ML17334B399

Forwards Indiana Michigan Power Co 1990 Annual Rept & Projected Cash Flow Statement for 1991

ML17334B399
Person / Time
Site:	Cook
Issue date:	04/09/1991
From:	Fitzpatrick E INDIANA MICHIGAN POWER CO. (FORMERLY INDIANA & MICHIG
To:	Murley T NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM), Office of Nuclear Reactor Regulation
Shared Package
ML17328B008	List: ML17328B007 ML17334B399
References
AEP:NRC:0909G, AEP:NRC:909G, NUDOCS 9104160384
Download: ML17334B399 (38)

Text

'.ACCELERATED DISTRIBUTION DEMONSTRATION SYSTEM REGULATORY'NFORMATION DISTRXBUTXON SYSTEM (RIDS)

..ACCESSION NBR:9104160384 DOC.DATE: 91/04/09 NOTARIZED: NO DOCKET g FACIL:50-315 Donald C. Cook Nuclear Power Plant, Unit 1, Indiana 6 05000315 50-316 Donald C. Cook, Nuclear Power Plant, Unit 2, Indiana 6 050003/6 AUTH. NAME AUTHOR AFFILIATION FXTZPATRICK,E. Indiana Michigan Power Co. (formerly Indiana & Michigan Ele RECIP.NAME RECIPIENT AFFILIATION R MURLEY,T.E. Office of Nuclear Reactor Regulation, Director (Post 870411 I

,SUMECT: Forwards "Indiana Michigan Power Co 1990 Annual Rept" I projected cash flow statement for 1991. D DISTRIBUTION. CODE: M004D COPIES RECEIVED:LTR TXTLE: 50.71(b) -Annual Financial Report $ ENCL g SIZE: +

NOTES: 5~

RECIPIENT COPIES RECXPXENT COPIES A ID CODE/NAME LTTR ENCL ID CODE/NAME LTTR ENCL PD3-1 PD 1 1 COLBURN,T. 1 0 D INTERNAL: AEOD/DOA 1 1 FI 1 1 D I

I EXTERNAL: NRC PDR 1 1 S R

I D

S A

D D

NOTE TO ALL "RIDS" RECIPIENTS:

PLEASE HELP US TO REDUCE WASTE! CONTACT THE DOCUMENT CONTROL DESK, ROOM Pl-37 (EXT. 20079) TO ELIMINATEYOUR NAME FROM DISTRIBUTION LISTS FOR DOCUMENTS YOU DON'T NEED!

TOTAL NUMBER'F COPIES REQUIRED: LTTR 5 ENCL 4

0 ~ ~ ~

b I

P

Indiana Michigan Power Company One Summit Square P.O. Box 60 Fort Wayne, IN 46801 219 425 2111 SHEHSINdh NIICiilGQM PQStfM AEP: NRC: 0909G 10 CFR 50.71(b) & 140.21(e)

Donald C. Cook Nuclear Plant Unit Nos ~ 1 and 2 Docket Nos. 50-315 and 50-316 License Nos. DPR-58 and DPR-74 FINANCIAL INFORMATION FOR INDIANA MICHIGAN POWER COMPANY U.S. Nuclear Regulatory Commission Attn: Document Control Desk Washington, D.C. 20555 Attn: T. E. Murley April 9, 1991

Dear Dr. Murley:

Enclosure 1 contains the Indiana Michigan Power Company's (I&M) annual report for 1990. Enclosure 2 contains a copy of I&M's pro]ected cash flow for 1991. These reports are submitted pursuant to 10 CFR 50.71(b) and 10 CFR 140.21(e).

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

Sincerely, E ~ E ~ Fit atrick Vice President ldp Enclosures cc: D. H. Williams, Jr.

A. A, Blind - Bridgman J. R. Padgett G. Charnoff A. B. Davis - Region III NRC Resident Inspector - Bridgman NFEM Section Chief 91PqP9 91pp>6038+~ p5ppp315

@DR QQOCK pDR poop I/I

..91041603@,

1990 Annual Report

Contents Background of the Company Directors and Officers of the Company .

Selected Consolidated Financial Data .

Management's Discussion and Analysis of Results of Operations and Financial Condition 5-9 Consolidated Statements of Income 10 Consolidated Balance Sheets 11-12 Consolidated Statements of Cash Flows 13 Consolidated Statements of Retained Earnings 14 Notes to Consolidated Financial Statements 15-25 Independent Auditors'eport 26 Operating Statistics 27-28 Dividends and Price Ranges of Cumulative Preferred Stock 29

INDIANAMICHIGANPOWER COMPANY One Summit Square, P.O. Box 60, Fort Wayne, Indiana 46801 Background of the Company INDIANA MIGHIGAN PowER CQMPANY (the Company), a subsidiary of American Electric Power Company, Inc.

(AEP), is engaged in the generation, purchase, transmission and distribution of electric power. The Company was organized under the laws of Indiana on February 21, 1925, and is also authorized to transact business in Michigan and West Virginia. Its principal executive offices are in Fort Wayne, Indiana.

The Company has two wholly owned subsidiaries; they are Blackhawk Coal Company and Price River Coal Company, which were formerly engaged in coal-mining operations. Blackhawk Coal Company currently leases or subleases portions of its coal rights, land and related mining equipment to unaffiliated companies.

In addition, the Company has a river transportation division (RTD) that barges coal on the Ohio and Kanawha Rivers to generating plants of the Company and affiliates. RTD also provides some barging services to unaffiliated companies.

The Company serves approximately 480,000 customers in northern and eastern Indiana and a portion of southwestern Michigan. Among the principal industries served are transportation equipment, primary metals, fabricated metal products, electrical and electronic machinery, and chemicals and allied products. In addition, the Company supplies wholesale electric power to other electric utilities, municipalities and electric cooperatives.

The Company's generating plants and important load centers are interconnected by a high-voltage trans-mission network. This network in turn is interconnected either directly or indirectly with the following other AEP System companies to form a single integrated power system: AEP Generating Company, Appalachian Power Company, Columbus Southern Power Company, Kentucky Power Company, Kingsport Power Company, Michigan Power Company, Ohio Power Company and Wheeling Power Company. The Company is also interconnected with the following unaffiliated utilities: Central Illinois Public Service Company, The Cincinnati Gas 8 Electric Company, Commonwealth Edison Company, Consumers Power Company, illinois Power Company, Indianapolis Power Ir Light Company, Northern Indiana Public Service Company, PSI Energy Inc.

and Richmond Power Ir Light Company, as well as Indiana-Kentucky Electric Corporation (a subsidiary of Ohio Valley Electric Corporation, an affiliate that is not a member of the AEP System).

Directors MARK A. BAILEY RICHARD C. MENGE RICHARD E. DISBROW DwiGHT L PiTTENGER (a)

WILLIAMN. D'ONOFRIO RONALD E. PRATER (b)

ALLEN R. GIAssBURN (a) DALE M. TRENARY (a)

M. RICHARD HARRELL (b) WILLIAME. WALTERS (b)

WILLIAMJ. LHOTA W. S. WHITE, JR.

GERALD P. MALONEY DAVID H. WILLIAMS, JR.

Officers W. S. WHITE, JR. (C) RICHARD F. HERING CARL J. Moos Chairman of the Board Vice President Assistant Secretary RICHARD E. DISBROW (d) WILLIAMJ. LHOTA JOHN B. SHINNOCK Vice Chairman Vice President Assistant Secretary and Chief Fxecutive Officer GERALD P. MALONEY LEONARD V. ASSANTE RICHARD C. MENGE Vice President Assistant Treasurer President and Chief DAVID H. WILLIAMS, JR. BRUCE M. BARBER Operating Officer Vice President Assistant Treasurer MILTON P. ALEXICH PETER J. DEMARIA GERALD R. KNORR Vice President Treasurer Assistant Treasurer MARK A. BAILEY JOHN F. DILORENZO, JR.

Vice President Secretary WILLIAMN. D'ONOFRIO Euo BAFILE Vice President Assistant Secretary and A. JosEPH Dowo Assistant Treasurer Vice President JEFFREY D. CROSS Assistant Secretary As of January 1, 1991 the current directors and officers of Indiana Michigan Power Company were employees ol American Electric Power Service Corporation with eight exceptions: Messrs.

Bailie, Bailey, D'Onofn'o, Gfassburn, Menge, Moos, Pittenger, and Trenary, who were employ.

ees of Indiana Michigan Power Company.

(a) Elected April 24, 1990 (b) Resigned April 24, 1990 (c) Resigned as Chief Executive Officer January 1 ~ 1991 (d) Elected January 1, 1991

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Selected Consolidated Financial Data Year Ended December 31, 1990 1989 1988 1987 1986 (in thousands)

INCOME STATEMENTS DATA:

OPERATING REVENUES ELECTRIC ....... $ 1,031,059 $ 1,005,638 $ 983,066 $ 1,017,268 $ 1,091,295 OPERATING EXPENSES 829,626 795,242 767,623 794,222 900,151 OPERATING INCOME 201,433 210,396 215,443 223,046 191,144 NONOPERATING INCOME 3,946 32,930 43,454 56,828 66,905 INCOME BEFORE INTEREST CHARGES ....... 205,379 243,326 258,897 279,874 258,049 INTEREST CHARGES 89,064 106,181 107,092 113,508 105,568 NET INCOME 116,315 137,145 151,805 166,366 152,481 PREFERRED STOCK DIVIDEND REQUIREMENTS . 15,587 18,048 18,848 20,955 26,256 EARNINGS APPLICABLE To COMMON STOCK 100,728 $ 119,097 $ 132,957 $ 145,411 $ 126,225 December 31, 1990 1989 1988 1987 1986 (in thousands)

BALANCE SHEETS DATA:

I ELECTRIC UTILITY PLANT ACCUMULATEO DEPRECIATION AND AMORTIZATION NET ELECTRIC UTILITY PLANT

$ 4,011,464 1,403,871

$ 2,607,593

$ 3,918,61 6 1,292,430

$ 2,626,186

$ 4,411,271 1,218,060

$ 3,193,211

$ 4,153,281 1,118,254

$ 3,035,027

$ 3,979,822 1,018,455

$ 2,961,367 TOTAL ASSETS $ 3,635,435 $ 4,259,826 $ 3,993,046 $ 3,956,563 $ 3,849,208 COMMON STOCK AND PAID-IN CAPITAL ... $ 774,193 $ 774,193 $ 838,347 $ 828,347 $ 828,347 RETAINED EARNINGS . 145,489 157,825 161,443 145,302 113,123 T0TAL C0MMQN SHAREowNER s EouITY .. $ 919,682 $ 932,018 $ 999,790 $ 973,649 $ 941,470 CUMULATIVE PREFERRED STOCK:

NOT SUBJECT TO MANDATORY REDEMPTION $ 197,000 $ 197,000 $ 197,000 $ 197,000 $ 197,000 SUBJEGT To MANDAT0RY REDEMPTI0N (a) 18,030 25,030 32,030 79,030 TOTAL . $ 197,000 $ 215,030 $ 222,030 $ 229,030 $ 276,030 L0NG-TERM DEBT (a) $ 1,123,833 $ 1,522,736 $ 1,575,220 $ 1,591,768 $ 1,421,523 OBLIGATI0Ns UNDER CAPITAL LEAsEs (a) . $ 133,064 $ 122,977 $ 167,920 $ 170,830 $ 187,845 TOTAL CAPITALIZATION AND LIABILITIES ... $ 3,635,435 $ 4,259,826 $ 3,993,046 $ 3,956,563 $ 3,849,208 (a) Including portion due within one-year.

Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Operating Revenues and Energy Sales Climb Net Income Oeclines Operating revenues rose $ 25 million in 1990 following a

$ 23 million increase in 1989. Increases in wholesale kilowatt-Net income decreased to $ 116 million in 1990 compared hour (kwh) sales predominantly to unaffiliated utilities with $ 137 million in 1989. The decline in 1990 was predom- accounted for the revenue increase in both years.

inantly due to a decline in nonoperating income as accruals The components of change in revenues are as follows:

for allowance for funds used during construction (AFUDC) Increase (Decrease) ceased with commercial operation of Rockport Plant Unit 2 From Previous Year (Rockport 2) in December 1989 and increased operating and (dollars in millions) 1990 1989 maintenance costs. In1989 net income decreased $ 15 million Amount  % Amount from 1988 primarily from lower operating income and a Retail:

decline in nonoperating income. Price variance ... S (8.1) $ (18.5)

Volume variance (8.4) 10.0 Outlook (16.5) (2.3) (8.5) (1.2)

The Company as part of the AEP System faces challenges in Wholesale:

Price variance . (9.2) (48.1) the 1990's that could adversely affect the Company's financial Volume variance 48.6 74.7 performance. While management believes the Company is 39.4 14.3 26.6 10.I equipped to deal with the future, uncertainties that could adversely affect the Company include the ability to obtain Other Operating Revenues ........ 2.5 4.5 Total S 25.4 2.5 S 22.6 2.3 favorable rate-making treatment to recover from ratepayers its cost of service on a timely basis with particular attention The modest decrease in 1990 retail sales volume reflects currently to:

the effects of unseasonably mild weather on residential sales.

~ The cost of new generating capacity.

Industrial sales volume, which had shown steady growth for

~

The cost of compliance with the Clean Air Act Amend-several years, began to slow in 1989 and experienced a slig ments of 1990.

decline in 1990. The negative effect on revenues of the lowei.

In addition, the Company's results could be negatively kwh sales volume was compounded by a reduction in rates affected by factors not generally within management's control as lower average fuel costs were passed on to customers. It such as: the current and any future decline in economic activ-is important to note that with the past growth in electric ity, increased competition in the wholesale electric energy heating and cooling load, results of operations have become market and the weather. The ability of the Company as a increasingly sensitive to weather.

member of the AEP System Power Pool (Power Pool) to make The increase in 1990 wholesale kwh sales was predomi-wholesale sales equal to or greater than the level of such sales nantly due to the commencement in January 1990 of a 250 reflected in the Company's rates, including the Power Pool's megawatt (mw) Iong-term Rockport 2 unit power sales agree-ability to sell the remaining portion of the Company's recently ment. Short-term wholesale sales, which can fluctuate due constructed Rockport 2 generating capacity not yet included to competition, the availability of unaffiliated generating in rates, will affect the Company's 1991 results of operations.

capacity and weather patterns, declined slightly in 1990 par-Management will make every effort to continue marketing tially offsetting the tong-term sales increase. The positive available capacity in the near term. In addition, management effect of increased wholesale sales volume on 1990 revenues will be devoting particular attention in 1991 toward: efforts was partly offset by a lower average price per kwh reflecting to increase rates to recover the cost of the recently added Rock-price competition in the short-term sales for resale market.

port 2 capacity; reduction of growth in its cost of service; and The lack of available unaffiliated generating capacity through-preparation of a plan to comply with power plant emission out most of 1989, a reduction by the Power Pool of its short-restrictions of the recently enacted Clean Air Act Amendments.

term energy prices and extremely cold weather in December 1989 combined to produce a significant increase in 1989's short-term wholesale sales compared with 1988.

INDIANAMICHIGANPOWER COMPANY ANO SUBSIDIARIES The Company as a member of the Power Pool participated The significant increase in other operation expense in 1990 in a long-term contract for the sale of up to 560 mw of power was primarily due to lease expense on Rockport 2 which was to an unaffiliated utility, which expired on December 31, 1990 sold and leased back in December 1989. In addition, other and was not renewed. This contract contributed $ 16 million operation expense and maintenance expense increased in to the Company's revenues and $ 5 million to net income in 1990 and1989 due to scheduled outages of both of the Com-1990. The Power Pool is attempting to replace the terminated pany's nuclear generating units. The units are refueled on an sales and recently reached an agreement to sell 100 mw under 18-month cycle. In the second half of 1990, both units were a long-term contract with an unaffiliated utility. In 1989 and out of service for several months each for scheduled refueling.

1990 the Power Pool sold significant quantities of energy to A substantial portion of the 1990 increase in nuclear plant a Canadian utility under a series of short-term wholesale con- maintenance was recorded in the fourth quarter. In 1989 Unit tracts which expired at the end of 1990. That customer is no 2 was out of service to replace its steam generators, refuel longer expected to purchase large quantities of energy. In and conduct a 10-year service inspection as required by the 1990 these sales contributed $ 34 million to the Company's Nuclear Regulatory Commission and Unit 1 underwent a revenues and $ 8 million to net income. The Power Pool is refueling outage. The next refueling outages are scheduled aggressively marketing available energy but cannot predict for 1992. A combination of stricter regulatory requirements whether replacement sales will be made due to the competitive for maintenance and training and the limited supply of nuclear nature of the energy market and its dependence on factors grade materials for replacement parts has contributed to which are not generally within the Power Pool's control. If nuclear industry operation and maintenance expenses the above terminated long-term and short-term sales are not increasing at a rate higher than the general inflation rate.

replaced the Company's results of operations will be adversely Industry efforts are underway to change this trend.

impacted. The 1990 decrease in Federal income tax expense was primarily due to adjustments relating to prior year's tax Operating Expenses Rise returns and an increase in the amortization of deferred invest-I Operating expenses increased 4% in 1990 after a 4%

ncrease in 1989. Changes in the components of operating expenses were:

ment tax credits due predominantly to placing Rockport 2 in service. The increase in Federal income tax expense in 1989 was primarily due to changes in certain book/tax timing dif-Increase (Decrease) ferences accounted for on a flow-through basis.

From Previous Year (dollars in millions) 1990 1989 Allowance for Funds Used Ouring Construction and Interest Amount Amount Charges Operating Expenses: AFUDC decreased substantially in 1990 since accruais on Fuel S 26.8 10.7 S 16.9 7.3 Purchased and Interchange Power Rockport 2 ceased effective with its commercial operation on (net) . (93.9) (370.1) (22.1) (46.6) December 1, 1989. The increase in 1989's AFUDC reflected Other Operation ............ 73.5 43.0 9.3 14.7 5.8 the additional accumulated Rockport 2 construction Maintenance 30.3 29.1 16.4 expenditures.

Depreciation and Amortization ... 4.3 3.4 4.6 3.9 In1990 interest expense decreased reflecting the reduction Amortization of Bockport unit 1 Phase. in Costs ........... (1.1) (6.2) in both long-term and short-term debt outstanding with pro-Taxes Other Than Federal Income ceeds from the sale of Rockport 2. The 1989 nonoperating Taxes (2.0) (3.5) 0.1 0.2 Federal Income Taxes (4.6) (10.0) 5.2 12.4 income decrease was the result of a one-time ciedit to income Total S 34.4 S 27.6 in the fourth quarter of 1988 to record, in accordance with Federal Energy Regulatory Commission (FERC) guidance, the The increases in fuel expense in both years reflect higher interest accrued on nuclear decommissioning trust funds net generation. With the commercial operation of Rockport 2 since their inception.

in December 1989, the Company became a net supplier to the Power Pool and as such commenced receiving Power Pool capacity credits which greatly reduced its purchased and interchange power expense in 1990. The Company was able to significantly decrease purchased and interchange power expense in 1989 due to the increased availability of its gen-rating units

Liquidity and Capital Resources In December 1989 the Company and its affiliate, AEP Gen-erating Company (AEGCo), sold their 50% interests in Rock-Construction Spending Decreases port 2 and leased back the unit. Net proceeds to the Company Gross plant and property additions amounted to $ 162 mil- from the sale were $ 661 million after taxes. The Company lion in 1990, a 21% decrease from 1989 reflecting the com- used the proceeds to repay short-term and Iong-term debt, pletion of Rockport 2. Construction expenditures for the next return capital contributions to its parent and repurchase three years are estimated at $ 523 million, exclusive of yet to receivables. The net gain on the sale did not affect 1989 be determined expenditures necessary to meet the require- earnings since it was deferred and is being amortized along ments of the Clean Air Act Amendments. The Company funds with applicable deferred taxes over the initial lease term. The its substantial annual capital requirements for construction of leases have been accounted for as operating leases. The sub-new facilities and improvement of existing facilities through stantial increase in cash during 1989 resulted from the Rock-a combination of internally generated funds, short-term and port 2 sale proceeds. The substantial amount of taxes paid long-term borrowings and investments in its common equity during 1990 in connection with the sale and leaseback, as by its parent, AEP. well as the related bond and stock redemptions caused the Debt and Preferred Stock Financing cash decrease in 1990.

The Company generally issues short-term debt to provide Concerns and Contingencies interim financing of construction expenditures in excess of available internally generated funds. At December 31, 1990, Clean Air Law Environmental Costs the Company had unused short-term lines of credit of $ 263 In November 1990 the Clean Air Act Amendments became million shared with other AEP System companies. Regulatory law requiring, among other things, substantial reductions in provisions limit short-term debt borrowings to $ 200 million sulfur dioxide and nitrogen oxide emissions from coal-fired and a charter provision further limits short-term borrowings electric generating plants and placing a permanent nationwide to $ 90 million. The Company periodically reduces short-term limit on emissions after 1999. The new law establishes a stri debt with the proceeds of sales of long-term debt and pre- timetable for compliance, setting a deadline of 1995 for th ferred stock securities and investments in its common equity phase of reductions and 2000 for the second phase. 'irst by AEP. Although the AEP System has in the past made substantial The issuance of senior securities is expected to be relatively expenditures to satisfy the provisions of clean air laws, the modest in the next few years since it is expected that approx- System will have to adopt substantial additional measures to imately 70% of the Company's projected construction comply with the new amendments. The AEP System is review-expenditures for 1991-1993 will be financed internally, exclu- ing the amendments and evaluating the compliance alterna-sive of any expenditures necessary to meet the requirements tives. The compliance alternatives being considered include:

of the recently enacted Clean Air Act Amendments. Additional (a) installation of new emissions reduction equipment (scrub-amounts needed in excess of internally generated funds will bers) on affected generating units which would require sub-be raised externally through sales of securities and invest- stantial capital expenditures and result in significantly ments in the Company's common equity by AEP. increased operating costs and reduced generating efficiency; In order to issue additional levels of certain long-term debt, (b) switching to lower sulfur coal or natural gas, resulting in the Company must have pre-tax earnings equal to at least less substantial capital expenditures and adverse impacts on twice annual interest charges on long-term debt after giving affiliated mining operations and related facilities; (c) prema-effect to the issuance of the new debt. Generally to issue ture retirement of certain existing generating units; and/or (d) additional levels of preferred stock, the Company must have significant capital expenditures to repower existing generating after-tax gross income at least equal to one and one-half times units with pressurized fluidized bed combustion (PFBC) tech-annual interest and preferred dividend requirements after giv- nology presently being tested at an affiliate's Tidd PFBC dem-ing effect to the issuance of the new preferred stock. As a onstration plant. The Company's Cook Nuclear Plant is not result, the earnings performance of the Company will deter-mine its ability to finance, which, in turn, will determine its ability to fund construction. As of December 31, 1990, the Company's long-term debt and preferred stock coverage ratios were 3.79 and 2.02, respectively.

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES affected by the new legislation. Additionally, the Company's Other New Environmental and Health Concerns Rockport Plant and three of the four units at Tanners Creek In recent years there has been considerable discussion of

, Plant, all of which burn low sulfur coal, are currently in com- environmental and health concerns regarding the emission pliance with the new law. Alternatives to meet the new require- from generating facilities of "greenhouse" gases such as ments at the Company's two remaining coal-fired units, carbon dioxide and the effects on public health of electric and Tanners Creek Unit 4 and the Breed Plant, are being studied. magnetic fields (EMF) from transmission and distribution As a member of the Power Pool the Company shares in the facilities. Management is concerned that new laws may be cost of compliance at generating units owned by other Power passed or new regulations promulgated without sufficient sci-Pool member companies. The Company's cost of compliance entific evidence. The AEP System will be working to support could adversely affect results of operations and financial con- efforts to properly study "global warming" and EMF and to dition if not recovered through the rate-making process. define the extent, if any, to which they pose a threat to the Hazardous Material environment and public health before new restrictions are imposed. Should Congress enact legislation to control or limit The generation of electricity unavoidably produces a num-greenhouse gases and EMF, the Company's results of oper-ber of non-hazardous and hazardous materials such as ash, ations and financial condition could be adversely affected slag, sludge, low level radioactive waste, spent nuclear fuel, unless the cost of compliance can be recovered from etc. In addition asbestos, polychlorinated biphenyls (PCB's) rate payers.

and other hazardous materials have been employed in the Company's generating plants and transmission/distribution Regulatory Concerns facilities. The Company fully complies with all existing laws In July 1989 the Company filed a request with the Indiana regarding handling, transportation, storage and disposal of Utility Regulatory Commission (IURC) for an annual increase hazardous and non-hazardous materials it produces or uses. in rates of $ 60 million. In August 1990 the IURC granted the However, additional compliance efforts and costs could be Company an increase in rates of $ 14.3 million. In October incurred to meet the requirements of new laws and 1990 the IURC amended its order, at the Company's request, regulations. and allowed an additional $ 5 million increase in rates. The The Comprehensive Environmental Response Compensa- Company and other parties requested a rehearing of certain tion and LiabilityAct (Superfund) established programs deal- portions of the IURC's orders and in February 1991 the IURC ing with clean up of hazardous waste disposal sites, as well issued an order granting rehearing on certain of those issues.

as other matters, and authorized the Environmental Protection During 1990, the Company filed with the FERC for an $ 11 Agency (EPA) to administer them. The Company has been million annual rate increase from its firm wholesale cus-named by the EPA as a "potentially responsible party" for tomers. In December the FERC granted the Company's five sites and has received information requests for two other request to collect rates designed to produce a $ 4 million sites. The Company's present estimates do not anticipate annual increase, subject to refund, pending the issuance of material clean up costs. However, should material costs be a final order.

incurred for the clean up of these sites or for any other site at which the Company may have disposed of materials, the Company's results of operations and financial condition could be adversely impacted unless the costs can be recovered from rate payers.

The Company maintains insurance against damage and liabilityfrom its nuclear plant. In the event of a nuclear incident at the Company's nuclear plant or any nuclear plant in the United States the insurance program could require the Com-pany to pay significant retrospective premiums. In addition the Company may incur additional uninsured costs. If not recovered from ratepayers, such costs could adversely impact results of operations and financial condition.

In 1990 an initial decision was issued by a FERC admin- New Accounting Standards istrative law judge regarding a complaint filed by a wholesale The Financial Accounting Standard Board's (FASB) new customer concerning the reasonableness of the Company's accounting standard on income taxes requires the Company coal costs and the coal transportation charges of affiliates. to adopt the liability method of accounting for income taxes The initial decision would require the Company to refund to in 1992 and will result in a significant increase in total assets wholesale customers $ 25 million related to coal costs and a and liabilities due to the recording of deferred income taxes yet to be determined amount of affiliated transportation on timing differences previously flowed through and corre-charges. The Company has filed exceptions to the initial deci- sponding offsetting regulatory assets and liabilities. In addi-sion and the matter is subject to a final decision of the full tion existing deferred taxes will be adjusted to the lev'el commission. required at the currently existing statutory tax rate with an In February 1991 the Michigan Public Service Commission offsetting regulatory asset or liabilityfor deferred tax amounts (MPSC) granted the Company a $ 10.4 million annual rate associated with utility operations. Whether the Company increase from its Michigan retail jurisdictional customers. implements the new standard on a restated or prospective This rate increase will be effective in two steps: $ 7.4 million basis has not yet been determined. The FASB has indicated in April 1991 and $ 3 million in April 1992. The order also that it expects to issue an exposure draft during the first half places a moratorium on any new base rate filing prior to July of 1991 which will amend the new standard and may extend 1992 and requires the Company to file an application, within its required effective date until 1993. The Company expects six months, to merge Michigan Power Company, an affiliate, to defer implementation of the new standard until the effective into the Company. It is not presently anticipated that the date of the amended standard. It is not presently anticipated merger will significantly impact results of operations and that the final standard will significantly impact results of oper-financial condition. ations or financial condition.

Economic Outlook The FASB has issued a new accounting standard that requires a change in accounting for postretirement benefits The economy slowed in 1990 on a national level and to a other than pensions from an expense-as-paid method to a lesser.extent in the Company's service area. Although the accrual method. This standard permits initial year recognition slowing economy had minimal effect on 1990 sales levels, of the entire prior service cost or recognition of a transition further slowdowns or a deep recession could negatively affect obligation over periods up to 20 years and has an effective demand for energy, especially from industrial customers.

date of 1993. The Company expects to elect the 20 year With its large industrial base, results of operations for the transition option to comply with the new standard. With the Company are sensitive to economic conditions which can be assistance of its independent actuary the Company is pres-impacted by inflation, foreign currency fluctuations, the mar-ently computing its obligation for retiree benefits other than ket price of primary metals, costs of compliance with the pensions. The Company's obligation is significant as is the Clean Air Act Amendments of 1990 and other matters beyond difference between the annual accruals required by the new the control of the Company and its major industrial standard under the 20 year transition option and the current customers.

pay-as-you-go expense. The Company expects to seek recov-Effects of Inflation ery of the increased accruals from ratepayers. Should recov-inflation continues to affect the Company, even though the ery of or a commitment to recover the required increased inflation rate has been relatively low in recent years. Since accruals beginning in 1993 be denied, the Company's results the rate-making process limits the Company to recovery of of operations and possibly its financial condition would be the historical cost of assets, economic losses are experienced adversely impacted.

when the effects of inflation are not recovered from customers on a timely basis. Such losses are offset partly by the eco-nomic gains that result from the repayment of long-term debt with inflated dollars.

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Consolidated Statements of Income Year Ended December 31, 1989 1988 (in thousands)

OPERATING REVENUES ELECTRIC $ 1,031,059 $ 1,005,638 $ 983,066 OPERATING EXPENBEs:

Fuel 276,719 249,886 232,946 Purchased and Interchange Power (net) (68,529) 25,376 47,503 Other Operation . 244,382 170,855 161,532 Maintenance 134,521 104,223 89,545 Depreciation and Amortization 129,091 124,809 120,145 Amortization of Rockport Plant Unit 1 Phase-in Costs 16,961 16,961 18,089 Taxes Other Than Federal Income Taxes 54,389 56,377 56,271 Federal Income Taxes 42,092 46,755 41,592 Total Operating Expenses 829,626 795,242 767,623 OPERATING INCOME 201,433 210,396 215,443 NONOPERATING INCOME:

Allowance for Equity Funds Used During Construction 1,174 27,972 27,023 Other 2 772 4,958 16,431 Total Nonoperating Income 3,946 32,930 43,454 INCOME BEFORE INTEREST CHARGES . 205,379 243,326 258,897 INTEREST CHARGES:

Long-term Debt . 87,385 131,009 130,649 Short-term Debt and Other 3,158 7,279 6,635 Allowance for Borrowed Funds Used During Construction ~7,479 ~32,107) ~30,192 Net Interest Charges 89,064 106,181 107,092 NET INCOME 1169315 137,145 151,805 PREFERRED STOCK DIVIDEND REQUIREMENTS 15,587 18,048 18,848 EARNINGS APPLICABLE To COMMON STOCK $ 100,728 $ 119,097 $ 132,957 See Notes to Consolidated Finandat Statements.

Consolidated Balance Sheets December 31, 1990 1989 (in thousands)

ASSETS ELEcTRIc UTILITY PLANT:

Production $ 2,473,678 $ 2,465,133 Transmission 778,115 777,782 Distribution 482,324 452,780 General (includes nuclear fuel) 182,906 170,349 Construction Work in Progress . 94,441 52,572 Total Electric Utility Plant . 4,011,464 3,918,616 Accumulated Depreciation and Amortization . 1,403,871 1,292,430 Net Electric Utility Plant 2,607,593 2,626,186 OTHER PROPERTY ANo INVEsTMENTs 343,307 321,215 CURRENT AssETs:

Cash and Cash Equivalents . 2,721 595,487 Accounts Receivable:

Customers 70,677 114,350 Affiliated Companies . 26,926 10,669 Miscellaneous 25,237 23,441 Allowance for Uncollectible Accounts . (674) (606)

Fuel at average cost . 54,790 40,057 Materials and Supplies at average cost . 38,483 32,479 Accrued Utility Revenues 39,085 35,885 Other '11,860 6,920 Total Current Assets 269,'105 858,682 DEFERREO DEBITS:

Deferred Taxes Gain on Sale and Leaseback of Rockport Plant Unit 2 .. 176,967 183,290 Deferred Depreciation and Return Rockport Plant Unit 1 ........ 114,918 131,879 Deferred Nuclear Fuel Disposal Costs........................ 43,615 47,822 Other 79,930 90,752 Total Deferred Debits 415,430 453,743 Total $3,635,435 $ 4,259,826 See Notes to Consolidated Flnanotat Statements.

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES December 31, 1990 1989 (in thousands)

CAPITALIZATIONAND LIABILITIES CAPITALIZATION:

Common Stock No Par Value:

Authorized 2,500,000 Shares Outstanding 1,400,000 Shares $ 56,584 $ 56,584 Paid-in Capital 717)609 717,609 Retained Earnings 145,489 157,825 Total Common Shareowner's Equity 919,682 932,018 Cumulative Preferred Stock Not Subject to Mandatory Redemption 197,000 197,000 Long-term Debt 1,072,333 1,021,566 Total Capitalization 2,189,015 2,150,584 OTHER NONCURRENT LIABILITIES 220,127 190,962 CURRENT LIABILITIES:

Cumulative Preferred Stock Due Within One Year . 18,030 Long-term Debt Due Within One Year 51,500 501,170 Commercial Paper . 33,945 Accounts Payable:

General . 62,343 52,602 Affiliated Companies 16,831 35,811 Taxes Accrued 200,787 Interest Accrued 21,900 36,101 Obligations Under Capital Leases . 36,399 33,247 Other 55,471 76,878 Total Current Liabilities . 278,389 954,626 DEFERREO CREOITS:

Deferred Income Taxes 478,005 485,444 Deferred Investment Tax Credits . 212,913 221,666 Deferred Gain on Sale and Leaseback Rockport Plant Unit 2 . 234,303 241,255 Other 22,683 15,289 Total Deferred Credits 947,904 963,654 C0MMITMENTs ANo C0NTINGENGIEs (Note 10)

Total $ 3,635,435 $ 4,259,826 12

Consolidated Statements of Cash Flows Year Ended December 31, 1990 1989 1988 (in thousands)

OPERATING ACTIVITIES:

Income

'et

$ 116,315 $ 137,145 $ 151,805 Adjustments for Noncash Items:

Depreciation and Amortization 138,?4? 133,551 128,191 Amortization of Rockport Plant Unit 1 Phase-in Costs ....... 16,961 . 16,961 18,089 Amortization of Deferred Nuclear Fuel Disposal Costs ....... 4,20? 3,204 5,408 Deferred Income Taxes (8,804) (196,977) 3,161 Deferred State Taxes Rockport Plant Unit 2 Sale and Leaseback Transaction . 1,93? (39,943)

Deferred Investment Tax Credits . (8,248) 27,445 23,672 Allowance for Equity Funds Used During Construction ...... (1,1?4) (27,972) (27,023)

Changes in Certain Current Assets and Liabilities:

Accounts Receivable (net) . 25,688 (79,755) 25,530 Fuel, Materials and Supplies (20,?3?) 4,682 16,485 Accrued Utility Revenues . (3,200) (8,373) 24,064 Accounts Payable (9,239) 18,367 11,019 Taxes Accrued (200,?8?) 196,502 (41,913)

Interest Accrued . (14,201) (252) (759)

Other (net) ~6,91 9 26,510 26,704 Net Cash Flows From Operating Activities .......... 30,546 211,095 364,433 INYEsTING ACTIvITIEs:

Construction Expenditures . (104,494) (196,824) (276,545 Allowance for Equity Funds Used During Construction ........ 1,1?4 27,972 27,023 Cash Used for Construction Expenditures (103,320) (168,852) (249,522)

Proceeds from Sale and Leaseback Rockport Plant Unit 2 ... 850,000 Proceeds from Sales of Other Property 6,039 1,381 1,117 Net Cash Flows From (Used For) Investing Activities . 9? 281 682,529 ~248.405)

FINANCING ACTIVITIES:

Capital Contributions From (Returned to) Parent (63,000) 10,000 Issuance of Long-term Debt . 40,000 50,000 Change in Short-term Debt (net) . 33,945 (35,850) 35,850 Retirement of Cumulative Preferred Stocks (19,048) (7,000) (7,000)

Retirement of Long-term Debt (451,?70) (62,512) (74,050)

Dividends Paid on Common Stock (113,064) (119,952) (116,816)

Dividends Paid on Cumulative Preferred Stock . ~16,064) ~18,248) ~19,048 Net Cash Flows Used For Financing Activities ....... ~526,031 306,562 121,064 Net Increase (Decrease) in Cash and Cash Equivalents .......... (592,?66) 587,062 (5,036)

Cash and Cash Equivalents January 1 595,487 8,425 13,461 Cash and Cash Equivalents December 31 6 2 721 6 595.487 6 8,425 See Notes to Consolidated Financial Statements.

13

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Consolidated Statements of Retained Earnings Year Ended December 31,

'1990 1989 1988 (in thousands)

Retained Earnings January 1 $ 157,825 $ 161,443 $ 145,302 Net Income ............... 116,315 137,145 151,805 274,140 298,588 297,107 Cash Dividends Declared:

Common Stock . 113,064 119,952 116,816 Cumulative Preferred Stock:

4)jo% Series 495 495 495 4.56% Series 273 273 273 4.12% Series 165 165 165 7.08% Series 2,124 2,124 2,124 7.76% Series 2,716 2,716 2,716 8.68% Series ,2)604 2,604 2,604 12% Series 48 838 1,198

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

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

$ 2.75 Series 122 1,793 2,233 Total Dividends . 128,651 138,000 135,664 Net Premium on Reacquisition of Preferred Stock . 2,763 Total Deductions 128,651 140.763 135,664 Retained Earnings December 31 $ 145,489 $ 157,825 $ 161,443 See Notes to Consolidated Finanelat Statements.

14

Notes to Consolidated Financial Statements

1. Significant Accounting Policies: Income Taxes Deferred income taxes are provided except where not per-Principles of Consolidation mitted by the state commissions and the FERC. The Company The consolidated financial statements include the accounts deferred and is amortizing over the life of its plant the effect of Indiana Michigan Power Company (the Company) and its of tax reductions resulting frominvestment tax credits utilized wholly owned subsidiaries. Significant intercompany trans- in connection with current Federal income tax accruals con-actions have been eliminated in consolidation. sistent with rate-making policies.

System of Accounts Operating Revenues The accounting and rates of the Company are subject in The Company accrues revenues for electric service ren-certain respects to the requirements of state regulatory com- dered but unbilled at month-end.

missions and the Federal Energy Regulatory Commission (FERC). The financial statements of the Company have been Fuel Costs prepared on the basis of the uniform system of accounts The Company bills its fuel costs under fuel recovery mech-prescribed by the FERC.

anisms designed to reflect, in rates, changes in costs of fuel with the approval of various regulatory commissions. Accord-Electric UtilityPlant; Depreciation and Amortization; ingly, the Company accrues revenues related to unrecovered Other Property and Investments fuel.

Electric utility plant, which is stated at original cost, gen-erally is subject to first mortgage liens. Other The Company capitalizes, as a construction cost, an allow-The common stock of the Company is wholly owned by ance for funds used during construction (AFUDC), a non-cash American Electric Power Company, Inc. (AEP).

income item, which is defined in the applicable regulatory In accordance with regulatory approvals, the Company rec systems of accounts as the net cost of borrowed funds used ognizes gain or loss on reacquired debt in income in the yea for construction purposes and a reasonable return on equity of reacquisition unless such debt is refinanced, in which case, funds when so used. The composite rates used by the Com-the gain or loss is deferred and amortized over the term of pany after compounding on a semi-annual basis were 10.5%

the replacement debt.

in 1990 and 1989 and 10.25% in 1988.

Debt discount or premium and debt issuance expenses are The Company provides for depreciation on a straight-line being amortized over the lives of the related debt issues, and basis over the estimated useful lives of the property and deter-the amortization thereof is included in other interest charges mines depreciation provisions largely through the use of com-in accordance with rate-making treatment.

posite rates by functional class of property.

The Company is committed under unit power agreements Operating expenses are charged with the costs of labor, with affiliates to purchase from AEP Generating Company materials, supervision and other costs incurred in operating (AEGCo), an affiliated company, 70% of AEGCo's Rockport and maintaining the Company's properties. Property accounts Plant capacity unless it is sold to unaffiliated utilities.

are charged with the cost of property additions, major replace-Certain prior-period amounts have been reclassified to con-ments of property and betterments. The accumulated provi-form to current-period presentation.

sions for depreciation are charged with retirements and associated removal costs net of salvage.

Other property and investments are generally stated at cost.

Cash and Cash Equivalents The Company and its subsidiaries consider cash, unre-stricted special deposits, working funds, and temporary cash investments as defined by the FERC to be cash and cash equivalents. Temporary cashinvestments include highly liquid investments purchased with a maturity of three months or less.

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES

2. Bate Matters: The Company has entered into a long-term unit power agreement with Carolina Power & Light (CPL), an unaffiliated Rockport Plant Unit f Phase-in Plan utility, to supply 250 mw of Rockport 2 capacity for a 20-year The Company has phase-in plans in its Indiana and FERC period that began in January 1990. The FERC allowed the jurisdictions for Rockport Plant Unit1 (Rockport1). Rockport agreement to become effective subject to refund pending a 1 is a 1,300 megawatt (mw) generating unit that began com- hearing and final order. During 1990, the FERC resolved the mercial operation in December 1984 and is jointly and equally pending issues and the Company made refunds as ordered.

owned by the Company and AEGCo. At December 31, 1990 Unless the Company sells the remaining 470 mw of Rockport and 1989, the Company had unamortized deferred returns of 2 capacity on a long-term basis it is contributed to the AEP

$ 89,061,000 and $ 102,206,000, respectively, and un- System Power Pool (Power Pool). The Company will share amortized deferred depreciation of $ 25,857,000 and with the other members of the Power Pool in the cost of the

$ 29,673,000, respectively. These deferrals are being amor- remaining uncommitted Rockport 2 capacity. Future results tized on a straight-line basis through 1997 and recovered in of operations will be impacted unless the Power Pool can sell rates. the additional capacity.

Rockport Plant Unit 2 Safe and Leaseback and Rate Recovery Coal and Transportation Charges The Company and AEGCo constructed a second 1,300 mw unit at the Rockport Plant (Rockport 2) at a cost of $ 1.3 billion. In June 1990 an initial decision was issued by a FERC The unit began commercial operation on December 1, 1989. administrative law judge regarding a complaint filed by a On December 7, 1989, the Company and AEGCo sold their wholesale customer concerning the reasonableness of the respective 50% interests in the unit for $ 1.7 billion, the esti- Company's coal costs and the coal transportation charges of mated fair market value, and leased back 50% interests in affiliates. The initial decision would require the Company to Rockport 2 for an initial term of 33 years. The gain from the refund to wholesale customers $ 25 million related to coal sale was deferred and is being amortized, including related costs and a yet to be determined amount for affiliated trans-taxes, over the initial lease term. The leases have been portation charges. The Company has filed exceptions to the accounted for as operating leases. initial decision and the matter is subject to final decision of The Company will receive1,105 mw of Rockport 2 capacity, the full commission.

comprised of 650 mw, its 50% share, and 455 rnw it is obligated to purchase from AEGCo under the terms of a long-term unit power agreement. In July1989, the Company filed a request with the Indiana Utility Regulatory Commission (IURC) for an increase in rates of approximately $ 60,000,000 annually to recover, among other things, the Company's Indi-ana jurisdictional share of the cost of 385 mw of Rockport 2 capacity purchased from AEGCo. The rate request did not seek recovery of the cost of the remaining 720 mw of Rockport 2 energy since it was based on the assumption that the 720 mw would be sold to unaffiliated utilities. In August 1990 the IURC granted the Company an increase in rates of $ 14.3 million. In October 1990 the IURC amended its order and allowed an additional $ 5 million increase in rates. The Com-pany has been granted a rehearing of certain other portions of the IURC's August order.

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

3. Federal Income Taxes:

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

Year Ended December 31, 1990 1989 1988 (in thousands)

Charged (Credited) to Operating Expenses (net):

Current..............................................

Deferred........,,....................... $ 52.894 S 215,793 $ 11,865 (5,043) (196,503) 5,563 Deferred Investment Tax Credits (5.759) 27,465 24.164 Total ~ ~ ~ ~ ~ ~ ~ ~ ~ ~............... 42,092 46,755 41.592 Charged (Credited) to Nonoperating Income (net):

Current Deferred ............................................

Deferred Investment Tax Credits .................. 7,288 (3,761) 1,234 (474) 1 ~ 186 (2,402)

(2.489) (20) (492)

Total 1,038 740 (1,708)

Total Federal Income Taxes as Reported $ 43,130 $ 47,495 $ 39,884 The following is a reconciliation of the difference between the amount of Federal income taxes computed by multiplying book income before Federal income taxes by the statutory tax rate, and the amount of Federal income taxes reported in the Consolidated Statements of Income.

Year Ended December 31 ~

1990 1989 1988 (in thousands)

Net Income $ 116,315 $ 137,145 $ 151,805 Federal Income Taxes 43,130 47,495 Pre tax Book Income $ 159,445 $ 184,640 Federal Income Taxes on Pre-Tax Book Income at Statutory Rate (34%) . $ 54,211 $ 62,778 S 65,174 Increase (Decrease) in Federal Income Taxes Resulting From the Following Items on Which Deferred Taxes Are Not Provided:

Allowance for Equity Funds Used During Construction Net of Amortization of Prior Year Deferred Taxes for Items Capitalized on the Books but Deducted for Tax Purposes .. (2,476) (12,664) (12,079)

Mine Development and Mineral Rights Amortization 4,369 3,048 2,293 Tax Exempt income Nuclear Decommissioning Trust Funds (480) (383) (4,066)

Other (1,684) 1 ~ 111 (4,481)

Amortization of Deferred Investment Tax Credits . (10,810) (6,395) (6,957)

Total Federal Income Taxes as Reported S 43,130 S47,495 S S 39,884 Effective Federal Income Tax Rate 27 1% 25.7% 20.8%

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES The following are the principal components of Federal income taxes as reported:

Year Ended December 31.

1990 1989 1988 (in thousands)

Current:

Federal Income Taxes 862,744 6250,867 S 43,680 (2,562) (33,840) (30,629) (b)

Investment Tax Credits 60,182 217,027 (a) 13,051 Total Current Federal Income Taxes Deferred:

1,041 2,254 4,737 Depreciation Allowance for Borrowed Funds Used During Construction and Miscellaneous Items Capitalized ....... (2,953) 7,109 5,186 (8,278)

Unrecovered and Levelized Fuel . 4,214 (5,453)

Nuclear Decommissioning Costs (756) (514) 16,432 (c)

Unbilled Revenue (3,349) (3,713) (4,202)

Deferred Return Rockport Plant Unit 1 . (2,864) (2,864) (3,538)

Sale of Rockport Plant Unit 2 (56,863)

Deferred Net Gain Sale of Rockport Plant Unit 2 3,457 (128,194)

Other (7,594) (8,739) (7,176)

(8,804) (196,977) 3,161 Total Deferred Federal Income Taxes (8,248) 27,445 (a) 23,672 (b)

Total Deferred Investment Tax Credits Total Federal Income Taxes as Reported $ 43.130 S 47,495 S 39,884 The placing of Rockport 2 in service in December (a) The significant increase in current Federal income taxes resulted from the gain on the sale of Rockport 2.

of both the 1989 enabled the Company to utilize significant investment tax credits generated by the sale and leaseback to reduce its taxes payabie. The tax effect gain and the credits utilized were deferred.

credits on qualified progress expenditures on (b) Based on Internal Revenue Service regulations issued in 1988, the Company elected to claim investment tax cumulative effect of the 1987 tax return and amended tax returns for 1975 through 1986. 'The current and deferred tax effects recorded during 1988 represent the this election as well as 1988 current year accruals.

deduct nuclear decommissioning costs on the (c) Based on a ruling the Company received from the Internal Revenue SeNice in 1988, the Company elected to the cumulative 1987 tax return and on amended tax returns for the years 1984 through 1986. The current.and deferred tax effects recorded during 1988 represent effect of this election as well as 1988 current year accruals.

The Company and its subsidiaries join in the filing of a In'December 1987, the Financial Accounting Standards consolidated Federal income tax return with their affiliated Board (FASB) issued SFAS 96 "Accounting for Income Taxes" companies in the AEP System. The allocation of the AEP which requires that companies adopt the liability method of System's current consolidated Federal income tax to the Sys- accounting for income taxes. Presently SFAS 96 must be tem companies is in accordance with Securities and Exchange adopted by the Company by January 1992 on a restated basis Commission (SEC) rules under the Public UtilityHolding Com- or as a cumulative effect of an accounting change in the year pany Act of 1935 (1935 Act). These rules permit the allocation of adoption. However, the FASB has indicated that they expect of the benefit of current tax losses and investment tax credits to issue an exposure draft during the first half of 1991 which utilized to the System companies giving rise to them in deter- will amend SFAS 96 and may extend its required effective date mining taxes currently payable. The tax loss of the System until January 1993. When the new standard is adopted, total parent company, AEP, is allocated to its subsidiaries with assets and liabilities will increase significantly to reflect pre-taxable income. With the exception of the loss of the parent viously unrecorded deferred tax assets and liabilities on tem-company, the method of allocation approximates a separate porafy differences and related offsetting regulatory assets and return result for each company in the consolidated group. liabilities. In addition, existing deferred taxes will be adjusted At December 31, 1990, the cumulative net amount of to the level required at the currently existing statutory tax rate income tax timing differences on which deferred taxes have which will be offset by a regulatory asset or liability for not been provided totaled $ 448,000,000. deferred tax amounts associated with utility operations. It is The consolidated Federal income tax returns for the years not presently anticipated that the final standard will signifi-1983 through 1987 are being audited by the Internal Revenue cantly impact results of operations or financial condition'.

Service. In the opinion of management, the final settlement Whether the new standard will be implemented on a restated of open years should not have a material effect on the earnings or prospective basis has not yet been determined.

of the Company.

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

4. Related-party Transactions: The Company participates with other AEP System com-panies in a transmission equalization agreement. This agree-Operating revenues shown in the Consolidated Statements ment combines certain AEP System companies'nvestments of Income include sales of energy to Michigan Power Com-in transmission facilities and shares the costs of ownership pany, an affiliated utility that is not a member of the Power in proportion to the System companies'espective peak Pool, of approximately $ 31,000,000, $ 32,000,000 and demands. Pursuant to the terms of the agreement, the Com-

$ 34,000,000 for the years ended December 31, 1990, 1989 and 1988, respectively. pany recorded in other operation expenses credits of The Company purchases power and engages in interchange $ 47,586,000, $ 37,346,000 and $ 36,996,000 for transmis-sion services in 1990, 1989 and 1988, respectively.

power transactions to exchange energy with affiliated and The Company recorded revenues in nonoperating income unaffiliated utilities as follows:

from providing barging services as follows:

Year Ended December 31 ~

Year Ended December 31 ~

1990 1989 1988 1990 1989 1988 (in thousands)

Purchased and Interchange (in thousands)

Power (net): Affiliated Companies $ 17,094 $ 21,092 Purchased Power: Unaffiliated Companies 2.882 5.173 AEP Generating Company (a) . $ 78,990 $ 13,023 $ 3,313 Total $ 19.976 $ 26,265 Ohio Valley Electric Corporation (a) ...... 529 5,623 13,580 Unaffiliated Companies ... 28,196 21,486 7,478 American Electric Power Service Corporation provides cer-Net Interchange Power: tain professional services to the Company and its affiliated AEP Power Pool Member Utilities: companies in the AEP System. The costs of the services are Capacity Charge (Credit) .. (98,664) 4,558 14,332 determined bythe service corporation on a direct-charge basis Energy Charge (Credit) .. (77,913) (17,858) 9,858 to the extent practicable and on reasonable bases of proration Unaffiliated Companies ... 333 (1,456) (1,058) for indirect costs. The charges for services are made at cost Total ............. $ (68.529) $ 25.376 $ 47,503 and include no compensation for the use of equity capital, all (a) Affiliated utilities that are not members of the Power Pool. of which is furnished to the service corporation by AEP. The Company expenses or capitalizes billings from the service The Company is a member of the Power Pool which allows corporation depending on the nature of the professional serv-the Company to share the benefits and costs associated with ice rendered. The service corporation is subject to the reg-the System's generating plants. Under the terms of the Sys-ulation of the SEC under the 1935 Act.

tem Interchange Agreement, capacity charges and credits are designed to allocate the cost of the System's capacity among S. Common Shareowner's Equity:

the Power Pool members based on their relative peak demands and generating reserves. Net energy charges and In December 1989 the Company returned $ 63,000,000 of credits are intended to compensate Power Pool members for cash capital contributions to its parent from paid-in capital.

their out of pocket cost when they deliver more energy to the The Company received $ 10,000,000 of capital contributions Power Pool than they receive. In addition the Company shares in 1988. In 1989, the Company recorded charges of in short-term wholesale sales to unaffiliated utilities made by $ 1,154,000 to paid-in capital and $ 2,763,000 to retained the Power Pool. The Company's share was credited to oper- earnings representing the write-off of premiums paid in con-ating revenues in the amount of $ 126,005,000, nection with the reacquisition of its $ 3.63 Series Cumulative

$ 126,065,000 and $ 74,181,000 in 1990, 1989 and 1988, Preferred Stock. There were no other transactions affecting respectively. The Company became a net supplier of capacity the common stock or paid-in capital accounts in 1990, 1989 to the Power Pool with commercial operation of Rockport 2 or 1988.

in December1989. Accordingly the Company received capac- Covenants in mortgage indentures, debenture and bank ity and energy credits resulting in a reduction of total pur- loan agreements, charter provisions and orders of regulatory chased and interchange power expense in 1989 and a further authorities place various restrictions on the use of retained reduction to a net credit in 1990. earnings of the Company to pay dividends (other than stock dividends) on its common stocks and for other purposes. At December 31, 1990, approximately $ 45,900,000 of retained earnings were restricted. In addition, regulatory approval is required for the Company to pay dividends out of paid-in capital.

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES

6. Cumulative Preferred Stock:

At December 31, 1990, authorized shares of cumulative preferred stock were as follows:

Par Vaiue Shares Authorized

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

A. Cumulative Preferred Stock Not Subject To Mandatory Redemption:

Amount Call Price Shares Par Outstanding December 31 ~

December 31 ~

Series 1990 vaiue December 31, 1990 1990 1989 (in thousands) 4'/s% $ 106.125 $ 100 120,000 S 12,000 $ 12,000 4 56% 102 100 60,000 6,000 6,000 4.12% 102.728 100 40,000 4,000 4,000 7 08% 102.91 '100 300,000 30,000 30,000 7.76% 103.44 100 350,000 35,000 35,000 8.68% 103.10 100 300,000 30,000 30,000

$2.15 26.08 25 1,600,000 40,000 40,000

$ 2.25 26.13 25 1,600,000 40,000 40,000

$ 197,000 $ 197,000 1 . Cumulative Preferred Stock Subject to Mandatory Redemption:

Number of Shares Redeemed Amount Shares Par Year Ended December 31 ~

Outstanding December 31, Vaiue 1990 1989 1988 December 31 1990

~ 1990 1989 (in thousands) 12% $ 100 47,325 30,000 30,000 $ 4,733

$ 2.75 25 531,900 160,000 160,000 13,297

$ 18,030 20

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

7. Long-term Oebt and Uncs of Credit Unsecured promissory notes payable to banks have been entered into by the Company as follows:

Long-term debt by major category was outstanding as December 31 ~

follows:

1990 1989 December 31, 1990 1989 9.12% due 1990... s(in thousands)$20,000 (in thousands) 9.18% due 1990... 20,000 First Mortgage Bonds ....... S 599,179 $ 1,007,744 9.28% due 1991 ... 20,000 20,000 Sinking Fund Debentures 6,188 6,492 9.28% due 1991 ... 20,000 20,000 Notes Payable to Banks - 80,000 80,000 9.07% due 1995... 40,000 Installment Purchase Contracts . 308,175 307,953 Total $ 80,000 $ 80,000 Other Long term Debt (a) .... 130,291 120,547 1,123,833 1,522,736 Less Portion Oue Within One Year 51,500 501,170 Installment purchase contracts have been entered into by Total $ 1,072,333 $ 1,021,566 the Company in connection with the issuance of pollution control revenue bonds by governmental authorities as follows:

(a) Nuclear Fuel Disposal Costs including interest accrued. See Note 10. December 31 ~

First mortgage bonds outstanding were as follows: 1990 1989 December 31 ~ (in thousands) 1990 1989  % Rate Oue (in thousands) City of Lawrenceburg, Indiana:

% Rate Oue BVi 2006 July 1 $ 25,000 $ 25,000 7 2006 May 1 40,000 40,000 4% 1993 August . 1 S 42,902 $ 42,902 6% 2006 May 1 12,000 12,000 7r/e 1997 February 1 50,000 50,000 City of Rockporl, Indiana:

9'/e 1997 July 1 75,000 75,000 9% 2005 June 1 ... 6,500 6,500 7 1998 May 1 35,000 35,000 9'/4 2010 June 1 ... 33,500 Br/e 2000 April 1 .. 50,000 50,000 9~/4 2014 August 1 .. 50,000 9% 2003 June 1 (a) 173,M0 185,000 Pli (a) 2014 August 1 .. 50,000 8% 2003 December 1 40,000 40,000 (b) 2014 August 1 .. 50,000 9% 2008 March 1 . 34,034 100,000 City of Sullivan, Indiana:

133/i 2013 August 1 . 58,704 7% 2004 May 1 7,000 7,000 9% 2015 October 1 100,000 6% 2006 May 1 25,000 25,000 9% 2016 July 1 100,000 7% 2009 May 1 13,000 ~

13,000 8% 2017 February 1 100,000 100,000 Unamortized Discount (3,825) (4,047) 10~/s 2017 May 1 75,000 Unamortized Discount (net) .. (1,257) (3.862) Total $ 308,175 $ 307.953 599,179 1,007,744 (a) The adjustable interest rate changed from 7%% on August 1 1990 and

~

11,500 411 ~ 170 will change every five years thereafter.

$ 587.679 S 596,574 (b) The variable interest rate is determined weekly. The average weighted interest was 6.5% for 1990 and 7.0% for 1989.

(a) The 9'/a% series due 2003 requires sinking fund payments of

$ 11,500,000 on June 1, 1991 and $ 13,500,000 annually on June 1, 1992 Under the terms of certain installment purchase contracts, through 2002 with the noncumulative option to redeem an additional amount the Company is required to pay purchase price installments in each of the specified years from a minimum of $ 100,000 to a maximum in amounts sufficient to enable the cities to pay interest on equal to the scheduled requirement for each year, but with a maximum optional redemption, as to all years in the aggregate, of $ 75,000,000. and the principal (at stated maturities and upon mandatory redemption) of related pollution control revenue bonds issued The indentures relating to the first mortgage bonds contain to finance the Company's share of construction of pollution improvement, maintenance and replacement provisions control facilities at certain generating plants of the Company.

requiring the deposit of cash or bonds with the trustee, or in On certain series the principal is payable at stated maturities lieu thereof, certification of unfunded property additions.

or on the demand of the bondholders at periodic interest The sinking fund debentures are due May 1, 1998 at an adjustment dates. Certain series are supported by bank letters interest rate of 7t/4%. Prior to December 31, 1990 sufficient of credit which expire in 1995.

principal amounts of debentures had been reacquired in antic-ipation of all future sinking fund requirements. The Company may call additional debentures of up to $ 300,000 annually.

21

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Long-term debt, excluding premium or discount, outstand- Properties under capital leases and related obligations ing at December 31, 1990 is due as follows: recorded on the Company's Consolidated Balance Sheets are Principal Amount as follows:

(in thousands) December 31 ~

1991 $ 51,500 1990 1989 1992 13,500 (in thousands) 1993 56,402 Electric Utility Plant:

1994 13,500 Production $ 9,090 $ 8,835 1995 53,500 Distribution 14,607 14,603 Later Years 940,513 General:

Total $ 1,128,915 Nuclear Fuel (net of amortization) .... 96,914 88,328 Other 38.013 34,777 The amount of short-term debt the Company may borrow Total Electric Utility Plant........ 158,624 146,543 Accumulated Amortization 25,675 23,783 is limited by the provisions of the 1935 Act to $ 200,000,000 Net Electric Utility Plant 132,949 122,760 and further limited by provision of the charter to $ 90,000,000.

Other Property 2,008 16,746 The Company shares bank lines of credit with other AEP Accumulated Amortization 1,893 16,529 System companies and at December 31, 1990 and 1989 had unused shared lines of $ 263,000,000 and $ 233,000,000, Net Other Property ............. 115 217 Net Properties under Capital Leases . $ 133,064 $ 122,977 respectively. Under the terms of the lines of credit, notes can Obligations under Capital Leases (a) $ 133,064 $ 122,977 be issued with a maturity of up to 270 days. In accordance with agreements with the banks, commitment fees of up to (a) Including amounts due within one year.

'/4 of 1% a year are required to maintain the lines, of credit.

Properties and related obligations under operating leases

8. Leases: are not included in the Company's Consolidated Balance Sheets.

The Company and its subsidiaries lease property, plant and Future minimum lease payments, by year and in the aggre-quipment for periods up to 35 years. Most of the leases require the lessee to pay related property taxes, maintenance gate, consisted of the following at December 31, 1990:

Capital Operating costs and other costs of operation. The Company and its Leases Leases subsidiaries expect that leases generally will be renewed or (in thousands) replaced by other leases. The majority of the leases have 94,791 1991 $ 7,535 $

purchase or renewal options. 1992 6,631 91,557 In 1990 the Company replaced its nuclear fuel leases with 1993 5,415 91,267 1994 4,669 90,897 a financial institution by entering into a new nuclear fuel leas-1995 4,351 90,483 ing agreement with a special purpose entity which provides Later Years 34,167 2,180.708 for leasing of up to $ 140 million of nuclear fuel. The special Total Future Minimum Lease purpose entity owns the nuclear fuel and finances all of its Payments 62,768 $2,639,703 investment in nuclear fuel. The Company accounts for nuclear Less Estimated interest Element .. 26,618 fuel leases as capital leases. Estimated Present Value of Future Minimum Lease Payments 36,150 Unamortized Nuclear Fuel 96,914(a)

Total $ 133,064 (a) Including portion due within one year. Rental payments for nuclear fuel viill be paid in proportion to heat produced and carrying charges on the lessor's unrecovered costs. Nuclear fuel rentals of $49,990,000, $59,212,000 and

$ 52,568,000 were charged to fuel expense in 1990, 1989 and 1988, respectively.

Included in the above analysis of future minimum lease payments and of properties under capital leases and related obligations are certain leases in which portions of the related rentals are paid for or reimbursed by affiliated companies in the AEP System based on their usage of the leased property.

22

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The Company and its subsidiaries cannot predict the extent of retiree health care benefits. SFAS 106 permits the recog-to which affiliated companies will utilize the properties under nition of the transition obligation (the unfunded and unrec-such leases in the future. ognized accumulated postretirement benefit obligation) in the Rental payments for capital and operating leases are pri- initial year of implementation or over periods up to 20 years.

marily charged to operating expenses in accordance with rate- The Company expects to elect the 20 year transition option.

making treatment. The components of rental payments are In anticipation of this new requirement, the Company made as follows: a $ 4.1 million contribution in 1990, the maximum amount Year Ended Oecember 31 ~ deductible for Federal income tax purposes, to a Voluntary 1990 1989 1988 Employee Beneficiary Association (VEBA) trust fund for post-(in thousands) retirement benefits other than pensions. Another measure Operating Leases ........... $ 87,357 $ 16,454 $ 16,661 taken by the Company was to implement a program of cor-Capital Leases: porate owned life insurance to help fund and reduce the future Amortiaation of Principal..... 46,836 52,815 49,014 Interest 10,877 13,733 11,690 cost of postretirement benefits other than pensions. The Total Rental Payments $ 145.070 $ 83,002 $ 77,365 insurance policies have generated a substantial cash surren-der value which is recorded, net of equally substantial policy loans, as other property and investments. In future years the

9. Benefit Plans:

policies are expected to generate significant cash flows which The Company and its subsidiaries participate with other will be contributed to the VEBA trust fund. The annual accruals companies in the AEP System in a trusteed, noncontributory required by SFAS 106 are expected to be significantly greater defined benefit plan to provide pensions, subject to certain than the currently recognized pay-as-you-go expenses. The eligibility requirements, for all employees. Plan benefits are Company expects to seek recovery of the increased accruals determined by a formula which considers each participant's from ratepayers. Should recovery of or a commitment to highest average earnings, years of accredited service and recover the SFAS 106 accruals beginning in 1993 be denied, social security covered compensation. Pension costs are allo- the Company's results of operations and possibly its financi cated to each System company by first charging each System condition would be adversely impacted.

company with its service cost and then allocating the remain-ing pension cost in proportion to its share of the projected 10. Commitments and Contingencies:

benefit obligation. The Company and its subsidiaries'unding Construction policy is to make annual contributions to the plan's trust fund equal to the net periodic pension cost to the extent deductible The construction budget of the Company and its subsidi-for Federal income tax purposes, but not less than the min- aries for the years 1991-1993 is estimated at $ 523,000,000, imum required contribution. and, in connection therewith, commitments have been made.

Net pension costs for the years ended December 31, 1990, 1989 and1988 were $ 2,726,000, $ 1,271,000 and $ 397,000, Litigation respectively. In February 1990 the Supreme Court of Indiana overruled The Company offers an employee savings plan under which an appeals court and reversed an IURC order that had eligible participants can invest from 1% to 16% of their salar- assigned a major industrial customer to the Company's serv-ies among several investment alternatives, including AEP ice territory. In August 1990 the IURC issued an order trans-common stock. An employer contribution equal to one-half ferring the right to serve the industrial customer to an of the first 6% of the employees'ontribution is invested in unaffiliated local distribution utility. Concurrent with the trans-AEP common stock. The Company's annual contributions fer of service the Company began providing service to the were $ 2,822,000 in 1990, $ 2,726,000 in 1989 and local distribution utility in an amount sufficient to meet the

$ 2,31 2,000 in 1988. energy needs of the industrial customer. As a result the annual ln addition to providing perision benefits, the Company and loss of revenue is expected to be $ 500,000 rather than the its subsidiaries provide certain other benefits for retired potential $ 7 million loss previously reported.

employees. Substantially all employees may become eligible In October 1990 the local distribution utility sued the Com-for these benefits if they have 10 years of health care plan pany under a provision of Indiana Iaw that allows the local participation at retirement. The cost of retiree benefits is rec- distribution utility to seek damages equal to the gross reve-ognized as an expense when paid. In 1990, 1989 and 1988, nues received by a utility that renders retail service in the the cost-of retiree health care benefits totaled $ 2,580,000, designated service territory of another utility. The Compan

$ 2,121,000 and $ 2,048,000, respectively. received revenues of approximately $ 29 million from servin The FASB has issued SFAS 106 "Employers'ccounting the major industrial customer. It is not clear whether such a for Postretirement Benefits Other Than Pensions" which claim would be upheld when the service was rendered in requires employers, beginning in1993, to accrue for the costs accordance with an IURC order which the Company believed in good faith to be valid.

23

INDIANA MICHIGANPOIVER COMPANY AND SUBSIDIARIES The Company is involved in other legal proceedings and 1990 and was not renewed. This contract contributed $ 16 claims. While management is unable to predict the outcome million to the Company's revenues and $ 5 million to net of litigation, it is not expected that the resolution of these income in 1990. The Power Pool is attempting to replace the matters will have a material adverse effect on the Company's terminated sales with new transactions with unaffiliated util-financial condition. ities. Recently, an agreement was reached to sell 100 mw under a long-term contract with an unaffiliated utility. Whether Environmental Matters the Power Pool will be successful in negotiating additional The Company and its subsidiaries are subject to regulation transactions to take the place of the expired contract cannot by Federal, state and local authorities with respect to air- and presently be determined.

water-quality control and other environmental matters, and are subject to zoning and other regulation by local authorities. Nuclear Insurance On November15, 1990 President Bush signed into law the The Company is subject to the Price-Anderson Act which Clean Air Act Amendments of 1990 which, among other limits the public liability of a licensee of a nuclear plant for a things, requires significant reductions in the emission of sul- single nuclear incident to the amount of primary liability insur-fur dioxide and nitrogen oxide from various existing System ance available from private sources and an industry retro-generating plants. With respect to acid rain control the new spective deferred premium assessment plan. Based on 115 law establishes a strict timetable for compliance setting a reactors currently being subject to the Act, the limit of public deadline of 1995 for the first phase of reductions and 2000 liability is $ 7.8 billion. The Company maintains the maximum for the second phase as well as a permanent nationwide cap private insurance available of $ 200,000,000 for its two-unit on sulfur dioxide emissions after 1999. The AEP System is Donald C. Cook Nuclear Plant (Cook Plant). The maximum reviewing the provisions of the new law and evaluating com- standard deferred premium that the Company may be pliance alternatives which include: (a) installation of new assessed, in the event of a nuclear incident at any licensed emissions reduction equipment (scrubbers) on affected gen- nuclear power plant in the United States, is $ 63,000,000 per erating units which would require substantial capital expend- reactor, but an assessment may not exceed $ 10,000,000 in itures and result in significant operating costs and reduced any one year. If public liability claims and authorized legal generating efficiency; (b) switching to lower sulfur coal or costs exceed the amount of liability insurance and deferred natural gas, resulting in less substantial capital expenditures premiums, a licensee must pay a surcharge of up to 5 percent and adverse impacts on affiliated mining operations and of the standard deferred premium for such claims and costs.

related facilities; (c) premature retirement of certain gener- Thus, if damages in excess of private insurance result from ating units; and/or (d) significant capital expenditures to a nuclear incident, the Company could be assessed its pro repower existing generating units with pressurized fluidized rata share of the liability up to a maximum of $ 126,000,000 bed combustion (PFBC) technology presently being tested at for its two reactors, in annual installments of $ 20,000,000, an affiliate's Tidd PFBC demonstration plant. The cost of com- plus $ 6,300,000 for excess claims and costs. There is no pliance for certain of the Company's generating units and the limit on the number of incidents for which the Company could Company's share of such costs through the Power Pool will be assessed these sums.

be substantial. Unless these costs are recovered through The Company also has property damage, decontamination rates, the Company's results of operations will be adversely and decommissioning insurance for loss resulting from dam-affected. age to the Cook Plant facilities in the amount of $ 2.185 billion.

Recent concerns about global warming have led to inter- Nuclear insurance pools provide $ 1.06 billion of coverage and national negotiations and proposed legislation to stabilize or Nuclear Electric Insurance Limited (NEIL) provides the reduce "greenhouse" gases such as carbon dioxide. Pro- remainder. If NEIL's losses exceed its available resources, posed legislation, passed by the U.S. Senate in the last ses- the Company would be subject to a retrospective premium sion of Congress, is expected to be considered in the current assessment of up to $ 7.6 million. Nuclear Regulatory Com-session of Congress. Since the System's coal-fired generating mission (NRC) regulations require that, in the event of an plants emit significant quantities of carbon dioxide, the cost accident, whenever the estimated costs of reactor stabilization of any restrictions could adversely affect the Company's and site decontamination exceed $ 100 million, the insurance results of operations and financial position if not recovered proceeds must be used, first, to return the reactor to, and from ratepayers. maintain it in, a safe and stable condition and, second, to decontaminate the reactor and reactor station site in accord-ong-term Power Sales ance with a plan approved by the NRC. The insurers then The Company as a member of the Power Pool has partic- would indemnify the Company for property damage up to ipated in a long-term contract for the sale of up to 560 mw $ 1.985 billion less any amounts used for stabilization and of power to an unaffiliated utility that expired December 31, decontamination. The remaining $ 200 million, as provided 24

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Concluded) by NEIL, (reduced by any stabilization and decontamination amounted to $ 10,000,000 before income taxes in 1990. The expenditures over $ 1.985 billion) would cover decommis- Company intends to reevaluate periodically amounts collected sioning costs in excess of funds already collected for decom- for such costs and to seek regulatory approval to revise such missioning, as discussed below. amounts as necessary.

NEIL's extra-expense program provides insurance to cover Funds recovered through the rate-making process for dis-extra costs of replacement power resulting from a prolonged posal of spent nuclear fuel consumed prior to April 7, 1983 accidental outage of a nuclear unit. The Company's policy and for nuclear decommissioning have been deposited in insures against suchincreased costs up to approximately $ 1.8 external funds for the future payment of such costs.

million per week (starting 21 weeks after the outage) for one year, $ 1.2 million per week for the second year and $ 600,000 11. Supplementary Information:

per week for the third year, or 80% of those amounts per unit The following are the components of taxes other than Fed-if both units are down for the same reason. If NEIL's losses eral income taxes:

exceed its available resources, the Company would be subject Year Ended December 31, to a retrospective premium assessment of up to $ 4.6 million. 1990 1989 1988 Some potential losses or liabilities may not be insurable or (in thousands) the amount of insurance carried may not be sufficient to meet Real and Personal Property.... $ 26,946 $ 31,897 $ 32,339 potential losses and liabilities, including liabilities relating to State Gross Receipts, Excise, Franchise and Miscellaneous damage to the Cook Plant and costs of replacement power in State and Local 12,156 29,282 12,361 the event of a nuclear incident at the Cook Plant. Future losses State Income 5,760 28,057 4,913 or liabilities which are not completely insured, unless Payroll 7,590 7,084 6,658 Deferred Taxes Rockport 2 recovered through rates, could have a material adverse effect Sale and Leaseback on the financial condition of the Company. Transaction ............ 1,937 (39.943)

Total .............. $ 54,389 $ 56,377 $ 56.271 Disposal of Spent Nuclear Fuel and Nuclear Decommissioning The following are the amounts of cash paid for:

The Nuclear Waste Policy Act of 1982 as amended estab- Year Ended December 31 ~

lishes Federal responsibility for the permanent disposal of 1990 1989 1988 spent nuclear fuel. Disposal costs are paid by fees assessed (in thousands)

Interest (net of capitalized against owners of nuclear plants and deposited into the amounts) $ 101,905 $ 107,124 $ 106,283 Nuclear Waste Fund created by the Act. In1983 the Company Income Taxes ........ 247,172 64,843 67,019 entered into a contract with the U.S. Department of Energy (DOE) for the disposal of spent nuclear fuel. Under terms of The amounts of non-cash investing acquisitions under cap-the contract, for the disposal of nuclear fuel consumed after ital leases were $ 57,112,000 in 1990, $ 9,035,000 in 1989 April 6, 1983 by the Cook Plant, the Company is paying to and $ 46,791,000 in 1988.

the fund a fee of one mill per kilowatthour, which the Company is currently recovering from its customers. For the disposal of nuclear fuel consumed prior to April 7, 1983, the Company 12. Unaudited Quarterly Financial Information:

must pay over a period of 10 years to the U.S. Treasury an The following consolidated quarterly financial information estimated fee of $ 71,964,000, exclusive of interest. The Com- is unaudited but, in the opinion of the Company, includes all pany has deferred this amount plus accrued interest on its adjustments (consisting of only normal recurring accruals) balance sheet, has received regulatory approval for the recov- necessary for a fair presentation of the amounts shown:

ery of this amount and is amortizing the amount deferred as Quarterly Periods Operating Operating Net it is being recovered. Because of the current uncertainties of Ended Revenues Income Income DOE's program for permanent disposal of spent nuclear fuel, (in thousands) the Company has not yet commenced paying this fee. 1990 An independent consulting firm employed by the Company March 31 $ 253,075 $ 59,281 $ 37,699 June 30 248,460 48,733 27,442

. has estimated that the cost of decommissioning the Cook September 30 .. 264,782 52,886 32,077 Plant could range from $ 330,000,000 to $ 369,000,000 in December 31 .. 264,742 40,533 19,097 1989 dollars. The Company has received regulatory approval 1989 March 31 257,688 51,568 36,352 from all of its jurisdictions for the recovery of such nuclear June 30 244,738 46,239 28,028 decommissioning costs associated with the Cook Plant which September 30 .. 249,761 56,242 40,357 December 31 .. 253,451 56,347 32,408 25

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Independent Auditors'eport 155 East Broad Street Facsimile: (614) 229 4647 Columbus, Ohio 4321 5-3650 Telephone: (614) 221-1000 To the Shareowners and Board of Directors of Indiana Michigan Power Company:

We have audited the accompanying consolidated balance sheets of Indiana Michigan Power Company and its subsidiaries as of December 31, 1990 and 1989, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1990.

These financial statements are the responsibility of the Company's management. Our responsibility is,to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Indiana Michigan Power Company and its subsidiaries as of December 31, 1990 and 1989, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1990 in conformity with generally accepted accounting principles.

~~ ~o February 26, 1991 26

Operating Statistics 1990 1989 1988 1987 1986 ELEGTRIc OPERATING REVENUEs (in thousands):

From Kilowatt-hour Sales:

Retail:

Residential:

Without Electric Heating ........... $ 179,955 $ 182,786 $ 189,845 $ 186,418 174,550 With Electric Heating ............. 86,108 93,291 96,145 90,261 90,881 Total Residential 266) 063 276,077 285,990 276,679 265,431 Commercial 195,184 196,404 194,982 191,352 184,276 Industrial 228,927 233,990 233,855 235,470 219,344 Miscellaneous . 11,273 11,475 11,645 11,533 11,171 Total Retail 701,447 717,946 726,472 715,034 680,222 Wholesale (sales for resale) ............ 314,351 274,916 248,283 293,379 400,779 Total from Kilowatt-hour Sales .... 1,015,798 992,862 974,755 1,008,413 1,081,001 Provision for Revenue Refunds ......... ~1. 800 541 Total Net of Provision for Revenue Refunds ............ 1,015,798 992,862 972,955 1,008,413 1,081,542 Other Operating Revenues 15,261 12,776 10,111 8,855 9,753 Total Electric Operating Revenues . $ 1,031,059 $ 1,005,638 $ 983,066 $ 1,017,268 $ 1,091,295 S0URGEs AND SALEs 0F ENERGY (in millions of kilowatt-hours):

Sources:

Net Generated:

Fossil Fuel . 14,451 10,634 8,707 6,662 8,187 Nuclear Fuel 11,115 12,094 9,791 10,060 10,986 Hydroelectric 116 97 70 62 79 Total Net Generated ...... 25,682 22,825 18,568 16,784 19,252 Purchased 4,724 2,229 1,700 2,558 4,941 Net Interchange ~5,973 ~1,942) 737 1,947 542 Total Sources . 24,433 23,112 21,005 21,289 24,735 Less: Losses, Company Use, Etc.. 1,590 1,606 1,630 1,456 1,645 Net Sources 22,843 21,506 19,375 19,833 23,090 Sales:

Retail:

Residential:

Without Electric Heating . 2,774 2,792 2,825 2,719 2,536 With Electric Heating ... 1,484 1,585 1,571 1,445 1,442 Total Residential 4,258 4,377 4,396 4,164 3,978 Commercial 3,388 3,375 3,290 3,142 3,007 Industrial . 5,140 5,168 5,036 4,834 4,371 Miscellaneous . 221 228 228 221 212 Total Retail 13,007 13,148 12,950 12,361 Wholesale (sales for resale) .. 9,836 8,358 6,425 7,472 Total Sales 22,843 21,506 19,375 19,833 27

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES OPERATING STATISTICS (Concluded) 1990 1989 1988 1987 1986 AYERAGE CosT 0F FUEL CoNsUME0 (in cents):

Per Million Btu:

Coal . 145 164 182 190 185 Nuclear . 58 61 70 75 74 Overall 105 106 120 117 118 Per Kilowatt-hour Generated:

Coal . 1.42 1.62 1.81 1.87 1.82 Nuclear . .64 .67 .77 .84 .83 Overall 1.08 1.11 1.26 1..25 1.25 RESIDENTIAL SERVICE AVERAGES:

Annual Kwh Use per Customer:

Total 10,047 10,434 10,596 10,146 9,813 With Electric Heating . 16,979 18,447 ,18,551 17,341 17,716 Annual Electric Bill:

Total $ 627.84 $ 658.08 $ 689.33 $ 674.13 $ 654.88 With Electric Heating . $ 985.16 $ 1,085.56 $ 1,135.46 $ 1,083.10 $ 1,116.86 Price per Kwh (in cents):

Total 6.25 6.31 6.51 6.64 6.67 With Electric Heating . 5.80 5.88 6.12 6.25 6.30 NUMBER 0F ELECTRIc CvsT0MERs:

Year-End:

Retail:

Residential:

Without Electric Heating .... 338,171 335,625 332,488 328,937 325,623 With Electric Heating ...... 88,258 87,016 85,635 84,442 82,324 Total Residential 426)429 422,641 418,123 413,379 407,947 Commercial .. 47,020 46,176 45,249 44,207 43,689 Industrial 4,494 4,485 4,479 4,345 3,882 Miscellaneous 2,018 2,026 1,984 1,946 1,846 Total Retail . 479,961 475,328 469,835 463,877 457,364 Wholesale (sales for resale) ..... 54 50 108 105 106 Total Electric Customers .. 480,015 475,378 469,943 463,982 457,470 28

INDIANAMICHIGANPOWER COMPANY Dividends and Price Ranges of Cumulative Preferred Stock By Quarters (1990 and 1989) 1990 Quarters 1989 Quarters 1st 2nd 3rd 4th 1st 2nd 3rd 4th Cumulative Preferred Stock

($ 100 Par Value) 4'/8% Series Dividends Paid Per Share $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 $ 1.03125 Market Price $ Per Share (MSE) High Low 4.56% Series Dividends Paid Per Share $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 Market Price $ Per Share (OTC)

Ask (high/low)

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

Ask (high/low) 44/44 Bid (high/low) 42~/i/41'/i 42/40'li 42/39'/i 7.08% Series Dividends Paid Per Share $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 $ 1.77 Market Price $ Per Share (NYSE) High 78 75 77 75 71 76 77 77~/e Low 73 72 73 72 66'/i 68 73% 75 7.76% Series Dividends Paid Per Share $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94 Market Price S Per Share (NYSE) High 83 79 81 77'/8 85'/4 84'/e Low 76'/i 77'/4 76'/i 74 80 80'/8 8.68% Series Dividends Paid Per Share $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 Market Price $ Per Share (NYSE) High 88'/i 87'/4 88'/4 84'/i 88'/i 92 92 Low 85'/i 85'/8 85'/i 81 i/z 81'/i 86 89 12% Series (a)

Dividends Paid Per Share $ 1.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00 Market Price $ Per Share (NYSE) High 103'/i 106'/i 106 108 Low 101 102'/i 103 104

($ 25 Par Value)

$ 2.15 Series Dividends Paid Per Share $ 0.53?5 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 Market Price S Per Share (NYSE) High 23'le 22'/8 23'/i 24'/s 22% 23 24'/8 24 Low 21'/8 21% 21'/i 22'/i 21 203/~ 22 22'/i

$ 2.25 Series Dividends Paid Per Share $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 $ 0.5625 Market Price S Per Share (NYSE) High 24'/8 23'/s 23'/i 24'/8 23'/e 24 24'/e 25'/e Low 22'/s 22'/i 22'/s 23% 21'/i 215/8 23'/i 23'/8

$ 2.75 Series (a)

Dividends Paid Per Share $ 0.229 S0.6875 $ 0.6875 $ 0.6875 $ 0.6875 Market Price S Per Share (NYSE) High 27 26'/i 27'/i 27'/i 27 Low 26~/i 26 25'/i 26 26'/i MSE Midwest Stock Exchange OTC Over-the. Counter NYSE New York Stock Exchange Note The above bid and asked quotations represent prices between dealers and do not represent actual transactions.

Market quotations provided by National Quotation Bureau, inc.

Dash indicates quotation not available.

(a) Redeemed February 1990.

29

The Company's Annual Report (Form 10-K) to the Securities and Exchange Commission will be available in April 1991 to shareowners upon written request and at no cost.

Please address such requests to:

Mr. G. C. Dean American Electric Power Service Corporation 1 Riverside Plaza Columbus, Ohio 43215 ansfer Agent and Registrar of Cumulative Preferred Stock First Chicago Trust Company of New York 30 West Broadway, New York, N.Y. 10007-2192

Indiana Michigan Power Service Area and the American Electric Power System Leke Ml eh l ye n MICHIGAN OHIO INDIANA WEST VIRGINIA VIRGINIA KENTUCKY LEGEND Indiana Michigan Power Co. Area Other AEP operating TENNESSEE D companies'reas 0 Major power pIant

ENCLOSURE 2 TO AEP:NRC:0909G INDIANA MICHIGAN POWER COMPANY'S PROJECTED CASH PLOW

1991 Internal Cash Flow Projection for Donald"C;- Cook Nuclear. Plant"

~

$ Millions Actual Projected

.1-9 9 0 1991 Net income after taxes 116.3 123 Less dividends paid 129.2 117 Retained earnings ~12: 9) 6 Adjustments:

Depreciation and amortization 155.7 158 Deferred Federal income taxes and investment tax credits (17.0) (6)

AFUDC -'(.2' ) ( ~

3)

Total adjustments 136.0 149 Internal cash flow 123.1 155 Average quarterly cash flow '-30;8 39 Average cash balances and short-term investments* .-28. 7 10 Total S9i5 49

• Adjusted to eliminate unusually high level from sale of assets.

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

Maximum Total Contingent Liability $ 20;70-2raillion (2 units)

J