ML17334B304

1988 Annual Rept. W/890410 Ltr

ML17334B304
Person / Time
Site:	Cook
Issue date:	12/31/1988
From:	ALEXICH M P INDIANA MICHIGAN POWER CO. (FORMERLY INDIANA & MICHIG
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
AEP:NRC:0909E, AEP:NRC:909E, NUDOCS 8904190328
Download: ML17334B304 (39)

Text

<4cELERaTEDDlUBUTloNDEMOwsTB10KsYrrEMREGULATORYINFORMATIONDISTRIBUTIONSYSTEM(RIDS)ACCESSIONNBR:8904190328DOC.DATE:.89/04/10NOTARIZED:NODOCKETFACXL:50-315DonaldC.CookNuclearPowerPlant,Unit1,Indiana60500031550-316DonaldC.CookNuclearPowerPlant,Unit2,Indiana605000316AUTH.NAMEAUTHORAFFILIATION'LEXICH,M.P.IndianaMichiganPowerCo.(formerlyIndiana&MichiganEleRECIP.NAME"RECXPIENTAFFILIATIONDocumentControlBranch(DocumentControlDesk)

SUBJECT:

Forwards1988annualrept.DISTRIBUTIONCODE:M004DCOPIESRECEIVED:LTRQENCL(SIZE:3RTXTLE:50.71(b)AnnualFinancialReportDNOTES:SRECIPIENTID.CODE/NAMEPD3-1PDCOPIESLTTRENCL11RECIPIENTIDCODE/NAMESTANG,JCOPIESLTTRENCL10INTERNAL:AEOD/DOAEXTERNALLPDR01111111AEOD/DSP/TPABNRCPDR1111RNOIR'IOALL"RIDS"RECXPXENZS:PLEASEHELPUSIOREDUCEWASTE!CGNZACT'IHEDOCUMEPZCXNZROLDESKSRQQMPl-37(EXT.20079)KOELIMlNATEYOURNAMEFROHDISIVKBVZIGNLIPIDFORDOCUMEMISYOUDGNiTNEZD!TOTALNUMBEROFCOPIESREQUIRED:LTTR7ENCL6 IndianaMichiganCowerCompanyP.O:8ox16631Coiumbus,OH43216.NAEP:NRC:0909E10CFR50.71(b)&140.21(e)DonaldC.CookNuclearPlantUnitNos.1and2DocketNos.50-315and50-316LicenseNos.DPR-58andDPR-74FINANCIALINFORMATIONFORINDIANAMICHIGANPOWERCOMPANYU.S.NuclearRegulatoryCommissionAttn:DocumentControlDeskWashington,D.C.20555Attn:T.E.MurleyApril10,1989

DearDr.Murley:

Enclosure1containstheIndianaMichiganPowerCompany's(I&M)annualreportfor1988.Enclosure2containsacopyofI&M'sprojectedcashflowfor1989.Thesereportsaresubmittedpursuantto10CFR50.71(b)and10CFR140.21(e).ThisdocumenthasbeenpreparedfollowingCorporateproceduresthatincorporateareasonablesetofcontrolstoensureitsaccuracyandcompletenesspriortosignaturebytheundersigned.Sincerely,M.P.'AlichVicePresidentKJT/ehEnclosurescc:D.H.Williams,Jr.W.G.Smith,Jr.-BridgmanR.C.CallenG.CharnoffG.BruchmannNRCResidentInspector-BridgmanA.B.Davis-RegionIIIp$gKO5OOO'=.PDI..

ENCLOSURE1TOAEP:NRC:0909EINDIANAMICHIGANPOWERCOMPANY'S1988ANNUALREPORT

CCg, ENCLOSURE2TOAEP:NRC:0909E'01989InternalCashFlowProjectionforDonaldC.CookNuclearPlant(5Millions)Projected1989Actual1988NetincomeaftertaxesLessdividendspaidRetainedearningsAdjustments:DepreciationandamortizationDeferredincometaxesandinvestmenttaxcreditsAFUDCTotaladjustmentsInternalcashflowAveragequarterlycashflowAveragecashbalancesandshort-terminvestments151.8135.915.9146.326.8(57.2)115.9131.832.610.5134138(4)152(13)"(55)84802015Total43.1358Ownershipinalloperatingnuc'learunits:Unit1andUnit2-100%MaximumTotalContingentLiability-$20.0million(2units)

<Ehr.GdianaMichiganPowerCompany!8P0419'0328881231PDRADOCK05000315',,IPDR Contents4(~~BackgroundoftheCompanyDirectorsandOfficersoftheCompany.SelectedConsolidatedFinancialData.Management'sDiscussionandAnalysisofResultsofOperationsandFinancialConditionConsolidatedStatementsofIncomeConsolidatedBalanceSheetsConsolidatedStatementsofCashFlowsConsolidatedStatementsofRetainedEarningsNotestoConsolidatedFinancialStatementsIndependentAuditors'eportOperatingStatisticsDividendsandPriceRangesofCumulativePreferredStock5-79-101213-232425-2627 INDIANAMICHIGANPOWERCOMPANYOneSummitSquare,P.O.Box60,FortWayne,Indiana46801BackgroundoftheCompanyINDIANAMIGHIGANPowERC0MPANY(theCompany),asubsidiaryofAmericanElectricPowerCompany,Inc.(AEP),isengagedinthegeneration,purchase,transmissionanddistributionofelectricpower.TheCompanywasorganizedunderthelawsofIndianaonFebruary21,1925,andisalsoauthorizedtotransactbusinessinMichiganandWestVirginia.ItsprincipalexecutiveofficesareinFortWayne,Indiana.TheCompanyhastwowhollyownedsubsidiaries;theyareBlackhawkCoalCompanyandPriceRiverCoalCompany,whichwereformerlyengagedincoal-miningoperations.TheCompanyservesapproximately470,000customersinnorthernandeasternIndianaandaportionofsouthwesternMichigan.Amongtheprincipalindustriesservedaretransportationequipment,primarymetals,fabricatedmetalproducts,electricalandelectronicmachinery,andrubberandplasticproducts.Inaddition,theCompanysupplieswholesaleelectricpowertootherelectricutilities,municipalitiesandelectriccooperatives.TheCompany'sgeneratingplantsandimportantloadcentersareinterconnectedbyahigh-voltagetrans-missionnetwork.ThisnetworkinturnisinterconnectedeitherdirectlyorindirectlywiththefollowingotherAEPSystemcompaniestoformasingleintegratedpowersystem:AEPGeneratingCompany,AppalachianPowerCompany,ColumbusSouthernPowerCompany,KentuckyPowerCompany,KingsportPowerCompany,MichiganPowerCompany,OhioPowerCompanyandWheelingPowerCompany.TheCompanyisalsointerconnectedwiththefollowingotherutilities:CentralillinoisPublicServiceCompany,TheCincinnatiGas8ElectricCompany,CommonwealthEdisonCompany,ConsumersPowerCompany,IllinoisPowerCompany,Indiana-KentuckyElectricCorporation(asubsidiaryofOhioValleyElectricCorporation),IndianapolisPower8LightCompany,NorthernIndianaPublicServiceCompany,PublicServiceCompanyofIndiana,Inc.andRichmondPower8LightCompany.

DirectorsJ.M.ALMSON(a)W.A.BLACKRICHARDE.DISBROWJOHNE.DOLAN(b)WILLIAMN.D'ONOFRIOA.R.GtASSBURNM.R.HARRELL(a)GERALDP.MALONEYRICHARDC.MENGER.E.PRATER(C)JOSEPHH.VIPPERMANW.E.WALTERS(C)W.S.WHITE,JR.DAVIDH.WILLIAMS,JR.(d)OfficersW.S.WHITE,JR.ChairmanoftheBoardandChiefExecutiveOfficerW.A.BLACKPresidentandChiefOperatingOfficerRICHARDC.MENGE(e)SeniorVicePresidentMILTONP.ALEXICHVicePresidentRICHARDE.DISBROWVicePresidentJOHNE.DOLAN(b)VicePresidentWILLIAMN.D'ONOFRIOVicePresidentA.JOSEPHDOWDVicePresidentRICHARDF.HERINGVicePresidentGERALDP.MALONEYVicePresidentJOSEPHH.VIPPERMANVicePresidentDAVIDH.WiLLIAMS,JR.(d)VicePresidentPETERJ.DEMARIATreasurerJOHNF.DILORENZO,JR.SecretaryEUOBAFILEAssistantSecretaryandAssistantTreasurerJEFFREYD.CROSSAssistantSecretaryCARLJ.MOOSAssistantSecretaryJOHNB.SHINNOCKAssistantSecretaryJOANST.JAMES(t)AssistantSecretaryLEONARDV.ASSANTEAssistantTreasurerBRUCEM.BARBERAssistantTreasurerJAMESD.HUEBNER(g)AssistantTreasurerGERALDR.KNORRAssistantTreasurerTheprincipaloccupationofeacholtheabovedirectorsandofficersofIndianaMichiganPowerCompany,withtenexceptions,IsasanemployeeofAmerfcanElectricPowerServiceCor-poration.TheexceptionsareMessrs.Allison,Bafile,Black,O'Onofrio,Glassbum,Harrell,,Menge,Moos,Prater,andWalterswhoseprincipaloccupationsduring1988wereasofficersoremployeesofIndianaMichiganPowerCompany.(a)ResignedApril26,1988(b)ResignedFebruary1,1988(c)ElectedApril26,1988(d)ElectedFebruary1~1988(e)ElectedMarch1,1988(I)ResignedJanuary1~1989(g)ResignedFebruary1,1989 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIESSelectedConsolidatedFinancialDataYearEndedDecember31,198819871986(inthousands)19851984INCOMESTATEMENTSDATA'PERATINGREVENUES-ELECTRIC.......TOTALOPERATINGEXPENSESOPERATINGINCOMETOTALOTHERINCOMEANDDEDUCTIONS....INCOMEBEFOREINTERESTCHARGES.......NETINTERESTCHARGESNETINCOMEPREFERREDSTOCKDIVIDENDREQUIREMENTS.EARNINGSAPPLICABLEToCOMMONSTOCK..$983,066$1,017,268$1,091,295$1,078,793767,623794,222900,151886,904$979,551799.393191,88976,879223,04656,828180,15853,044233,20291,017191,14466,905258,049105,568152,48126,256215,44343,454268,768122,667279,874113,508166,36620,955258,897107,092142,18527,705146,10127,056151,80518,848$132,957$145,411$126,225$119,045$114,48019881987December31,1986(inthousands)19851984BAULNCESHEETSDATA:ELECTRICUTILITYPLANTACCUMULATEDPROVISIONSFORDEPRECIATIONANDAMORTIZATION.NETELECTRICUTILITYPLANTTOTAL,ASSETS...........~~~~~~~~~~~~COMMONSTOCKANDOTHERPAID.INCAPITAL..RETAINEDEARNINGSTQTALCDMMDNSHAREDWNER'sEQUITY......CUMULATIVEPREFERREDSTOCK'.NOTSUBJECTTOMANDATORYREDEMPTIONSUBJEGTToMANDATDRYREDEMPTI0N(a)L0NG-TERMDEBT(a)(a)Includingportionduewithinoneyear.1,218,0601,118,2543,193,2113,035,0273,993,0463,956,5631,018,455962,670868,1922,961,3673,849,2083,144,8563,763,5953,072,8143,658,647838,347161,443828,347145,302828,347113,123828,347100,130828,34494,317999,790973,649941,470928,477922,661197,00025,0301,575,220197,00032,0301,591,768197,00079,0301,421,523197,00086,0301,442,070197,00093,1971,347,623$4,411,271$4,153,281$3,979,822$4,107,526$3,941,006 Management'sDiscussionandAnalysisofResultsofOperationsandFinancialConditionResultsofOperationsNetIncomeNetincomedecreasedby9%in1988followinga9%in-creasein1987.Thedecreasein1988resultedprimarilyfromthenegativeeffectofthelossin1987ofamajorwholesalecustomer.Thiswaspartiallyoffsetbythetaxeffectofcostsassociatedwithnucleardecommissioningtrustfunds,anon-recurringchargein1987relatingtowholesalepowertrans-actions,whichisreflectedinotherincomeanddeductions,andanincreaseintotalallowanceforfundsusedduringcon-struction.The1987increaseresultedmostlyfromanincreaseinoperatingincomewhichwaspartiallyoffsetbyadecreaseinotherincomeanddeductionsandanincreaseintotalin-terestcharges.OutlookWholesaleCustomersTheCompanylostonemajorwholesalecustomerin1987andreceivednoticefromanothertoterminateservice.InthefirstinstancetheCompanyhadalong-termcontractthatex-piredonOecember31,1987toprovide400,000kilowattsofenergy(200,000kilowattsafterFebruary1,1987)toanun-affiliatedutility.Thiscontractcontributedapproximately7%and12%oftheCompany'stotaloperatingrevenuesand19%and37%oftheCompany'searningsapplicabletocommonstockbeforeanyproformaadjustmentforAEPSystemin-tercompanytransactionsin1987and1986,respectively.InthesecondsituationawholesalecustomernotifiedtheCompanyin1987thatitplannedtoterminatepurchasingenergyfromtheCompanyandrequestedtransmissionwheel-ingarrangementswiththeCompanyeffectiveAugust1,1988.However,theexistingcontractwasextendedforoneyearandtheCompanyenteredintoanagreementfortransmissionwheelingserviceandpartialloadrequirementsforthiswhole-salecustomereffectiveAugust1,1989.ServicebytheCom-panytothiscustomerwasatanaveragelevelof180,000kilowattsin1988,170,000kilowattsin1987and162,000kilowattsin1986andcontributedapproximately5%,4%and3%oftheCompany'stotaloperatingrevenuesand16%,12%and11%oftheCompany'searningsapplicabletocommonstockbeforeanyproformaadjustmentforAEPSystemin-tercompanytransactionsin1988,1987and1986,respec-tively.Ifthiscontractdidnotexist,theCompanywouldhavebeenrequiredtomakepaymentsinalesseramount,oral-ternativelybeenentitledtomorereceipts,duetooperationoftheAEPSystemPool.AfterproformaadjustmentforAEPSystemintercompanytransactions,theaggregatecontribu-tionofthiscontractwouldhavebeenapproximately11%,8%and8%oftheCompany'searningsapplicabletocommonstockin1988,1987and1986,respectively.RegulatoryEnvironmentTheelectricutilityindustryoperatesinaregulatoryenvi-ronmentthatmakesitdifficulttopredictwhethernewplantadditionswillbefullyincludedinratebaseupontheirdedi-cationtopublicservice.ThisisofconcerntotheCompanysinceithasunderconstructionRockportPlantUnit2(Rock-port2)whichisexpectedtobecompletedinlate1989.See"RockportPlantUnit2"inNote2oftheNotestoConsolidatedFinancialStatements.EconomyTheeconomyoftheCompany'sserviceterritoryhasre-coveredfromtherecessionof1982.IndustrialproductionisupreflectinganewcompetitivenessnotonlywithintheUnitedStatesbutalsointheglobalmarketplace.Economicgrowthisexpectedtocontinueforaperiodoftime.However,thelong-termeconomicwell-beingoftheregionissubjecttotheeffectsofrecession,inflation,foreigncurrencyfluctuationsandotherinfluences,whichcouldadverselyimpactthefutureresultsofoperationsoftheCompany.AcidRainLegislationTheCompanyconsumedover4milliontonsofcoalin1988togeneratenearly9billionkilowatthoursofelectricity.Pro-posalsarebeingconsideredbyCongressthatwouldplacsevereenvironmentalrestrictionsonemissionsfromcoburnedtoproduceelectricity.These"acidrain"proposalscouldrequiretheCompanytomakesubstantialcapitalin-vestmentsandtoincursubstantialincreasedoperatingcostsinordertocomply.TheimpactontheCompany'sfinancialconditionisdependentuponpassageoffinallegislationandfuturerate-makingtreatment.DeregulationIn1988,theFederalEnergyRegulatoryCommissionpro-posedrulesthatwouldeffectivelyderegulatethegenerationofelectricityforcertainpowerproducers.Theseproposalsifadoptedasissuedwouldradicallyaltertheelectricutilityin-dustry.Theproposedruleswouldcreateanewclassofpowerproducersexemptfrommostformsofrateregulationthat.couldenterorleavethemarketastheirinterestsandfinancialconditionsdictate.TheCompanylikeallelectricutilitiesisobligatedtoprovideitscustomerswithalloftheirpowerneeds.Ifutilitiesbecomeagentsthatcannotmanagetheirpowersupplythen,intheCompany'sview,reliabilitywouldbeimpaired.Sincereliabilityofelectricserviceisofpara-mountimportanceunderanobligationtoserve,theCompanyhasopposedtheproposedrules.Iftheseorotherrulescon-cerningderegulationareadopted,thelong-termeffectonthefinancialconditionoftheCompanyisindeterminable.

INDIANAMICHIGANPOWERCOMPANYANOSIJBSIDIARIESperatingRevenuesandEnergySalesOperatingrevenuesdecreased3%in1988comparedtoa7%decreasein1987.Thedecreasein1988revenuesresultedprimarilyfromadecreaseinwholesalesalespartiallyoffsetbytherecordlevelofkwhsalestoretailcustomers.The1987decreasecamemostlybecauseofa14%decreaseinoverallsalesofelectricenergy.Theelementsthatgaverisetochangesinoperatingrevenuesaresummarizedbelow.Revenuesfromwholesalecustomersdecreased15%dur-ing1988ona14%decrease,inkwhsales,followinga27%decreaseinrevenuesin1987ona35%decreaseinkwhsales.Thedecreasesinkwhsalesinbothyearsweremostlycausedbytheexpirationofalong-termcontractwithawholesalecustomer(discussedpreviously).In1987,howevertheim-pactoflowerkwhsaleswasoffsetpartiallybyanincreaseintheaveragewholesalerealizationastheCompanypursuedsaleswithhigherprofitmargins.The1987declineinenergysaleswasalsocausedbyanincreaseinavailableenergysupplyfromunaffiliatedgeneratingcapacitythathadbeenoutofserviceforanextendedtimeandtheadditionofnewgen-eratingunitsbyunaffiliatedutilities.Revenuesfromretailcustomers(residential,commercialandindustrial)increased2%in1988aftera5%increasein1987.Thehigherrevenuesin1988wereattributabletothe.cordlevelofkwhsales(13billionkwh).ThecontinuedonomicimprovementintheCompany'sserviceareacou-ledwithhotsummerweatherledtotherecordlevelofkwhsalestoallretailcustomerclasses.TheeffectonrevenuesofthehigherkwhsaleslevelwaslargelyoffsetbyareductioninratesaslowerFederalincometaxesandaveragefuelcostswerepassedontocustomers.Theincreasein1987revenuesreflecteda7%increaseinkwhsalesandimprovementinrevenuesfromeachcustomerclass.OperatingExpensesTotaloperatingexpensesdecreased3%aftera12%de-creasein1987.Thecomponentsofoperatingexpensesthatcausedthechangesarediscussedbelow.Fuelexpense,thesinglelargestexpenseoftheCompany,increased11%in1988aftera10%declinein1987.The1988increaseresultedmainlyfromincreasednetgenerationwhilethe1987decreasewasduemainly.toreducedlevelsofgen-eration.Changesinfuelcostsgenerallyarerecoveredinrev-enuesthroughfuel-clauseadjustmentmechanismsandthereforedonothaveasignificanteffectonnetincome.Purchasedandinterchangepowerexpensedecreasedby54%in1988and43%in1987.In1988,thechangewascausedmostlyfromincreasedavailabilityoftheCompany'sinternalgenerationaswellaslowernetcostperkwhofpur-chasedandinterchangepowerandaslightdecreaseintheCompany'stotalloadrequirements.The1987changewasprimarilyduetotheassignmentofcertainrightstopurchasepowerfromAEPGeneratingCompany(AEGCo),anaffiliatedcompany,toanunaffiliatedcompany.Thisdecreasewaspar-tiallyoffsetbyincreasedinterchangepowertransactions,pri-marilywithaffiliatedcompanies,inordertoreplaceinternalgenerationlostbecauseofoutages..Maintenanceexpenseincreased15%in1987.Factorscon-tributingtothecomparativelyhigherlevelsofexpensein1987wereadditionalmaintenanceactivitiesfornuclearplantandothermaintenanceactivities.Federalincometaxesdeclined45%in1988followinga21%decreasein1987.The1988decreaseinFederalincometaxexpensewasprimarilyduetothedecreaseinpre-taxbookoperatingincome,whilethe1987decreasecamemostlyfromthedecreaseinthestatutoryFederalincometaxrateasaresultoftheTaxReformActof1986.TheCompanywasgrantedreductionsinitsannualbaseratelevelstoreflectareductionintheFederalincometaxrateto34%.andothercost-of-serviceitems.Therefore,there-ductionsintaxrateshadaminimaleffectonearnings.OtherprovisionsintheTaxReformActof1986,suchasthoserelatingtodepreciationandrepealofinvestmenttaxcredit,willresultinreducedinternalcashflow.However,theseotherprovisionsarenotanticipatedtohaveamaterialimpactonnetearnings.AllowanceForFundsUsedDuringConstructionThetotalallowanceforfundsusedduringconstruction(AFUDC)increasedin1988andtheproportionofAFUDCincludedinnetincomeincreasedto38%(32%netofincometaxes)in1988from30%(25%netofincometaxes)in1987.TheincreaseintheproportionofAFUDCincludedinnetin-comeresultedfromadditionalconstructionexpendituresonRockport2beingsubjecttotheallowance.6 LiquidityandCapitalResources-ConstructionProgramTheCompany'splantandpropertyadditionsfor1988amountedto$323million,a30%increaseover1987.Con-structionexpendituresforthethree-yearperiod1989-1991areestimatedat$457million.Thisincludesthecompletionofconstructionofthesecond1,300-megawattgeneratingunitattheRockportPlant,Rockport2.Inaddition,theCompanycouldberequiredtomakesubstantialadditionalcapitalex-pendituresifacidrainlegislationsimilartothatcurrentlypro-posedisenactedintolaw.DebtandPreferredStockFinancingTheCompanygenerallyissuesshort-termdebt(commer-cialpaperandbankloans)toprovideinterimfinancingofconstructionexpendituresinexcessofavailableinternallygeneratedandotherfunds.TheCompanythenperiodicallyreducesshort-termdebtwiththeproceedsfromsalesoflong-termdebtandpreferredstocksecuritiesandwithinvestmentsinitscommonequitybyAEP.IssuanceofseniorsecuritiesisexpectedtobemodestinthenextfewyearssincealloftheCompany'sprojectedcon-structionexpendituresfor1989-1991areexpectedtobefi-nancedwithinternallygeneratedfundsandproceedsfromthesaleandleasebackofRockport2discussedbelow.Ifanyadditionalamountsareneededinexcessofinternallygen-eratedfunds,theywillhavetoberaisedexternally,asinthepast,throughsalesofsecurities,short-termborrowingsandinvestmentsintheCompany'scommonequitybyAEP.AtDecember31,1988,theCompanyhadunusedshort-termlinesofcreditofapproximately$292millionwhichweresharedwithotherSystemcompanies.CookNuclearPlantTheCookNuclearunitshavebeenexhibitingindicationsofintergranularcorrosion(IGC)inthesteamgeneratortubing,aconditionwhichhasdevelopedinotherpressurizedwaterreactors.ThisledtoadecisiontooperateUnit2at80%powerandUnit1at90%powerasasteam-generatorlifeconservationmeasure.TheIGCproblemintheUnit1steamgeneratorshasbeenoccurringataslowerratethaninUnit2,butitispossiblethattheUnit1steamgeneratorsmayhavetobereplacedeventually.However,therearenopresentplansforsuchreplacement.InApril1988,Unit2wastakenoutofservicetoreplacetheunit'ssteamgenerators,refueltheunitandperformthe10-yearanniversaryserviceinspec-tionasrequiredbytheNuclear,RegulatoryCommission.TheunitisexpectedtoreturntoserviceinMarch1989.TheCompanywillseekrecoveryinitsratebaseofthesteamgeneratorreplacementexpendituresinthenextgeneralratecasewhichisexpectedtobefiledin1989.RockportPlantUnit2TheCompanyandAEGCo,anaffiliate,whichjointlyowtheRockportPlanthavesignedacommitmentletteragree-menttosellandleasebacktheirinterestsinRockport2.At'ecember31,1988,theCompanyandAEGCohadexpended$1.1billiononRockport2.TheCompanyandAEGCoexpecttousethenetproceedsfromthesale,estimatedtobe$1.4billionaftertaxes,toreducetheircapitalization,includingtheredemptionbytheCompanyofcertainpubliclyheldfirstmort-gagebondsandpreferredstock.Thesalewillnothaveaneffecton1989netincomesincethenetgainwillbedeferredandamortizedovertheleaseterm.Theleasesareexpectedtoberecordedasoperatingleases.TheCompanyandAEGCoexpecttosellasubstantialpor-tionoftheunit'scapacitytounaffiliatedutilitiesunderlong-termunitpoweragreements.Onesuchagreementtosupply250megawattsfora20yearperiodtoanunaffiliatedutilityhasbeensigned.Recoveryofthecostsofcapacitynotsoldtounaffiliatedutilitiesandthetimingofsuchrecoveryaresubjecttofutureregulatoryproceedings.See"RockportPlantUnit2"inNote2oftheNotestoConsolidatedFinancialStatementsforadditionalinformation.EffectsofInfiationInflationcontinuestoaffecttheCompany,eventhoughtheinflationratehasbeenrelativelylowinrecentyears.Sinetherate-makingprocesslimitstheCompanytorecoveryothehistoricalcostofassets,economiclossesareexperiencedwhentheinflatedvalueoftheassetsisnotrecovered.How-ever,suchlossesareoffsetpartlybytheeconomicgainsthatresultfromtherepaymentoflong-termdebtwithinflateddollars.NewAccountingStandardsTheFinancialAccountingStandardsBoard(FASB)hasis-suedanewaccountingstandardregardingincometaxesthattheCompanywillberequiredtoadoptinthefuturewhichisdiscussedinNote3oftheNotestoConsolidatedFinancialStatements.TheFASBhasproposedanewaccountingstandardthatwouldrequireachangeinaccountingforpost-retirementben-efitsotherthanpensionsfromanexpenseaspaidmethodtoanaccrualmethod.Thisproposalwouldrequiretheamorti-zationofpriorservicecostsoveraminimumof15yearsandhasatentativeeffectivedate'of1992.TheimpactontheCompany'sfinancialpositionisdependentuponissuanceofafinalstandardandfuturerate-makingtreatment.

INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIESConsolidatedStatementsofIncomeOPERATINGREYENUEs-ELECTRIcYearEndedDecember31,19881987(inthousands)$983,066$1,017,268$1,091,295OPERATINGEXPENSES:Operation:FuelforElectricGeneration.PurchasedandInterchangePower(net).OtherMaintenanceDepreciationandAmortization.Amortization(Deferral)ofRockportPhase-inCosts.TaxesOtherThanFederalIncomeTaxes.,FederalIncomeTaxesTotalOperatingExpenses.OPERATINGINCOMEOTHERINCOMEANODEOUCTIONS:AllowanceforEquityFundsUsedDuringConstruction.DeferredReturn-RockportPlantOtherTotalOtherIncomeandDeductions.ICOMEBEFOREINTERESTCHARGES...............232,94647,503161,53289,545120,14518,08956,27141,592?67,623215,44327,02316,43143,454258,897208,931102,644156,31091,807116,915(4,488)46,73075,373794,222223,04626,05531,442~669)56,828279,874233,241180,620157,50080,171112,188(10,732)51,29195,872900,151191,14425,39743,438~1.930)66,905258,049NTERESTCHARGES:Long-termDebt.Short-termDebtandOtherAllowanceforBorrowedFundsUsedDuringConstruction.NetInterestChargesNETINCOMEPREFERREDSTOCKDIVIOENOREQUIREMENTSEARNINGSAPPLICABLEToCOMMONSTOCKSeeNotestoConsolidatedFinancialStatements.130,6496,635~30,192)131,0935,712~23,297)124,3337,843~26,603)113,508107,092105,568152,48126,256166,36620,955151,80518,848$132,957$145,411$126,225 ConsolidatedBalanceSheetsASSETSDecember31,19881987(inthousands)ELECTRICUTILITYPLANT:ProductionTransmissionDistribution.General(includesnuclearfuel).ConstructionWorkinProgressTotalElectricUtilityPlantAccumulatedProvisionsforDepreciationandAmortization.NETELECTRICUTILITY,PLANTOTHERPROPERTYANOINVESTMENTS$2,331,581737,919423,729206,068711,9744,411,2711,218,0603,193,211301931$2,269,325725,047397,214207,722553,9734,153,2811,ii8,2543,035,027283,313CURRENTAssETs:CashandCashEquivalentsSpecialDeposits-RestrictedFunds.AccountsReceivable:CustomersAssociatedCompaniesMiscellaneous.AllowanceforUncollectibleAccountsFuel-ataveragecost.MaterialsandSupplies-ataveragecostAccruedUtilityRevenuesOther.TotalCurrentAssets8,4252,16839,8479,08719,648(483)51,28925,92927,5128,649192,07113,46117,92871,7307,05815,475(634)70,72822,97551,5767,942278,239DEFERREODEBITS:DeferredDepreciationandReturn-RockportPlant.DeferredNuclearFuelDisposalCosts.Other.TotalDeferredDebits.Total.SeeNotestoConsolidatedFinancialStatements.148,84051,026105961170,41356,434133,137305,833359,984$3,993,046$3,956,563 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIESCAPITALIZATIONANDLIABILITIESDecember31,19881987(inthousands)CAPITALIZATION:CommonStock-NoParValue:Authorized-2-;500,000SharesOutstanding-1,400,000SharesOtherPaid-inCapitalRetainedEarningsTotalCommonShareowner'sEquityCumulativePreferredStock:NotSubjecttoMandatoryRedemption.SubjecttoMandatoryRedemptionLong-termDebt.TotalCapitalization.OTHERNONCURRENTLIABILITIESCURRENTLIABILITIES:Long-termDebtDueWithinOneYear.NotesPayable..................CommercialPaperAccountsPayable:General:AssociatedCompanies.TaxesAccruedInterestAccrued.ObligationsUnderCapitalLeasesOther.TotalCurrentLiabilitiesDEFERREDCREDITS:DeferredIncomeTaxesDeferredInvestmentTaxCreditsOther.TotalDeferredCreditsS56,584781,763161,443999,790197,00025,0301,563,7202755,545207,63711,5007,95027,90055,21014,8364,28536,35343,03747,866248,937535,829194,726,20,377750,932S56,584771,763145,302973,649197,00032,0301,539,7372,742,416193,69252,03141,45117,57646,19837,11243,85648,928287,152542,298171,55919,446733,303C0MMITMENTsANDC0NTINGENGIEs(Note11)Total.$3,993,046$3,956,56310 ConsolidatedStatementsofCashFlows1988YearEndedDecember31,19871986(inthousands)CAsHFLowsFR0MOPERATINGACTIvITIEs:NetIncome.AdjustmentstoReconcileNetIncometoNetCashProvidedbyOperatingActivities:DepreciationandAmortization.DeferredIncomeTaxes.DeferredInvestmentTaxCreditsAllowanceforEquityFundsUsedDuringConstruction.ChangesinCertainCurrentAssetsandLiabilities:AccountsReceivable(net)Fuel,MaterialsandSuppliesAccruedUtilityRevenues.AccountsPayableAmortizationofDeferredNuclearFuelDisposalCosts..DeferredReturn-RockportPlant.Other(net)NetCashProvidedbyOperatingActivities.....CASHFLOWSFROMINVESTINGACTIVITIES:PlantandPropertyAdditions.AllowanceforEquityFundsUsedDuringConstruction...CashUsedforPlantandPropertyAdditions.ProceedsfromSalesofProperty.NetCashUsedbyInvestingActivitiesCASHFLOWSFROMFINANCINGACTIVITIES:CapitalContributionsfromParent.IssuanceofLong-termDebt.ChangeinShort-termDebt(net).RetirementofCumulativePreferredStocksRetirementofLong-termDebtDividendsPaidonCommonStockDividendsPaidonPreferredStocksNetCashUsedbyFinancingActivitiesNetIncrease(Decrease)inCashandCashEquivalents.....CashandCashEquivalentsatBeginningofYear.CashandCashEquivalentsatEndofYearSupplementalDisclosure:CashPaidDuringtheYearFor:Interest(netofAllowanceforBorrowedFundsUsedDuringConstruction).IncomeTaxesNoncashInvestingActivities:PlantAcquiredUnderCapitalLeasesSeeNotestoConsolidatedFinancialStatements.S151,805S166,366146,2803,16123,672(27,023)25,53016,48524,06411,0195,408~15,968364,433(276,545)27,023(249,522)1,117120,31013,597(7,700)(26,055)10,952(14,293)(2,576)(402)12,207(31,442)24,329265,293(206,941)26,055(180,886)1,81610,00050,00035,850p,ooo)p4,o5o)(116,816)~19,048)$121,064)(5,036)13,461S8,425376,811'49,925)(50,917)(222,005)(113,232)~22.607)~81.875)4,3489,113313,461$106,28367,01946,791$107,38970,65541,046~248,405f179,070)S152,481107,91524,21925,328(25,397)(3,636)(9,361)22,615(10,571)13,247(43,438)8,836.262,238(175,776)25,397(150,379)9,547~140,832197,68149,925(7,000)(228,432)(113,232)~26,456~127,514)(6,108)15,22189,113$107,97222,61433,09911 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIESConsolidatedStatementsofRetainedEarningsBalanceatBeginningofYear.NetIncome.Total1988$145,302151,805297,1071987(inthousands)$113,123166,366279,489YearEndedDecember31.1986$100,130152,481252,611CashDividendsDeclared:CommonStockCumulativePreferredStock:4)/e%Series.4.56%Series.4.12%Series.7.08%Series.7.76%Series............8.68%Series.12%Series.$2.15Series.............$2.25Series....,........$2.75Series.$3.63Series.TotalDividendsBalanceatEndofYear.eNotestoConsolidatedFinancialStatements.116)816-4952731652,1242,7162,6041,1983,4403,6002233135,664$161,443113,2324952731652,1242,7162,6041,5583,4403,6002,6731,307134,187$145,302113,2324952731652,1242,7162,6041,9183,4403,6003,1135,808139,488$113,12312 NotestoConsolidatedFinancialStatements1.SignificantAccountingPolicies:PrinciplesofConsolidationTheconsolidatedfinancialstatementsincludetheaccountsofIndianaMichiganPowerCompany(theCompany)anditswhollyownedsubsidiaries.Significantintercompanytrans-actionshavebeeneliminatedinconsolidation.ThecommonstockoftheCompanyiswhollyownedbyAmericanElectricPowerCompany,Inc.(AEP).SystemofAccountsTheaccountingandratesoftheCompanyaresubjectincertainrespectstotherequirementsofstateregulatorybodiesandincertainrespectstotherequirementsoftheFederalEnergyRegulatoryCommission(FERC).Theconsolidatedfi-nancialstatementshavebeenpreparedonthebasisoftheuniformsystemofaccountsprescribedbytheFERC.ElectricUti%'tyPlant;DepreciationandAmortization;OtherPropertyandInvestmentsElectricutilityplantisstatedatoriginalcost.Generally,theplantoftheCompanyissubjecttofirstmortgageliens.'heCompanycapitalizes,asaconstructioncost,anallow-anceforfundsusedduringconstruction(AFUDC),anitemnotrepresentingcashincome,whichisdefinedintheappli-'cableregulatorysystemsofaccountsasthenetcostofbor-rowedfundsusedforconstructionpurposesandareasonablerateonequityfundswhensoused.ThecompositeratesusedbytheCompanyaftercompoundingonasemi-annualbasiswere10.25%in1988and11.5%in1987and1986.TheCompanyprovidesfordepreciationonastraight-linebasisovertheestimatedusefullivesoftheproperty.Thecurrentprovisionsaredeterminedlargelywiththeuseofcom-positeratesbyfunctionalclassofproperty.Operatingexpensesarechargedwiththecostsoflabor,materials,supervisionandothercostsincurredinmaintainingtheproperties.Propertyaccountsarechargedwithcostsofbettermentsandmajorreplacementsofproperty,andtheaccumulatedprovisionsfordepreciationarechargedwithre-tirements,togetherwithremovalcostslesssalvage.Otherpropertyandinvestmentsaregenerallystatedatcost.CashandCashEquivalentsln1988,theCompanyanditssubsidiariesimplementedStatementofFinancialAccountingStandardsNo.95,"State-mentofCashFlows"(SFAS95)usingtheindirectmethodofpresentationforcashflowsfromoperatingactivities.Forpur-posesoftheconsolidatedstatementsofcashflows,theCom-panyanditssubsidiariesconsidercash,specialdeposits,workingfunds,andtemporarycashinvestmentsasdefinedbytheFERCtobecashandcashequivalents.Temporarycashinvestmentsincludehighlyliquidinvestmentspurchasedwithamaturityofthreemonthsorless.The1987and1986con-solidatedstatementsoffundshavebeenrestatedtoconformtothecurrent-periodcashflowspresentation.IncomeTaxesDeferredFederalincometaxesareprovidedtotheextentthatsuchamountsarereflectedinrevenuelevels.TheCorri-panynormalizestheeffectoftaxreductionsresultingfrominvestmenttaxcreditsutilizedinconnectionwithcurrentFed-eralincometaxaccrualsconsistentwithrate-makingpolicies.TheCompany'ssubsidiariesgenerallyusetheflow-throughmethodofaccountingforinvestmenttaxcreditsandpracticedeferredtaxaccountingfortheeffectsofcertaintimingdifferences.OperatingRevenuesTheCompanyaccruesunbilledrevenuesforelectricservicerenderedsubsequenttothelastbillingcyclethroughmonth-end.Operatingrevenuesderivedfromacertainwholesalecus-tomerrepresentedapproximately7%oftotaloperatingrev-enuesfor1987and12%for1986.ThecontractwiththiscustomerexpiredonDecember31,1987.FuelCostsTheCompanybillsitsfuelcostsunderafuelrecoverymechanismdesignedtoreflectinrateschangesincostsoffuelasorderedbyvariousregulatorybodies.Accordingly,theCompanyaccruesrevenuerelatingtounrecoveredfuel.SaleofReceivablesInDecember1988theCompanyenteredintoanagreementtosellundividedinterestsindesignatedpoolsofcustomeraccountsreceivableandaccruedutilityrevenues,withlimitedrecourse,uptoamaximumof$50,000,000atanyonetime.Undividedinterestsinnewpoolsmaybesoldascollectionsreducepreviouslysoldinterests.TheagreementexpiresinDecember1993andmaybeterminatedatanytimepriorthereto.TheCompanyreceivedproceedsof$79,000,000dur-ingtheyear.AtDecember31,1988approximately$50,000,000remainstobecollected.13 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIES'therInaccordancewithregulatoryapprovals,theCompanyrec-ognizesthegainorlossonreacquireddebtinincomeintheyearofreacquisitionunlesssuchdebtisrefinancedinwhichcasethegainorlossisdeferredandamortizedoverthetermofthereplacementdebt.Debtdiscountorpremiumanddebtexpensesarebeingamortizedoverthelivesoftherelateddebtissues,andtheamortizationthereofisincludedinotherinterestcharges.TheCompanyiscommittedunderaunitpoweragreementwithAEPGeneratingCompany(AEGCo),alsoanAEPsubsid-iary,topuichase70%ofAEGCo'sRockportPlantcapacityunlessitissoldtounaffiliatedutilities.Certainprior-periodamountshavebeenreclassifiedtocon-formtocurrent-periodpresentation.2.HateMatters:RockportPlantUnit1TheCompanyhasphase-inplansinbothitsIndianaandFERCjurisdictionsforUnit1oftheRockportPlant(Rockport1).Rockport1isa1,300-megawattgeneratingunitthatbegancommercialoperationinDecember1984andisjointlyownedbytheCompanyandAEGCo.AtDecember31,1988and1987,theCompanyhadunamortizeddeferredreturnsof115,351,000and$131,970,000,respectively,andun-mortizeddeferreddepreciationof$33,489,000and$38,443,000,respectivelywhicharebeingamortizedonastraight-linebasisthrough1997.TheCompanyhasbeenengagedinstateandFederalrateproceedingstomodifyitsphase-inplanstocomplywithSFAS92"RegulatedEnterprises-AccountingforPhase-inPlans."SFAS92allowsthedeferralofcostsforfuturere-coveryunderphase-inplansonlyifthephase-inplanhasbeenapprovedbytheregulatorandprovidesforrecoveryofallcostsdeferredpursuanttotheplanwithin10yearsoftheinitialdeferrals.Thecommencementofthe10-yearrecoveryperiodisdelayedforplansineffectpriorto1988,ifcertainconditionsaremet.In1987,theIndianaUtilityRegulatoryCommissionap-provedan,amendedphase-inplantocomplywithSFAS92.In1988,theFERCapprovedsettlementagreementsbe-tweentheCompanyandcertainwholesalecustomers.Thesettlementagreementsprovidefor,amongotherthings,com-pliancewiththe10-yearrecoveryperiodasrequiredbySFAS92,theeffectoftheTaxReformActof1986andothercostofserviceissues,anetratereductionof$2,800,000annuallyeffectiveprospectivelyandaonetimerefund.TheCompanyhasarateproceedingwiththeremainingwholesalecustomersthatincludes,amongotherthings,com-pliancewiththe10-yearrecoveryperiod.Afinalorderispending.In'theopinionofmanagement,theultimatereso-lutionwillnothaveasignificanteffectonresultsofoperations.RockportPlantUnit2InJanuary1989,theCompanyandAEGCosignedacom-mitmentletteragreementtosellandleasebacktheirrespective50%interestsina1,300-megawattunittheyareconstructingattheRockportPlant(Rockport2).TheCompanyandAEGCohaveexpended$1.1billiononRockport2throughDecember1988.ThisagreementcallsfortheCompanyandAEGCotoselltheirinterestsinRockport2inlate1989,justpriortocommercialoperation,andsimultaneouslyforeachcompanytoleasea50%interestintheunitforaninitialtermof33years.ThesalespricewillbethefairmarketvalueofRockport2,estimatedtobe$1.7billionandthetotalcostoftheunitatthedateofthesaleisestimatedtobe$1.3billion.Thenetgainfromthesalewillbedeferredandamortizedovertheinitialleaseterm.Theleasesareexpectedtoberecordedasoperatingleases.InDecember1988,theCompanysignedaunitpoweragreementwithanunaffiliatedutilitytosupply250megawattsfromRockport2fora20yearperiodexpectedtobegininJanuary1990.Itisexpectedthatanadditional500megawattsofRockport2capacitywillbesoldbytheCompanyandAEGCotounaffiliatedutilitiesunderlong-termunitpoweragree-ments.Recoveryofthecostsofcapacitynotsoldtounaffi-liatedutilitiesandthetimingofsuchrecoveryaresubjecttofutureregulatoryproceedings.Theabovetransactionsaresubjecttoregulatoryapprovalandotherconditions.

NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Continued)3.FederalIncomeTaxes:ThedetailsofFederalincometaxesasreportedareasfollows:1988YearEndedDecember31,YearEndedDecember31,19871986(inthousands)Charged(Credited)toOperatingExpenses(net):Current$11,865$63,543$44,340Deferred5,56319,53326,208DeferredInvestmentTaxCredits24,164(7.703)25,324Total41,59275,37395,872Charged(Credited)toOtherIncomeandDeductions(net):Current1,1862,760(7,414)Deferred(2,402)(5,936)(1,989)DeferredInvestmentTaxCredits(492)34Total(1.708)(3,173)(9,399)TotalFederalIncomeTaxesasReported$39,884$72,200$86,473ThefollowingisareconciliationofthedifferencebetweentheamountofFederalincometaxescomputedbymultiplyingbookincomebeforeFederalincometaxesbythestatutorytaxrate,andtheamountofFederalincometaxesreportedintheConsolidatedStatementsofIncome.NetIncomeFederalIncomeTaxesPre.taxBookIncomeFederalIncomeTaxesonPre.TaxBookIncomeatStatutoryRate(34%in1988,40%in1987and46%in1986)Increase(Decrease)inFederalIncomeTaxesResultingFromtheFollowingItemsonWhichDeferredTaxesAreNotProvided:ExcessofBookOverTaxDepreciation.AllowanceforFundsUsedDuringConstructionandMiscellaneousItemsCapitalizedontheBooksbutDeductedforTaxPurposesDeferredReturn-RockportPlantTaxExemptIncome-NuclearDecommissioningTrustFunds.OtherInvestmentTaxCredits(net)TotalFederalIncomeTaxesasReported.EffectiveFederalIncomeTaxRate1988$151,80539,884$191,6893,129(12,079)2,112(4,066)(7,429)(6,957)S39,88420.8%1987(inthousands)$166,36672,200$238.5665,104(13,965)(5,447)(1,603)(7,315)$72,20030.3%1986$152,48186,473$238,9546,242(15,529)(9,228)(1,152)(3,779)S86,47336.2%15 INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIESThefollowingaretheprincipalcomponentsofFederalincometaxesasreported:I1988YearEndedDecember31~19871986,(inthousands)Current:FederalIncomeTaxes.investmentTaxCreditsTotalCurrentFederalIncomeTaxes.Deferred:Depreciation(liberalized,ADRandACRS)AllowanceforBorrowedFundsUsedDuringConstructionandMiscellaneousItemsCapitalized.UnrecoveredandLevelizedFuelNuclearDecommissioningCostsSpentNuclearFuelFeeUnbilledRevenueDeferredReturn-RockportPlantOtherTotalDeferredFederalIncomeTaxesTotalDeferredInvestmentTaxCreditsTotalFederalIncomeTaxesasReportedS65,91838566,303S68,308(31,382)36,926S43,680(30,629)(a)13,0514,73715,32826,2725,1863,9319,448(8,278)(9,327)(2,466)16,432(b)(4,235)(4,820)(1,737)251(7,845)(4,202)(2,839)(4,247)(3,538)5,3159,818(5.439)5,173(1,941)3,16113,59724,21923,672(a)(7,700)25,328S39,884S72,200S86,473(a)BasedonInternalRevenueServiceregulationsissuedin1988,theCompanyelectedtoclaiminvestmenttaxcreditsonqualifiedprogressexpendituresonthe1987taxreturnandamendedtaxreturnsfor1975through1986.Thecurrentanddeferredtaxeffectsrecordedduring1988representthecumulativeeffectofthiselectionaswellas1988currentyearaccruals.(b)BasedonarulingtheCompanyreceivedfromtheInternalRevenueServicein1988,theCompanyelectedtodeductnucleardecommissioningcostsonthe1987taxreturnandonamendedtaxreturnsfortheyears1984through1986.Thecurrentanddeferredtaxeffectsrecordedduring1988representthecumulativeeffectofthiselectionaswellas1988currentyearaccruals.TheCompanyanditssubsidiariesjoininthefilingofa+onsolidatedFederalincometaxreturnwiththeiraffiliatedompaniesintheAEPSystem.TheallocationoftheAEPSystem'sconsolidatedFederalincometaxtotheSystemcom-paniesisiriaccordancewithSecuritiesandExchangeCom-mission(SEC)rulesunderthePublicUtilityHoldingCompanyActof1935.TheserulespermittheallocationofthebenefitofcurrenttaxlossestotheSystemcompaniesgivingrisetosuchlossesindeterminingtaxescurrentlypayable.ThetaxlossoftheSystemparentcompany,AEP,isallocatedtoitssubsidiarieswithtaxableincome.Withtheexceptionofthelossoftlieparentcompany,themethodofallocationap-proximatesaseparatereturnresultforeachcompanyintheconsolidatedgroup.Consolidatedinvestmenttaxcreditsuti-lizedareallocatedtotheSystemcompaniesgivingrisetothem.:.AtDecember31,1988,thecumulativenetamountofin-cometaxtimingdifferencesonwhichdeferredtaxeshavenotbeenprovidedtotaled$487,000,000.TheSystemreachedsettlementswiththeInternalRevenueService(IRS)forallissuesfromtheauditsoftheconsolidatedFederalincometaxreturnsfortheyearspriorto1983.Returnsfortheyears1983and1984arebeingauditedbytheIRS.Intheopinionofmanagement,thefinalsettlementofopenyearswillnothaveamaterialeffectontheearningsoftheCompany.InDecember1987,theFinancialAccountingStandardsBoardissuedSFAS96"AccountingforIncomeTaxes"whichrequiresthatcompaniesadopttheliabilitymethodofac-countingforincometaxes.SFAS96mustbeadoptedbytheCompanynolaterthanJanuary1990onarestatedbasisorasacumulativeeffectofanaccountingchangeintheyearofadoption.TheCompanyhasnotyetdeterminedifitwilladoptSFAS96onarestatedorprospectivebasis.Whenthenewstandardisadopted,totalassetsandlia-bilitieswillincreasesignificantlytoreflectpreviouslyunre-cordeddeferredtaxassetsandliabilitiesontemporarydifferencesandrelatedregulatoryassetsandliabilities.Inaddition',existingdeferredtaxeswillbeadjustedtothelevelrequiredatthecurrentlyexistingstatutorytaxrate.Whilethecomputationsarenotyetcompleted,itisexpectedthatasignificantportionoftherequireddeferredincometaxad-justmentswillbeoffsetbyregulatoryassetsandliabilities.TheeffectofimplementingthenewstandardontheCom-pany'sfinancialconditionhasnotyetbeendetermined.

NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Continued)4.SupplementaryIncomeStatementInformationandRelated-partyTransactions:ElectricoperatingrevenuesshownintheConsolidatedStatementsofIncomeincludesalesofenergytoREPSystemcompaniesofapproximately$34,000,000,$35,000,000,and$33,000,000fortheyearsendedDecember31,1988,1987and1986,respectively.OperatingexpensesshownintheConsolidatedStatementsofIncomeincludecertainitemsnotshownseparately,asfollows:AmericanElectricPowerServiceCorporation(AEPSC)pro-videscertainservicestotheCompanyandtheaffiliatedcom-paniesintheAEPSystem.Thecostsoftheservicesaredeterminedbytheservicecompanyonadirectchargebasistotheextentpracticableandonreasonablebasesofprorationforindirectcosts.Thechargesforservicesaremadeonacostbasisandincludenocompensationfortheuseofequitycapital,allofwhichisfurnishedtotheservicecompanybyAEP.TheservicecompanyissubjecttotheregulationoftheSECunderthePublicUtilityHoldingCompanyActof1935.PurchasedandInterchangePower(net):PurchasedPower(a)...InterchangePower(net):AEPSystemElectricUtilitiesOtherCompanies....Total..........TaxesOtherThanFederalIncomeTaxes:RealandPersonalPropertyTaxes~~~~~~~~~~~~~StateGrossReceipts,ExciseandFranchiseTaxesandMiscellaneousStateandYearEndedOecember31~198819871986(inthousands)$24,371S42,139$170,04724,190(1.058)$47,503,62,991(2.486)$102.64410,720(147)$180.620$32,339$28,002$27,7955.CommonStockandOtherPaid-inCapital:TheCompanyreceiveda$10,000,000cashcapitalcontri-butionfromitsparentin1988.Therewerenootherchangesineitheroftheaforementionedaccountsin1988,1987or1986.6.RetainedEarnings:VariousrestrictionsontheuseoftheCompany'sretainedearningsforcashdividendsoncommonstockandotherpur-posesarecontainedinorresultfromcovenantsinmortgageindentures,debentureandbankloanagreements,charterprovisions,andordersofregulatoryauthorities.Approxi-mately$45,900,000atDecember31,1988,wasrestricted.LocalTaxes..........12,3619,38313,832StateIncomeTaxes.......4,913',3064,121SocialSecurityTaxes'......6.6586,0395.543Total.............$56,271$46,730$51,291(a)IncludespowerpurchasedfromOhioValleyElectricCorporationofap.proximately$13,580,000In1988,S31,076,000in1987and$39,378,000in1986.AlsoIncludespowerpurchasedfromAEGcoofapproximately$3,313,000in1988,$2,797,000ln1987and$122,023,000in1986.

INDIANAMICHIGANPOWERCOMI'ANYANOSUBSIDIARIES7.CumulativePreferredStock:AtDecember31,1988,authorizedsharesofcumulativepreferredstockwereasfollows:ParValueSharesAuthorized$1002,250,0002511,200,000ThecumulativepreferredstockiscallableattheoptionoftheCompanyatthepriceindicatedplusaccrueddividends.Theinvojuntaryliquidationpreferenceisparvalue.Unissuedsharesofthecumulativepreferredstockmayormaynotpossessmandatoryredemptioncharacteristicsuponissuance.In1987,theCompanyredeemedandcancelledtheentire$3.63Seriesconsistingof1,600,000shares.A.CumulativePreferredStockNotSubjectToMandatoryRedemption:Series4I/8%456%4.12%708%776%8.68%$2.15$2.25Year-endCallPrice$106.125102102.728102.91103.44103.1026.0826.13ParValue$1001001001001001002525SharesOutstandingDecember31~1988120,00060,00040,000300,000350,000300,0001,600,0001,600,000AmountDecember31,19881987(inthousands)S12,000S12,0006,0006,0004,0004,00030,0M30,00035,00035,00030,00030,00040,00040,00040,00040.000$197,000$197,000B.CumulativePreferredStockSubjecttoMandatoryRedemption:ParValue$10627.07NumberofSharesRedeemedAmountSharesYearEndedDecember31~OutstandingDecember31,Series(a)CallPrice198819871986December31~198819881987(inthousands)12%(b)S1M30,00030,000*30,00077,325S7,733$10,733$2.75(c)25160,000160,000160,000691,9M17,29721,297$25,030$32,030(a)Thesintdngfundprovisionsoftheseriessubjecttomandatoryredemptionaggregate$232,500in1990,$2,797,500in1991,$3,500,000in1992and1993.Unlessallsinkingfundprovisionshavebeenmet,nodistributionmaybemadeonthecommonstock.(b)Asinkingfundforthe12%seriesrequirestheCompanytoprovide,onorbeforeOctober1ofeachyear,fortheredemptionof15,000sharesofsuchseries.Thisprovisionmaybesatisfiedthroughsharespreviouslypurchasedorbyredemptionat$100ashare,TheCompanyhastheright,oneachsinkingfunddate,toredeemanadditional15,000shares.AtDecember31~1988,theCompanyhadreacquired27,675sharesinanticipationoffuturesinkingfundrequirements.(c)Acumulativesinkingfundforthe$2.75seriesrequirestheCompanytoredeem80,000sharesonorbeforeOctober1,ofeachyear.TheCompanyhastheoptiontocreditsharespurchasedorotherwiseacquiredinlieuofredeemingsharesforthesinkingfundandhasthenoncumulativeoptiontodoublethenumberofsharestoberedeemedinanyyear.AtDecember31~1988,theCompanyhadacquired188,100sharesinanticipationoffuturesinkingfundrequirements.

NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Continued)FirstMortgageBonds.........SinkingFundDebenturesNotesPayabletoBanksInstallmentPurchaseContracts...OtherLong.termDebt(a)......LessPortionDueWithinOneYear.....Total19881987(inthousands)$1,019,036$1,092,6847,6487,813130,00080,000307,732307,511110,804103,7601,575,2201,591,76811,50052,031$1,563,720$1.539.737(a)NuclearFuelDisposalCosts.SeeNote11.Firstmortgagebondsoutstandingwereasfollows:December31,19881987(inthousands)%RateOue3r/>>1988-February1.......43/>>1988-November1......tt~/>>1990-June1.........4'/>>1993-August1........7r/>>1997-February1.....:.9>>/>>1997-July171998-May18'/e2000-April19i/r2003-June1(a).......~Br/>>2003-December1......9i/z2008-March1........13'/>>2013-August1........9>>/>>2015-October1.......9>>/>>2016-July183/>>2017-February1.......10i/>>2017-May1UnamortizedDiscount(net).........S22,97417,55716.00042,90250,00075,00035,00050,000208,00040,000100,00064,578100,000100,000100,00075,000(4.327)42,90250,00075,00035,00050,000196,50040,000100,00058,704100,000.100,000100,00075,000(4,070)LessPortionDueWithinOneYearTotal1,019,03611,5001,092,68452,031$1,007,536$1,040,653(a)The9'I~%seriesdue2003requiressinkingfundpaymentsof$11,500,000annuallyonJune1,through1991and$13,500,000annuallyonJune1,1992through2002withthenoncumulativeoptiontoredeemanad-ditionalamountineachofthespecifiedyearsfromaminimumofS100,000toamaximumequaltothescheduledrequirementforeachyear,butwitha,maximumoptionalredemption,astoallyearsintheaggregate,of$75,000,000.Theindenturesrelatingtothefirstmortgagebondscontainimprovement,maintenanceandreplacementprovisionsre-quiringthedepositofcashorbondswiththetrustee,orinlieuthereof,certificationofunfundedpropertyadditions.ThesinkingfunddebenturesaredueMay1,1998ataninterestrateof7t/4%.AtDecember31,1988and1987,theprincipalamountsofdebenturesreacquiredinanticipationofsinkingfundrequirementswere$2,552,000andS2,687,000,respectively.InadditiontothesinkingfundrequirementstheCompanymaycalladditionaldebenturesofuptoS300,000annually.8.Long-termDebt,LinesofCredit,andCompensatingBalances:Long-termdebtbymajorcategorywasoutstandingasfollows:December31~UnsecuredpromissorynotespayabletobankshavebeenenteredintobytheCompanyasfollows:December31~19881987(inthousands)S25,000$-25,00020,00020,00020,00020,00040,00040,000$130,000$80,0009.02%due1990(a)9.10%due1990(a)9.12%due1990..9.18%due1990..9.28%due1991Total(a)InterestrateissubjecttoadjustmentonNovember30,1989.Installmentpurchasecontractshavebeenenteredintobythe-Companyinconnectionwiththeissuanceofpollutioncontrolrevenuebondsbygovernmentalauthoritiesasfollows:December31,19881987(inthousands)%RateDueCityofLawrenceburg,indiana:8>>/22006-July17'2006-May16r/>>2006-May1CityofRockport,fndiana:9i/>>2005-June1......9i/.2010-June1......9i/.2014-August1.....7ih(a)2014-August1.....(b)2014-August1.....CityofSullivan,Indiana:73/>>2004-MayI6r/>>2006-May17>>h2009-May1UnamortizedDiscountTotalS25,00040,00012,000$25,00040,00012,0006,50033,50050,00050,00050,0007,0007,00025,00025,00013,00013,000(4,268)(4,489)$307.732S307,511=(a)AdjustableinterestratewillchangeAugust1~1990andeveryfiveyearsthereafter.(b)Variableinterestrateisdeterminedweekly.Theaverageweightedinterestwas5.9%for1988and5.5%for1987.Underthetermsofcertaininstallmentpurchasecontracts,theCompanyisrequiredtopaypurchasepriceinstallmentsinamountssufficienttoenablethecitiestopayinterestonandtheprincipal(atstatedmaturitiesanduponmandatoryredemption)ofrelatedpollutioncontrolrevenuebondsissuedtofinancetheconstructionofpollutioncontrolfacilitiesatcertaingeneratingplantsoftheCompany.Oncertainseriestheprincipalwillbepayableatstatedmaturitiesoronthedemandofthebondholdersatperiodicinterestadjustmentdates.Certainseriesaresupportedbylettersofcreditfromabankwhichexpirein1990and1992.Portionsoftheproceedsoftheinstallmentpurchasecon-tractsaredepositedwithtrusteesandmaybeusedonlyforspecifiedconstructionexpenditures.Thesefundsareshownonthebalancesheetsasspecialdeposits-restrictedfunds.'9 INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIESLong-termdebt,excludingpremiumordiscount,outstand-ngatDecember31,1988isdueasfollows:PrincipalAmount(inthousands)1989........................$11,5M1990....,101,500199151,500199213,5001993......................56,402LaterYears,................1.349,156Total$1,583.558TheCompanyhadunusedshort-termbanklinesofcreditofapproximately$292,000,000and$285,000,000atDecember31,1988and1987,respectively,underwhichnotescouldbeissuedwithnomaturitymorethan270days.Availablelinesofcreditaresubjecttowithdrawalatthebanks'ptionsandsuchlinesaresharedwithotherAEPSystemcompanies.Inaccordancewithinformalagreementswiththebanks,compensatingbalancedepositsofupto10%orequiv-alentfeesareretluiredtomaintainthelinesofcredit.Sub-stantiallyallbankbalancesaremaintainedbytheCompanytocompensatethebanksforservicesandfortheCompany'sshareofbothusedandavailablelinesofcredit.9.Leases:TheCompanyanditssubsidiaries,aspartoftheiropera-tions,leaseproperty,plantandequipmentforperiodsupto35years.Mostoftheleasesrequirethepaymentofrelatedpropertytaxes,maintenancecostsandothercostsofoper-ation.TheCompanyanditssubsidiariesexpectthat,inthenormalcourseofbusiness,leasesgenerallywillberenewedorreplacedbyotherleases.Themajorityoftheleaseshavepurchaseoptionsorrenewaloptionsforsubstantiallyalloftheeconomiclivesoftheproperties.Thefollowingisananalysisofpropertiesundercapitalleasesandrelatedobligations:December31~19881987(inthousands)ElectricUtilityPlant:ProductionS8,358Distribution14,603General:NuclearFuel(netofamortization).......OtherTotalElectricUtilityPlant...........AccumulatedProvisionsforAmortizationNetElectricUtilityPlantOtherProperty.AccumulatedProvisionsforAmortization16,33117,065NetOtherProperty....,...........8032,297NetPropertiesunderCapitalLeases....$167,920$170,830ObligationsunderCapitalLeases(a)....$167,920$170,830(a)includinganestimated$43,037,000and$43,856,000atDecember31,1988and1987,respectively,duewithinoneyear.S8,40614,603131,97035,541190,47223,355167,11717,134PaymentsmadeundercapitalleasesincludeS49,014,000,$55,557,000and$61,409,000ofamortizationexpensefortheyearsendedDecember31,1988,1987and1986,respectively.Futureminimumleasepayments,byyearandintheag-gregate,forcapitalleasesandnoncancelableoperatingleasesoftheCompanyanditssubsidiariesconsistedofthefollowingatDecember31,1988:19891990199119921993LaterYearsTotalFutureMinimumLeasePaymentsCapitalOperating~leasesa)Leases(inthousands)S8,000S20,0006,00020,0005,00019,0004,MO16,0004,00015,0003900017000066,000$260.000LessEstimatedInterestElementIncludedThereinEstimatedPresentVatueofFutureMinimumLeasePayments...30,000$36,000(a)Minimumpaymentsdonotindudeleasesofnudearfuel.Nuctearfuelrentalscomprisetheunamortizedbalanceofthelessor'scost(approximately$131,970,000)lesssalvagevalue,ifany,tobepaidinproportiontoheatproducedandcarryingchargesonthelessor'sunrecoveredcosts.ItIscon-templatedthatportionsofthepresentlyleasedmaterialwillbereplenishedbyadditionalleasedmaterial.NudearfuelrentalsofSS2,568,000,$58,670,000and$6S,301,000werechargedtofuelforelectrfcgenerationin1988,1987and1986,respectively.Includedintheaboveanalysisoffutureminimumleasepaymentsand'ofpropertiesundercapitalleasesandrelated20 NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Continued)obligationsarecertainleasesinwhichportionsoftherelatedrentalsarepaidfororreimbursedbyassociatedcompaniesintheAEPSystembasedontheirusageoftheleasedproperty.TheCompanyanditssubsidiariescannotpredicttheextenttowhichorproportioninwhichtheassociatedcompanieswillutilizethepropertiesundersuchleasesinthefuture.Rentalsforalloperatingleasesareclassifiedapproximatelyasfollows:YearEndedDecember31~198819871986(inthousands)$11,000$11,000$10,000OperatingExpensesClearingandMiscellaneousAccounts(portionsolwhicharechargedtoincome)Total6,0005.0007.000,$17,000$16.000$17,000InJanuary1989,theCompanysignedacommitmentletteragreementtosellandleasebackRockport2asdiscussedinNote2.10.PensionPlan:TheCompanyanditssubsidiariesparticipatewithothercompaniesintheAEPSysteminatrusteed,noncontributorydefinedbenefitplantoprovidepensions,subjecttocertaineligibilityrequirements,foralltheiremployees.Planbenefitsaredeterminedbyaformulawhichconsiderseachpartici-pant'shighestaverageearnings,yearsofaccreditedserviceandsocialsecuritybenefits.PensioncostsfortheplanareallocatedtoeachSystemcompanyonthebasisofeachcom-pany'sshareofthetotalSystemprojectedbenefitobligation.TheCompanyanditssubsidiaries'undingpolicyistomakeannualcontributionstotheplanequaltotheamountsde-ductibleforFederalincometaxpurposes.NetpensioncostofthedefinedbenefitplanfortheyearsendedDecember31,1988and1987wasapproximately$397,000and$161,000,respectively.In1986theCompanyanditssubsidiariesrecordednopensioncost.Inadditiontoprovidingpensionbenefits,theCompanyanditssubsidiariesprovidecertainhealthcarebenefitsforretiredemployees.SubstantiallyalloftheCompanyanditssubsi-diaries'.employeesmaybecomeeligibleforthesebenefitsiftheyhavecompleted10yearsofcontinuousserviceatre-tirement.Thecostofretireehealthcarebenefitsisrecognizedasexpensewhenpaid.In1988,1987and1986,thecostofcurrentretireehealthcarebenefitstotaled$1,758,000,$1,327,000and$1,061,000,respectively.11~CommitmentsandContingencies:ConstructionTheconstructio(tbudgetoftheCompanyanditssubsidi-ariesfortheyears1989-1991isestimatedat$457,000,000,and,inconnectiontherewith,commitmentshavebeenmade.LitigationTheCompanyandAEPSChavebeeninvolvedinlitigationwithTerreHauteIndustries,Inc.(THI)overacontractforconstructionofanelectrostaticprecipitatorattheBreedPlant.InJuly1988,theSupremeCourtofIndianadeniedapetitionforanappealofadecisionbytheCourtofAppealsofIndianaregardinganawardfordamages.TheCourtofAppealsofIndianahadreversedpartofalowercourtdecisionbyre-ducinga$4,934,000awardforcompensatorydamagesanddroppinga$12,000,000awardforpunitivedamages.TheCompanyrecordedaliabilityin1983,includinginterest,forthecompensatorydamages.TheCompanyintendedtosatisfythereducedjudgementforcompensatorydamagesbymakingpaymenttoTHI;however,THIhasrefusedtoacceptpaymentandrequestedarehearingwiththeIndianaSupremeCourt.Thematterispending.IntheopinionofmanagementtheultimateresolutionofthismattershouldnothaveasignificanteffectontheearningsoftheCompany.EnvironmentalMattersTheCompanyanditssubsidiariesaresubjecttoregulationbyFederal,stateandlocalauthoritieswithrespecttoair-andwater-qualitycontrolandotherenvironmentalmatters,andaresubjecttozoningandotherregulationbylocalauthorities.Althoughthecumulative,long-termeffectofchangingenvironmentalrequirementsupontheCompanyanditssub-sidiariescannotbeestimatedatpresent,compliancewithsuchrequirementsmaymakeitnecessary,atcostswhichmaybesubstantial,toretrofitexistingfacilitieswithadditionalair-pollution-controlequipment;tochangefuelsuppliestolowersulfurcontentcoal;toconstructcoolingtowersorsomeotherclosed-cyclecoolingsystems;toundertakenewmeas-uresinconnectionwiththestorage,transportationanddis-posalofby-productsandwastes;tocurtailorceaseoperationsatexistingfacilities,andtodelaythecommercialoperationof,ormakedesignchangeswithrespectto,facil-itiesunderconstruction.

INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIESLegislativeproposalsarependingbeforetheU.S.Congressatexpresslyseektocontrolaciddeposition.Ifanyoftheseillsbecomelaw,significantreductionsintheemissionofsulfurdioxideandnitrogenoxidefromvariousexistingCom-panygeneratingplantscouldberequired.Thesereductionswouldentailverysubstantialcapitalandoperatingcoststhat,inturn,couldnecessitatesubstantialrateincreasesbytheCompany.Inaddition,anumberofstatesandenvironmentalorganizationshavependinginthecourtsproceedingsundertheCleanAirActseekingreductionsintheemissionofsulfurdioxideincertainmidwesternstates.Further,theU.S.EnvironmentalProtectionAgencyiscon-sideringanumberofsignificantpolicychangesinitsrulesgoverningsulfurdioxideemissions.Adoptionofanyofthecontemplatedpolicychangescouldrequiresubstantialex-penditurestoaccomplishreductionsinsulfurdioxideemis-sionsfromtheCompany'scoal-firedgeneratingplants.TransmissionEqualizationAgreementTheCompanyparticipateswithotherAEPSystemcom-paniesinatransmissionequalizationagreement.Thisagree-mentpoolscertainAEPSystemcompanies'nvestmentsintransmissionfacilitiesandsharesamongthepartiesthecostsofownershipinproportiontotheparties'espectivedemandatios.TheFERChadpermittedtheagreementtobeimple-ented,effectiveJanuary1985,subjecttorefund.Theagree-mentasfiledprovidedforthecompaniestopooltheirinvestmentsinextra-highvoltagefacilities(345kvandabove)andtophaseintheequalizationofcostsovertheperiod1985-1989.InDecember1988,theFERCissuedafinalorderapprovingtheagreementwithcertainmodificationsthatrequire,amongotherthings,thecompaniestopooltheirinvestmentsinallhighvoltagetransmissionfacilities(138kvandabove)andtoeliminatethephase-infeature.Bothofthesechangesbe-cameeffectiveprospectivelyinAugust1988.Pursuanttothetermsoftheagreement,theCompanyre-cordedcreditsof$36,996,000,$26,025,000and$10,672,000fortransmissionservicesinotheroperationex-pensefortheyearsendedDecember31,1988,1987and1986,respectively.NuclearInsuranceTheCompanyissubjecttothePrice-AndersonActwhichlimitsthepublicliabilityofalicenseeofanuclearplantforasinglenuclearincidenttotheamountofprimaryliabilityin-suranceavailablefromprivatesourcesandanindustryret-rospectivedeferredpremiumassessmentplan.TheCompanymaintainsthemaximumprivateinsuranceavailableof$200,000,000foritstwo-unitDonaldC.CookNuclearPlant(CookPlant).AmendmentstothePrice-AndersonAct,effec-tiveAugust1988,increasedthelimitsofpublicliabilityto$7,608,800,000basedon112reactorscurrentlybeingsub-jecttotheAct.ThemaximumstandarddeferredpremiumthattheCompanymaybeassessed,intheeventofanuclearincidentatanylicensednuclearpowerplantintheUnitedStates,is$63,000,000perreactor,butanassessmentmaynotexceed$10,000,000inanyoneyear.Ifpublicliabilityclaimsandauthorizedlegalcostsexceedtheamountoflia-bilityinsuranceanddeferredpremiums,alicenseemustpayasurchargeofupto5percentofthestandarddeferredpre-miumforsuchclaimsandcosts.Thus,ifdamagesinexcessofprivateinsuranceresultfromanuclearincident,theCom-panycouldbeassesseditsproratashareoftheliabilityuptoamaximumof$126,000,000foritstworeactors,inannualinstallmentsof$20,000,000,plus$6,300,000forexcessclaimsandcosts.ThereisnolimitonthenumberofincidentsforwhichtheCompanycouldbeassessedthesesums.TheCompanyalsohaspropertyinsurancefordamagetotheCookPlantfacilitiesintheamountof$1.7billion.Theprimarylayerof$500,000,000isprovidedthroughnuclearinsurancepools.Theexcesscoverageabove$500,000,000isprovidedthroughinsurancepools($400,000,000)andNu-clearElectricInsuranceLimited(NEIL).NEIL'sexcessprop-ertyinsuranceprogramprovides$825,000,000incoverage.Themaximumassessmentunderthisprogramcouldbe$9,200,000(sevenandone-halftimestheannualpremiumona100%coveragebasis).22 0NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Concluded)NEIL'sextra-expenseprogramprovidesinsurancetocoverextracostsofreplacementpowerresultingfromaprolongedaccidentaloutageofanuclearunit.TheCompany'spolicyinsuresagainstsuchincreasedcostsuptoapproximately$2,350,000perweek(starting21weeksaftertheoutage)foroneyearand$1,175,000perweekforthesecondyear,or80%ofthoseamountsperunitifbothunitsaredownforthesamereason.TheCompanywouldbesubjecttoaretrospec-tivepremiumofupto$8,154,000(fivetimesannualpre-mium)ifNEIL'slossesexceededitsaccumulatedfunds.Somepotentiallossesorliabilitiesmaynotbeinsurableortheamountofinsurancecarriedmaynotbesufficienttomeetpotentiallossesandliabilities,includingliabilitiesrelatingtodamagetotheCookPlantandcostsofreplacementpowerintheeventofanuclearincidentattheCookPlant.Futurelossesorliabilitieswhicharenotcompletelyinsured,unlessallowedtoberecoveredthroughrates,couldhaveamaterialadverseeffectonthefinancialconditionoftheCompany.DisposalofSpentNuclearFuelandNuclearDecommissioningTheNuclearWastePolicyActestablishesFederalrespon-sibilityforthepermanentdisposalofspentnuclearfuel.Dis-posalcostsarepaidbyfeesassessedagainstownersofnuclearplantsanddepositedintotheNuclearWasteFundcreatedbytheAct.ForthedisposalofnuclearfuelconsumedafterApril6,1983bytheCookPlant,theCompanymustpaytothefundafeeofonemillperkilowatthour,whichthCompanyiscurrentlyrecoveringfromitscustomers.InJune1983,theCompanyenteredintoacontractwithDOEforthedisposalofspentnuclearfuel.UndertermsofthecontracttheCompanymustpayoveraperiodof10yearstotheU.S.Treasuryafeeestimatedatapproximately$71,964,000,ex-clusiveofinterest,forthedisposalofnuclearfuelconsumedpriortoApril7,1983.TheCompanyhasdeferredthisamountplusaccruedinterestonitsbalancesheetandhasreceivedregulatoryapprovalfortherecoveryofthisamountandisamortizingtheamountdeferredasitisbeingrecovered.AnindependentconsultingfirmemployedbytheCompanyhasestimatedthatthecostofdecommissioningtheCookPlantcouldrangefrom$284,000,000to$321,000,000in1986dollars.TheCompanyhasreceivedregulatoryapprovalineachofitsjurisdictionsfortherecoveryofnucleardecom-missioningcostsassociatedwiththeCookPlant.TheCom-panyintendstoreevaluateperiodicallyamountscollectedforsuchcostsandtoseekregulatoryapprovaltorevisesuchamountsasnecessary.Fundsrecoveredthroughtherate-makingprocessfordis-posalofspentnuclearfuelconsumedpriortoApril7,1983andfornucleardecommissioninghavebeendepositedinex-ternalfundsforthefuturepaymentofsuchcosts.12.UnauditedQuarterlyFinancialInforrnatlo:Thefollowingconsolidatedquarterlyfinancialadjustments(consistingofonlynormalrecurringQuarterlyPeriodsOperatingOperatingEndedRevenuesIncome(inthousands)informationisunauditedbut,intheopinionoftheCompany,includesallaccruals)necessaryforafairpresentationoftheamountsshown:NetQuarterlyPeriodsOperatingOperatingNetIncomeEndedRevenuesIncomeIncomeRnIhousnndsh1988March31June30September30....December31....$243,617224,026266,690248,733$66,3404816758,86042,076$46,49828,87139,848'6,5881987March31June30September30.....December31$253,638241,653283,944238,033$59,73848,99952,88161,428$47,39037,98938,91442,07323 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIESIndependentAuditors'eport08IOitt8H8Ski8S+38lS155EastBroadStreetCotumt<us,Ohio432153650(614)221~1000ITTTe/ex:4995627TotheShareownersandBoardofDirectorsofIndianaMichiganPowerCompany:WehaveauditedtheaccompanyingconsolidatedbalancesheetsofIndianaMichiganPowerCompanyanditssubsidiariesasofDecember31,1988and1987andtherelatedconsolidatedstatementsofincome,retainedearningsandcashflowsforeachofthethreeyearsintheperiodendedDecember31,1988.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.Weconductedourauditsinaccordancewithgenerallyacceptedauditingstandards.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareas'onablebasisforouropinion.Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofIndianaMichiganPowerCompanyanditssubsidiariesatDecember31,1988and1987andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1988inconformitywithgenerallyacceptedaccountingprinciples.(C(<(Ad)i4((.WI4(L(.PFebruary21,1989-24 e,cOperatingStatistics1988198719861985ELEGTRIGOPERATINGREYENUEs(inthousands):FromKilowatt-hourSales:Retail:Residential:WithoutElectricHeating...........WithElectricHeatingTotalResidentialCommercial.IndustrialMiscellaneousTotalRetail.Wholesale(salesforresale)............TotalfromKilowatt-hourSales....ProvisionforRevenueRefunds.........TotalNetofProvisionforRevenueRefunds............OtherOperatingRevenuesTotalElectricOperatingRevenues.I$189,845$186,418$174,55096,14590,26190,881175,53490,949$150,33482,739285,990194,982233)85511,645?26,4?2248,283276,679191,352235,47011,533715,034293,379265,431184,276219,34411,171680,222400,779266,483181,240213,16111,234672,118396,980233,073150,733173,9869,666567,458414,390974,?551,008,413~1,800)1,081,0011,069,098541~105)981,848~12,4941,081,5429,7531,068,9939,8001,008,4138,855969,35410,197972,95510,111$983,066$1,017,268$1,091,295$1,078,793$979,551SOURCESANDSALESOFENERGY(inmillionsofkilowatt-hours):Sources:NetGenerated-Steam:FossilFuelNuclearFuelNetGenerated-Hydroelectric...SubtotalPurchased.NetInterchangeTotalSources...Less:Losses,CompanyUse,Etc..NetSources8,?0?9,?91?018,5681,?00?3?6,66210,0606216,7842,5581,94721,00521,2891,6301,45619,3?519,8338,18710,9867919,2524,94154224,7351,64523,0907,9337,8007415,8073,2484,94824,0031,54222,4617,07112,9136820,0524;9131,35326,3181,50824,810Sales:Retail:,Residential:WithoutElectricHeating.WithElectricHeating...TotalResidentialCommercial.IndustrialMiscellaneousTotalRetail.Wholesale(salesforresale)..TotalSales2,8251,5?14,3963,2905,03622812,9506,42519,3?52,7191,4454,1643,1424,83422112,3617,47219,8332;5361,4423,9783,0074,37121211,56811,52223,0902,5571,4814,0382,9684,28221611,50410,95722,4612,5341,5614,0952,8704,20120911,37513,43525 INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIESPERATINGSTATISTICS(Concluded)AYERAGECosT0FFUELC0NsUMED(incents):PerMillionBtu:Coal.Nuclear.Ov'erailPerKilowatt-hourGenerated:Coal.Nuclear.Overall1988182701201.81.771.261987190751171.87.841.251986185741181.82.831.251985194801361.97.861.421984189651031.83.701.08REBIDENTIALSERYICE-AYERAGEs:AnnualKwhUseperCustomer:Total.WithElectricHeating.AnnualElectricBill:Total.WithElectricHeating..PriceperKwh(incents):Total.WithElectricHeating.10,59618,551$689.33$1,135.466.516.1210,14617,341$674.13$1,083.106.646.259,81317,716$654.88$1,116.866.676.3010,05018,486$663.18$1,135.426.606.1410,24919,771$583.35$1,048.275.695.30NUMBEROFELECTRICCUSTOMERS:Year-End:Retail:Residential:WithoutElectricHeating....WithElectricHeating......TotalResidentialCommercialIndustrialMiscellaneous.TotalRetailWholesale(salesforresale).....TotalElectricCustomers..332,48885,635418,12345,2494,4791,984469,835108469,943328,93784.442413,37944,2074,3451,946463,877105463,982325,62382,324407,94743,6893,8821,846457,364106457,470322,92280,734403,65643,0173,7011,852452,226104452,330321,28679,823401,10942,9123,4151,584449,020105449,12526 INDIANAMICHIGANPOWERCOMPANVQ,'ividendsandPriceRangesofCumulativePreferredStockByQuafters(1988and1987)CumulativePreferredStock1st1988-Quarters2nd3rd4th1st1987-Quarters2nd3rd($100ParValue)4~/s%SeriesDividendsPaidPerShareMarketPrice-$PerShare(MSE)-HighLow4.56%SeriesDividendsPaidPerShareMarketPrice-SPerShare(OTC)Ask(high/low)Bid(high/low)4,12%SeriesDividendsPaidPerShareMarketPrice-$PerShare(OTC)Ask(high/low)Bid(highflow)7.08%SeriesDividendsPaidPerShareMarketPrice-SPerShare(NYSE)-.High-Low7.76%SeriesDividendsPaidPerShareMarketPrice-SPerShare(NYSE)-High-Low8.68%SeriesDividendsPaidPerShareMarketPrice-SPerShare(NYSE)-High-Low12%SeriesDividendsPaidPerShareMarketPrice-$PerShare(NYSE)-High-Low($25ParValue)$2.15SeriesDividendsPaidPerShareMarketPrice-$PerShare(NYSE)-High-LowS2.25SeriesDividendsPaidPerShareMarketPrice-SPerShare(NYSE)-High-Low$2.75SeriesDividendsPaidPerShareMarketPrice-$PerShare(NYSE)-High-Low$3.63Series(a)DividendsPaidPerShareMarketPrice-$PerShare(NYSE)-High-Low$1.14$1.14$1.14$1.14$1.14$1.14S1.14$1.14$1.03$1.03$1.03$1.03$1.03$1.03$1.03$1.03$1.77$1.77$1.77$1.77$1.77$1.77$1.77$1.7777/s70l>>70'I>>71I>>68s/s68'/s67'/z67'/>>$1.94$1.94$1.94$1.9481/s77/s77'/>>78/s7574'/>>73'/>>73$2.17$2.17S2.17$2.1791s/s86'/z85'/>>87'/z82'lz82'/z80'/z81$3.00$3.00$3.00$3.00107107'/z106108'/z101'/>>103'/z102'/z103887984'/>>70'/s75'/>>"67'/s7161s/s$1.94$1.94$1.94$1.9496'/z93'/85'/s80$2.17$2.17104'/s10299'/>>,90'/z82M72s/>>$2.1790'/s877665$2.1785'/z'9'/s$3.00S3.00$3.00$3.0010SV~108103104107'/z103107s/s101'/>>$0.5375$0.5375$0.5375$0.5375'0.5375$0.5375$0.5375$0.537525222523'/s23'/z21'/>>22'/s21'/z26'ls2425'/>>21'/z23'I>>19'/s22'/s18'/z$0.5625$0.5625$0.5625$0.5625$0.5625$0.5625$0.5625$0.562524'ls2224'/>>22'/z2422'/>>23'/>>21z/s2724'/>>26'/s23'lz2620'/z2420$0.6875$0.6875$0.6875$0.6875$0.6875$0.6875$0.6875$0.687527'/z26'/z27s/s-26'I>>2726'/>>271/226'/z27'/>>26'/>>$0.90753127'/>>26'/>>2626'/z25'/s2725$1.03125$1.03125$1.03125$1.03125$1.03125$1.03125$1.03125$1.0312543'/s4341z/s41'/zMSE-MidwestStockExchangeOTC-Over-the-CounterNYSE-NewYorkStockExchangeNote-Theabovebidandaskedquotationsrepresentpricesbetweendealersanddonotrepresentactualtransactions.MarketquotationsprovidedbyNationalQuotationBureau,inc.Dashindicatesquotationnotavailable.(a)RedeemedApril1987.27 TheCompany'sAnnualReport(Form10-K)totheSecuritiesandExchangeCommissionwillbeavailableonoraboutMarch31,1989toshareownersuponwrittenrequestandatnocost.Pleaseaddresssuchrequeststo:Mr.G.C.DeanAmericanElectricPowerServiceCorporation1RiversidePlazaColumbus,Ohio43215nsferAgentandRegistrarofCumulativePreferredStockMorganShareholderServicesTrustCompany30WestBroadway,NewYork,N.Y.10007-2192 Ll~

LekoMlcbigenMICHIGANOHIOINDIANAWESTVIRGINIAKENTUCKYVIRGINIALEGENDindianaMichiganPowerCo.AreaOtherAEPoperatingcompanies'reasQMaJorpowerplantTENNESSEE

~10 ENCJOSURE2TOAEP:NRC:0909E~~1989InternalCashFlowProjectionforDonaldC.CookNuclearPlant(5Millions)Projected1989Actual1988Netincomeaftertaxes.LessdividendspaidRetainedearningsAdjustments:DepreciationandamortizationDeferredincometaxesandinvestmenttaxcreditsAFUDCTotaladjustmentsInternalcashflowAveragequarterlycashflowAveragecashbalancesandshort-terminvestments151.8135.915.9146.326.8(57.2)115.9131.832.610.5134138(4)152(13)(55)84802015Total43.1358Ownershipinalloperatingnuclearunits:Unit1andUnit2-100%MaximumTotalContingentLiability-$20.0million(2units)

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