of those portions of the AEP 1999 Annual Report (for the fiscal year ended December 31, 1999) 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 June 1, 1998).
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- APCo++ (CONTINUED) 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); Annual Report on Form 10-K of APCo for the fiscal year ended December 31, 1998, Exhibit 4(b)]. 4(b) -- 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); Registration Statement No. 333-49071, Exhibit 4(b); Registration Statement No. 333-84061, Exhibits 4(b) and 4(c)]. *4(c) -- Company Order and Officers' Certificate, dated October 19, 1999, establishing certain terms of the 7.45% Senior Notes, Series D, 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); 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)].
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- APCo++ (CONTINUED) 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)(1) -- 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(e)(2) -- Amendment No. 1, dated as of December 31, 1999, to the Agreement and Plan of Merger [Current Report on Form 8-K of APCo dated December 15, 1999, File No. 1-3457, Exhibit 10]. +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) -- AEP System Excess Benefit Plan, Amended and Restated as of August 1, 1999 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1999, File No. 1-3525, Exhibit 10(a)]. +10(h)(2) -- AEP System Supplemental Savings Plan, Amended and Restated as of November 1, 1999 (Non-Qualified) [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1999, File No. 1-3525, Exhibit 10(b)]. +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)]. +10(j) -- AEP System Survivor Benefit Plan, effective January 27, 1998 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1998, File No. 1-3525, Exhibit 10]. +10(k) -- AEP Senior Executive Severance Plan for Merger with Central and South West Corporation, effective March 1, 1999[Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1998, File No. 1-3525, Exhibit 10(o)]. +10(l) -- AEP Change In Control Agreement [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1999, File No. 1-3525, Exhibit 10(p)]. *12 -- Statement re: Computation of Ratios. *13 -- Copy of those portions of the APCo 1999 Annual Report (for the fiscal year ended December 31, 1999) which are incorporated by reference in this filing.
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- APCo++ (CONTINUED) 21 -- List of subsidiaries of APCo [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1999, 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 [Registration Statement No. 333-54025, Exhibits 4(a), 4(b), 4(c) and 4(d); Annual Report on Form 10-K of CSPCo for the fiscal year ended December 31, 1998, File No. 1-2680, Exhibits 4(c) and 4(d)]. 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)].
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- CSPCo++ (CONTINUED) 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)(1) -- 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(e)(2) -- Amendment No. 1, dated as of December 31, 1999, to the Agreement and Plan of Merger [Current Report on Form 8-K of CSPCo dated December 15, 1999, File No. 1-2680, Exhibit 10]. *12 -- Statement re: Computation of Ratios. *13 -- Copy of those portions of the CSPCo 1999 Annual Report (for the fiscal year ended December 31, 1999) 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)].
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- I&M++ (CONTINUED) 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)]. 4(b) -- Copy of Indenture (for unsecured debt securities), dated as of October 1, 1998, between I&M and The Bank of New York, as Trustee [Registration Statement No. 333-88523, Exhibits 4(a), 4(b) and 4(c)]. *4(c) -- Copy of Company Order and Officers' Certificate, dated November 23, 1999, establishing certain terms of the Floating Rate Notes, Series A, due 2000. 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)(4) -- 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)(5) -- 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)].
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- I&M++ (CONTINUED) 10(b) -- 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(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 1, 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)(1) -- 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(g)(2) -- Amendment No. 1, dated as of December 31, 1999, to the Agreement and Plan of Merger [Current Report on Form 8-K of I&M dated December 15, 1999, File No. 1-3570, Exhibit 10]. *12 -- Statement re: Computation of Ratios. *13 -- Copy of those portions of the I&M 1999 Annual Report (for the fiscal year ended December 31, 1999) 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, 1999, 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)].
E-9 82
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- KEPCo++ (CONTINUED) 4(b) -- Copy of Indenture (for unsecured debt securities), dated as of September 1, 1997, between KEPCo and Bankers Trust Company, as Trustee [Registration Statement No. 333-75785, Exhibits 4(a), 4(b), 4(c) and 4(d)]. *4(c) -- Copy of Company Order and Officers' Certificate, dated November 2, 1999, establishing certain terms of the Floating Rate Notes, Series A, due 2000. 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)(1) -- 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(d)(2) -- Amendment No. 1, dated as of December 31, 1999, to the Agreement and Plan of Merger [Current Report on Form 8-K of KEPCo dated December 15, 1999, File No. 1-6858, Exhibit 10]. *12 -- Statement re: Computation of Ratios. *13 -- Copy of those portions of the KEPCo 1999 Annual Report (for the fiscal year ended December 31, 1999) 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)].
E-10 83
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- OPCo++ (CONTINUED) 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)(iv); 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 [Registration Statement No. 333-49595, Exhibits 4(a), 4(b) and 4(c); Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Exhibits 4(c) and 4(d)]. *4(c) -- Copy of Company Order and Officers' Certificate, dated June 9, 1999, establishing certain terms of the 6.75% Senior Notes, Series B, due 2004. *4(d) -- Copy of Company Order and Officers' Certificate, dated September 1, 1999, establishing certain terms of the 7% Senior Notes, Series C, 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, 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); 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)].
E-11 84
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- OPCo++ (CONTINUED) 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)(1) -- 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(g)(2) -- Amendment No. 1, dated as of December 31, 1999, to the Agreement and Plan of Merger [Current Report on Form 8-K of OPCo dated December 15, 1999, File No. 1-6543, Exhibit 10]. +10(h)(1) -- AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K of OPCo 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) -- AEP System Excess Benefit Plan, Amended and Restated as of August 1, 1999 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1999, File No. 1-3525, Exhibit 10(a)]. +10(j)(2) -- AEP System Supplemental Savings Plan, Amended and Restated as of November 1, 1999 (Non-Qualified) [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1999, File No. 1-3525, Exhibit 10(b)]. +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)]. +10(l) -- AEP System Survivor Benefit Plan, effective January 27, 1998 [Quarterly Report on Form 10-Q of AEP for the quarter ended September 30, 1998, File No. 1-3525, Exhibit 10]. +10(m) -- AEP Senior Executive Severance Plan for Merger with Central and South West Corporation, effective March 1, 1999[Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1998, File No. 1-3525, Exhibit 10(o)]. +10(n) -- AEP Change In Control Agreement [Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1999, File No. 1-3525, Exhibit 10(p)]. *12 -- Statement re: Computation of Ratios.
E-12 85
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- OPCo++ (CONTINUED) *13 -- Copy of those portions of the OPCo 1999 Annual Report (for the fiscal year ended December 31, 1999) 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, 1999, 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. E-13 EX-3 2 EX-3(E) AMENDED BY-LAWS EXHIBIT 3(e) APPALACHIAN POWER COMPANY BY-LAWS Section 1. The annual meeting of the shareholders of the corporation for the election of directors and for the transaction of such other corporate business as may properly come before said meeting shall be held at the main office of the corporation, in the City of Roanoke, Virginia, or at such other place within or without the Commonwealth of Virginia as shall be specified in the notice, or waiver of notice, of such meeting, on the fourth Tuesday of April in each year, or on such other day as shall be specified in the notice, or waiver of notice, of such meeting. (As amended 1/26/67) Section 2. Special meetings of the shareholders of the corporation may be held upon the call of the Chairman of the Board or of the Board of Directors or Executive Committee, or of shareholders holding one-tenth of the then outstanding capital stock entitled to vote, at such time and at such place within or without the Commonwealth of Virginia as may be stated in the call and notice of any such special meeting. (As amended 1/31/80) Section 3. Notice of the time, place and purpose of every meeting of shareholders shall be mailed by the Secretary or the officer performing his duties at least ten days before the meeting to each shareholder of record entitled to vote, at his last known post office address, but meetings may be held without notice if all shareholders entitled to vote are present or if notice is waived before or after the meeting by those not present. No shareholders shall be entitled to notice of any meeting of shareholders with respect to any shares registered in his name after the date upon which notice of such meeting is required by law or by these by-laws to have been mailed or otherwise given to shareholders. Section 4. The holders of a majority of the stock of the corporation entitled to vote, present in person or by proxy, shall constitute a quorum, but less than a quorum shall have power to adjourn. At all meetings of shareholders, each shareholder entitled to vote may vote and otherwise act either in person or by proxy. Section 5. Meetings of shareholders shall be presided over by the Chairman of the Board, or, in his absence, by the President, or, in the absence of both, by a Vice President, or, if none of such officers is present, by a Chairman to be elected at the meeting. The Secretary of the corporation shall act as Secretary of such meeting if present. In his absence the Chairman may appoint a Secretary. (As amended 1/31/80) Section 6. The stock of the corporation shall be transferable or assignable on the books of the corporation by the holders in person or by attorney on the surrender of the certificate therefor duly endorsed. Certificates of stock shall be in such form and executed in such manner as may be prescribed by law and the Board of Directors. The Board of Directors may appoint one or more transfer agents and registrars for the stock. The Board of Directors are hereby authorized to fix in advance a date not less than ten nor more than fifty days preceding the date of any meeting of shareholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record for the determination of the shareholders entitled to notice of and to vote at any such meeting, or entitled to receive payment of any such dividend, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of capital stock, and in such case only shareholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting, or to receive payment of such dividend, or allotment of rights, or exercise such rights, as the case may be, and notwithstanding any transfer of any stock on the books of the corporation after such record date fixed as aforesaid. (As amended 2/25/71) Section 7. The directors shall be elected at the annual meeting of shareholders or as soon thereafter as practicable and shall hold office for one year or until their successors are elected and qualify. It shall not be necessary to be a shareholder in order to be a director. The shareholders may remove any director at any time without cause assigned and fill the vacancy at a meeting called for the purpose of considering such action. Any vacancy in the Board of Directors not caused by such removal may be filled by the Board at any meeting. (As amended 1/29/81 ) Section 8. Meetings of the Board of Directors shall be held at the time fixed by resolution of the Board or upon call of the Chairman of the Board, the President or a Vice President and may be held at any place within or without the State of Virginia. The Secretary or officer performing his duties shall give reasonable notice (which need not exceed two days) of all meetings of directors, provided that a meeting may be held without notice immediately after the annual election, 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. Notice by mail or telegraph to the usual business or residence address of the director shall be sufficient. A majority of the Board of Directors in office shall constitute a quorum. Less than such a quorum shall have power to adjourn any meeting from time to time without notice. Section 9. The Board of Directors as soon as may be after their election in each year may appoint an Executive Committee to consist of the Chairman of the Board and such number of directors as the Board may from time to time determine. Such Committee shall have and may exercise during the intervals between meetings of the Board all the powers vested in the Board except the power to fill vacancies in the Board, the power to change the membership of or fill vacancies in said Committee and the power to change the by-laws. The Board shall have the power at any time to change the membership of such Committee and to fill vacancies in it. The Executive Committee may make rules for the conduct of its business and may appoint such committees and assistants as it may deem necessary. A majority of the members of said Committee shall constitute a quorum. The Chairman of the Board shall be the Chairman of the Executive Committee. During the intervals between the meetings of the Executive Committee the Chairman of said Committee shall possess and may exercise such of the powers vested in the Executive Committee as from time to time may be conferred upon him by resolution of the Board of Directors or the Executive Committee. (As amended 1/31/80) Section 10. The Board of Directors, as soon as may be convenient after the election of directors in each year, shall elect from among their number a Chairman of the Board and shall also elect a President, one or more Vice Presidents, a Secretary and a Treasurer and shall, from time to time, elect such other officers as they may deem proper. The same person may be elected to more than one office. (As amended 12/19/90) Section 11. The term of office of all officers shall be until the next election of directors and until their respective successors are chosen and qualify, but any officer may be removed from office at any time by the Board of Directors. Vacancies in the offices shall be filled by the Board of Directors. Section 12. The officers of the corporation shall have such duties as usually pertain to their offices except as modified by the Board of Directors, and shall also have such powers and duties as may from time to time be conferred upon them by the Board of Directors. Section 13. The Board of Directors are authorized to select such depositaries as they shall deem proper for the funds of the corporation. All checks and drafts against such deposited funds shall be signed by officers or persons to be specified by the Board of Directors. Section 14. The corporate seal of the corporation shall be in such form as the Board of Directors shall prescribe. Section 15. A director of this corporation shall not be disqualified by his office from dealing or contracting with the corporation either as a vendor, purchaser or otherwise, nor shall any transaction or contract of this corporation be void or voidable by reason of the fact that any director or any firm of which any director is a member or any corporation of which any director is a shareholder or director, is in any way interested in such transaction on contract, provided that such transaction or contract is or shall be authorized, ratified or approved either (1) by a vote of a majority of a quorum of the Board of Directors or of the Executive Committee without counting in such majority or quorum any director so interested or member of a firm so interested or a shareholder or director of a corporation so interested, or (2) by vote at any shareholders' meeting of the holders of record of a majority of all the outstanding shares for stock of this corporation entitled to vote or by writing or writings signed by a majority of such holders; nor shall any director be liable to account to this corporation for any profits realized by him from or through any such transaction, or contract of this corporation authorized, ratified or approved as aforesaid by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder or director, was interested in such transaction or contract. Nothing herein contained shall create any liability in the events above described or prevent the authorization, ratification or approval of such contracts in any other manner provided by law; nor shall anything herein be considered as in any way affecting the rights of the corporation or of any person interested, on account of any fraud in connection with any such transaction. Section 16. (1) Definitions. In this Section 16: (a) "expenses" includes, without limitation, counsel fees; (b) "employee" shall include, without limitation, any employee, including any professionally licensed employee of the corporation. Such term shall also include, without limitation, any employee, including any professionally licensed employee of a subsidiary or affiliate of the corporation who is acting on behalf of the corporation; (c) "liability" means the obligation to pay a judgment, settlement, penalty, fine, including any excise tax assessed with respect to any employee benefit plan, or reasonable expenses incurred with respect to a proceeding; (d) "official capacity" means, (i) when used with respect to a director, the office of director in the corporation; or (ii) when used with respect to an individual other than a director, the office in the corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise whether at the request of the corporation or otherwise; (e) "party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding; (f) "proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, including all appeals. (2) Indemnification. The corporation shall indemnify any person who was or is a party to any proceeding by reason of the fact that such person is or was a director, officer or employee of the corporation, or any subsidiary or affiliate of the corporation or is or was serving at the request of the corporation as a director, trustee, partner, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability incurred by such person in connection with such proceeding if (a) such person conducted him or herself in good faith; and (b) such person believed, in the case of conduct in his or her official capacity, that his or her conduct was in the best interests of the corporation, and in all other cases that his or her conduct was at least not opposed to its best interests; and (c) in the case of any criminal proceeding, such person had no reasonable cause to believe his or her conduct was unlawful; and (d) such person was not grossly negligent or guilty of willful misconduct. Indemnification required under this Section 16 in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. A person is considered to be serving an employee benefit plan at the corporation's request if such person's duties to the corporation also impose duties on, or otherwise involve services by, such person to the plan or to participants in or beneficiaries of the plan. A person's conduct with respect to an employee benefit plan for a purpose such person believed to be in the interests of the participants and beneficiaries of the plan is conduct that satisfies the requirements of this Section 16. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the standard of conduct described in this subsection (2) has not been met. (3) Limitations upon indemnification. Notwithstanding the provisions of subsection (2) of this Section 16, no indemnification shall be made in connection with: (a) any proceeding by or in the right of the corporation in which the person seeking indemnification was adjudged liable to the corporation; or (b) any proceeding charging any person with improper benefit to him or herself, whether or not involving action in such person's official capacity, in which such person was adjudged liable on the basis that personal benefit was improperly received by such person. (4) Determination and Authorization of Indemnification. In any case in which a director, officer or employee of the corporation requests indemnification, upon such person's request, the Board of Directors shall meet within sixty (60) days thereof to determine whether such person is eligible for indemnification in accordance with the applicable standards of conduct set forth in subsections (2) and (3) of this Section 16. Such determination shall be made as follows: (a) By the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding; (b) If a quorum cannot be obtained under paragraph (a) of this subsection (4), by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting of two or more directors not at the time parties to the proceeding; (c) By special legal counsel; (i) Selected by the Board of Directors or its committee in the manner prescribed in paragraphs (a) or (b) of this subsection (4); or (ii) If a quorum of the Board of Directors cannot be obtained under paragraph (a) of this subsection (4) and a committee cannot be designated under paragraph (b) of this subsection (4), selected by majority vote of the full Board of Directors, in which selection directors who are parties may participate; or (d) By the shareholders, but shares owned by or voted under the control of directors, officers or employees who are at the time parties to the proceeding may not be voted on the determination; or (e) By the Chairman of the Board if the person seeking indemnification is neither a director nor an officer of the corporation. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under paragraph (c) of this subsection (4) to elect counsel. (5) Advancement of Expenses. To the fullest extent permitted by law, the corporation shall promptly advance expenses as they are incurred by any person who is a party to any proceeding, whether by or in the right of the corporation or otherwise, by reason of the fact that such person is or was a director, officer or employee of the corporation or of any subsidiary or affiliate of the corporation, or is or was serving at the request of the corporation as a director, trustee, partner, officer, or employee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, 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 standards set forth in subsections (2) and (3) of this Section 16. (6) Contract Rights: Non-exclusivity of Indemnification: Contractual Indemnification. The foregoing provisions of this Section 16 shall be deemed to be a contract between the corporation and each director, officer or employee of the corporation, or its subsidiaries, or affiliates, and any modification or repeal of this Section 16 or such provisions of the Code of Virginia shall not diminish any rights or obligations existing prior to such modification or repeal with respect to any proceeding theretofore or thereafter brought; provided, however, that the right of indemnification provided in this Section 16 shall not be deemed exclusive of any other rights to which any director, officer or employee of the corporation may now be or hereafter become entitled apart from this Section 16, under any applicable law including the Code of Virginia. Irrespective of the provisions of this Section 16, the Board of Directors may, at any time from time to time, approve indemnification of directors, officers, employees or agents to the full extent permitted by the Code of Virginia at the time in effect, whether on account of past or future actions or transactions. Notwithstanding the foregoing, the corporation shall enter into such additional contracts providing for indemnification and advancement of expenses with directors, officers or employees of the corporation 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 Code of Virginia. (7) Miscellaneous Provisions. The indemnification provided by this Section 16 shall be limited with respect to directors, officers and controlling persons to the extent provided in any undertaking entered into by the corporation 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. The corporation may purchase and maintain insurance on behalf of any person described in this Section 16 against any liability which may be asserted against such person whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Section 16. Every reference in this Section 16 to directors, officers or employees shall include former directors, officers and employees and their respective heirs, executors and administrators. If any provision of this Section 16 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 of the validity of the remaining provisions hereof. The provisions of this Section 16 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 4/21/87) Section 17. These by-laws may at any time be amended or added to or any part thereof repealed by affirmative vote of a majority of a quorum of the Board of Directors given at a duly convened meeting of the Board of Directors, the notice of which includes notice of the proposed amendment, addition or repeal. Section 18. The Board of Directors shall be six in number. The directors need not be shareholders. A majority of the directors shall constitute a quorum for the transaction of business. (As amended 6/1/98) EX-4 3 EX-4(C) APCO COMPANY ORDER AND CERTIFICATE EXHIBIT 4(c) October 19, 1999 Company Order and Officers' Certificate Senior Notes, Series D The Bank of New York, as Trustee 101 Barclay Street New York, New York 10286 Attention: Corporate Trust Division Ladies and Gentlemen: Pursuant to Article Two of the Indenture, dated as of January 1, 1998 (as it may be amended or supplemented, the "Indenture"), from Appalachian Power Company (the "Company") to The Bank of New York, as trustee (the "Trustee"), and the Board Resolutions dated February 24, 1999, a copy of which certified by the Secretary or an Assistant Secretary of the Company is being delivered herewith under Section 2.01 of the Indenture, and unless otherwise provided in a subsequent Company Order pursuant to Section 2.04 of the Indenture, 1. The Company's Senior Notes, Series D, Due 2004 (the "Notes") are hereby established. The Notes shall be in substantially the form attached hereto as Exhibit 1. 2. The terms and characteristics of the Notes shall be as follows (the numbered clauses set forth below corresponding to the numbered subsections of Section 2.01 of the Indenture, with terms used and not defined herein having the meanings specified in the Indenture): (i) the aggregate principal amount of Notes which may be authenticated and delivered under the Indenture shall be limited to $50,000,000, except as contemplated in Section 2.01(i) of the Indenture; (ii) the date on which the principal of the Notes shall be payable shall be November 1, 2004; (iii) interest shall accrue from the date of authentication of the Notes; the Interest Payment Dates on which such interest will be payable shall be May 1 and November 1, and the Regular Record Date for the determination of holders to whom interest is payable on any such Interest Payment Date shall be the April 15 or October 15 preceding the relevant Interest Payment Date; provided that the first Interest Payment Date shall be May 1, 2000 and interest payable on the Stated Maturity Date or any Redemption Date shall be paid to the Person to whom principal shall be paid; (iv) the interest rate at which the Notes shall bear interest shall be 7.45% per annum; (v) the Notes shall be redeemable at the option of the Company, in whole at any time or in part from time to time, upon not less than thirty but not more than sixty days' previous notice given by mail to the registered owners of the Notes at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes being redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed (excluding the portion of any such interest accrued to the date of redemption) discounted (for purposes of determining present value) to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined below) plus 20 basis points, plus, in each case, accrued interest thereon to the date of redemption. "Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Comparable Treasury Price" means, with respect to any redemption date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case a percentage of its principal amount) on the third Business Day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U. S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such third Business Day, the Reference Treasury Dealer Quotation for such redemption date. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Company and reasonably acceptable to the Trustee. "Reference Treasury Dealer" means a primary U. S. government securities dealer in New York City selected by the Company and reasonably acceptable to the Trustee. "Reference Treasury Dealer Quotation" means, with respect to the Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at or before 5:00 p.m., New York City time, on the third Business Day preceding such redemption date. (vi) (a) the Notes shall be issued in the form of a Global Note; (b) the Depositary for such Global Note shall be The Depository Trust Company; and (c) the procedures with respect to transfer and exchange of Global Notes shall be as set forth in the form of Note attached hereto; (vii) the title of the Notes shall be "Senior Notes, Series D, Due 2004"; (viii) the form of the Notes shall be as set forth in Paragraph 1, above; (ix) not applicable; (x) the Notes shall not be subject to a Periodic Offering; (xi) not applicable; (xii) not applicable; (xiii) not applicable; (xiv) the Notes shall be issuable in denominations of $1,000 and any integral multiple thereof; (xv) not applicable; (xvi) the Notes shall not be issued as Discount Securities; (xvii) not applicable; (xviii) not applicable; and (xix) not applicable. 3. You are hereby requested to authenticate $50,000,000 aggregate principal amount of 7.45% Senior Notes, Series D, Due 2004, executed by the Company and delivered to you concurrently with this Company Order and Officers' Certificate, in the manner provided by the Indenture. 4. You are hereby requested to hold the Notes as custodian for DTC in accordance with the Letter of Representations dated October 13, 1999, from the Company and the Trustee to DTC. 5. Concurrently with this Company Order and Officers' Certificate, an Opinion of Counsel under Sections 2.04 and 13.06 of the Indenture is being delivered to you. 6. The undersigned Armando A. Pena and Thomas G. Berkemeyer, the Treasurer and Assistant Secretary, respectively, of the Company do hereby certify that: (i) we have read the relevant portions of the Indenture, including without limitation the conditions precedent provided for therein relating to the action proposed to be taken by the Trustee as requested in this Company Order and Officers' Certificate, and the definitions in the Indenture relating thereto; (ii) we have read the Board Resolutions of the Company and the Opinion of Counsel referred to above; (iii) we have conferred with other officers of the Company, have examined such records of the Company and have made such other investigation as we deemed relevant for purposes of this certificate; (iv) in our opinion, we have made such examination or investigation as is necessary to enable us to express an informed opinion as to whether or not such conditions have been complied with; and (v) on the basis of the foregoing, we are of the opinion that all conditions precedent provided for in the Indenture relating to the action proposed to be taken by the Trustee as requested herein have been complied with. Kindly acknowledge receipt of this Company Order and Officers' Certificate, including the documents listed herein, and confirm the arrangements set forth herein by signing and returning the copy of this document attached hereto. Very truly yours, APPALACHIAN POWER COMPANY By: /s/ A. A. Pena Treasurer And: /s/ Thomas G. Berkemeyer Assistant Secretary Acknowledged by Trustee: By: /s/ Michael Culhane Authorized Signatory EX-12 4 APCO COMPUTATION OF RATIOS EXHIBIT 12 APPALACHIAN POWER COMPANY Computation of Consolidated Ratio of Earnings to Fixed Charges (in thousands except ratio data)
Year Ended December 31, 1995 1996 1997 1998 1999 Fixed Charges: Interest on First Mortgage Bonds. . . . . . . . . . . $ 80,777 $ 82,082 $ 81,009 $ 72,057 $ 65,697 Interest on Other Long-term Debt. . . . . . . . . . . 16,404 18,025 28,163 40,642 50,712 Interest on Short-term Debt . . . . . . . . . . . . . 5,119 3,639 4,569 4,245 5,959 Miscellaneous Interest Charges. . . . . . . . . . . . 5,323 7,327 6,857 11,470 8,212 Estimated Interest Element in Lease Rentals . . . . . 7,000 6,600 6,000 5,900 6,100 -------- ------- ------ -------- -------- Total Fixed Charges. . . . . . . . . . . . . . . $114,623 $117,673 $126,598 $134,314 $136,680 ======== ======== ======== ======== ======== Earnings: Net Income. . . . . . . . . . . . . . . . . . . . . . $115,900 $133,689 $120,514 $ 93,330 $120,492 Plus Federal Income Taxes . . . . . . . . . . . . . . 53,355 65,801 54,835 43,941 70,950 Plus State Income Taxes . . . . . . . . . . . . . . . 7,273 10,180 8,109 6,845 5,085 Plus Fixed Charges (as above) . . . . . . . . . . . . 114,623 117,673 126,598 134,314 136,680 -------- -------- -------- -------- -------- Total Earnings . . . . . . . . . . . . . . . . . $291,151 $327,343 $310,056 $278,430 $333,207 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges. . . . . . . . . . . 2.54 2.78 2.44 2.07 2.43 ==== ==== ==== ==== ====
EX-13 5 APCO 1999 ANNUAL REPORT
APPALACHIAN POWER COMPANY AND SUBSIDIARIES Selected Consolidated Financial Data Year Ended December 31, 1998 1997 1996 1995 1994 (in thousands) INCOME STATEMENTS DATA: Operating Revenues $1,672,244 $1,628,515 $1,624,869 $1,545,039 $1,535,500 Operating Expenses 1,443,701 1,388,521 1,381,993 1,317,937 1,330,282 Operating Income 228,543 239,994 242,876 227,102 205,218 Nonoperating Income (Loss) (8,301) (222) 128 (4,699) (4,716) Income Before Interest Charges 220,242 239,772 243,004 222,403 200,502 Interest Charges 126,912 119,258 109,315 106,503 98,157 Net Income 93,330 120,514 133,689 115,900 102,345 Preferred Stock Dividend Requirements 2,497 7,006 15,938 16,405 15,660 Earnings Applicable to Common Stock $ 90,833 $ 113,508 $ 117,751 $ 99,495 $ 86,685 Year Ended December 31, 1998 1997 1996 1995 1994 (in thousands) BALANCE SHEETS DATA: Electric Utility Plant $5,087,359 $4,901,046 $4,717,132 $4,558,436 $4,398,727 Accumulated Depreciation and Amortization 1,984,856 1,869,057 1,782,017 1,694,746 1,627,852 Net Electric Utility Plant $3,102,503 $3,031,989 $2,935,115 $2,863,690 $2,770,875 Total Assets $4,047,038 $3,883,430 $3,800,737 $3,723,975 $3,635,632 Common Stock and Paid-in Capital $ 924,091 $ 873,506 $ 835,838 $ 785,509 $ 764,866 Retained Earnings 179,461 207,544 208,472 199,021 206,361 Total Common Shareholder's Equity $1,103,552 $1,081,050 $1,044,310 $ 984,530 $ 971,227 Cumulative Preferred Stock: Not Subject to Mandatory Redemption $ 19,359 $ 19,747 $ 29,815 $ 55,000 $ 55,000 Subject to Mandatory Redemption (a) 22,310 22,310 190,000 190,235 190,385 Total Cumulative Preferred Stock $ 41,669 $ 42,057 $ 219,815 $ 245,235 $ 245,385 Long-term Debt (a) $1,552,455 $1,494,535 $1,365,842 $1,285,684 $1,228,911 Obligations Under Capital Leases (a) $ 65,175 $ 60,110 $ 51,969 $ 48,937 $ 43,138 Total Capitalization and Liabilities $4,047,038 $3,883,430 $3,800,737 $3,723,975 $3,635,632 (a) Including portion due within one year.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES 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 from forward looking statements are: electric load and customer growth; abnormal weather conditions; available sources and costs of fuels; availability of generating capacity; the speed and degree to which competition is introduced to our power generation business, the structure and timing of a competitive market and its impact on energy prices or fixed rates; the ability to recover stranded costs in connection with deregulation of generation, new legislation and government regulations; the ability of the Company to successfully control its costs; the economic climate and growth in our service territory; unforeseen problems or failures related to Year 2000 readiness of computer software and hardware; inflationary trends; electricity market prices; interest rates; and other risks and unforeseen events. This discussion contains a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. Appalachian Power Company (the Company) is a wholly-owned subsidiary of American Electric Power Company, Inc. (AEP Co., Inc.), a public utility holding company. The Company is engaged in the generation, purchase, sale, transmission and distribution of electric power to 888,000 retail customers in southwestern Virginia and southern West Virginia and does business as American Electric Power (AEP). The Company supplies electric power to the AEP System Power Pool (AEP Power Pool) and shares the revenues and costs of AEP Power Pool wholesale sales to neighboring utility systems and power marketers. The Company also sells wholesale power to municipalities. As a member of the AEP Power Pool and a signatory company to the AEP System Transmission Equalization Agreement, the Company's generation and transmission facilities are operated in conjunction with the facilities of certain other AEP affiliated utilities as an integrated utility system. Results of Operations Net Income Although operating revenues increased in 1998, net income declined $27.2 million or 23% due primarily to increased fuel and maintenance expenses, losses on certain non-regulated electricity trading activities outside of the AEP Power Pool's traditional marketing area, increased interest charges and provisions for revenue refunds. The $13.2 million or 10% decline in 1997 was primarily due to increased interest charges reflecting additional amounts of long-term debt outstanding. Operating Revenues Increase Operating revenues increased 3% in 1998 primarily due to increased revenues from trading and transmission services. In 1997 revenues were relatively unchanged. The changes in the components of revenues are as follows: Increase (Decrease) From Previous Year (Dollars in Millions) 1998 1997 Amount % Amount % Retail: Residential $(5.1) $ (8.4) Commercial 2.3 (2.8) Industrial (0.3) 13.6 Other 2.2 0.2 (0.9) (0.1) 2.6 0.2 Wholesale 30.7 9.6 (13.5) (4.1) Transmission 19.3 69.9 6.5 30.9 Miscellaneous (5.4) (25.5) 8.0 59.6 Total $43.7 2.7 $ 3.6 0.2 The Company as part of the AEP System shares the benefits and costs of the System's generation through the AEP Power Pool. The cost of the System's generating capacity is allocated among the AEP Power Pool members, based on their relative peak demands and generating reserves through the payment or receipt of capacity charges and credits. AEP Power Pool members are also compensated for their out-of-pocket costs of energy delivered to the AEP Power Pool and charged for energy received from the AEP Power Pool. The AEP Power Pool calculates each Company's prior twelve month peak demand relative to the total peak demand of all member companies as a basis for sharing revenues and costs. The result of this calculation is each Company's member load ratio (MLR) which determines each Company's percentage share of revenues or costs. During 1998 the Company's MLR decreased resulting in the Company being allocated a smaller share of wholesale revenues and expenses from the AEP Power Pool. In 1997 management decided to develop a power marketing and trading business. The power marketing and trading business is conducted by American Electric Power Service Corporation as agent for the AEP Power Pool and its revenues and expenses are allocated to AEP Power Pool members based on MLR. The volume of the power marketing and trading business grew substantially during 1998 and accounted for the increase in wholesale revenues which reflects the Company's share of net revenues from electricity trading with other utilities and power marketers. Trading revenues are recorded net of purchases. Wholesale revenues decreased in 1997 primarily due to a decline in energy sales to the AEP Power Pool reflecting the AEP Power Pool's reduced need for energy as energy sales to unaffiliated entities declined. Transmission service revenues increased due to a substantial rise in the volume of energy transmitted for other entities over the AEP System's transmission lines. The issuance of open access transmission rules by the Federal Energy Regulatory Commission (FERC) facilitated the growth in transmission services. The Company receives its MLR share of transmission revenues. In 1998 miscellaneous revenues declined due to the recordation of provisions for revenue refunds under final rate orders. The increase in miscellaneous operating revenues in 1997 was due to the favorable effect of a provision recorded in 1996 for the completion of rate refunds under a settlement in the Virginia jurisdiction. Operating Expenses Increase Operating expenses increased 4% in 1998 and less than one percent in 1997. The increase in 1998 is mainly due to increased fuel and maintenance costs. Changes in the components of operating expenses are as follows: Increase (Decrease) From Previous Year (dollars in millions) 1998 1997 Amount % Amount % Fuel $33.7 8.4 $ 36.1 9.8 Purchased Power (8.4) (2.7) (21.5) (6.5) Other Operation 7.9 3.2 6.5 2.7 Maintenance 22.0 19.5 (4.6) (3.9) Depreciation and Amortization 6.1 4.5 4.6 3.5 Taxes Other Than Federal Income Taxes (0.5) (0.4) (3.7) (3.1) Federal Income Taxes (5.6) (9.6) (10.9) (15.5) Total $55.2 4.0 $ 6.5 0.5 The increase in fuel expense in 1998 is primarily due to an increase in generation. Fuel expense increased 10% in 1997 primarily due to increased generation and the operation of the West Virginia power supply cost recovery mechanism which requires that overcollections of fuel costs be deferred for future refund to customers through a charge to fuel expense. The level of generation increased primarily in the fourth quarter of 1997 when both units of the affiliate's nuclear plant were unavailable. The reduction in purchased power expense was due to reduced capacity charges from the AEP Power Pool as a result of the decrease in the Company's MLR and decreased purchases from the AEP Power Pool. The decline in purchased power expense in 1997 was mainly due to decreased purchases from the AEP Power Pool. Maintenance expense increased in 1998 primarily as a result of expenditures to restore service and make repairs following two severe snow storms and to clear and maintain right-of-ways. Federal income taxes attributable to operations decreased in both years primarily due to a decline in pre-tax operating income. Nonoperating Income Nonoperating income declined in 1998 primarily due to losses from forward electricity sales and purchases outside of the AEP Power Pool's traditional marketing area and electricity derivatives such as options, swaps, etc. Open non-regulated trades are marked-to-market and recorded in nonoperating income. Interest Charges and Preferred Stock Dividends The increase in interest charges in 1998 is primarily due to increased long-term borrowings and the accrual of interest to be paid to customers under rate refund orders. Interest charges increased in 1997 primarily as a result of an increase in the balance of long-term debt outstanding to replace preferred stock. Preferred stock dividend requirements decreased significantly due to a decrease in the number of shares outstanding reflecting the reacquisition of 1.3 million shares in the first quarter of 1997 as part of a tender offer and the redemption of the remaining 477,500 outstanding shares of the 7.80% series in April 1997. Business Outlook The most significant factor affecting the Company's future earnings is its ability to recover its costs as the electric generating business becomes more competitive. Although the FERC instituted open transmission access and competition in the wholesale market in 1996, the introduction of competition and customer choice for retail customers has been slow and continues at a deliberate pace as legislators and regulatory officials recognize the complexity of the issues. Federal legislation has been proposed to mandate competition and customer choice at the retail level. The Company's retail operations are in West Virginia and Virginia. West Virginia is currently considering initiatives to move to customer choice, although the timing is uncertain. In February 1999 the Virginia legislature passed comprehensive legislation, which will become law upon the Governor's signature, to restructure the electric utility industry and taxes applicable to electric utility services. Under the restructuring bill a transition to choice of supplier for retail customers will commence on January 1, 2002 and be completed, subject to a finding by the State Corporation Commission (SCC) that an effective competitive market exists, on January 1, 2004. Provisions allowing for an acceleration or limited delay in this schedule are also contained in the bill. Except as provided in the legislation, the generation of electricity will not be subject to rate regulation after January 1, 2002. Additionally, each Virginia electric utility is required by 2001 to join or establish a regional transmission entity which will manage and control transmission assets. The Virginia restructuring bill also provides an opportunity for recovery of just and reasonable net stranded costs. Stranded costs are those costs above market that potentially would not be recoverable in a competitive market. The mechanisms in the Virginia legislation for stranded cost recovery are dual: a capping of incumbent utility rates until as late as July 1, 2007, and the application of a wires charge upon customers who may depart the incumbent utility in favor of an alternative supplier prior to the termination of the rate cap. The legislation provides for the establishment of capped rates prior to January 1, 2001. The capped rates may be terminated after January 1, 2004, and prior to July 1, 2007, based upon the SCC determining that an effective competitive market exists. The wires charge will be equal to the difference between the generation component of the capped rates and the market price for generation service and will be imposed upon departing customers through the expiration of the rate cap period. Related tax legislation, which is intended to be revenue neutral, provides for replacement of the gross receipts and certain other taxes on electric utilities with a consumption tax levied upon customers on the basis of kilowatt-hour usage, and a state corporate net income tax. Under the provisions of Statement of Financial Accounting Standards (SFAS) 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 to match expenses and revenues with cost-based rates in the same accounting period. In order to maintain net regulatory assets on the balance sheet, SFAS 71 requires that rates charged to customers be cost-based and the recovery of regulatory assets must be probable. In the event a portion of the Company's business no longer meets the requirements of SFAS 71, SFAS 101 "Accounting for the Discontinuance of Application of Statement 71" requires that net regulatory assets be written off for that portion of the business. The provisions of SFAS 71 and SFAS 101 never anticipated that deregulation would include an extended transition period or that it would provide for recovery of stranded costs during and after a transition period. In July 1997 the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) addressed such a situation with the consensus reached on issue 97-4 that the application of SFAS 71 to a segment of a regulated electric utility cease when that segment is subject to a legislatively approved plan for competition 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 probable of recovery in future regulated rates. The Company's firm wholesale sales are a relatively small part of our business and are still under cost-of-service contracts. Our Virginia rates for generation will continue to be cost-based regulated until the establishment of capped rates. Until the capped rates are determined the Company does not have sufficient detail to reasonably determine what the legislature's approved plan for competition will entail. In West Virginia retail rates continue to be based upon cost-of-service. Consequently, as of December 31, 1998 the Company's generation business is still cost-based regulated. When capped rates are established in Virginia the application of SFAS 71 would be discontinued for the Virginia retail jurisdiction portion of the generating business, generation-related regulatory assets applicable to the Virginia jurisdiction will have to be written off to the extent that they cannot be recovered under the provisions of the restructuring legislation and generating assets for the Virginia retail jurisdiction will have to be evaluated for impairment. Based upon initial reviews the amount of regulatory assets applicable to the Virginia generating business at December 31, 1998 is estimated to be $64 million before related tax effects and any possible offsetting regulatory liabilities. Regulatory liabilities applicable to the Virginia generation business at December 31, 1998 are estimated to be $39 million of which $26 million represents deferred investment tax credits. The Company is evaluating the tax normalization rules regarding the timing of the reversal of deferred investment tax credits in connection with the Virginia restructuring legislation. Should it not be possible under the Virginia legislation to recover any portion of the generation net regulatory assets, it could have a material adverse impact on results of operations; however, the amount of any impairment loss for Virginia retail jurisdictional generating assets and any loss from a possible inability to recover net generation regulatory assets cannot be estimated until such time as capped rates are determined under the legislation. In the event West Virginia were to provide some form of retail competition such that the Company's West Virginia jurisdiction was no longer cost-based regulated for generation, and if it were not possible to demonstrate probability of recovery of resultant stranded costs including net regulatory assets during the transition period or from regulated distribution rates, then results of operations, cash flows and financial condition would be adversely affected. At the current time the timing and status of initiatives to move to customer choice in West Virginia is uncertain and the Company is in no position to determine whether it will incur a loss if and when West Virginia adopts restructuring. Litigation Corporate Owned Life Insurance The Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 to 1993 requested a ruling from their National Office that certain interest deductions claimed by the Company relating to a corporate owned life insurance (COLI) program should not be allowed. As a result of a suit filed by the Company in United States District Court (discussed below) this request for ruling was withdrawn by the IRS agents. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deductions through December 31, 1998 would reduce earnings by approximately $79 million (including interest). The Company has made no provision for any possible adverse earnings impact from this matter. In 1998 the Company made payments of taxes and interest attributable to COLI interest deductions for taxable years 1991-97 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payments to the IRS are included on the balance sheet in other property and investments pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid plus interest. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the United States in the United States District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. The Company is involved in a number of other 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. Cost Containment and Process Improvement Efforts continue to reduce the cost of products and services in order to maintain competitiveness. The accounting department completed its consolidation of operations and the marketing department completed its reorganization in 1998 producing cost reductions. In 1998 the Company reviewed its staffing levels for power generation and energy delivery and developed plans to reduce staff in 1999. The cost of staff reductions planned for 1999 was provided for in the fourth quarter of 1998. Although cost savings are expected to result from the power generation and energy delivery reorganizations, the Company continues to incur expenses related to investments in marketing and customer services and the reengineering and improvement of business processes. During 1998, the Company completed installation of a new unified customer service system which is designed to support customer requests for service, billings, accounts receivable, credit and collection functions. On January 1, 1999, the Company's new financial data base and PeopleSoft client server accounting and purchasing software became operational. The move to client server business software and related online data bases will empower employees to maximize the benefits of their personal computers and will position them to better access the power of the Internet and other new technologies. Fuel Costs The management and control of coal costs is critical to our competitive position. Approximately 98% of the Company's generation is coal fired with coal supplied under long-term contracts and purchased 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 when spot market prices are favorable. 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 the Company has spent hundreds of millions of dollars to equip its facilities with the latest economical clean air and water technologies and to research new technologies. We intend to continue in a leadership role fostering economically prudent efforts to protect and preserve the environment. By-products from the generation of electricity include materials such as ash, slag and sludge. Coal combustion by-products 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, polychlorinated biphenyls (PCBs) and other hazardous and nonhazardous materials. The Company is currently incurring costs to safely dispose of such substances. Additional costs could be incurred to comply with new laws and regulations if enacted. The Comprehensive Environmental Response, Compensation and Liability Act (Superfund) addresses clean-up of hazardous substances at disposal sites and authorized the United States Environmental Protection Agency (Federal EPA) to administer the clean-up programs. As of year-end 1998, there is one site for which the Company has received an information request which could lead to a potentially responsible party designation. The Company's liability has been resolved for a number of sites with no significant effect on results of operations and present estimates do not anticipate material cleanup costs for the identified site in which the Company is involved. However, if for reasons not currently identified significant costs are incurred for cleanup, future results of operations, cash flows and possibly financial condition could be adversely affected unless the costs can be recovered from customers. Federal EPA is required by the Clean Air Act Amendments of 1990 (CAAA) to issue rules to implement the law. In 1996 Federal EPA issued final rules governing nitrogen oxide (NOx) 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 power plants of the Company and its affiliates in the AEP System. To comply with Phase II of CAAA, the Company plans to install NOx emission control equipment on certain units and switch fuel at other units. Total capital costs to meet the requirements of Phase II of CAAA are estimated to be approximately $55 million of which $37 million has been incurred through December 31, 1998. On September 24, 1998, the administrator of Federal EPA signed final rules which require reductions in NOx emissions in 22 eastern states, including the states in which the Company's generating plants are located. The implementation of the final rules would be achieved through the revision of state implementation plans (SIPs) by September 1999. SIPs are a procedural method used by each state to comply with Federal EPA rules. The final rules anticipate the imposition of a NOx reduction on utility sources of approximately 85% below 1990 emission levels by the year 2003. On October 30, 1998, a number of utilities, including the Company and the other operating companies of the AEP System, filed a petition in the United States (US) Court of Appeals for the District of Columbia Circuit seeking a review of the final rules. Should the states fail to adopt the required revisions to their SIPs within one year of the date the final rules were signed (September 24, 1999), Federal EPA has proposed to implement a federal plan to accomplish the NOx reductions. Federal EPA also proposed the approval of portions of petitions filed by eight northeastern states that would result in imposition of NOx emission reductions on utility and industrial sources in upwind midwestern states. These reductions are substantially the same as those required by the final NOx rules and could be adopted by Federal EPA in the event the states fail to implement SIPs in accordance with the final rules. Preliminary estimates indicate that compliance could result in required capital expenditures of approximately $325 million. Compliance costs cannot be estimated with certainty and the actual costs incurred to comply could be significantly different from this preliminary estimate depending upon the compliance alternatives selected to achieve reductions in NOx emissions. Unless such costs are recovered from customers, they would have a material adverse effect on results of operations, cash flows and possibly financial condition. At the Third Conference of the Parties to the United Nations Framework Convention on Climate Change held in Kyoto, Japan in December 1997 more than 160 countries, including the US, negotiated a treaty requiring legally-binding reductions in emissions of greenhouse gases, chiefly carbon dioxide, which many scientists believe are contributing to global climate change. The treaty, which requires the advice and consent of the US Senate for ratification, would require the US to reduce greenhouse gas emissions seven percent below 1990 levels in the years 2008-2012. Although the US has agreed to the treaty and signed it on November 12, 1998, President Clinton has indicated that he will not submit the treaty to the Senate for consideration until it contains requirements for "meaningful participation by key developing countries" and the rules, procedures, methodology and guidelines of the treaty's market-based policy instruments, joint implementation programs and compliance enforcement provisions have been negotiated. At the Fourth Conference of the Parties, held in Buenos Aires, Argentina, in November 1998, the parties agreed to a work plan to complete negotiations on outstanding issues with a view toward approving them at the Sixth Conference of the Parties to be held in December 2000. We will continue to work with the Administration and Congress to monitor the development of public policy on this issue. If the Kyoto treaty is approved by Congress, the costs to comply with the emission reductions required by the treaty are 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. Financial Condition The Company issued $220 million principal amount of long-term obligations in 1998 at interest rates ranging from 5% to 7.3% and received from its parent a $50 million capital contribution. The principal amount of long-term debt retirements, including maturities, totaled $157 million with interest rates ranging from 7-1/4% to 8.75%. The Company's senior secured debt/first mortgage bond ratings are: Moody's, A3; Standard and Poor's (S&P), A; Fitch, A; and Duff & Phelps, LLC (D & P), A. Gross plant and property additions were $226 million in 1998 and $233 million in 1997. Management estimates construction expenditures for the next three years to be $766 million which includes the cost of transmission and distribution projects for the improvement of and addition to electric energy delivery facilities. The funds for construction of new facilities and improvement of existing facilities can come from a combination of internally generated funds, short-term and long-term borrowings and investments in common equity by the Company's parent, AEP Co., Inc. Approximately 65% of the construction expenditures for the next three years are expected to be financed with internally generated funds. When necessary the Company generally issues short-term debt to provide for interim financing of capital expenditures that exceed internally generated funds. At December 31, 1998, $763 million of unused short-term lines of credit shared with other AEP System companies were available. Short-term debt borrowings are limited by provisions of the 1935 Act to $325 million. Generally periodic reductions of outstanding short-term debt are made through issuances of long-term debt and through additional capital contributions by the parent company. The Company's earnings coverage presently exceeds all minimum coverage requirements for the issuance of mortgage bonds and preferred stock. The minimum coverage ratio is 2.0 for mortgage bonds and 1.5 for preferred stock. At December 31, 1998, the mortgage bonds and preferred stock coverage ratios were 3.88 and 1.8, respectively. Market Risks The Company has certain market risks inherent in its business activities from changes in electricity commodity prices and interest rates. The allocation of trading of electricity and related financial derivative instruments through the AEP Power Pool exposes the Company to market risk. Market risk represents the risk of loss that may impact the Company due to adverse changes in electricity commodity market prices and rates. In 1998 the AEP Power Pool substantially increased the volume of its wholesale power marketing and trading activities. Various policies and procedures have been established to manage market risk exposures including the use of a risk measurement model utilizing Value at Risk (VaR). Throughout the year ending December 31, 1998, the Company's share of the highest, lowest and average quarterly VaR in the wholesale trading portfolio was less than $3 million at a 95% confidence level with a holding period of three business days. The AEP Power Pool uses the variance-covariance method for calculating VaR based on three months of daily prices. Based on this VaR analysis, at December 31, 1998 a near term change in electricity commodity prices is not expected to have a material effect on the Company's results of operations, cash flows or financial condition. The Company is exposed to changes in interest rates primarily due to short-term and long-term borrowings to fund its business operations. The debt portfolio has fixed and variable interest rates with terms from one day to forty years and an average duration of six years at December 31, 1998. 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 are 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 $135 million at December 31, 1998. The Company would not expect to liquidate its entire debt portfolio in a one year holding period. Therefore, a near term change in interest rates should not materially affect results of operations or the consolidated financial position of the Company. Also since the Company's rates are cost-based regulated, the risk of interest rate changes on debt used to finance regulated operations is mitigated. Inflation affects the Company'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 Year 2000 Readiness Disclosure On or about midnight on December 31, 1999, digital computing systems may begin to produce erroneous results or fail, unless these systems are modified or replaced, because such systems may be programmed incorrectly and interpret the date of January 1, 2000 as being January 1st of the year 1900 or another incorrect date. In addition, certain systems may fail to detect that the year 2000 is a leap year. Problems can also arise earlier than January 1, 2000, as dates in the next millennium are entered into non-Year 2000 ready programs. Readiness Program Internally, the Company, through the AEP System, is modifying or replacing its computer hardware and software programs to minimize Year 2000-related failures and repair such failures if they occur. This includes both information technology systems (IT), which are mainframe and client server applications, and embedded logic systems (non-IT), such as process controls for energy production and delivery. Externally, the problem is being addressed with entities that interact with the Company, including suppliers, customers, creditors, financial service organizations and other parties essential to the Company's operations. In the course of the external evaluation, the Company has sought written assurances from third parties regarding their state of Year 2000 readiness. Another issue we are addressing is the impact of electric power grid problems that may occur outside of our transmission system. The Company, along with other electric utilities in North America, regularly submits information to the North American Electric Reliability Council (NERC) as part of NERC's Year 2000 readiness program. NERC then publicly reports summary information to the U.S. Department of Energy (DOE) regarding the Year 2000 readiness of electric utilities. In 1999 AEP plans to participate in two NERC-sponsored coordinated electric industry Year 2000 readiness drills. The second NERC report, dated January 11, 1999 and entitled: Preparing the Electric Power Systems of North American for Transition to the Year 2000 - A Status Report and Work Plan, Fourth Quarter 1998, states that: "With more than 44% of mission critical components tested through November 30, 1998, findings continue to indicate that transition through critical Year 2000 (Y2K) rollover dates is expected to have minimal impact on electric system operations in North America." The Company continues to set a target date of June 30, 1999 for having all mission critical and high priority systems and components Y2K ready. Through the Electric Power Research Institute, an electric industry-wide effort has been established to deal with Year 2000 problems affecting embedded systems. Under this effort, participating utilities are working together to assess specific vendors' system problems and test plans. The state regulatory commissions in the Company's service territory are also reviewing the Year 2000 readiness of the Company. Company's State of Readiness Work has been prioritized in accordance with business risk. The highest priority has been assigned to activities that potentially affect safety, the physical generation and delivery of energy, and communications; followed by back office activities such as customer service/billing, regulatory reporting, internal reporting and administrative activities (e.g. payroll, procurement, accounts payable); and finally, those activities that would cause inconvenience or productivity loss in normal business operations. The following chart shows our progress toward becoming ready for the Year 2000 as of December 31, 1998: IT SYSTEMS NON-IT SYSTEMS COMPLETION COMPLETION DATE/ESTIMATED PERCENT DATE/ESTIMATED PERCENT YEAR 2000 PROJECT PHASES COMPLETION DATE COMPLETE COMPLETION DATE COMPLETE Launch: Initiation of 2/24/1998 100% 5/31/1998 100% the Year 2000 activities within the organization. Establishment of organizational structure, personnel assignments and budget for the workgroup. Continuous management update and awareness program. Inventory and Assessment: Identifying all Company 7/31/1998 100% 2/15/1999 99% computer systems that could be affected by the millennium change. Prioritize repair efforts based upon criticality to maintaining ongoing operations. Remediation/Testing: The process of modifying, 6/30/1999 Mainframe 6/30/1999 37% replacing or retiring 70% those mission critical and high priority digital-based systems with problems Client processing dates past the Server: Year 2000. Testing these 18% systems to ensure that after modifications have been implemented correct date processing occurs and full functionality has been maintained. Costs to Address the Company's Year 2000 Issues Through December 31, 1998, the Company has spent $6 million on the Year 2000 project and, estimates spending an additional $10 million to $14 million to achieve Year 2000 readiness. Most Year 2000 costs are for software modifications, IT consultants and salaries and are expensed; however, in certain cases the Company has acquired hardware that was capitalized. The Company intends to fund these expenditures through internal sources. Although significant, the cost of becoming Year 2000 compliant is not expected to have a material impact on the Company's results of operations, cash flows or financial condition. Risks of the Company's Year 2000 Issues The applications posing the greatest business risk to the Company's operations should they experience Y2K problems are: * Automated power generation, transmission and distribution systems * Telecommunications systems * Energy trading systems * Time-in-use, demand and remote metering systems for commercial and industrial customers and * Work management and billing systems. The potential problems related to erroneous processing by, or failure of, these systems are: * Power service interruptions to customers * Interrupted revenue data gathering and collection * Poor customer relations resulting from delayed billing and settlement. In addition, although as discussed relationships with third parties, such as suppliers, customers and other electric utilities, are being monitored, these third parties nonetheless represent a risk that cannot be assessed with precision or controlled with certainty. Due to the complexity of the problem and the interdependent nature of computer systems, if our corrective actions, and/or the actions of others who impact the AEP System's operations but are not affiliated with the AEP System, fail for critical applications, Year 2000-related issues may materially adversely affect the Company. Company's Contingency Plans To address possible failures of electric generation and delivery of electrical energy due to Year 2000 related failures, we have established a draft Year 2000 contingency plan and submitted it to the East Central Area Reliability Council in December 1998 as part of NERC's review of regional and individual electric utility contingency plans in 1999. NERC's target date is June 1999 for the completion of this contingency plan. In addition, the Company intends to establish contingency plans for its business units to address alternatives if Year 2000 related failures occur. Contingency plans will be developed by the end of 1999. The Company's plans build upon the disaster recovery, system restoration, and contingency planning that we have had in place. New Accounting Standards In 1997 the FASB issued SFAS 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." SFAS 130 establishes the standards for reporting and displaying components of "comprehensive income," which is the total of net income and all transactions not included in net income affecting equity except those with shareholders. The Company adopted SFAS 130 in the first quarter of 1998. For 1998 there were no material differences between net income and comprehensive income. SFAS 131 initiates standards for annual and interim financial statements to report operating segments of a business for which separate financial information is available and regularly evaluated by the chief operating decision maker in allocating resources and reviewing performance. Information about products and services and geographic areas is to be reported at an enterprise-level instead of by segment. SFAS 131 was required to be adopted by the Company for the year ended December 31, 1998 with restatement of prior period comparative information. Adoption of SFAS 131 did not have any effect on results of operations, cash flows or financial condition. In the first quarter of 1998 the Company adopted the American Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the capitalization and amortization of certain costs of acquiring or developing internal use computer software. The SOP had to be adopted at the beginning of a fiscal year with no restatement or retroactive adjustment of prior periods. The adoption of the SOP effective January 1, 1998 did not have a material effect on results of operations, cash flows or financial condition. In February 1998, the FASB issued SFAS 132 "Employers' Disclosure about Pensions and Other Postretirement Benefits" which revised employers' disclosures about pensions and other postretirement benefit plans and suggested that the disclosure be combined. It did not change the measurement or recognition requirements for postretirement benefit accounting. The adoption of SFAS 132 did not have an effect on results of operations, cash flows or financial condition. EITF 98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" was issued in November 1998 to address the application of mark-to-market accounting for energy trading contracts. Under the provisions of this standard, which must be adopted by the Company in January 1999, energy trading contracts can no longer be accounted for on a settlement basis. Instead they are to be marked-to-market. Initial adoption of EITF 98-10 is not expected to have a significant impact on results of operations, cash flows or financial condition. The FASB issued SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" in June 1998. SFAS 133 establishes accounting and reporting standards for derivative instruments. It requires that all derivatives be recognized as either an asset or a liability and measured at fair value in the financial statements. If certain conditions are met a derivative may be designated as a hedge of possible changes in fair value of an asset, liability or firm commitment; variable cash flows of forecasted transactions; or foreign currency exposure. The accounting/reporting for changes in a derivative's fair value (gains and losses) depend on the intended use and resulting designation of the derivative. Management is currently studying the provisions of SFAS 133 to determine the impact of its adoption on January 1, 2000 on results of operations, cash flows and financial condition. In April 1998 the AICPA issued SOP 98-5 "Reporting on the Costs of Start-up Activities". The SOP clarifies the accounting and reporting for one time start-up activities and organization costs, requiring that they be expensed as incurred. The adoption of this standard in January 1999 is not expected to have a material effect on results of operations, cash flows or financial condition.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES Consolidated Statements of Income Year Ended December 31, 1998 1997 1996 (in thousands) OPERATING REVENUES $1,672,244 $1,628,515 $1,624,869 OPERATING EXPENSES: Fuel 437,500 403,777 367,651 Purchased Power 303,116 311,514 333,014 Other Operation 254,718 246,785 240,249 Maintenance 134,856 112,873 117,483 Depreciation and Amortization 143,809 137,670 133,074 Taxes Other Than Federal Income Taxes 116,070 116,590 120,307 Federal Income Taxes 53,632 59,312 70,215 Total Operating Expenses 1,443,701 1,388,521 1,381,993 OPERATING INCOME 228,543 239,994 242,876 NONOPERATING INCOME (LOSS) (8,301) (222) 128 INCOME BEFORE INTEREST CHARGES 220,242 239,772 243,004 INTEREST CHARGES 126,912 119,258 109,315 NET INCOME 93,330 120,514 133,689 PREFERRED STOCK DIVIDEND REQUIREMENTS 2,497 7,006 15,938 EARNINGS APPLICABLE TO COMMON STOCK $ 90,833 $ 113,508 $ 117,751
See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 1997 (in thousands) ASSETS ELECTRIC UTILITY PLANT: Production $1,976,729 $1,942,325 Transmission 1,116,421 1,079,919 Distribution 1,641,278 1,583,161 General 233,465 207,380 Construction Work in Progress 119,466 88,261 Total Electric Utility Plant 5,087,359 4,901,046 Accumulated Depreciation and Amortization 1,984,856 1,869,057 NET ELECTRIC UTILITY PLANT 3,102,503 3,031,989 OTHER PROPERTY AND INVESTMENTS 111,020 34,544 CURRENT ASSETS: Cash and Cash Equivalents 7,755 6,947 Accounts Receivable: Customers 122,746 129,924 Affiliated Companies 35,802 24,502 Miscellaneous 8,572 10,231 Allowance for Uncollectible Accounts (2,234) (1,333) Fuel - at average cost 49,826 47,901 Materials and Supplies - at average cost 60,440 57,359 Accrued Utility Revenues 45,985 51,208 Energy Marketing and Trading Contracts 22,436 923 Prepayments 8,151 6,037 TOTAL CURRENT ASSETS 359,479 333,699 REGULATORY ASSETS 426,193 441,223 DEFERRED CHARGES 47,843 41,975 TOTAL $4,047,038 $3,883,430 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES December 31, 1998 1997 (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common Stock - No Par Value: Authorized - 30,000,000 Shares Outstanding - 13,499,500 Shares $ 260,458 $ 260,458 Paid-in Capital 663,633 613,048 Retained Earnings 179,461 207,544 Total Common Shareholder's Equity 1,103,552 1,081,050 Cumulative Preferred Stock: Not Subject to Mandatory Redemption 19,359 19,747 Subject to Mandatory Redemption 22,310 22,310 Long-term Debt 1,472,451 1,415,026 TOTAL CAPITALIZATION 2,617,672 2,538,133 OTHER NONCURRENT LIABILITIES 120,281 137,371 CURRENT LIABILITIES: Long-term Debt Due Within One Year 80,004 79,509 Short-term Debt 76,400 130,300 Accounts Payable - General 60,569 52,683 Accounts Payable - Affiliated Companies 50,313 44,133 Taxes Accrued 35,719 41,549 Customer Deposits 14,123 13,713 Interest Accrued 19,990 20,949 Revenue Refunds Accrued 95,267 3,311 Energy Marketing and Trading Contracts 24,076 729 Other 78,808 68,083 TOTAL CURRENT LIABILITIES 535,269 454,959 DEFERRED INCOME TAXES 643,711 658,655 DEFERRED INVESTMENT TAX CREDITS 62,231 67,496 DEFERRED CREDITS 67,874 26,816 COMMITMENTS AND CONTINGENCIES (Note 4) TOTAL $4,047,038 $3,883,430 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows Year Ended December 31, 1998 1997 1996 (in thousands) OPERATING ACTIVITIES: Net Income $ 93,330 $ 120,514 $ 133,689 Adjustments for Noncash Items: Depreciation and Amortization 144,967 138,975 134,381 Deferred Federal Income Taxes (2,338) (5,117) 592 Deferred Investment Tax Credits (5,265) (5,181) (5,602) Deferred Power Supply Costs (net) 30,081 12,310 293 Provision for Rate Refunds (31,019) 7,601 (2,626) Changes in Certain Current Assets and Liabilities: Accounts Receivable (net) (1,562) (3,990) (19,176) Fuel, Materials and Supplies (5,006) 3,950 15,583 Accrued Utility Revenues 5,223 635 13,235 Accounts Payable 14,066 10,924 3,668 Taxes Accrued (5,830) 614 (7,731) Revenue Refunds Accrued 91,956 (2,272) 5,583 Payment of Disputed Tax and Interest Related to COLI (68,316) - - Change in Operating Reserves 30,631 16,473 6,906 Other (net) (16,754) (14,923) (3,052) Net Cash Flows From Operating Activities 274,164 280,513 275,743 INVESTING ACTIVITIES: Construction Expenditures (204,869) (218,074) (191,815) Proceeds from Sales of Property and Other 2,930 4,971 1,933 Net Cash Flows Used For Investing Activities (201,939) (213,103) (189,882) FINANCING ACTIVITIES: Capital Contributions from Parent Company 50,000 40,000 50,000 Issuance of Long-term Debt 211,944 183,257 273,340 Retirement of Cumulative Preferred Stock (294) (183,875) (25,904) Retirement of Long-term Debt (157,973) (56,379) (195,910) Change in Short-term Debt (net) (53,900) 69,600 (64,825) Dividends Paid on Common Stock (118,916) (114,436) (108,300) Dividends Paid on Cumulative Preferred Stock (2,278) (5,890) (15,666) Net Cash Flows Used For Financing Activities (71,417) (67,723) (87,265) Net Increase (Decrease) in Cash and Cash Equivalents 808 (313) (1,404) Cash and Cash Equivalents January 1 6,947 7,260 8,664 Cash and Cash Equivalents December 31 $ 7,755 $ 6,947 $ 7,260 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES Consolidated Statements of Retained Earnings Year Ended December 31, 1998 1997 1996 (in thousands) Retained Earnings January 1 $207,544 $208,472 $199,021 Net Income 93,330 120,514 133,689 300,874 328,986 332,710 Deductions: Cash Dividends Declared: Common Stock 118,916 114,436 108,300 Cumulative Preferred Stock: 4-1/2% Series 875 892 1,348 4.50% Series - - 9 5.90% Series 455 455 2,950 5.92% Series 364 364 3,552 6.85% Series 579 579 2,055 7.40% Series - - 1,385 7.80% Series - 931 3,900 Total Cash Dividends Declared 121,189 117,657 123,499 Capital Stock Expense 224 3,785 739 Total Deductions 121,413 121,442 124,238 Retained Earnings December 31 $179,461 $207,544 $208,472 See Notes to Consolidated Financial Statements.
APPALACHIAN POWER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: Organization Appalachian Power Company (the Company or APCo) is a wholly-owned subsidiary of American Electric Power Company, Inc. (AEP Co., Inc.), a public utility holding company. The Company is engaged in the generation, purchase, sale, transmission and distribution of electric power to 888,000 retail customers in southwestern Virginia and southern West Virginia and does business as American Electric Power (AEP). The Company supplies electric power to the American Electric Power System Power Pool (AEP Power Pool) and shares the revenues and costs of Power Pool wholesale sales to neighboring utility systems and power marketers. The Company also sells wholesale power to municipalities. As a member of the American Electric Power System (AEP System) Power Pool and a signatory company to the AEP System Transmission Equalization Agreement, the Company's generation and transmission facilities are operated in conjunction with the facilities of certain other AEP affiliated utilities as an integrated utility system. The Company has four wholly-owned subsidiaries which are consolidated in these financial statements: Cedar Coal Co., Central Appalachian Coal Company and Southern Appalachian Coal Company (which were formerly engaged in coal mining and now lease their coal reserves to unaffiliated companies) and West Virginia Power Company (which is inactive). Regulation As a subsidiary of AEP Co., Inc., the Company is subject to the regulation of the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (1935 Act). Retail rates are regulated by the State Corporation Commission of Virginia (Virginia SCC) and the Public Service Commission of West Virginia (WVPSC). The Federal Energy Regulatory Commission (FERC) regulates the Company's wholesale rates. Principles of Consolidation The consolidated financial statements include the revenues, expenses, cash flows, assets, liabilities and equity of APCo and its wholly-owned subsidiaries. Significant intercompany items are eliminated in consolidation. Basis of Accounting As a cost-based rate-regulated entity, APCo's 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 Statement of Financial Accounting Standards (SFAS) 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 of plant are deducted from the electric utility plant in service account and deducted from accumulated depreciation together with associated removal costs, net of salvage. The costs of labor, materials and overheads incurred to operate and maintain utility plant are included in operating expenses. Allowance for Funds Used During Construction (AFUDC) AFUDC is a noncash nonoperating income item that is capitalized and recovered through depreciation over the service life of utility plant. It represents the estimated cost of borrowed and equity funds used to finance construction projects. In the Virginia jurisdiction, construction work in progress is included in rate base and earns a return in regulated rates in lieu of recording AFUDC. The amounts of AFUDC in 1998, 1997 and 1996 were not significant. Depreciation and Amortization Depreciation of electric utility plant is provided on a straight-line basis over the estimated useful lives of utility plant and is calculated largely through the use of composite rates by functional class. The annual composite depreciation rates for 1998, 1997 and 1996 are as follows: Annual Composite Functional Class Depreciation of Property Rates Production: Steam 3.4% Hydro 2.8% Transmission 2.2% Distribution 3.3% General 3.1% Expenditures for the demolition and removal of plant are charged to the accumulated provision for depreciation and recovered through depreciation charges included in rates. Cash and Cash Equivalents Cash and cash equivalents include temporary cash investments with original maturities of three months or less. Operating Revenues Revenues include the accrual of electricity consumed but unbilled at month-end as well as billed revenues. Power Supply Costs and Fuel Costs The Company practices deferred accounting with respect to over or under collection of certain fuel and power supply costs pursuant to the Virginia SCC's fuel cost recovery mechanism. In the Virginia jurisdiction, changes in fuel costs and the fuel portion of purchased power costs are deferred and reviewed for recovery or refund annually by the Virginia SCC. In the West Virginia jurisdiction, under the terms of a 1996 settlement agreement, a modified version of deferral accounting will be practiced for the over and under collection of fuel, Power Pool capacity charges and certain transmission revenue for the period November 1996 through December 1999. Although a cumulative over and under recovery balance will be maintained, ratepayers will not be responsible for any cumulative underrecovery balance at December 31, 1999. Overrecoveries during the annual periods through December 31, 1999 in excess of $10 million per period would be accumulated and shared equally between the Company and its ratepayers. Overrecoveries under $10 million are not shared with rate payers and are included in operating income annually. Wholesale jurisdictional fuel cost changes are expensed and billed as incurred through a FERC fuel clause. Derivative Financial Instruments During 1998, the AEP Power Pool substantially increased the volume of its power marketing and trading transactions (trading activities) in which the Company shares. Trading activities involve the sale of electricity under physical forward contracts at fixed and variable prices and the trading of electricity contracts including exchange traded futures and options and over-the-counter options and swaps. The majority of these transactions represent physical forward contracts in the AEP System's traditional marketing area and are typically settled by entering into offsetting contracts. The net revenues from these transactions are included in operating revenues for ratemaking, accounting and financial and regulatory reporting purposes. In addition the AEP Power Pool enters into transactions for the purchase and sale of electricity options, futures and swaps, and for the forward purchase and sale of electricity outside of the AEP System's traditional marketing area. These non-regulated trading activities are included in nonoperating income and accounted for on a mark-to-market basis. The unrealized mark-to-market gains and losses from such non-regulated trading activity are reported as assets and liabilities, respectively. The Company enters into forward contracts to manage the exposure to unfavorable changes in the cost of debt to be issued. These anticipatory debt instruments are entered into in order to manage the change in interest rates between the time a debt offering is initiated and the issuance of the debt (usually a period of 60 days). Any resultant gains or losses are deferred and amortized over the life of the debt issuance. There were no such forward contracts outstanding at December 31, 1998 or 1997. See Note 7 - Financial Instruments, Credit and Risk Management for further discussion. Reclassification In the fourth quarter of 1998 the Company changed the presentation of its trading activities from a gross basis (purchases and sales reported separately) to a net basis (purchase and sales are reported on a net basis as revenues). This reclassification had no impact on net income. Certain prior year amounts have been reclassified to conform to current year presentation. Such reclassifications had no impact on previously reported net income. Income Taxes The Company follows the liability method of accounting for income taxes as prescribed by SFAS 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes are provided for all temporary differences between 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 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. Investment tax credits that have been deferred are being amortized over the life of regulated plant investment. Debt and Preferred Stock Gains and losses from the reacquisition of debt are deferred as regulatory assets and amortized over the remaining term of the reacquired debt in accordance with rate-making treatment. If debt is refinanced, reacquisition costs are deferred and amortized over the term of the replacement debt commensurate with their recovery in rates. Debt discount or premium and debt issuance expenses are deferred and 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 the cost of preferred stock reacquired is credited to paid-in capital and amortized to retained earnings. Other Property and Investments Other property and investments are stated at cost. Comprehensive Income There were no material differences between net income and comprehensive income. 2. EFFECTS OF REGULATION: In accordance with SFAS 71 the consolidated financial statements include regulatory assets (deferred expenses) and regulatory liabilities (deferred income) recorded in accordance with regulatory actions in order to match expenses and revenues from cost-based rates in the same accounting period. 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. Among other things, application of SFAS 71 requires that the Company's regulated rates be cost-based and the recovery of regulatory assets must be probable. In the event a portion of the Company's business were to no longer meet those 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 cost. In February 1999 the Virginia legislature passed comprehensive legislation, which will become law upon the Governor's signature, to restructure the electric utility industry. Under the restructuring bill a transition to choice of supplier for retail customers will commence on January 1, 2002 and be completed, subject to a finding by the Virginia SCC that an effective competitive market exists, on January 1, 2004. Provisions allowing for an acceleration or limited delay in this schedule are also contained in the bill. Except as provided in the legislation, the generation of electricity will not be subject to rate regulation after January 1, 2002. Additionally, each Virginia electric utility is required by 2001 to join or establish a regional transmission entity which will manage and control transmission assets. The Virginia restructuring bill also provides an opportunity for recovery of just and reasonable net stranded costs. Stranded costs are those costs above market that potentially would not be recoverable in a competitive market. The mechanisms in the Virginia legislation for stranded cost recovery are dual: a capping of incumbent utility rates until as late as July 1, 2007, and the application of a wires charge upon customers who may depart the incumbent utility in favor of an alternative supplier prior to the termination of the rate cap. The legislation provides for the establishment of capped rates prior to January 1, 2001. The capped rates may be terminated after January 1, 2004, and prior to July 1, 2007, based upon the Virginia SCC determining that an effective competitive market exists. The wires charge will be equal to the difference between the generation component of the capped rates and the market price for generation service and will be imposed upon departing customers through the expiration of the rate cap period. Management has reviewed all the evidence currently available and concluded that as of December 31, 1998 the requirements to apply SFAS 71 continue to be met. Virginia rates for generation will continue to be cost-based regulated until the establishment of capped rates as provided in the legislation. When capped rates are established the application of SFAS 71 would be discontinued for the Virginia retail jurisdiction portion of the generating business. At that time generation-related regulatory assets applicable to the Virginia jurisdiction will have to be written off to the extent that they cannot be recovered under the provisions of the restructuring legislation and generating assets for the Virginia retail jurisdiction will have to be evaluated for impairment. Based upon initial reviews the amount of regulatory assets applicable to the Virginia generating business at December 31, 1998 is estimated to be $64 million before related tax effects and any possible offsetting regulatory liabilities. Regulatory liabilities applicable to the Virginia generation business at December 31, 1998 are estimated to be $39 million of which $26 million represents deferred investment tax credits. The Company is evaluating the tax normalization rules regarding the timing of the reversal of deferred investment tax credits in connection with the Virginia restructuring legislation. Should it not be possible under the Virginia legislation to recover any portion of the generation net regulatory assets, it could have a material adverse impact on results of operations; however, the amount of any impairment loss for Virginia retail jurisdictional generating assets and any loss from a possible inability to recover net generation regulatory assets cannot be estimated until such time as capped rates are determined under the legislation. Recognized regulatory assets and liabilities are comprised of the following: December 31, 1998 1997 (in thousands) Regulatory Assets: Amounts Due From Customers For Future Income Taxes $374,750 $386,127 Unamortized Loss On Reacquired Debt 22,827 23,561 Deferred Storm Damage 6,101 8,542 Other 22,515 22,993 Total Regulatory Assets $426,193 $441,223 Regulatory Liabilities: Deferred Investment Tax Credits $ 62,231 $67,496 Other* 53,955 21,121 Total Regulatory Liabilities $116,186 $88,617 * Included in Deferred Credits on Consolidated Balance Sheets. 3. RATE MATTERS: In June 1997 the Company filed an application with the Virginia SCC for approval, among other things, of an increase of $30.5 million in base rates on an annual basis. In July 1997 the Virginia SCC suspended implementation of the proposed rates until November 11, 1997 when rates were placed into effect subject to refund. On January 11, 1999, the Company and the Virginia SCC Staff filed a Stipulation agreement with the Virginia SCC which was approved in February 1999. The Stipulation's main provisions include the retroactive elimination of the $30.5 million annual increase in base rates that was being collected subject to refund; a reduction in base rates of $6 million effective January 1, 1998; the refund with interest of all amounts collected above the approved rates; the intention to hold rates at these levels through December 31, 2000; an investment of at least $90 million in Virginia distribution facilities between January 1, 1998 and December 31, 2000 (Plan Period); and a benchmark rate of return on equity of 10.85% (Benchmark Rate) upon which future earnings will be tested. During the Plan Period, one-third of any earnings above the Benchmark Rate will be retained by the Company and the remaining two-thirds will be refunded to ratepayers. The fuel factor component of rates will continue to be administered under current regulation. A refund liability, including interest, of $51.6 million at December 31, 1998 has been accrued. In September 1992 the Company implemented, subject to refund, an $8.7 million annual rate increase to its wholesale customers pending a final order from the Federal Energy Regulatory Commission (FERC). On June 29, 1998 the FERC granted an annual rate increase of $3.4 million and required a refund including interest of amounts collected in excess of the $3.4 million annual increase. A rehearing of the FERC's order has been requested. A refund liability, including interest, of $42.8 million at December 31, 1998 has been accrued. 4. COMMITMENTS AND CONTINGENCIES: Construction and Other Commitments Substantial construction commitments have been made to support the Company's utility operations. Such commitments do not include any expenditures for new generating capacity. Construction expenditures for 1999-2001 are estimated to be $766 million. Long-term fuel supply contracts contain clauses that provide for periodic price adjustments. The contracts are for various terms, the longest of which extends to 2006, and contain various clauses that would release the Company from its obligation under certain force majeure conditions. Clean Air Act/Air Quality The United States (US) Environmental Protection Agency (Federal EPA) is required by the Clean Air Act Amendments of 1990 (CAAA) to issue rules to implement the law. In 1996 Federal EPA issued final rules governing nitrogen oxides (NOx) emissions that must be met after January 1, 2000 (Phase II of CAAA). The final rules will require substantial reductions in NOx emissions from certain types of boilers including those in the AEP System's and the Company's power plants. To comply with Phase II of CAAA, the Company plans to install NOx emission control equipment on certain units and switch fuel at other units. The Company's total capital costs to meet the requirements of Phase II of CAAA are estimated to be approximately $55 million of which $37 million has been incurred through December 31, 1998. On September 24, 1998, Federal EPA finalized rules which require reductions in NOx emissions in 22 eastern states, including the states in which the AEP System's and the Company's generating plants are located. The implementation of the final rules would be achieved through the revision of state implementation plans (SIPs) by September 1999. SIPs are a procedural method used by each state to comply with Federal EPA rules. The final rules anticipate the imposition of a NOx reduction on utility sources of approximately 85% below 1990 emission levels by the year 2003. On October 30, 1998, a number of utilities, including the Company and the other operating companies of the AEP System, filed petitions in the US Court of Appeals for the District of Columbia Circuit seeking a review of the final rules. Should the states fail to adopt the required revisions to their SIPs within one year of the date of the final rules (September 24, 1999), Federal EPA has proposed to implement a federal plan to accomplish the NOx reductions. Federal EPA also proposed the approval of portions of petitions filed by eight northeastern states that would result in imposition of NOx emission reductions on utility and industrial sources in upwind midwestern states. These reductions are substantially the same as those required by the final NOx rules and could be adopted by Federal EPA in the event the states fail to implement SIPs in accordance with the final rules. Preliminary estimates indicate that compliance could result in required capital expenditures by the Company of approximately $325 million. Compliance costs cannot be estimated with certainty and the actual costs incurred to comply could be significantly different from this preliminary estimate depending upon the compliance alternatives selected to achieve reductions in NOx emissions. Unless such costs are recovered from customers, they would have a material adverse effect on results of operations, cash flows and possibly financial condition. Litigation The Internal Revenue Service (IRS) agents auditing the AEP System's consolidated federal income tax returns for the years 1991 to 1993 requested a ruling from their National Office that certain interest deductions claimed by the Company relating to AEP's corporate owned life insurance (COLI) program should not be allowed. As a result of a suit filed by the Company in US District Court (discussed below) this request for ruling was withdrawn by the IRS agents. Adjustments have been or will be proposed by the IRS disallowing COLI interest deductions for taxable years 1991-96. A disallowance of the COLI interest deductions through December 31, 1998 would reduce earnings by approximately $79 million (including interest). The Company has made no provision for any possible adverse earnings impact from this matter. In 1998 the Company made payments of taxes and interest attributable to COLI interest deductions for taxable years 1991-97 to avoid the potential assessment by the IRS of any additional above market rate interest on the contested amount. The payments to the IRS are included on the balance sheet in other property and investments pending the resolution of this matter. The Company will seek refund, either administratively or through litigation, of all amounts paid plus interest. In order to resolve this issue without further delay, on March 24, 1998, the Company filed suit against the US in the US District Court for the Southern District of Ohio. Management believes that it has a meritorious position and will vigorously pursue this lawsuit. In the event the resolution of this matter is unfavorable, it will have a material adverse impact on results of operations and cash flows. The Company is involved in a number of other 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. RELATED PARTY TRANSACTIONS: Benefits and costs of the AEP System's generating plants are shared by members of the AEP Power Pool of which the Company is a member. Under terms of the System Interconnection Agreement, capacity charges and credits are designed to allocate the cost of the System's capacity among the AEP Power Pool members based on their relative peak demands and generating reserves. AEP Power Pool members are also compensated for the out-of-pocket costs of energy delivered to the AEP Power Pool and charged for energy received from the AEP Power Pool. Operating revenues include $36.9 million in 1998, $40.1 million in 1997 and $54.8 million in 1996 for energy supplied to the AEP Power Pool. Since the Company's internal peak demand exceeds its generating capacity, charges for AEP Power Pool capacity reservation, which is a charge for the right to receive power even if the power is not taken, and charges for energy received from the AEP Power Pool were included in purchased power expense as follows: Year Ended December 31, 1998 1997 1996 (in thousands) Capacity Charges $ 83,536 $128,680 $125,456 Energy Charges 97,226 149,113 187,754 Total $180,762 $277,793 $313,210 Power marketing and trading operations, which are described in Note 1, are conducted by the AEP Power Pool and shared with the Company. The Company's operating revenues, purchased power expense and nonoperating income include amounts for power marketing and trading allocated by the AEP Power Pool as follows: Year Ended December 31, 1998 1997 1996 (in thousands) Operating Revenues $193,441 $128,041 $126,971 Purchased Power Expense 111,909 27,330 14,700 Nonoperating Loss (11,179) (81) - Energy sold directly to Kingsport Power Company (KGPCo), an affiliated distribution utility that is not a member of the AEP Power Pool, was included in operating revenues in the amounts of $56.8 million in 1998, $57.9 million in 1997 and $59.5 million in 1996. Purchased power expense includes $10.4 million in 1998, $6.4 million in 1997 and $5.1 million in 1996 of energy bought from the Ohio Valley Electric Corporation, an affiliated company that is not a member of the AEP Power Pool. AEP System electric operating utility companies including the Company participate in the AEP Transmission Equalization Agreement. This agreement combines certain AEP System companies' investments in transmission facilities and shares the costs of ownership in proportion to the System companies' respective peak demands. Pursuant to the terms of the agreement since the Company's relative investment in transmission facilities is greater than its relative peak demands in 1998 and less than its relative peak demands in 1997 and 1996, other operation expense includes equalization charges (credits) of $(2.4) million, $8.4 million and $6.5 million in 1998, 1997 and 1996, respectively. The Company and an affiliate, Ohio Power Company (OPCo), jointly own two power plants. The costs of operating these facilities are apportioned between the owners based on ownership interests. The Company's share of these costs is included in the appropriate expense accounts on the Consolidated Statements of Income. The Company's investment in these plants is included in electric utility plant on the Consolidated Balance Sheets. American Electric Power Service Corporation (AEPSC) provides certain managerial and professional services to AEP System companies including the Company. The costs of the services are billed to its affiliated clients by AEPSC on a direct-charge basis, whenever possible, and on reasonable bases of proration for shared services. The billings for services are made at cost and include no compensation for the use of equity capital, which is furnished to AEPSC by AEP Co., Inc. Billings from AEPSC are capitalized or expensed depending on the nature of the services rendered. AEPSC and its billings are subject to the regulation of the SEC under the 1935 Act. 6. SEGMENT INFORMATION: Effective December 31, 1998 the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". The Company has one reportable segment, a regulated vertically integrated electricity generation and energy delivery business. All other activities are insignificant. The Company's operations are managed on an integrated basis because of the substantial impact of bundled cost-based rates and regulatory oversight on business processes, cost structures and operating results. Included in the regulated electric utility business is the power marketing and trading activities that are discussed in Note 5. For the years ended December 31, 1998, 1997 and 1996, all of the Company's revenues are derived from the generation, sale and distribution of electricity in the United States. 7. FINANCIAL INSTRUMENTS, CREDIT AND RISK MANAGEMENT The Company is subject to market risk as a result of changes in electricity commodity prices and interest rates. The Company participates in a power marketing and trading operation that manages the exposure to electricity commodity price movements using physical forward purchase and sale contracts at fixed and variable prices, and financial derivative instruments including exchange traded futures and options, over-the-counter options, swaps and other financial derivative contracts at both fixed and variable prices. Physical forward electricity contracts within the AEP System's traditional market area are recorded as net operating revenues in the month when the physical contract settles. The Company's share of the net gains from these regulated transactions for the year ended December 31, 1998 was $33 million. Physical forward electricity contracts outside AEP's traditional economic marketing area, and all financial electricity trading transactions where the underlying physical commodity is outside AEP's traditional market area are marked to market and recorded in nonoperating income. The Company's share of the net losses from these non-regulated trading transactions for the year ended December 31, 1998 was $11 million. The unrealized mark-to-market gains and losses from such trading of financial instruments are reported as assets and liabilities, respectively. These activities were not material in prior periods. The Company is exposed to risk from changes in interest rates primarily due to short-term and long-term borrowings used to fund its business operations. The debt portfolio has both fixed and variable interest rates with terms from one day to forty years and an average duration of six years at December 31, 1998. A near term change in interest rates should not materially affect results of operations or financial position since the Company would not expect to liquidate its entire debt portfolio in a one year holding period. Also since the Company's rates are still cost-based regulated, the risk of interest rate changes on debt used to finance regulated operations is mitigated. Market Valuation The book value 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. The book value amounts and fair values of the Company's significant financial instruments at December 31, 1998 and 1997 are summarized in the following table. The fair values of long-term debt and preferred stock 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 fair value of those financial instruments that are marked-to-market are based on management's best estimates using over-the-counter quotations, exchange prices, volatility factors and valuation methodology. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. At December 31, 1997 the notional amounts and fair valves of derivatives were not material. Book Value Fair Value (in thousands) Non-Derivatives 1998 Long-term Debt $1,552,500 $1,638,700 Preferred Stock 22,300 23,400 1997 Long-term Debt 1,494,500 1,572,300 Preferred Stock 22,300 23,400 Derivatives 1998 Fair Value Average Fair Value (in thousands) Trading Assets Electric Physicals $13,700 $12,200 Options 10,100 24,300 Swaps 1,000 300 Trading Liabilities Electric Futures (2,100) (500) Physicals (14,800) (13,900) Options (8,900) (23,700) Swaps (2,300) (600) At December 31, 1998 the notional amounts of the Company's non-regulated electric trading physical forward contract purchases and sales are 3,024 Gigawatt hours (Gwh) and 3,234 Gwh, respectively; the notional amounts for fixed priced swaps purchases and sales are 111 Gwh and 119 Gwh, respectively; and the notional amounts for options to purchase and to sell are 2,184 Gwh and 1,570 Gwh, respectively. The Company has a net long position of 117 Gwh for electric future contracts. At December 31, 1998 the fair value of the assets and liabilities related to the wholesale electric forward contracts was $110 million and $107 million, respectively. The related notional amounts were 14,388 Gwh for purchases and 14,682 Gwh for sales. The average fair value amounts outstanding during the period were $277 million of assets and $265 million of liabilities. Credit and Risk Management In addition to market risk associated with electricity price movements, the Company through the AEP Power Pool is also subject to the credit risk inherent in the risk management activities. Credit risk refers to the financial risk arising from commercial transactions and/or the intrinsic financial value of contractual agreements with trading counter parties, by which there exists a potential risk of nonperformance. The AEP Power Pool has established and enforced credit policies that minimize this risk. The AEP Power Pool accepts as counter parties to forwards, futures, and other derivative contracts primarily those entities that are classified as Investment Grade, or those that can be considered as such due to the effective placement of credit enhancements and/or collateral agreements. Investment grade is the designation given to the four highest debt rating categories (i.e., AAA, AA, A, BBB) of the major rating services e.g., ratings BBB- and above at Standards & Poor's and Baa3 and above at Moody's. When adverse market conditions have the potential to negatively affect a counter party's credit position, the AEP Power Pool requires further credit enhancements to mitigate risk. Since the formation of the power marketing and trading business in July of 1997, the Company has experienced no significant losses due to the credit risk associated with risk management activities; furthermore, the Company does not anticipate any future material effect on its results of operations, cash flow or financial condition as a result of counter party nonperformance. 8. STAFF REDUCTIONS: During 1998 an internal evaluation of the power generation organization was conducted with a goal of developing a better organizational structure for a competitive generation market. The study was completed in October 1998. In addition, a review of energy delivery staffing levels was conducted in 1998. As a result approximately 180 power generation and energy delivery positions were identified for elimination. Severance accruals totaling $7.6 million were recorded by the Company in December 1998 for reductions in power generation and energy delivery staffs and were charged to other operation expense in the Consolidated Statements of Income. In the first quarter of 1999 the power generation and energy delivery staff reductions were made. 9. BENEFIT PLANS: The Company and its subsidiaries participate in the AEP System qualified pension plan, a defined benefit plan which covers all employees. Net pension costs for the years ended December 31, 1998, 1997 and 1996 were $0.8 million, $1.9 million and $4.2 million, respectively. Postretirement Benefits Other Than Pensions are provided for retired employees for medical and death benefits under an AEP System plan. The annual accrued costs were $16.6 million in 1998, $17.3 million in 1997 and $19 million in 1996. A defined contribution employee savings plan required that the Company make contributions to the plan totaling $4.3 million in 1998, $4 million in 1997, and $4.1 million in 1996. 10. FEDERAL INCOME TAXES: The details of federal income taxes as reported are as follows:
Year Ended December 31, 1998 1997 1996 (in thousands) Charged (Credited) to Operating Expenses (net): Current $56,446 $66,810 $71,648 Deferred (143) (4,801) 1,283 Deferred Investment Tax Credits (2,671) (2,697) (2,716) Total 53,632 59,312 70,215 Charged (Credited) to Nonoperating Income (net): Current (4,902) (1,677) (837) Deferred (2,195) (316) (691) Deferred Investment Tax Credits (2,594) (2,484) (2,886) Total (9,691) (4,477) (4,414) Total Federal Income Taxes as Reported $43,941 $54,835 $65,801 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, 1998 1997 1996 (in thousands) Net Income $ 93,330 $120,514 $133,689 Federal Income Taxes 43,941 54,835 65,801 Pre-tax Book Income $137,271 $175,349 $199,490 Federal Income Taxes on Pre-tax Book Income at Statutory Rate (35%) $48,045 $61,372 $69,822 Increase (Decrease) in Federal Income Taxes Resulting From the Following Items: Depreciation 11,667 10,945 11,932 Corporate Owned Life Insurance (4,212) (3,974) (2,298) Removal Costs (4,200) (4,200) (5,460) Investment Tax Credits (net) (5,265) (5,181) (5,602) Other (2,094) (4,127) (2,593) Total Federal Income Taxes as Reported $43,941 $54,835 $65,801 Effective Federal Income Tax Rate 32.0% 31.3% 33.0%
The following tables show the elements of the net deferred tax liability and the significant temporary differences giving rise to such deferrals: December 31, 1998 1997 (in thousands) Deferred Tax Assets $ 168,898 $ 144,869 Deferred Tax Liabilities (812,609) (803,524) Net Deferred Tax Liabilities $(643,711) $(658,655) Property Related Temporary Differences $(496,464) $(491,904) Amounts Due From Customers For Future Federal Income Taxes (106,436) (108,727) Deferred State Income Taxes (70,644) (75,476) All Other (net) 29,833 17,452 Net Deferred Tax Liabilities $(643,711) $(658,655) The Company and its subsidiaries join in the filing of a consolidated federal income tax return with their affiliated companies in the AEP System. The allocation of the AEP System's current consolidated federal income tax to the System companies is in accordance with SEC rules under the 1935 Act. These rules permit the allocation of the benefit of current tax losses to the System companies giving rise to them in determining their current tax expense. The tax loss of the System parent company, AEP Co., Inc., is allocated to its subsidiaries with taxable income. With the exception of the loss of the parent company, the method of allocation approximates a separate return result for each company in the consolidated group. The AEP System 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. With the exception of the deductibility of interest deductions related to AEP's corporate owned life insurance program, which is discussed under the heading, Litigation, in Note 4, management is not aware of any issues for open tax years that upon final resolution are expected to have a material adverse effect on results of operations. 11. COMMON SHAREHOLDER'S EQUITY: The Company received from AEP Co., Inc. cash capital contributions of $50 million, $40 million and $50 million in 1998, 1997 and 1996, respectively, which were credited to paid-in capital. In 1998, 1997 and 1996 net changes in paid-in capital of $585,000, $(2,332,000) and $329,000, respectively, resulted from gains and (expenses) associated with cumulative preferred stock transactions. There were no other material transactions affecting common stock and paid-in capital accounts in 1998, 1997 and 1996. At December 31, 1998 there were no dividend restrictions on retained earnings. To pay dividends out of paid-in capital, the Company needs regulatory approval. 12. CUMULATIVE PREFERRED STOCK: The authorized number of shares of no par value cumulative preferred stock is 8,000,000. The aggregate involuntary liquidation price for all shares of cumulative preferred stock may not exceed $300 million. The unissued shares of the cumulative preferred stock may or may not possess mandatory redemption characteristics upon issuance. The cumulative preferred stock is callable at the price indicated plus accrued dividends. The involuntary liquidation preference is $100 per share. The Company redeemed and canceled 500,000 shares of the 7.80% series and 2,348 shares of the 4.50% series subject to mandatory redemption in 1997 and 1996, respectively. The Company redeemed and canceled 250,000 shares of the 7.40% series not subject to mandatory redemption in 1996. Cumulative Preferred Stock Not Subject to Mandatory Redemption:
Call Price Shares Amount December 31, Number of Shares Redeemed Outstanding December 31, Series 1998 Year Ended December 31, December 31, 1998 1998 1997 1998 1997 1996 (in thousands) 4-1/2% $110.00 3,878 100,685 1,850 193,587 $19,359 $19,747
Cumulative Preferred Stock Subject to Mandatory Redemption:
Call Price December 31, Number of Shares Redeemed Outstanding December 31, Series(a) 1998 Year Ended December 31, December 31, 1998 1998 1997 1998 1997 1996 (in thousands) 5.90% (b) $ (d) - 422,900 - 77,100 $ 7,710 $ 7,710 5.92% (b) (d) - 538,500 - 61,500 6,150 6,150 6.85% (c) (e) - 215,500 - 84,500 8,450 8,450 $22,310 $22,310 (a) The sinking fund provisions of each series have been met by purchase of shares in advance of the due date. (b) Commencing in 2003 and continuing through 2007 the Company may redeem at $100 per share 25,000 shares of the 5.90% series and 30,000 shares of the 5.92% series outstanding under sinking fund provisions at its option and all outstanding shares must be reacquired in 2008. Shares redeemed in 1997 may be applied to meet the sinking fund requirement. (c) Commencing in 2000 and continuing through date of redemption, a sinking fund for the 6.85% cumulative preferred stock will require the redemption of 60,000 shares each year, in each case at $100 per share. The Company has the non-cumulative option to redeem up to 60,000 additional shares on any sinking fund date at a redemption price of $100 per share. Shares redeemed in 1997 may be applied to meet the sinking fund requirement. (d) Not callable until after 2002. (e) Not callable until after 1999.
13. LONG-TERM DEBT AND LINES OF CREDIT: Long-term debt by major category was outstanding as follows: December 31, 1998 1997 (in thousands) First Mortgage Bonds $ 960,597 $1,096,811 Installment Purchase Contracts 234,262 234,217 Senior Unsecured Notes 193,959 - Junior Debentures 161,087 160,948 Other Long-term Debt 2,550 2,559 1,552,455 1,494,535 Less Portion Due Within One Year 80,004 79,509 Total $1,472,451 $1,415,026 First mortgage bonds outstanding were as follows: December 31, 1998 1997 (in thousands) % Rate Due 7.00 1999 - December 1 $ 30,000 $ 30,000 6.35 2000 - March 1 48,000 48,000 6.71 2000 - June 1 48,000 48,000 6-3/8 2001 - March 1 100,000 100,000 7.95 2002 - March 1 - 60,000 7.38 2002 - August 15 50,000 50,000 7.40 2002 - December 1 30,000 30,000 6.65 2003 - May 1 40,000 40,000 6.85 2003 - June 1 30,000 30,000 6.00 2003 - November 1 30,000 30,000 7.70 2004 - September 1 21,000 21,000 7.85 2004 - November 1 (a) 50,000 50,000 8.00 2005 - May 1 50,000 50,000 6.89 2005 - June 22 30,000 30,000 6.80 2006 - March 1 100,000 100,000 8.75 2022 - February 1 - 29,919 8.70 2022 - May 22 - 35,000 8.43 2022 - June 1 37,471 50,000 8.50 2022 - December 1 70,000 70,000 7.80 2023 - May 1 40,000 40,000 7.90 2023 - June 1 30,000 30,000 7.15 2023 - November 1 30,000 30,000 7.125 2024 - May 1 50,000 50,000 8.00 2025 - June 1 50,000 50,000 Unamortized Discount (3,874) (5,108) 960,597 1,096,811 Less Portion Due Within One Year 80,000 60,000 Total $ 880,597 $1,036,811 (a) A one time put feature allows this series of bonds to be put back to the Company on November 1, 1999. Consequently the bonds are classified as due in 1999. Certain indentures relating to the first mortgage bonds contain improvement, maintenance and replacement provisions requiring the deposit of cash or bonds with the trustee, or in lieu thereof, certification of unfunded property additions. Installment purchase contracts have been entered into, in connection with the issuance of pollution control revenue bonds by governmental authorities as follows: December 31, 1998 1997 (in thousands) % Rate Due Industrial Development Authority of Russell County, Virginia: 7-1/4 1998 - November 1 $ - $ 19,500 7.70 2007 - November 1 17,500 17,500 5.00 2021 - November 1 19,500 - Putnam County, West Virginia: 5.45 2019 - June 1 40,000 40,000 6.60 2019 - July 1 30,000 30,000 Mason County, West Virginia: 7-7/8 2013 - November 1 10,000 10,000 7.40 2014 - January 1 30,000 30,000 6.85 2022 - June 1 40,000 40,000 6.60 2022 - October 1 50,000 50,000 Unamortized Discount (2,738) (2,783) 234,262 234,217 Less Portion Due Within One Year - 19,500 Total $234,262 $214,717 Under the terms of the installment purchase contracts, the Company is required to pay amounts sufficient to enable the payment of interest on and the principal (at stated maturities and upon mandatory redemptions) of related pollution control revenue bonds issued to finance the construction of pollution control facilities at certain plants. Senior unsecured notes outstanding were as follows: December 31, 1998 1997 (in thousands) % Rate Due 7.20 2038 - March 31 $100,000 $ - 7.30 2038 - June 30 100,000 - Unamortized Discount (6,041) - Total $193,959 $ - Junior debentures outstanding were as follows: December 31, 1998 1997 (in thousands) 8-1/4% Series A due 2026 - September 30 $ 75,000 $ 75,000 8% Series B due 2027 - March 31 90,000 90,000 Unamortized Discount (3,913) (4,052) Total $161,087 $160,948 Interest may be deferred and payment of principal and interest on the junior debentures is subordinated and subject in right to the prior payment in full of all senior indebtedness of the Company. At December 31, 1998, future annual long-term debt payments are as follows: Amount (in thousands) 1999 $ 80,004 2000 96,005 2001 100,006 2002 80,006 2003 100,007 Later Years 1,112,993 Total Principal Amount 1,569,021 Unamortized Discount (16,566) Total $1,552,455 Short-term debt borrowings are limited by provisions of the 1935 Act to $325 million. Lines of credit are shared with other AEP System companies and at December 31, 1998 and 1997 were available in the amounts of $763 million and $442 million, respectively. Facility fees of approximately 1/10 of 1% of the short-term line of credit are required to maintain the lines of credit. Outstanding short-term debt consisted of: Year-end Balance Weighted Outstanding Average (in thousands) Interest Rate December 31, 1998: Notes Payable $34,600 5.7% Commercial Paper 41,800 6.2% Total $76,400 6.0% December 31, 1997: Notes Payable $ 33,700 6.5% Commercial Paper 96,600 6.8% Total $130,300 6.7% 14. LEASES: Leases of property, plant and equipment are for periods of up to 30 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 for both operating and capital leases are generally charged to operating expenses in accordance with rate-making treatment. The components of rental costs are as follows: Year Ended December 31, 1998 1997 1996 (in thousands) Operating Leases $ 7,047 $ 8,016 $ 9,567 Amortization of Capital Leases 13,561 11,771 12,175 Interest on Capital Leases 3,541 3,290 3,416 Total Rental Costs $24,149 $23,077 $25,158 Properties under capital leases and related obligations recorded on the Consolidated Balance Sheets are as follows: December 31, 1998 1997 (in thousands) Electric Utility Plant Under Capital Leases: Production Plant $ 9,463 $10,553 General Plant 87,776 77,980 Total Electric Utility Plant Under Capital Leases 97,239 88,533 Accumulated Amortization 32,064 28,423 Net Properties Under Capital Leases $65,175 $60,110 Capital Lease Obligations*: Noncurrent Liability $52,429 $48,552 Liability Due Within One Year 12,746 11,558 Total Capital Lease Obligations $65,175 $60,110 *Represents the present value of future minimum lease payments. Capital lease obligations are included in other noncurrent and other current liabilities on the Consolidated Balance Sheets. Properties under operating leases and related obligations are not included in the Consolidated Balance Sheets. Future minimum lease payments consisted of the following at December 31, 1998: Non- Cancelable Capital Operating Leases Leases (in thousands) 1999 $16,704 $2,227 2000 14,453 1,991 2001 12,235 932 2002 11,158 415 2003 8,222 413 Later Years 17,018 3,712 Total Future Minimum Lease Rentals 79,790 $9,690 Less Estimated Interest Element 14,615 Estimated Present Value of Future Minimum Lease Payments $65,175 15. SUPPLEMENTARY INFORMATION: Year Ended December 31, 1998 1997 1996 (in thousands) Cash was paid for: Interest (net of capitalized amounts) $124,027 $115,508 $104,156 Income Taxes $65,102 $71,749 $82,194 Noncash Acquisitions Under Capital Leases $21,146 $15,266 $15,308 16. UNAUDITED QUARTERLY FINANCIAL INFORMATION: Quarterly Periods Operating Operating Net Ended Revenues Income Income (in thousands) 1998 March 31 $415,366 $64,249 $33,199 June 30 403,080 46,192 15,124 September 30 474,476 70,951 33,446 December 31 379,322 47,151 11,561 1997 March 31 416,450 64,334 36,484 June 30 373,084 45,397 15,378 September 30 413,532 64,780 34,753 December 31 425,449 65,483 33,899 Fourth quarter 1998 net income declined primarily as a result of unseasonably mild weather, provisions for rate refunds recorded for the Virginia retail jurisdiction and severance accruals for staff reductions. See "Reclassification" section in Note 1 regarding reclassification of prior period amounts. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Appalachian Power Company: We have audited the accompanying consolidated balance sheets of Appalachian Power Company and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1998. 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 Appalachian Power Company and its subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Columbus, Ohio February 23, 1999 EX-23 6 CONSENT OF DELOITTE & TOUCHE Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-84061 of Appalachian Power Company on Form S-3 of our reports dated February 22, 2000 (March 3, 2000 as to Note 6), appearing in and incorporated by reference in this Annual Report on Form 10-K of Appalachian Power Company for the year ended December 31, 1999. Deloitte & Touche LLP Columbus, Ohio March 24, 2000 EX-24 7 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY APPALACHIAN POWER COMPANY Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999 The undersigned directors of APPALACHIAN POWER COMPANY, a Virginia corporation (the "Company"), do hereby constitute and appoint E. LINN DRAPER, JR., ARMANDO A. PENA and HENRY W. FAYNE, 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 10-K, pursuant to Section 13 of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 1999, 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 2nd day of March, 2000. /s/ E. Linn Draper, Jr. /s/ Armando A. Pena E. Linn Draper, Jr. Armando A. Pena /s/ Henry W. Fayne /s/ J. H. Vipperman Henry W. Fayne J. H. Vipperman /s/ Wm. J. Lhota Wm. J. Lhota EX-27 8 ARTICLE UT FIN. DATA SCH. FOR 10-Q
UT 0000006879 APPALACHIAN POWER COMPANY 1,000 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 3,183,461 160,546 538,711 34,788 436,894 4,354,400 260,458 714,259 175,854 1,150,571 20,310 18,491 1,539,302 0 0 123,480 126,005 0 52,009 12,636 1,311,596 4,354,400 1,650,937 75,844 1,333,857 1,409,701 241,236 8,096 249,332 128,840 120,492 2,706 117,786 121,392 65,697 167,889 0 0 All common stock owned by parent company; no EPS required.
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