AEP GENERATING COMPANY
SELECTED FINANCIAL DATA
Year Ended December 31,
1997 1996 1995 1994 1993
(in thousands)
INCOME STATEMENTS DATA:
Operating Revenues $227,868 $225,892 $231,795 $236,041 $229,273
Operating Expenses 218,828 215,997 218,752 219,625 212,062
Operating Income 9,040 9,895 13,043 16,416 17,211
Nonoperating Income 3,603 3,695 3,685 3,413 4,668
Income Before Interest Charges 12,643 13,590 16,728 19,829 21,879
Interest Charges 3,857 4,159 8,041 9,719 10,922
Net Income $ 8,786 $ 9,431 $ 8,687 $ 10,110 $ 10,957
Year Ended December 31,
1997 1996 1995 1994 1993
(in thousands)
BALANCE SHEETS DATA:
Electric Utility Plant $633,450 $632,257 $631,614 $631,528 $631,032
Accumulated Depreciation 257,191 238,532 218,055 199,264 181,587
Net Electric Utility Plant $376,259 $393,725 $413,559 $432,264 $449,445
Total Assets $419,058 $442,911 $464,879 $479,219 $499,475
Common Stock and Paid-in Capital $ 40,235 $ 45,235 $ 48,735 $ 48,735 $ 55,435
Retained Earnings 2,528 1,886 1,955 4,268 1,339
Total Common Shareholder's Equity $ 42,763 $ 47,121 $ 50,690 $ 53,003 $ 56,774
Long-term Debt (a) $ 69,570 $ 89,554 $ 89,538 $108,340 $108,188
Total Capitalization
and Liabilities $419,058 $442,911 $464,879 $479,219 $499,475
(a) Including portion due within one year.
AEP GENERATING COMPANY
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. Under the terms of the agreement with Indiana Michigan
Power Company, it will buy all of the Company's Rockport capacity
when the agreements with the other two companies expire in 1999 and
2004. 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 decreased $.6 million or 7% as a result of a
reduction in the return on common equity due to a return of capital
to the parent company and a decrease in the return on other capital
due to lower financing costs and increased income attributable to
temporary cash investments.
Income statement items which changed significantly were:
Increase(Decrease)
(dollars in millions) From Previous Year
Amount %
Operating Revenues. . . . . . . $ 2.0 1
Fuel Expense. . . . . . . . . . 4.7 5
Other Operation Expense . . . . (0.7) (6)
Maintenance Expense . . . . . . (0.9) (7)
The increase in operating revenues reflects an increase in
recoverable operating expenses offset in part by the lower returns
on capital discussed above.
Fuel expense increased due to a higher average cost of coal
consumed and the effect of a favorable $1.6 million settlement in
1996 of a coal transportation dispute. Other operation expense
decreased in 1997 due to decreases in pension and benefits costs
and a reduction in the annual FERC assessment fee. The decrease in
maintenance expense in 1997 was due to the effect of a 1996 write-off
of obsolete materials and reduced boiler inspection and repairs
performed on Rockport Plant.
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of
Directors of AEP Generating Company:
We have audited the accompanying balance sheets of AEP Generating
Company as of December 31, 1997 and 1996, and the related
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 financial statements present fairly, in all
material respects, the financial position of AEP Generating Company
as of December 31, 1997 and 1996, and the results of its operations
and its 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
AEP GENERATING COMPANY
STATEMENTS OF INCOME
Year Ended December 31,
1997 1996 1995
(in thousands)
OPERATING REVENUES $227,868 $225,892 $231,795
OPERATING EXPENSES:
Fuel 98,191 93,475 99,635
Rent - Rockport Plant Unit 2 68,283 68,289 66,794
Other Operation 11,506 12,203 13,145
Maintenance 12,408 13,338 11,203
Depreciation 21,614 21,648 21,674
Taxes Other Than Federal Income Taxes 3,542 3,569 2,962
Federal Income Taxes 3,284 3,475 3,339
TOTAL OPERATING EXPENSES 218,828 215,997 218,752
OPERATING INCOME 9,040 9,895 13,043
NONOPERATING INCOME 3,603 3,695 3,685
INCOME BEFORE INTEREST CHARGES 12,643 13,590 16,728
INTEREST CHARGES 3,857 4,159 8,041
NET INCOME $ 8,786 $ 9,431 $ 8,687
STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
1997 1996 1995
(in thousands)
RETAINED EARNINGS JANUARY 1 $1,886 $1,955 $ 4,268
NET INCOME 8,786 9,431 8,687
CASH DIVIDENDS DECLARED 8,144 9,500 11,000
RETAINED EARNINGS DECEMBER 31 $2,528 $1,886 $ 1,955
See Notes to Financial Statements.
AEP GENERATING COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
(in thousands)
OPERATING ACTIVITIES:
Net Income $ 8,786 $ 9,431 $ 8,687
Adjustments for Noncash Items:
Depreciation 21,614 21,648 21,674
Deferred Federal Income Taxes 4,762 5,401 6,947
Deferred Investment Tax Credits (3,444) (3,489) (3,522)
Amortization of Deferred Gain on Sale and
Leaseback - Rockport Plant Unit 2 (5,571) (5,571) (5,571)
Changes in Certain Current Assets and Liabilities:
Accounts Receivable (1,831) 149 840
Fuel, Materials and Supplies 7,705 1,770 (1,293)
Accounts Payable 2,194 (1,584) (412)
Taxes Accrued 517 (94) (651)
Interest Accrued 190 (99) (2,585)
Other (net) 62 (125) (628)
Net Cash Flows From Operating Activities 34,984 27,437 23,486
INVESTING ACTIVITIES - Construction Expenditures (3,907) (2,170) (4,017)
FINANCING ACTIVITIES:
Return of Capital to Parent Company (5,000) (3,500) -
Issuance of Long-term Debt - - 88,368
Retirement of Long-term Debt (20,010) - (111,347)
Change in Short-term Debt (net) 2,175 (12,150) 14,525
Dividends Paid (8,144) (9,500) (11,000)
Net Cash Flows Used For Financing Activities (30,979) (25,150) (19,454)
Net Increase in Cash and Cash Equivalents 98 117 15
Cash and Cash Equivalents January 1 139 22 7
Cash and Cash Equivalents December 31 $ 237 $ 139 $ 22
See Notes to Financial Statements.
AEP GENERATING COMPANY
BALANCE SHEETS
December 31,
1997 1996
(in thousands)
ASSETS
ELECTRIC UTILITY PLANT:
Production $627,803 $627,926
General 3,137 2,931
Construction Work in Progress 2,510 1,400
Total Electric Utility Plant 633,450 632,257
Accumulated Depreciation 257,191 238,532
NET ELECTRIC UTILITY PLANT 376,259 393,725
CURRENT ASSETS:
Cash and Cash Equivalents 237 139
Accounts Receivable - Affiliated Companies 20,710 18,879
Fuel - at average cost 10,107 17,792
Materials and Supplies - at average cost 4,246 4,266
Prepayments 368 804
TOTAL CURRENT ASSETS 35,668 41,880
REGULATORY ASSETS 5,639 5,857
DEFERRED CHARGES 1,492 1,449
TOTAL $419,058 $442,911
See Notes to Financial Statements.
AEP GENERATING COMPANY
December 31,
1997 1996
(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 39,235 44,235
Retained Earnings 2,528 1,886
Total Common Shareholder's Equity 42,763 47,121
Long-term Debt 69,570 89,554
TOTAL CAPITALIZATION 112,333 136,675
OTHER NONCURRENT LIABILITIES 1,259 1,613
CURRENT LIABILITIES:
Short-term Debt - Notes Payable 11,750 9,575
Accounts Payable:
General 6,232 4,265
Affiliated Companies 3,472 3,245
Taxes Accrued 3,420 2,903
Interest Accrued 461 271
Rent Accrued - Rockport Plant Unit 2 4,963 4,963
Other 3,747 3,661
TOTAL CURRENT LIABILITIES 34,045 28,883
DEFERRED GAIN ON SALE AND LEASEBACK - ROCKPORT PLANT UNIT 2 138,901 144,472
REGULATORY LIABILITIES:
Deferred Investment Tax Credits 70,016 73,460
Amounts Due to Customers for Income Taxes 31,375 33,893
Other - 66
TOTAL REGULATORY LIABILITIES 101,391 107,419
DEFERRED INCOME TAXES 31,129 23,849
TOTAL $419,058 $442,911
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 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 cost-based 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. Additions,
major replacements and betterments are added to the plant accounts.
Retirements of plant are deducted from the electric utility plant
in service account and deducted from accumulated depreciation
together with associated removal costs, net of salvage. The costs
of labor, materials and overheads incurred to operate and maintain
utility plant are included in operating expenses.
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 plant was 3.5% and for general plant was 2.8%.
Amounts for removal of plant are recovered through depreciation
charges included in the unit power agreements.
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
were not significant for 1997, 1996 and 1995.
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 own 50% of one unit (Rockport 1) and each lease a
50% interest in the other unit (Rockport 2) from unaffiliated
lessors under an operating lease. The gain on the sale and lease-
back of Rockport 2 was deferred and is being amortized, with
related taxes to reduce the regulated selling price of Rockport
energy, over the initial lease term which expires in 2022.
Rockport 1 went into service in 1984 and Rockport 2 went into
service in 1989.
Unit Power Agreements
Revenues are derived from the sale of Rockport Plant capacity
and energy to other utilities. Under FERC approved unit power
agreements, AEGCo's share of Rockport Plant capacity is sold to two
affiliates, I&M and Kentucky Power Company (KPCo), and an unaffili-
ated utility, Virginia Electric and Power Company (VEPCo). The
agreements provide for the sale of 390 mw of Rockport Plant
capacity (15% of each unit) to KPCo through 2004, the sale of 455
mw of Rockport 1 capacity to VEPCo through 1999 and the sale of the
remaining capacity (455 mw of Rockport 2) to I&M. Under the terms
of the I&M unit power agreement, I&M will purchase AEGCo's entire
share of the Rockport Plant when the unit power agreements with
KPCo and VEPCo expire. Approximately 32% in 1997, 32% in 1996 and
34% in 1995 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 tempo-
rary cash investments. Included as a credit in the cost of
operation is amortization of the deferred gain on the sale of
Rockport 2 and deferred investment tax credits on Rockport 2
reducing unit power prices.
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 No. 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 deferred taxes are recorded on temporary
differences and not reflected in rates currently, deferred income
taxes are provided with related regulatory assets and liabilities
in accordance with SFAS No. 71.
Investment Tax Credits
Based on directives of regulatory commissions, the Company
reflects investment tax credits in rates 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. The Company's
policy with regard to investment tax credits for nonutility
property is to practice the flow-through method of accounting.
Debt
Losses on reacquisition of debt are deferred and amortized over
the 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 billings.
Debt discount and debt issuance expenses are amortized over the
term of the related debt, with the amortization included in
interest charges.
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,
1997 1996
(in thousands)
Series 1995 A due 2025 (a) $35,000 $45,000
Series 1995 B due 2025 (a) 35,000 45,000
Unamortized Discount (430) (446)
Total $69,570 $89,554
(a) An adjustable interest rate can be a daily, weekly, commercial
paper or term rate as designated by the Company. Initially the
Company selected a daily rate which ranged from 2.0% to 5.5% during
1997 and 1.8% to 5.1% during 1996 and averaged 3.6% in 1997 and
3.4% in 1996.
Under the terms of the installment purchase contracts, AEGCo
is required to pay amounts sufficient to enable the payment of
interest and principal on the related pollution control revenue
bonds issued to refinance the construction costs of pollution
control facilities at the Rockport Plant. On the Series 1995 A and
B bonds the principal is payable at maturity or on the demand of
the bondholders. The Company has agreements that provide for
brokers to remarket bonds tendered. In the event the bonds cannot
be remarketed, AEGCo has a standby bond purchase agreement with a
bank that provides for the bank to purchase any bonds not
remarketed. The purchase agreement expires in 2000.
Short-term debt borrowings are limited by provisions of the
1935 Act to $100 million. The standby bond purchase agreement
further limits total debt borrowings (long and short term excluding
the installment purchase contracts) to $80 million. Lines of
credit are shared with American Electric Power (AEP) System
companies and at December 31, 1997 and 1996 were available in the
amounts of $86 million and $115 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. At December 31, 1997
and 1996, outstanding short-term debt consisted of notes payable of
$11.8 million and $9.6 million, respectively, with year-end
weighted average interest rates of 6.4% and 6.8%, respectively.
3. LEASES:
Future minimum operating lease payments for the lease of
Rockport 2 are $74 million per year for 1998 through 2002 and total
$1.85 billion for 2003 through the end of the lease term in 2022.
There were no other material lease commitments at December 31,
1997 and 1996.
4. 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 approximate carrying value and are
based on quoted market prices for the same or similar issues and
the current interest rates offered for instruments of the same
remaining maturities.
5. 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 $(1,478) $(1,928) $(3,613)
Deferred 4,762 5,403 6,952
Total 3,284 3,475 3,339
Charged (Credited) to Nonoperating Income (net):
Current 92 117 92
Deferred - (2) (5)
Deferred Investment Tax Credits (3,444) (3,489) (3,522)
Total (3,352) (3,374) (3,435)
Total Federal Income Taxes as Reported $ (68) $ 101 $ (96)
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 $8,786 $9,431 $8,687
Federal Income Taxes (68) 101 (96)
Pre-tax Book Income $8,718 $9,532 $8,591
Federal Income Taxes on Pre-tax Book Income at
Statutory Rate (35%) $ 3,051 $ 3,336 $ 3,007
Increase (Decrease) in Federal Income Taxes
Resulting From the Following Items:
Depreciation 1,090 1,110 1,082
Allowance for Funds Used During Construction (1,070) (1,070) (1,070)
Rockport Plant Unit 2 Investment Tax Credits
included in Taxable Income (net) 374 374 374
Investment Tax Credits (net) (3,444) (3,489) (3,522)
Other (69) (160) 33
Total Federal Income Taxes as Reported $ (68) $ 101 $ (96)
Effective Federal Income Tax Rate N.M 1.1% N.M.
N.M.= Not Meaningful
The following tables show the elements of the net deferred
tax liabilities and the significant temporary differences giving
rise to such deferrals:
December 31,
1997 1996
(in thousands)
Deferred Tax Assets $ 91,350 $ 94,229
Deferred Tax Liabilities (122,479) (118,078)
Net Deferred Tax Liabilities $ (31,129) $ (23,849)
Property Related Temporary
Differences $(86,334) $(82,550)
Net Deferred Gain on Sale and
Leaseback - Rockport
Plant Unit 2 48,615 50,565
All Other (net) 6,590 8,136
Total Net Deferred Tax
Liabilities $(31,129) $(23,849)
The Company joins in the filing of a consolidated federal
income tax return with its 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 years prior to 1991. Returns for the years 1991
through 1996 are presently open and under audit by the IRS. In the
opinion of management, the final settlement of open years will not
have a material effect on results of operations or cash flows.
6. COMMON SHAREHOLDER'S EQUITY:
In 1997 and 1996, the Company returned capital to its parent
in the amounts of $5 million and $3.5 million, respectively. There
were no other material transactions affecting common stock and
paid-in capital in 1997, 1996 and 1995.
7. RELATED PARTY TRANSACTIONS:
Operating revenues include sales of energy under long-term unit
power agreements to two AEP System companies of $156 million, $153
million and $154 million for the years ended December 31, 1997,
1996 and 1995, 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 the parent company,
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.
8. SUPPLEMENTARY INFORMATION:
Year Ended December 31,
1997 1996 1995
(in thousands)
Cash was paid (received) for:
Interest (net of
capitalized amounts) $ 3,220 $ 3,834 $10,234
Income Taxes (1,698) (1,763) (3,516)