COLUMBUS SOUTHERN POWER COMPANY
Selected Consolidated Financial Data
Year Ended December 31,
1997 1996 1995 1994 1993
(in thousands)
INCOME STATEMENTS DATA:
Operating Revenues $1,139,604 $1,105,683 $1,071,862 $1,031,151 $953,652
Operating Expenses 944,477 920,136 886,054 845,283 803,436
Operating Income 195,127 185,547 185,808 185,868 150,216
Nonoperating Income (Loss) 3,137 (970) 5,202 7,030 27,343
Loss from Zimmer Plant
Disallowance (net of tax) - - - - 144,533
Income Before Interest
Charges 198,264 184,577 191,010 192,898 33,026
Interest Charges (net) 78,885 77,469 80,394 83,053 88,924
Net Income (Loss) 119,379 107,108 110,616 109,845 (55,898)
Preferred Stock Dividend
Requirements 2,442 6,029 11,907 12,084 11,062
Earnings (Loss) Applicable
to Common Stock $ 116,937 $ 101,079 $ 98,709 $ 97,761 $(66,960)
December 31,
1997 1996 1995 1994 1993
BALANCE SHEETS DATA: (in thousands)
Electric Utility Plant $2,976,110 $2,899,893 $2,820,208 $2,729,577 $2,645,055
Accumulated Depreciation 1,074,588 1,016,909 953,170 884,237 811,817
Net Electric Utility Plant $1,901,522 $1,882,984 $1,867,038 $1,845,340 $1,833,238
Total Assets $2,613,860 $2,541,586 $2,594,126 $2,594,342 $2,582,671
Common Stock and Paid-in
Capital $ 613,138 $ 615,735 $ 615,453 $ 606,668 $ 607,072
Retained Earnings 138,172 99,582 74,320 46,976 18,288
Total Common Shareholder's
Equity $ 751,310 $ 715,317 $ 689,773 $ 653,644 $ 625,360
Cumulative Preferred
Stock - Subject to
Mandatory Redemption (a) $ 25,000 $ 75,000 $ 82,500 $ 150,000 $ 125,000
Long-term Debt (a) $ 969,600 $ 897,281 $ 990,796 $ 997,608 $1,017,713
Obligations Under Capital
Leases (a) $ 38,587 $ 36,134 $ 27,816 $ 24,452 $ 15,237
Total Capitalization and
Liabilities $2,613,860 $2,541,586 $2,594,126 $2,594,342 $2,582,671
(a) Including portion due within one year.
COLUMBUS SOUTHERN POWER COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF
RESULTS OF OPERATIONS
Net Income Increases
Net income increased 11% in 1997 primarily due to the effects
of additional accruals for uncollectible accounts and the effect
of unfavorable adjustments for pension and postretirement benefits
other than pensions (OPEB) costs recorded in 1996.
Operating revenues increased $34 million or 3% in 1997
reflecting increased wholesale power sales partially offset by
decreased revenues from retail customers as shown in the following
price volume analysis:
Increase (Decrease)
(dollars in millions) From Previous Year
Amount %
Retail:
Price Variance . . . . . . . . $(18.8)
Volume Variance. . . . . . . . 10.2
Fuel Cost Recoveries . . . . . (6.7)
(15.3) (1.5)
Wholesale:
Price Variance . . . . . . . . (6.5)
Volume Variance. . . . . . . . 54.8
48.3 51.6
Other Operating Revenues. . . . . 0.9
Total . . . . . . . . . . . . . $ 33.9 3.1
The reduction in retail revenues resulted mainly from the
cessation in June 1997 business of a revenue surcharge for the
recovery of phase-in deferrals related to the Zimmer Plant which
were collected from February 1994 to June 1997. Retail sales
increased 2% primarily due to increased sales to commercial and
industrial customers reflecting commercial customer growth and
increased usage by industrial customers. Under a Public Utilities
Commission of Ohio (PUCO) fuel clause adjustment mechanism, under
or over recoveries of fuel costs are deferred and charged or
refunded to customers after semiannual regulatory review. Also
gains and losses on emission allowance transactions are included as
a component of the fuel clause adjustment mechanism. The decrease
in fuel recovery revenues is attributable to a refund to customers
of deferred gains on emission allowance transactions. The refund
or decrease in fuel clause revenues and the cessation of the Zimmer
revenue surcharge did not affect net income since they were offset
by the amortization of deferred emission allowance gains and Zimmer
plant phase-in costs.
Wholesale revenues increased significantly primarily due to
increased energy sales from new power marketing transactions and
increased coal conversion service sales. In 1997 the Company
shared in new power marketing transactions which began in July
1997. The new power marketing transactions involve the purchase
and sale of electricity outside the American Electric Power (AEP)
transmission system. Coal conversion services are provided to
power marketers and certain non-affiliated utilities under a
Federal Energy Regulatory Commission (FERC) approved interruptible
tariff for the conversion of customers' coal to electricity and do
not include any fuel cost.
Operating Expenses Increase
Operating expenses increased $24 million or 2.6% in 1997 due
mainly to power purchases by the new power marketing business.
Changes in the components of operating expenses were as follows:
Increase (Decrease)
(dollars in millions) From Previous Year
Amount %
Fuel. . . . . . . . . . . . . . . $ (8.7) (4.6)
Purchased Power . . . . . . . . . 52.2 30.9
Other Operation . . . . . . . . . (16.1) (8.2)
Maintenance . . . . . . . . . . . 1.5 2.4
Depreciation. . . . . . . . . . . 2.7 3.0
Amortization of Zimmer Plant
Phase-in Costs . . . . . . . . . (18.2) (53.6)
Taxes Other Than Federal
Income Taxes. . . . . . . . . . 2.0 1.7
Federal Income Taxes. . . . . . . 8.9 14.2
Total . . . . . . . . . . . . . $ 24.3 2.6
Fuel expense decreased 5% primarily due to the operation of the
fuel clause adjustment mechanism which credited fuel expense in the
current year for the deferral of underrecovered fuel costs compared
with the prior year when the fuel clause adjustment mechanism
charged to fuel expense the amortization of previously
underrecovered deferred fuel costs.
The Company's share of purchases by the new AEP power marketing
business are the main reason for the increase in 1997 of purchased
power expense.
The decrease in other operation expense was attributable to a
reduction in uncollectible accounts expense, reduced employee
benefits costs and amortization of deferred gains on the sale of
emission allowances. Uncollectible accounts expense decreased due
to the effect of significant accruals recorded in 1996. The
decline in employee benefits costs was caused by the effect of
unfavorable adjustments for pension and OPEB costs recorded in
1996.
The reduction in the amortization of deferred Zimmer Plant
phase-in costs reflects the completion of the surcharge recovery
plan and the amortization of the original deferral. The cessation
of the amortization did not affect net income since the
amortization was being recovered in revenues through a surcharge
which terminated with the completion of the amortization.
Federal income taxes attributable to operations increased
primarily due to an increase in pre-tax operating income and
changes in certain book/tax differences accounted for on a flow-through
basis for rate-making purposes.
INDEPENDENT AUDITORS' REPORT
To the Shareholders 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, 1997 and 1996, and the related consolidated statements of
income, retained earnings, and cash flows for each of the three
years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Columbus Southern Power Company and its subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 24, 1998
COLUMBUS SOUTHERN POWER COMPANY
Consolidated Statements of Income
Year Ended December 31,
1997 1996 1995
(in thousands)
OPERATING REVENUES $1,139,604 $1,105,683 $1,071,862
OPERATING EXPENSES:
Fuel 180,086 188,746 169,791
Purchased Power 221,064 168,894 167,517
Other Operation 180,663 196,762 190,542
Maintenance 66,956 65,414 71,022
Depreciation 90,723 88,070 85,448
Amortization of Zimmer Plant Phase-in Costs 15,746 33,937 33,268
Taxes Other Than Federal Income Taxes 117,519 115,518 109,680
Federal Income Taxes 71,720 62,795 58,786
TOTAL OPERATING EXPENSES 944,477 920,136 886,054
OPERATING INCOME 195,127 185,547 185,808
NONOPERATING INCOME (LOSS) 3,137 (970) 5,202
INCOME BEFORE INTEREST CHARGES 198,264 184,577 191,010
INTEREST CHARGES 78,885 77,469 80,394
NET INCOME 119,379 107,108 110,616
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,442 6,029 11,907
EARNINGS APPLICABLE TO COMMON STOCK $ 116,937 $ 101,079 $ 98,709
See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY
Consolidated Balance Sheets
December 31,
1997 1996
(in thousands)
ASSETS
ELECTRIC UTILITY PLANT:
Production $1,521,381 $1,503,371
Transmission 336,446 326,247
Distribution 926,178 885,267
General 138,041 130,946
Construction Work in Progress 54,064 54,062
Total Electric Utility Plant 2,976,110 2,899,893
Accumulated Depreciation 1,074,588 1,016,909
NET ELECTRIC UTILITY PLANT 1,901,522 1,882,984
OTHER PROPERTY AND INVESTMENTS 33,653 24,069
CURRENT ASSETS:
Cash and Cash Equivalents 12,626 9,134
Accounts Receivable:
Customers 87,357 50,557
Affiliated Companies 12,317 4,446
Miscellaneous 12,353 9,032
Allowance for Uncollectible Accounts (1,058) (1,032)
Fuel - at average cost 19,549 18,278
Materials and Supplies - at average cost 27,628 23,999
Accrued Utility Revenues 51,765 31,826
Prepayments 29,979 32,330
TOTAL CURRENT ASSETS 252,516 178,570
REGULATORY ASSETS 359,481 385,689
DEFERRED CHARGES 66,688 70,274
TOTAL $2,613,860 $2,541,586
See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY
December 31,
1997 1996
(in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stock - No Par Value:
Authorized - 24,000,000 Shares
Outstanding - 16,410,426 Shares $ 41,026 $ 41,026
Paid-in Capital 572,112 574,709
Retained Earnings 138,172 99,582
Total Common Shareholder's Equity 751,310 715,317
Cumulative Preferred Stock - Subject to Mandatory Redemption 25,000 25,000
Long-term Debt 887,850 882,641
TOTAL CAPITALIZATION 1,664,160 1,622,958
OTHER NONCURRENT LIABILITIES 42,271 40,068
CURRENT LIABILITIES:
Preferred Stock Due Within One Year - 50,000
Long-term Debt Due Within One Year 81,750 14,640
Short-term Debt 66,600 51,800
Accounts Payable - General 43,199 34,619
Accounts Payable - Affiliated Companies 28,088 20,209
Taxes Accrued 131,107 129,429
Interest Accrued 14,198 13,605
Other 28,619 32,314
TOTAL CURRENT LIABILITIES 393,561 346,616
DEFERRED INCOME TAXES 433,593 441,477
DEFERRED INVESTMENT TAX CREDITS 52,934 57,101
DEFERRED CREDITS 27,341 33,366
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL $2,613,860 $2,541,586
/TABLE
COLUMBUS SOUTHERN POWER COMPANY
Consolidated Statements of Cash Flows
Year Ended December 31,
1997 1996 1995
(in thousands)
OPERATING ACTIVITIES:
Net Income $119,379 $107,108 $ 110,616
Adjustments for Noncash Items:
Depreciation 90,959 87,697 85,071
Deferred Federal Income Taxes 5,250 (12,771) 2,914
Deferred Investment Tax Credits (4,168) (3,909) (3,483)
Deferred Fuel Costs (net) (6,115) 4,519 (11,377)
Deferred Zimmer Plant Operating Expenses and
Carrying Charges 16,097 32,152 29,150
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (net) (47,966) 2,850 (11,916)
Fuel, Materials and Supplies (4,900) 5,558 5,148
Accrued Utility Revenues (19,939) 8,563 (8,794)
Accounts Payable 16,459 2,799 3,038
Other (net) (6,316) 24,522 6,212
Net Cash Flows From Operating Activities 158,740 259,088 206,579
INVESTING ACTIVITIES:
Construction Expenditures (108,931) (92,667) (98,356)
Proceeds from Sale and Leaseback
Transactions and Other 1,722 2,956 2,923
Net Cash Flows Used For Investing Activities (107,209) (89,711) (95,433)
FINANCING ACTIVITIES:
Capital Contributions from Parent Company - - 15,000
Issuance of Long-term Debt 86,172 - 72,526
Retirement of Preferred Stock (52,953) (7,500) (71,773)
Retirement of Long-term Debt (14,640) (99,053) (80,000)
Change in Short-term Debt (net) 14,800 17,475 34,325
Dividends Paid on Common Stock (78,684) (75,876) (71,900)
Dividends Paid on Cumulative Preferred Stock (2,734) (5,866) (12,812)
Net Cash Flows Used For Financing Activities (48,039) (170,820) (114,634)
Net Increase (Decrease) in Cash and Cash Equivalents 3,492 (1,443) (3,488)
Cash and Cash Equivalents January 1 9,134 10,577 14,065
Cash and Cash Equivalents December 31 $ 12,626 $ 9,134 $ 10,577
See Notes to Consolidated Financial Statements.
COLUMBUS SOUTHERN POWER COMPANY
Consolidated Statements of Retained Earnings
Year Ended December 31,
1997 1996 1995
(in thousands)
Retained Earnings January 1 $ 99,582 $ 74,320 $ 46,976
Net Income 119,379 107,108 110,616
218,961 181,428 157,592
Deductions:
Cash Dividends Declared:
Common Stock 78,684 75,876 71,900
Cumulative Preferred Stock:
7% Series 1,750 1,750 1,750
7-7/8% Series - 3,938 3,937
9.50% Series - - 5,522
Total Cash Dividends Declared 80,434 81,564 83,109
Capital Stock Expense 355 282 163
Total Deductions 80,789 81,846 83,272
Retained Earnings December 31 $138,172 $ 99,582 $ 74,320
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, sale, purchase, transmission and
distribution of electric power serving 621,000 retail customers in
its service territory in central and southern Ohio. Wholesale
electric power is supplied to neighboring utility systems, power
marketers and the American Electric Power (AEP) System Power Pool
(Power Pool). As a member of the AEP Power Pool and a signatory
company to the American Electric Power System (AEP System)
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, which are
consolidated in these financial statements, are: Conesville Coal
Preparation 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 subsidiary of AEP Co., Inc., 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 consolidation.
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
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 (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 plant in
service account and are 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.
The amounts of AFUDC for 1997, 1996 and 1995 were not significant.
Depreciation
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 as follows:
Annual Composite
Functional Class Depreciation
of Property Rates
Production 3.2%
Transmission 2.3%
Distribution 3.7%
General 3.4%
Amounts for the demolition and 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 was terminated in January 1997, CSPCo
sold $50 million of undivided interests in designated pools of
accounts receivable and accrued utility revenues with limited
recourse. As collections reduced previously sold pools, interests
in new pools were sold. At December 31, 1996, $50 million remained
to be collected and remitted to the buyer.
Operating Revenues and Fuel Costs
Revenues include the accrual of electricity consumed but
unbilled at month-end as well as billed revenues. Changes in
retail jurisdictional fuel cost are deferred until reflected in
revenues in later months through a PUCO fuel cost recovery
mechanism. The deferral is amortized to fuel expense commensurate
with its recovery in rates. 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 the book cost and
tax basis of assets and liabilities which will result in a future
tax consequence. Where the flow-through method of accounting for
temporary differences is reflected in rates, deferred income taxes
are recorded with related regulatory assets and liabilities in
accordance with SFAS 71.
Investment Tax Credits
The Company's policy is to account for investment tax credits
under the flow-through method except where regulatory commissions
reflect investment tax credits in the rate-making process on a
deferral basis. Deferred investment tax credits, which represent
a regulatory liability, are being amortized over the life of the
related plant investment commensurate with recovery in rates.
Debt and Preferred Stock
Gains and losses on reacquisition of debt are deferred and
amortized over the remaining term of the reacquired debt in
accordance with rate-making treatment. If the debt is refinanced,
the reacquisition costs are deferred and amortized over the term of
the replacement debt commensurate with their recovery in rates.
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
included in paid-in capital and amortized to reduce retained
earnings commensurate with their recovery in rates. The excess of
par value over the cost of preferred stock required is credited to
paid-in capital and amortized to retained earnings.
Other Property and Investments
Other property and investments are stated at cost.
2. EFFECTS OF REGULATION AND THE ZIMMER PHASE-IN PLAN:
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. 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 rates be cost-based regulated. The Company has
reviewed all the evidence currently available and concluded that it
continues to meet the requirements to apply SFAS 71. In the event
a portion of the Company's business no longer met these
requirements, that is its rates were no longer cost based,
regulatory assets and liabilities would have to be written off for
that portion of the business and assets would have to be tested for
possible impairment and if required an impairment loss recorded
unless the net regulatory assets and impairment losses are
recoverable as a stranded investment.
Recognized regulatory assets and liabilities are comprised of
the following:
December 31,
1997 1996
(in thousands)
Regulatory Assets:
Amounts Due From Customers For
Future Income Taxes $256,710 $269,820
Zimmer Plant Phase-in Plan
Deferrals - 15,379
Deferred Zimmer Plant
Carrying Charges 43,003 43,003
Unamortized Loss On
Reacquired Debt 29,173 32,740
Other 30,595 24,747
Total Regulatory Assets $359,481 $385,689
Regulatory Liabilities:
Deferred Investment Tax Credits $52,934 $57,101
Other* 21,537 24,741
Total Regulatory Liabilities $74,471 $81,842
* Included in Deferred Credits on the Consolidated Balance Sheets.
The rate phase-in plan deferrals are applicable to the Zimmer
Plant, a 1,300 mw coal-fired plant which commenced commercial
operation in 1991. CSPCo owns 25.4% of the plant with the
remainder owned by two unaffiliated companies.
As a result of an Ohio Supreme Court decision, in January 1994
the PUCO approved a temporary rate surcharge of 3.39% effective
February 1, 1994 to recover Zimmer Plant phase-in plan deferrals.
In June 1997 the Company completed recovery of the phase-in plan
deferrals and discontinued the 3.39% temporary rate surcharge. In
1997, 1996 and 1995 $15.4 million, $31.5 million and $28.5 million,
respectively, of net phase-in deferrals were collected through the
surcharge. The deferral balance, which was completely recovered
and amortized in 1997, was $15.4 million at December 31, 1996. The
collection and cessation of the surcharge recovery of amounts
deferred under the phase-in plan did not affect net income. The
rate surcharge terminated with the completion of the amortization
of the phase-in plan deferral.
3. 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. Aggregate
construction expenditures for 1998-2000 are estimated to be $381
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 commission review and
approval. The contracts are for various terms, the longest of
which extends to 2007, and contain various clauses that would
release the Company from its obligation under certain force majeure
conditions.
Revised Air Quality Standards
On July 18, 1997, the United States Environmental Protection
Agency published a revised National Ambient Air Quality Standard
(NAAQS) for ozone and a new NAAQS for fine particulate matter (less
than 2.5 microns in size). The new ozone standard is expected to
result in redesignation of a number of areas of the country that
are currently in compliance with the existing standard to
nonattainment status which could ultimately dictate more stringent
emission restrictions for AEP System generating units. New
stringent emission restrictions on AEP System generating units to
achieve attainment of the fine particulate matter standard could
also be imposed. The AEP System operating companies joined with
other utilities to appeal the revised NAAQS and filed petitions for
review in August and September 1997 in the U.S. Court of Appeals
for the District of Columbia Circuit. Management is unable to
estimate compliance costs without knowledge of the reductions that
may be necessary to meet the new standards. If such costs are
significant, they could have a material adverse effect on results
of operations, cash flows and possibly financial condition unless
recovered.
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 the results of operations, cash
flows or financial condition.
4. RELATED PARTY TRANSACTIONS:
Benefits and costs of the AEP System's generating plants are
shared by members of the Power Pool. The Company is a member 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 $18.6 million in 1997, $15.4
million in 1996 and $14.8 million in 1995 for energy supplied to
the Power Pool.
Since the Company's internal peak demand exceeds its
generating capacity, charges for Power Pool capacity reservation,
which is a charge for the right to receive power even if the power
is not taken, and for energy received from the Power Pool were
included in purchased power expense as follows:
Year Ended December 31,
1997 1996 1995
(in thousands)
Capacity Charges $ 82,536 $ 83,723 $ 83,318
Energy Charges 74,416 76,758 74,100
Total $156,952 $160,481 $157,418
Power Pool members share in wholesale sales to unaffiliated
entities made by the Power Pool. The Company's share of these
wholesale Power Pool sales included in operating revenues were
$108.4 million in 1997, $63.6 million in 1996 and $45.8 million in
1995.
In addition, the Power Pool purchases power from unaffiliated
companies for resale to other unaffiliated entities. The Company's
share of these purchases was included in purchased power expense
and totaled $58.0 million (including new power marketing
transactions) in 1997, $7.1 million in 1996 and $10 million in
1995. Revenues from these transactions, including a transmission
fee for power that passes through the AEP System transmission
network, are included in the above Power Pool wholesale operating
revenues.
Purchased power expense includes $6.1 million in 1997, $1.3
million in 1996 and $0.8 million in 1995 for energy bought from the
Ohio Valley Electric Corporation, an affiliated company that is not
a member of the Power Pool.
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,
since the Company's relative investment in transmission facilities
is less than its relative peak demand, other operation expense
includes equalization charges of $29.9 million, $30.6 million and
$31.1 million in 1997, 1996 and 1995, respectively.
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 required
contribution in accordance with the Employee Retirement Income
Security Act of 1974. Net pension costs for the year ended
December 31, 1997 were none and for the years 1996 and 1995 were
$1.5 million and $0.8 million, respectively.
Postretirement benefits other than pensions (OPEB) are
provided for retired employees under an AEP System plan.
Substantially all employees are eligible for postretirement health
care and life insurance if they retire from active service after
reaching age 55 and have at least 10 service years. OPEB costs are
determined by the application of AEP System actuarial assumptions
to each operating company's employee complement. The annual
accrued costs, which includes the recognition of one-twentieth of
the prior service transition obligation, were $7.5 million in 1997,
$13.6 million in 1996 and $11.3 million in 1995. The funding
policy for AEP's OPEB plan is to make contributions to an external
Voluntary Employees Beneficiary Association trust fund equal to the
incremental OPEB costs (i.e., the amount that the total
postretirement benefits cost under SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions,"
exceeds the pay-as-you-go amount). Contributions were $4.1 million
in 1997, $8.2 million in 1996 and $14.3 million in 1995.
An employee savings plan is offered which allows participants
to contribute up to 17% of their salaries into various 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 Co., Inc. common stock. The
Company's annual contributions totaled $1.9 million in 1997 and
1996 and $2.1 million in 1995.
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,
1997 1996
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 $ 13,774 $ 272 $ 13,628 $ 46
Conesville Generating Station (Unit No. 4) 43.5 80,030 53 79,484 268
J.M. Stuart Generating Station 26.0 183,164 624 179,633 2,973
Wm. H. Zimmer Generating Station 25.4 699,512 2,708 698,765 1,349
$976,480 $3,657 $971,510 $4,636
Transmission (a) $59,345 $ 300 $59,105 $ 324
(a) Varying percentages of ownership.
At December 31, 1997 and 1996, the accumulated depreciation with
respect to the Company's share of jointly owned facilities amounted
to $301.2 million and $271.2 million, respectively.
7. CUMULATIVE PREFERRED STOCK:
At December 31, 1997, 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 is subject to
mandatory redemption and has an involuntary liquidation preference of
par value. The Company redeemed 500,000 shares of the 7-7/8% Series
Cumulative Preferred Stock in 1997, 75,000 shares of 9.50% Series
Cumulative Preferred Stock in 1996 and 675,000 shares in 1995.
Call Price Shares Amount
December 31, Par Outstanding December 31,
Series 1997 Value December 31, 1997 1997 1996
(in thousands)
7% (a) (a) $100 250,000 $25,000 $25,000
7-7/8% (b) (b) 100 - - 50,000
$25,000 $75,000
(a) 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. The sinking fund provisions of the 7% series
aggregate $5,000,000, in 2000, 2001 and 2002.
(b) In March 1997 the Company redeemed the entire 500,000 shares
outstanding of its 7-7/8% series.
8. FEDERAL INCOME TAXES:
The details of federal income taxes as reported are as follows:
Year Ended December 31,
1997 1996 1995
(in thousands)
Charged (Credited) to Operating Expenses (net):
Current $ 69,619 $ 78,262 $60,091
Deferred 5,678 (11,842) 2,028
Deferred Investment Tax Credits (3,577) (3,625) (3,333)
Total 71,720 62,795 58,786
Charged (Credited) to Nonoperating Income (net):
Current (941) (1,280) (874)
Deferred (428) (929) 886
Deferred Investment Tax Credits (591) (284) (150)
Total (1,960) (2,493) (138)
Total Federal Income Taxes as Reported $ 69,760 $ 60,302 $58,648
The following is a reconciliation of the difference between the
amount of federal income taxes computed by multiplying book income
before federal income taxes by the statutory tax rate, and the amount
of federal income taxes reported.
Year Ended December 31,
1997 1996 1995
(in thousands)
Net Income $119,379 $107,108 $110,616
Federal Income Taxes 69,760 60,302 58,648
Pre-tax Book Income $189,139 $167,410 $169,264
Federal Income Taxes on Pre-tax Book Income at
Statutory Rate (35%) $66,199 $58,594 $59,242
Increase (Decrease) in Federal Income Taxes
Resulting From the Following Items:
Depreciation 8,651 7,861 7,959
Investment Tax Credits (net) (4,168) (3,909) (3,848)
Other (922) (2,244) (4,705)
Total Federal Income Taxes as Reported $69,760 $60,302 $58,648
Effective Federal Income Tax Rate 36.9% 36.0% 34.6%
The following tables show the elements of the net deferred tax
liability and the significant temporary differences giving rise to
such deferrals:
December 31,
1997 1996
(in thousands)
Deferred Tax Assets $ 79,047 $ 77,978
Deferred Tax Liabilities (512,640) (519,455)
Net Deferred Tax Liabilities $(433,593) $(441,477)
Property Related Temporary
Differences $(341,701) $(341,669)
Amounts Due From Customers For
Future Federal Income Taxes (89,824) (94,413)
All Other (net) (2,068) (5,395)
Total Net Deferred
Tax Liabilities $(433,593) $(441,477)
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 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 Internal Revenue Service
(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 open and under audit by the IRS. During
the audit the IRS agents requested a ruling from their National Office
that certain interest deductions relating to corporate owned life
insurance (COLI) claimed by the Company should not be allowed. The
COLI program was established in 1990 as part of the Company's strategy
to fund and reduce the cost of medical benefits for retired employees.
AEP filed a brief with the IRS National Office refuting the agents'
position. Although no adjustments have been proposed, a disallowance
of COLI interest deductions through December 31, 1997 would reduce
earnings by approximately $39 million (including interest).
Management believes it has meritorious defenses and will vigorously
contest any proposed adjustments. No provisions for this amount have
been recorded. In the event the Company is unsuccessful it could have
a material adverse impact on results of operations and cash flows.
9. SUPPLEMENTARY INFORMATION:
Year Ended December 31,
1997 1996 1995
(in thousands)
Cash was paid for:
Interest (net of
capitalized amounts) $74,248 $77,021 $78,046
Income Taxes 70,870 76,298 57,896
Noncash Acquisitions under
Capital Leases 8,568 14,247 9,094
10. LEASES:
Leases of property, plant and equipment are for periods of 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 for both operating and capital leases are generally
charged to operating expenses in accordance with rate-making treat-
ment. The components of rental costs are as follows:
Year Ended December 31,
1997 1996 1995
(in thousands)
Operating Leases $ 6,279 $ 7,544 $ 7,684
Amortization of Capital
Leases 6,675 5,169 4,971
Interest on Capital Leases 2,022 2,094 1,547
Total Rental Costs $14,976 $14,807 $14,202
Properties under capital leases and related obligations recorded
on the Consolidated Balance Sheets are as follows:
December 31,
1997 1996
(in thousands)
Electric Utility Plant:
Production $ - $ 1,952
General 53,537 48,030
Total Electric Utility Plant 53,537 49,982
Other Property 2,511 2,189
Total Properties 56,048 52,171
Accumulated Amortization 17,461 16,037
Net Properties under
Capital Leases $38,587 $36,134
Obligations under Capital Leases:*
Noncurrent Liability $32,649 $30,520
Liability Due Within One Year 5,938 5,614
Total Capital Lease
Obligations $38,587 $36,134
* Represents the present value of future minimum lease payments.
Capital lease obligations are included in other noncurrent
liabilities 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, 1997:
Non-
cancelable
Capital Operating
Leases Leases
(in thousands)
1998 $ 8,299 $ 5,078
1999 7,782 4,764
2000 7,069 4,603
2001 6,138 4,425
2002 5,172 939
Later Years 15,749 6,026
Total Future Minimum Lease Payments 50,209 $25,835
Less Estimated Interest Element 11,622
Estimated Present Value of Future Minimum Lease Payments $38,587
11. COMMON SHAREHOLDER'S EQUITY:
The Company received from AEP Co., Inc. a cash capital
contribution of $15 million in 1995 which was credited to paid-in
capital. In 1997, 1996 and 1995 net changes to paid-in capital of
$(2,597,000), $282,000 and $6,215,000, respectively, represented gains
and expenses associated with cumulative preferred stock transactions.
There were no other material transactions affecting the common stock
and paid-in capital accounts in 1997, 1996 and 1995.
12. LONG-TERM DEBT AND LINES OF CREDIT:
Long-term debt by major category was outstanding as follows:
December 31,
1997 1996
(in thousands)
First Mortgage Bonds $719,218 $733,522
Installment Purchase Contracts 91,003 90,949
Senior Unsecured Notes 47,721 -
Junior Debentures 111,658 72,810
969,600 897,281
Less Portion Due Within
One Year 81,750 14,640
Total $887,850 $882,641
First mortgage bonds outstanding were as follows:
December 31,
1997 1996
(in thousands)
% Rate Due
6-1/4 1997 - October 1 $ - $ 14,640
9.15 1998 - February 2 57,000 57,000
7.00 1998 - June 1 24,750 24,750
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 50,000
6.75 2004 - May 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 25,500 25,500
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 50,000
7.60 2024 - May 1 50,000 50,000
Unamortized Discount (3,032) (3,368)
719,218 733,522
Less Portion Due Within
One Year 81,750 14,640
Total $637,468 $718,882
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,
1997 1996
(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 (1,242) (1,296)
Total $91,003 $90,949
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.
In October 1997 the Company issued $48,000,000 of 6.85% Senior
Unsecured Notes due October 3, 2005. The unamortized discount at
December 31, 1997 is $279,000.
Junior debentures are composed of the following:
December 31,
1997 1996
(in thousands)
% Rate Due
8-3/8 2025 - September 30 $ 75,000 $75,000
7.92 2027 - March 31 40,000 -
Unamortized Discount (3,342) (2,190)
Total $111,658 $72,810
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, 1997 future annual long-term debt payments are
as follows:
Amount
(in thousands)
1998 $ 81,750
1999 -
2000 -
2001 -
2002 135,000
Later Years 760,745
Total Principal Amount 977,495
Unamortized Discount (7,895)
Total $969,600
Short-term debt borrowings are limited by provisions of the 1935
Act to $175 million. Lines of credit are shared with AEP System
companies and at December 31, 1997 and 1996 were available in the
amounts of $442 million and $409 million, respectively. Facility fees
of approximately 1/10 of 1% of the short-term lines 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, 1997:
Notes Payable $ 4,300 5.8%
Commercial Paper 62,300 6.7
Total $66,600 6.7
December 31, 1996:
Notes Payable $20,000 6.4%
Commercial Paper 31,800 7.4
Total $51,800 7.0
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, 1997 and 1996 fair values for preferred stock subject to
mandatory redemption were $26.8 million and $79.5 million, and for
long-term debt were $1,014 million and $910 million, respectively.
The carrying amounts for preferred stock subject to mandatory
redemption were $25 million and $75 million, and for long-term debt
were $970 million and $897 million at December 31, 1997 and 1996,
respectively. Fair values are based on quoted market prices for the
same or similar issues and the current dividend or interest rates
offered for instruments of the same remaining maturities.
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION:
Quarterly Periods Operating Operating Net
Ended Revenues Income Income
1997
March 31 $265,007 $47,430 $29,324
June 30 263,263 42,968 23,430
September 30 313,024 64,895 45,488
December 31 298,310 39,834 21,137
1996
March 31 271,040 48,426 25,126
June 30 269,023 47,173 27,496
September 30 303,270 52,405 34,759
December 31 262,350 37,543 19,727