ML17326A449

Annual Financial Rept 1978

ML17326A449
Person / Time
Site:	Cook
Issue date:	02/19/1979
From:	INDIANA MICHIGAN POWER CO., INDIANA MICHIGAN POWER CO. (FORMERLY INDIANA & MICHIG
To:
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ML17326A448	List: ML17326A447 ML17326A449
References
NUDOCS 8001040660
Download: ML17326A449 (28)

Text

ANNUALREPORT 1978 AMERICAN ELECTRIC PONER SYSTEM

The Company's Annual Report Mr. H. D. Post (Form 10-K) to the Securities and Assistant Treasurer Exchange Commission will be available American Electric Power on or about March 31, 1979 to shareowners Service Corporation upon their written request and at no cost. 2 Broadway Please address such requests to: New York, N. Y. 10004 Transfer Agent of Cumulative Preferred Stock Morgan Guaranty Trust Company of iVew York 30 West Broadway, New York, N. Y. 10007 Registrar of Cumulative Preferred Stock Irving Trust Company 1 Wall Street, New York, N. Y. 10015

INDIANAMICHIGAN ELECTRIC COMPANY 210I Spj%un Avenue, Fort Wayne, Indiana 46801 Contents Background of the Company 4 Consolidated Summary of Operations .

Management's Comments on Consolidated Summary of Operations ..... 6-7 Auditors'pinion Consolidated Statement of Income ~ ~ ~ 9 Consolidated Balance Sheet 10-11 Consolidated Statement of Sources of Funds for Plant and Property Additions . 12 Consolidated Statement of Retained Earnings 13 Notes to Consolidated Financial Statements 14-23 Operating Statistics and Balance Sheet Data 24-25 Directors and OEcers of the Company . 26 Price Range of Cumulative Preferred Stock . ~ ~ ~ ~ 27

INDIANA & MICHI~< ELECTRIC COMPANY 2101 Spy Run Ave~ Fort Wayne, Indiana 46801 Background of the Company INDIANASc MtcHIGAN ELEGTRIc CoMPANY (the Company) is a subsidiary of American Electric Power Company, Inc. (AEP) and is engaged in the generation, purchase, transmission, and distribu-tion 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.

Indiana & Michigan Power Company, the generating subsidiary of the Company, was formed in 1971 to own, complete the construction of, and operate the Donald C. Cook Nuclear Plant (the Nuclear Plant). Unit No. 1 of the Nuclear Plant was placed in commercial operation on August 23, 1975. Unit No. 2 was placed in commercial operation on July 1, 1978. The subsidiary sells all of the plant's generation to the parent for distribution to the latter's customers.

The Company serves 231 communities and approximately 437,000 customers in a 7,740-square-mile area of northern and eastern Indiana and a portion of southwestern Michigan. This area has an estimated population of 1,566,000. Among the principal industries served are manufacturers of automobiles, trucks, automotive parts, aircraft parts, steel, ferrous and nonferrous castings, farm machinery, machine tools, electric motors, electric transformers, electric wire and cable, glass, textiles, rubber products, food products and electronic components. In addition, the Company supplies wholesale electric power to other electric utilities, municipalities, and 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 major integrated power system:

Appalachian Power Company, Kentucky Power Company, 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 8c Electric Company, Consumers Power Company, Commonwealth Edison Com-pany, Illinois Power Company, Indiana-Kentucky Electric Corporation (a subsidiary of Ohio Valley Electric Corporation), Indianapolis Power Sc Light Company, Northern Indiana Public Service Company, and Public Service Company of Indiana, Inc.

INDIANA & MI AN ELECTRIC COMPANY AN GENERATING SUBSIDIARY Consolidated Summary of Operations Year Ended December 31, 1978 1977 1976 1975 1974 (In Thousands)

OPERATING REVENUES ELECTRIC ...$ 603,480 $ 512,824 $ 416,193 $ 363,355 $ 287,606 OPERATING EXPENSES:

Operation:

Fuel for Electric Generation ............ 1259277 74,052 70,127 55,775 55,216 Purchased and Interchange Power (Net) ... 116@08 144,833 126,712 121,194 111,161 Other . 609001 44,706 40,251 37,800 27,959 Maintenance 32,724 28,452 20,140 17,078 17,747 Depreciation 599844 48)824 47,852 32,734 24,853 Taxes, Other Than Income Taxes .......... 26,432 23,408 18,920 14,015 10,956 Federal and State Income Taxes 23,060 18,149 (8,625) 6,026 (3,086)

Total Operating Expenses ........ 443,646 382,424 315,377 284,622 244,806 OPERATING INCOME 159)834 130,400 100,816 78,733 42,800 OTHER INCOME AND DEDUCTIONS:

Allowance for Fu'nds Used During Construction 28,874(a) 45,482(a) 59,454(a)-

Allowance for Other Funds Used During Con-struction.................. 27,974 26,889 Miscellaneous Nonoperating Income Less De-ductions . 1)040 952 718 135 1,537 Total Other Income and Deductions 29,014 27,841 29,592 45,617 60,991 INCOME BEFORE INTEREST CHARGES 188)848 158,241 130,408 124,350 103,791 INTEREST CHARGES:

Total Interest Charges 96,648 80,772 76,534 70,822 Allowance for Borrowed Funds Used During Construction (Credit) (22,627) (19,651)

Net Interest Charges ............ 74,021 61,121 76,534 70,822 CONSOLIDATED INCOME BEFORE CUMULATIVE EFFEGT QF AccoUNTING CHANGEs ........ 114)827 97,120 53,874 53,528 NON-RECURRING CUMULATIVE EFFECT OF AC-coUNTING CHANGEs (Net of $ 603,000 Appli-cable Taxes) 8,151 CoitsoLIDATED NET INcoME ................ $ 114)827 $ 97,120 $ 53,874 $ 53,528 $ 41,554 (a) Not reclassified into debt and equity components since allocation based on then existing capital structure would not necessarily be comparable to allocation under the FERC formula used after 1976.

Management's Comments on Consolidated Summary of Operations The amounts shown in the Consolidated Summary Increase (Decrcasc) of Operations and discussed below reflect only the 1977 vs. 1976 results of past operations and are not intended as any (In Millions) representation as to the results of operations for any Coal Oil Nuclear Total future period. Reference is made to the consolidated Cost of Fuel Consumed .. $ 5.1 $ 4.1 $ 2.4 $ 11.6 Generation Level and financial statements, related notes, and Operating Fuel Mix ............. (2.8) 1.0 (5.9) (7.7)

Statistics and Balance Sheet Data for additional infor- Overall Increase mation concerning results of operations. (Decrease) $ 2.3 $ 5.1 $ (3.5) $ 3.9 1978 vs. 1977 Operating Revenues Electric (In Millions)

Coal Oil Nuclear Total Electric operating revenues increased by $ 96,631,000 Cost of Fuel Consumed .. $ 23.7 $ 4.4 $ 3.3 $ 31.4 (23% ) in 1977 over 1976 and by $ 90,656,000 (18% ) Generation Level and in 1978 over 1977. Factors associated with the in- Fuel Mix ............. (2.2) 5.7 16.3 19.8 creases and related estimated amounts are as follows: Overall Increase ........ $ 21.5 $ 10.1 $ 19.6 $ 51.2 Increase (Dccreasc) The cost of fossil fuel consumed increased signifi-1977 vs.,1976 1978 vs. 1977 cantly in 1977 and 1978. The increase in 1977 was (In Millions) affected by there having been a refund of approximately Base Rates and Fuel Cost Adjust- $ 4,000,000 to the Company in settlement of litigation ments $ 109.3 $ 53.8 with a supplier of fuel oil. (Such amount was recorded Sales Volume ................... (21.2) 51.1 as a reduction to fuel for electric generation for 1976 Sales Mix 8.2 (14.2) and is reflected in the increase shown above in the Other Operating Revenues ....... 0.3 cost of oil in 1977 from 1976.) A decrease in the Overall Increase ... $ 96.6 $ 90.7 quantity of nuclear fuel consumed in 1977 was related to the planned outage of Unit No. 1 of the Nuclear The increase in operating revenues in 1977 over Plant for refueling. The increase in 1978 also reflected 1976 was primarily attributable to rate increases placed the placing of Unit No. 2 of the Nuclear Plant in com-in effect during 1976 and 1977 and to the recovery of mercial operation during July. The utilization of the increased fuel costs pursuant to the Company's fuel- relatively more expensive fuel oil (to conserve coal adjustment clauses. Growth in operating revenues dur- supplies) to generate electricity during the coal miners'trike ing 1977 was limited due to a 17%%uo decrease in kilowatt- which ended in March 1978 contributed to the hour sales for resale. The increase in operating reven- increase in 1978 over 1977.

ues in.1978 over 1977 reflected a 29% increase in The purchased and interchange power increase of kilowatt-hour sales for resale, the recovery of increased $ 18,121,000 (14% ) in 1977 and decrease of fuel costs, and rate increases placed in effect during $ 28,525,000 (20%) in 1978 primarily reflect the 1977 and 1978. Conservation measures by some cus- utilization of the Nuclear Plant as described above.

tomers have tended to limit the growth of operating revenues in both 1977 and 1978. Other operation expense increased by $ 15,295,000 (34%) in 1978 over 1977 mainly due to higher costs of labor, materials, supplies, and services, and was also Operating Expenses affected by test generation prior to, and increased Fuel for electric generation increased in 1977 over generation due to, placing of Unit No. 2 of the Nuclear 1976 by $ 3,925,000 (6%) and in 1978 over 1977 by Plant into commercial operation.

$ 51,225,000 (69% ). Factors relating to these increases The increase in maintenance expense in 1977 over and the related estimated amounts are shown below: 1976 of $ 8,312,000 (41%) was associated with cer-

IIVDIAIVA4 Ml rlIV ELECTRIC COMPANY AIV GEIVERATIBG SUBSIDlr!RY MANAGEMENT'S COMMENTS ON CONSOLIDATED

SUMMARY

OF OPERATIONS (Concluded) tain increased maintenance activity in 1977 which had tributable to increased applicable revenues, and to previously been deferred and with higher "labor cost Michigan Single Business Tax pertaining to the Gen-and increased costs of materials, supplies, and services erating Subsidiary.

as regards power production maintenance. Maintenance Information concerning Federal income taxes (in-expense increased by $ 4,272,000 (15% ) in 1978 over cluding a reconciliation of actual Federal income taxes 1977 largely because of increasing cost levels and to such taxes computed at statutory rates) is shown in increased power plant, transmission and distribution Note 3 of Notes to Consolidated Financial statements.

maintenance activities.

The increase in depreciation expense in 1978 over Allowance for Funds Used During Construction 1977 of $ 11,020,000 (23%) was chiefly due to the placing of Unit No. 2 of the Nuclear Plant and certain The allowance for funds used during construction environmental protection facilities at the Company's (AFUDC), including the portion shown as a credit to Tanners Creek Plant in commercial operation. interest charges, increased by $ 17,666,000 (61%) in 1977. This increase was related to an increased amount Taxes, other than income taxes increased by invested in construction (including Unit No. 2 of the

$ 4,488,000 (24%) in 1977. This was due to increases Nuclear Plant and precipitator installation projects at in utility plant in service and the completion in 1976 two of the Company's plants) and to the etfect of the of the amortization (approximating $ 3,000,000 for , Generating Subsidiary's compounding AFUDC begin-that year) of certain deferred credits associated with ning in 1977.

property taxes which had been deferred pursuant to regulatory authorization. The increase in taxes, other Interest Charges than income taxes in 1978 over 1977 of $ 3,024,000 (13%) was largely attributable to increased Indiana In 1978, total interest charges increased by Property Tax resulting from greater assessed valuation $ 15,876,000 (20% ) over 1977; this was related to ad-of property, increased Indiana Gross Income Tax at- ditional long-term debt outstanding.

'(

Auditors'pinion To the Shareowners and the Board of Directors of Indiana & Michigan Electric Company AVe have examined the balance sheets of Indiana & Michigan Electric Company and its gen-erating subsidiary, Indiana & Michigan Power Company, consolidated, as of December 31, 1978 and 1977 and the related statements of consolidated income, retained earnirigs and sources of funds for plant and property additions for the respective years then ended. 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.

As discussed in paragraphs three and five of Note 2 of Notes to Consolidated Financial State-ments, the Company is collecting certain wholesale revenues subject to possible refund and has been incurring charges for interchange power subject to refund by its affiliated interchange power suppliers. An initial decision in the interchange power proceeding in February 1978, could, if sustained, result in substantial refunds to the Company. In addition, the Company is involved in antitrust matters discussed in paragraphs three and five of Note 10 of ¹tes to Consolidated Financial Statements.

In our opinion, subject to the effect on the financial statements identified above of such adjust-ments, if any, as might have been required had the outcome of the rate and antitrust matters referred to in the preceding paragraph been known, such financial statements present fairly the financial position of the above companies, consolidated, as of December 31, 1978 and 1977 and the results of their operations and their sources of funds for plant and property additions for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

New York, New York February 19, 1979 (March 2, 1979 as to paragraph five of Note 10 of Notes to Consolidated Financial Statements)

INDIANA dc MICHIGAN TRIC COMPANY AND GENERATING SUBSIDIARY Consolidated Statement of Income Year Ended December 31, 2978 1977 (In Thousands)

OPERATING REYENUEs ELEGTRIc (Notes 1 and 2) ........... $ 603,480 $ 312,824 OPERATING EXPENSES:

Operation:

Fuel for Electric Generation 125,277 74,052 Purchased and Interchange Power (Net)

(Notes 2 and 9) . 116,308 144,833 0 ther ~ ~ ~ ~ 0 \ ~ ~ 0 ~ ~ ~ ~ ~ 60,001 44,706 Maintenance (Note 1) 32,724 28,452 Depreciation (Note 1) 597844 48,824 Taxes, Other Than Income Taxes (Note 9) 26,432 23,408 State Income Taxes (378) 704 Federal Income Taxes (Notes 1 and 3) .. 23,438 17,445 Total Operating Expenses ~ 443,646 382,424 OPERATING INCOME 159,834 130,400 OTHER INcoME AND DEDUcTIGNs (Notes 1 and 3);

Allowance for Other Funds Used During, Construction ...... 27,974 26,889 Miscellaneous Nonoperating Income Less Deductions ...... 1,040 952 Total Other Income and Deductions ............ 291014 27,841 INCOME BEFORE INTEREST CHARGES . 188,848 158,241 INTEREST CHARGES:

Interest on Long-term Debt . 89,397 73,188 Interest on Short-term Debt . 5,964 6,697 Miscellaneous Interest Charges (Note 1) 1,287 887 Total Interest Charges 96,648 80,772 Allowance for Borrowed Funds Used During Construction (Credit) (Note 1) ... (22,627) (19,651)

Net Interest Charges 74,021 61,121 CONSOLIDATED NET INCOME $ 1147827 $ 97,120 See Notes to Consolidated Financial Statements.

Consolidated Balance Sheet December 31, 1978 1977 ASSETS AND OTHER DEBITS (In Thousands)

ELEGTRIc UTILITYPLANT (Note 1):

Production $ 1@45,070 $ 864,902 Transmission 421,644 401,562 Distribution 257,186 244,103 General and Miscellaneous (includes Nuclear Fuel) ......... 68,209 40,965 Construction Work in Progress 305,136 555,500 Total Electric Utility Plant 2,397,245 2,107,032 Less Accumulated Provision for Depreciation ~.........,.... 410,520 358,826 Electric Utility Plant, Less Provision ...... ~...... 1,986,725 1,748,206 OTHER PRQPERTY AND INVEsTMENTs (Notes 1 and 4) 170,299 137,421 CURRENT AssBTs:

Cash (Note 8) 21,264 54,735 Special Deposits and Working Funds 6,750 24,065 Temporary Cash Investments (at cost, which approximates market) 8,494 Accounts Receivable:

Customers 46,277 38,052 Associated Companies 7,511 9,382 Mtscellaneous 4,498 4,968 Accumulated Provision for Uncollectible Accounts ........ (299) (221)

Materials and Supplies (at average cost or less):

Construction and Operation Materials and Supplies . 12,783 11,468 Fuel 16,112 17,320 Accrued Utility Revenues 13,811 18,149 Prepayments and Other Current Assets 3,467 4,322 Total Current Assets 132,174 190,734 DEFERRED DEBITS:

Unamortized Debt Expense (Note 1) 3,143 2,172 Property Taxes 1,422 1,450 Deferred Collection of Fuel Costs (Note 2) ...... 1,584 1,655 Other Work in Progress . 9,010 4,780 Other Deferred Debits . ~..................... 45,606 36,521 Total Deferred Debits 60,765 46,578 Total . $ 2,349,963 $ 2,122,939 See Notes to Consolidated Financial Statements.

10

INDIANA & MICHIGAiV ELEC COMPANY AND GENERATIN SUBSIDIARY December 31, 1978 1977 LIABILITIES AND OTHER CREDITS (In Thousands)

CAPITALIZATION:

Common Stock iNo Par Value (Note 5):

Authorized 2,500,000 Shares Outstanding 1,400,000 Shares . S 56,5&4 S 56,584 Premium on Capital Stock (Note 5) 381 381 Other Paid-in Capital (Note 5) 470,228 410,228 Retained Earnings (Note 6) . 136,829 104,566 Total Common Shareowner's Equity ........... 664,022 571,759 Cumulative Preferred Stock (Note 7) 227,000 187,000 Long-term Debt (less portion due within one year) (Note 8) 1,043,090 977,062 Total Capitalization (less long-term debt due within one year) . 1,934,112 1,735,821 CURRENT LIABILITIES:

Long-term Debt Due within One Year (Note 8) ............ 7,536 61,421 Short-term Debt (Note 8):

Notes Payable to Banks . 69,490 49,650 Commercial Paper 55,450 52)200 Accounts Payable:

General . 50,460 19,650 Associated Companies 15,305 16,306 Dividends Declared:

Common Stock 14,252 11,360 Cumulative Preferred Stock 4,754 3,854 Customer Deposits 1,909 1,739 Taxes Accrued 20,005 18,804 Interest Accrued 18,338 19,041 Other Current Liabilities 16,439 16,653 Total Current Liabilities . 273,938 270,678 CoMMITMENTs AND CQNTINGENcIEs (iNote 10)

DEFERRED CREDITs AND OPERATING REsERVEs:

Deferred Income Taxes (iNote 1) .. 120,921 102,143 Deferred Investment Tax Credits (Notes I and 3) ........... 8,503 10,785 Other Deferred Credits and Operating Reserves ............. 12,489 3,512 Total Deferred Credits and Operating Reserves ..... 141,913 116,440 Total $ 2)349)963 $ 2,122,939

'I Consolidated Statement of Sources of Funds for Plant and Property Additions Year Ended December 31, 1978 1977 (In Thousands)

FUNDS FROM OPERATIONS:

Cohsolidated Net Income $ 114,827 $ 97,120 Principal Non-fund Charges (Credits) to Income:

Depreciation . 59,853 48,837 Provision for Deferred Income Taxes (Net) ............ 18,779 13,535 Deferred Investment Tax Credits (Net) 3,423 5,038 Allowance for Other Funds Used During Construction .... (27,974) (26,889)

Other (Net) . 506 72 Total Funds from Operations . 169,414 137,713 FUNDS FROM FINANCINGS:

Issuances and Contributions:

Long-term Debt . 369,839 135,391 Cumulative Preferred Stock 38,486 38,120 Capital Contributions from Parent Company ............" 60,000 58,000 Short-term Debt (Net) 23,090 Total . '491,415" 231,511 Les~Retirements:

Long-term Debt . 357,877 10,873 Short-term Debt (Net) 46,163 Net Funds from Financings . 133,538 174,475 DIVIDENDS ON COMMON STOCK (62,692) (52,920)

DIVIDENDS ON CUMULATIVE PREFERRED STOCK .............. (18,357) (14,041)

SALEs oF PRoPERTY 42,416 97,311 OTHER CHANGES (NET) (13,675) (4,523)

DEGREAsE (INGREAsE) IN WQRKING CAPITAL (Excluding Short-term Debt and Long-term Debt Due Within One Year) (a) . ~ ~ 92,615 (61,061)

Total $ 343,259 $ 276,954 PLANT AND PROPERTY ADDITIONS:

Gross Additions to Utility Plant . $ 340,209 $ 272,433 Gross Other Additions . 31,024 31,410 Total Gross Additions . 371,233 303,843 Allowance for Other Funds Used During Construction ...... (27,974) (26,889)

Total $ 343,259 $ 276,954 (a) Represented by decrease (increase) as follows:

Cash and Cash Items $ 59,280 $ (30,020)

Accounts Receivable (5,806) (3,534)

Materials and Supplies . (107) (5,851)

Accounts Payable 29,809 (11,096)

Taxes Accrued 17201 (1,087)

Other (Net) 8,238 (9,473)

$ 92,615 $ (61,061)

See Notes to Consolidated Financial Statements.

12

liVDIAIVA& MICHIGAIV EW"RIC COMPAIV Y AIVD GEIVERATTJVG SUIISIDIARY Consolidated Statement of Retained Earnings December 31, 1978 1977 (In Thousands)

Balance at Beginning of Year $ 104,566 $ 76,286 Consolidated Net Income . 114,827 97,120 Total 219,393 173,406 Deductions:

Cash Dividends Declared:

Common Stock 62,692 52,920 Cumulative Preferred Stock:

4~/s % Series 495 495 4.56% Series 273 273 4.12% Series . 165 165 7.08% Series 2,124 2,124 7.76% Series . 2,716 2,716 8.68% Series . 2,604 2,604 12 % Series . 3,600 3,600

$ 2.15 Series 3,440 2,064

$ 2.25 Series 2,940 Total Cash Dividends Declared ............... 81,049 66,961 Capital Stock Expense 1,515 1,879 Total Deductions 82i564 68,840 Balance at End of Year (Note 6) . $ 136,829 $ 104,566 See IVoies io Consolidated Financial Stasements.

Notes to Consolidated Financial Statements

1. Significant Accounting Policies: Income is charged with the costs of labor, materials, The common stock of the Company is wholly owned supervision, and other costs incurred in maintaining the by American Electric Power Company, Inc. (AEP). properties. Property accounts are charged with costs of The consolidated financial statements include the ac- betterments and major replacements of property, and counts of the Company and its wholly owned subsidiary the accumulated provisions for depreciation are charged Indiana & Michigan Power Company (the Generating with retirements, together with removal costs less salvage.

Subsidiary). The Generating Subsidiary was.formed to Nonutility property, other property investments, and own, complete construction of and operate the Donald other investments are generally stated at cost.

C. Cook Nuclear Plant, the first unit of which has been 'ncome Taxe's in commercial operation since 1975 and the second unit Deferred Federal income taxes, reduced where ap-of which was placed in commercial operation during plicable by investment tax credits, are provided by the July 1978. Significant intercompany items have been Company and the Generating Subsidiary generally to eliminated in consolidation. A minor inactive subsidiary the extent that such amounts are allowed for rate-has not been consolidated.

making purposes. On October 1, 1978, the Company The accounting and rates of the Company and the and its Generating Subsidiary expanded deferred tax Generating Subsidiary are subject in certain respects to accounting to additional timing differences pursuant to the requirements of state regulatory bodies and in cer- an order of the Public Service Commission of Indiana.

tain respects to the requirements of the Federal Energy The Company and the Generating Subsidiary prac-Regulatory Commission (FERC). The consolidated tice deferral accounting for the effect of tax reductions financial statements have been prepared, with full res- resulting from the application of investment tax credits ervation of legal rights, on the basis of the accounts to provisions for current and certain deferred Federal which are maintained for FERC purposes. income taxes. The deferred investment tax credit ap-plicable to current Federal income taxes payable is Utility Plant, Other Property and Investments amortized over 30 years.

and Depreciation Electric utility plant is stated at original cost. Gen- Pension Plan erally, the plant of the Company and the Generating The Company and the Generating Subsidiary par-Subsidiary is subject to first mortgage liens. ticipate with other companies in the AEP System in The companies capitalize, as a construction cost, an. a trusteed plan to provide pensions for all employees, allowance for funds used during construction, an item subject to certain eligibility requirements. The plan was not representing cash income, which is defined in the previously contributory on the part of employees, but applicable regulatory systems of accounts as the net as of January 1, 1978, required employee contributions cost of borrowed funds used for construction purposes were eliminated as to substantially all employees. The and a reasonable rate on other funds when so used. pension plan conforms to the Employee Retirement The respective composite rates used by the Company Income Security Act of 1974 (ERISA).

and the Generating Subsidiary were increased to 10.5% Pension costs for the years ended December 31, and 10.2%, respectively, during 1978 (effective Janu- 1978 and 1977 were approximately $ 2,624,000 and ary 1) from 8.5% used by both companies in 1977, $ 2,170,000, respectively, representing the cost of cur-(applied by the Company on an annual basis and by rently accruing benefits. There were no unfunded prior the Generating Subsidiary on a semiannual compound service costs as of December 31, 1978. Effective Janu-basis). ary 1, 1979, benefits of the plan were modified. The The companies provide for depreciation on a straight- change resulted in unfunded prior service costs of line basis over the estimated useful lives of the property. approximately $ 1,970,000, which will be amortized The current provisions are determined largely with the over 30 years. The plan may be modified or terminated use of functional composite rates as follows: at any time, subject to limitations of labor agreements.

Functional Composite Employees Savings Plan Class of Annual

~PIO Cll Rate The Company and the Generating Subsidiary par-Production: ticipate with other AEP System companies in a trusteed Steam Nuclear . 4.0% savings plan which became effective January 1, 1978 Steam Fossil. fired 3.1% and is available to employees who have met eligibility Transmission ........... requirements. The savings plan conforms to the appli-Distribution . 3.3%

General 3.5% cable provisions of ERISA. Each employer contributes

If>tDIAt>tA >it M~GAt>t ELECTRIC COMPANY A%V GEHERATlt>tG SVBSIDIARY to the plan an amount equal to 50% of its employee-participants'ontributions up to 6% of their regular 1978...............

1977 .

(In Thousands)

S 24>981 27,968 compensation. Benefits to participating employees are Prior to 1977 . 50,368 based solely upon amounts contributed to the partici- Total 3103,317 pants'ccounts. By its nature the plan is<fully funded at all times. The cost of the plan for the year ended On February 23, 1978, an administrative law judge December 31, 1978 totaled $ 607,000. of FERC issued an initial decision ordering one of the afiiliated interchange power suppliers to make certain Other refunds, after recomputing interchange charges for the The Company accrues unbilled revenues for services period subsequent to June 1975 on the basis of the rendered subsequent to the last billing cycle through interconnection agreement in effect prior to that date, month-end. but excluding from such calculations as member ca-miscellaneous nonoperating income for the years pacity, in the case of the Company, the capacity owned ended December 31, 1978 and 1977 includes gains by the Generating Subsidiary and, in the case of an-amounting to $ 261,000 and $ 306,000, respectively, on other member of the System, the capacity owned by its certain long-term debt reacquired. generating subsidiary. If the change is finally ordered Debt discount or premium and debt expense are by FERC, the Company could become entitled to re-being amortized over the lives of the related debt issues -funds in a substantial amount. Certain intervenors have and the amortization thereof is included within miscel- urged that changes be made in the interconnection laneous interest charges. agreement, which would have the opposite effect, in-creasing the amounts payable by the Company.'he

2. Operating Revenues and Operating Expenses: AEP System subsidiaries, including the Company, have filed a brief which urges that the action of the admin-The Company has collected retail revenues under istrative law judge be revised so as to sustain the origi-final orders of the Public Service Commission of Indi-nal amounts charged,'but cannot predict the final out-ana which became effective in February 1977 and come of the proceeding or the effect thereof on the September 1978. The 1977 order has been appealed to a court of appeals and certain parties have initiated Company.

Operating revenues derived from domestic govern-proceedings looking toward an appeal from the 1978 mental entities represent approximately 8% and 10%

order.

of total operating revenues for 1978 and 1977, respec-In September 1978, FERC ordered that the Com-tively. Operating revenues derived from a certain pany refund approximately $ 3,000,000 to a municipal wholesale customer represent approximately 12% and customer. The Company recorded the refund in the third quarter of 1978. The effect of such refund on 7% of total operating revenues for 1978 and 1977, respectively.

prior periods was not material.

Revenues collected by the Company from wholesale In 1978 the Company received approval of the Public Service Commission of Indiana to collect, over rate increases placed into effect subject to possible a five-year period ending in 1983, substantially all of refund (exclusive of the amount refunded as described its deferred fuel costs.

above) are estimated as follows:

(In Thousands) 3. Federal Incoine Taxes:

1978 $ 20,777 The details of Federal income taxes are as follows:

1977 16,439 Year Ended Prior to 1977 5,224 December 31, Total $ 42,440 1978 1977 Charged (Credited) to Operating (In Thousands)

See Note 10 for information with respect to an anti- Expenses:

trust decision enjoining the Company from charging Current Federal Income Taxes certain wholesale rates. (Net) $ 1,357 S(1,128)

Deferred Federal Income Taxes Commencing in June 1975, operating expenses in- (Net) 18,658 13,535 clude the effect of changes in rates charged for inter- Deferred Investment Tax Credits 5,038 change power transactions between the Company and other companies in the AEP System. The effect of Total .................... 23,438 17,445 such changes was to increase the charges to the Com-pany, subject to possible refund by its interchange Deductions ............

Charged to Other Income and 936(a) 537 Total Federal Income Taxes S24,374 S17,982 power suppliers, by the following estimated amounts: (a) Includes deferred income taxes of $ 121,000.

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The consolidated effective Federal income tax rates were less than the statutory rates for the years 1978 and 1977. The following is a reconciliation of the differences between the amount of Federal income tax expense reported in the Consolidated Statement of Income and the amount of Federal income taxes computed by multiplying consolidated net income before Federal income taxes by the statutory tax rate.

Year Ended December 31, 1978 1977 (InThousands)

Consolidated Net Income $ 114,827 $ 97,120 Federal Income Taxes . 24,374 17,982 Pre-Tax Book Income . 8139,201 8113,102 Federal Income Tax on Prc-Tax Book Income at Statutory Rate of 48% . 8 66,816 8 33,249 Increase (Decrease) in Federal Income Taxes Resulting from:

Excess of Tax over Book Dcprcciation (19,691) (16,080)

Allowance for Funds Used During Construction and Items Capitalized on the Books but Deducted for Tax Purposes . (25,853) (24,005)

Mine Development and Exploration Expense (4,680) (1,962)

Provision for Revenue Refunds . (888) (2,912)

Amortization of Pollution Control Facilities . (4,080) (1,609)

Miscellaneous Items 109 (5,633)

Federal Income Tax on Current-Year Taxable Income (Separate-Return Basis) 11,733 3,048 Reduction Due to System Consolidation . (11,733) (3,048)

Minimum Tax on Preference Items 650 18 Currently Payable 650 18 Adjustments of Prior-Year Accruals (Net) (276) (774)

Adjustments for Tax Losses (a):

Federal Income Taxes 7,503 68 Investment Tax Credit (5,705) 97 Current Federal Income Taxes (Net) . 2,172 (591)

Deferred Federal Income Taxes (Net of Amortization) Resulting from the Following Timing Differences:

Depreciation (Liberalized and Asset Depreciation Range) .. ~ . 17,439 13,931 Unbilied Revenue . (1,221) 3,315 Accelerated Amortization of Emergency Facilities (Amortization of Prior-Year Provisions) ........ (1,848) (1,882)

Provision for Revenue Refunds 2,213 Other 2,188 1,154 Investmcnt Tax Credit Applicable to Deferred Federal Income Taxes on Certain Timing Differences 2,221 (5,196)

Deferred Federal Income Taxes (Net) 18.779 13,535 Deferred Investment Tax Credits (Net) . 3,423(c) 5,038 Total Federal Income Taxes $ 24,374 '17,982 (a) The AEP System allocates Federal income taxes currently payable in accordance with SEC regulations, which require that the benefit of tax losses be allocated to the AEP System companies with taxable income.

The benefits of these tax losses, without affecting taxes payable, are reallocated to the AEP System companies giving rise to such losses, as it is expected that these losses would be usable in subsequent years to reduce taxes payable of the loss companies.

16

INDIANA 4 Ml AN ELECTRIC COMPANY AND GENERATING SUBSIDIARY (b) In accordance with an order of the SEC under the Public Utility Holding Company Act of 1935, a tax loss of the Generating Subsidiary is to be first applied to reduce the taxable income of the Company and any unused amount is to be allocated among the other System companies included in the consolidated Federal income tax return, but with the provision that any losses so allocated to other System companies shall be reallocated to the Company if usable by it in subsequent years. The effect of tax losses allocated to other companies would be included in the reallocation referred to in (a) above.

(c) The System consolidated Federal income tax return for 1977, filed in 1978, showed a taxable income which was less than that estimated for the year-end accrual. The decrease was principally attributable to additional percentage repair allowance deductions of the Company and affiliated companies and mine development expense deductions of the Company claimed over the estimated amounts utilized in pre-paring the 1977 year-end accrual. These differences had no significant effect on the amount of income taxes payable for 1977 because of the effect of investment tax credits; however,.total System Federal income taxes for 1977 would have been reduced due to the related reversal of deferred investment tax credits, The increase in income ($ 3,194,000) resulting from these differences in estimates was recorded by the Company in the third quarter of 1978.

The Company joins in the filing.of a consolidated 4. Other Property and Investments:

Federal income tax return with its affiliated companies The following is an analysis of other property and in the AEP System. Unused System investmcnt tax investments:

credits at December 31, 1978 aggregated approximately December 31,

$ 201,000,000, of which approximately $ 21,300,000 1978 1977 may be carried forward =through 1981, $ 52,800,000 (In Thousands)

Nonutility Property and Other through 1982, $ 20,500,000 through 1983, $ 27,400,000 Property Investments:

through 1984, and $ 79,000,000 through 1985. Of western Coal Lands Acquired as Source of Low4ulfur Fuel ... $ 149,713 $ 120,799 these amounts, approximately $ 26,000,000 had been Other Coal Properties and Fuel-applied as a reduction of deferred income taxes prior Handling Facilities .......... 4,946 3,692 Miscellaneous (Net) ........... 15 495 12 674 to December 31, 1978 and will not be reflected in net Subtotal ................ 170,154 137,165 income when realized in futureyears except as af- Ohio Valley Electric Corporation Sub-ordinated Notes .................. 56 fected by changes in deferred income taxes. Other Investments .................. 145 200 Total Other Property and The System consolidated Federal income tax re- Investments ............... $ 170,299 $ 137,421 turns for the years prior to 1965 have been settled.

The returns for the years 1965 through 1969 together 5. Common Stock, Premium on Capital Stock, and Other Paid-in Capitals with certain unrecorded refund claims relating to the years 1965, 1966 and 1967 are currently being settled There were no common stock transactions and no transactions affecting premium on capital stock during on the basis of a net refund for the period, the amount the years 1978 and 1977. The Company received from of which the System companies deem immaterial. The its parent cash capital contributions of $ 60,000,000 in returns for the years 1970 through 1973 have been 1978 and $ 58,000,000 in 1977; such contributions reviewed by the Internal Revenue Service and addi- were credited to other paid-in capital.

tional taxes for those years have been proposed, some of which the System companies have protested. In the 6. Retained Earnings:

opinion of the System companies, adequate provision Various restrictions on the use of retained earnings has been made for such additional taxes. for cash dividends on common stock and other pur-poses are contained in or result from covenants in mortgage indentures, debenture and bank loan agree-ments, charter provisions, and orders of regulatory authorities. Approximately $ 48,500,000 at December 31, 1978 was so restricted.

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Cumulative Preferred Stodc The following is an analysis of cumulative preferred stock:

Amount Redemption Current Restricted Par Shares December 31.

Series Call Price(a) . Prior to Value Outstanding 1978 1977 (In Thousands) 4 Vs% '106.125 $ 100 120,000 $ 12,000 $ 12,000 4.56% 102.000 100 60,000 6,000 6,000 4.12% 102.728 100 40,000 4,000 4,000 7.08% 106.450 100 300,000 30,000 30,000 7.76% 107.320 100 350,000 35,000 35,000 8.68% 107.440 100 300,000 30,000 30,000 12 112.000(b) 9/1/80 100 300,000 30,000 30,000

$ 2.15 27.150 5/1/82 25 1,600,000 40,000 40,000

$ 2.25 27.250 3/1/83 25 1,600,000 40,000 Total Cumulative Preferred Stock $ 227,000 $ 187,000 (a) Callable at the option of the Company, at the price indicated plus accrued dividends. Thc involuntary liquidation preference is par value.

(b) A sinking fund for the 12% series requires the Company to provide, on or before October 1 of each year, beginning in 1980, for thc purchase, or redemption at $ 100 a share, of 15,000 shares of such series. The Company has the right, on each sinking fund date, to redeem an additional 15,000 shares. Unless all sinking fund provisions have been met, no distribution may be made on the common stock.

In 1976 shareowners authorized the issuance of up to 4,000,000 shares of $ 25 par value cumulative preferred stock (which ranks equally with the $ 100 par value cumulative preferred stock) and in 1978 increased the authori-zation to 7,200,000 shares. In 1977 the Company issued and sold 1,600,000 shares of the $ 2.15 series and in 1978 the Company issued and sold 1,600,000 shares of the $ 2.25 series.

At December 31, 1978, authorized shares of cumulative preferred stock were as follows:

Shares Par Value ,Authorized

$ 100... 2.250,000 25 . 7,200,000 S. Long-term Debt, Short-term Debt, Lines of Credit, Dcccmber 31.

and Compensating Balances: Series Due 1978 1977 Long-term debt by major category was outstanding (In Thousands) 7  % 1998 $ 35,000 $ 35,000 as follows (less portion due within one 'year): 8Fs% 2000 50,000 50,000 8Ys% 2003 40,000 40,000 December 31. 9'%003(c) 255,000 1978 1977 9'A%%uo 2008 100,000 Unamortized Debt First Mortgage Bonds ..............

(In Thousands)

Discount Net (552) (262)

$ 832,286 $ 482,826 Sinking Fund Debentures ........... 24,083 25,260 Less Portion due ivithin One. Year ..

835,286 3,000 539,999 57,173 Notes Payable to Banks, duc 1980 .. 82,000 360,000 Installment Purchase Contracts ...... 99,841 99,750 Total $ 832,286 $ 482.826 Other Long-term Debt ............. 4,880 9,226 (a) Retired February 1, 1978.

Total (less portion due within (b) Retired September 1, 1978.

one year) $ 1,043,090 $ 977,062 (c) Guaranteed by American Electric Power Company, Inc.

(d) These bonds are obligations of the Generating Subsidiary.

First mortgage bonds outstanding were as follows: The unamortized discount amounted to $ 189,000 and

$ 221.000 at December 31, 1978 and 1977, respectively.

December 31, (e) Sinking fund payments are required as follows:

Series Due 1978 1977 10% series due 1985 $ 750,000 annually on March 1.

107/s% series due 1984 $ 2,250,000 annually on Decem-(In Thousands)

"6'o 1978(a) .................... $

$ 30,000 ber 1, through 1983, with the noncumulative election to redeem an additional $ 2,250,000 in each year.

3 1978(b) .................... 24,173 9'%eries due 2003 $ 11,500,000 annually on June 1, 2%% 1980 3 Vs% 1982 ......... 18,015 16,046 18,015 16,046 1980 through 1991 and $ 13.500,000 annually on Junc 1, 1992 through 2002 with the noncumulative option to 10Vs % 1982 70,000 70,000 redeem an additional amount in each of the specified 3Ys% 1983 .... .. ... . 13,762 13,762 years from a minimum of $ 100,000 to a maximum 11 3Ys% 1984 1983 .............. 60,000 60,000 equal to the scheduled requirement for each year, but 15,082 15,082 with a maximum ootional redemption, as to all years 10zs% 1984(c)(d)(e) 10 3ss%

4%duo 4%%

1985(e) 1988 1988 1993 66,000 13,500 22,974 17 557 42,902 70,500 14,250 22,974 17 557 42,902 in the aggregate, of $75,000,000.

In January 1979, the Company of 10N% first mortgage bonds due in 1987. The issued $ 80,000,000 18

INDIANA ck Ml AN ELECTRIC CohfPANY AND GENERATING SUBSIDIARY Generating Subsidiary has a delayed-delivery contract Consolidated long-term debt outstanding at Decem-to sell an additional $ 45,000,000 of its first mortgage ber 31, 1978 is due as follows:

bonds, 9th% Series due 2003, on March 1, 1979. Principal Amount The indentures relating to the first mortgage bonds (In Thousands)

'contain improvement, maintenance and replacement 1979 $ 71536 provisions requiring the deposit of cash or bonds with 1980 118,859 the trustee, or in lieu thereof, certification of unfunded 1981 15,032 property additions. The Company has elected to'use 1982 101,304 unfunded property additions to meet these provisions 1983 89,035 in the past. Later Years 721.505 Sinking fund debentures of the Company outstanding Total $ 1,053,271 were as follows:

December 31, At December 31, 1978 and 1977, the principal 1978 1977 amounts of debentures reacquired in anticipation of sinking fund requirements were $ 2,183,000 and (In Thousands) 5Vs% Due 1986 $ 12,076 $ 12,491 $ 1,815,000, respectively. The companies may make 714% Due 1998 11,941 12,694 additional debenture or first mortgage bond sinking fund Unamortized Debt Premium ........... 66 75 payments of up to $ 3,050,000 annually ($ 2,250,000 Total $ 24,083 $ 25,260 relating to Generating Subsidiary).

Installment purchase contracts of the Company were The interest rate on the long-term notes payable to as follows: .banks (an average of 12.2% at December 31, 1978 December 31, and 8.4% at December 31, 1977) depends on the 1978 1977 prime commercial rate plus a fractional percentage.

(In Thousands) The Generating Subsidiary has informal arrangements City of Lawrenceburg, Indiana: with the banks to maintain average compensating bank 8ViÃo Series due 2006 ...... $ 25,000 $ 25,000 balances equal to approximately 15% of certain of the 7% Series due 2006 ........ 40,000 40,000 notes outstanding'on. an average basis or such smaller 67ie% Series due 2006 ...... 12,000 12,000 City of Sullivan, Indiana: amount as the banks consider appropriate in view of 6ss% Series due 2006 ...... 25,000 25,000 other banking relationships or, in lieu thereof, to pay Unamortized Debt Discount ... (2,159) (2,250) a fee on any draw-down of the compensating balances Total $ 99,841 $ 99,750 based on the approximate effective interest cost of the Under the terms of certain installment purchase con- related notes, assuming the full compensating balances had been maintained; At December 31, 1978 and 1977, tracts, the Company is required to pay purchase price installments in amounts sufficient to enable the cities the compensating balances under the arrangements were approximately $ 9,800,000 and $ 34,100,000, re-to pay interest on and the principal (at stated maturi-ties and upon mandatory redemption) of related pol- spectively. The effective interest rate, representing the lution control revenue bonds issued to finance the con- actual interest rates on the notes outstanding adjusted struction of pollution control facilities at the Company's for the effect of the compensating balance require-ments, averaged 13.9% at December 31, 1978 and Tanners Creek and Breed Plants.

was approximately 9.6% at December 31, 1977.

Other long-term debt of the Company outstanding consisted of: Short-term debt and interest rates thereon were as December 31, follows:

1978 1977 1978 1977 (In Thousands) (Dollars in Coal rcscrve obligations payable in 'I Weighted average interest rates for debt Thousands) equal annual installments through 1980 with interest at 8% .......... $ 8,252 outstanding at end of year:

$ 12,377 Notes payable due 1978 through Notes Payable to Banks ............ 10.9% 7.8%

1985, 6%-7%

Other 902 262 934 Commercial Paper .................. 11.2% 7.4%

162 Maximum amount of debt outstanding at 9,416 13,473 any monthwnd during the year:

Less portion due within one year .. 4,536 4,247 Notes Payable to Banks ............ $ 69,490 $ 87,400 Total $ 4,880 $ 9,226 Commercial Paper .................. $ 55,450 $ 76,042 19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1978 1977 Year Ended December 31, (Dollars in Thousands) 1978 1977 Weighted average intcrcst rate of debt (InThousands) outstanding during the year (a): Taxes, Other Than Income Taxes:

Notes Payable to Banks ............ 94% 6.6% Real and Personal Property Taxes.. $ 14,617 $ 13,609 Commercial Paper .................. 9.1% 6.6% State Gross Sales, Excise and Fran-chise Taxes, and Miscellaneous Average .amount of debt outstanding State and Local Taxes .......... 9,842 8,078 during thc year:

Social Security Taxes Federal and Notes Payablc to Banks ............ $ 31,862 '39,457 State 1,973 1,721 Commercial Paper .................. $ 36,211 $ 58,716 $ 26,432 $ 23.408 (a) Average interest rates are determined by dividing inter- (a) Includes power purchased from OVEC of approximately est expensed for the year by average month-end debt.

$ 1,558,000 in 1978 and $ 476,000 in 1977.

(b) Includes interchange power sold to OVEC of approxi-mately $ 908,000 in 1978 and $ 956,000 in 1977.

The Company had unused short-term bank lines of Charges to income for royalties and advertising are credit of approximately $ 144,000,000 and $ 208,000,- less than 1% of gross revenues in each case.

000 at December 31, 1978 and 1977, respectively, Sales and purchases of energy and interchange power under which notes could be issued with no maturity transactions are regulated by the various commissions more than 270 days after date of issue. The available having jurisdiction.

lines of credit are subject to withdrawal at the American Electric Power Service Corporation pro-and $ 135,000,000 and $ 200,000,000, respec-banks'ption, vides certain services to the Company and the affiliated tively, of such lines are shared with other AEP System companies in the AEP System. The costs of the ser-companies. In accordance with informal agreements vices are determined by the service company on a with the banks, compensating balances of up to 10% directwhargc basis to the extent practicable and on or, in certain instances, equivalent fees are required reasonable bases of proration for indirect costs. The to ntaintain the lines of credit, and, on any amounts charges for services are made on a cost basis but in-actually borrowed, generally either additional compen- clude no compensation for the use of equity capital, sating balances of up to 10% are maintained or adjust- all of which is furnished to the service company by mcnts in interest rates are made. Substantially all bank AEP. The service company is subject to the regulation balances are maintained by the Company to compensate of the Securities and Exchange Commission under the the banks for services and for both used and available Public Utility Holding Company Act'of 1935.

lines of credit.

9. Supplemental Income Statement Information and

10. Commitments and Contingencies:

Related-Party Transactions: The construction budget of the Company and the Electric operating revenues shown in the Consoli- Generating Subsidiary for the year 1979 is estimated dated Statement of Income include sales of energy to at $ 241,000,000 and, in connection therewith, com-AEP System companies of approximately $ 17,500,000 mitments have been made.

and $ 14,500,000 for the years ended December 31, The Company participates with its parent, two asso-1978 and 1977, respectively.

ciated utility companies, several unaffiliated utility companies, and Ohio Valley Electric Corporation Operating expenses shown in the Consolidated State-(OVEC) in supplying the U.S. Department of Energy ment of Income include certain items not shown sepa-(POE) with the power requirements of its plant near rately, as follows:

Portsmouth, Ohio. The proceeds from the sales of Year Ended December 31, power by OVEC are designed to be sufficient for 1978 1977 OVEC to meet its opeiating expenses and fixed costs, including amortization of long-term debt capital (bal-(In Thousands) ance approximately $ 43,300,000 as of December 31, Purchased Power (a) ........... $ 6,241 $ 2,965 1978), over a period ending in 1982, and to provide Interchange Power (Net):

for an annual return on its equity capital. The Com-AEP System Electric Utilities . 80,043 140,957 pany, as a participant, is entitled to receive from Other Companies (b) ......... 30,024 911 OVEC, and is obligated to pay for, 7.6% of the power

$ 116,308 $ 144,833 not required by DOE. The power agreement terminates 20

INDIANA &, Ml GAiV ELECTRIC COAfPANY AND GENERATING SUBSIDIARY in 1979 but DOE has notified OVEC of its desire to transactions involved in the investigation; the auditor's negotiate an extension to 1992. report was filed in December 1978. The AEP System In 1978, three court proceedings brought, in recent companies are engaged in a continuing program 'for years by certain municipalities in Indiana and Michigan,, the orderly and economic divestment of a limited all wholesale customers of the Company, were com- amount of real estate, acquired in connection with the bined into a single consolidated case in a U.S. District housing and industrial development programs, that was Court and a fourth action was commenced in the same subject to question.

court. A trial of the consolidated case was held and.in ln 1975, an investigation was commenced under the January 1979 the court ruled for the plaintiffs that the Federal Power Act concerning the reasonableness and Company, its parent, and American Electric Power prudence of the coal-purchasing policies and practices Service Corporation have violated the antitrust laws, of members of the AEP System, the manner in which awarded the municipalities damages of approximately wholesale fuel-adjustment clauses are implemented by

$ 12,100,000 when trebled, placed limitations on the System members, and related matters. In 1978 the Company's putting into effect or charging wholesale FERC staff issued a preliminary report which alleged rates to the plaintiffs and enjoined the Company from overcharges of approximately $ 10,000,000 on the part certain practices. The financial statements at December of the entire AEP System, of which only a relatively 31, 1978 do not include any provision for such dam- small portion relates to the Company's operations. The ages. The companies are appealing the decision and report also questioned certain aspects of the AEP provisions of the judgment awarding monetary dam- System's fuel positions and policies. The AEP System ages have been stayed. companies are preparing a response to these allegations.

In another proceeding, the Company is awaiting de- In 1976 a cable-television organization filed an anti-cision on its appeal to FERC, filed in 1977, with re- trust suit in a U.S. District Court alleging that the spect to a ruling by an administrative law judge on a Company, with five telephone companies named as complaint made to the commission by the same group co-conspirators, had attempted to monopolize com-of municipalities. That complaint, alleging that the munications by terminating contracts and increasing municipal electric systems had been threatened with charges for the rental of utility poles, and sought dam-termination of wholesale electric service, had earlier ages which when trebled would aggregate more than been upheld by the FERC judge. $ 150,000,000. In early 1979, the court entered a In March 1979, two other municipal customers judgment denying damages and injunctive relief.

brought a separate action against the Company, its The companies are subject to certain developing parent and the Service Corporation alleging violations laws and regulations with respect to air and water of the antitrust laws and seeking damages of at least quality, land use, and other environmental matters.

$ 7,000,000 before trebling and other remedies. Certain IVhile the companies are unable to predict the ultimate issues in the complaint are similar to those tried in the effect of such laws and regulations, it is possible that consolidated case discussed in the second preceding they may be required to pay penalties for failure to paragraph. comply during certain periods or that compliance there-As previously reported, the Securities and Exchange with may require the companies to incur substantial Commission (SEC) had commenced an investigation, additional costs to modify or replace existing and pro-through its staff, into certain aspects of the AEP Sys- posed equipment and facilities.

tem's operations, including its promotion of all-electric Other highly complex litigation relates to the Donald housing during the 1960's and the acquisition and C. Cook Nuclear Plant's fuel-supply contracts. Two operation of certain coal and transportation properties. contractors, United Nuclear Corporation and General The SEC staff had maintained that commission au- Atomic Company (GAC), are variously obligated to thorization should have been obtained for some of the supply uranium concentrates and six fabricated nuclear-transactions. The AEP System companies disagreed fuel reloads to the Company. Each contractor claims, but did agree to a negotiated settlement in order to among other things, that it is not or may not be obli-avoid long litigation with the SEC. As a result, the gated to make deliveries of uranium concentrates or fab-AEP System companies agreed to a consent order in ricated nuclear-fuel reloads and that it is entitled to a a U. S. District Court in which they neither admitted price higher than contracted. The Company received nor denied the allegations. As part of the agreement, a the first two reloads and assured delivery of the remain-special auditor was appointed to review intercompany ing four reloads through rights-reserved agreements charges and costs associated with the programs and with GAC, which were incorporated into injunctive 21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded) orders of the court. Under the agreements, pending the length from 2 to 35 years. Most of the leases require court's judgment and without prejudice to the ultimate the companies to pay related property taxes, mainte-rights of the parties, the reloads, were to be supplied nance costs, and other costs of operation. The com-at a higher provisional cost to the Company. In panies expect that in the normal course of business, 1978, a U.S. District Court entered judgment ordering leases will generally be renewed or replaced by other GAC to pay the Company damages of approximately leases. The greatest part of the rentals is under leases

$ 16,000,000 and to deliver the remaining reloads at having purchase options or having renewal options for the price specified in the contract. GAC has appealed substantially all of the economic lives of the properties.

the judgment. A stay of the monetary portion of the judgment has been granted, but motions to stay the Rentals are analyzed as follows:

specific-performance portion of the judgment have been Year Ended denied. December 31, The companies intend to apply to regulatory com- 1978 1977 missions to provide, through future increased rates, for (In Thousands) the costs that will be incurred to store spent nuclear Gross Rentals $ 60,000 $ 32,000 fuel and to decommission the Nuclear Plant at the end Less Rental Recoveries (including of its service life. The companies plan to effect modifi- Sublcasc Rentals) (a) ............ 1,000 1,000 cations to increase the present spent-fuel storage ca- Nct Rentals (b) $ 59,000 $ 31,000 pacity of the Nuclear Plant to permit normal operations (a) Includes amounts paid for or reimbursed by associated through the early 1990's, at a cost which is not ex- companies.

pected to cause a material increase in the construction (b) Classified as:

budget. The companies are also studying alternative ............

Operating Expcnscs $ 51,000 $ 26,000 methods of decommissioning the Nuclear Plant but Clearing and Miscellaneous cannot reasonably estimate, at this time, the future Accounts (portions of which a costs that will be incurred. charged to income) 8,000 5,000 The Price-Anderson Act limited the public liability $ 59,000 $ 31,000 of a licensee of a nuclear plant to $ 560,000,000 for a single nuclear incident, to be covered in part by pri- Future minimum lease payments, by year and in the vate insurance with the balance to be covered by agree- aggregate, under the companies'apital leases and ments of indemnity with the Nuclear Regulatory Com- noncancelable operating leases consisted of the follow-mission. The Generating Subsidiary has purchased ing at December 31, 1978:

private insurance in the maximum available amount of Capital Operating

$ 140,000,000. In the event of a nuclear incident in- Lcascs(a) Leases volving any commercial nuclear facility in. the country, (In Thousands) the Generating Subsidiary, together with other licensees, 1979 . $ 6 000 $ 7 000 could be individually assessed $ 5,000,000 per incident 1980 . 6,000 7,000 for each reactor owned (subject to a maximum of 1981 . 6,000 7,000

$ 10,000,000 in any year for each reactor owned in the 1982 6,000 7,000 event of more than one incident). The Price-Anderson 1983 . 5,000 7,000 indemnities have been decreased by the aggregate Later Years . 74,000 74,000 amount which is assessable against existing licensees Total Future Minimum Lease Payments 103,000 $ 109,000 and will continue to decrease as new operating units Less Estimated Interest Element are licensed. Included Thcrcin (b) .............. 61,000 The Generating Subsidiary has procured property Estimated Present Value of Future insurance in the maximum available amount of $ 220,- Minimum Lease Payments ......... $ 42,000 000,000 for damage to the nuclear plant facilities and (a) Excludes leases of nuclear fuel, all of which arc capital is a self-insurer for any property loss in excess of that leases. Nuclear fuel rentals comprise thc unamortized balance amount. of thc lessor's cost (approximately $ 99,000,000 at Dcccmbcr 31, 1978 and $ 93,000,000 at Dcccmbcr 31, 1977), less salvage, value, if any, to be paid over thc period of usage in proportion

11. Leases: to heat produced, and carrying charges on the lessor's unrccov-crcd cost. It is contemplated that portions of the presently The companies, as part of their operations, lease leased material will be replenished by additional leased material.

property, plant, and equipment under leases ranging in (b) Interest rates used range from 4.9% to 12.1%. ~

22

IIVDIA¹t dtl hfl GAiV ELECTRIC COhfPAIVY AIVD GEIVERATIIVG SUBSIDIARY The following is a pro forma analysis of leased prop- 12. Unaudited Quarterly Financial Informationt erties under capital leases and related obligations, The following consolidated quarterly financial in-d assuming that such leases were capitalized:,d', gP'.

formation is unaudited but, in the opinion of the Company, includes all adjustments (consisting of only December 31, normal recurring accruals) necessary for a fair pres-t978 l977 entation of the amounts shown:

(In Thnnnnndn)

Nuclear Fuel $ 143,000 $ 132,000 Quarterly Periods Operating Operating Net Ended Revenues Income Income Coal-Mining and Coal-Transportation (In Thousands)

Equipment 15,000 17,000 1978 Real Estate 13,000 13,000 Mar. 31................. $ 145,106 $ 41,553 $ 32,196 Electric Distribution System Property 12,000 12,000 June 30................. 157,958 40,183 34,491(a)

Sept. 30................. 152,218 40,749 22,739(b)

Other 11,000 10,000 Dec. 31................. 148,198 37,349 25,401(a)

Gross Properties under Capital Leases 194,000 184,000 1977 Less Accumulated Provision for Mar. 31................. 128,258 31,821 23,191 Amortization 58,000 53,000 June 30................. 118,070 30,698 22,871 Net Properties under Capital Leases.. $ 136,000 $ 131,000 Sept. 30................. 133,016 33,812 25,817 Dec. 31................. 133,480 34,069 25,241 Obligations under Capital Leases (a) .. $ 141,000 $ 136,000 (a) Includes increases in AFUDC of approximately $ 1,567,000 recorded in thc second quarter and $ 3,372,000 recorded in (a) Including an estimated $ 37,000,000 and $ 31,000,000, re- the fourth quarter relating to changes in AFUDC rates, spectively, due within one year. applied in each case eifecuve as of January 1, 1978.

(b) Includes the effect of a revenue refund (see Note 2), and a change in tax estimate (sec Note 3).

Had capital leases been capitalized, any additional 13. Unaudited Replacement-Cost Information:

net expense would have been insignificant. The pro Estimated replacement-cost and related amounts forma data do not give recognition to offsetting ad- pertaining to depreciation, as of and for the years justments in allowable revenues that the companies ended December 31, 1978 and 1977, of productive believe would normally be expected to occur through capacity (as represented by property in service, ex-the regulatory rate-making process, if the related leases cluding nondepreciable items such as land and exclud-had been capitalized.

ing other amounts for which replacement-cost data are Included in the above analyses of future minimum not required to be computed) are considerably greater lease payments and of properties under capital leases than the related original~ost amounts reported in the and related obligations are certain leases as to which consolidated financial statements. A quantitative analy-portions of the related rentals are paid for or reim- sis of such unaudited replacement-cost information is bursed by associated companies in the AEP System included in the Company's 1978 Annual Report based on their usage of the leased property. The Com- (Form 10-K) to the Securities and Exchange Commis-pany cannot predict the extent to which or proportion sion. Reference is made elsewhere herein for informa-in which tile associated companies will utilize the tion with regard to obtaining a copy of the Company's properties under such leases in the future. Form 10-K for the year 1978.

23

Operating Statistics and Balance Sheet Data 1978 1977 1976 1975 1974 OPERATING STATISTICS ELEGTRIc OPERATING REYENUEs (Thousands):

From Kilowatt-hour Sales:

Residential:

Without Electric Heating ............ $ 96,624 $ 90,833 $ 71,888 $ 69,438 $ 53,265 With Electric Heating ............'... 54 067 46,948 37,447 33,493 27,080 Total Residential ............... 150,691 137,781 109,335 102,931 80,345 Commercial . 96,370 92,312 72,527 69,176 50,554 Industrial 121,346 109,357 80,233 75,167 63,314 Sales for Resale:

Municipalities 39,121 44,091 26,841 22,551 23,493 Cooperatives 1 7/732 15,619 10,491 9,178 7,548 Other Electric Utilities .............. 166,441 103,517 110,382 75,887 55,994 Total Sales for Resale ........... 223,294 163,227 147,714 107,616 87,035 Miscellaneous 7,729 6,062 2,573 4.650 3,389 Total from Kilowatt-hour Sales .... 599,430 508,739 412,382 359,540 284,637 Other Operating Revenues ............... 4,050 4,085 3,811 3,815 2,969 Total Electric Operating Revenues.. $ 603,480 $ 512,824 $ 416,193 $ 363,355 $ 287,606 SoURGEs AND SALEs oF ENERGY (Millions of Kilowatt-hours):

Sources:

Net Generated Steam:

Fossil Fuel 7,231 7,317 7,701 7,255 8,815 Nuclear Fuel . 10,101(a) 4,786 6,809 4,458(a)

Net Generated Hydroelectric .......... 75 68 72 89 73 Net Generated Other ................ 14 Subtotal 17>407 12,171 14,582 11,802 8,902 Purchased 301 182 232 368 694 Net Interchange . 4 475 7,922 6,523 6,778 8,451 Total Sources 22,183 20,275 21,337 18,948 18,047 Less: Losses, Company Use, Etc........ 1,340 1,270 1,290 1,305 1,335 Net Sources . 20 843 19,005 20,047 17,643 16,712 Sales:

Residential:

Without Electric Heating ... 2,352 2,456 2,384 2,374 2,181

.With Electric Heating ~.... 1 622 1,605 1,577 1,451 1,413 Total Residential ..... 3,974 4,061 3,961 3,825 3,594 Commercial 2 498 2,671 2,579 2,464 2,192 Industrial . 4 319 4,473 4,209 3,835 4,134 Sales for Resale:

Municipalities 1,585 1,642 1,527 1,522 1,847 Cooperatives 814 786 754 690 651" Other Electric Utilities .... 7 468 5,195 6,849 5,152 4,166 Total Sales for Resale . 9,867 7,623 9,130 7,364 6,664 Miscellaneous 185 177 168 155 128 Total Sales 20 843 19,005 20,047 17,643 16,712 (a) Includes 691 million kilowatt-hours in 1978 and 2,309 million kilowatt-hours in 1975 as test generation. The fuel cost associated with such generation is charged to other operation expense.

24

IlVDIAJVA 4 MICHIGAIV ELECTRIC COMPAIVY AIVD GElVERATIlVG SUBSIDIARY AvERAGE CosT oF FUEL CGNsUMED (a): 1978 1977 1976 1975 1974 Cents per MillionBtu:

Coal 109.68 74.96 65.89 56.09 51.68 Fuel Oil ........ ~

229.68 168.80 76.72(b) 190.44 . 187.38 Nuclear 34.65 29.72 26.34 27.83 Overall . 71.16 59.12 46.47(b) 65.56 69.51 Cents per Kilowatt-hour Generated:

Coal 1.11 .73 .63 .54 .49 Fuel Oil 2.40 1.88 .84(b) 2.11 1.85 Nuclear .38 .33 .28 .30 Overall . .75 .61 .47(b) .53 .67 SERVICE AVERAGES: 'ESIDENTIAL Annual Kwh Use per Customer Total 10,260 10,641 10,439 10,305 10,525 With Electric Heating .... 22)067 22,830 23,200 22,153 23,239 Annual Electric Bill Total $ 389 $ 361 $ 288 $ 277 $ 234 With Electric Heating .... $ 736 $ 668 $ 551 $ 511 $ 439 Price per Kwh (Cents)

Total 3.79 3.39 2.76 2.69 2.22 With Electric Heating .... 3.34 2.93 2.37 2.31 1.89 NUMBER oF ELEGTRIG CUsToMERs Year-End:

Residential:

Without Electric Heating ............. 315,472 313,085 312,211 310,953 281,904 With Electric Heating ............... 74 900 72,059 69,237 66,812 64,233 Total Residential ............... 390,372 385,144 381,448 377,765 346,137 Commercial 42,106 41,907 41,703 41,456 37,593 Industrial 2,689 2,500 2,452 2,418 2,416 Sales for Resale:

Municipalities 23 23 23 22 23 Cooperatives 64 61 59 58 58 Other Electric Utilities ............... 20 16 15 18 6 Total Sales for Resale ........... 107 100 97 98 87 Miscellaneous, . 1,331 1,304 1,280 1,259 1,167 Total Electric Customers ......... 436 605 430,955 426,980 422,996 387,40,0 BALANCE.SHEET DATA Year-End (Millions)

Utility Plant $ 2,397 $ 2,107 $ 1,933 $ 1,771 $ 1,630 Accumulated Provision for Depreciation ....... 410 359 317 275 249 Net Utility Plant . 1,987 1,748 1,616 1,496- 1,381 Total Assets and Other Debits ............... 2,350 2,123 1,914 1,764 1,545 Common Stock, Premium on Capital Stock, and Other Paid-in Capital 527 467 409 367 318 Retained Earnings 137 105 76 80 71 Cumulative Preferred Stock . 227 187 147 147 117 Long-term Debt (c) . 1,051 1,038 914 895 739 (a) Excludes effect of deferred collection of fuel costs.

(b) Includes effect of refund received from supplier of-fuel oil resulting from settlement of litigation concerning pricing. Without such refund, the average cost of fuel oil for 1976 would have been 173.27 cents per million Btu and 1.91 cents per kilowatt-hour generated, and the overall cost of fuel would have been 49.33 cents per million Btu and 0.50 cents per kilowatt-hour generated.

(c) Including Portion Due Within On>> Year.

25

INDIANA 4 MICHIGAN ELECT OMPANY Directors FRANK N. BIEN GERALD P. MALONEY (a)

W. A. BLACK (f) RICHARD C. MENGE LAWRENCE R. BRUNKE J. F. STARK RICHARD E. DISBROW JOHN TILLINGHAST (m)

J. LEE FLANAGAN ..W. S. WHITE, JR.

E. W. HBRMANSBN RORERT 0. WHITMAN (b)

G. E. LEMASTERS Officers W. S. WHITE, JR. RGBERT O. WHITMAN (c)

President -

Treasurer J. F. STARK (g) PETER J. DEMARIA (d)

Executive Vice President Treasurer W. A. BLACK (f) H. D. ANDERSON, JR.

Ezectttive Vice President Assistant Secretary and J. F. STARK (h)

Assistant Treasurer Senior Vice President ALLEN H. STUHLMANN

., FRANK N. BIEN Assistant Secretary and Vice President Assistant Treasurer RICHARD E. DISBROW JOHN F. DILORENZO, JR.

Vice President Assistant Secretary JOHN E. DOLAN (I) CEDRIC L. MAST (j)

Vice President Assistant Secretary A. JOSEFH DOWD WARREN O. KBLTNER (k)

Vice President Assistant Secretary GERALD P. MALONEY WILLIAME. OLSON

'Vice President Assistant Secretary RICHARD C. MENGE PETER J. DEMARIA (c)

Vice President Assistant Treasurer JoHN TILLINGHAsT(m) WILLIAMN. D'ONOFRIO (I)

Vice President Assistant Treasurer JOHN R. BURTON GERALD R. KNORR (i)

Secretary Assistant Treasurer Tite principal occupation of each of the above directors and officers of Indiana

• Michigan Electric Company, with tcn exceptions, is as an officer of American Electric Power Service Corporation of Ncw York, N. Y. The excep-tions are the Messrs. IIr. A. Black, Lawrence R. Brunke, J. Lce Flanagan, E. IV.

Hcrmanscn, IVarrcn O. Kcltncr, G. E LeMasters, I. F. Stark, Richard C.

Menge, Allen H. Stuhlmann, and Cedric L Mast whose principal occupations are as officers of Indiana & Michigan Electric Company, as indicated.

(a) Elected April 25, 1978 (h) Elected July 1, 1978 (b) Resigned April 25, 1978 (i) Elected July I, 1978 (c) Resigned April 27, 1978 (j) Resigned January 1, 1979 (d) Elected April 27, 1978 (k) Elected January I, 1979 (c) Resigned April 27, 1978 (1) Elected March I, 1979 (I) Elected July I, 1978 (m) Resigned March 29, 1979 (g) Resigned July I, 1978 26

INDIANA & MICHIGAN ELECTRIC COMPANY Price Range of Cumulative Preferred Stock By Quarters (I978 and I977) 1978 Quarters 1977 Quarters Cumulative Preferred Stock 1st 2nd 3rd 4th 1st 2nd 31'd 4th

($ 100 Par Value) 4Vs% 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 (OTC)

Ask (high/low)

Bid (high/low) 40/40 43'h/43Vt 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 S Per ~

Share (OTC)

Ask (high/low)

Bid (high/low) 46/45 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 S Per Share (OTC)

Ask (high/low) 46/46 Bid (high/low) 45/45 43/43 45/45 45/44 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 79th 76 77th 77Vi 81 81s/s 83'h 80th Low 74 697/s 69th 64V4 76th 77Vs 77 75 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) 84N 89th High 85 867/s 82 89 91 89 Low 80~/s 75 76 74 82ih 84th 86% 84 8.68% Series Dividends Paid Per Sharc $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 Market Price S Per Share (NYSE) High 98 93 987/s 94th 94'9s/4 99 101'h 997/s Low 91ih 82 83th 82 91 96 94 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 Low 116 111 ih 113 109 113%

108V4 112%

103 123 117 120Fs 117 118'21 123V~

113V4

($ 25 Par Value)

$ 2.15 Series'ividends Paid Per Share S .5375 $ .5375 $ .5375 S .5375 .215 S .5375 $ .5375 Market Price $ Per 1 Share (NYSE) High 23% 227/s 23th 227/s 25s/4 25 Low 22% 20V4 21V4 19' 24Vs 23 V~

$ 2.25 Series" Dividends Paid Per Share S .7125~~~ $ .5625 $ .5625 Market Price S Per Share (NYSE) High 21'4'/s 24 24i/s Low 21% 20Vs OTC Over-the-Counter NYSE New York Stock Exchange

'ssued in May 1977

~~ Issued in ~ifarch 1978

"~ Includes partial dividend for first quarter.

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

Market quotations provided by National Quotation Bureau, Inc. Dash indicates quotation not available.

27

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