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 and
Kentucky Power Company, 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.
Net Income Declines and Operating Revenues Increase
Net income declined $0.8 million reflecting both a reduction in common
equity on which a return was earned and lower interest income offset, in
part, by an increase in the return on other capital. The reduction in common
equity resulted from the return of capital contributions to the parent compa-
ny of $6.7 million in 1994 and $1.3 million in 1993, as well as payment of
dividends in excess of net income in 1993. Interest income declined in 1994
as a result of a December 1993 redemption of $55 million of installment
purchase contracts which reduced the cash available for investment. The unit
power agreements provide for the reduction of the return on other capital by
interest income on temporary cash investments. Hence the decline in interest
income increased the return on other capital.
Income statement items which changed significantly were as follows:
Increase(Decrease)
(dollars in thousands) From Previous Year
Amount %
Operating Revenues. . . . . . . $ 6,768 3.0
Fuel. . . . . . . . . . . . . . 11,471 12.9
Maintenance . . . . . . . . . . (3,137) (23.2)
Taxes Other Than Federal
Income Taxes. . . . . . . . . (342) (6.6)
Federal Income Taxes. . . . . . (297) (7.2)
Nonoperating Income . . . . . . (1,255) (26.9)
Interest Charges. . . . . . . . (1,203) (11.0)
The increase in operating revenues reflects the recovery of higher
operating expenses through the workings of the unit power agreements
partially offset by the reduced common equity return discussed above.
The increase in fuel expense resulted from an increase in generation of
8% primarily due to increased availability of both Rockport Plant units and
the effect of a retroactive coal transportation cost refund received in the
first quarter of 1993.
Maintenance expense decreased since only one unit was out of service
for scheduled boiler inspections and repairs in 1994, while planned boiler
inspections and repairs were performed on both units in 1993.
The reduction in taxes other than federal income taxes was due to prior
period Indiana property tax accrual adjustments and a fourth quarter 1994
accrual adjustment to state income taxes.
Federal income tax expense attributable to operations decreased
primarily due to adjustments associated with the audit of prior years' tax
returns.
Nonoperating Income and Financing Costs Decrease
The decrease in nonoperating income was primarily due to the decline in
interest income earned on temporary cash investments, explained above. The
decline in interest expense resulted from the redemption of the $55 million
installment purchase contract on December 1, 1993 offset in part by an
increase in interest expense on short-term debt.
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, 1994 and 1993, and the related 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 financial statements present fairly, in all material
respects, the financial position of AEP Generating Company as of December 31,
1994 and 1993, and the results of its operations and its 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
STATEMENTS OF INCOME
Year Ended December 31,
1994 1993 1992
(in thousands)
OPERATING REVENUES $236,041 $229,273 $239,232
OPERATING EXPENSES:
Fuel 100,685 89,214 102,438
Rent - Rockport Plant Unit 2 67,304 67,003 65,927
Other Operation 10,978 11,395 10,122
Maintenance 10,379 13,516 10,268
Depreciation 21,615 21,631 21,447
Taxes Other Than Federal Income Taxes 4,866 5,208 4,727
Federal Income Taxes 3,833 4,130 6,871
TOTAL OPERATING EXPENSES 219,660 212,097 221,800
OPERATING INCOME 16,381 17,176 17,432
NONOPERATING INCOME 3,413 4,668 6,706
INCOME BEFORE INTEREST CHARGES 19,794 21,844 24,138
INTEREST CHARGES 9,684 10,887 11,237
NET INCOME $ 10,110 $ 10,957 $ 12,901
STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
1994 1993 1992
(in thousands)
RETAINED EARNINGS JANUARY 1 $ 1,339 $23,173 $32,036
NET INCOME 10,110 10,957 12,901
CASH DIVIDENDS DECLARED 7,181 32,791 21,764
RETAINED EARNINGS DECEMBER 31 $ 4,268 $ 1,339 $23,173
See Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1994 1993 1992
(in thousands)
OPERATING ACTIVITIES:
Net Income $ 10,110 $ 10,957 $ 12,901
Adjustments for Noncash Items:
Depreciation 21,615 21,631 21,447
Deferred Federal Income Taxes 5,297 5,160 7,258
Deferred Investment Tax Credits (3,430) (3,489) (3,344)
Amortization of Deferred Gain on Sale and
Leaseback - Rockport Plant Unit 2 (7,557) (7,557) (8,453)
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable (1,139) 3,037 (1,385)
Fuel, Materials and Supplies (5,547) 4,563 7,227
Accounts Payable 697 3,951 (2,922)
Taxes Accrued (49) 9,671 13,931
Other (net) 5,847 1,070 1,152
Net Cash Flows From Operating Activities 25,844 48,994 47,812
INVESTING ACTIVITIES
- Construction Expenditures (3,909) (3,124) (3,536)
FINANCING ACTIVITIES:
Capital Contributions Returned
to Parent Company (6,700) (1,300) -
Retirement of Long-term Debt - (55,000) -
Change in Short-term Debt (net) (8,050) 15,250 -
Dividends Paid (7,181) (32,791) (21,764)
Net Cash Flows Used For
Financing Activities (21,931) (73,841) (21,764)
Net Increase (Decrease) in
Cash and Cash Equivalents 4 (27,971) 22,512
Cash and Cash Equivalents January 1 3 27,974 5,462
Cash and Cash Equivalents December 31 $ 7 $ 3 $ 27,974
See Notes to Financial Statements.
BALANCE SHEETS
December 31,
1994 1993
(in thousands)
ASSETS
ELECTRIC UTILITY PLANT:
Production $627,429 $627,502
General 2,658 1,757
Construction Work in Progress 1,441 1,773
Total Electric Utility Plant 631,528 631,032
Accumulated Depreciation 199,264 181,587
NET ELECTRIC UTILITY PLANT 432,264 449,445
CURRENT ASSETS:
Cash and Cash Equivalents 7 3
Accounts Receivable:
Affiliated Companies 19,683 18,689
Other 185 40
Fuel - at average cost 18,368 12,867
Materials and Supplies - at average cost 4,167 4,121
Prepayments 452 731
TOTAL CURRENT ASSETS 42,862 36,451
DEFERRED FEDERAL INCOME TAX ASSETS - 10,975
DEFERRED CHARGES 29,288 30,536
TOTAL $504,414 $527,407
See Notes to Financial Statements.
December 31,
1994 1993
(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 47,735 54,435
Retained Earnings 4,268 1,339
Total Common Shareowner's Equity 53,003 56,774
Long-term Debt 53,340 108,188
TOTAL CAPITALIZATION 106,343 164,962
OTHER NONCURRENT LIABILITIES 2,019 1,736
CURRENT LIABILITIES:
Long-term Debt Due Within One Year 55,000 -
Short-term Debt - Notes Payable 7,200 15,250
Accounts Payable:
General 4,914 5,016
Affiliated Companies 4,592 3,793
Taxes Accrued 3,648 3,697
Interest Accrued 2,955 2,963
Rent Accrued - Rockport Plant Unit 2 6,490 5,588
Other 4,579 1,063
TOTAL CURRENT LIABILITIES 89,378 37,370
DEFERRED GAIN ON SALE AND LEASEBACK -
ROCKPORT PLANT UNIT 2 211,089 218,646
REGULATORY LIABILITIES:
Deferred Investment Tax Credits 80,471 83,901
Amounts Due to Customers for Federal Income Taxes 9,649 20,792
TOTAL REGULATORY LIABILITIES 90,120 104,693
DEFERRED FEDERAL INCOME TAXES 5,465 -
TOTAL $504,414 $527,407
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 cost-based 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 and represent
FERC-approved deferred expenses and revenues, respectively, resulting from
the rate-making process.
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.
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. The rate for production was 3.5% and
for general was 3.8%. Amounts to be used for removal of plant are recovered
through depreciation charges included in rates.
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 depreci-
ation and represents the estimated cost of borrowed and equity funds used to
finance construction projects. The average rates used to accrue AFUDC were
5% in 1994, 8.5% in 1993 and 9.25% in 1992. Since there were no significant
long-term construction projects, AFUDC was not significant in 1994, 1993 and
1992.
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
(KPCo), 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 KPCo (15% of each unit). An agreement with I&M and
VEPCo permits the Company to sell 455 mw of Rockport 1 capacity to VEPCo in
lieu of selling it to I&M through December 31, 1999. I&M purchases 455 mw of
Rockport 2 capacity. Approximately 36% in 1994, 37% in 1993 and 33% in 1992
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
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 deferred taxes are recorded on temporary
differences and not reflected in rates currently, regulatory assets and
liabilities are recorded in accordance with SFAS 71.
Investment Tax Credits
Based on directives of regulatory commissions, the Company reflected
investment tax credits in rates on a deferral basis. Commensurate with rate
treatment deferred investment tax credits are being amortized over the life
of the related plant investment. The Company's policy with regard to invest-
ment tax credits for non-utility property was to practice the flow-through
method of accounting.
Debt
Losses on reacquired debt are deferred and amortized over the term of the
reacquired debt in accordance with rate-making treatment.
Reclassifications
Certain prior-period amounts were reclassified to conform with current-
period presentation.
2. 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,
1994 1993
(in thousands)
9-3/8% due 2014 $ 55,000 $ 55,000
6-5/8% due 2014 (a) 55,000 55,000
Unamortized Discount (1,660) (1,812)
108,340 108,188
Less Portion Due Within
One Year 55,000 -
Total $ 53,340 $108,188
(a) The adjustable interest rate changes every five years and is supported by
a bank letter of credit that expires in September 1995. As a result the
liability is classified as due within one year on the balance sheet.
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
$50 million and further limited by provisions of the bank letter of credit to
$40 million. Lines of credit are shared with AEP System companies and at
December 31, 1994 and 1993 were available in the amounts of $125 million and
$116 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, 1994 and 1993, outstanding
short-term debt consisted of notes payable of $7.2 million and $15.3 million,
respectively, with weighted average interest rates of 6.4% and 3.5%,
respectively.
3. COMMON SHAREOWNER'S EQUITY:
In 1994 and 1993, the Company returned capital contributions to its parent
in the amounts of $6.7 million and $1.3 million, respectively, with approval
of the SEC.
4. 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 $(1,464) $(1,991) $ 577
Deferred 5,297 6,121 6,297
Deferred Investment Tax Credits - - (3)
Total 3,833 4,130 6,871
Charged (Credited) to
Nonoperating Income (net):
Current (10) 1,661 747
Deferred - (961) 961
Deferred Investment Tax Credits (3,430) (3,489) (3,341)
Total (3,440) (2,789) (1,633)
Total Federal Income Taxes as Reported $ 393 $ 1,341 $ 5,238
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 $10,110 $10,957 $12,901
Federal Income Taxes 393 1,341 5,238
Pre-tax Book Income $10,503 $12,298 $18,139
Federal Income Taxes on Pre-tax Book Income
at Statutory Rate (35% in 1994 and 1993
and 34% in 1992) $ 3,676 $ 4,304 $ 6,167
Increase (Decrease) in Federal Income Taxes
Resulting From the Following Items:
Depreciation 1,139 1,154 1,101
Allowance for Funds Used During
Construction (1,070) (1,054) (1,083)
Amortization of Deferred Net Book Gain
on Sale and Leaseback - Rockport
Plant Unit 2 640 640 715
Rockport Plant Unit 2 Investment Tax
Credits included in Taxable Income (net) 374 374 367
Investment Tax Credits (net) (3,430) (3,489) (3,341)
Federal Income Tax Accrual Adjustments (900) (600) 1,400
Other (36) 12 (88)
Total Federal Income Taxes as Reported $ 393 $ 1,341 $ 5,238
Effective Federal Income Tax Rate 3.7% 10.9% 28.9%
The following table shows the elements of the net deferred tax assets
(liabilities) and the significant temporary differences:
December 31,
1994 1993
(in thousands)
Deferred Tax Assets $ 120,006 $ 130,312
Deferred Tax Liabilities (125,471) (119,337)
Net Deferred Tax
Assets (Liabilities) $ (5,465) $ 10,975
Property Related Temporary
Differences $(74,117) $(63,200)
Amounts Due to Customers for
Federal Income Taxes 3,377 7,277
Net Deferred Gain on Sale and
Leaseback - Rockport
Plant Unit 2 64,718 67,033
All Other (net) 557 (135)
Total Net Deferred
Tax Assets (Liabilities) $ (5,465) $ 10,975
The Company joins in the filing of a consolidated federal income tax
return with its affiliates in the American 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 to the
System companies giving rise to them in determining their current tax ex-
pense. 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
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.
5. 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 $112 million and $136 million at December 31, 1994 and 1993,
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. The carrying amount for long-term debt was $108 million at
December 31, 1994 and 1993.
6. RELATED PARTY TRANSACTIONS:
Operating revenues include sales of energy under long-term unit power
agreements to two AEP System companies of $152 million, $145 million and $160
million for the years ended December 31, 1994, 1993 and 1992, 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 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, 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.
7. LEASES:
Future minimum operating lease payments for the lease of Rockport 2 are
$74 million per year for 1995 through 1999 and total $1.7 billion for later
years.
There were no other material lease commitments at December 31, 1994 and
1993.
8. SUPPLEMENTARY INFORMATION:
Year Ended December 31,
1994 1993 1992
(in thousands)
Cash was paid (received) for:
Interest (net of
capitalized amounts) $ 9,367 $10,667 $ 10,922
Income Taxes (1,143) (9,142) (12,204)