ML17334B092

Indiana & Michigan Electric Co,Annual Rept 1986. Projected Cash Flow for 1987 encl.W/870518 Ltr

ML17334B092
Person / Time
Site:	Cook
Issue date:	12/31/1986
From:	Alexich M INDIANA MICHIGAN POWER CO. (FORMERLY INDIANA & MICHIG
To:	Murley T NRC OFFICE OF ADMINISTRATION & RESOURCES MANAGEMENT (ARM)
References
AEP:NRC:0909C, AEP:NRC:909C, NUDOCS 8705270419
Download: ML17334B092 (38)

Text

REQULATO INFORMAl ION DISTRIBUTION TEN (RIDS)

'r'CCESSION,NBR: 870527041 9 DOC. DAl E: Bb/1 2/31 NOTARIZED: NO DOCKET N FAC Ik: 50-315 Donald C. Cook Nuclear Pover Planti Unit 1 > Ind iana 0 050003f 5 50-31b Donald C. Cook Nuclear PoI.ier Planti Uriit 24 Ind iana Pr 05000316 AUTH. NAME AUTHOR AFFILIATICIN ALEXICH> M. P. Indiana Lic Michigan Electric Co.

REC IP. NAME RECIPIENT AFFILIATE ll~N MURLEY> T. E. Document Control BI anch (Document Control Des." )

SUBJECT:

"Indiana 5 Michigan Electric Coi Annual Rept 198b. " W/870of8 1tr.

DISTRIBUTION CODE: N004D COPIES RFCEIVED: LTR l ENCL 3 SIZE: Q TITLE: 50. 71(b) Annual Financial Repor i.

NOTES:

REC IP I ENT COPIES RECIPIENT COP IP~

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INDIANA 8 NICHIGAN ELECTRIC CONPANY P,O, BOX 16631 COLUMBUS, OHIO 43216 Mav 18, 1987 AEP'NRC:0909C 10 CFR 50.71(b) 6 140.21(e)

Donald C. Cook Nuclear Plant Unit Nos. 1 and 2 Docket Nos. 50-315 and 50-316 License Nos. DPR-58 and DPR-74 FINANCIAL INFORMATION FOR INDIANA 6 MICHIGAN ELECTRIC COMPANY U.S. Nuclear Regulatory Commission Attn: Document Control Desk Washington, D.C. 20555 Attn: T. E. Murley

Dear Mr. Murley:

Enclosure 1 contains the Indiana 6 Michigan Electric Company's (I&MECo) annual report for 1986. Enclosure 2 contains a copy of 16MECo's projected cash flow for 1987. These reports are submitted pursuant to 10 CFR 50.71(b) and 10 CFR 140.21(e).

This document has been prepared following Corporate procedures which incorporate a reasonable set of controls to insure its accuracy and completeness prior to signature by the undersigned.

Very truly yours, M. P. Al xich Vice President cm Enclosures cc: John E. Dolan (w/o enclosures)

W. G. Smith, Jr. - Bridgman (w/o enclosures)

R. C. Callen (w/o enclosures)

G. Charnoff (w/o enclosures)

G. Bruchmann (w/o enclosures)

NRC Resident Inspector - Bridgman A. B. Davis - Region III po J

il

'Enclosure 2 to AEP:NR :0909C 1987 Internal Cash Plow Projection for Donald C. Cook Nuclear Plant, (Millions)

Actual Projected 1986 1987 Net income after taxes 152.5 152 Less dividends paid 139.5 136 Retained earnings 13.0 16 Adjustments:

Depreciation and amortization 107.9 117 Deferred income taxes and investment tax credits 49.5 10 AFUDC (52.0) (51)

Total adjustments 105.4 76 Internal cash flow 118.4 92 Average quarterly cash flow 29.6 23 Average cash balances and short-term investments 49.0 35 Total 78.6 58

% Ownership in all operating nuclear units: Unit 1 and Unit 2 100%

Maximum Total Contingent Liability $ 20.0 million (2 units)'

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0 0 0 ANNUALREPORT 1986 AMERICAN ELECTRIC POWER SYSTEM 8705270419 Qgos(Q ADOCK 0 000315 'DR I P DR/

Contents Background of the Company Selected Financial Data Management's Discussion and Analysis of Results of Operations and Financial Condition 5-7 Auditors'pinion Consolidated Statements of Income Consolidated Balance Sheets 10-11 Consolidated Statements of Sources and Applications of Funds 12 Consolidated Statements of Retained Earnings 13 Notes to Consolidated Financial Statements 14-25 Operating Statistics 26-27 Directors and Officers of the Company 28 Dividends and Price Ranges of Cumulative Preferred Stock 29

INDIANA& MICHIGANELECTRIC COMPANY One Summit Square, P.O. Box 60, Fort Wayne, Indiana 4680I Background of the Company INDtANA & MrcHroAN ELEcnuc CoMpANY (the Company), a subsidiary of American Electric Power Company, Inc. (AEP), is engaged in the generation, purchase, transmission and distribution of electric

, power. The Company was organized under the laws of Indiana on February 21, 1925, and is also authorized to transact business in Michigan and West Virginia. Its principal executive offices are in Fort Wayne, Indiana.

The Company has two wholly owned subsidiaries; they are Blackhawk Coal Company and Price River Coal Company, which were formerly engaged in coal-mining operations.

The Company serves approximately 457,000 customers in northern and eastern Indiana and a portion of southwestern Michigan. Among the principal industries served are transportation equipment, primary metals, fabricated metal products, electrical and electronic machinery, and rubber and plastic products.

In addition, the Company supplies wholesale electric power to other electric utilities, municipalities and electric cooperatives.

The Company's generating plants and important load centers are interconnected by a high-voltage transmission network. This network in turn is interconnected either directly or indirectly with the following other AEP System companies to form a single integrated power system: AEP Generating Company, Appalachian Power Company, Columbus and Southern Ohio Electric Company, Kentucky Power Com-pany, Kingsport Power Company, Michigan Power Company, Ohio Power Company and Wheeling Electric Company. The Company is also interconnected with the following other utilities: Central Illinois Public Service Company, The Cincinnati Gas & Electric Company, Commonwealth Edison Company, Consumers Power Company, Illinois Power Company, Indiana-Kentucky Electric Corporation (a sub-

+sidiary of Ohio Valley Electric Corporation), Indianapolis Power & Light Company, Northern Indiana Public Service Company and Public Service Company of Indiana, Inc.

Selected Financial Data Year Ended December 31, 1986 1985 1984 1983 1982 (in thousands)

INCOME STATEMENTS DATA:

OPERATING REvENUEs ELEcrRIC .......... $ 1,069,359 $ 1,059,903 $ 965,972 $ 868,980 $ 809,803 TOTAL OFBRATINO EXFBNSBS ............... 878 215 868,014 785,814 686,237 634,858 OPERATING INCOME 191,144 191,889 180,158 182,743 174,945 TOTAL OTHER INCOME AND DEDUCTIONS ...... 66 905 76,879 53,044 53,629 48,725 1NCOME EEFORB INIBRFBT CHAROBS ......... 2586049 268,768 233,202 236,372 223,670 NET INTEREST CHARGES 105 568 122,667 91,017 96,496 102,647 CoNsoLIDATED NET INcoME before preferred stock dividend requirements ..... 152,481 146,101 142,185 139,876 121,023 PREFERRED STOCK DIVIDEND REQUIREMENTS .. 26 256 27,056 27,705 28,384 28,628 EAIININOS AFFLICABLE TO COMMON STOCK .... $ 126 225 $ 119,045 $ 114,480 $ 111,492 $ 92,395 December 31, 1986 1985 1984 1983 /1982 (in thousands)

BALANCE SHEETS DATA:

ELEcrRIc UTILITY PLANr $ 3,783,973 $ 3,878,707 $ 3,715,005 $ 3,666,823 $ 3,541,114 ACCUMULATED PROVISIONS FOR DEPRECIATION, DEPLETION AND AMORTIZATION 999 716 938,369 836,963 4760,889 685,789 NET ELECIRIc UTILITY PLANT 2,784,257 2,940,338 2,878,042 2,905,934 2,855,325 TGTAL AssErs 3,669,867 3,559,078 3,463,874 3,343,963 3,135,884 COMMON STOCK, PREMIUMS ON CAPITAL STOCK AND OTHER PAID-IN CAPrrAL ............. 828,347 828,347 828,344 ( 807,925 777,783 RETAINED EARNINGS 113,123 100,130 94,317 95,616 91,756 CUMULATIVEPREFERRED STOCK:

Nol'UBJEcf To MANDAToRY REDEMPrIQN 197,000 197,000 197,000 197,000 197,000 SUBIEcr To MANDATQRY REDEMPrtoN (a) 79,030 86,030 93,197 99,497 104,447 LONG-TERM DEBT (a) 1,421,523 1,442,070, 1,347,623 1,445,704 1,397,475 (a) Including portion due within one year.

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The following are the more significant factors bearing Revenues from retail customers (residential, commercial on the financial condition of Indiana & Michigan Electric and industrial) were up 1.2% in 1986, after increasing by Company and its subsidiaries as reflected in the consoli- 18.4% in 1985. The increase in 1986 retail revenues was dated results of operations. This discussion refers tq the mainly because of additional rate relief coupled with a consolidated financial statements that follow. slight increase in energy sales partially offset by lower fuel cost recoveries. The slight increase in 1986 energy sales RESULTS OF OPERATIONS included an increase in industrial and commercial sales of

¹t Income 2.1% and 1.3%, respectively, partially offset by a decrease of 1.5% in residential sales. The increase in energy sales Consolidated net income before preferred dividend re- to industrial customers, the fourth consecutive year of quirements increased by 4.4% in 1986 and 2.8% in 1985. growth, reflected a continuation of a recovery in the in-The 1986 increase resulted primarily from lower fixed dustrial sector of the Company's service territory. The in-charges for interest and increased miscellaneous nonoper- crease in 1985 revenues was due primarily to higher rates.

ating income less deductions due predominantly to a de- Revenues from energy sales to other utilities remained crease in certain costs associated with a subsidiary's Utah virtually unchanged despite a 3.5% rise in kwh sales, and mining properties. dropped 5.7% in 1985 on a 20.9% drop in kwh sales.

The proportion of allowances for funds used during con- Although kwh sales rose in 1986, revenues remained flat struction (AFUDC) included in net income before preferred because of a lower average realization per kwh sold. Com-dividend requirements remained even with the previous petition and price cutting in the wholesale market were year: 34.1% (27.2% net of income taxes) in 1986 and directly responsible for the reduced realization per kwh.

33.3%'27.1% net of income taxes) in 1985. This is in The decrease in 1985 kwh sales, caused primarily by lower contrast to 82.1% (66.0% net of income taxes) in 1984. sales to neighboring utilities, was partially offset by in-The decrease in the AFUDC percentage in 1985, compared creased rates charged by the Company to its wholesale with 1984, was largely the result of a decrease in construc- customers. The highly competitive wholesale marketplace tion work in progress subject to such allowance due to the is expected to continue in the near future since a number commercial operation of Rockport Plant Unit No.' (Rock- of nonaffiliated midwestern utilities have capacity to sell.

port 1) in late 1984. See.Note 1 of the Notes to Consolidated The Company has a long-term contract that expires on Financial Statements for a description of AFUDC. December 31, 1987 to provide 400,000 kilowatts of energy Another item affecting earnings was a deferred return (200,000 kilowatts after February 1, 1987) to a nonaffil-recorded by the Company on its investment in Rockport iated utility. This contract contributed approximately 12%,

Unit 1. The deferred return represented 28.5% of net in- 12% and 11% of the Company's total operating revenues come in 1986 and 41.3% in 1985. See Note 3 of the Notes and 37%, 37% and 32% of the Company's earnings ap-to Consolidated Financial Statements. plicable to common stock before any pro-forma adjust-ments for the AEP System Interchange Power Pool (Pool)

Operating Revenues and Expenses in 1986, 1985 and 1984, respectively. If this contract did Consolidated operating revenues increased slightly in not exist the Company would'have been required to make 1986 over the previous year compared to a 9.7% increase payments in a lesser amount, or alternatively been entitled in 1985. The increase in 1986 revenues was mostly due to to certain receipts, due to the operation of the Pool. After additional rate relief and a small increase in sales of electric these pro-forma adjustments, the contract contributed ap-energy partially offset by reduced fuel cost recoveries. In proximately 18%, 17% and 24% of such earnings for such 1985, kilowatt-hour (kwh) sales decreased 10.5% primar-respective years ily due to a drop in kwh sales to wholesale customers.

Operating revenues increased in 1985 even with this sales decline, primarily due to rate relief along with increased recovery of fuel costs.

The Company has reflected the reduction in revenues Depreciation expense increased in both 1986 and 1985.

resulting from the February 1 reduction in the contract in The increase in 1985 was due mainly to the commercial its petition before the Public Service Commission of In- operation of Rockport 1. The 1986 increase was due largely diana for a rate increase. The Company can give no as- to the amortization of previously deferred Rockport 1 costs.

surance that it will receive such relief or arrange other Federal income taxes increased 31.4% in 1986 compared transactions and failure to receive such relief or arrange to a modest increase in 1985. The 1986 increase in Federal other transactions could have a material adverse effect on income taxes was due primarily to an increase in pre-tax the Company's net income. book operating income and changes in certain book/tax Purchased and interchange power expense decreased timing differences, the tax effects of which are accounted 23.9% in 1986 following a 23.2% increase in 1985. The for on a flow-through basis.

changes in 1986 and 1985 were mostly caused by the un- Total interest charges decreased 8.9% in 1986 after a availability of the Donald C. Cook Nuclear Plant Unit small decrease in 1985. The 1986 decrease resulted from No. 1 (Cook I) during 1985, because of the 10-year an- the Company's replacement of high-interest bonds with niversary service outage required by the Nuclear Regula- bonds having lower interest rates.

tory Commission. When Cook 1 was returned to service, Egects of Inflation the purchased and interchange power transactions were no Inflation has had an effect on the Company's consoli-longer needed to meet the Company's load requirements.

dated revenues, expenses and net income before preferred In addition, the purchase of an affiliated company's share stock dividend requirements that is not readily evident in of the generation of Rockport 1 further increased purchased conventional financial statements. Over the past thee and interchange power expense in 1985.

Fuel expense, the single largest expense of the Com- years, consolidated revenues showed a slight increase on an historical basis; however, when adjusted for, the effects pany, increased by 8.7% and 11.4% in 1986 and 1985, respectively. In 1986 the consumption of fuel increased as of inflation they remain relatively flat. Most of the Com-pany's assets are long-lived property, plant arid equipment a result of a higher generation level mostly the result of acquired over a period of years. The depreciation of these Cook 1 being returned to. service as explained above. In assets charged to income is based on'historical cost and 1985 fuel expense increased due primarily to the commer-cial operation of Rockport 1 as well as an increase in other would be substantially greater when adjusted for the cost internal fossil generation. This relatively more expensive of replacing these resources at current cost. However, the rate-making process limits the Company to recovery of the fossil generation was used to help offset the decrease in nuclear generation available because of the Cook 1 outage historical cost of assets. If the income statement were ad-justed for inflation, net income would be substantially discussed earlier. Future fuel expense will be affected by lower. The low rate of inflation over the past several years generation levels, supply-and-demand factors, contractual did not eliminate these effects but rather minimized the agreements between the coal industry and the United Mine variation from year to year.

Workers of America and the possibility of more stringent environmental restrictions on the burning of certain types of coal. Whether or not future increases in fuel costs will affect earnings adversely will depend on the Company's continued ability to recover such costs promptly in the face of efforts by some consumer groups and others to delay or reduce rate increases and to eliminate or reduce the extent of coverage of fuel-adjustment clauses.

Maintenance expense had a small decrease in 1986 but increased 28.7% in 1985. The 1985 increase included the expense of the 10-year anniversary service outage of Cook 1, the commercial operation of Rockport 1, and the failure of step-up transformers at Rockport 1.

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES

- LIQUIDITYAND CAPITAL RESOURCES The Company can issue additional long-term debt and preferred stock only if it complies with earnings-coverage Construction and Financing Program requirements contained in its mortgage bond and debenture The Company has a construction program to build, ac- indentures and charter. These provisions do not prevent quire, improve and replace plant, property and equipment certain types of pollution-control revenue bond financings used for the generation, transmission and distribution of by public bodies on behalf of the Company, but the levels electricity and for other utility services. Construction ex- of coverage under them may affect the cost and marketa-penditures for the three-year period 1987-1989 are esti- bility of such bonds. At December 31, 1986, the long-term mated at $ 748 million. If acid rain legislation similar to debt and preferred stock coverages of the Company were that currently proposed is enacted into law, the Company at least 2.80 and 1 80, respectively.

~

would be required to make substantial additional expend-Cook Nuclear Plant itures. See "Environmental Matters" in Note 10 of the Notes to Consolidated Financial Statements for additional The Cook Nuclear units are exhibiting indications of information. intergranular corrosion (IGC) in the steam generator tub-The need for external funds to support the construction ing, a condition which has developed in other pressurized program is expected to increase. It is expected that ap- water reactors. This has led to a decision to operate Unit proximately'45% of the Company's projected construction No. 2 at 80% power and Unit No. 1 at 90% power as a expenditures for 1987-1989 will be financed with internally steam-generator'ife conservation measure. It is presently generated funds. The additional amounts needed, in excess planned to replace the Unit No. 2 steam generators in late of other available funds, will have to be raised externally, 1988 or 1989, at an estimated cost of $ 160 million, to as in the past, through sales of securities and with invest- correct this condition. The IGC problem in the Unit No. 1 ments in the Company's common equity by AEP. steam generators is occurring at a slower rate than in Unit The Company generally issues short-term debt (com- No. 2, but it is possible that the Unit No. 1 steam gen-mercial paper and bank loans) to provide interim financing erators will also have.to be replaced eventually. However, of construction expenditures in excess of available inter- there are no present plans for such replacement. When the nally generated and"other funds. The Company then pe- Unit No. 2 replacement program occurs, it will require an riodically reduces short-term debt with the proceeds of extended outage, estimated at 12 months. This is not ex-sales of long-term debt securities and preferred stock and pected to have a materially adverse effect on the Compa-with investments in its common equity by AEP. ny's operations or financial results.

The amounts of short-term debt that the Company may Tar Reform Act issue are limited by regulatory restrictions under the Public The Tax Reform Act of 1986, enacted October 22, 1986, Utility Holding Company Act of 1935 and by restrictions provides for extensive revisions to Federal tax law. A major in its charter and in certain debt instruments. At December provision of the Act reduces the corporate income tax rate 31, 1986, the Company had received authorizations from from 46% to 34%, effective July 1, 1987. As a result of the Securities and Exchange Commission to issue a total this and other changes in the tax law, our regulatory com-of approximately $ 220 million of short-term debt, and had missions are reviewing the Act's impact on rates to con-outstanding unused short-term lines of credit with banks sumers in their jurisdictions. While the Company is not of approximately $ 269 million shared with other AEP Sys-,

able to quantify, at this time, the, overall effects on financial tem companies. The lines of credit may be withdrawn at results for all of the Company's jurisdictions, the Company any time by the banks extending them, and in most cases does not anticipate a material impact on net income as a the banks require the maintenance of compensating deposit result of these changes in the tax law. However, provisions balances or the payment of fees in lieu of deposits.

in the Act relating to depreciation lives, repeal of the in-vestment tax credit and taxation of unbilled revenues will result in reduced internal cash flow.

Auditors'pinion Deleitte Heskiiis+Sells 155 fest Broad Street Cofumbus. Ohio 4321&3650 (614) 221-1000 ITT Teterc 4995627 To the Shareowners and the Board of Directors of Indiana S Michigan Electric Company:

We have examined the consolidated balance sheets of Indiana S Michigan Electric Company and its subsidiaries as of December 31, 1986 and 1985 and the related consolidated statements of income, retained earnings and sources and applications of funds for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, such consolidated financial statements present fairly the financial position of the Company and its subsidiaries at December 31, 1986 and 1985 and the results of their operations and their sources and applications of funds for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis.

February 24, 1987

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES Consolidated Statements of Income Year Ended December 31, 1986 1985 1984 (in thousands)

OPERATING REVENUES ELECIRIC $ 1 069 359 $ 1,059,903 $ 965,972 OPERATING EXPENSES:

Operation:

Fuel for Electric Generation 233,241 214,545 192,592 Purchased and Interchange Power (net) 1589684 208,501 169,217 Other 1579500 151,658 161,430 Maintenance 80,171 81,089 63,002 Depreciation and Amortization 101,456 92,895 85,268 Taxes Other Than Federal Income Taxes 519291 46,339 44,921 Federal Income Taxes 95 872 72,987 69,384 Total Operating Expenses 878 215 868,014 785,814 OPERATING INCOME 191 144 191,889 180,158 OTHER INcoME AND DEDUcrtoNs:

Allowance for Other Funds Used During Construction . 259397 26,214 61,361 Deferred Return Rockport Plant 43,438 60,378 3,401 Miscellaneous Nonoperating Income Less Deductions . ~1930) ~9,713) ~11,718)

Total Other Income and Deductions ........ 66 905 76,879 53,044 INCOME BEFORE INTEREST CHARGES 258 049 268,768 233,202 INTEREST CHARGES:

Interest on Long-term Debt . 124,333 134,117 142,719 Interest on Short-term Debt . 6,118 9,119 1,809 Miscellaneous Interest Charges . 1 725 1,909 1,884 Total Interest Charges 132,176 145,145 146,412 Allowance for Borrowed, Funds Used During Construction (credit) 26 608 22,478 55,395 Net Interest Charges 105 568 122,667 91,017 CoNsoLIDATED NET INcoME before preferred stock dividend requirements 152,481 146,101 142,185 PREFERRED STOCK DIVIDEND'REQUIREMENTS 26 256 27,056 27,705 EARNINGS APPLICABLE TO COMMON STOCK $ 126 225 $ 119,045 $ 114,480 Scc IVotcs to Consolidatt d Financial Statcmcnts

Consolidated Balance Sheets December 31, 1986 1985 (in thousands)

ASSETS ELEcTRlc UTILITYPmNr:

Production $ 292399863 $ 2,164,035 Transmlsston 713,398 599,029 Distribution 362,314 340,769 General and Miscellaneous 46,301 229,269 Construction Work in Progress . 422 097 545,605 Total Electric Utility Plant 3,783,973 3,878,707 Less Accumulated Provisions for Depreciation and Amortization 999 716 938,369 Electric Utility Plant Less Provisions 2 784 257 2,940,338 OTHER PRQPERTY AND INVEsTMENm 260 569 74,092 CURRENr Assam:

Cash 3,062 4,503 Special Deposits and Working Funds 41,891 52,281 Temporary Cash Investments (at cost, which approximates market) 4,972 Accounts Receivable:

Customers 89,129 88,743 Associated Companies 5,360 5,611 Miscellaneous 10,7011 7,117 Accumulated Provision for Uncollectible Accounts (609) (526)

Materials and Supplies (at average cost or less):

Fuel 58,463 48,507 Construction and Operation Materials and Supplies 20,947 21,542 Accrued Utility Revenues 49,000 71,615 Prepayments and Other Current Assets 9 727 8,772 Total Current Assets 287 671 313,137 DEFERRED DEBITS:

Unamortized Debt Expense 5,619 5,398 Property Taxes 2,776 2,478 Other Work in Progress . 1,566 2,449 Deferred Nuclear Fuel Disposal Costs 64,546 72,620 Deferred Depreciation and Return Rockport Plant . 134,483 80,313 Other Deferred Debits 128 380 68,253 Total Deferred Debits 337 370 231,511 Total $ 3 669 867 $ 3,559,078 See bootes to Consolidated Financial Statements.

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INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES December 31, 1986 1985 (in thousands)

CAPITALIZATIONAND LIABILITIES CAPITALIZATION:

Common Stock No Par Value:

Authorized 2,500,000 Shares Outstanding 1,400,000 Shares . $ 569584 $ 56,584 Premiums on Capital Stock 381 381 Other Paid-in Capital 771,382 771,382 Retained Earnings . 113 123 100,130, Total Common Shareowner's Equity ............... 941,470 928,477 Cumulative Preferred Stock:

Not Subject to Mandatory Redemption 197,000 197,000 Subject to Mandatory Redemption (less sinking fund requirements due within one year) 75,030 86,030 Long-term Debt (less portion due within one year) ............ 1 410 023 1,302,872 Total Capitalization (less amounts due within one year) . 2 623 523 2,514,379

~ OTHER NONCURRENT LIABILITIES 59 520 45,544 CIIRRENT LIABILITIES: 1 Cumulative Preferred Stock Sinking Fund Requirements Due Within One Year 4,000 Long-term Debt Due Within One Year 11,500 139,198 Short-term Debt:

Notes Payable,. 11,325 Commercial Paper 38,600 Accounts Payable:

General 34,420 35,431 Associated Companies 25,009 34,569 Dividends Declared on Cumulative Preferred Stock ..... 6,414 6,614 Customer Deposits 3,662 3,155 Accrued 'axes 53,472 32,918 Interest Accrued 329143 35,381 Revenue Refunds Accrued . 18,625 Other Current Liabilities 48 521 34,156 Total Current Liabilities 269 066 340,047 CoMMITMENTs AND CQNTINGENcIEs (Note 10)

DEFERRED CREDITS:

Deferred Income Taxes 525,044 492,728 Deferred Investment Tax Credits 180,306 154,745 Other Deferred Credits . 12 408 11,635 Total Deferred Credits . 717 758 659,108 Total $ 3 669 867 $ 3,559,078

Consolidated Statements of Sources and Applications of Funds Year Ended December 31, 1986 1985 1984 (in thousands)

SOURCES OF FUNDS:

Funds from Operations:

Consolidated Net Income . $ 1529481 $ 146,101 $ 142,185 Principal Non-fund Charges (Credits) to Income:

Depreciation and Amortization 107,915 93,460 88,298 Provision for Deferred Income Taxes (net) 24,219 82,163 54,638 Deferred Investment Tax Credits (net) 25,328 46,571 58,078 Amortization of Deferred Nuclear Fuel Disposal Costs 13,247 9,206 4,163 Allowance for Other Funds Used During Construction ....... (25,397) (26,214) (61,361)

Deferred Return Rockport Plant (43,438) (60,378) (3,401)

Other (net) 4 585 3,789 5,187 Total Funds from Operations 258 940 294,698 287,787 Funds from Contributions and Financings:

Contributions and Financings:

Capital Contributions from Parent Company ............... 20,000 Long-term Debt 197,681 144,660 Short-term Debt (net) 49 925 ~110,000) 46,605 Total 247,606 34,660 66,605 Less Retirements of Cumulative Preferred Stock and Long-term Debt 235 432 80,347 103,982.

Net Funds from Contributions and Financings 12 174 ~45,687 37,377 Sales of Property 39 476 52,828 243,579 Decrease (increase) in Working Capital (a) 28 258 73,710 ~115,113 Total Sources of Funds $ 338 848 $ 375,549 $ 378,876 APPLICATIONS OF FUNDS:

Plant and Property Additions:

Gross Addttions to Utility Plant $ 204,942 $ 222,625 $ 297,232 Gross Other Additions 3 933 105 122 Total Gross Additions 208,875 222,730 297,354 Allowance for Other Funds Used During Construction ......... (25 397) ~26,2)4 ~6),361 Net Plant and Property Additions . 183,478 196,516 235,993 Dividends on Common Stock 113,232 113,232 115,779 Dividends on Cumulative Preferred Stock 26,256 27,056 27,705 Deferred Depreciation Rockport Plant ... 12,765 16,652 Other Changes (net) 3 117 22,093 ~601 Total Applications of Funds $ 338 848 $ 375.549 $ 378,876 (a) Excludes Cumulative Preferred Stock Sinking Fund Requirements Due Within One Year, Long-term Debt Due Within One Year and Short-term Debt and is represented by decrease (increase) as follows:

Cash and Cash Items $ 16,803 $ 81,479 $ (129,986)

Accounts Receivable (3,636) 5,497', 15,638 Materials and Supplies . (9,361) 22,402 882 Accrued Utility Revenues 22,615 (26,236) 3,171 Accounts Payable (10,571) (1,687) (24,034)

Dividends Declared on Common Stock ............... (2,660) (14,956)

Taxes Accrued 20,554 6,096 11,854 Revenue Refunds Accrued (18,625) (1,052) 19,579 Other (net) . 10 479 ~10,129) 2,739

$ 28 258 $ 73,710 ~$ I )5,113)

See ¹tes to Consolidated Financial Statements.

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INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES Consolidated Statements of Retained Earnings Year Ended December 31, 1986 1985 1984 (in thousands)

Balance at Beginning of Year $ 100,130 $ 94,317 $ 95,616 Consolidated Net Income 152 481 146, 101 142,185 Total 252 611 240,418 237,801 Deductions:

Cash Dividends Declared:

Common Stock 1139232 113,232 115,779 Cumulative Preferred Stock:

4'/8% Series 495 495 495 4.56% Series 273 273 273

4. 12% Series 165 165 165 7.08% Series 2,124 2,124 2,124 7.76% Series 2,716 2,716 2,716 8.68% Series 2,604 2,604 2,604 12% Series 1,918 2,278 2,615

$ 2.15 Series 3,440 3,440 3,440

$ 2.25 Series 3,600 3,600 3,600

$ 2.75 Series 3,113 3,553 3,865

$ 3.63 Series 5 808 5,808 5,808 Total Deductions 139 488 140,288 143,484 Balance at End of Year 5113 123 $ 100,130 $ 94,317 See iVotes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

1. Significant Accounting Policies: Income Taxes The common stock of the Company is wholly owned by Deferred Federal income taxes are provided to the extent American Electric Power Company, Inc. (AEP). that such amounts are reflected in revenue levels. The Com-The accounting and 'rates of the Company are subject in pany normalizes the effect of tax reductions resulting from certain respects to the requirements of state regulatory bod- investment tax credits utilized in connection with current ies and in certain respects to the requirements of the Federal Federal income tax accruals consistent with rate-making Energy Regulatory Commission (FERC). policies.

The consolidated financial statements include the ac- The Company's consolidated coal subsidiaries generally counts of the Company and two wholly owned subsidiaries use the flow-through method of accounting for investment previously engaged in coal-mining operations. Significant tax credits and practice deferred tax accounting for the intercompany items have been eliminated in consolidation. effects of certain timing differences.

The consolidated financial statements have been prepared on the basis of the accounts which are maintained for FERC Pension Plans purposes. The companies participate with other companies in the AEP System in a non-contributory trusteed plan to provide Electric UtilityPlant; Depreciation and pensions for all their employees, subject to certain eligi-Amortization; Other Property and Investments bility requirements.

Electric utility plant is stated at original cost. Generally, The companies recorded no pension cost for the years the plant of the Company is subject to first mortgage liens. ended December 31, 1986 and 1985. Pension cost for the The Company capitalizes, as a construction cost, an al- year ended December 31, 1984 was approximately lowance for funds used during construction (AFUDC), an $ 2,713,000. In 1985 the companies changed the actuarial item not representing cash income, which is defined in the cost method from the projected benefit method to the proj-applicable regulatory systems of accounts as the net cost ected unit credit method and changed the assumed invest-of borrowed funds used for construction purposes and a ment rate of return used in determining pension expense reasonable rate on other funds when so used. The com- under the plan to 9% from 7%. The 1985 cost was reduced posite rates used by the Company after compounding on a by approximately $ 2,035,000 because of the change in semi-annual basis were 11.5% in 1986, 12.55% in 1985 assumed rate of return and by approximately $ 678,000 and 12.5% in 1984. because of the change in cost method. The actuarial The Company provides for depreciation on a straight- changes made are believed to reflect more appropriate ac-line basis over the estimated useful lives of the property. tuarial assumptions and will position the plan to reflect The current provisions are determined largely with the use forthcoming changes in accounting for pension costs sched-of functional composite rates as follows: uled to take effect in 1987. Pension costs provide for the Functional Composite cost of currently accruing benefits and amortization of, and of Annual

'.6%

Class interest on, unfunded prior service costs amortized over

~PlO fl Rates Production:

if periods of up to 30 years. Pension cost, determined under Steam Nuc1ear 4.0% the forthcoming accounting standards, would not be sig-Steam Fossil-fired . 3.7% nificantly different. The companies make annual contri-Transmission 2.1% butions to the plan equal to the amounts accrued for pension Distribution General 2.9% expense. In addition to providing pension benefits, the companies provide certain health care benefits for retired Operating expenses are charged with the costs of labor, employees. Substantially all of the companies'mployees materials, supervision and other costs incurred in main-may become eligible for these benefits if they have com-taining the properties. Property accounts are charged with pleted 10 years of continuous service at retirement. The costs of betterments and major replacements of property, cost of retiree health care benefits is recognized as expense and the accumulated provisions for depreciation are when paid. In 1986, 1985 and 1984, these costs totaled charged with retireinents, together with removal costs less

$ 1,061,000, $ 780,000 and $ 852,000, respectively.

salvage.

Other property and investments are generally stated at cost.

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES A comparison of the plan's accumulated benefits and net 2. Mining Operations:

assets as of January 1, 1986, the date of the most recent actuarial study, is presented below: In May 1986, Blackhawk Coal Company (Blackhawk),

Janu 1, a subsidiary formerly engaged in coal-mining operations, 1986 1985 consummated an agreement to lease or sublease certain of (in thousands) its coal rights, land and related mining equipment and fa-Actuarial present value of cilities in Carbon County, Utah. In connection with the accumulated plan benefits: lease/sublease transaction, Blackhawk transferred Vested $ 75,124 $ 67,421 Nonvested .......... 8,233 7.945 $ 107,000,000 of its investment from general and miscel-laneous electric utility plant to other property and invest-

$ 83,357 $ 75,366 ments. The remainder of its investment in this property not Net assets available for benefits $ 128,726 $ 108,534 recovered in the lease/sublease transaction, approximately The assumed rate of return used by the actuary in deter- $ 50,000,000, is subject to recovery in the future from mining the actuarial present value of accrued benefits was wholesale customers in accordance with a FERC settlement 8% at each valuation date. agreement and was transferred to other deferred debits. See The Company is of the opinion that comparing the ac- Note 10.

tuarial value of accumulated plan benefits with net assets Blackhawk's remaining partially developed Carbon available for benefits, as in the above table, may tend to County, Utah coal rights not being recovered from whole-be misleading. The plan as required by the Employee sale customers or through the above lease/sublease trans-Retirement Income Security Act of 1974 (ERISA) is action, with a net book value of approximately being funded on an ongoing basis on the assumption that $ 51,000,000, have been retained as an investment and it will be in existence for many years to come. However, transferred to other property and investments.

the statement of actuarial value of accumulated plan ben-efits as required by the Financial Accounting Standards

3. Rate Matters:

Board is essentially a hypothetical plan termination cal-culation not taking into account future salary and wage The Company has been engaged in rate proceedings for increases or future service. Additionally, it should be rec- the inclusion in rate base of construction costs of Unit 1 ognized that net assets, which are at fair value, will fiuc- of the Rockport Plant (Rockport 1). Rockport 1 is a tuate from time to time, which may create erroneous 1,300,000-kilowatt generating unit jointly owned by the impressions of the status of the long-term funding process. Company and AEP Generating Company (AEGCo), also However, the 1987 pension accounting changes referred an AEP subsidiary. The unit began commercial operation to above do provide for including the effect of future salary on December 10, 1984. The Company and AEGCo have increases on accumulated plan benefits, in addition to expended $ 725,847,000 through December 1986 on the changing the pension cost determination. As such, the new construction of a second unit at the Rockport Plant (Rock-standard would provide for a more appropriate ongoing port 2), which is expected to be completed in 1989 at an basis of comparing accumulated plan benefits with assets. estimated cost of $ 1.3 to $ 1.4 billion. The Company is committed to purchase 70% of AEGCo's share of Rock-Other port 2 energy. The inclusion of Rockport 2 in rate base, The'Company accrues unbilled revenues for electric the recovery of related purchased power and the timing of service rendered subsequent to the last billing cycle through such are dependent on the outcome of future regulatory month-end. proceedings.

Debt discount or premium and debt expenses are being amortized over the lives of the related debt issues and the amortization tliereof is included within miscellaneous interest charges.

Operating revenues derived from a certain wholesale'ustomer represent approximately 12% of total operating revenues for 1986, 12% for 1985 and 11% for 1984.

15

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The Public Service Commission of Indiana (PSCI) ap- In December 1986, the Financial Accounting Standards proved a two-step rate increase with the first step effective Board (FASB) issued Statement of Financial Accounting in December 1984 and the second step effective one year Standards No. 90, "Regulated Enterprises Accounting later. The first step and the second step excluded from rate for Abandonments and Disallowances of Plant Costs,"

base $ 315,153,000 and $ 245,000,000, respectively, of which amended Statement No. 71, "Accounting for the construction costs associated with Rockport 1 but allowed Effects of Certain Types of'Regulation," as it relates to the Company to accrue a deferred return based on a rate the accounting for plant abandonments and partial rate dis-equal to its AFUDC rate and to defer annual depreciation allowances, which presently does not affect the Company.

expense on the amounts excluded from rate base. The The FASB continues to consider additional amendments second-step rate levels provide for amortization of the first- to FASB 71 which, among other things, will address phase-step deferred return and deferred depreciation to cost of in plans.

service over a 30-year period. In May 1986, the Company In October 1986, the FERC approved an offer of settle-petitioned the PSCI for a rate increase which included plac- ment concerning wholesale rates that AEGCo may charge ing in rate base the remainder of Rockport 1 and the am- under its Unit Power Agreements with the Company and ortization of the second-step'eferred return and deferred Kentucky Power Company (KEPCo). The Company Unit depreciation to cost of service over a 30-year period. Power Agreement provides for the sale by AEGCo to the The FERC issued orders in 1985, providing for a total Company of 50% of the total output of the Rockport Plant.

increase of approximately $ 47,216,000 in three steps. Step Pursuant to an agreement between the Company and I of approximately $ 17,446,000 was effective in October KEPCo, AEGCo has entered into a unit power agreement 1984; Step II of approximately $ 17,534,000 was effective with KEPCo to sell KEPCo 15% of the total output of in December 1984; and Step III of approximately Rockport Plant. As a result, the Company purchased 35%

$ 12,236,000 was effective in December 1985. The Step II of the output of the Rockport Plant from AEGCo through and Step III rates excluded from rate base $ 170,724,000 December 31, 1986. The Company has also entered into and $ 132,721,000, respectively, of construction costs as- an agreement with an unaffiliated utility which permits sociated with Rockport 1 but allowed the Company to ac- AEGCo to sell from January 1, 1987 through December crue a deferred return based on a rate equal to its AFUDC 31, 1999 the 35% of the output of Rockport 1 which the rate and to defer annual depreciation expense on the Company is obligated to purchase from AEGCo. The amounts excluded from rate base. The Step III rate levels FERC had permitted the Unit Power Agreements between provide for amortization of the Step II deferred return and affiliated companies to become effective subject to refund deferred depreciation to cost of service over a 30-year December 10, 1984. As a result of the FERC approval of period. the settlement offer, the Company received from AEGCo As a result of the above rate proceedings, the Company a refund of approximately $ 4,700,000 in November 1986 has recorded through December 31, 1986 and 1985 a net which was credited to purchased and interchange power deferred return of $ 105,065,000 and $ 63,661,000, respec- expense.

tively, and net deferred depreciation of $ 29,418,000 and KEPCo is involved in litigation at both the state and

$ 16,652,000, respectively, on Rockport 1. Federal levels related to its participation in the Unit Power The Company has received regulatory approvals in each Agreement with AEGCo. In the event that KEPCo does of its jurisdictions to utilize a fuel-cost-levelization plan in not pay for its future purchases under the Unit Power connection with a certain long-term coal supply contract Agreement, the Company would be contractually obligated for Rockport 1. Under these plans, the difference between to make such payments and purchase the related energy.

actual fuel costs and average fuel costs was deferred through June 1986 with monthly amortization to fuel ex-pense of Rockport 1 beginning in July 1986. At December 31, 1986, the Company had approximately $ 33,585,000 deferred pursuant to these plans.

16

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES

4. Federal Income Taxes:

The details of Federal income taxes as reported are as follows:

Year Ended December 31.

1986 19&5 1984 (in thousands)

Charged (Credited) to Operating Expenses:

Current (net) $ 44,340 $ (55,991) $ (45,036)

Deferred (net) 26,208 82,407 56,342 Dcferrcd Investment Tax Credits (net) 25,324 46,571 58,078 Total 95,872 72,987 69,384 Y

Current Dcferrcd (net)

Defcrrcd Investment Tax Credits Total (net)......

Ch ed (Credited ) to Other Income and Deductions:

Total Federal Income Taxes as Reported

~...

(7,414)

(1,989)

$ 86,473 4

(9.399)

(7,706)

(244)

(7,950)

$ 65,037 (8,429)

(1,704)

(10,133)

$ 59,251 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 in the Consolidated Statements of Income.

Year Ended December 31, 1986 1985 1984 (in thousands)

Consolidated Net Income Bcforc Preferred Stock Dividend Requirements . $ 152,481 $ 146,101 $ 142,185 Federal Income Taxes 86,473 65,037 59.251 Pre-tax Book Income . $ 238,954 $ 211,138 $ 201,436 Federal Income Taxes on Pre-Tax Book Income at Statutory Rate (46%) $ 109,919 $ 97,123 $ 92,661 Increase (Decrease) in Federal Income Taxes Resulting From the Following Items on Which Deferred Taxes Arc Not Provided:

Excess of Book Over Tax Depreciation 6,242 4,930 2,659 Allowance for Funds Used During Construction and Miscellaneous Items Capitalized on the Books but Deducted for Tax Purposes (15,529) (15,633) (31,437)

Deferred Return Rock port Plant (9,228) (14,929) (820)

Investment Tax Credits Not Deferred 751 (82) 295 Amortization of Deferred Investment Tax Credits . (4,530) (4,786) (2,233)

Other (1,152) (1.586) (1,874)

Total Federal Income Taxes a's Reported $ 86,473 $ 65,037 $ 59.251 Effective Federal Income Tax Rate 36.2% 30.8% 29.4%

17

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The following are the principal components of Federal income taxes as reported:

Year Ended Dcccmber 31.

1986 1985 1984 (in thousands)

Current:

Federal Income Taxes $ 68,308 $ (11,824) $ 26,589 Investment Tax Credits . (31,382) (51,873)(a) (80.054)(a)

Total Current Federal Income Taxes (net) 36;926 (63,697) (53.465)

Deferred:

Depreciation (liberalized, ADR and ACRS) . 26,272 33,099 22,582 Allowance for Bonowcd Funds Used During Consuuction and Miscellaneous Items Capitalized 9,448 6,511 24,168 Percentage Repair Al!owancc 1,452 (329) 14,420 (b)

Nuclear Decommissioning Costs . (4,820) (4,820) (4,945)

Unrecovcrcd and Lcvelized Fuel . (2,466) 14,506 (415)

Adjustments for Revenue Refunds 9,052 (9,052)

Nuclear Fuel Lease Adjustments . (638) 9,530 (4,141)

Spent Nuclear Fuel Fee (7,845) (3,175) (4,084)

Unbilled Rcvcnue (4,247) 6,804 1,219 Deferred Return Rockport Plant 9,818 12,791 745 Other (5,031) (2,240) (5,897)

Investment Tax Credits Applicable to Certain Deferred Income Taxes 2,276 434 20,038 Total Defened Federal Income Taxes (net) 24,219 82,163 54,638 Total Deferred Investment Tax Credits (nct) 25,328 46,571 58,078 Total Federal Income Taxes as Reported $ 86,473 $ 65,037 $ 59,251 (a) The Company was able to utilize investment tax credits in excess of the statutory limitation as a result of thc lack of available credits of other System companies with taxable income.

(b) Based on Intcmal Revenue Service regulations issued in 1984, the Company elected percentage repair allowance on thc 1983 tax return and filed amended tax returns for 1981 and 1982. The deferred taxes provided in 1984 represent the cumulative effect of these elections as well as 1984 current year accruals.

The companies join in the filing of a consolidated Federal The System has reached a settlement with the Internal income tax return with their affiliated companies in the Revenue Service (IRS) for the majority of issues from the AEP System. The allocation of the AEP System's consol- audit of the consolidated Federal income tax returns for the idated Federal income tax to the System companies is in years 1974-1976. Several issues regarding these returns accordance with SEC rules under the Public UtilityHolding are not covered by the settlement agreement and are subject Company Act of 1935. These rules permit the allocation to future disposition. Returns for the years 1977-1982 have of the benefit of current tax losses to the System companies been reviewed by the IRS, and additional taxes for these giving rise to such losses in determining taxes currently years have been proposed, some of which the System com-payable. The tax loss of the System parent company, Amer- panies have protested or will be protesting. In the opinion ican Electric Power Company, Inc., is allocated to its sub- of management, the final resolution of open matters will sidiaries with taxable income. With the exception of the not have a material effect on the earnings of the Company.

loss of the parent company, the method of allocation ap-proximates a separate return result for each company in the 5. Common Stock, Premiums on Capital Stock and consolidated group. Consolidated investment tax credits Other Paid-in Capital:

utilized are allocated to the System companies giving rise The Company received from its parent cash capital con-to them. tributions of $ 20,000,000 in 1984. In 1985 and 1984 a At December 31, 1986, the companies'umulative net credit to other paid-in capital of $ 3,000 and $ 419,000, amount of income tax timing differences on which deferred respectively, represented the excess of par value over cost taxes have not been provided totaled $ 493,000,000. of cumulative preferred stock reacquired by the Company to meet sinking fund requirements. There were no other changes in any of the aforementioned accounts in 1986, 1985 or 1984.

18

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES

6. Retained Earnings:

Various restrictions on the use of retained earnings for cash dividends on common stock and other purposes are contained in or result from covenants in mortgage indentures, debenture and bank loan agreements, charter provisions, and orders of regulatory authorities. Approximately $ 45,900,000 at December 31, 1986, was so restricted.

7. Cumulative Preferred Stock:

At December 31, 1986, authorized shares of cumulative preferred stock were as follows:

Par Value Shares Authorized

$ 100 2,250,000 25 11,200,000 The cumulative preferred stock is callable at the option of the Company at the price indicated plus accrued dividends. The involuntary liquidation preference is par value. Unissued shares of the cumulative preferred stock'ay or may not possess mandatory redemption characteristics upon issuance.

A. Cumulative Preferred Stock Not Subject To Mandatory Redemption:

Number of Shares Redeemed Amount Year Ended December 31. Shares December 31, Series Call Price 1986 1985 1984 O~uuaaadta 1986 1985 (in thousa nds) 4'h% $ 106.125 $ 100 120,000 $ 12,000 $ 12,000 4.56% .. 102 100 60,000 6,000 6,000 4.12% .. 102.728 100 40,000 4,000 4,000 7.08% .. 102.91 100 300,000 30,000 30,000 7.76%'. 103A4 100 350,000 35,000 35,000 8.68% .. 105.27 100 300,000 30,000 30,000

$ 2.15 26.61 25 1,600,000 40,000 40,000 26.69 25 1,600,000 40,000 40,000

$ 197,000 $ 197,000 B. Cumulative Preferred Stock Subject to Mandatory Redemption:

Number of Shares Redeemed Amount Par Year Ended December 31, Shares December 31, Series (a) Call drlua Valua l988 l988 l984 ~Outslandin 1986 1985 (in thousands) 12% (b) $ 106 $ 100 30,000 31,673 27,527 137,325 $ 13,733 $ 16,733

$ 2.75 (c) 27.07 25 160,000 160,000 141,900 1,011,900 25,297 29,297

$ 3.63 (d) 27.72 25 1,600,000 40.000 40,000 79,030 86,030 Less Sinking Fund Requirements Due Within One Year . 4,000

$ 75.030 $ 86,030 (a) 'Ihe sinking fund provisions of thc series subject to mandatory redemption aggregate $ 2,000,000 in 1987, $ 2,232,500 in 1988, $ 4,797,500 in 1989,

$ 5,500,000 in 1990 and 1991. Unless all sinking fund provisions have been met; no distribution may be made on thc common stock.

(b) A sinking fund for the 12% series requires the Company to provide, on or before October 1 of each year, for thc redemption of 15,000 shares of such series. This provision may be satisfied thmugh shares previously purchased or by redemption at $ 100 a share. The Company has the right, on each sinking fund date, to redeem an additional 15,000 shares. At December 31, 1986, thc Company had reacquired 27,675 shares in anticipation of future sinking fund requirements.

(c) A cumulative sinking fund for the $ 2.75 series requires the Company to redeem 80,000 shares on or before October 1, of each year. The Company has the option to credit shares purchased or otherwise acquired in lieu of redeeming shares for thc sinking 1'und and has thc noncumulative option to double the number of shares to be redeemed in any year. At December 31, 1986, the Company had acquired 188,100 shares in anticipation of future sinking fund requirements.

(d) Commencing with thc year 1987, a cumulative sinking fund for the $ 3.63 series requires thc Company to redeem 80,000 shares on or before January 1, of each year. 'Ihe Company has the option to credit shares purchased or otherwisc acquired in lieu of redeeming shares for the sinking fund and has the noncumulative option to double thc number of shares to be redeemed in any year on and after January 1, 1987.

19

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

8. Long-term Debt, Lines of Credit, and Sinking fund debentures outstanding were as follows:

Compensating Balances: December 31, 1986 1985 Long-term debt by major category was outstanding as (in thousands) follows: $. $ 7,698 December 31, -

8,357 9,210 1986 1985 3 (in thousands) 8,357 16,911 First Mortgage Bonds....... $ 1,008,248 $ 1,026,400 Less Portion Due Within One Year ... 7,698 Sinking Fund Debentures 8,357 16,911 Total $ 8,357 $ 9.213 Installment Purchase Contracts . 307,289 307,068

'ther Long-term Debt (a) .... 97,629 91.691 At December 31, 1986 and 1985, the principal amounts 1,421,523 1,442,070 of debentures reacquired in anticipation of sinking fund Less Portion Due Within Onc Year 11,500 139,198 requirements were $ 2,443,000 and $ 3,692,000, respec-Total $ 1,410,023 $ 1,302,872 tively. In addition to the sinking fund requirements the (a) Nuclear Fuel Disposal Costs. See Note 10. Company may call additional debentures of up to $ 300,000 First mortgage bonds outstanding were as follows: annually.

Installment purchase contracts have been entered into by December 31, the Company in connection with the issuance of pollution 1986 1985 control revenue bonds by governmental authorities as (in thousands)

% Rate Du c follows:

10'/i I987 January I ... $ $ 80,000 December 31, 3'/s I988 February I .. 22,974 22,974 1986 1985 4'/4 1 988 November . 1 17,557 17,557 March I 120,000 (in thousands) 14'/~ 1 989 I is/s I 990 June .....

1 80,000 80,000

% Rate Due 15'/s 1 991 November . 1 38,800 39,600 City of Lawrenceburg, Indiana:

16'/s 992 April 97,000 99,000 8'/z 2006 July 1 $ 25,000 $ 25,000 4i/s 1

1 993 1

August ... 42,902 42,902 7 2006 May 1 ..... 40,000 40,000 7 1 998 May i....

1 1

35,000 35,000 67/s 2006 May I ..... 12,000 12,000 8'/s 2 000 April 50,000 50,000 City of Rockport, Indiana:

9'h 2 003 1

June I (a) 219,500 231,000 9i/s 2005 Junc 1 ..... 6,500 6,500 8'/s 2 003 December I 40,000 40,000 9i/4 2010 June 1 .....

August I ...

33,500 33,500 9'/i 2 008 March 1 100,000 100,000 9i/4 2014 50,000 50,000 13s/i 2 013 August ... 1 67,200 70,000 7iA (a) 2014 August ... 1 ~ 50,000 50,000 9s/s 2 015 October 1 100,000 (b) 2014 August 1 50,000 50,000 9s/4 2 016 July 100,000 City of Sullivan, Indiana:

2004 May .....

1 Unamortize d Discount (net) .... (2,685) (1,633) 7'/s 2006 May .....

1 7,000 7,000 Less Portion Duc Within One Year 1,008,248 11,500 1,026,400 131,500 7'009 67/s Unamortized Discount 1

May .....

1 25,000 13,000 (4.711) 25,000 13,000 (4.932)

Total $ 996,748 $ 894.900 Total $ 307,289 $ 307,068 (a) Thc 9/i% series due 2003 requires sinking fund payments of (a) Adjustable interest rate will change August 1, 1990 and every five

$ 11,500,000 annually on June 1, through 1991 and $ 13,500,000 annually years thereafter.

on June I, 1992 through 2002 with the noncumulative option to redeem (b) Variable interest rate is determined weekly. The average weighted an additional amount in each of thc specified years from a miniinum of interest was 5.3% for 1986 and 5.6% for 1985.

$ 100,000 to a maximum equal to the scheduled requirement for each year, but with a maximum optional redemption, as to all years in the aggregate, Under the terms of certain installment purchase con-of $ 75,000,000. tracts, the Company is required to pay purchase price in-The indentures relating to the first mortgage bonds con- stallments in amounts sufficient to enable the cities to pay tain improvement, maintenance and replacement provi- interest on and the principal (at stated maturities and upon sions requiring the deposit of cash or bonds with the trustee, mandatory redemption) of related pollution control revenue or in lieu thereof, certification of unfunded property bonds issued to finance the construction of pollution control additions. facilities at certain generating plants of the Company. On certain series the principal will be payable at stated ma-turities or on the demand of the owners at periodic-interest adjustment dates.

20

INDIANA& MICHIGANELECTRIC COMPAM'ND SUBSIDIARIES

• Certain series are supported by letters of credit from a 9. Supplementary Income Statement Information bank which expire in 1990 and 1992. and Related-party Transactions:

Portions of the proceeds of the installment purchase con-Electric operating revenues shown in the Consolidated tracts are deposited with trustees and may be used only for specified construction expenditures. Approximately Statements of Income include sales of energy to AEP Sys-tem companies of approximately $ 33,000,000,

$ 35,743,000 and $ 43,566,000 of funds so deposited is included in. special deposits and working funds at Decem- $ 32,000,000 and $ 27,000,000 for the years ended Decem-ber 31, 1986, 1985 and 1984, respectively.

ber 31, 1986 and 1985, respectively.

Long-term debt, excluding premium or discount, out- Operating expenses shown in the Consolidated State-ments of Income include certain items not shown sepa-standing at December 31, 1986 is due as follows:

rately, as follows:

Year Ended December 31, (in thousands) 1988........

1987...................... $ 11,500 1986 1985 1984 1990.....

1989.....................

1991....................

Later Years ....................

52,031 11,500 91,500 50,300 1,212,088 Purchased and Interchange Power (net):

Purchased Power (a) ....

Interchange Power (net):

$ 166,179 (in thousands)

$ 145,518 $ 106,755 AEP System Electric Total . $ 1,428.919 Utilities .........

Other Companies 10,720 78,718 76I271 (18,215) (15,735) (13.809)

The Company had unused short-term bank lines of credit Total ........... $ 158,684 $ 208,501 $ 169,217 of approximately $ 269,000,000 and $ 375,000,000 at Taxes Other 'Ihan Federal December 31, 1986'and 1985, respectively, under which Income Taxes:,

notes could be issued with no maturity more than 270 days. Real and Personal Property The available lines of credit are subject to withdrawal at Taxes $ 27,795 $ 27,141 $ 25,263 State Gross Receipts Excise the banks'ption, and $ 269,000,000 and $ 345,000,000 at and Franchise Taxes and December 31, 1986 and 1985, respectively, of such lines Miscellaneous State and are shared with other AEP System companies. In accord- Local Taxes State Income Taxes

......... 13,832 13,305 13,023 ance with informal agreements with the banks, compen- 4,121 632 2,113 sating balance deposits of up to 10% or equivalent fees are Social Security Taxes .... 5,543 5,261 4,522 Total $ 51,291 $ 46,339 $ 44,921 required to maintain the lines of credit and on any amounts actually borrowed, generally either additional compensat- (a) Includes power purchased from Ohio Valley Electric Corporation (OVEC) of approximately $ 39,378,000 in 1986, $ 6,733,000 in 1985 and ing balance deposits of up to 10% are maintained or ad- $ 17,688,000 in 1984. Also includes power purchased from AEGCo of justments in interest rates are made. Substantially all bank approximately $ 122,023,000 in 1986, $ 119,952,000 in 1985 and balances are maintained by the Company to compensate $ 26,034,000 in 1984.

the banks for services and for the Company's share of both Charges to operating expenses for royalties and for ad-used and available lines of credit. vertising are less than 1% of gross revenues in each year.

Sales and purchases of energy and interchange power transactions, are regulated by the various commissions hav-ing jurisdiction.

American Electric Power Service Corporation (AEPSC) provides certain services to the Company and the affiliated companies in the AEP System. The costs of the services are determined by the service company on a direct charge basis to the extent practicable and on reasonable bases of proration for indirect costs. The charges for services are made on a cost basis and include no compensation for the use of equity capital, all of which is furnished to the service company by AEP. The service company is subject to the regulation of the SEC under the Public Utility Holding Company Act of 1935.

21

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

10. Commitments and Contingencies: Litigation The Company terminated a contract with Terre Haute Construction Industries, Inc. (THI) on the grounds that THI was not The construction budget of the companies for the year meeting the schedule for the construction of an electro-1987 is estimated at $ 243,000,000 and, in connection static precipitator at the Breed Plant. THI instituted a suit therewith, commitinents have been made. for breach of contract against the Company in an Indiana circuit court claiming damages in an unspecified amount.

Ohio Valley Electric Corporation THI also named the AEPSC as a defendant and requested damages from it for interference with THI's contract with AEP and Columbus and Southern Ohio Electric Com-the Company and for libel. The defendants denied THI's pany own 42.1% of Ohio Valley Electric Corporation complaint and the Company counterclaimed for damages (OVEC), which supplies the U.S. Department of Energy in the amount of $ 6,801,000 which the Company claims (DOE) with the power requirements of its gaseous diffusion it suffered as a result of the delay in the construction work.

plant near Portsmouth, Ohio. The proceeds from the sales Trial of this action was completed in December 1982. In of power by OVEC, aggregating $ 332,000,000 in 1986, an order dated January 9, 1984, the court awarded com-are designed to be sufficient for OVEC to meet its operating pensatory and punitive damages to THI in the amounts of expenses and fixed costs, and to provide for a return on its

$ 4,934,000 and $ 12,000,000, respectively, exclusive of equity capital. The Company, as a sponsoring company, interest. As a result of that judgment, the Company re-is entitled to receive from OVEC, and is obligated to pay corded in 1983 a liability, including interest, on the Con-for, the power not required by DOE in proportion to its solidated Balance Sheet for the compensatory damages.

power participation ratio, which averaged 18.5% in 1986.

The Company and the Service Corporation are appealing The DOE power agreement terminates in 1992.

the court decision.

Regulatory Matters Environmental Matters In January 1985 a settlement agreement was reached The companies are subject to regulation by Federal, state stemming from a Federal Power Commission investigation and local authorities ~with respect to air- and water-quality begun in 1975 into the reasonableness and prudence of the control and other environmental matters, and are subject coal-purchasing policies and practices of certain System to zoning and other regulation by local authorities. Al-companies. The settlement agreement provides for a though the cumulative, long-term effect of changing

$ 21,931,000 refund ($ 18,084,000 by the Company) to cer-environmental requirements upon the companies cannot be tain wholesale customers. The agreement further provides estimated at present, compliance with such requirements the opportunity for the Company to recover from certain may make it necessary, at costs which may be substantial, wholesale customers certain costs totaling $ 50,000,000 to retrofit existing facilities with additional air-pollution-which when increased for related income taxes cannot ex-control equipment; to change fuel supplies to lower sulfur ceed $ 75,000,000 in revenues and can be recovered over content coal; to construct cooling towers or some other a period not to exceed 12 years. The Company has re-closed-cycle cooling systems; to undertake new measures covered $ 7,660,000 through December 1986. The status in connection with the storage, transportation and disposal of the remainder of the investment in Utah coal mines is of by-products and wastes; to curtail or cease operations discussed in Note 2. In anticipation of the settlement agree- .

at existing facilities, and to delay the commercial operation ment, the Company recorded in December 1984 provisions of, or make design changes with respect to, facilities under aggregating $ 11,336,000, net of taxes, to reflect the refund construction.

terms of the settlement agreement.

22

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES Legislative proposals are pending before the United The Company has insurance covering its two-unit Donald States Congress that expressly seek to control acid depo- C. Cook Nuclear Plant in the maximum available amount sition in the eastern portion of the United States. If any of of $ 160,000,000, and the balance of $ 540,000,000 is cov-these bills become law, significant reductions in the emis- ered by a mandatory program of deferred premiums that sion of sulfur dioxide from various existing Company gen- would be assessed, after a nuclear incident, against all erating plants would be required. These reductions would owners of nuclear reactors. In the event of a nuclear in-entail very substantial capital and operating costs that, in cident, the Company could be assessed $ 5,000,000 per turn, could necessitate substantial rate increases by the incident for each of its two nuclear generating units (subject Company. In addition, a number of states and environ- to a maximum of $ 10,000,000 per reactor in any year in mental organizations have commenced proceedings under the event of more than one incident). The Price-Anderson the Clean Air Act seeking substantial reductions in the Act expires in 1987, and Congress has begun consideration emission of sulfur dioxide in certain midwestern states. of its renewal. If the Act is not renewed, the Cook Plant Further, the U.S. Environmental Protection Agency is would continue to be subject to the program currently in contemplating a number of significant policy changes in existence. If the Act is renewed, it is likely that the limits its rules governing sulfur dioxide emissions. Adoption of of public liability will be increased.

any of the contemplated policy changes could require sub- The Company also has property insurance for damage stantial reductions in sulfur dioxide emissions from the to the Cook Plant facilities in the amount of $ 1.23 billion.

Company's coal-fired generating plants. The primary layer of $ 500,000,000 is provided through nuclear insurance pools. The excess coverage above Transmission Agreement $ 500,000,000 is provided through insurance pools The Company participates with other AEP System com- ($ 120,000,000) and Nuclear Electric Insurance Limited panies in a Transmission Agreement. This agreement pools (NEIL). NEIL's excess property insurance program pro-certain AEP System companies'nvestments in extra-high- vides $ 610,000,000 in coverage. The maximum assess-voltage lines and shares among the parties the costs of ment under this program could be $ 9,250,000 (seven and ownership in proportion to the parties'espective demand one-half times the annual premium on a 100% coverage ratios. The equalization of costs among the parties will be basis).

phased-in over the period 1985-1989. The agreement was NEIL's extra-expense program provides insurance to permitted by the FERC to be implemented, effective Jan- cover extra costs of replacement power resulting from a uary 22, 1985, subject to refund. prolonged accidental, outage of a nuclear unit. The Com-Pursuant to the terms of the agreement, the Company pany's policy insures against such increased costs up to recorded credits of $ 10,672,000 and $ 5,338,000 for trans- approximately $ 2,250,000 per week (starting 26 weeks mission services in other operation expense for the years after the outage) for one year and $ 1,125,000 per week for

. ended December.31, 1986 and 1985, respectively. the second year, or 80% of those amounts per unit if both units are down for the same reason. The Company would Nuclear Insurance be subject to a retrospective premium of up to $ 8,326,000 The Price-Anderson Act limits the public liability of a (five times annual premium) if NEIL's losses exceeded its licensee of a nuclear plant to $ 560,000,000 for a single accumulated funds.

nuclear incident. When the 80th nuclear power reactor in An incident at the Cook Plant could have a substantial the United States went into operation on November 15, adverse effect upon the Company.

1982, the Nuclear Regulatory Commission's indemnity ob-ligation was eliminated. Now, as each new reactor is li-censed to operate, the $ 560,000,000 limit is increased by another $ 5,000,000. The current level is $ 700,000,000.

23

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Concluded)

Disposal of Spent Nuclear Fuel 11. Leases:

and Nuclear Decommissioning The companies, as part of their operations, lease prop-.

The Nuclear Waste Policy Act of 1982 establishes erty, plant and equipment under leases ranging in length Federal responsibility for the permanent disposal of spent from 1 to 35 years. Most of the leases require the companies nuclear fuel. Disposal costs are paid by fees assessed to pay related property taxes, maintenance costs and other against owners of nuclear plants and deposited into the costs of operation. The companies expect that in the normal Nuclear Waste Fund created by the Act. For the disposal course of business, leases will generally be renewed or of nuclear fuel consumed after April 6, 1983 by the Com- replaced by other leases. The majority of the various rentals pany's Cook Nuclear Plant, the Company must pay to the are included in leases having purchase options or renewal fund a fee of one mill per kilowatthour, which the Company options for substantially all of the economic lives of the is currently recovering from its customers. In June 1983, properties.

the Company entered into a contract with DOE for the An accounting standard required the companies to cap-disposal of spent nuclear fuel. Under terms of the contract italize leases beginning in 1984 for all capital leases entered the Company must pay to the U.S. Treasury a fee estimated into after December 31, 1982 and all earlier leases begin-at approximately $ 71,964,000, exclusive of interest, for ning in 1987. This standard requires the companies to re-the disposal of nuclear fuel consumed prior to April 7, cord rental expense in a manner consistent with rate-1983. The Company has deferred this amount plus accrued making treatment, therefore there is no effect on the Con-

~

interest on its balance sheet pending recovery through the solidated Statements of Income.

rate-making process. The Company has received regula- The following is an analysis of properties under capital tory approval for the recovery of this amount and has begun leases and related obligations entered into after December to reduce the amount deferred as it is being recovered. 31, 1982:

The Company has filed a petition with the PSCI which, December 31, among other things, requests an increase in the amounts 1986 1985 being recovered for nuclear decommissioning costs asso-(in thousands) ciated with the Cook Plant. An independent consulting firm Electric Utility Plant:

employed by the Company for the purposes of this pro- Production $ 2,714 $ 1,998 ceeding has estimated that the cost of decommissioning General and Miscellaneous ........... 8.568 7 773 this plant could range from $ 284,000,000 to $ 321,000,000 Total Electric Utility Plant .......'... 11,282 9,771 Less Accumulated Provision for in 1986 dollars. The Company is recovering from its cus- Amortization . 2,982 1,861 tomers nuclear decommissioning costs based on levels less Electric Utility Plant Less Provision .... 8,300 7,910 than $ 284,000,000. Other Property . 421 38 Funds recovered through the rate-making process for Less Accumulated Provision for disposal of spent nuclear fuel consumed prior to April 7, Amortization 217 13 1983 and for nuclear decommissioning generally have been Other Property Less Provision........ 204 25 deposited in either external trust funds or internal special Net Properties under Capital Leases .. $ 8.504 $7,935

'unds for the future payment of such costs. Obligations under Capital Leases (a) .. $ 8,504 $7,935 (a) Including an estimated $ 1,826,000 and $ 1,504,000 at December 31, 1986 and 1985, respectively, due within onc year.

Payments made under capital leases entered into after December 31, 1982 include $ 1,013,000, $ 999,000 and

$ 710,000 of amortization expense for the years ended De-cember 31, 1986, 1985 and 1984, respectively.

24

IIIDIAHA& MICHIGANELECTRIC COhfPANY AND SUBSIDIARIES The following is a pro forma analysis of properties under Rentals for all operating leases are classified approxi-capital leases and related obligations assuming that leases mately as follows:

entered into prior to January 1, 1983 were capitalized: Year Ended December 31, December 31, 1986 1985 1984 1986 1985 (in thousands)

(in thousands) Gross Rentals $ 92,000 $ 73,000 $ 100,000 Nuclear Fuel $ 308,000 $ 327,000 Less Rental Recoveries (including Coal-mining and Coal-transportation sublease rentals) (a)........ 3,000 3,000 3,000 Equipment 22,000 ,24,000 Nct Rentals (b) $ 89,000 $ 70,000 $ 97,000 Other Transportation Equipment..... 6,000 7,000 Real Estate 12,000 12,000 (a) Includes amounts paid for or Electric Distribution System Property 19,000 20,000 reimbursed by associated Gross Properties under Capital Leases . 367,000 companies.

390,000 Less Accumulated Provision for (b) Classified approximately as:

Amortization 188,000 185,000 Operating Expenses....... $ 81,000 $ 63,000 $ 90,000 Clearing and Miscellaneous Net Properties under Capital Leases $ 179,000 $ 205,000 Accounts (portions of which Obligations under Capital Leases (a) are charged to income)..... 8,000 7,000 7,000

$ 179,000 $ 205,000 Total $ 89.000 $ 70,000 $ 97,000 (a) Including an estimated $ 60,000,000 at December 31, 1986 and 1985, due within one year. Included in the above analysis of future minimum lease Future minimum lease payments, by year and in the payments and of properties under capital leases and related aggregate, of the companies'apital leases and noncan- obligations are certain leases as to which portions of the celable operating leases consisted of the following at related rentals are paid for or reimbursed by associated December 31, 1986: companies in the AEP System based on their usage of the Capital Operatlllg leased property. The companies cannot predict the extent Leases (a)(b) Leases to which or proportion in which the associated companies (in thousands) will utilize the properties under such leases in the future.

1987 . $ 10,000 $ 19,000 1988 9,000 19,000 1989 6,000 19,000

12. Unaudited Quarterly Financial Information:

1990 5,000 19,000 1991 4,000 19,000 The following consolidated quarterly financial infor-Later Years 45,000 198,000 mation is unaudited but, in the opinion of the Company, Total Future Minimum Lease includes all adjustments (consisting of only normal recur-Payments . 79,000 ~ $ 293,000 ring accruals) necessary for a fair presentation of the Less Estimated Interest Element amounts shown:

Included Therein 37,000 Quarterly Periods Operating Operating Net Estimated Present Value of Future Ended Revenues income Income~

Minimum Lease Payments ..... $ 42,000 (in Ihau sanck) 1986 (a) Includes capital leases entered into prior to January I, 1983 assuming March 31 ........... $ 274,112 $ 54,720 $ 37,921 that such leases were capitalized. June 30 ............ 261,147 36,674 27,665 Minimum payments do not include leases of nuclear fuel. Nuclear

'b) fuel rentals comprise the unamortized balance of the lessor's cost (approx-September 30 December 31

........ 268,939 47,534 41,485 265,161 52,216 45,410 imately $ 146,000,000) less salvage value, ifany, to be paid in proportion 1985 to heat produced, and carrying charges on the lessor's unrecovered costs. March 31 ........... 274,692 58,061 43,460 It is contemplated that portions of the presently leased material will'be June 30 ............ 240,360 40,622 26,116 replenished by additional leased material. September 30 December 31

........ 269,603 39,975 30,608 275,248 53,231 45,917 iBefore preferred stock dividend requirements.

25

Operating Statistics.

1986 1985 1984 1983 1982 ELEcrntc OFERATING REYENUEs (in thousands):

From Kilowatt-hour Sales:

Retail:

Residential:

Without Electric Heating ..... ~...... $ 174,550 175,534 $ 150,334 $ 144,370 $ 125,798 With Electric Heating ............... 90 881 90,949 82,739 70,851 68,793 Total Residential ............... ~ . 265,431 266,483 233,073 215,221 194,591 Commercial 184,276 181,240 150,733 137,616 127,470 Industrial 219,344 213,161 173,986 154,751 137,152 Miscellaneous 11 171 11,234 9,666 8,696 7,568 Total Retail . 680,222 672,118 567,458 516,284 466,781 Wholesale (sales for resale) .............. 378 843 378,090 400,811 343,427 325,468 Total from Kilowatt-hour Sales .... 1,059,065 1,050,208 968,269 859,711 792,249

~105

~

Provision for Revenue Refunds ~.......... 541 ~12,494)

Total Net of Provision for Revenue Refunds 1,059,606 1,050,103 955,775 859,711 792,249 Other Operating Revenues ................. 9 753 9,800 10,197 9,269 17,554 Total Electric Operating Revenues .. $ 1 069 359 $ 1,059,903 $ 965,972 $ 868,980 $ 809,803 SQURcEs AND SALEs oF ENERGY (in millions of kilowatt-hours):

Sources:

Net Generated Steam:

Fossil Fuel . 8,187 7,933 7,071 5,684 4,587 Nuclear Fuel 10,986 7,800 12,913 12,301 12,349 Net Generated Hydroelectric 79 74 68 55 77 Subtotal 19,252 I5,807 20,052 18,040 17,013 Purchased 4,733 3,065 4,905 4,881 2,154 Net Interchange ~272) 4,319 748 573 3,775 Total Sources 23,713 23,191 25,705 23,494 22,942 Less: Losses, Company Use, Etc.......... ~1645 1,542 1,508 1,441 1,243 Net Sources ~22 068 21,649 24,197 22,053 21,699 Sales:

Retail:

Residential:

Without Electric Heating .......... 2,536 2,557 2,534 2,596 2,472 With Electric Heating ........... ~ ~ ~1442 1,481 1,561 1,458 1,540 Total Residential ............... 3,978 4,038 4,095 4,054 4,012 Commercial 3,007 2,968 2,870 2,807 2,803 Industrial 4,371 4,282 4,201 3,941 3,701 Miscellaneous 212 216 209 204 197 Total Retail . 11,568 11,504 11,375 11,006 10,713 Wholesale (sales for resale) ............ ~10 500 '0,145 12,822 11,047 10,986 Total Sales ~22 068 21,649 24,197 22,053 21,699 26

INDIANA& MICHIGANELECTRIC COMPANY AND SUBSIDIARIES OPERATING STATISTICS (Concluded) 1986 1985 1984 1983 1982 AYERAGE CosT oF FUEL CQNsUMED (in cents): (a)

Per MillionBtu:

Coal 185 194 189 184 190 Nuclear 74 80 65 54 50 Overall 118 136 103 92 85 Per Kilowatt-hour Generated:

Coal 1.82 1.97 1.83 1.76 1.85 Nuclear .83 .86 .70 .59 '.53 Overall 1.25 1.42 1.08 .96 .89 RESID~ SERvlcE AvERAGEs:

'nnual Kwh Use per Customer:

Total 9,813 10,050 10,249 10,187 10,084 With Electric Heating 179716 18,486 19,771 18,780 19,990 Annual Electric Bill:

Total $ 654.88 $ 663.18 $ 583.35 $ 540.74 $ 489.08 With Electric Heating $ 1,116.86 $ 1,135.42 $ 1,048.27 $ 912.31 $ 892.91 Price per Kwh (in cents):

Total 6.67 6.60 5.69 5.31 4.85 With Electric Heating 6.30 6.14 5.30 4.86 4.47 NUMBER OF ELECTRIC CUSTOMERS.'ear-End:

Retail:

Residential:

Without Electric Heating ............ 325,623 322,922 . 321,286 320,655 320,097 With Electric Heating ............... 82 324 80,734 79,823 78,31'1 77,335 Total Residential ... .. ~........

~ ~ ~ 407,947 403,656 401,109

"

398,966 397,432 Commercial 43,689 43,017 42,912 42,552 42,233 Industrial 3,882 3,701 3,415 3,253 3,249 Miscellaneous I 846 1,852 1,584 1,571 1,458 Total Retail . 457,364 452,226 449,020 446,342 444,372 Wholesale (sales for resale) .............. 106 104 105 106 105 Total Electric Customers .......... 457 470 452,330 449,125 446,448 444,477 (a) Excludes effec of defened collection of fuel costs.

27

Directors J. M. ALLIsoN (a) GERALD P. MALONEY W. A. BLAcK RICHARD C. MENGE RICHARD E. DISBROW C. W. Romeo (a)

JOHN E. DOLAN J. F. STARK (C)

N. D'ONOFRIO

'ILLIAM JOSEPH H. VIPPERMAN M. R. HARRELL W. S. WHITE, JR.

E. W. HERMANSEN (b)

Officers W. S. WHITE, JR. GERALD P. MALONEY JOHN B. SHINNOCK Chairman of the Board Vice President Assistant Secretary and Chief Zrecutive OftI'cer RICHARD C. MENGE JoAN ST. JAMas W. A. BLAcK Vice President Assistant Secretary President and JOSEPH H. VIPPERMAN LEQNARD V. AssAma Chief Operating Offtcer Vice President Assistant Treasurer J. F. STARK (c)

Senior Vice President PETER J. DEMARIA BRUCE M. BARBER Treasurer Assistant Treasurer MILTON P. ALEXICH JOHN R. BURTON 'AMas D. HUEBNER Vice President Secretary Assistant Treasurer RICHARD E. DISBROW ELIO BAFILE GERALD R. KNORR Vice President Assistant Secretary and Assistant Treasurer JOHN E. DOLAN Assistant Treasurer Vice President JQHN F. DILoaamo, JR.

WiLLIAMN. D'ONOFRIO Assistant Secretary Vice President WILLIAMC. HARVEY A. JosEPH DowD Assistant Secretary

'ice President CARL J. Moos RICHARD F. HERINO AssisTAm SEcRETARY Vice President The principal occupation ofeach ofthe above directors and ogccrs ofIndiana dt hfichigan Electric Company, with tcn exceptions, is as an employee of American Electric Power Service Corporation. Thc cxccptions are J. M. Allison, Etio Bafile, 1V. A. Black, IVilliam N. D'OnoPio, M. R. Harrell, E. IV. Hermansen, Richard C. Mcnge, Carl J. Moos, C. 1V. Roahrig and J. F. Stark whose principal occupations are as offtccrs or employees of Indiana

• Michigan Electric Company.

(a) Elected April 22, 1986 (b) Resigned February 28, 1986 (c) Resigned January 29, 1987 28

INDIANA MICHIGANELECTRIC COMPANY chic Dividends and Price Ranges of Cumulative Preferred Stock By Quarters (1986 and 1985) 1986 uarters 1985 uatters 1st 2nd 3rd 4th 1st 2nd 3rd 4th

($ 100 Par Value) 4t/e% Series Dividends Paid Per Share $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 Market Price $ Per Share (MSE) High 36'/e 36'/e 44 Low 34'/e 35 35'le 4.56% Series Dividends Paid Per Share $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 Market Price $ Per Share (OTC)

Ask (high/low)

Bid (high/low) 4.12% Series Dividends Paid Per Share $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 Market Price $ Per Share (OTC)

Ask (high/low)

Bid (high/low) 7.08% Series Dividends Paid Per Share $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 Market Price $ Per Share (NYSE) High 76 80'/e 80'A 88t/e 56'/e 62 62'le 66

~ Low 65 67s/4 70 77 50t/e 53'/2 57'/4 57s/e 7.76% Series Dividends Paid Per Share $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94, $ 1.94 $ 1.94 Market Price $ Per Share (NYSE) High 84 89 87'/i 94'/e 617/e 68 68 71s/e Low 69t/4 75 76 83'/e 55'/e 59 63'le 63'/4 8.68% Series Dividends Paid Per Share $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 Market Price $ Per Share (NYSE) High 93'/e 98'/e 98t/e 102'/z 69t/e 75 75 80 Low 78'A 85'/4 88~/s 92~/e 63 64'/e 71s/e 72 12% Series Dividends Paid Per Share $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00 Market Price $ Per Share (NYSE) High 106/e 107 106 106 101 106'/e 105'/2 107 Low 101'/e 99'/e IOOYi 102 97'le 97'/e 100 100

($25 Par Value)

$ 2.15 Series Dividends Paid Per Sham $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 Market Price $ Per Share (NYSE) High 24'/e 25 24s/e 25'/e 17s/e 19'/e 19'/e 20'/e Low 19'le 21 22t/e 23s/e 16'/z 16'/e 17s/e 17s/e

$ 2.25 Series Dividends Paid Per Share $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 Market Price $ Per Share (NYSE) High 24'/2 25'/e 25'/4 26'/e 18t/4 19s/4 20s/e 207/e Low 20'/e 21s/e 23t/e 24s/e 17 17'/e 18'A 18'/e

$ 2.75 Series Dividends Paid Per Share $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 Market Price $ Per Share (NYSE) High 29 27~/2 28 27s/e 25'/e 25'le 25'/z 27 Low 26 25 27 27s/e 22'/e 24'/e 24s/e 24s/4 .

$ 3.63 Series Dividends Paid Per Share $ 0.9075 $ 0.9075 $ 0.9075 $ 0.9075 $ 0.9075 $ 0.9075 $ 0.9075 $ 0.9075 Market Price $ Per Share (NYSE) High 31t/e 30'/e 31s/e 30t/i 28'/e 30'/e 30'/i 31t/e Low 28s/e 28s/e 28'/e 27 26'/e 27s/e 27s/e 28 MSE Midwest Stock Exchange OTC Over. the-Counter NYSE New York Stock Exchange

'Note The above bid and asked quotations represent prices between dealers and do not represent actual transactions.

Market quotations provided by National Quotation Bureau, Inc.

Dash indicates quotation not available.

29

The Company's Annual Report (Form 10-K) to the Securities and Exchange Commission will be available on or about March 31, 1987 to shareowners upon written request and at no cost.

Please address such requests to:

Mr. G. C. Dean American Electric Power Service Corporation 1 Riverside Plaza Columbus, Ohio 43215 Transfer Agent and Registrar of Cumulative Preferred Stock Morgan Shareholder Services Trust Company 30 West Broadway, New York, N.Y. 10007 30

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