MANAGEMENT'S NARRATIVE ANALYSIS
OF RESULTS OF OPERATIONS
Operating revenues are derived from the sale of Rockport Plant energy and
capacity to two affiliated companies, Indiana Michigan Power Company (I&M)
and Kentucky Power Company (KEPCo), and one unaffiliated utility, Virginia
Electric and Power Company, pursuant to Federal Energy Regulatory Commission
(FERC) approved long-term unit power agreements. The unit power agreements
provide for recovery of costs including a FERC approved rate of return on
common equity and a return on other capital net of temporary cash investments
(TCI).
Net Income and Operating Revenues Decrease
Net income declined $1.9 million reflecting a reduction in common equity on
which a return is earned and the negative effects of increased TCI on the
return on other capital. The reduction of common equity resulted from the
payment of dividends in excess of net income, as well as a $1.3 million
return of capital to the parent company. Based on the unit power agreement
formulas, TCI reduce the return on other capital to the extent that the
return on TCI is lower than the weighted average cost of debt. The average
balance of TCI increased monthly until December 1, 1993 when a $55 million
installment purchase contract was redeemed.
The $10 million decline in operating revenues reflects the recovery of
decreased operating expenses, and the above discussed reduction in the
Company's equity on which a return is earned.
Operating Expenses Decrease
Operating expenses decreased $9.7 million as follows:
Increase (Decrease)
From Previous Year
Amount %
(dollars in thousands)
Fuel $(13,224) (12.9)
Rent - Rockport
Plant Unit 2 1,076 1.6
Other Operation 1,273 12.6
Maintenance 3,248 31.6
Depreciation 184 0.9
Taxes Other Than
Federal Income Taxes 481 10.2
Federal Income Taxes (2,741) (39.9)
Total $ (9,703) (4.4)
The decrease in fuel expense resulted from an 11% lower average cost of
fuel per kilowatt-hour generated and a 2% decline in generation. The
reduction in the average cost of fuel was primarily due to a refund of coal
transportation charges.
Rent expense increased due to tax indemnification clauses in the lease
agreements which requires the Company to reimburse the lessors for certain
taxes.
The increase in other operation expense reflects increases in steam power
generation expenses, the FERC annual operating assessment and postretirement
benefits other than pensions which are billed to the Company by I&M, the
operator of the Rockport Plant. In 1993 a new accounting standard required
I&M to change its accounting method for postretirement benefits other than
pensions from pay-as-you-go to accrual accounting resulting in the increased
billing.
Maintenance expense increased as a result of planned boiler inspections
and repairs at both Rockport Plant units during 1993.
Taxes other than federal income taxes increased mainly due to higher
Indiana property tax rates, partly offset by the effect of franchise tax
audit adjustments recorded during 1992.
The decrease in federal income tax expense attributable to operations was
primarily due to additional accrual adjustments recorded in 1992 for prior-
year federal income taxes to reflect Internal Revenue Service audit settle-
ments and a reduction in pre-tax operating income in 1993.
Nonoperating Income Decreases and Financing Costs Decline
Nonoperating income decreased as a result of interest income recorded in
1992 on prior years' federal income tax refunds due to an audit settlement,
offset in part by an increase in interest income on TCI. The decline in
interest expense resulted from lower interest rates on the $55 million
installment purchase contract prior to its redemption on December 1, 1993.
INDEPENDENT AUDITORS' REPORT
To the Shareowner and Board of
Directors of AEP Generating Company:
We have audited the accompanying balance sheets of AEP Generating Company as
of December 31, 1993 and 1992, and the related statements of income, retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1993. 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 financial statements present fairly, in all material
respects, the financial position of AEP Generating Company as of December 31,
1993 and 1992, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1993 in conformity with
generally accepted accounting principles.
As discussed in Note 1 in Notes to Financial Statements, effective January 1,
1993, the Company changed its method of accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes."
DELOITTE & TOUCHE
Columbus, Ohio
February 22, 1994
STATEMENTS OF INCOME
Year Ended December 31,
1993 1992 1991
(in thousands)
OPERATING REVENUES $229,273 $239,232 $241,596
OPERATING EXPENSES:
Fuel 89,214 102,438 101,271
Rent - Rockport Plant Unit 2 67,003 65,927 66,660
Other Operation 11,395 10,122 9,769
Maintenance 13,516 10,268 9,963
Depreciation 21,631 21,447 21,364
Taxes Other Than Federal Income Taxes 5,208 4,727 4,128
Federal Income Taxes 4,130 6,871 6,627
TOTAL OPERATING EXPENSES 212,097 221,800 219,782
OPERATING INCOME 17,176 17,432 21,814
NONOPERATING INCOME 4,668 6,706 4,167
INCOME BEFORE INTEREST CHARGES 21,844 24,138 25,981
INTEREST CHARGES 10,887 11,237 12,082
NET INCOME $ 10,957 $ 12,901 $ 13,899
STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
1993 1992 1991
(in thousands)
RETAINED EARNINGS JANUARY 1 $23,173 $32,036 $39,077
NET INCOME 10,957 12,901 13,899
CASH DIVIDENDS DECLARED 32,791 21,764 20,940
RETAINED EARNINGS DECEMBER 31 $ 1,339 $23,173 $32,036
See Notes to Financial Statements.
/TABLE
BALANCE SHEETS
December 31,
1993 1992
(in thousands)
ASSETS
ELECTRIC UTILITY PLANT:
Production $627,502 $622,274
General 1,757 1,774
Construction Work in Progress 1,773 3,933
Total Electric Utility Plant 631,032 627,981
Accumulated Depreciation 181,587 160,658
NET ELECTRIC UTILITY PLANT 449,445 467,323
CURRENT ASSETS:
Cash and Cash Equivalents 3 27,974
Accounts Receivable:
Affiliated Companies 18,689 21,678
Other 40 88
Fuel - at average cost 12,867 17,466
Materials and Supplies - at average cost 4,121 4,085
Prepayments 731 626
Accrued Tax Benefit - 5,974
TOTAL CURRENT ASSETS 36,451 77,891
DEFERRED FEDERAL INCOME TAX ASSETS 10,975 -
REGULATORY ASSETS 30,536 31,151
TOTAL $527,407 $576,365
See Notes to Financial Statements.
/TABLE
December 31,
1993 1992
(in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stock - Par Value $1,000:
Authorized and Outstanding - 1,000 Shares $ 1,000 $ 1,000
Paid-in Capital 54,435 55,735
Retained Earnings 1,339 23,173
Total Common Shareowner's Equity 56,774 79,908
Long-term Debt 108,188 162,780
TOTAL CAPITALIZATION 164,962 242,688
OTHER NONCURRENT LIABILITIES 1,736 1,015
CURRENT LIABILITIES:
Short-term Debt - Notes Payable 15,250 -
Accounts Payable:
General 5,016 3,952
Affiliated Companies 3,793 906
Taxes Accrued 3,697 -
Interest Accrued 2,963 3,098
Rent Accrued - Rockport Plant Unit 2 5,588 4,963
Other 1,063 1,493
TOTAL CURRENT LIABILITIES 37,370 14,412
DEFERRED GAIN ON SALE AND LEASEBACK -
ROCKPORT PLANT UNIT 2 218,646 226,203
DEFERRED INVESTMENT TAX CREDITS 83,901 87,390
DEFERRED FEDERAL INCOME TAXES - 4,657
DEFERRED AMOUNTS DUE TO CUSTOMERS FOR
FEDERAL INCOME TAXES 20,792 -
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL $527,407 $576,365
/TABLE
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1993 1992 1991
(in thousands)
OPERATING ACTIVITIES:
Net Income $ 10,957 $ 12,901 $ 13,899
Adjustments for Noncash Items:
Depreciation 21,631 21,447 21,364
Deferred Federal Income Taxes 5,160 7,258 5,734
Deferred Investment Tax Credits (3,489) (3,344) (3,711)
Amortization of Deferred Gain on Sale
and Leaseback - Rockport Plant Unit 2 (7,557) (8,453) (7,587)
Changes in Certain Current
Assets and Liabilities:
Accounts Receivable 3,037 (1,385) 765
Fuel, Materials and Supplies 4,563 7,227 1,309
Accounts Payable 3,951 (2,922) (1,148)
Taxes Accrued 9,671 13,931 332
Other (net) 1,070 1,152 (832)
Net Cash Flows From
Operating Activities 48,994 47,812 30,125
INVESTING ACTIVITIES - Construction
Expenditures (3,124) (3,536) (3,687)
FINANCING ACTIVITIES:
Capital Contributions Returned
to Parent Company (1,300) - -
Retirement of Long-term Debt (55,000) - -
Change in Short-term Debt (net) 15,250 - (5,725)
Dividends Paid (32,791) (21,764) (20,940)
Net Cash Flows Used For
Financing Activities (73,841) (21,764) (26,665)
Net Increase (Decrease) in Cash
and Cash Equivalents (27,971) 22,512 (227)
Cash and Cash Equivalents January 1 27,974 5,462 5,689
Cash and Cash Equivalents December 31 $ 3 $ 27,974 $ 5,462
See Notes to Financial Statements.
/TABLE
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization
AEP Generating Company (the Company or AEGCo) 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 and wholesale
sale, under long-term agreements, of electric power to two affiliates and an
unaffiliated utility.
Rate Regulation
As a subsidiary of AEP Co., Inc., AEGCo is subject to regulation by the
Securities and Exchange Commission (SEC) under the Public Utility Holding
Company Act of 1935 (1935 Act). Rates are regulated by the Federal Energy
Regulatory Commission (FERC).
Basis of Accounting
As a rate-regulated entity, AEGCo's financial statements reflect the actions
of the FERC which may 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
and liabilities are recorded to defer expenses or revenues reflecting such
rate-making differences.
Utility Plant
Electric utility plant is stated at original cost. 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 income item that is recovered over the service life of
utility plant through depreciation and represents the estimated cost of bor-
rowed and equity funds used to finance construction projects. The average
rates used to accrue AFUDC were 8.5% in 1993, 9.25% in 1992 and 9.5% in 1991.
Since there were no significant long-term construction projects, AFUDC was
not significant in 1993, 1992 and 1991.
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 (i.e., production and general). Amounts
to be used for demolition of plant are recovered through depreciation charges
included in rates.
Rockport Plant
Rockport Plant consists of two 1,300 megawatt (mw) coal-fired units.
AEGCo and Indiana Michigan Power Company (I&M), an affiliate, each owns 50%
of one unit (Rockport 1) and each leases a 50% interest in the other unit
(Rockport 2) from unaffiliated lessors under an operating lease. The gain on
the sale and leaseback of Rockport 2 was deferred and is being amortized,
with related taxes, over the initial lease term which expires in 2022.
Unit Power Agreements
Revenues are derived from the sale of capacity and energy to other
utilities. Under FERC approved unit power agreements, AEGCo's share of Rock-
port Plant capacity is sold to two affiliates, I&M and Kentucky Power Company
(KEPCo), and an unaffiliated utility, Virginia Electric and Power Company
(VEPCo). One agreement provides for the sale to I&M of AEGCo's entire output
of Rockport 1 and 2. Pursuant to a subsequent agreement, 390 mw of Rockport
Plant capacity is sold to KEPCo (15% of each unit). An agreement with I&M
and VEPCo permits the sale of 455 mw of AEGCo's Rockport 1 capacity to VEPCo
through December 31, 1999. I&M purchases 455 mw of Rockport 2 capacity. Ap-
proximately 37% in 1993, 33% in 1992 and 36% in 1991 of operating revenues
were derived from sales to VEPCo.
Recovery of Costs
Pursuant to the unit power agreements, full cost of service recovery is
allowed. Recovery includes costs of operation, a return on common equity and
a return on other capital net of temporary cash investments.
Cash and Cash Equivalents
Cash and cash equivalents include temporary cash investments with original
maturities of three months or less.
Income Taxes
Effective January 1, 1993, the Company adopted the liability method of
accounting for income taxes as prescribed by SFAS 109, Accounting for Income
Taxes. Under this standard deferred federal income taxes are provided for
all differences between the book and tax basis of assets and liabilities
which will result in a future tax consequence. In prior years deferred
federal income taxes were provided for differences between book and taxable
income at statutory rates. As a result of the adoption of SFAS 109,
additional deferred tax assets were recorded and in accordance with SFAS 71
corresponding regulatory liabilities were also recorded. As a result of this
change in accounting effective January 1, 1993, deferred federal income tax
assets and regulatory liabilities increased $21.6 million with no effect on
net income.
Investment tax credits utilized in prior years' federal income tax returns
were deferred and are being amortized over the life of the related plant
investment in accordance with rate-making treatment.
Debt
Losses on reacquired debt are deferred and amortized over the term of the
reacquired debt.
Reclassifications
Certain prior-period amounts were reclassified to conform with current-
period presentation.
2. COMMITMENTS AND CONTINGENCIES:
Construction
Construction expenditures for the years 1994-1996 are estimated at $13
million and, in connection therewith, certain commitments have been made.
Environmental Matters
The Company is regulated by federal, state and local authorities with
respect to air and water quality and other environmental matters.
The generation of electricity produces non-hazardous and hazardous by-
products. Substantial costs to store and dispose of hazardous and non-
hazardous materials have been incurred and will be incurred. Significant
additional costs could be incurred in the future to meet the requirements of
new laws and regulations, if enacted, and to clean up storage and disposal
sites under existing legislation. Management has no knowledge of any
unrecorded material cleanup costs.
The Clean Air Act Amendments of 1990 (CAAA) require significant reductions
in sulfur dioxide and nitrogen oxides emitted from certain existing generat-
ing plants. The Rockport Plant complies with the CAAA since the plant burns
low sulfur western coal obtained under long-term contract.
3. FEDERAL INCOME TAXES:
The details of federal income taxes as reported are as follows:
Year Ended December 31,
1993 1992 1991
(in thousands)
Charged (Credited) to
Operating Expenses (net):
Current $(1,991) $ 577 $ 944
Deferred 6,121 6,297 5,734
Deferred Investment Tax Credits - (3) (51)
Total 4,130 6,871 6,627
Charged (Credited) to
Nonoperating Income (net):
Current 1,661 747 247
Deferred (961) 961 -
Deferred Investment Tax Credits (3,489) (3,341) (3,660)
Total (2,789) (1,633) (3,413)
Total Federal Income
Taxes as Reported $ 1,341 $ 5,238 $ 3,214
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,
1993 1992 1991
(in thousands)
Net Income $10,957 $12,901 $13,899
Federal Income Taxes 1,341 5,238 3,214
Pre-tax Book Income $12,298 $18,139 $17,113
Federal Income Taxes on Pre-tax Book
Income at Statutory Rate (35% in
1993 and 34% in 1992 and 1991) $ 4,304 $ 6,167 $ 5,818
Increase (Decrease) in Federal Income
Taxes Resulting From the
Following Items:
Depreciation 1,154 1,101 1,141
Allowance for Funds Used
During Construction (1,054) (1,083) (1,073)
Amortization of Deferred Net Book
Gain on Sale and Leaseback
- Rockport Plant Unit 2 640 715 715
Rockport Plant Unit 2 Investment
Tax Credits included in Taxable
Income (net) 374 367 367
Investment Tax Credits (net) (3,489) (3,341) (3,664)
Federal Income Tax Accrual
Adjustments (600) 1,400 -
Other 12 (88) (90)
Total Federal Income Taxes as
Reported $ 1,341 $ 5,238 $ 3,214
Effective Federal Income Tax Rate 10.9% 28.9% 18.8%
The following are the principal components of federal income taxes as
reported:
Year Ended December 31,
1993 1992 1991
(in thousands)
Current:
Federal Income Taxes $ (330) $ 1,321 $ 1,144
Investment Tax Credits - 3 47
Total Current Federal Income Taxes (330) 1,324 1,191
Deferred:
Depreciation 4,703 4,653 4,090
Allowance for Borrowed Funds
Used During Construction (1,061) (1,035) (1,130)
Accrued Interest Income (961) 961 -
Amortization of Deferred Net Book
Gain on Sale and Leaseback
- Rockport Plant Unit 2 2,971 3,272 3,537
Rockport Plant Unit 2 Investment
Tax Credits Included in
Taxable Income (net) (499) (602) (723)
Other 7 9 (40)
Total Deferred Federal Income Taxes 5,160 7,258 5,734
Total Deferred Investment Tax Credits (3,489) (3,344) (3,711)
Total Federal Income Taxes as
Reported $ 1,341 $ 5,238 $ 3,214
The Company joins in the filing of a consolidated federal income tax
return with its affiliates in the Amercian Electric Power (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 and invest-
ment tax credits utilized 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 alloca-
tion approximates a separate return result for each company in the
consolidated group.
The AEP System settled with the Internal Revenue Service (IRS) all issues
from the audits of the consolidated federal income tax returns for 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.
The net deferred tax asset of $11 million at December 31, 1993 is composed
of deferred tax assets of $130.3 million and deferred tax liabilities of
$119.3 million. The significant temporary differences giving rise to the net
deferred tax asset are:
Deferred Tax Asset
(Liability)
(in thousands)
Property Related Temporary Differences $(63,200)
Amounts Due To Customers
For Future Federal Income Taxes 7,277
Deferred Net Gain on Sale
and Leaseback -
Rockport Plant Unit 2 67,033
All Other (net) (135)
Total Net Deferred Tax Asset $ 10,975
4. LONG-TERM DEBT AND LINES OF CREDIT:
Installment purchase contracts were entered into in connection with the
issuance of pollution control revenue bonds by the city of Rockport, Indiana
as follows:
December 31,
1993 1992
(in thousands)
9-3/8% due 2014 $ 55,000 $ 55,000
6-5/8% due 2014 (a) 55,000 55,000
Variable interest
rate due 2014 (b) - 55,000
Unamortized Discount (1,812) (2,220)
Total $108,188 $162,780
(a) The adjustable interest rate changes every five years and is supported by
a bank letter of credit that expires in September 1995.
(b) Redeemed December 1993. The average weighted interest rate was 2.8%,
2.9% and 4.4% for 1993, 1992 and 1991, respectively.
Under the terms of the installment purchase contracts, AEGCo is required
to pay amounts sufficient to enable the payment of interest on and the
principal (at stated maturities or on the demand of the owners at periodic
interest adjustment dates) of related pollution control revenue bonds issued
to finance the construction of pollution control facilities at the Rockport
Plant. The installment purchase contracts are guaranteed by AEP Co., Inc.
Short-term debt borrowings are limited by provisions of the 1935 Act to $60
million and further limited by provisions of the bank letter of credit to $43
million. Lines of credit are shared with AEP System companies and at
December 31, 1993 and 1992 were available in the amounts of $116 million and
$137 million, respectively. Commitment fees of approximately 3/16 of 1% a
year are paid to the banks to maintain the lines of credit.
5. RELATED PARTY TRANSACTIONS:
Operating revenues include sales of energy under long-term unit power
agreements to two AEP System companies of $145 million, $160 million and $155
million for the years ended December 31, 1993, 1992 and 1991, respectively.
I&M operates the Rockport Plant and bills the Company for its share of
operating costs which are included in the Statements of Income.
American Electric Power Service Corporation (AEPSC) provides certain
managerial and professional services to AEP System companies. The costs of
the services are determined 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, all of which is furnished to AEPSC by AEP Co., Inc.
Billings from AEPSC are expensed or capitalized 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. LEASES:
Future minimum operating lease payments for the lease of Rockport 2 are
$74 million per year for 1994 through 1998 and total $1.8 billion for later
years.
There were no other material lease commitments at December 31, 1993 and
1992.
7. 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. Fair values for long-term
debt were $136 million and $174 million at December 31, 1993 and 1992,
respectively, based on quoted market prices for the same or similar
issues and the current interest rates offered for instruments of the
same remaining maturities.
8. SUPPLEMENTARY INFORMATION:
Year Ended December 31,
1993 1992 1991
(in thousands)
Taxes Other Than Federal
Income Taxes include:
Real and Personal Property $3,535 $2,801 $2,453
State Income 714 758 839
Payroll 550 511 489
Other State and Local 409 657 347
Total $5,208 $4,727 $4,128
Cash was paid (received) for:
Interest (net of
capitalized amounts) $10,667 $ 10,922 $11,835
Income Taxes $(9,142) $(12,204) $3,731