MANAGEMENT'S NARRATIVE ANALYSIS OF
RESULTS OF OPERATIONS
Net Income Increases
Net income increased by $166 million in 1994 due to the effect of a $144.5
million after tax loss recorded in 1993 as a result of a disallowance of a
portion of the Company's investment in its Zimmer Plant. Excluding the 1993
disallowance, net income would have increased by $21 million in 1994 due to
the favorable impact of increased retail energy sales reflecting unseasonable
weather in January and June 1994 and the refinancing of debt at lower
interest rates.
Operating Revenues Increase
Operating revenues for 1994 increased $77.5 million or 8.1%. The
components of the change in revenues were as follows:
Increase (Decrease)
(dollars in millions) From Previous Year
Amount %
Retail:
Price variance . . . . . . . . $66.6
Volume variance. . . . . . . . 6.0
Fuel Cost Recoveries . . . . . (2.0)
70.6 8.2
Wholesale:
Price variance . . . . . . . . 7.6
Volume variance. . . . . . . . (3.7)
3.9 5.2
Other Operating Revenues. . . . . 3.0
Total . . . . . . . . . . . . . $77.5 8.1
Retail revenues increased primarily due to a rate increase granted in
February 1994. The Public Utilities Commission of Ohio (PUCO) granted a
7.11% increase in rates effective February 1, 1994 as a result of a November
1993 Ohio Supreme Court ruling that the PUCO did not have authority under
state law to order a rate phase-in for the Zimmer Plant. The increase
includes a 3.72% base rate increase, which represents the acceleration of the
final step of the court rejected rate phase-in plan, and a 3.39% surcharge,
which provides for recovery of $96.9 million of previous deferrals under the
phase-in plan and a return thereon, to be collected until the deferrals are
recovered which is expected to be in 1998. The rate increase has no effect
on net income since it is offset by the amortization of prior year phase-in
plan deferrals and the cessation of current year deferrals which
would have occurred had the phase-in plan continued in effect.
Wholesale revenues increased 5.2% reflecting higher sales to the AEP
System Power Pool (Power Pool) due to increased availability of several
Conesville Plant generating units in 1994 compared with 1993 and an increase
in take-or-pay capacity charges to unaffiliated utilities. Capacity charges
are to reserve a specified quantity of generating capacity and are collected
even when the energy is not taken. The increase in capacity charges resulted
from an increase in capacity reserved under a long-term contract and the
short-term contract sale of capacity to unaffiliated utilities in the summer
of 1994 due to the forced outage of an unaffiliated generating unit.
However, the increase in capacity reservation did not have a corresponding
increase in energy sales due to mild weather throughout most of 1994. While
severe winter weather in January 1994 and extremely hot June weather
increased short-term wholesale sales in those months, the mild weather
throughout the remainder of 1994 combined with increased competition in the
wholesale market reduced short-term sales for the year.
Operating Expenses Increase
Operating expenses increased $41.8 million or 5.2% in 1994. Changes in the
components of operating expenses were as follows:
Increase (Decrease)
(dollars in millions) From Previous Year
Amount %
Fuel. . . . . . . . . . . . . . . $ 17.4 9.3
Purchased Power . . . . . . . . . (25.4) (15.9)
Other Operation . . . . . . . . . 4.7 2.8
Maintenance . . . . . . . . . . . 0.1 0.1
Depreciation. . . . . . . . . . . (1.7) (2.0)
Amortization of Zimmer Plant
Phase-in Costs. . . . . . . . . 36.0 N.M.
Taxes Other Than Federal
Income Taxes. . . . . . . . . . 3.3 3.3
Federal Income Taxes. . . . . . . 7.4 18.7
Total Operating Expenses. . . . $41.8 5.2
The increase in fuel expense was due to an increase in net generation
reflecting the full availability in 1994 of three units that had been out of
service for scheduled maintenance in the second quarter of 1993.
Purchased power expense decreased due to the reduction in wholesale
energy demand caused by the cooler late summer weather and mild fall weather
as well as the increase in net generation.
The amortization of Zimmer Plant phase-in costs increased sharply due to
the court ordered discontinuance of Zimmer phase-in plan deferrals in
February 1994 and the subsequent amortization of the deferred costs,
commensurate with their recovery.
Federal income tax expense attributable to operations increased
primarily due to the increase in pre-tax operating income offset in part by
changes in certain book/tax differences accounted for on a flow-through basis
and adjustments associated with the audit of prior years' tax returns.
Deferred Zimmer Plant Carrying Charges
The decrease in deferred Zimmer Plant carrying charges in 1994 resulted
from the cessation of deferrals commensurate with inclusion of the full plant
investment in rate base effective February 1, 1994. The amortization of the
deferrals is included in depreciation and amortization expense.
Interest Expense Decreases
Interest expense declined due to the refinancing program throughout 1993
and in the first quarter of 1994 that refinanced $200 million of long-term
debt at lower interest rates and retired $19.7 million of long-term debt in
1994.
INDEPENDENT AUDITORS' REPORT
To the Shareowners and Board of
Directors of Columbus Southern
Power Company:
We have audited the accompanying consolidated balance sheets of Columbus
Southern Power Company and its subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income, retained earnings, and
cash flows for each of the three years in the period ended December 31, 1994.
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 Columbus Southern Power Company
and its subsidiaries as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 21, 1995
Consolidated Statements of Income
Year Ended December 31,
1994 1993 1992
(in thousands)
OPERATING REVENUES $1,031,151 $953,652 $843,996
OPERATING EXPENSES:
Fuel 204,210 186,761 188,077
Purchased Power 134,540 159,979 137,718
Other Operation 175,102 170,397 160,008
Maintenance 71,629 71,537 54,533
Depreciation 83,180 84,883 76,710
Amortization (Deferral) of Zimmer Plant
Phase-in Costs 27,144 (8,913) (9,346)
Taxes Other Than Federal Income Taxes 102,672 99,348 94,714
Federal Income Taxes 46,806 39,444 19,267
TOTAL OPERATING EXPENSES 845,283 803,436 721,681
OPERATING INCOME 185,868 150,216 122,315
NONOPERATING INCOME:
Deferred Zimmer Plant Carrying
Charges (net of tax) 5,604 25,343 41,901
Other 1,426 2,000 5,269
TOTAL NONOPERATING INCOME 7,030 27,343 47,170
Loss From Zimmer Plant Disallowance:
Disallowed Cost - 159,067 -
Related Income Taxes - (14,534) -
NET ZIMMER LOSS - 144,533 -
INCOME BEFORE INTEREST CHARGES 192,898 33,026 169,485
INTEREST CHARGES 83,053 88,924 93,241
NET INCOME (LOSS) 109,845 (55,898) 76,244
PREFERRED STOCK DIVIDEND REQUIREMENTS 12,084 11,062 10,220
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ 97,761 $(66,960) $ 66,024
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
December 31,
1994 1993
(in thousands)
ASSETS
ELECTRIC UTILITY PLANT:
Production $1,461,484 $1,443,506
Transmission 306,744 295,539
Distribution 797,570 755,342
General 111,623 97,874
Construction Work in Progress 52,156 52,794
Total Electric Utility Plant 2,729,577 2,645,055
Accumulated Depreciation 884,237 811,817
NET ELECTRIC UTILITY PLANT 1,845,340 1,833,238
OTHER PROPERTY AND INVESTMENTS 26,744 34,558
CURRENT ASSETS:
Cash and Cash Equivalents 14,065 6,633
Accounts Receivable:
Customers 41,056 42,906
Affiliated Companies 4,624 1,084
Miscellaneous 10,025 8,098
Allowance for Uncollectible Accounts (1,768) (991)
Fuel - at average cost 28,060 32,257
Materials and Supplies - at average cost 24,923 25,772
Accrued Utility Revenues 31,595 28,889
Prepayments 31,241 30,235
TOTAL CURRENT ASSETS 183,821 174,883
REGULATORY ASSETS 475,019 479,672
DEFERRED CHARGES 63,418 60,320
TOTAL $2,594,342 $2,582,671
See Notes to Consolidated Financial Statements.
December 31,
1994 1993
(in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stock - No Par Value:
Authorized - 24,000,000 Shares
Outstanding - 16,410,426 Shares $ 41,026 $ 41,026
Paid-in Capital 565,642 566,046
Retained Earnings 46,976 18,288
Total Common Shareowner's Equity 653,644 625,360
Cumulative Preferred Stock -
Subject to Mandatory Redemption 150,000 125,000
Long-term Debt 917,608 997,013
TOTAL CAPITALIZATION 1,721,252 1,747,373
OTHER NONCURRENT LIABILITIES 25,861 17,189
CURRENT LIABILITIES:
Long-term Debt Due Within One Year 80,000 20,700
Short-term Debt - 25,225
Accounts Payable - General 34,934 37,258
Accounts Payable - Affiliated Companies 14,057 13,289
Taxes Accrued 113,362 114,233
Interest Accrued 18,923 23,245
Other 37,521 22,189
TOTAL CURRENT LIABILITIES 298,797 256,139
DEFERRED FEDERAL INCOME TAXES 467,593 474,290
DEFERRED INVESTMENT TAX CREDITS 64,597 68,533
DEFERRED CREDITS 16,242 19,147
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL $2,594,342 $2,582,671
Consolidated Statements of Cash Flows
Year Ended December 31,
1994 1993 1992
(in thousands)
OPERATING ACTIVITIES:
Net Income (Loss) $ 109,845 $ (55,898) $ 76,244
Adjustments for Noncash Items:
Depreciation 82,795 84,462 84,755
Deferred Federal Income Taxes (2,132) 10,167 36,908
Deferred Investment Tax Credits (3,929) (5,471) (4,787)
Deferred Fuel Costs (net) 2,247 3,659 (4,236)
Deferred Zimmer Plant Operating Expenses
and Carrying Charges 19,156 (46,475) (77,532)
Loss from Zimmer Plant Disallowance - 159,067 -
Changes in Certain Current Assets and
Liabilities:
Special Deposits - Restricted Funds - 1,293 17,612
Accounts Receivable (net) (2,840) (8,030) 3,540
Fuel, Materials and Supplies 5,046 1,428 6,091
Accrued Utility Revenues (2,706) (12,599) (4,586)
Accounts Payable (1,556) 3,336 (8,068)
Other (net) (11,382) (407) (2,056)
Net Cash Flows From Operating Activities 194,544 134,532 123,885
INVESTING ACTIVITIES:
Construction Expenditures (80,973) (88,605) (76,262)
Proceeds from Sale and Leaseback
Transactions and Other 2,606 2,659 -
Net Cash Flows Used For Investing Activities (78,367) (85,946) (76,262)
FINANCING ACTIVITIES:
Capital Contributions from Parent Company - - 20,000
Issuance of Cumulative Preferred Stock 24,596 - 49,448
Issuance of Long-term Debt 198,298 197,722 251,046
Retirement of Long-term Debt (225,834) (166,166) (278,918)
Change in Short-term Debt (net) (25,225) (28,594) (12,381)
Dividends Paid on Common Stock (68,788) (42,175) (68,760)
Dividends Paid on Cumulative Preferred Stock (11,792) (11,062) (9,564)
Net Cash Flows Used For Financing Activities (108,745) (50,275) (49,129)
Net Increase (Decrease) in
Cash and Cash Equivalents 7,432 (1,689) (1,506)
Cash and Cash Equivalents January 1 6,633 8,322 9,828
Cash and Cash Equivalents December 31 $ 14,065 $ 6,633 $ 8,322
See Notes to Consolidated Financial Statements.
Consolidated Statements of Retained Earnings
Year Ended December 31,
1994 1993 1992
(in thousands)
Retained Earnings January 1 $ 18,288 $127,562 $130,765
Net Income (Loss) 109,845 (55,898) 76,244
128,133 71,664 207,009
Deductions:
Cash Dividends Declared:
Common Stock 68,788 42,175 68,760
Cumulative Preferred Stock:
7% Series 1,167 - -
7-7/8% Series 3,938 3,937 3,423
9.50% Series 7,125 7,125 7,125
Total Cash Dividends Declared 81,018 53,237 79,308
Other 139 139 139
Total Deductions 81,157 53,376 79,447
Retained Earnings December 31 $ 46,976 $ 18,288 $127,562
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization
Columbus Southern Power Company (the Company or CSPCo) 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,
transmission and distribution of electric power in central and southern Ohio.
As a member of the American Electric Power (AEP) System Power Pool (Power
Pool) and a signatory company to the AEP Transmission Equalization Agreement,
CSPCo's facilities are operated in conjunction with the facilities of certain
other AEP affiliated utilities as an integrated utility system.
The Company's three wholly-owned subsidiaries are: Conesville Coal Prepa-
ration Company (CCPC) which provides coal washing services for one of the
Company's generating stations; Simco Inc. which is engaged in leasing a coal
conveyor system to CCPC; and Colomet, Inc. which is engaged in real estate
activities for its parent.
Regulation
As a member of the AEP System, CSPCo 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 Public
Utilities Commission of Ohio (PUCO). The Federal Energy Regulatory
Commission (FERC) regulates wholesale rates.
Principles of Consolidation
The consolidated financial statements include CSPCo and its wholly-owned
subsidiaries. Significant intercompany items are eliminated in consol-
idation.
Basis of Accounting
As a cost-based rate-regulated entity, CSPCo's financial statements
reflect the actions of regulators that result in the recognition of revenues
and expenses in different time periods than do enterprises that are not rate
regulated. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation,
regulatory assets and liabilities are recorded and represent regulator
approved deferred expenses and revenues, respectively, resulting from the
rate-making process. Such deferrals are amortized commensurate with their
inclusion in rates (revenues).
Utility Plant
Electric utility plant is stated at original cost and is generally subject
to first mortgage liens. Additions, major replacements and betterments are
added to the plant accounts. Retirements from the plant accounts and
associated removal costs, net of salvage, are deducted from accumulated
depreciation.
The costs of labor, materials and overheads incurred to operate and
maintain utility plant are included in operating expenses.
Allowance for Funds Used During Construction (AFUDC)
AFUDC is a noncash nonoperating income item that is recovered with
regulator approval over the service life of utility plant through
depreciation and represents the estimated cost of borrowed and equity funds
used to finance construction projects. The average rates used to accrue
AFUDC were 7.25%, 4.75% and 3.75% in 1994, 1993 and 1992, respectively, and
the amounts of AFUDC accrued were $1.2 million in 1994 and 1993 and $0.5
million in 1992.
Depreciation
Depreciation 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 as follows:
Functional Class Composite
of Property Annual Rates
Production 3.2%
Transmission 2.3%
Distribution 3.7%
General 3.5%
Amounts to be used for removal of plant are 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.
Sale of Receivables
Under an agreement that expires in 1995, CSPCo can sell up to $50 million
of undivided interests in designated pools of accounts receivable and accrued
utility revenues with limited recourse. As collections reduce previously
sold pools, interests in new pools are sold. At December 31, 1994 and 1993,
$50 million remained to be collected and remitted to the buyer.
Operating Revenues
Revenues include the accrual of electricity consumed but unbilled at
month-end as well as billed revenues.
Fuel Costs
Changes in retail jurisdictional fuel cost are deferred until reflected in
revenues in later months through a PUCO fuel cost recovery mechanism.
Wholesale jurisdictional fuel cost changes are expensed and billed as
incurred.
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, regulatory assets and
liabilities are recorded in accordance with SFAS 71.
Investment Tax Credits
The Company's policy was to account for investment tax credits under the
flow-through method except where regulatory commissions reflected investment
tax credits in the rate-making process on a deferral basis. Commensurate
with rate treatment deferred investment tax credits are being amortized over
the life of the related plant investment.
Debt and Preferred Stock
Gains and losses on reacquired debt are deferred and amortized over the
remaining term of the reacquired debt in accordance with rate-making
treatment. If the debt is refinanced the reacquisition costs are deferred
and amortized over the term of the replacement debt commensurate with their
recovery in rates.
Debt discount or premium and debt issuance expenses are amortized over the
term of the related debt, with the amortization included in interest charges.
Redemption premiums paid to reacquire preferred stock are deferred and
amortized in accordance with rate-making treatment.
Other Property and Investments
Other property and investments are stated at cost.
Reclassifications
Certain prior-period amounts were reclassified to conform with current-
period presentation.
2. EFFECTS OF REGULATION AND THE ZIMMER PHASE-IN PLAN:
The consolidated financial statements include assets and liabilities
recorded in accordance with regulatory actions to match expenses and revenues
in cost-based rates. Regulatory assets are expected to be recovered in
future periods through the rate-making process and regulatory liabilities are
expected to reduce future rate recoveries. The Company's regulatory assets
and liabilities are comprised of the following:
December 31,
1994 1993
(in thousands)
Regulatory Assets:
Amounts Due From Customers For
Future Federal Income Taxes $286,079 $290,644
Zimmer Plant Phase-in Plan
Deferrals 75,394 93,907
Deferred Zimmer Plant
Carrying Charges 43,003 43,003
Unamortized Loss On
Reacquired Debt 34,839 31,632
Other 35,704 20,486
Total Regulatory Assets $475,019 $479,672
Regulatory Liabilities:
Deferred Investment Tax Credits $64,597 $68,533
Other Regulatory Liabilities* 13,123 16,357
Total Regulatory Liabilities $77,720 $84,890
* Included in Deferred Credits on the Consolidated Balance Sheets.
The Zimmer Plant is a 1,300 mw coal-fired plant which commenced commercial
operation in 1991. CSPCo owns 25.4% of the plant with the remainder owned by
two unaffiliated companies.
In May 1992 the PUCO issued an order providing for a phased-in rate
increase of $123 million for the new Zimmer Plant to be implemented in three
steps over a two-year period and disallowed $165 million of Zimmer Plant
investment. CSPCo appealed the PUCO ordered Zimmer disallowance and phase-in
plan to the Ohio Supreme Court. In November 1993 the Supreme Court issued a
decision on CSPCo's appeal affirming the disallowance and finding that the
PUCO did not have statutory authority to order phased-in rates. The Court
instructed the PUCO to fix rates to provide gross annual revenues in
accordance with the law and to provide a mechanism to recover the revenues
deferred under the phase-in order.
As a result of the ruling, 1993 net income was reduced by $144.5 million
after tax to reflect the disallowance and in January 1994, the PUCO approved
a 7.11% rate increase effective February 1, 1994. The increase is comprised
of a 3.72% base rate increase to complete the rate increase phase-in and a
temporary 3.39% surcharge, which will be in effect until the deferred
revenues are recovered, estimated to be 1998. In 1994 $18.5 million of net
phase-in deferrals were collected through the surcharge. In 1993 and 1992,
$47.9 million and $46 million, respectively, were deferred under the phase-in
plan. The recovery of amounts deferred under the phase-in plan and the
increase in rates to the full rate level did not affect net income.
From the in-service date of March 1991 until rates went into effect in May
1992 deferred carrying charges of $43 million were recorded on the Zimmer
Plant investment. Recovery of the deferred carrying charges will be sought
in the next PUCO base rate proceeding in accordance with the PUCO accounting
order that authorized the deferral.
3. COMMITMENTS AND CONTINGENCIES:
Construction and Other Commitments
Substantial construction commitments have been made. Such commitments do
not include any expenditures for new generating capacity. The aggregate con-
struction program expenditures for 1995-1997 are estimated to be $289
million.
Long-term fuel supply contracts contain clauses that provide for periodic
price adjustments. The PUCO has a fuel clause mechanism that provides for
deferral and subsequent recovery or refund of changes in the cost of fuel
with PUCO review and approval. The contracts are for various terms, the
longest of which extends to 2011, and contain various clauses that would
release the Company from its obligation under certain force majeure
conditions.
Clean Air
The Clean Air Act Amendments of 1990 (CAAA) require significant reductions
in sulfur dioxide and nitrogen oxide emissions from various AEP System
generating plants. The first phase of reductions in sulfur dioxide emissions
(Phase I) began on January 1, 1995 and the second, more restrictive phase
(Phase II) begins on January 1, 2000. The law also established a permanent
nationwide cap on sulfur dioxide emissions after 1999.
Under an AEP Systemwide Phase I compliance plan the Company will modify
Conesville Units 1 through 3 to allow use of either low sulfur coal or
natural gas at an estimated capital cost of $30 million. Also the compliance
plan calls for switching to moderate-sulfur coal at Beckjord Unit 6 (a unit
jointly owned with two unaffiliated utilities) with no additional capital
cost. Although Conesville Unit 4 is an affected Phase I unit, it does not
require operating or fuel changes under the compliance plan since the plan
provides for under-compliance at Conesville 4 to be offset by over-compliance
at other AEP System units. The Company's other generating units are not
affected in Phase I.
The Company will incur a portion of the Phase I compliance costs of other
AEP affiliates through the Power Pool (which is described in Note 5). The
compliance plan for the AEP System's generating units affected by Phase I
includes installation of flue gas desulfurization systems (scrubbers) at the
two-unit 2,600 mw Gavin Plant owned by an affiliate, Ohio Power Company and
fuel switching at other affected affiliated plants. The Company will incur
additional costs to comply with Phase II requirements at its generating
plants and those of affiliated Power Pool members. If the Company is unable
to recover its compliance cost from customers, results of operations would be
adversely impacted.
Other Environmental Matters
The Company and its subsidiaries are regulated by federal, state and local
authorities with respect to air and water quality and other environmental
matters. Local authorities also regulate zoning. The generation of
electricity produces non-hazardous and hazardous by-products. Asbestos,
polychlorinated biphenyls (PCBs) and other hazardous materials have been used
in the generating plants and transmission/distribution facilities.
Substantial costs to store and dispose of hazardous materials have been
incurred. Significant additional costs could be incurred in the future to
meet the requirements of new laws and regulations and to clean up disposal
sites under existing legislation. Management has no knowledge of any
material clean up costs related to the Company's past disposal of hazardous
and non-hazardous materials.
Litigation
The Company is involved in a number of legal proceedings and claims.
While management is unable to predict the outcome of litigation, it is not
expected that the resolution of these matters will have a material adverse
effect on financial condition.
4. RELATED PARTY TRANSACTIONS:
Benefits and costs of the System's generating plants are shared by members
of the Power Pool. Under the terms of the System Interconnection Agreement,
capacity charges and credits are designed to allocate the cost of the
System's capacity among the Power Pool members based on their relative peak
demands and generating reserves. Power Pool members are also compensated for
the out-of-pocket costs of energy delivered to the Power Pool and charged for
energy received from the Power Pool.
Operating revenues include $15.8 million in 1994, $12.5 million in 1993
and $13 million in 1992 for energy suppled to the Power Pool.
Charges for Power Pool capacity reservation and energy received were
included in purchased power expense as follows:
Year Ended December 31,
1994 1993 1992
(in thousands)
Capacity Charges $ 74,936 $ 85,450 $ 81,727
Energy Charges 46,164 68,277 48,966
Total $121,100 $153,727 $130,693
Power Pool members share in wholesale sales to unaffiliated utilities made
by the Power Pool. The Company's share of the Power Pool's wholesale sales
included in operating revenues were $48.7 million in 1994, $49.3 million in
1993 and $40 million in 1992.
In addition, the Power Pool purchases power from unaffiliated companies
for immediate resale to other unaffiliated utilities. The Company's share of
these purchases was included in purchased power expense and totaled $13.4
million in 1994, $6.2 million in 1993 and $7 million in 1992. Revenues from
these transactions are included in the above Power Pool wholesale operating
revenues.
AEP System companies participate in a 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, other operation expense includes equalization charges of $30.1
million, $31.2 million and $29.9 million in 1994, 1993 and 1992, respective-
ly.
American Electric Power Service Corporation (AEPSC) provides certain
managerial and professional services to AEP System companies. The costs of
the services are billed by AEPSC on a direct-charge basis to the extent
practicable and on reasonable bases of proration for indirect costs. The
charges 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.
5. BENEFIT PLANS:
The Company and its subsidiaries participate in the AEP System pension
plan, a trusteed, noncontributory defined benefit plan covering all employees
meeting eligibility requirements. Benefits are based on service years and
compensation levels. Pension costs are allocated by first charging each
System company with its service cost and then allocating the remaining
pension cost in proportion to its share of the projected benefit obligation.
The funding policy is to make annual trust fund contributions equal to the
net periodic pension cost up to the maximum amount deductible for federal
income taxes, but not less than the minimum contribution required by with the
Employee Retirement Income Security Act of 1974.
Net pension costs for the years ended December 31, 1994, 1993 and 1992
were $2.2 million, $2.5 million and $3.9 million, respectively.
An employee savings plan is offered which allows participants to
contribute up to 17% of their salaries into three investment alternatives,
including AEP Co., Inc. common stock. An employer matching contribution,
equaling one-half of the employees' contribution to the plan up to a maximum
of 3% of the employees' base salary, is invested in AEP common stock. The
employer's annual contributions totaled $2.1 million in 1994 and $1.9 million
in both 1993 and 1992.
Certain other benefits are provided for retired employees under an AEP
System other postretirement benefit plan. Substantially all employees are
eligible for health care and life insurance if they have at least 10 service
years and are age 55 at retirement. Prior to 1993, net costs of these
benefits were recognized as an expense when paid and totaled $1.9 million in
1992.
SFAS 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, was adopted in January 1993 for the Company's aggregate liability
for postretirement benefits other than pensions (OPEB). SFAS 106 requires
the accrual during the employee's service years of the present value
liability for OPEB costs. Costs for the accumulated postretirement benefits
earned and not recognized at adoption are being recognized in accordance with
SFAS 106, as a transition obligation over 20 years. OPEB costs are deter-
mined by the application of AEP System actuarial assumptions to each operat-
ing company's employee complement. The annual accrued costs for employees
and retirees OPEBs required by SFAS 106, which includes the recognition of
one-twentieth of the prior service transition obligation, were $10.4 million
in 1994 and $9.7 million in 1993.
The Company received approval from the PUCO and FERC to defer under
certain conditions the increased OPEB costs not being currently recovered in
rates. In the FERC jurisdiction future recovery of the deferrals and the
annual ongoing OPEB costs will be sought in the next base rate filing. In
the retail jurisdiction the Company had sufficient earnings in 1994 to absorb
the increased OPEB cost over the pay-as-you-go cost. At December 31, 1994
and 1993, the total OPEB deferred costs were $2.7 million and $3.6 million,
respectively.
A Voluntary Employees Beneficiary Association (VEBA) trust fund for OPEB
benefits was established and a corporate owned life insurance (COLI) program
was implemented. The insurance policies have a substantial cash surrender
value which is recorded, net of equally substantial policy loans, as other
property and investments. In 1995 the Company will contribute an amount to
the VEBA trust fund equal to the difference between the pay-as-you-go OPEB
cost and SFAS 106 total OPEB cost for 1994 and 1995. This contribution will
be funded by amounts collected from ratepayers plus net earnings from the
COLI program.
6. COMMON OWNERSHIP OF GENERATING AND TRANSMISSION FACILITIES:
The Company jointly owns, as tenants in common, four generating units and
transmission facilities with two unaffiliated companies. Each of the
participating companies is obligated to pay its share of the costs of any
such jointly owned facilities in the same proportion as its ownership
interest. The Company's proportionate share of the operating costs
associated with such facilities is included in the Consolidated Statements of
Income and the amounts reflected in the accompanying Consolidated Balance
Sheets under utility plant include such costs as follows:
Company's Share
December 31,
1994 1993
Percent Utility Construction Utility Construction
of Plant Work Plant Work
Ownership in Service in Progress in Service in Progress
(in thousands)
Production:
W.C. Beckjord Generating Station (Unit No. 6) 12.5 $ 12,625 $1,137 $ 12,518 $ 141
Conesville Generating Station (Unit No. 4) 43.5 78,831 420 77,527 371
J.M. Stuart Generating Station 26.0 175,195 3,209 168,419 6,979
Wm. H. Zimmer Generating Station 25.4 695,990 1,797 695,121 1,210
$962,641 $6,563 $953,585 $8,701
Transmission (a) $ 58,813 $ 161 $ 58,730 $ 6
(a) Varying percentage of ownership.
At December 31, 1994 and 1993, the accumulated depreciation with respect
to the Company's share of jointly owned facilities amounted to $218.2 million
and $189.4 million, respectively.
7. CUMULATIVE PREFERRED STOCK:
At December 31, 1994, authorized shares of cumulative preferred stock were
as follows:
Par Value Shares Authorized
$100 2,500,000
25 7,000,000
The cumulative preferred stock outstanding shown below is subject to
mandatory redemption and has an involuntary liquidation preference of par
value.
Call Price Shares Amount
December 31, Par Outstanding December 31,
Series (a) 1994 Value December 31, 1994 1994 1993
(in thousands)
7% (b) (b) $100 250,000 $ 25,000 $ -
7-7/8% (c) $107.88 100 500,000 50,000 50,000
9.50% (d) $109.50 100 750,000 75,000 75,000
$150,000 $125,000
(a) The sinking fund provisions of series subject to mandatory redemption
aggregate $3,750,000 in both 1996 and 1997 and $6,250,000 in both 1998 and
1999. There are no sinking fund provisions for 1995.
(b) Shares issued June 1994. Commencing in 2000, a sinking fund will require
the redemption of 50,000 shares at $100 a share on or before August 1 of each
year. The Company has the right, on each sinking fund date, to redeem an
additional 50,000 shares. Redemption of this series is prohibited prior to
August 1, 2000.
(c) Shares issued March 1992. Commencing in 1998, a sinking fund will
require the redemption of 25,000 shares at $100 a share on or before May 1 of
each year. The Company has the right, on each sinking fund date, to redeem
an additional 25,000 shares. Redemption of this series is restricted prior
to March 1, 1997.
(d) Commencing in 1996, a sinking fund will require the redemption of 37,500
shares at $100 a share on or before February 1 of each year. The Company has
the right, on each sinking fund date, to redeem an additional 37,500 shares.
Redemption of this series is restricted prior to November 1, 1995.
8. FEDERAL INCOME TAXES:
The details of federal income taxes as reported are as follows:
Year Ended December 31,
1994 1993 1992
(in thousands)
Charged (Credited) to Operating Expenses (net):
Current $56,424 $ 34,235 $ (619)
Deferred (5,916) 8,935 24,386
Deferred Investment Tax Credits (3,702) (3,726) (4,500)
Total 46,806 39,444 19,267
Charged (Credited) to Nonoperating Income (net):
Current (525) (4,777) (4,113)
Deferred 3,784 14,559 12,522
Deferred Investment Tax Credits (227) (538) (287)
Total 3,032 9,244 8,122
Credited to Loss from Zimmer Disallowance (net):
Deferred - (13,327) -
Deferred Investment Tax Credits - (1,207) -
Total - (14,534) -
Total Federal Income Taxes as Reported $49,838 $ 34,154 $27,389
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,
1994 1993 1992
(in thousands)
Net Income (Loss) $109,845 $(55,898) $ 76,244
Federal Income Taxes 49,838 34,154 27,389
Pre-tax Book Income (Loss) $159,683 $(21,744) $103,633
Federal Income Taxes on Pre-tax Book Income (Loss) at
Statutory Rate (35% in 1994 and 1993; 34% in 1992) $55,889 $(7,610) $35,235
Increase (Decrease) in Federal Income Taxes
Resulting From the Following Items:
Deferred Zimmer Plant Carrying Charges 3 928 (6,021)
Corporate Owned Life Insurance (2,787) (3,351) (2,702)
Depreciation 7,335 8,604 7,773
Zimmer Plant Disallowance - 42,346 -
Federal Income Tax Accrual Adjustments (3,300) - -
Amortization/Reversal of Deferred Investment
Tax Credits (net) (3,929) (5,468) (3,760)
Other (3,373) (1,295) (3,136)
Total Federal Income Taxes as Reported $49,838 $34,154 $27,389
Effective Federal Income Tax Rate 31.2% N/A 26.4%
The following tables show the elements of the net deferred tax liability
and the significant temporary differences that gave rise to it:
December 31,
1994 1993
(in thousands)
Deferred Tax Assets $ 74,752 $ 75,687
Deferred Tax Liabilities (542,345) (549,977)
Net Deferred Tax Liabilities $(467,593) $(474,290)
Property Related Temporary
Differences $(330,434) $(322,299)
Amounts Due From Customers For
Future Federal Income Taxes (100,128) (101,725)
Deferred Return - Zimmer Plant (21,546) (26,477)
All Other (net) (15,485) (23,789)
Total Net Deferred
Tax Liabilities $(467,593) $(474,290)
The Company and its subsidiaries join in the filing of a consolidated
federal income tax return with their affiliates 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, 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 Internal Revenue Service (IRS) all
issues from the audits of the consolidated federal income tax returns for the
years prior to 1988. Returns for the years 1988 through 1990 are presently
being audited by the IRS. In the opinion of management, the final settlement
of open years will not have a material effect on results of operations.
9. SUPPLEMENTARY INFORMATION:
Year Ended December 31,
1994 1993 1992
(in thousands)
Cash was paid (received)
for:
Interest (net of
capitalized amounts) $83,251 $88,141 $93,428
Income Taxes 59,218 35,514 (7,643)
Noncash Acquisitions under
Capital Leases were 14,899 8,672 4,017
10. LEASES:
Leases of property, plant and equipment are for periods up to 31 years and
require payments of related property taxes, maintenance and operating costs.
The majority of the leases have purchase or renewal options and will be
renewed or replaced by other leases.
Lease rentals are primarily charged to operating expenses in accordance
with rate-making treatment. The components of rental costs are as follows:
Year Ended December 31,
1994 1993 1992
(in thousands)
Operating Leases $ 7,850 $ 8,873 $10,342
Amortization of Capital
Leases 4,050 3,032 2,289
Interest on Capital Leases 1,092 763 644
Total Rental Costs $12,992 $12,668 $13,275
Properties under capital leases and
related obligations recorded on the
Consolidated Balance Sheets are as follows:
December 31,
1994 1993
(in thousands)
Electric Utility Plant:
Production $ 1,952 $ 1,952
Transmission 4 330
General 33,415 21,093
Total Electric Utility Plant 35,371 23,375
Other Property 1,167 2,548
Total Properties 36,538 25,923
Accumulated Amortization 12,086 10,686
Net Properties under Capital Leases $24,452 $15,237
Obligations under Capital Leases:
Noncurrent Liability $19,562 $12,162
Liability Due Within One Year 4,890 3,075
Total Capital Lease Obligations $24,452 $15,237
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, 1994:
Non-
cancelable
Capital Operating
Leases Leases
(in thousands)
1995 $ 6,127 $ 5,949
1996 4,826 5,889
1997 3,973 5,625
1998 3,310 5,392
1999 2,787 5,045
Later Years 8,089 16,362
Total Future Minimum Lease Payments 29,112 $44,262
Less Estimated Interest Element 4,660
Estimated Present Value of
Future Minimum Lease Payments $24,452
11. COMMON SHAREOWNER'S EQUITY:
The Company received from AEP Co., Inc. a cash capital contribution of $20
million in 1992 which was credited to paid-in capital. In 1994 charges to
paid-in capital of $404,000 represented issuance expenses of cumulative
preferred stock. There were no other material transactions affecting the
common stock and paid-in capital accounts in 1994, 1993 and 1992.
12. LONG-TERM DEBT AND LINES OF CREDIT:
Long-term debt by major category was outstanding as follows:
December 31,
1994 1993
(in thousands)
First Mortgage Bonds $856,767 $ 876,926
Installment Purchase Contracts 90,841 90,787
Notes Payable due 1995 50,000 50,000
997,608 1,017,713
Less Portion Due Within One Year 80,000 20,700
Total $917,608 $ 997,013
First mortgage bonds outstanding were as follows:
December 31,
1994 1993
(in thousands)
% Rate Due
8.95 1995 - December 20 $ 30,000 $ 30,000
8-5/8 1996 - February 1 - 100,000
6-1/4 1997 - October 1 14,640 14,640
9.15 1998 - February 2 57,000 57,000
7 1998 - June 1 24,750 24,750
9 1999 - December 1 - 19,700
9.31 2001 - August 1 30,000 30,000
7.95 2002 - July 1 40,000 40,000
7.25 2002 - October 1 75,000 75,000
7.15 2002 - November 1 20,000 20,000
6.80 2003 - May 1 50,000 50,000
6.60 2003 - August 1 40,000 40,000
6.10 2003 - November 1 20,000 20,000
6.55 2004 - March 1 50,000 -
6.75 2004 - May 1 50,000 -
9 2017 - March 1 - 100,000
9.625 2021 - June 1 50,000 50,000
8.70 2022 - July 1 35,000 35,000
8.40 2022 - August 1 15,000 15,000
8.55 2022 - August 1 15,000 15,000
8.40 2022 - August 15 40,000 40,000
8.40 2022 - October 15 15,000 15,000
7.90 2023 - May 1 50,000 50,000
7.75 2023 - August 1 40,000 40,000
7.45 2024 - March 1 50,000 -
7.60 2024 - May 1 50,000 -
Unamortized Discount (net) (4,623) (4,164)
856,767 876,926
Less Portion Due Within One year 30,000 20,700
Total $826,767 $856,226
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 the Ohio Air Quality Development
Authority as follows:
December 31,
1994 1993
(in thousands)
% Rate Due
6-3/8 2020 - December 1 $48,550 $48,550
6-1/4 2020 - December 1 43,695 43,695
Unamortized Discount (1,404) (1,458)
Total $90,841 $90,787
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 of related pollution control revenue bonds issued to finance
the Company's share of construction of pollution control facilities at the
Zimmer Plant.
The notes payable due April 24, 1995 were issued under a term loan
agreement in 1991 and bear interest at a fixed rate of 8.79% until maturity.
At December 31, 1994 annual long-term debt payments, excluding premium or
discount, are as follows:
Principal Amount
(in thousands)
1995 $ 80,000
1996 -
1997 14,640
1998 81,750
1999 -
Later Years 827,245
Total $1,003,635
Short-term debt borrowings are limited by provisions of the 1935 Act to
$200 million and further limited by provisions of the notes payable to $163
million. Lines of credit are shared with AEP System companies and at
December 31, 1994 and 1993 were available in the amounts of $518 million and
$512 million, respectively. Commitment fees of approximately 3/16 of 1% of
the unused short-term lines of credit are paid each year to the banks to
maintain the lines of credit. At December 31, 1993 outstanding short-term
debt consisted of $12.5 million of notes payable and $12.7 million of
commercial paper with weighted average interest rates of 3.6% and 3.8%,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts receivable,
short-term debt and accounts payable approximate fair value because of the
short-term maturity of these instruments. At December 31, 1994 and 1993 fair
values for preferred stock subject to mandatory redemption were $153 million
and $138 million, and for long-term debt were $921 million and $1,076
million, respectively. The carrying amounts for preferred stock subject to
mandatory redemption were $150 million and $125 million, and for long-term
debt were $998 million and $1,018 million at December 31, 1994 and 1993,
respectively. Fair values are based on quoted market prices for the same or
similar issues and the current dividend or interest rates offered for instru-
ments of the same remaining maturities.
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION:
Quarterly Periods Operating Operating Net
Ended Revenues Income Income
1994
March 31 $255,829 $43,468 $24,652
June 30 256,754 44,523 25,242
September 30 280,470 61,597 42,528
December 31 238,098 36,280 17,423 (a)
(a) Includes favorable federal income tax adjustments of $3.3 million related
to the resolution of various issues with the IRS.
(b) Includes loss from Zimmer Disallowance as discussed in Note 2.
Quarterly Periods Operating Operating Net
Ended Revenues Income Income (Loss)
1993
March 31 $219,875 $29,960 $ 18,230
June 30 219,820 33,136 18,650
September 30 276,438 50,795 (110,257)(b)
December 31 237,519 36,325 17,479