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

<4cELERaTED DlUBUTloN DEMOwsTB10K sYrrEMREGULATORY INFORMATION DISTRIBUTION SYSTEM(RIDS)ACCESSION NBR:8904190328 DOC.DATE:.89/04/10 NOTARIZED:

NODOCKETFACXL:50-315 DonaldC.CookNuclearPowerPlant,Unit1,Indiana60500031550-316DonaldC.CookNuclearPowerPlant,Unit2,Indiana605000316AUTH.NAMEAUTHORAFFILIATION

'LEXICH,M.P.

IndianaMichiganPowerCo.(formerly Indiana&MichiganEleRECIP.NAME" RECXPIENT AFFILIATION DocumentControlBranch(Document ControlDesk)

SUBJECT:

Forwards1988annualrept.DISTRIBUTION CODE:M004DCOPIESRECEIVED:LTR QENCL(SIZE:3RTXTLE:50.71(b)AnnualFinancial ReportDNOTES:SRECIPIENT ID.CODE/NAME PD3-1PDCOPIESLTTRENCL11RECIPIENT IDCODE/NAME STANG,JCOPIESLTTRENCL10INTERNAL:

AEOD/DOAEXTERNALLPDR01111111AEOD/DSP/TPAB NRCPDR1111RNOIR'IOALL"RIDS"RECXPXENZS:

PLEASEHELPUSIOREDUCEWASTE!CGNZACT'IHEDOCUMEPZCXNZROLDESKSRQQMPl-37(EXT.20079)KOELIMlNATE YOURNAMEFROHDISIVKBVZIGN LIPIDFORDOCUMEMIS YOUDGNiTNEZD!TOTALNUMBEROFCOPIESREQUIRED:

LTTR7ENCL6 IndianaMichiganCowerCompanyP.O:8ox16631Coiumbus, OH43216.NAEP:NRC:0909E 10CFR50.71(b)&140.21(e)

DonaldC.CookNuclearPlantUnitNos.1and2DocketNos.50-315and50-316LicenseNos.DPR-58andDPR-74FINANCIAL INFORMATION FORINDIANAMICHIGANPOWERCOMPANYU.S.NuclearRegulatory Commission Attn:DocumentControlDeskWashington, D.C.20555Attn:T.E.MurleyApril10,1989

DearDr.Murley:

Enclosure 1containstheIndianaMichiganPowerCompany's (I&M)annualreportfor1988.Enclosure 2containsacopyofI&M'sprojected cashflowfor1989.Thesereportsaresubmitted pursuantto10CFR50.71(b)and10CFR140.21(e).

Thisdocumenthasbeenpreparedfollowing Corporate procedures thatincorporate areasonable setofcontrolstoensureitsaccuracyandcompleteness priortosignature bytheundersigned.

Sincerely, M.P.'AlichVicePresident KJT/ehEnclosures cc:D.H.Williams, Jr.W.G.Smith,Jr.-BridgmanR.C.CallenG.CharnoffG.Bruchmann NRCResidentInspector

-BridgmanA.B.Davis-RegionIIIp$gKO5OOO'=.PDI..

ENCLOSURE 1TOAEP:NRC:0909E INDIANAMICHIGANPOWERCOMPANY'S 1988ANNUALREPORT

CCg, ENCLOSURE 2TOAEP:NRC:0909E

'01989InternalCashFlowProjection forDonaldC.CookNuclearPlant(5Millions)

Projected 1989Actual1988NetincomeaftertaxesLessdividends paidRetainedearningsAdjustments:

Depreciation andamortization Deferredincometaxesandinvestment taxcreditsAFUDCTotaladjustments InternalcashflowAveragequarterly cashflowAveragecashbalancesandshort-terminvestments 151.8135.915.9146.326.8(57.2)115.9131.832.610.5134138(4)152(13)"(55)84802015Total43.1358Ownership inalloperating nuc'learunits:Unit1andUnit2-100%MaximumTotalContingent Liability

-$20.0million(2units)

<Ehr.GdianaMichiganPowerCompany!8P0419'0328 881231PDRADOCK05000315',,IPDR Contents4(~~Background oftheCompanyDirectors andOfficersoftheCompany.SelectedConsolidated Financial Data.Management's Discussion andAnalysisofResultsofOperations andFinancial Condition Consolidated Statements ofIncomeConsolidated BalanceSheetsConsolidated Statements ofCashFlowsConsolidated Statements ofRetainedEarningsNotestoConsolidated Financial Statements Independent Auditors'eport Operating Statistics Dividends andPriceRangesofCumulative Preferred Stock5-79-101213-232425-2627 INDIANAMICHIGANPOWERCOMPANYOneSummitSquare,P.O.Box60,FortWayne,Indiana46801Background oftheCompanyINDIANAMIGHIGANPowERC0MPANY(theCompany),

asubsidiary ofAmericanElectricPowerCompany,Inc.(AEP),isengagedinthegeneration,

purchase, transmission anddistribution ofelectricpower.TheCompanywasorganized underthelawsofIndianaonFebruary21,1925,andisalsoauthorized totransactbusinessinMichiganandWestVirginia.

Itsprincipal executive officesareinFortWayne,Indiana.TheCompanyhastwowhollyownedsubsidiaries; theyareBlackhawk CoalCompanyandPriceRiverCoalCompany,whichwereformerlyengagedincoal-mining operations.

TheCompanyservesapproximately 470,000customers innorthernandeasternIndianaandaportionofsouthwestern Michigan.

Amongtheprincipal industries servedaretransportation equipment, primarymetals,fabricated metalproducts, electrical andelectronic machinery, andrubberandplasticproducts.

Inaddition, theCompanysupplieswholesale electricpowertootherelectricutilities, municipalities andelectriccooperatives.

TheCompany's generating plantsandimportant loadcentersareinterconnected byahigh-voltage trans-missionnetwork.Thisnetworkinturnisinterconnected eitherdirectlyorindirectly withthefollowing otherAEPSystemcompanies toformasingleintegrated powersystem:AEPGenerating Company,Appalachian PowerCompany,ColumbusSouthernPowerCompany,KentuckyPowerCompany,KingsportPowerCompany,MichiganPowerCompany,OhioPowerCompanyandWheelingPowerCompany.TheCompanyisalsointerconnected withthefollowing otherutilities:

CentralillinoisPublicServiceCompany,TheCincinnati Gas8ElectricCompany,Commonwealth EdisonCompany,Consumers PowerCompany,IllinoisPowerCompany,Indiana-Kentucky ElectricCorporation (asubsidiary ofOhioValleyElectricCorporation),

Indianapolis Power8LightCompany,NorthernIndianaPublicServiceCompany,PublicServiceCompanyofIndiana,Inc.andRichmondPower8LightCompany.

Directors J.M.ALMSON(a)W.A.BLACKRICHARDE.DISBROWJOHNE.DOLAN(b)WILLIAMN.D'ONOFRIO A.R.GtASSBURN M.R.HARRELL(a)GERALDP.MALONEYRICHARDC.MENGER.E.PRATER(C)JOSEPHH.VIPPERMAN W.E.WALTERS(C)W.S.WHITE,JR.DAVIDH.WILLIAMS, JR.(d)OfficersW.S.WHITE,JR.ChairmanoftheBoardandChiefExecutive OfficerW.A.BLACKPresident andChiefOperating OfficerRICHARDC.MENGE(e)SeniorVicePresident MILTONP.ALEXICHVicePresident RICHARDE.DISBROWVicePresident JOHNE.DOLAN(b)VicePresident WILLIAMN.D'ONOFRIO VicePresident A.JOSEPHDOWDVicePresident RICHARDF.HERINGVicePresident GERALDP.MALONEYVicePresident JOSEPHH.VIPPERMAN VicePresident DAVIDH.WiLLIAMS, JR.(d)VicePresident PETERJ.DEMARIATreasurer JOHNF.DILORENZO, JR.Secretary EUOBAFILEAssistant Secretary andAssistant Treasurer JEFFREYD.CROSSAssistant Secretary CARLJ.MOOSAssistant Secretary JOHNB.SHINNOCKAssistant Secretary JOANST.JAMES(t)Assistant Secretary LEONARDV.ASSANTEAssistant Treasurer BRUCEM.BARBERAssistant Treasurer JAMESD.HUEBNER(g)Assistant Treasurer GERALDR.KNORRAssistant Treasurer Theprincipal occupation ofeacholtheabovedirectors andofficersofIndianaMichiganPowerCompany,withtenexceptions, IsasanemployeeofAmerfcanElectricPowerServiceCor-poration.

Theexceptions areMessrs.Allison,Bafile,Black,O'Onofrio,

Glassbum, Harrell,,

Menge,Moos,Prater,andWalterswhoseprincipal occupations during1988wereasofficersoremployees ofIndianaMichiganPowerCompany.(a)ResignedApril26,1988(b)ResignedFebruary1,1988(c)ElectedApril26,1988(d)ElectedFebruary1~1988(e)ElectedMarch1,1988(I)ResignedJanuary1~1989(g)ResignedFebruary1,1989 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIES SelectedConsolidated Financial DataYearEndedDecember31,198819871986(inthousands) 19851984INCOMESTATEMENTS DATA'PERATING REVENUES-ELECTRIC.......TOTALOPERATING EXPENSESOPERATING INCOMETOTALOTHERINCOMEANDDEDUCTIONS

....INCOMEBEFOREINTERESTCHARGES.......NETINTERESTCHARGESNETINCOMEPREFERRED STOCKDIVIDENDREQUIREMENTS

.EARNINGSAPPLICABLE ToCOMMONSTOCK..$983,066$1,017,268

$1,091,295

$1,078,793 767,623794,222900,151886,904$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:ELECTRICUTILITYPLANTACCUMULATED PROVISIONS FORDEPRECIATION ANDAMORTIZATION

.NETELECTRICUTILITYPLANTTOTAL,ASSETS...........

~~~~~~~~~~~~COMMONSTOCKANDOTHERPAID.INCAPITAL..RETAINEDEARNINGSTQTALCDMMDNSHAREDWNER's EQUITY......CUMULATIVE PREFERRED STOCK'.NOTSUBJECTTOMANDATORY REDEMPTION SUBJEGTToMANDATDRY REDEMPTI0N (a)L0NG-TERM DEBT(a)(a)Including portionduewithinoneyear.1,218,060 1,118,254 3,193,211 3,035,027 3,993,046 3,956,563 1,018,455 962,670868,1922,961,367 3,849,208 3,144,856 3,763,595 3,072,814 3,658,647 838,347161,443828,347145,302828,347113,123828,347100,130828,34494,317999,790973,649941,470928,477922,661197,00025,0301,575,220 197,00032,0301,591,768 197,00079,0301,421,523 197,00086,0301,442,070 197,00093,1971,347,623

$4,411,271

$4,153,281

$3,979,822

$4,107,526

$3,941,006 Management's Discussion andAnalysisofResultsofOperations andFinancial Condition ResultsofOperations NetIncomeNetincomedecreased by9%in1988following a9%in-creasein1987.Thedecreasein1988resultedprimarily fromthenegativeeffectofthelossin1987ofamajorwholesale customer.

Thiswaspartially offsetbythetaxeffectofcostsassociated withnucleardecommissioning trustfunds,anon-recurring chargein1987relatingtowholesale powertrans-actions,whichisreflected inotherincomeanddeductions, andanincreaseintotalallowance forfundsusedduringcon-struction.

The1987increaseresultedmostlyfromanincreaseinoperating incomewhichwaspartially offsetbyadecreaseinotherincomeanddeductions andanincreaseintotalin-terestcharges.OutlookWholesale Customers TheCompanylostonemajorwholesale customerin1987andreceivednoticefromanothertoterminate service.InthefirstinstancetheCompanyhadalong-term contractthatex-piredonOecember31,1987toprovide400,000kilowatts ofenergy(200,000kilowatts afterFebruary1,1987)toanun-affiliated utility.Thiscontractcontributed approximately 7%and12%oftheCompany's totaloperating revenuesand19%and37%oftheCompany's earningsapplicable tocommonstockbeforeanyproformaadjustment forAEPSystemin-tercompany transactions in1987and1986,respectively.

Inthesecondsituation awholesale customernotifiedtheCompanyin1987thatitplannedtoterminate purchasing energyfromtheCompanyandrequested transmission wheel-ingarrangements withtheCompanyeffective August1,1988.However,theexistingcontractwasextendedforoneyearandtheCompanyenteredintoanagreement fortransmission wheelingserviceandpartialloadrequirements forthiswhole-salecustomereffective August1,1989.ServicebytheCom-panytothiscustomerwasatanaveragelevelof180,000kilowatts in1988,170,000kilowatts in1987and162,000kilowatts in1986andcontributed approximately 5%,4%and3%oftheCompany's totaloperating revenuesand16%,12%and11%oftheCompany's earningsapplicable tocommonstockbeforeanyproformaadjustment forAEPSystemin-tercompany transactions in1988,1987and1986,respec-tively.Ifthiscontractdidnotexist,theCompanywouldhavebeenrequiredtomakepaymentsinalesseramount,oral-ternatively beenentitledtomorereceipts, duetooperation oftheAEPSystemPool.Afterproformaadjustment forAEPSystemintercompany transactions, theaggregate contribu-tionofthiscontractwouldhavebeenapproximately11%,

8%and8%oftheCompany's earningsapplicable tocommonstockin1988,1987and1986,respectively.

Regulatory Environment Theelectricutilityindustryoperatesinaregulatory envi-ronmentthatmakesitdifficult topredictwhethernewplantadditions willbefullyincludedinratebaseupontheirdedi-cationtopublicservice.ThisisofconcerntotheCompanysinceithasunderconstruction RockportPlantUnit2(Rock-port2)whichisexpectedtobecompleted inlate1989.See"Rockport PlantUnit2"inNote2oftheNotestoConsolidated Financial Statements.

EconomyTheeconomyoftheCompany's serviceterritory hasre-coveredfromtherecession of1982.Industrial production isupreflecting anewcompetitiveness notonlywithintheUnitedStatesbutalsointheglobalmarketplace.

Economicgrowthisexpectedtocontinueforaperiodoftime.However,thelong-term economicwell-being oftheregionissubjecttotheeffectsofrecession, inflation, foreigncurrencyfluctuations andotherinfluences, whichcouldadversely impactthefutureresultsofoperations oftheCompany.AcidRainLegislation TheCompanyconsumedover4milliontonsofcoalin1988togeneratenearly9billionkilowatthours ofelectricity.

Pro-posalsarebeingconsidered byCongressthatwouldplacsevereenvironmental restrictions onemissions fromcoburnedtoproduceelectricity.

These"acidrain"proposals couldrequiretheCompanytomakesubstantial capitalin-vestments andtoincursubstantial increased operating costsinordertocomply.TheimpactontheCompany's financial condition isdependent uponpassageoffinallegislation andfuturerate-making treatment.

Deregulation In1988,theFederalEnergyRegulatory Commission pro-posedrulesthatwouldeffectively deregulate thegeneration ofelectricity forcertainpowerproducers.

Theseproposals ifadoptedasissuedwouldradically altertheelectricutilityin-dustry.Theproposedruleswouldcreateanewclassofpowerproducers exemptfrommostformsofrateregulation that.couldenterorleavethemarketastheirinterests andfinancial conditions dictate.TheCompanylikeallelectricutilities isobligated toprovideitscustomers withalloftheirpowerneeds.Ifutilities becomeagentsthatcannotmanagetheirpowersupplythen,intheCompany's view,reliability wouldbeimpaired.

Sincereliability ofelectricserviceisofpara-mountimportance underanobligation toserve,theCompanyhasopposedtheproposedrules.Iftheseorotherrulescon-cerningderegulation areadopted,thelong-term effectonthefinancial condition oftheCompanyisindeterminable.

INDIANAMICHIGANPOWERCOMPANYANOSIJBSIDIARIES peratingRevenuesandEnergySalesOperating revenuesdecreased 3%in1988comparedtoa7%decreasein1987.Thedecreasein1988revenuesresultedprimarily fromadecreaseinwholesale salespartially offsetbytherecordlevelofkwhsalestoretailcustomers.

The1987decreasecamemostlybecauseofa14%decreaseinoverallsalesofelectricenergy.Theelementsthatgaverisetochangesinoperating revenuesaresummarized below.Revenuesfromwholesale customers decreased 15%dur-ing1988ona14%decrease, inkwhsales,following a27%decreaseinrevenuesin1987ona35%decreaseinkwhsales.Thedecreases inkwhsalesinbothyearsweremostlycausedbytheexpiration ofalong-term contractwithawholesale customer(discussed previously).

In1987,howevertheim-pactoflowerkwhsaleswasoffsetpartially byanincreaseintheaveragewholesale realization astheCompanypursuedsaleswithhigherprofitmargins.The1987declineinenergysaleswasalsocausedbyanincreaseinavailable energysupplyfromunaffiliated generating capacitythathadbeenoutofserviceforanextendedtimeandtheadditionofnewgen-eratingunitsbyunaffiliated utilities.

Revenuesfromretailcustomers (residential, commercial andindustrial) increased 2%in1988aftera5%increasein1987.Thehigherrevenuesin1988wereattributable tothe.cordlevelofkwhsales(13billionkwh).Thecontinued onomicimprovement intheCompany's serviceareacou-ledwithhotsummerweatherledtotherecordlevelofkwhsalestoallretailcustomerclasses.Theeffectonrevenuesofthehigherkwhsaleslevelwaslargelyoffsetbyareduction inratesaslowerFederalincometaxesandaveragefuelcostswerepassedontocustomers.

Theincreasein1987revenuesreflected a7%increaseinkwhsalesandimprovement inrevenuesfromeachcustomerclass.Operating ExpensesTotaloperating expensesdecreased 3%aftera12%de-creasein1987.Thecomponents ofoperating expensesthatcausedthechangesarediscussed below.Fuelexpense,thesinglelargestexpenseoftheCompany,increased 11%in1988aftera10%declinein1987.The1988increaseresultedmainlyfromincreased netgeneration whilethe1987decreasewasduemainly.to reducedlevelsofgen-eration.Changesinfuelcostsgenerally arerecovered inrev-enuesthroughfuel-clause adjustment mechanisms andtherefore donothaveasignificant effectonnetincome.Purchased andinterchange powerexpensedecreased by54%in1988and43%in1987.In1988,thechangewascausedmostlyfromincreased availability oftheCompany's internalgeneration aswellaslowernetcostperkwhofpur-chasedandinterchange powerandaslightdecreaseintheCompany's totalloadrequirements.

The1987changewasprimarily duetotheassignment ofcertainrightstopurchasepowerfromAEPGenerating Company(AEGCo),anaffiliated company,toanunaffiliated company.Thisdecreasewaspar-tiallyoffsetbyincreased interchange powertransactions, pri-marilywithaffiliated companies, inordertoreplaceinternalgeneration lostbecauseofoutages..

Maintenance expenseincreased15%

in1987.Factorscon-tributing tothecomparatively higherlevelsofexpensein1987wereadditional maintenance activities fornuclearplantandothermaintenance activities.

Federalincometaxesdeclined45%in1988following a21%decreasein1987.The1988decreaseinFederalincometaxexpensewasprimarily duetothedecreaseinpre-taxbookoperating income,whilethe1987decreasecamemostlyfromthedecreaseinthestatutory FederalincometaxrateasaresultoftheTaxReformActof1986.TheCompanywasgrantedreductions initsannualbaseratelevelstoreflectareduction intheFederalincometaxrateto34%.andothercost-of-service items.Therefore, there-ductionsintaxrateshadaminimaleffectonearnings.

Otherprovisions intheTaxReformActof1986,suchasthoserelatingtodepreciation andrepealofinvestment taxcredit,willresultinreducedinternalcashflow.However,theseotherprovisions arenotanticipated tohaveamaterialimpactonnetearnings.

Allowance ForFundsUsedDuringConstruction Thetotalallowance forfundsusedduringconstruction (AFUDC)increased in1988andtheproportion ofAFUDCincludedinnetincomeincreased to38%(32%netofincometaxes)in1988from30%(25%netofincometaxes)in1987.Theincreaseintheproportion ofAFUDCincludedinnetin-comeresultedfromadditional construction expenditures onRockport2beingsubjecttotheallowance.

6 Liquidity andCapitalResources

-Construction ProgramTheCompany's plantandpropertyadditions for1988amountedto$323million,a30%increaseover1987.Con-struction expenditures forthethree-year period1989-1991 areestimated at$457million.Thisincludesthecompletion ofconstruction ofthesecond1,300-megawatt generating unitattheRockportPlant,Rockport2.Inaddition, theCompanycouldberequiredtomakesubstantial additional capitalex-penditures ifacidrainlegislation similartothatcurrently pro-posedisenactedintolaw.DebtandPreferred StockFinancing TheCompanygenerally issuesshort-term debt(commer-cialpaperandbankloans)toprovideinterimfinancing ofconstruction expenditures inexcessofavailable internally generated andotherfunds.TheCompanythenperiodically reducesshort-term debtwiththeproceedsfromsalesoflong-termdebtandpreferred stocksecurities andwithinvestments initscommonequitybyAEP.Issuanceofseniorsecurities isexpectedtobemodestinthenextfewyearssincealloftheCompany's projected con-struction expenditures for1989-1991 areexpectedtobefi-nancedwithinternally generated fundsandproceedsfromthesaleandleaseback ofRockport2discussed below.Ifanyadditional amountsareneededinexcessofinternally gen-eratedfunds,theywillhavetoberaisedexternally, asinthepast,throughsalesofsecurities, short-term borrowings andinvestments intheCompany's commonequitybyAEP.AtDecember31,1988,theCompanyhadunusedshort-termlinesofcreditofapproximately

$292millionwhichweresharedwithotherSystemcompanies.

CookNuclearPlantTheCookNuclearunitshavebeenexhibiting indications ofintergranular corrosion (IGC)inthesteamgenerator tubing,acondition whichhasdeveloped inotherpressurized waterreactors.

ThisledtoadecisiontooperateUnit2at80%powerandUnit1at90%powerasasteam-generator lifeconservation measure.TheIGCproblemintheUnit1steamgenerators hasbeenoccurring ataslowerratethaninUnit2,butitispossiblethattheUnit1steamgenerators mayhavetobereplacedeventually.

However,therearenopresentplansforsuchreplacement.

InApril1988,Unit2wastakenoutofservicetoreplacetheunit'ssteamgenerators, refueltheunitandperformthe10-yearanniversary serviceinspec-tionasrequiredbytheNuclear,Regulatory Commission.

TheunitisexpectedtoreturntoserviceinMarch1989.TheCompanywillseekrecoveryinitsratebaseofthesteamgenerator replacement expenditures inthenextgeneralratecasewhichisexpectedtobefiledin1989.RockportPlantUnit2TheCompanyandAEGCo,anaffiliate, whichjointlyowtheRockportPlanthavesignedacommitment letteragree-menttosellandleaseback theirinterests inRockport2.At'ecember31,1988,theCompanyandAEGCohadexpended$1.1billiononRockport2.TheCompanyandAEGCoexpecttousethenetproceedsfromthesale,estimated tobe$1.4billionaftertaxes,toreducetheircapitalization, including theredemption bytheCompanyofcertainpubliclyheldfirstmort-gagebondsandpreferred stock.Thesalewillnothaveaneffecton1989netincomesincethenetgainwillbedeferredandamortized overtheleaseterm.Theleasesareexpectedtoberecordedasoperating leases.TheCompanyandAEGCoexpecttosellasubstantial por-tionoftheunit'scapacitytounaffiliated utilities underlong-termunitpoweragreements.

Onesuchagreement tosupply250megawatts fora20yearperiodtoanunaffiliated utilityhasbeensigned.Recoveryofthecostsofcapacitynotsoldtounaffiliated utilities andthetimingofsuchrecoveryaresubjecttofutureregulatory proceedings.

See"Rockport PlantUnit2"inNote2oftheNotestoConsolidated Financial Statements foradditional information.

EffectsofInfiation Inflation continues toaffecttheCompany,eventhoughtheinflation ratehasbeenrelatively lowinrecentyears.Sinetherate-making processlimitstheCompanytorecoveryothehistorical costofassets,economiclossesareexperienced whentheinflatedvalueoftheassetsisnotrecovered.

How-ever,suchlossesareoffsetpartlybytheeconomicgainsthatresultfromtherepayment oflong-term debtwithinflateddollars.NewAccounting Standards TheFinancial Accounting Standards Board(FASB)hasis-suedanewaccounting standardregarding incometaxesthattheCompanywillberequiredtoadoptinthefuturewhichisdiscussed inNote3oftheNotestoConsolidated Financial Statements.

TheFASBhasproposedanewaccounting standardthatwouldrequireachangeinaccounting forpost-retirement ben-efitsotherthanpensionsfromanexpenseaspaidmethodtoanaccrualmethod.Thisproposalwouldrequiretheamorti-zationofpriorservicecostsoveraminimumof15yearsandhasatentative effective date'of1992.TheimpactontheCompany's financial positionisdependent uponissuanceofafinalstandardandfuturerate-making treatment.

INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIES Consolidated Statements ofIncomeOPERATING REYENUEs-ELECTRIcYearEndedDecember31,19881987(inthousands)

$983,066$1,017,268

$1,091,295 OPERATING EXPENSES:

Operation:

FuelforElectricGeneration

.Purchased andInterchange Power(net).OtherMaintenance Depreciation andAmortization

.Amortization (Deferral) ofRockportPhase-inCosts.TaxesOtherThanFederalIncomeTaxes.,FederalIncomeTaxesTotalOperating Expenses.OPERATING INCOMEOTHERINCOMEANODEOUCTIONS:

Allowance forEquityFundsUsedDuringConstruction

.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-term Debt.Short-term DebtandOtherAllowance forBorrowedFundsUsedDuringConstruction

.NetInterestChargesNETINCOMEPREFERRED STOCKDIVIOENOREQUIREMENTS EARNINGSAPPLICABLE ToCOMMONSTOCKSeeNotestoConsolidated Financial Statements.

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 Consolidated BalanceSheetsASSETSDecember31,19881987(inthousands)

ELECTRICUTILITYPLANT:Production Transmission Distribution

.General(includes nuclearfuel).Construction WorkinProgressTotalElectricUtilityPlantAccumulated Provisions forDepreciation andAmortization

.NETELECTRICUTILITY,PLANTOTHERPROPERTYANOINVESTMENTS

$2,331,581 737,919423,729206,068711,9744,411,271 1,218,060 3,193,211 301931$2,269,325 725,047397,214207,722553,9734,153,281 1,ii8,2543,035,027 283,313CURRENTAssETs:CashandCashEquivalents SpecialDeposits-Restricted Funds.AccountsReceivable:

Customers Associated Companies Miscellaneous

.Allowance forUncollectible AccountsFuel-ataveragecost.Materials andSupplies-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:DeferredDepreciation andReturn-RockportPlant.DeferredNuclearFuelDisposalCosts.Other.TotalDeferredDebits.Total.SeeNotestoConsolidated Financial Statements.

148,84051,026105961170,41356,434133,137305,833359,984$3,993,046

$3,956,563 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIES CAPITALIZATION ANDLIABILITIES December31,19881987(inthousands)

CAPITALIZATION:

CommonStock-NoParValue:Authorized ;500,000 SharesOutstanding

-1,400,000 SharesOtherPaid-inCapitalRetainedEarningsTotalCommonShareowner's EquityCumulative Preferred Stock:NotSubjecttoMandatory Redemption

.SubjecttoMandatory Redemption Long-term Debt.TotalCapitalization

.OTHERNONCURRENT LIABILITIES CURRENTLIABILITIES:

Long-term DebtDueWithinOneYear.NotesPayable..................

Commercial PaperAccountsPayable:General:Associated Companies

.TaxesAccruedInterestAccrued.Obligations UnderCapitalLeasesOther.TotalCurrentLiabilities DEFERREDCREDITS:DeferredIncomeTaxesDeferredInvestment TaxCreditsOther.TotalDeferredCreditsS56,584781,763161,443999,790197,00025,0301,563,720 2755,545207,63711,5007,95027,90055,21014,8364,28536,35343,03747,866248,937535,829194,726,20,377750,932S56,584771,763145,302973,649197,00032,0301,539,737 2,742,416 193,69252,03141,45117,57646,19837,11243,85648,928287,152542,298171,55919,446733,303C0MMITMENTs ANDC0NTINGENGIEs (Note11)Total.$3,993,046

$3,956,563 10 Consolidated Statements ofCashFlows1988YearEndedDecember31,19871986(inthousands)

CAsHFLowsFR0MOPERATING ACTIvITIEs:

NetIncome.Adjustments toReconcile NetIncometoNetCashProvidedbyOperating Activities:

Depreciation andAmortization

.DeferredIncomeTaxes.DeferredInvestment TaxCreditsAllowance forEquityFundsUsedDuringConstruction

.ChangesinCertainCurrentAssetsandLiabilities:

AccountsReceivable (net)Fuel,Materials andSuppliesAccruedUtilityRevenues.AccountsPayableAmortization ofDeferredNuclearFuelDisposalCosts..DeferredReturn-RockportPlant.Other(net)NetCashProvidedbyOperating Activities

.....CASHFLOWSFROMINVESTING ACTIVITIES:

PlantandPropertyAdditions

.Allowance forEquityFundsUsedDuringConstruction

...CashUsedforPlantandPropertyAdditions

.ProceedsfromSalesofProperty.NetCashUsedbyInvesting Activities CASHFLOWSFROMFINANCING ACTIVITIES:

CapitalContributions fromParent.IssuanceofLong-term Debt.ChangeinShort-term Debt(net).Retirement ofCumulative Preferred StocksRetirement ofLong-term DebtDividends PaidonCommonStockDividends PaidonPreferred StocksNetCashUsedbyFinancing Activities NetIncrease(Decrease) inCashandCashEquivalents

.....CashandCashEquivalents atBeginning ofYear.CashandCashEquivalents atEndofYearSupplemental Disclosure:

CashPaidDuringtheYearFor:Interest(netofAllowance forBorrowedFundsUsedDuringConstruction)

.IncomeTaxesNoncashInvesting Activities:

PlantAcquiredUnderCapitalLeasesSeeNotestoConsolidated Financial Statements.

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 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIES Consolidated Statements ofRetainedEarningsBalanceatBeginning ofYear.NetIncome.Total1988$145,302151,805297,1071987(inthousands)

$113,123166,366279,489YearEndedDecember31.1986$100,130152,481252,611CashDividends Declared:

CommonStockCumulative Preferred Stock: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.TotalDividends BalanceatEndofYear.eNotestoConsolidated Financial Statements.

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 NotestoConsolidated Financial Statements 1.Significant Accounting Policies:

Principles ofConsolidation Theconsolidated financial statements includetheaccountsofIndianaMichiganPowerCompany(theCompany)anditswhollyownedsubsidiaries.

Significant intercompany trans-actionshavebeeneliminated inconsolidation.

ThecommonstockoftheCompanyiswhollyownedbyAmericanElectricPowerCompany,Inc.(AEP).SystemofAccountsTheaccounting andratesoftheCompanyaresubjectincertainrespectstotherequirements ofstateregulatory bodiesandincertainrespectstotherequirements oftheFederalEnergyRegulatory Commission (FERC).Theconsolidated fi-nancialstatements havebeenpreparedonthebasisoftheuniformsystemofaccountsprescribed bytheFERC.ElectricUti%'tyPlant;Depreciation andAmortization; OtherPropertyandInvestments Electricutilityplantisstatedatoriginalcost.Generally, theplantoftheCompanyissubjecttofirstmortgageliens.'heCompanycapitalizes, asaconstruction cost,anallow-anceforfundsusedduringconstruction (AFUDC),anitemnotrepresenting cashincome,whichisdefinedintheappli-'cableregulatory systemsofaccountsasthenetcostofbor-rowedfundsusedforconstruction purposesandareasonable rateonequityfundswhensoused.Thecomposite ratesusedbytheCompanyaftercompounding onasemi-annual basiswere10.25%in1988and11.5%in1987and1986.TheCompanyprovidesfordepreciation onastraight-line basisovertheestimated usefullivesoftheproperty.

Thecurrentprovisions aredetermined largelywiththeuseofcom-positeratesbyfunctional classofproperty.

Operating expensesarechargedwiththecostsoflabor,materials, supervision andothercostsincurredinmaintaining theproperties.

Propertyaccountsarechargedwithcostsofbetterments andmajorreplacements ofproperty, andtheaccumulated provisions fordepreciation arechargedwithre-tirements, togetherwithremovalcostslesssalvage.Otherpropertyandinvestments aregenerally statedatcost.CashandCashEquivalents ln1988,theCompanyanditssubsidiaries implemented Statement ofFinancial Accounting Standards No.95,"State-mentofCashFlows"(SFAS95)usingtheindirectmethodofpresentation forcashflowsfromoperating activities.

Forpur-posesoftheconsolidated statements ofcashflows,theCom-panyanditssubsidiaries considercash,specialdeposits, workingfunds,andtemporary cashinvestments asdefinedbytheFERCtobecashandcashequivalents.

Temporary cashinvestments includehighlyliquidinvestments purchased withamaturityofthreemonthsorless.The1987and1986con-solidated statements offundshavebeenrestatedtoconformtothecurrent-period cashflowspresentation.

IncomeTaxesDeferredFederalincometaxesareprovidedtotheextentthatsuchamountsarereflected inrevenuelevels.TheCorri-panynormalizes theeffectoftaxreductions resulting frominvestment taxcreditsutilizedinconnection withcurrentFed-eralincometaxaccrualsconsistent withrate-making policies.

TheCompany's subsidiaries generally usetheflow-through methodofaccounting forinvestment taxcreditsandpracticedeferredtaxaccounting fortheeffectsofcertaintimingdifferences.

Operating RevenuesTheCompanyaccruesunbilledrevenuesforelectricservicerenderedsubsequent tothelastbillingcyclethroughmonth-end.Operating revenuesderivedfromacertainwholesale cus-tomerrepresented approximately 7%oftotaloperating rev-enuesfor1987and12%for1986.ThecontractwiththiscustomerexpiredonDecember31,1987.FuelCostsTheCompanybillsitsfuelcostsunderafuelrecoverymechanism designedtoreflectinrateschangesincostsoffuelasorderedbyvariousregulatory bodies.Accordingly, theCompanyaccruesrevenuerelatingtounrecovered fuel.SaleofReceivables InDecember1988theCompanyenteredintoanagreement tosellundivided interests indesignated poolsofcustomeraccountsreceivable andaccruedutilityrevenues, withlimitedrecourse, uptoamaximumof$50,000,000 atanyonetime.Undivided interests innewpoolsmaybesoldascollections reducepreviously soldinterests.

Theagreement expiresinDecember1993andmaybeterminated atanytimepriorthereto.TheCompanyreceivedproceedsof$79,000,000 dur-ingtheyear.AtDecember31,1988approximately

$50,000,000 remainstobecollected.

13 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIES

'therInaccordance withregulatory approvals, theCompanyrec-ognizesthegainorlossonreacquired debtinincomeintheyearofreacquisition unlesssuchdebtisrefinanced inwhichcasethegainorlossisdeferredandamortized overthetermofthereplacement debt.Debtdiscountorpremiumanddebtexpensesarebeingamortized overthelivesoftherelateddebtissues,andtheamortization thereofisincludedinotherinterestcharges.TheCompanyiscommitted underaunitpoweragreement withAEPGenerating Company(AEGCo),alsoanAEPsubsid-iary,topuichase70%ofAEGCo'sRockportPlantcapacityunlessitissoldtounaffiliated utilities.

Certainprior-period amountshavebeenreclassified tocon-formtocurrent-period presentation.

2.HateMatters:RockportPlantUnit1TheCompanyhasphase-inplansinbothitsIndianaandFERCjurisdictions forUnit1oftheRockportPlant(Rockport 1).Rockport1 isa1,300-megawatt generating unitthatbegancommercial operation inDecember1984andisjointlyownedbytheCompanyandAEGCo.AtDecember31,1988and1987,theCompanyhadunamortized deferredreturnsof115,351,000 and$131,970,000, respectively, andun-mortizeddeferreddepreciation of$33,489,000 and$38,443,000, respectively whicharebeingamortized onastraight-line basisthrough1997.TheCompanyhasbeenengagedinstateandFederalrateproceedings tomodifyitsphase-inplanstocomplywithSFAS92"Regulated Enterprises

-Accounting forPhase-inPlans."SFAS92allowsthedeferralofcostsforfuturere-coveryunderphase-inplansonlyifthephase-inplanhasbeenapprovedbytheregulator andprovidesforrecoveryofallcostsdeferredpursuanttotheplanwithin10yearsoftheinitialdeferrals.

Thecommencement ofthe10-yearrecoveryperiodisdelayedforplansineffectpriorto1988,ifcertainconditions aremet.In1987,theIndianaUtilityRegulatory Commission ap-provedan,amendedphase-inplantocomplywithSFAS92.In1988,theFERCapprovedsettlement agreements be-tweentheCompanyandcertainwholesale customers.

Thesettlement agreements providefor,amongotherthings,com-pliancewiththe10-yearrecoveryperiodasrequiredbySFAS92,theeffectoftheTaxReformActof1986andothercostofserviceissues,anetratereduction of$2,800,000 annuallyeffective prospectively andaonetimerefund.TheCompanyhasarateproceeding withtheremaining wholesale customers thatincludes, amongotherthings,com-pliancewiththe10-yearrecoveryperiod.Afinalorderispending.In'theopinionofmanagement, theultimatereso-lutionwillnothaveasignificant effectonresultsofoperations.

RockportPlantUnit2InJanuary1989,theCompanyandAEGCosignedacom-mitmentletteragreement tosellandleaseback theirrespective 50%interests ina1,300-megawatt unittheyareconstructing attheRockportPlant(Rockport 2).TheCompanyandAEGCohaveexpended$1.1billiononRockport2throughDecember1988.Thisagreement callsfortheCompanyandAEGCotoselltheirinterests inRockport2inlate1989,justpriortocommercial operation, andsimultaneously foreachcompanytoleasea50%interestintheunitforaninitialtermof33years.ThesalespricewillbethefairmarketvalueofRockport2,estimated tobe$1.7billionandthetotalcostoftheunitatthedateofthesaleisestimated tobe$1.3billion.Thenetgainfromthesalewillbedeferredandamortized overtheinitialleaseterm.Theleasesareexpectedtoberecordedasoperating leases.InDecember1988,theCompanysignedaunitpoweragreement withanunaffiliated utilitytosupply250megawatts fromRockport2fora20yearperiodexpectedtobegininJanuary1990.

Itisexpectedthatanadditional 500megawatts ofRockport2capacitywillbesoldbytheCompanyandAEGCotounaffiliated utilities underlong-term unitpoweragree-ments.Recoveryofthecostsofcapacitynotsoldtounaffi-liatedutilities andthetimingofsuchrecoveryaresubjecttofutureregulatory proceedings.

Theabovetransactions aresubjecttoregulatory approvalandotherconditions.

NOTESTOCONSOLIDATED FINANCIAL STATEMENTS (Continued) 3.FederalIncomeTaxes:ThedetailsofFederalincometaxesasreportedareasfollows:1988YearEndedDecember31,YearEndedDecember31,19871986(inthousands)

Charged(Credited) toOperating Expenses(net):Current$11,865$63,543$44,340Deferred5,56319,53326,208DeferredInvestment TaxCredits24,164(7.703)25,324Total41,59275,37395,872Charged(Credited) toOtherIncomeandDeductions (net):Current1,1862,760(7,414)Deferred(2,402)(5,936)(1,989)DeferredInvestment TaxCredits(492)34Total(1.708)(3,173)(9,399)TotalFederalIncomeTaxesasReported$39,884$72,200$86,473Thefollowing isareconciliation ofthedifference betweentheamountofFederalincometaxescomputedbymultiplying bookincomebeforeFederalincometaxesbythestatutory taxrate,andtheamountofFederalincometaxesreportedintheConsolidated Statements ofIncome.NetIncomeFederalIncomeTaxesPre.taxBookIncomeFederalIncomeTaxesonPre.TaxBookIncomeatStatutory Rate(34%in1988,40%in1987and46%in1986)Increase(Decrease) inFederalIncomeTaxesResulting FromtheFollowing ItemsonWhichDeferredTaxesAreNotProvided:

ExcessofBookOverTaxDepreciation

.Allowance forFundsUsedDuringConstruction andMiscellaneous ItemsCapitalized ontheBooksbutDeductedforTaxPurposesDeferredReturn-RockportPlantTaxExemptIncome-NuclearDecommissioning TrustFunds.OtherInvestment TaxCredits(net)TotalFederalIncomeTaxesasReported.Effective FederalIncomeTaxRate1988$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 INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIES Thefollowing aretheprincipal components ofFederalincometaxesasreported:

I1988YearEndedDecember31~19871986,(inthousands)

Current:FederalIncomeTaxes.investment TaxCreditsTotalCurrentFederalIncomeTaxes.Deferred:

Depreciation (liberalized, ADRandACRS)Allowance forBorrowedFundsUsedDuringConstruction andMiscellaneous ItemsCapitalized

.Unrecovered andLevelized FuelNuclearDecommissioning CostsSpentNuclearFuelFeeUnbilledRevenueDeferredReturn-RockportPlantOtherTotalDeferredFederalIncomeTaxesTotalDeferredInvestment TaxCreditsTotalFederalIncomeTaxesasReportedS65,91838566,303S68,308(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)BasedonInternalRevenueServiceregulations issuedin1988,theCompanyelectedtoclaiminvestment taxcreditsonqualified progressexpenditures onthe1987taxreturnandamendedtaxreturnsfor1975through1986.Thecurrentanddeferredtaxeffectsrecordedduring1988represent thecumulative effectofthiselectionaswellas1988currentyearaccruals.

(b)BasedonarulingtheCompanyreceivedfromtheInternalRevenueServicein1988,theCompanyelectedtodeductnucleardecommissioning costsonthe1987taxreturnandonamendedtaxreturnsfortheyears1984through1986.Thecurrentanddeferredtaxeffectsrecordedduring1988represent thecumulative effectofthiselectionaswellas1988currentyearaccruals.

TheCompanyanditssubsidiaries joininthefilingofa+onsolidated Federalincometaxreturnwiththeiraffiliated ompaniesintheAEPSystem.Theallocation oftheAEPSystem'sconsolidated FederalincometaxtotheSystemcom-paniesisiriaccordance withSecurities andExchangeCom-mission(SEC)rulesunderthePublicUtilityHoldingCompanyActof1935.Theserulespermittheallocation ofthebenefitofcurrenttaxlossestotheSystemcompanies givingrisetosuchlossesindetermining taxescurrently payable.ThetaxlossoftheSystemparentcompany,AEP,isallocated toitssubsidiaries withtaxableincome.Withtheexception ofthelossoftlieparentcompany,themethodofallocation ap-proximates aseparatereturnresultforeachcompanyintheconsolidated group.Consolidated investment taxcreditsuti-lizedareallocated totheSystemcompanies givingrisetothem.:.AtDecember31,1988,thecumulative netamountofin-cometaxtimingdifferences onwhichdeferredtaxeshavenotbeenprovidedtotaled$487,000,000.

TheSystemreachedsettlements withtheInternalRevenueService(IRS)forallissuesfromtheauditsoftheconsolidated Federalincometaxreturnsfortheyearspriorto1983.Returnsfortheyears1983and1984arebeingauditedbytheIRS.Intheopinionofmanagement, thefinalsettlement ofopenyearswillnothaveamaterialeffectontheearningsoftheCompany.InDecember1987,theFinancial Accounting Standards BoardissuedSFAS96"Accounting forIncomeTaxes"whichrequiresthatcompanies adopttheliability methodofac-countingforincometaxes.SFAS96mustbeadoptedbytheCompanynolaterthanJanuary1990onarestatedbasisorasacumulative effectofanaccounting changeintheyearofadoption.

TheCompanyhasnotyetdetermined ifitwilladoptSFAS96onarestatedorprospective basis.Whenthenewstandardisadopted,totalassetsandlia-bilitieswillincreasesignificantly toreflectpreviously unre-cordeddeferredtaxassetsandliabilities ontemporary differences andrelatedregulatory assetsandliabilities.

Inaddition',

existingdeferredtaxeswillbeadjustedtothelevelrequiredatthecurrently existingstatutory taxrate.Whilethecomputations arenotyetcompleted, itisexpectedthatasignificant portionoftherequireddeferredincometaxad-justments willbeoffsetbyregulatory assetsandliabilities.

Theeffectofimplementing thenewstandardontheCom-pany'sfinancial condition hasnotyetbeendetermined.

NOTESTOCONSOLIDATED FINANCIAL STATEMENTS (Continued) 4.Supplementary IncomeStatement Information andRelated-party Transactions:

Electricoperating revenuesshownintheConsolidated Statements ofIncomeincludesalesofenergytoREPSystemcompanies ofapproximately

$34,000,000,

$35,000,000, and$33,000,000 fortheyearsendedDecember31,1988,1987and1986,respectively.

Operating expensesshownintheConsolidated Statements ofIncomeincludecertainitemsnotshownseparately, asfollows:AmericanElectricPowerServiceCorporation (AEPSC)pro-videscertainservicestotheCompanyandtheaffiliated com-paniesintheAEPSystem.Thecostsoftheservicesaredetermined bytheservicecompanyonadirectchargebasistotheextentpracticable andonreasonable basesofproration forindirectcosts.Thechargesforservicesaremadeonacostbasisandincludenocompensation fortheuseofequitycapital,allofwhichisfurnished totheservicecompanybyAEP.Theservicecompanyissubjecttotheregulation oftheSECunderthePublicUtilityHoldingCompanyActof1935.Purchased andInterchange Power(net):Purchased Power(a)...Interchange Power(net):AEPSystemElectricUtilities OtherCompanies

....Total..........

TaxesOtherThanFederalIncomeTaxes:RealandPersonalPropertyTaxes~~~~~~~~~~~~~StateGrossReceipts, ExciseandFranchise TaxesandMiscellaneous StateandYearEndedOecember31~198819871986(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$10,000,000 cashcapitalcontri-butionfromitsparentin1988.Therewerenootherchangesineitheroftheaforementioned accountsin1988,1987or1986.6.RetainedEarnings:

Variousrestrictions ontheuseoftheCompany's retainedearningsforcashdividends oncommonstockandotherpur-posesarecontained inorresultfromcovenants inmortgageindentures, debenture andbankloanagreements, charterprovisions, andordersofregulatory authorities.

Approxi-mately$45,900,000 atDecember31,1988,wasrestricted.

LocalTaxes..........

12,3619,38313,832StateIncomeTaxes.......4,913',3064,121SocialSecurityTaxes'......6.6586,0395.543Total.............

$56,271$46,730$51,291(a)Includespowerpurchased fromOhioValleyElectricCorporation ofap.proximately

$13,580,000 In1988,S31,076,000 in1987and$39,378,000 in1986.AlsoIncludespowerpurchased fromAEGcoofapproximately

$3,313,000 in1988,$2,797,000 ln1987and$122,023,000 in1986.

INDIANAMICHIGANPOWERCOMI'ANYANOSUBSIDIARIES 7.Cumulative Preferred Stock:AtDecember31,1988,authorized sharesofcumulative preferred stockwereasfollows:ParValueSharesAuthorized

$1002,250,000 2511,200,000 Thecumulative preferred stockiscallableattheoptionoftheCompanyatthepriceindicated plusaccrueddividends.

Theinvojuntary liquidation preference isparvalue.Unissuedsharesofthecumulative preferred stockmayormaynotpossessmandatory redemption characteristics uponissuance.

In1987,theCompanyredeemedandcancelled theentire$3.63Seriesconsisting of1,600,000 shares.A.Cumulative Preferred StockNotSubjectToMandatory Redemption:

Series4I/8%456%4.12%708%776%8.68%$2.15$2.25Year-endCallPrice$106.125102102.728102.91103.44103.1026.0826.13ParValue$1001001001001001002525SharesOutstanding December31~1988120,00060,00040,000300,000350,000300,0001,600,000 1,600,000 AmountDecember31,19881987(inthousands)

S12,000S12,0006,0006,0004,0004,00030,0M30,00035,00035,00030,00030,00040,00040,00040,00040.000$197,000$197,000B.Cumulative Preferred StockSubjecttoMandatory Redemption:

ParValue$10627.07NumberofSharesRedeemedAmountSharesYearEndedDecember31~Outstanding December31,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)Thesintdngfundprovisions oftheseriessubjecttomandatory redemption aggregate

$232,500in1990,$2,797,500 in1991,$3,500,000 in1992and1993.Unlessallsinkingfundprovisions havebeenmet,nodistribution maybemadeonthecommonstock.(b)Asinkingfundforthe12%seriesrequirestheCompanytoprovide,onorbeforeOctober1ofeachyear,fortheredemption of15,000sharesofsuchseries.Thisprovision maybesatisfied throughsharespreviously purchased orbyredemption at$100ashare,TheCompanyhastheright,oneachsinkingfunddate,toredeemanadditional 15,000shares.AtDecember31~1988,theCompanyhadreacquired 27,675sharesinanticipation offuturesinkingfundrequirements.

(c)Acumulative sinkingfundforthe$2.75seriesrequirestheCompanytoredeem80,000sharesonorbeforeOctober1,ofeachyear.TheCompanyhastheoptiontocreditsharespurchased orotherwise acquiredinlieuofredeeming sharesforthesinkingfundandhasthenoncumulative optiontodoublethenumberofsharestoberedeemedinanyyear.AtDecember31~1988,theCompanyhadacquired188,100sharesinanticipation offuturesinkingfundrequirements.

NOTESTOCONSOLIDATED FINANCIAL STATEMENTS (Continued)

FirstMortgageBonds.........

SinkingFundDebentures NotesPayabletoBanksInstallment PurchaseContracts...

OtherLong.termDebt(a)......LessPortionDueWithinOneYear.....

Total19881987(inthousands)

$1,019,036

$1,092,684 7,6487,813130,00080,000307,732307,511110,804103,7601,575,220 1,591,768 11,50052,031$1,563,720

$1.539.737 (a)NuclearFuelDisposalCosts.SeeNote11.Firstmortgagebondsoutstanding wereasfollows: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-May1Unamortized Discount(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)LessPortionDueWithinOneYearTotal1,019,036 11,5001,092,684 52,031$1,007,536

$1,040,653 (a)The9'I~%seriesdue2003requiressinkingfundpaymentsof$11,500,000 annuallyonJune1,through1991and$13,500,000 annuallyonJune1,1992through2002withthenoncumulative optiontoredeemanad-ditionalamountineachofthespecified yearsfromaminimumofS100,000toamaximumequaltothescheduled requirement foreachyear,butwitha,maximumoptionalredemption, astoallyearsintheaggregate, of$75,000,000.

Theindentures relatingtothefirstmortgagebondscontainimprovement, maintenance andreplacement provisions re-quiringthedepositofcashorbondswiththetrustee,orinlieuthereof,certification ofunfundedpropertyadditions.

Thesinkingfunddebentures aredueMay1,1998ataninterestrateof7t/4%.AtDecember31,1988and1987,theprincipal amountsofdebentures reacquired inanticipation ofsinkingfundrequirements were$2,552,000 andS2,687,000, respectively.

Inadditiontothesinkingfundrequirements theCompanymaycalladditional debentures ofuptoS300,000annually.

8.Long-term Debt,LinesofCredit,andCompensating Balances:

Long-term debtbymajorcategorywasoutstanding asfollows:December31~Unsecured promissory notespayabletobankshavebeenenteredintobytheCompanyasfollows: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)Interestrateissubjecttoadjustment onNovember30,1989.Installment purchasecontracts havebeenenteredintobythe-Company inconnection withtheissuanceofpollution controlrevenuebondsbygovernmental authorities asfollows: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-May1Unamortized DiscountTotalS25,00040,00012,000$25,00040,00012,0006,50033,50050,00050,00050,0007,0007,00025,00025,00013,00013,000(4,268)(4,489)$307.732S307,511=

(a)Adjustable interestratewillchangeAugust1~1990andeveryfiveyearsthereafter.

(b)Variableinterestrateisdetermined weekly.Theaverageweightedinterestwas5.9%for1988and5.5%for1987.Underthetermsofcertaininstallment purchasecontracts, theCompanyisrequiredtopaypurchasepriceinstallments inamountssufficient toenablethecitiestopayinterestonandtheprincipal (atstatedmaturities anduponmandatory redemption) ofrelatedpollution controlrevenuebondsissuedtofinancetheconstruction ofpollution controlfacilities atcertaingenerating plantsoftheCompany.Oncertainseriestheprincipal willbepayableatstatedmaturities oronthedemandofthebondholders atperiodicinterestadjustment dates.Certainseriesaresupported bylettersofcreditfromabankwhichexpirein1990and1992.Portionsoftheproceedsoftheinstallment purchasecon-tractsaredeposited withtrusteesandmaybeusedonlyforspecified construction expenditures.

Thesefundsareshownonthebalancesheetsasspecialdeposits-restricted funds.'9 INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIES Long-term debt,excluding premiumordiscount, outstand-ngatDecember31,1988isdueasfollows:Principal Amount(inthousands) 1989........................

$11,5M1990....,

101,500199151,500199213,5001993......................

56,402LaterYears,................

1.349,156 Total$1,583.558 TheCompanyhadunusedshort-term banklinesofcreditofapproximately

$292,000,000 and$285,000,000 atDecember31,1988and1987,respectively, underwhichnotescouldbeissuedwithnomaturitymorethan270days.Available linesofcreditaresubjecttowithdrawal atthebanks'ptions andsuchlinesaresharedwithotherAEPSystemcompanies.

Inaccordance withinformalagreements withthebanks,compensating balancedepositsofupto10%orequiv-alentfeesareretluired tomaintainthelinesofcredit.Sub-stantially allbankbalancesaremaintained bytheCompanytocompensate thebanksforservicesandfortheCompany's shareofbothusedandavailable linesofcredit.9.Leases:TheCompanyanditssubsidiaries, aspartoftheiropera-tions,leaseproperty, plantandequipment forperiodsupto35years.Mostoftheleasesrequirethepaymentofrelatedpropertytaxes,maintenance costsandothercostsofoper-ation.TheCompanyanditssubsidiaries expectthat,inthenormalcourseofbusiness, leasesgenerally willberenewedorreplacedbyotherleases.Themajorityoftheleaseshavepurchaseoptionsorrenewaloptionsforsubstantially alloftheeconomiclivesoftheproperties.

Thefollowing isananalysisofproperties undercapitalleasesandrelatedobligations:

December31~19881987(inthousands)

ElectricUtilityPlant:Production S8,358Distribution 14,603General:NuclearFuel(netofamortization)

.......OtherTotalElectricUtilityPlant...........

Accumulated Provisions forAmortization NetElectricUtilityPlantOtherProperty.Accumulated Provisions forAmortization 16,33117,065NetOtherProperty....,...........

8032,297NetProperties underCapitalLeases....$167,920$170,830Obligations underCapitalLeases(a)....$167,920$170,830(a)including anestimated

$43,037,000 and$43,856,000 atDecember31,1988and1987,respectively, duewithinoneyear.S8,40614,603131,97035,541190,47223,355167,11717,134PaymentsmadeundercapitalleasesincludeS49,014,000,

$55,557,000 and$61,409,000 ofamortization expensefortheyearsendedDecember31,1988,1987and1986,respectively.

Futureminimumleasepayments, byyearandintheag-gregate,forcapitalleasesandnoncancelable operating leasesoftheCompanyanditssubsidiaries consisted ofthefollowing atDecember31,1988:19891990199119921993LaterYearsTotalFutureMinimumLeasePaymentsCapitalOperating

~leasesa)Leases(inthousands)

S8,000S20,0006,00020,0005,00019,0004,MO16,0004,00015,0003900017000066,000$260.000LessEstimated InterestElementIncludedThereinEstimated PresentVatueofFutureMinimumLeasePayments...30,000$36,000(a)Minimumpaymentsdonotindudeleasesofnudearfuel.Nuctearfuelrentalscomprisetheunamortized balanceofthelessor'scost(approximately

$131,970,000) lesssalvagevalue,ifany,tobepaidinproportion toheatproducedandcarryingchargesonthelessor'sunrecovered costs.ItIscon-templated thatportionsofthepresently leasedmaterialwillbereplenished byadditional leasedmaterial.

NudearfuelrentalsofSS2,568,000,

$58,670,000 and$6S,301,000 werechargedtofuelforelectrfcgeneration in1988,1987and1986,respectively.

Includedintheaboveanalysisoffutureminimumleasepaymentsand'ofproperties undercapitalleasesandrelated20 NOTESTOCONSOLIDATED FINANCIAL STATEMENTS (Continued) obligations arecertainleasesinwhichportionsoftherelatedrentalsarepaidfororreimbursed byassociated companies intheAEPSystembasedontheirusageoftheleasedproperty.

TheCompanyanditssubsidiaries cannotpredicttheextenttowhichorproportion inwhichtheassociated companies willutilizetheproperties undersuchleasesinthefuture.Rentalsforalloperating leasesareclassified approximately asfollows:YearEndedDecember31~198819871986(inthousands)

$11,000$11,000$10,000Operating ExpensesClearingandMiscellaneous Accounts(portions olwhicharechargedtoincome)Total6,0005.0007.000,$17,000$16.000$17,000InJanuary1989,theCompanysignedacommitment letteragreement tosellandleaseback Rockport2asdiscussed inNote2.10.PensionPlan:TheCompanyanditssubsidiaries participate withothercompanies intheAEPSysteminatrusteed, noncontributory definedbenefitplantoprovidepensions, subjecttocertaineligibility requirements, foralltheiremployees.

Planbenefitsaredetermined byaformulawhichconsiders eachpartici-pant'shighestaverageearnings, yearsofaccredited serviceandsocialsecuritybenefits.

Pensioncostsfortheplanareallocated toeachSystemcompanyonthebasisofeachcom-pany'sshareofthetotalSystemprojected benefitobligation.

TheCompanyanditssubsidiaries'unding policyistomakeannualcontributions totheplanequaltotheamountsde-ductibleforFederalincometaxpurposes.

NetpensioncostofthedefinedbenefitplanfortheyearsendedDecember31,1988and1987wasapproximately

$397,000and$161,000,respectively.

In1986theCompanyanditssubsidiaries recordednopensioncost.Inadditiontoproviding pensionbenefits, theCompanyanditssubsidiaries providecertainhealthcarebenefitsforretiredemployees.

Substantially alloftheCompanyanditssubsi-diaries'.employees maybecomeeligibleforthesebenefitsiftheyhavecompleted 10yearsofcontinuous serviceatre-tirement.

Thecostofretireehealthcarebenefitsisrecognized asexpensewhenpaid.In1988,1987and1986,thecostofcurrentretireehealthcarebenefitstotaled$1,758,000,

$1,327,000 and$1,061,000, respectively.

11~Commitments andContingencies:

Construction Theconstructio(t budgetoftheCompanyanditssubsidi-ariesfortheyears1989-1991 isestimated at$457,000,000, and,inconnection therewith, commitments havebeenmade.Litigation TheCompanyandAEPSChavebeeninvolvedinlitigation withTerreHauteIndustries, Inc.(THI)overacontractforconstruction ofanelectrostatic precipitator attheBreedPlant.InJuly1988,theSupremeCourtofIndianadeniedapetitionforanappealofadecisionbytheCourtofAppealsofIndianaregarding anawardfordamages.TheCourtofAppealsofIndianahadreversedpartofalowercourtdecisionbyre-ducinga$4,934,000 awardforcompensatory damagesanddroppinga$12,000,000 awardforpunitivedamages.TheCompanyrecordedaliability in1983,including

interest, forthecompensatory damages.TheCompanyintendedtosatisfythereducedjudgement forcompensatory damagesbymakingpaymenttoTHI;however,THIhasrefusedtoacceptpaymentandrequested arehearing withtheIndianaSupremeCourt.Thematterispending.Intheopinionofmanagement theultimateresolution ofthismattershouldnothaveasignificant effectontheearningsoftheCompany.Environmental MattersTheCompanyanditssubsidiaries aresubjecttoregulation byFederal,stateandlocalauthorities withrespecttoair-andwater-quality controlandotherenvironmental matters,andaresubjecttozoningandotherregulation bylocalauthorities.

Althoughthecumulative, long-term effectofchangingenvironmental requirements upontheCompanyanditssub-sidiaries cannotbeestimated atpresent,compliance withsuchrequirements maymakeitnecessary, atcostswhichmaybesubstantial, toretrofitexistingfacilities withadditional air-pollution-control equipment; tochangefuelsuppliestolowersulfurcontentcoal;toconstruct coolingtowersorsomeotherclosed-cycle coolingsystems;toundertake newmeas-uresinconnection withthestorage,transportation anddis-posalofby-products andwastes;tocurtailorceaseoperations atexistingfacilities, andtodelaythecommercial operation of,ormakedesignchangeswithrespectto,facil-itiesunderconstruction.

INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIES Legislative proposals arependingbeforetheU.S.Congressatexpressly seektocontrolaciddeposition.

Ifanyoftheseillsbecomelaw,significant reductions intheemissionofsulfurdioxideandnitrogenoxidefromvariousexistingCom-panygenerating plantscouldberequired.

Thesereductions wouldentailverysubstantial capitalandoperating coststhat,inturn,couldnecessitate substantial rateincreases bytheCompany.Inaddition, anumberofstatesandenvironmental organizations havependinginthecourtsproceedings undertheCleanAirActseekingreductions intheemissionofsulfurdioxideincertainmidwestern states.Further,theU.S.Environmental Protection Agencyiscon-sideringanumberofsignificant policychangesinitsrulesgoverning sulfurdioxideemissions.

Adoptionofanyofthecontemplated policychangescouldrequiresubstantial ex-penditures toaccomplish reductions insulfurdioxideemis-sionsfromtheCompany's coal-fired generating plants.Transmission Equalization Agreement TheCompanyparticipates withotherAEPSystemcom-paniesinatransmission equalization agreement.

Thisagree-mentpoolscertainAEPSystemcompanies'nvestments intransmission facilities andsharesamongthepartiesthecostsofownership inproportion totheparties'espective demandatios.TheFERChadpermitted theagreement tobeimple-ented,effective January1985, subjecttorefund.Theagree-mentasfiledprovidedforthecompanies topooltheirinvestments inextra-high voltagefacilities (345kvandabove)andtophaseintheequalization ofcostsovertheperiod1985-1989.InDecember1988, theFERCissuedafinalorderapproving theagreement withcertainmodifications thatrequire,amongotherthings,thecompanies topooltheirinvestments inallhighvoltagetransmission facilities (138kvandabove)andtoeliminate thephase-infeature.Bothofthesechangesbe-cameeffective prospectively inAugust1988.Pursuanttothetermsoftheagreement, theCompanyre-cordedcreditsof$36,996,000,

$26,025,000 and$10,672,000 fortransmission servicesinotheroperation ex-pensefortheyearsendedDecember31,1988,1987and1986,respectively.

NuclearInsurance TheCompanyissubjecttothePrice-Anderson Actwhichlimitsthepublicliability ofalicenseeofanuclearplantforasinglenuclearincidenttotheamountofprimaryliability in-suranceavailable fromprivatesourcesandanindustryret-rospective deferredpremiumassessment plan.TheCompanymaintains themaximumprivateinsurance available of$200,000,000 foritstwo-unitDonaldC.CookNuclearPlant(CookPlant).Amendments tothePrice-Anderson Act,effec-tiveAugust1988,increased thelimitsofpublicliability to$7,608,800,000 basedon112reactorscurrently beingsub-jecttotheAct.ThemaximumstandarddeferredpremiumthattheCompanymaybeassessed, intheeventofanuclearincidentatanylicensednuclearpowerplantintheUnitedStates,is$63,000,000 perreactor,butanassessment maynotexceed$10,000,000 inanyoneyear.Ifpublicliability claimsandauthorized legalcostsexceedtheamountoflia-bilityinsurance anddeferredpremiums, alicenseemustpayasurcharge ofupto5percentofthestandarddeferredpre-miumforsuchclaimsandcosts.Thus,ifdamagesinexcessofprivateinsurance resultfromanuclearincident, theCom-panycouldbeassesseditsproratashareoftheliability uptoamaximumof$126,000,000 foritstworeactors, inannualinstallments of$20,000,000, plus$6,300,000 forexcessclaimsandcosts.Thereisnolimitonthenumberofincidents forwhichtheCompanycouldbeassessedthesesums.TheCompanyalsohaspropertyinsurance fordamagetotheCookPlantfacilities intheamountof$1.7billion.Theprimarylayerof$500,000,000 isprovidedthroughnuclearinsurance pools.Theexcesscoverageabove$500,000,000 isprovidedthroughinsurance pools($400,000,000) andNu-clearElectricInsurance Limited(NEIL).NEIL'sexcessprop-ertyinsurance programprovides$825,000,000 incoverage.

Themaximumassessment underthisprogramcouldbe$9,200,000 (sevenandone-halftimestheannualpremiumona100%coveragebasis).22 0NOTESTOCONSOLIDATED FINANCIAL STATEMENTS (Concluded)

NEIL'sextra-expense programprovidesinsurance tocoverextracostsofreplacement powerresulting fromaprolonged accidental outageofanuclearunit.TheCompany's policyinsuresagainstsuchincreased costsuptoapproximately

$2,350,000 perweek(starting 21weeksaftertheoutage)foroneyearand$1,175,000 perweekforthesecondyear,or80%ofthoseamountsperunitifbothunitsaredownforthesamereason.TheCompanywouldbesubjecttoaretrospec-tivepremiumofupto$8,154,000 (fivetimesannualpre-mium)ifNEIL'slossesexceededitsaccumulated funds.Somepotential lossesorliabilities maynotbeinsurable ortheamountofinsurance carriedmaynotbesufficient tomeetpotential lossesandliabilities, including liabilities relatingtodamagetotheCookPlantandcostsofreplacement powerintheeventofanuclearincidentattheCookPlant.Futurelossesorliabilities whicharenotcompletely insured,unlessallowedtoberecovered throughrates,couldhaveamaterialadverseeffectonthefinancial condition oftheCompany.DisposalofSpentNuclearFuelandNuclearDecommissioning TheNuclearWastePolicyActestablishes Federalrespon-sibilityforthepermanent disposalofspentnuclearfuel.Dis-posalcostsarepaidbyfeesassessedagainstownersofnuclearplantsanddeposited intotheNuclearWasteFundcreatedbytheAct.ForthedisposalofnuclearfuelconsumedafterApril6,1983bytheCookPlant,theCompanymustpaytothefundafeeofonemillperkilowatthour, whichthCompanyiscurrently recovering fromitscustomers.

InJune1983,theCompanyenteredintoacontractwithDOEforthedisposalofspentnuclearfuel.UndertermsofthecontracttheCompanymustpayoveraperiodof10yearstotheU.S.Treasuryafeeestimated atapproximately

$71,964,000, ex-clusiveofinterest, forthedisposalofnuclearfuelconsumedpriortoApril7,1983.TheCompanyhasdeferredthisamountplusaccruedinterestonitsbalancesheetandhasreceivedregulatory approvalfortherecoveryofthisamountandisamortizing theamountdeferredasitisbeingrecovered.

Anindependent consulting firmemployedbytheCompanyhasestimated thatthecostofdecommissioning theCookPlantcouldrangefrom$284,000,000 to$321,000,000 in1986dollars.TheCompanyhasreceivedregulatory approvalineachofitsjurisdictions fortherecoveryofnucleardecom-missioning costsassociated withtheCookPlant.TheCom-panyintendstoreevaluate periodically amountscollected forsuchcostsandtoseekregulatory approvaltorevisesuchamountsasnecessary.

Fundsrecovered throughtherate-making processfordis-posalofspentnuclearfuelconsumedpriortoApril7,1983andfornucleardecommissioning havebeendeposited inex-ternalfundsforthefuturepaymentofsuchcosts.12.Unaudited Quarterly Financial Inforrnatlo:

Thefollowing consolidated quarterly financial adjustments (consisting ofonlynormalrecurring Quarterly PeriodsOperating Operating EndedRevenuesIncome(inthousands) information isunaudited but,intheopinionoftheCompany,includesallaccruals) necessary forafairpresentation oftheamountsshown:NetQuarterly PeriodsOperating Operating NetIncomeEndedRevenuesIncomeIncomeRnIhousnndsh 1988March31June30September 30....December31....$243,617224,026266,690248,733$66,3404816758,86042,076$46,49828,87139,848'6,5881987March31June30September 30.....December31$253,638241,653283,944238,033$59,73848,99952,88161,428$47,39037,98938,91442,07323 INDIANAMICHIGANPOWERCOMPANYANDSUBSIDIARIES Independent Auditors'eport 08IOitt8H8Ski8S+38 lS155EastBroadStreetCotumt<us, Ohio432153650 (614)221~1000ITTTe/ex:4995627TotheShareowners andBoardofDirectors ofIndianaMichiganPowerCompany:Wehaveauditedtheaccompanying consolidated balancesheetsofIndianaMichiganPowerCompanyanditssubsidiaries asofDecember31,1988and1987andtherelatedconsolidated statements ofincome,retainedearningsandcashflowsforeachofthethreeyearsintheperiodendedDecember31,1988.Thesefinancial statements aretheresponsibility oftheCompany's management.

Ourresponsibility istoexpressanopiniononthesefinancial statements basedonouraudits.Weconducted ourauditsinaccordance withgenerally acceptedauditingstandards.

Thosestandards requirethatweplanandperformtheaudittoobtainreasonable assurance aboutwhetherthefinancial statements arefreeofmaterialmisstatement.

Anauditincludesexamining, onatestbasis,evidencesupporting theamountsanddisclosures inthefinancial statements.

Anauditalsoincludesassessing theaccounting principles usedandsignificant estimates madebymanagement, aswellasevaluating theoverallfinancial statement presentation.

Webelievethatourauditsprovideareas'onable basisforouropinion.Inouropinion,theconsolidated financial statements referredtoabovepresentfairly,inallmaterialrespects, thefinancial positionofIndianaMichiganPowerCompanyanditssubsidiaries atDecember31,1988and1987andtheresultsoftheiroperations andtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1988inconformity withgenerally acceptedaccounting principles.

(C(<(Ad)i4((.WI4(L(.PFebruary21,1989-24 e,cOperating Statistics 1988198719861985ELEGTRIGOPERATING REYENUEs(inthousands):

FromKilowatt-hour Sales:Retail:Residential:

WithoutElectricHeating...........

WithElectricHeatingTotalResidential Commercial

.Industrial Miscellaneous TotalRetail.Wholesale (salesforresale)............

TotalfromKilowatt-hour Sales....Provision forRevenueRefunds.........

TotalNetofProvision forRevenueRefunds............

OtherOperating RevenuesTotalElectricOperating Revenues.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)1,081,001 1,069,098 541~105)981,848~12,4941,081,542 9,7531,068,993 9,8001,008,413 8,855969,35410,197972,95510,111$983,066$1,017,268

$1,091,295

$1,078,793

$979,551SOURCESANDSALESOFENERGY(inmillionsofkilowatt-hours):

Sources:NetGenerated

-Steam:FossilFuelNuclearFuelNetGenerated

-Hydroelectric

...SubtotalPurchased

.NetInterchange TotalSources...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...TotalResidential Commercial

.Industrial Miscellaneous TotalRetail.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 INDIANAMICHIGANPOWERCOMPANYANDSVBSIDIARIES PERATINGSTATISTICS (Concluded)

AYERAGECosT0FFUELC0NsUMED(incents):PerMillionBtu:Coal.Nuclear.Ov'erailPerKilowatt-hour Generated:

Coal.Nuclear.Overall1988182701201.81.771.261987190751171.87.841.251986185741181.82.831.251985194801361.97.861.421984189651031.83.701.08REBIDENTIAL SERYICE-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......TotalResidential Commercial Industrial Miscellaneous

.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,'ividends andPriceRangesofCumulative Preferred StockByQuafters(1988and1987)Cumulative Preferred Stock1st1988-Quarters2nd3rd4th1st1987-Quarters2nd3rd($100ParValue)4~/s%SeriesDividends PaidPerShareMarketPrice-$PerShare(MSE)-HighLow4.56%SeriesDividends PaidPerShareMarketPrice-SPerShare(OTC)Ask(high/low)

Bid(high/low) 4,12%SeriesDividends PaidPerShareMarketPrice-$PerShare(OTC)Ask(high/low)

Bid(highflow) 7.08%SeriesDividends PaidPerShareMarketPrice-SPerShare(NYSE)-.High-Low7.76%SeriesDividends PaidPerShareMarketPrice-SPerShare(NYSE)-High-Low8.68%SeriesDividends PaidPerShareMarketPrice-SPerShare(NYSE)-High-Low12%SeriesDividends PaidPerShareMarketPrice-$PerShare(NYSE)-High-Low($25ParValue)$2.15SeriesDividends PaidPerShareMarketPrice-$PerShare(NYSE)-High-LowS2.25SeriesDividends PaidPerShareMarketPrice-SPerShare(NYSE)-High-Low$2.75SeriesDividends PaidPerShareMarketPrice-$PerShare(NYSE)-High-Low$3.63Series(a)Dividends PaidPerShareMarketPrice-$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-Counter NYSE-NewYorkStockExchangeNote-Theabovebidandaskedquotations represent pricesbetweendealersanddonotrepresent actualtransactions.

Marketquotations providedbyNationalQuotation Bureau,inc.Dashindicates quotation notavailable.

(a)RedeemedApril1987.27 TheCompany's AnnualReport(Form10-K)totheSecurities andExchangeCommission willbeavailable onoraboutMarch31,1989toshareowners uponwrittenrequestandatnocost.Pleaseaddresssuchrequeststo:Mr.G.C.DeanAmericanElectricPowerServiceCorporation 1Riverside PlazaColumbus, Ohio43215nsferAgentandRegistrar ofCumulative Preferred StockMorganShareholder ServicesTrustCompany30WestBroadway, NewYork,N.Y.10007-2192 Ll~

LekoMlcbigenMICHIGANOHIOINDIANAWESTVIRGINIAKENTUCKYVIRGINIALEGENDindianaMichiganPowerCo.AreaOtherAEPoperating companies'reas QMaJorpowerplantTENNESSEE

~10 ENCJOSURE2TOAEP:NRC:0909E~~1989InternalCashFlowProjection forDonaldC.CookNuclearPlant(5Millions)

Projected 1989Actual1988Netincomeaftertaxes.Lessdividends paidRetainedearningsAdjustments:

Depreciation andamortization Deferredincometaxesandinvestment taxcreditsAFUDCTotaladjustments InternalcashflowAveragequarterly cashflowAveragecashbalancesandshort-terminvestments 151.8135.915.9146.326.8(57.2)115.9131.832.610.5134138(4)152(13)(55)84802015Total43.1358Ownership inalloperating nuclearunits:Unit1andUnit2-100%MaximumTotalContingent Liability

-$20.0million(2units)

'L~Ti~~4