ML17334B304

1988 Annual Rept. W/890410 Ltr

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

Text

<4cELERaTED DlUBUTloN DEMOwsTB10K sYrrEM REGULATORY INFORMATION DISTRIBUTION SYSTEM (RIDS)

ACCESSION NBR:8904190328 DOC.DATE:.89/04/10 NOTARIZED: NO DOCKET FACXL: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 05000316 AUTH. NAME AUTHOR AFFILIATION

'LEXICH,M.P. Indiana Michigan Power Co. (formerly Indiana & Michigan Ele RECIP.NAME" RECXPIENT AFFILIATION Document Control Branch (Document Control Desk)

SUBJECT:

Forwards 1988 annual rept.

DISTRIBUTION CODE: M004D COPIES RECEIVED:LTR Q ENCL ( SIZE: 3R TXTLE: 50.71(b) Annual Financial Report D NOTES: S RECIPIENT COPIES RECIPIENT COPIES ID. CODE/NAME LTTR ENCL ID CODE/NAME LTTR ENCL PD3-1 PD 1 1 STANG,J 1 0 INTERNAL: AEOD/DOA 1 1 AEOD/DSP/TPAB 1 1 01 1 1 EXTERNAL LPDR 1 1 NRC PDR 1 1 R

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PLEASE HELP US IO REDUCE WASTE! CGNZACT 'IHE DOCUMEPZ CXNZROL DESKS RQQM Pl-37 (EXT. 20079) KO ELIMlNATE YOUR NAME FROH DISIVKBVZIGN LIPID FOR DOCUMEMIS YOU DGNiT NEZD!

TOTAL NUMBER OF COPIES REQUIRED: LTTR 7 ENCL 6

Indiana Michigan Cower Company P.O: 8ox 16631 Coiumbus, OH 43216.

N AEP:NRC:0909E 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 10, 1989

Dear Dr. Murley:

Enclosure 1 contains the Indiana Michigan Power Company's (I&M) annual report for 1988. Enclosure 2 contains a copy of I&M's projected cash flow for 1989. 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, M. P. 'Al ich Vice President KJT/eh Enclosures cc: D. H. Williams, Jr.

W. G. Smith, Jr. - Bridgman R. C. Callen G. Charnoff G. Bruchmann NRC Resident Inspector - Bridgman p$

A. B. Davis - Region III gK O5OOO'=.

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ENCLOSURE 1 TO AEP:NRC:0909E INDIANA MICHIGAN POWER COMPANY'S 1988 ANNUAL REPORT

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'0 ENCLOSURE 2 TO AEP:NRC:0909E 1989 Internal Cash Flow Projection for Donald C. Cook Nuclear Plant (5 Millions)

Actual Projected 1988 1989 Net income after taxes 151.8 134 Less dividends paid 135. 9 138 Retained earnings 15.9 ( 4)

Adjustments:

Depreciation and amortization 146.3 152 Deferred income taxes and investment tax credits 26.8 (13) "

AFUDC (57.2) (55)

Total adjustments 115.9 84 Internal cash flow 131.8 80 Average quarterly cash flow 32.6 20 Average cash balances and short-term investments 10.5 15 Total 43.1 35 8 Ownership in all operating nuc'lear units: Unit 1 and Unit 2 100%

Maximum Total Contingent Liability $ 20.0 million (2 units)

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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 5-7 Consolidated Statements of Income Consolidated Balance Sheets 9-10 Consolidated Statements of Cash Flows Consolidated Statements of Retained Earnings 12 Notes to Consolidated Financial Statements 13-23 Independent Auditors'eport 24 Operating Statistics 25-26 Dividends and Price Ranges of Cumulative Preferred Stock 27

INDIANAMICHIGANPOWER COMPANY One Summit Square, P.O. Box 60, Fort Wayne, Indiana 46801 Background of the Company INDIANA MIGHIGAN PowER C0MPANY (the Company), a subsidiary of American Electric Power Company, Inc.

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

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

The Company serves approximately 470,000 customers in northern and eastern Indiana and a portion of southwestern Michigan. Among the principal industries served are transportation equipment, primary metals, fabricated metal products, electrical and electronic machinery, and rubber and plastic products. In addition, the Company supplies wholesale electric power to other electric utilities, municipalities and electric cooperatives.

The Company's generating plants and important load centers are interconnected by a high-voltage 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, King sport Power Company, Michigan Power Company, Ohio Power Company and Wheeling Power Company. The Company is also interconnected with the following other utilities: Central illinois Public Service Company, The Cincinnati Gas 8 Electric Company, Commonwealth Edison Company, Consumers Power Company, Illinois Power Company, Indiana-Kentucky Electric Corporation (a subsidiary of Ohio Valley Electric Corporation), Indianapolis Power 8 Light Company, Northern Indiana Public Service Company, Public Service Company of Indiana, Inc. and Richmond Power 8 Light Company.

Directors J. M. ALMSON (a) GERALD P. MALONEY W. A. BLACK RICHARD C. MENGE RICHARD E. DISBROW R. E. PRATER (C)

JOHN E. DOLAN (b) JOSEPH H. VIPPERMAN WILLIAMN. D'ONOFRIO W. E. WALTERS (C)

A. R. GtASSBURN W. S. WHITE, JR.

M. R. HARRELL (a) DAVID H. WILLIAMS, JR. (d)

Officers W. S. WHITE, JR. RICHARD F. HERING CARL J. MOOS Chairman of the Board Vice President Assistant Secretary and Chief Executive Officer GERALD P. MALONEY JOHN B. SHINNOCK W. A. BLACK Vice President Assistant Secretary President and H. VIPPERMAN JOAN ST. JAMES JOSEPH (t)

Chief Operating Officer Vice President Assistant Secretary RICHARD C. MENGE (e) DAVID H. WiLLIAMS, JR. (d) LEONARD V. ASSANTE Senior Vice President Vice President Assistant Treasurer MILTON P. ALEXICH PETER J. DEMARIA BRUCE M. BARBER Vice President Treasurer Assistant Treasurer RICHARD E. DISBROW JOHN F. DILORENZO, JR. JAMES D. HUEBNER (g)

Vice President Secretary Assistant Treasurer JOHN E. DOLAN (b) EUO BAFILE GERALD R. KNORR Vice President Assistant Secretary and Assistant Treasurer WILLIAMN. D'ONOFRIO Assistant Treasurer Vice President JEFFREY D. CROSS A. JOSEPH DOWD Assistant Secretary Vice President The principal occupation of each ol the above directors and officers of Indiana Michigan Power Company, with ten exceptions, Is as an employee of Amerfcan Electric Power Service Cor-poration. The exceptions are Messrs. Allison, Bafile, Black, O'Onofrio, Glassbum, Harrell,,

Menge, Moos, Prater, and Walters whose principal occupations during 1988 were as officers or employees of Indiana Michigan Power Company.

(a) Resigned April 26, 1988 (b) Resigned February 1, 1988 (c) Elected April 26, 1988 (d) Elected February 1 1988

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(e) Elected March 1, 1988 (I) Resigned January 1 1989

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(g) Resigned February 1, 1989

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Selected Consolidated Financial Data Year Ended December 31, 1988 1987 1986 1985 1984 (in thousands)

INCOME STATEMENTS REVENUES ELECTRIC .......

DATA'PERATING

$ 983,066 $ 1,017,268 $ 1,091,295 $ 1,078,793 $ 979,551 TOTAL OPERATING EXPENSES 767,623 794,222 900,151 886,904 799.393 OPERATING INCOME 215,443 223,046 191,144 191,889 180,158 TOTAL OTHER INCOME AND DEDUCTIONS .... 43,454 56,828 66,905 76,879 53,044 INCOME BEFORE INTEREST CHARGES ....... 258,897 279,874 258,049 268,768 233,202 NET INTEREST CHARGES 107,092 113,508 105,568 122,667 91,017 NET INCOME 151,805 166,366 152,481 146,101 142,185 PREFERRED STOCK DIVIDEND REQUIREMENTS . 18,848 20,955 26,256 27,056 27,705 EARNINGS APPLICABLE To COMMON STOCK .. $ 132,957 $ 145,411 $ 126,225 $ 119,045 $ 114,480 December 31, 1988 1987 1986 1985 1984 (in thousands)

BAULNCE SHEETS DATA:

ELECTRIC UTILITY PLANT $ 4,411,271 $ 4,153,281 $ 3,979,822 $ 4,107,526 $ 3,941,006 ACCUMULATED PROVISIONS FOR DEPRECIATION AND AMORTIZATION . 1,218,060 1,118,254 1,018,455 962,670 868,192 NET ELECTRIC UTILITY PLANT 3,193,211 3,035,027 2,961,367 3,144,856 3,072,814 TOTAL, ASSETS ........... ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 3,993,046 3,956,563 3,849,208 3,763,595 3,658,647 COMMON STOCK AND OTHER PAID.IN CAPITAL .. 838,347 828,347 828,347 828,347 828,344 RETAINED EARNINGS 161,443 145,302 113,123 100,130 94,317 TQTAL CDMMDN SHAREDWNER's EQUITY ...... 999,790 973,649 941,470 928,477 922,661 CUMULATIVE PREFERRED STOCK'.

NOT SUBJECT TO MANDATORY REDEMPTION 197,000 197,000 197,000 197,000 197,000 SUBJEGT To MANDATDRY REDEMPTI0N (a) 25,030 32,030 79,030 86,030 93,197 L0NG-TERM DEBT (a) 1,575,220 1,591,768 1,421,523 1,442,070 1,347,623 (a) Including portion due within one year.

Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Regulatory Environment The electric utility industry operates in a regulatory envi-Net Income ronment that makes it difficult to predict whether new plant Net income decreased by 9% in 1988 following a 9% in- additions will be fully included in rate base upon their dedi-crease in 1987. The decrease in 1988 resulted primarily from cation to public service. This is of concern to the Company the negative effect of the loss in 1987 of a major wholesale since it has under construction Rockport Plant Unit 2 (Rock-customer. This was partially offset by the tax effect of costs port 2) which is expected to be completed in late 1989. See associated with nuclear decommissioning trust funds, a non- "Rockport Plant Unit 2" in Note 2 of the Notes to Consolidated recurring charge in 1987 relating to wholesale power trans- Financial Statements.

actions, which is reflected in other income and deductions, and an increase in total allowance for funds used during con- Economy struction. The 1987 increase resulted mostly from an increase The economy of the Company's service territory has re-in operating income which was partially offset by a decrease covered from the recession of 1982. Industrial production is in other income and deductions and an increase in total in- up reflecting a new competitiveness not only within the United terest charges. States but also in the global marketplace. Economic growth is expected to continue for a period of time. However, the Outlook long-term economic well-being of the region is subject to the Wholesale Customers effects of recession, inflation, foreign currency fluctuations The Company lost one major wholesale customer in 1987 and other influences, which could adversely impact the future and received notice from another to terminate service. In the results of operations of the Company.

first instance the Company had a long-term contract that ex- Acid Rain Legislation pired on Oecember 31, 1987 to provide 400,000 kilowatts of The Company consumed over 4 million tons of coal in 1988 energy (200,000 kilowatts after February 1, 1987) to an un-to generate nearly 9 billion kilowatthours of electricity. Pro-affiliated utility. This contract contributed approximately 7%

and 12% of the Company's total operating revenues and 19% posals are being considered by Congress that would plac severe environmental restrictions on emissions from co and 37% of the Company's earnings applicable to common burned to produce electricity. These "acid rain" proposals stock before any pro forma adjustment for AEP System in-could require the Company to make substantial capital in-tercompany transactions in 1987 and 1986, respectively.

In the second situation a wholesale customer notified the vestments and to incur substantial increased operating costs in order to comply. The impact on the Company's financial Company in 1987 that it planned to terminate purchasing condition is dependent upon passage of final legislation and energy from the Company and requested transmission wheel-future rate-making treatment.

ing arrangements with the Company effective August1, 1988.

However, the existing contract was extended for one year and Deregulation the Company entered into an agreement for transmission In 1988, the Federal Energy Regulatory Commission pro-wheeling service and partial load requirements for this whole-posed rules that would effectively deregulate the generation sale customer effective August 1, 1989. Service by the Com-of electricity for certain power producers. These proposals if pany to this customer was at an average level of 180,000 adopted as issued would radically alter the electric utility in-kilowatts in 1988, 170,000 kilowatts in 1987 and 162,000 dustry. The proposed rules would create a new class of power kilowatts in 1986 and contributed approximately 5%, 4% and producers exempt from most forms of rate regulation that 3% of the Company's total operating revenues and 16%, 12% .could enter or leave the market as their interests and financial and 11% of the Company's earnings applicable to common conditions dictate. The Company like all electric utilities is stock before any pro forma adjustment for AEP System in- obligated to provide its customers with all of their power tercompany transactions in 1988, 1987 and 1986, respec- needs. If utilities become agents that cannot manage their tively. If this contract did not exist, the Company would have power supply then, in the Company's view, reliability would been required to make payments in a lesser amount, or al-be impaired. Since reliability of electric service is of para-ternatively been entitled to more receipts, due to operation of mount importance under an obligation to serve, the Company the AEP System Pool. After pro forma adjustment for AEP has opposed the proposed rules. If these or other rules con-System intercompany transactions, the aggregate contribu- cerning deregulation are adopted, the long-term effect on the tion of this contract would have been approximately11%, 8% financial condition of the Company is indeterminable.

and 8% of the Company's earnings applicable to common stock in 1988, 1987 and 1986, respectively.

INDIANAMICHIGANPOWER COMPANY ANO SIJBSIDIARIES perating Revenues and Energy Sales Purchased and interchange power expense decreased by Operating revenues decreased 3% in 1988 compared to a 54% in 1988 and 43% in 1987. In 1988, the change was 7% decrease in1987. The decrease in1988 revenues resulted caused mostly from increased availability of the Company's primarily from a decrease in wholesale sales partially offset internal generation as well as lower net cost per kwh of pur-by the record level of kwh sales to retail customers. The 1987 chased and interchange power and a slight decrease in the decrease came mostly because of a 14% decrease in overall Company's total load requirements. The 1987 change was sales of electric energy. The elements that gave rise to primarily due to the assignment of certain rights to purchase changes in operating revenues are summarized below. power from AEP Generating Company (AEGCo), an affiliated Revenues from wholesale customers decreased 15% dur- company, to an unaffiliated company. This decrease was par-ing 1988 on a 14% decrease, in kwh sales, following a 27% tially offset by increased interchange power transactions, pri-decrease in revenues in 1987 on a 35% decrease in kwh sales. marily with affiliated companies, in order to replace internal The decreases in kwh sales in both years were mostly caused generation lost because of outages..

by the expiration of a long-term contract with a wholesale Maintenance expense increased15% in1987. Factors con-customer (discussed previously). In 1987, however the im- tributing to the comparatively higher levels of expense in 1987 pact of lower kwh sales was offset partially by an increase in were additional maintenance activities for nuclear plant and the average wholesale realization as the Company pursued other maintenance activities.

sales with higher profit margins. The 1987 decline in energy Federal income taxes declined 45% in 1988 following a sales was also caused by an increase in available energy 21% decrease in 1987. The 1988 decrease in Federal income supply from unaffiliated generating capacity that had been out tax expense was primarily due to the decrease in pre-tax book of service for an extended time and the addition of new gen- operating income, while the 1987 decrease came mostly from erating units by unaffiliated utilities. the decrease in the statutory Federal income tax rate as a Revenues from retail customers (residential, commercial result of the Tax Reform Act of 1986.

and industrial) increased 2% in 1988 after a 5% increase in The Company was granted reductions in its annual base 1987. The higher revenues in 1988 were attributable to the rate levels to reflect a reduction in the Federal income tax rate

.cord level of kwh sales (13 billion kwh). The continued to 34%.and other cost-of-service items. Therefore, the re-onomic improvement in the Company's service area cou- ductions in tax rates had a minimal effect on earnings. Other led with hot summer weather led to the record level of kwh provisions in the Tax Reform Act of 1986, such as those sales to all retail customer classes. The effect on revenues of relating to depreciation and repeal of investment tax credit, the higher kwh sales level was largely offset by a reduction will result in reduced internal cash flow. However, these other in rates as lower Federal income taxes and average fuel costs provisions are not anticipated to have a material impact on were passed on to customers. The increase in 1987 revenues net earnings.

reflected a 7% increase in kwh sales and improvement in Allowance For Funds Used During Construction revenues from each customer class.

The total allowance for funds used during construction Operating Expenses (AFUDC) increased in 1988 and the proportion of AFUDC Total operating expenses decreased 3% after a 12% de- included in net income increased to 38% (32% net of income crease in 1987. The components of operating expenses that taxes) in 1988 from 30% (25% net of income taxes) in 1987.

caused the changes are discussed below. The increase in the proportion of AFUDC included in net in-Fuel expense, the single largest expense of the Company, come resulted from additional construction expenditures on increased 11% in 1988 after a 10% decline in 1987. The 1988 Rockport 2 being subject to the allowance.

increase resulted mainly from increased net generation while the 1987 decrease was due mainly.to reduced levels of gen-eration. Changes in fuel costs generally are recovered in rev-enues through fuel-clause adjustment mechanisms and therefore do not have a significant effect on net income.

6

Liquidity and Capital Resources Rockport Plant Unit 2 The Company and AEGCo, an affiliate, which jointly ow

-

Construction Program the Rockport Plant have signed a commitment letter agree-The Company's plant and property additions for 1988 ment to sell and leaseback their interests in Rockport 2. At amounted to $ 323 million, a 30% increase over 1987. Con- 'ecember 31, 1988, the Company and AEGCo had expended struction expenditures for the three-year period 1989-1991

$ 1.1 billion on Rockport 2. The Company and AEGCo expect are estimated at $ 457 million. This includes the completion to use the net proceeds from the sale, estimated to be $ 1.4 of construction of the second1,300-megawatt generating unit billion after taxes, to reduce their capitalization, including the at the Rockport Plant, Rockport 2. In addition, the Company redemption by the Company of certain publicly held first mort-could be required to make substantial additional capital ex-gage bonds and preferred stock. The sale will not have an penditures if acid rain legislation similar to that currently pro- effect on 1989 net income since the net gain will be deferred posed is enacted into law. and amortized over the lease term. The leases are expected Debt and Preferred Stock Financing to be recorded as operating leases.

The Company and AEGCo expect to sell a substantial por-The Company generally issues short-term debt (commer-tion of the unit's capacity to unaffiliated utilities under long-cial paper and bank loans) to provide interim financing of term unit power agreements. One such agreement to supply construction expenditures in excess of available internally 250 megawatts for a 20 year period to an unaffiliated utility generated and other funds. The Company then periodically has been signed. Recovery of the costs of capacity not sold reduces short-term debt with the proceeds from sales of long-to unaffiliated utilities and the timing of such recovery are term debt and preferred stock securities and with investments subject to future regulatory proceedings.

in its common equity by AEP.

See "Rockport Plant Unit 2" in Note 2 of the Notes to Issuance of senior securities is expected to be modest in Consolidated Financial Statements for additional information.

the next few years since all of the Company's projected con-struction expenditures for 1989-1991 are expected to be fi- Effects of Infiation nanced with internally generated funds and proceeds from Inflation continues to affect the Company, even though the the sale and leaseback of Rockport 2 discussed below. If any inflation rate has been relatively low in recent years. Sine additional amounts are needed in excess of internally gen- the rate-making process limits the Company to recovery o erated funds, they will have to be raised externally, as in the the historical cost of assets, economic losses are experienced past, through sales of securities, short-term borrowings and when the inflated value of the assets is not recovered. How-investments in the Company's common equity by AEP. ever, such losses are offset partly by the economic gains that At December 31, 1988, the Company had unused short- result from the repayment of long-term debt with inflated term lines of credit of approximately $ 292 million which were dollars.

shared with other System companies.

Cook Nuclear Plant New Accounting Standards The Cook Nuclear units have been exhibiting indications of The Financial Accounting Standards Board (FASB) has is-intergranular corrosion (IGC) in the steam generator tubing, sued a new accounting standard regarding income taxes that a condition which has developed in other pressurized water the Company will be required to adopt in the future which is reactors. This led to a decision to operate Unit 2 at 80% discussed in Note 3 of the Notes to Consolidated Financial power and Unit 1 at 90% power as a steam-generator life Statements.

conservation measure. The IGC problem in the Unit 1 steam The FASB has proposed a new accounting standard that generators has been occurring at a slower rate than in Unit would require a change in accounting for post-retirement ben-2, but it is possible that the Unit 1 steam generators may efits other than pensions from an expense as paid method to have to be replaced eventually. However, there are no present an accrual method. This proposal would require the amorti-plans for such replacement. In April 1988, Unit 2 was taken zation of prior service costs over a minimum of 15 years and out of service to replace the unit's steam generators, refuel has a tentative effective date'of 1992. The impact on the the unit and perform the 10-year anniversary service inspec- Company's financial position is dependent upon issuance of tion as required by the Nuclear, Regulatory Commission. The a final standard and future rate-making treatment.

unit is expected to return to service in March 1989. The Company will seek recovery in its rate base of the steam generator replacement expenditures in the next general rate case which is expected to be filed in 1989.

INDIANAMICHIGANPOWER COMPANY AND SVBSIDIARIES Consolidated Statements of Income Year Ended December 31, 1988 1987 (in thousands)

OPERATING REYENUEs ELECTRIc $ 983,066 $ 1,017,268 $ 1,091,295 OPERATING EXPENSES:

Operation:

Fuel for Electric Generation . 232,946 208,931 233,241 Purchased and Interchange Power (net) . 47,503 102,644 180,620 Other 161,532 156,310 157,500 Maintenance 89,545 91,807 80,171 Depreciation and Amortization . 120,145 116,915 112,188 Amortization (Deferral) of Rockport Phase-in Costs . 18,089 (4,488) (10,732)

Taxes Other Than Federal Income Taxes Federal Income Taxes

., 56,271 46,730 51,291 41,592 75,373 95,872 Total Operating Expenses . ?67,623 794,222 900,151 OPERATING INCOME 215,443 223,046 191,144 OTHER INCOME ANO DEOUCTIONS:

Allowance for Equity Funds Used During Construction . 27,023 26,055 25,397 Deferred Return Rockport Plant 31,442 43,438 Other 16,431 ~669) ~1.930)

Total Other Income and Deductions . 43,454 56,828 66,905 ICOME BEFORE INTEREST CHARGES ............... 258,897 279,874 258,049 NTEREST CHARGES:

Long-term Debt . 130,649 131,093 124,333 Short-term Debt and Other 6,635 5,712 7,843 Allowance for Borrowed Funds Used During Construction . ~30,192) ~23,297) ~26,603)

Net Interest Charges 107,092 113,508 105,568 NET INCOME 151,805 166,366 152,481 PREFERRED STOCK DIVIOENO REQUIREMENTS 18,848 20,955 26,256 EARNINGS APPLICABLE To COMMON STOCK $ 132,957 $ 145,411 $ 126,225 See Notes to Consolidated Financial Statements.

Consolidated Balance Sheets December 31, 1988 1987 (in thousands)

ASSETS ELECTRIC UTILITY PLANT:

Production $ 2,331,581 $ 2,269,325 Transmission 737,919 725,047 Distribution . 423,729 397,214 General (includes nuclear fuel) . 206,068 207,722 Construction Work in Progress 711,974 553,973 Total Electric Utility Plant 4,411,271 4,153,281 Accumulated Provisions for Depreciation and Amortization . 1,218,060 1,i i 8,254 NET ELECTRIC UTILITY,PLANT 3,193,211 3,035,027 OTHER PROPERTY ANO INVESTMENTS 301 931 283,313 CURRENT AssETs:

Cash and Cash Equivalents 8,425 13,461 Special Deposits Restricted Funds . 2,168 17,928 Accounts Receivable:

Customers 39,847 71,730 Associated Companies 9,087 7,058 Miscellaneous . 19,648 15,475 Allowance for Uncollectible Accounts (483) (634)

Fuel at average cost . 51,289 70,728 Materials and Supplies at average cost 25,929 22,975 Accrued Utility Revenues 27,512 51,576 Other . 8,649 7,942 Total Current Assets 192,071 278,239 DEFERREO DEBITS:

Deferred Depreciation and Return Rockport Plant . 148,840 170,413 Deferred Nuclear Fuel Disposal Costs . 51,026 56,434 Other . 105 961 133,137 Total Deferred Debits . 305,833 359,984 Total . $ 3,993,046 $ 3,956,563 See Notes to Consolidated Financial Statements.

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES December 31, 1988 1987 (in thousands)

CAPITALIZATIONAND LIABILITIES CAPITALIZATION:

Common Stock No Par Value:

Authorized 2-;500,000 Shares Outstanding 1,400,000 Shares S 56,584 S 56,584 Other Paid-in Capital 781,763 771,763 Retained Earnings 161,443 145,302 Total Common Shareowner's Equity 999,790 973,649 Cumulative Preferred Stock:

Not Subject to Mandatory Redemption . 197,000 197,000 Subject to Mandatory Redemption 25,030 32,030 Long-term Debt . 1,563,720 1,539,737 Total Capitalization . 2 755,545 2,742,416 OTHER NONCURRENT LIABILITIES 207,637 193,692 CURRENT LIABILITIES:

Long-term Debt Due Within One Year . 11,500 52,031 Notes Payable .................. 7,950 Commercial Paper 27,900 Accounts Payable:

General: 55,210 41,451 Associated Companies . 14,836 17,576 Taxes Accrued 4,285 46,198 Interest Accrued . 36,353 37,112 Obligations Under Capital Leases 43,037 43,856 Other . 47,866 48,928 Total Current Liabilities 248,937 287,152 DEFERRED CREDITS:

Deferred Income Taxes 535,829 542,298 Deferred Investment Tax Credits 194,726 171,559 Other . ,

20,377 19,446 Total Deferred Credits 750,932 733,303 C0MMITMENTs AND C0NTINGENGIEs (Note 11)

Total . $ 3,993,046 $ 3,956,563 10

Consolidated Statements of Cash Flows Year Ended December 31, 1988 1987 1986 (in thousands)

CAsH FLows FR0M OPERATING ACTIvITIEs:

Net Income . S 151,805 S 166,366 S 152,481 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation and Amortization . 146,280 120,310 107,915 Deferred Income Taxes . 3,161 13,597 24,219 Deferred Investment Tax Credits 23,672 (7,700) 25,328 Allowance for Equity Funds Used During Construction . (27,023) (26,055) (25,397)

Changes in Certain Current Assets and Liabilities:

Accounts Receivable (net) 25,530 10,952 (3,636)

Fuel, Materials and Supplies 16,485 (14,293) (9,361)

Accrued Utility Revenues . 24,064 (2,576) 22,615 Accounts Payable 11,019 (402) (10,571)

Amortization of Deferred Nuclear Fuel Disposal Costs .. 5,408 12,207 13,247 Deferred Return Rockport Plant . (31,442) (43,438)

Other (net) ~15,968 24,329 8,836 .

Net Cash Provided by Operating Activities ..... 364,433 265,293 262,238 CASH FLOWS FROM INVESTING ACTIVITIES:

Plant and Property Additions . (276,545) (206,941) (175,776)

Allowance for Equity Funds Used During Construction ... 27,023 26,055 25,397 Cash Used for Plant and Property Additions . (249,522) (180,886) (150,379)

Proceeds from Sales of Property . 1,117 1,816 9,547 Net Cash Used by Investing Activities ~248,405 f179,070) ~140,832 CASH FLOWS FROM FINANCING ACTIVITIES:

Capital Contributions from Parent . 10,000 Issuance of Long-term Debt . 50,000 197,681 376,811'49,925)

Change in Short-term Debt (net) . 35,850 49,925 Retirement of Cumulative Preferred Stocks p,ooo) (50,917) (7,000)

Retirement of Long-term Debt p4,o5o) (222,005) (228,432)

Dividends Paid on Common Stock (116,816) (113,232) (113,232)

Dividends Paid on Preferred Stocks ~19,048) ~22.607) ~26,456 Net Cash Used by Financing Activities $ 121,064) ~81.875) ~127,514)

Net Increase (Decrease) in Cash and Cash Equivalents ..... (5,036) 4,348 (6,108)

Cash and Cash Equivalents at Beginning of Year . 13,461 9,113 15,221 Cash and Cash Equivalents at End of Year S 8,425 3 13,461 8 9,113 Supplemental Disclosure:

Cash Paid During the Year For:

Interest (net of Allowance for Borrowed Funds Used During Construction) . $ 106,283 $ 107,389 $ 107,972 Income Taxes 67,019 70,655 22,614 Noncash Investing Activities:

Plant Acquired Under Capital Leases 46,791 41,046 33,099 See Notes to Consolidated Financial Statements.

11

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

1988 1987 1986 (in thousands)

Balance at Beginning of Year . $ 145,302 $ 113,123 $ 100,130 Net Income . 151,805 166,366 152,481 Total 297,107 279,489 252,611 Cash Dividends Declared:

Common Stock 116)816- 113,232 113,232 Cumulative Preferred Stock:

4)/e% Series . 495 495 495 4.56% Series . 273 273 273 4.12% Series . 165 165 165 7.08% Series . 2,124 2,124 2,124 7.76% Series............ 2,716 2,716 2,716 8.68% Series . 2,604 2,604 2,604 12% Series . 1,198 1,558 1,918

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

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

$ 2.75 Series . 2 233 2,673 3,113

$ 3.63 Series . 1,307 5,808 Total Dividends 135,664 134,187 139,488 Balance at End of Year $ 161,443 $ 145,302 $ 113,123

.e Notes to Consolidated Financial Statements.

12

Notes to Consolidated Financial Statements

1. Significant Accounting Policies: by the FERC to be cash and cash equivalents. Temporary cash investments include highly liquid investments purchased with Principles of Consolidation a maturity of three months or less. The 1987 and 1986 con-The consolidated financial statements include the accounts solidated statements of funds have been restated to conform of Indiana Michigan Power Company (the Company) and its to the current-period cash flows presentation.

wholly owned subsidiaries. Significant intercompany trans-actions have been eliminated in consolidation. Income Taxes The common stock of the Company is wholly owned by Deferred Federal income taxes are provided to the extent American Electric Power Company, Inc. (AEP). that such amounts are reflected in revenue levels. The Corri-pany normalizes the effect of tax reductions resulting from System of Accounts investment tax credits utilized in connection with current Fed-The accounting and rates of the Company are subject in eral income tax accruals consistent with rate-making policies.

certain respects to the requirements of state regulatory bodies The Company's subsidiaries generally use the flow-through and in certain respects to the requirements of the Federal method of accounting for investment tax credits and practice Energy Regulatory Commission (FERC). The consolidated fi- deferred tax accounting for the effects of certain timing nancial statements have been prepared on the basis of the differences.

uniform system of accounts prescribed by the FERC.

Operating Revenues Electric Uti%'ty Plant; Depreciation and The Company accrues unbilled revenues for electric service Amortization; Other Property and Investments rendered subsequent to the last billing cycle through month-Electric utility plant is stated at original cost. Generally, the end.

plant of the Company is subject to first mortgage liens. Operating revenues derived from a certain wholesale cus-

'he Company capitalizes, as a construction cost, an allow- tomer represented approximately 7% of total operating rev-ance for funds used during construction (AFUDC), an item enues for 1987 and 12% for 1986. The contract with this not representing cash income, which is defined in the appli- customer expired on December 31, 1987.

'cable regulatory systems of accounts as the net cost of bor-rowed funds used for construction purposes and a reasonable Fuel Costs rate on equity funds when so used. The composite rates used The Company bills its fuel costs under a fuel recovery by the Company after compounding on a semi-annual basis mechanism designed to reflect in rates changes in costs of were 10.25% in 1988 and 11.5% in 1987 and 1986.

fuel as ordered by various regulatory bodies. Accordingly, The Company provides for depreciation on a straight-line the Company accrues revenue relating to unrecovered fuel.

basis over the estimated useful lives of the property. The current provisions are determined largely with the use of com- Sale of Receivables posite rates by functional class of property.

In December 1988 the Company entered into an agreement Operating expenses are charged with the costs of labor, materials, supervision and other costs incurred in maintaining to sell undivided interests in designated pools of customer the properties. Property accounts are charged with costs of accounts receivable and accrued utility revenues, with limited betterments and major replacements of property, and the recourse, up to a maximum of $ 50,000,000 at any one time.

accumulated provisions for depreciation are charged with re- Undivided interests in new pools may be sold as collections tirements, together with removal costs less salvage. reduce previously sold interests. The agreement expires in Other property and investments are generally stated at cost. December 1993 and may be terminated at any time prior thereto. The Company received proceeds of $ 79,000,000 dur-Cash and Cash Equivalents ing the year. At December 31, 1988 approximately

$ 50,000,000 remains to be collected.

ln 1988, the Company and its subsidiaries implemented Statement of Financial Accounting Standards No. 95, "State-ment of Cash Flows" (SFAS 95) using the indirect method of presentation for cash flows from operating activities. For pur-poses of the consolidated statements of cash flows, the Com-pany and its subsidiaries consider cash, special deposits, working funds, and temporary cash investments as defined 13

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES

'ther The Company has a rate proceeding with the remaining In accordance with regulatory approvals, the Company rec- wholesale customers that includes, among other things, com-ognizes the gain or loss on reacquired debt in income in the pliance with the 10-year recovery period. A final order is year of reacquisition unless such debt is refinanced in which pending. In'the opinion of management, the ultimate reso-case the gain or loss is deferred and amortized over the term lution will not have a significant effect on results of operations.

of the replacement debt.

Rockport Plant Unit 2 Debt discount or premium and debt expenses are being amortized over the lives of the related debt issues, and the In January 1989, the Company and AEGCo signed a com-amortization thereof is included in other interest charges. mitment letter agreement to sell and leaseback their respective The Company is committed under a unit power agreement 50% interests in a1,300-megawatt unit they are constructing with AEP Generating Company (AEGCo), also an AEP subsid- at the Rockport Plant (Rockport 2). The Company and AEGCo iary, to puichase 70% of AEGCo's Rockport Plant capacity have expended $ 1.1 billion on Rockport 2 through December unless it is sold to unaffiliated utilities. 1988. This agreement calls for the Company and AEGCo to Certain prior-period amounts have been reclassified to con- sell their interests in Rockport 2 in late 1989, just prior to form to current-period presentation. commercial operation, and simultaneously for each company to lease a 50% interest in the unit for an initial term of 33

2. Hate Matters: years. The sales price will be the fair market value of Rockport 2, estimated to be $ 1.7 billion and the total cost of the unit Rockport Plant Unit 1 at the date of the sale is estimated to be $ 1.3 billion. The net The Company has phase-in plans in both its Indiana and gain from the sale will be deferred and amortized over the FERC jurisdictions for Unit 1 of the Rockport Plant (Rockport initial lease term. The leases are expected to be recorded as 1). Rockport1 is a1,300-megawatt generating unit that began operating leases.

commercial operation in December 1984 and is jointly owned In December 1988, the Company signed a unit power by the Company and AEGCo. At December 31, 1988 and1987, agreement with an unaffiliated utilityto supply 250 megawatts the Company had unamortized deferred returns of from Rockport 2 for a 20 year period expected to begin in 115,351,000 and $ 131,970,000, respectively, and un- January1990. It is expected that an additional 500 megawatts mortized deferred depreciation of $ 33,489,000 and of Rockport 2 capacity will be sold by the Company and AEGCo

$ 38,443,000, respectively which are being amortized on a to unaffiliated utilities under long-term unit power agree-straight-line basis through 1997. ments. Recovery of the costs of capacity not sold to unaffi-The Company has been engaged in state and Federal rate liated utilities and the timing of such recovery are subject to proceedings to modify its phase-in plans to comply with SFAS future regulatory proceedings.

92 "Regulated Enterprises Accounting for Phase-in The above transactions are subject to regulatory approval Plans." SFAS 92 allows the deferral of costs for future re- and other conditions.

covery under phase-in plans only if the phase-in plan has been approved by the regulator and provides for recovery of all costs deferred pursuant to the plan within 10 years of the initial deferrals. The commencement of the 10-year recovery period is delayed for plans in effect prior to 1988, if certain conditions are met.

In 1987, the Indiana Utility Regulatory Commission ap-proved an, amended phase-in plan to comply with SFAS 92.

In 1988, the FERC approved settlement agreements be-tween the Company and certain wholesale customers. The settlement agreements provide for, among other things, com-pliance with the 10-year recovery period as required by SFAS 92, the effect of the Tax Reform Act of 1986 and other cost of service issues, a net rate reduction of $ 2,800,000 annually effective prospectively and a one time refund.

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

3. Federal Income Taxes:

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

Year Ended December 31, 1988 1987 1986 (in thousands)

Charged (Credited) to Operating Expenses (net):

Current $ 11,865 $ 63,543 $ 44,340 Deferred 5,563 19,533 26,208 Deferred Investment Tax Credits 24,164 (7.703) 25,324 Total 41,592 75,373 95,872 Charged (Credited) to Other Income and Deductions (net):

Current 1,186 2,760 (7,414)

Deferred (2,402) (5,936) (1,989)

Deferred Investment Tax Credits (492) 3 4 Total (1.708) (3,173) (9,399)

Total Federal Income Taxes as Reported $ 39,884 $ 72,200 $ 86,473 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, 1988 1987 1986 (in thousands)

Net Income $ 151,805 $ 166,366 $ 152,481 Federal Income Taxes 39,884 72,200 86,473 Pre.tax Book Income $ 191,689 $ 238.566 $ 238,954 Federal Income Taxes on Pre.Tax Book Income at Statutory Rate (34% in 1988, 40% in 1987 and 46% in 1986)

Increase (Decrease) in Federal Income Taxes Resulting From the Following Items on Which Deferred Taxes Are Not Provided:

Excess of Book Over Tax Depreciation . 3,129 5,104 6,242 Allowance for Funds Used During Construction and Miscellaneous Items Capitalized on the Books but Deducted for Tax Purposes (12,079) (13,965) (15,529)

Deferred Return Rockport Plant 2,112 (5,447) (9,228)

Tax Exempt Income Nuclear Decommissioning Trust Funds . (4,066)

Other (7,429) (1,603) (1,152)

Investment Tax Credits (net) (6,957) (7,315) (3,779)

Total Federal Income Taxes as Reported . S 39,884 $ 72,200 S 86,473 Effective Federal Income Tax Rate 20.8% 30.3% 36.2%

15

INDIANA MICHIGANPOWER COMPANY AND SVBSIDIARIES The following are the principal components of Federal income taxes as reported:

Year Ended December 31 ~

I 1988 1987 1986

, (in thousands)

Current:

Federal Income Taxes . S 43,680 S65,918 S 68,308 investment Tax Credits (30,629) (a) 385 (31,382)

Total Current Federal Income Taxes . 13,051 66,303 36,926 Deferred:

Depreciation (liberalized, ADR and ACRS) 4,737 15,328 26,272 Allowance for Borrowed Funds Used During Construction and Miscellaneous Items Capitalized . 5,186 3,931 9,448 Unrecovered and Levelized Fuel (8,278) (9,327) (2,466)

Nuclear Decommissioning Costs 16,432 (b) (4,235) (4,820)

Spent Nuclear Fuel Fee (1,737) 251 (7,845)

Unbilled Revenue (4,202) (2,839) (4,247)

Deferred Return Rockport Plant (3,538) 5,315 9,818 Other (5.439) 5,173 (1,941)

Total Deferred Federal Income Taxes 3,161 13,597 24,219 Total Deferred Investment Tax Credits 23,672 (a) (7,700) 25,328 Total Federal Income Taxes as Reported S 39,884 S72,200 S 86,473 (a) Based on Internal Revenue Service regulations issued in 1988, the Company elected to claim investment tax credits on qualified progress expenditures on the 1987 tax return and amended tax returns for 1975 through 1986. The current and deferred tax effects recorded during 1988 represent the cumulative effect of this election as well as 1988 current year accruals.

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

The Company and its subsidiaries join in the filing of a the opinion of management, the final settlement of open years onsolidated Federal income tax return with their affiliated will not have a material effect on the earnings of the Company.

+ ompanies in the AEP System. The allocation of the AEP In December 1987, the Financial Accounting Standards System's consolidated Federal income tax to the System com- Board issued SFAS 96 "Accounting for Income Taxes" which panies is iri accordance with Securities and Exchange Com- requires that companies adopt the liability method of ac-mission (SEC) rules under the Public UtilityHolding Company counting for income taxes. SFAS 96 must be adopted by the Act of 1935. These rules permit the allocation of the benefit Company no later than January 1990 on a restated basis or of current tax losses to the System companies giving rise to as a cumulative effect of an accounting change in the year of such losses in determining taxes currently payable. The tax adoption. The Company has not yet determined if it will adopt loss of the System parent company, AEP, is allocated to its SFAS 96 on a restated or prospective basis.

subsidiaries with taxable income. With the exception of the When the new standard is adopted, total assets and lia-loss of tlie parent company, the method of allocation ap- bilities will increase significantly to reflect previously unre-proximates a separate return result for each company in the corded deferred tax assets and liabilities on temporary consolidated group. Consolidated investment tax credits uti- differences and related regulatory assets and liabilities. In lized are allocated to the System companies giving rise to addition', existing deferred taxes will be adjusted to the level them. required at the currently existing statutory tax rate. While the

.

At December 31, 1988, the cumulative net amount of in- computations are not yet completed, it is expected that a come tax timing differences on which deferred taxes have not significant portion of the required deferred income tax ad-been provided totaled $ 487,000,000. justments will be offset by regulatory assets and liabilities.

The System reached settlements with the Internal Revenue The effect of implementing the new standard on the Com-Service (IRS) for all issues from the audits of the consolidated pany's financial condition has not yet been determined.

Federal income tax returns for the years prior to 1983. Returns for the years 1983 and 1984 are being audited by the IRS. In

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

4. Supplementary Income Statement Information American Electric Power Service Corporation (AEPSC) pro-and Related-party Transactions: vides certain services to the Company and the affiliated com-panies in the AEP System. The costs of the services are Electric operating revenues shown in the Consolidated determined by the service company on a direct charge basis Statements of Income include sales of energy to REP System to the extent practicable and on reasonable bases of proration companies of approximately $ 34,000,000, $ 35,000,000, and for indirect costs. The charges for services are made on a

$ 33,000,000 for the years ended December 31, 1988, 1987 cost basis and include no compensation for the use of equity and 1986, respectively.

capital, all of which is furnished to the service company by Operating expenses shown in the Consolidated Statements AEP. The service company is subject to the regulation of the of Income include certain items not shown separately, as SEC under the Public Utility Holding Company Act of 1935.

follows:

Year Ended Oecember 31 ~

5. Common Stock and Other Paid-in Capital:

1988 1987 1986 (in thousands) The Company received a $ 10,000,000 cash capital contri-Purchased and Interchange bution from its parent in 1988. There were no other changes Power (net):

in either of the aforementioned accounts in 1988, 1987 or Purchased Power (a) ... $ 24,371 S 42,139 $ 170,047 1986.

Interchange Power (net):

AEP System Electric Utilities 24,190 ,62,991 10,720 Other Companies .... (1.058) (2.486) (147) 6. Retained Earnings:

Total .......... $ 47,503 $ 102.644 $ 180.620 Various restrictions on the use of the Company's retained Taxes Other Than Federal Income Taxes:

earnings for cash dividends on common stock and other pur-Real and Personal Property poses are contained in or result from covenants in mortgage Taxes ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ $ 32,339 $ 28,002 $ 27,795 indentures, debenture and bank loan agreements, charter State Gross Receipts, Excise and Franchise Taxes and provisions, and orders of regulatory authorities. Approxi-Miscellaneous State and mately $ 45,900,000 at December 31, 1988, was restricted.

Local Taxes .......... 12,361

',306 9,383 13,832 State Income Taxes .......

'......

4,913 4,121 Social Security Taxes 6.658 6,039 5.543 Total ............. $ 56,271 $46,730 $ 51,291 (a) Includes power purchased from Ohio Valley Electric Corporation of ap.

proximately $ 13,580,000 In 1988, S31,076,000 in 1987 and $ 39,378,000 in 1986. Also Includes power purchased from AEGco of approximately

$ 3,313,000 in 1988, $ 2,797,000 ln 1987 and $ 122,023,000 in 1986.

INDIANAMICHIGANPOWER COMI'ANY ANO SUBSIDIARIES

7. Cumulative Preferred Stock:

At December 31, 1988, authorized shares of cumulative preferred stock were as follows:

Par Value Shares Authorized

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

In 1987, the Company redeemed and cancelled the entire $ 3.63 Series consisting of 1,600,000 shares.

A. Cumulative Preferred Stock Not Subject To Mandatory Redemption:

Amount Shares December 31, Year-end Par Outstanding Series Call Price Value December 31 1988

~ 1988 1987 (in thousands) 4I/8% $ 106.125 $ 100 120,000 S 12,000 S 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 30,0M 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 B. Cumulative Preferred Stock Subject to Mandatory Redemption:

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

Series (a) Call Price Value 1988 1987 1986 December 31 1988

~ 1988 1987 (in thousands)

• 12% (b) $ 106 S1M 30,000 30,000 30,000 77,325 S 7,733 $ 10,733

$2.75 (c) 27.07 25 160,000 160,000 160,000 691,9M 17,297 21,297

$ 25,030 $ 32,030 (a) The sintdng fund provisions of the series subject to mandatory redemption aggregate $ 232,500 in 1990, $ 2,797,500 in 1991, $ 3,500,000 in 1992 and 1993.

Unless all sinking fund provisions have been met, no distribution may be made on the common stock.

(b) A sinking fund for the 12% series requires the Company to provide, on or before October 1 of each year, for the redemption of 15,000 shares of such series.

This provision may be satisfied through shares previously purchased or by redemption at $ 100 a share, The Company has the right, on each sinking fund date, to redeem an additional 15,000 shares. At December 31 1988, the Company had reacquired 27,675 shares in anticipation of future sinking fund requirements.

~

(c) A cumulative sinking fund for the $2.75 series requires the Company to redeem 80,000 shares on or before October 1, of each year. The Company has the option to credit shares purchased or otherwise acquired in lieu of redeeming shares for the sinking fund and has the noncumulative option to double the number of shares to be redeemed in any year. At December 31 1988, the Company had acquired 188,100 shares in anticipation of future sinking fund requirements.

~

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

8. Long-term Debt, Lines of Credit, and Unsecured promissory notes payable to banks have been Compensating Balances: entered into by the Company as follows:

December 31 ~

Long-term debt by major category was outstanding as 1988 1987 follows:

(in thousands)

$

December 31 9.02% due 1990 (a) S 25,000

~

1988 1987 9.10% due 1990 (a) 25,000 (in thousands) 9.12% due 1990 .. 20,000 20,000 First Mortgage Bonds Sinking Fund Debentures

......... $ 1,019,036 $ 1,092,684 9.18%

9.28%

due due 1990 1991

.. 20,000 40,000 20,000 40,000 7,648 7,813 Notes Payable to Banks 130,000 80,000 Total $ 130,000 $ 80,000 Installment Purchase Contracts... 307,732 307,511 Other Long. term Debt (a) ...... 110,804 103,760 (a) Interest rate is subject to adjustment on November 30, 1989.

1,575,220 1,591,768 Installment purchase contracts have been entered into by Less Portion Due Within One Year..... 11,500 52,031 Total the-Company in connection with the issuance of pollution

$ 1,563,720 $ 1.539.737 control revenue bonds by governmental authorities as follows:

(a) Nuclear Fuel Disposal Costs. See Note 11. December 31, First mortgage bonds outstanding were as follows: 1988 1987 December 31, (in thousands)

% Rate Due 1988 1987 City of Lawrenceburg, indiana:

(in thousands) 8>>/2 2006 July 1 $ 25,000 S 25,000

% Rate Oue 7 '2006 May 1 40,000 40,000 3r/>> 1988 February 1 ....... S 22,974 6r/>> 2006 May 1 12,000 12,000 43/>> 1988 November 1...... 17,557 City of Rockport, fndiana:

tt~/>> 1990 June1 ......... 16.000 9i/>> 2005 June 1 ...... 6,500 4'/>> 1993 August 1 ........ 42,902 42,902 9i/. 2010 June 1 ...... 33,500 7r/>> 1997

February 1 .....: . 50,000 50,000 9i/. 2014 August 1 ..... 50,000 9>>/>> 1997

July 1 75,000 75,000 7ih (a) 2014 August 1 ..... 50,000 7

8'/e 1998 2000 May 1 April 1 35,000 50,000 35,000 50,000 (b) 2014 August 1 ..... 50,000 City of Sullivan, Indiana:

9i/r 2003 June 1 (a) ....... 196,500 208,000 73/>> 2004 May I 7,000 7,000

~ Br/>> 2003 December 1 ...... 40,000 40,000 6r/>> 2006 May 1 25,000 25,000 9i/z 2008 March 1 ........ 100,000 100,000 7>>h 2009 May 1 13,000 13,000 13'/>> 2013 August 1 ........ 58,704 64,578 Unamortized Discount (4,268) (4,489) 9>>/>> 2015

October 1 ....... 100,000. 100,000 Total $ 307.732 S307,511=

9>>/>> 2016 July 1 100,000 100,000 83/>> 2017

February 1....... 100,000 100,000 (a) Adjustable interest rate will change August 1 1990 and every five years 10i/>> 2017 May 1 75,000 75,000

~

Unamortized Discount (net) ......... (4,070) (4.327) thereafter.

(b) Variable interest rate is determined weekly. The average weighted interest 1,019,036 1,092,684 was 5.9% for 1988 and 5.5% for 1987.

Less Portion Due Within One Year 11,500 52,031 Under the terms of certain installment purchase contracts, Total $ 1,007,536 $ 1,040,653 the Company is required to pay purchase price installments (a) The 9'I~% series due 2003 requires sinking fund payments of in amounts sufficient to enable the cities to pay interest on

$ 11,500,000 annually on June 1, through 1991 and $ 13,500,000 annually on and the principal (at stated maturities and upon mandatory June 1, 1992 through 2002 with the noncumulative option to redeem an ad-ditional amount in each of the specified years from a minimum of S100,000 to redemption) of related pollution control revenue bonds issued a maximum equal to the scheduled requirement for each year, but with a, to finance the construction of pollution control facilities at maximum optional redemption, as to all years in the aggregate, of $ 75,000,000.

certain generating plants of the Company. On certain series The indentures relating to the first mortgage bonds contain the principal will be payable at stated maturities or on the improvement, maintenance and replacement provisions re- demand of the bondholders at periodic interest adjustment quiring the deposit of cash or bonds with the trustee, or in dates.

lieu thereof, certification of unfunded property additions. Certain series are supported by letters of credit from a bank The sinking fund debentures are due May 1, 1998 at an which expire in 1990 and 1992.

interest rate of 7t/4%. At December 31, 1988 and 1987, the Portions of the proceeds of the installment purchase con-principal amounts of debentures reacquired in anticipation of tracts are deposited with trustees and may be used only for sinking fund requirements were $ 2,552,000 and S2,687,000, specified construction expenditures. These funds are shown respectively. In addition to the sinking fund requirements the on the balance sheets as special deposits restricted Company may call additional debentures of up to S300,000 funds.'9 annually.

INDIANA MICHIGANPOWER COMPANY AND SVBSIDIARIES Long-term debt, excluding premium or discount, outstand- The following is an analysis of properties under capital ng at December 31, 1988 is due as follows: leases and related obligations:

Principal Amount December 31 ~

(in thousands) 1988 1987 1990....,

1989 1991 1992

........................ $ 11,5M 101,500 51,500 13,500 Electric Utility Plant:

Production Distribution S

(in thousands) 8,358 14,603 S 8,406 14,603 1993...................... 56,402 General:

Later Years,................ 1.349,156 Nuclear Fuel (net of amortization) ....... 131,970 Total Other 35,541

$ 1,583.558 Total Electric Utility Plant........... 190,472 The Company had unused short-term bank lines of credit Accumulated Provisions for Amortization 23,355 of approximately $ 292,000,000 and $ 285,000,000 at Net Electric Utility Plant 167,117 December 31, 1988 and 1987, respectively, under which Other Property . 17,134 Accumulated Provisions for notes could be issued with no maturity more than 270 days. Amortization 16,331 17,065 Available lines of credit are subject to withdrawal at the Net Other Property ....,........... 803 2,297

....

banks'ptions and such lines are shared with other AEP System Net Properties under Capital Leases $ 167,920 $ 170,830 companies. In accordance with informal agreements with the banks, compensating balance deposits of up to 10% or equiv-Obligations under Capital Leases (a) .... $ 167,920 $ 170,830 alent fees are retluired to maintain the lines of credit. Sub- (a) including an estimated $ 43,037,000 and $ 43,856,000 at December 31, stantially all bank balances are maintained by the Company 1988 and 1987, respectively, due within one year.

to compensate the banks for services and for the Company's Payments made under capital leases include S49,014,000, share of both used and available lines of credit.

$ 55,557,000 and $ 61,409,000 of amortization expense for the years ended December 31, 1988, 1987 and 1986,

9. Leases: respectively.

The Company and its subsidiaries, as part of their opera- Future minimum lease payments, by year and in the ag-tions, lease property, plant and equipment for periods up to gregate, for capital leases and noncancelable operating leases 35 years. Most of the leases require the payment of related of the Company and its subsidiaries consisted of the following property taxes, maintenance costs and other costs of oper- at December 31, 1988:

ation. The Company and its subsidiaries expect that, in the Capital Operating

~leases a) Leases normal course of business, leases generally will be renewed (in thousands) or replaced by other leases. The majority of the leases have 1989 S 8,000 S 20,000 purchase options or renewal options for substantially all of 1990 6,000 20,000 the economic lives of the properties. 1991 5,000 19,000 1992 4,MO 16,000 1993 4,000 15,000 Later Years 39 000 170 000 Total Future Minimum Lease Payments 66,000 $ 260.000 Less Estimated Interest Element Included Therein 30,000 Estimated Present Vatue of Future Minimum Lease Payments ... $ 36,000 (a) Minimum payments do not indude leases of nudear fuel. Nuctear fuel rentals comprise the unamortized balance of the lessor's cost (approximately

$ 131,970,000) less salvage value, if any, to be paid in proportion to heat produced and carrying charges on the lessor's unrecovered costs. It Is con-templated that portions of the presently leased material will be replenished by additional leased material. Nudear fuel rentals of SS2,568,000, $ 58,670,000 and $ 6S,301,000 were charged to fuel for electrfc generation in 1988, 1987 and 1986, respectively.

Included in the above analysis of future minimum lease payments and'of properties under capital leases and related 20

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) obligations are certain leases in which portions of the related 11 ~ Commitments and Contingencies:

rentals are paid for or reimbursed by associated companies Construction in the AEP System based on their usage of the leased property.

The Company and its subsidiaries cannot predict the extent The constructio(t budget of the Company and its subsidi-to which or proportion in which the associated companies aries for the years 1989-1991 is estimated at $ 457,000,000, will utilize the properties under such leases in the future. and, in connection therewith, commitments have been made.

Rentals for all operating leases are classified approximately as follows: Litigation Year Ended December 31 ~

The Company and AEPSC have been involved in litigation 1988 1987 1986 with Terre Haute Industries, Inc. (THI) over a contract for (in thousands) construction of an electrostatic precipitator at the Breed Plant.

Operating Expenses $ 11,000 $ 11,000 $ 10,000 In July 1988, the Supreme Court of Indiana denied a petition Clearing and Miscellaneous for an appeal of a decision by the Court of Appeals of Indiana Accounts (portions ol which are charged to income) 6,000 5.000 7.000 regarding an award for damages. The Court of Appeals of Total , $ 17,000 $ 16.000 $ 17,000 Indiana had reversed part of a lower court decision by re-ducing a $ 4,934,000 award for compensatory damages and In January 1989, the Company signed a commitment letter dropping a $ 12,000,000 award for punitive damages. The agreement to sell and leaseback Rockport 2 as discussed in Company recorded a liability in 1983, including interest, for Note 2. the compensatory damages. The Company intended to satisfy the reduced judgement for compensatory damages by making payment to THI; however, THI has refused to accept payment

10. Pension Plan: and requested a rehearing with the Indiana Supreme Court.

The Company and its subsidiaries participate with other The matter is pending. In the opinion of management the companies in the AEP System in a trusteed, noncontributory ultimate resolution of this matter should not have a significant defined benefit plan to provide pensions, subject to certain effect on the earnings of the Company.

eligibility requirements, for all their employees. Plan benefits Environmental Matters are determined by a formula which considers each partici-pant's highest average earnings, years of accredited service The Company and its subsidiaries are subject to regulation and social security benefits. Pension costs for the plan are by Federal, state and local authorities with respect to air- and allocated to each System company on the basis of each com- water-quality control and other environmental matters, and pany's share of the total System projected benefit obligation. are subject to zoning and other regulation by local authorities.

The Company and its subsidiaries'unding policy is to make Although the cumulative, long-term effect of changing annual contributions to the plan equal to the amounts de- environmental requirements upon the Company and its sub-ductible for Federal income tax purposes. sidiaries cannot be estimated at present, compliance with Net pension cost of the defined benefit plan for the years such requirements may make it necessary, at costs which ended December 31, 1988 and 1987 was approximately may be substantial, to retrofit existing facilities with additional

$ 397,000 and $ 161,000, respectively. In 1986 the Company air-pollution-control equipment; to change fuel supplies to and its subsidiaries recorded no pension cost. lower sulfur content coal; to construct cooling towers or some In addition to providing pension benefits, the Company and other closed-cycle cooling systems; to undertake new meas-its subsidiaries provide certain health care benefits for retired ures in connection with the storage, transportation and dis-employees. Substantially all of the Company and its subsi- posal of by-products and wastes; to curtail or cease diaries'.employees may become eligible for these benefits if operations at existing facilities, and to delay the commercial they have completed 10 years of continuous service at re- operation of, or make design changes with respect to, facil-tirement. The cost of retiree health care benefits is recognized ities under construction.

as expense when paid. In 1988, 1987 and 1986, the cost of current retiree health care benefits totaled $ 1,758,000,

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

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Legislative proposals are pending before the U.S. Congress Nuclear Insurance at expressly seek to control acid deposition. If any of these The Company is subject to the Price-Anderson Act which ills become law, significant reductions in the emission of limits the public liability of a licensee of a nuclear plant for a sulfur dioxide and nitrogen oxide from various existing Com- single nuclear incident to the amount of primary liability in-pany generating plants could be required. These reductions surance available from private sources and an industry ret-would entail very substantial capital and operating costs that, rospective deferred premium assessment plan. The Company in turn, could necessitate substantial rate increases by the maintains the maximum private insurance available of Company. In addition, a number of states and environmental $ 200,000,000 for its two-unit Donald C. Cook Nuclear Plant organizations have pending in the courts proceedings under (Cook Plant). Amendments to the Price-Anderson Act, effec-the Clean Air Act seeking reductions in the emission of sulfur tive August 1988, increased the limits of public liability to dioxide in certain midwestern states. $ 7,608,800,000 based on 112 reactors currently being sub-Further, the U.S. Environmental Protection Agency is con- ject to the Act. The maximum standard deferred premium that sidering a number of significant policy changes in its rules the Company may be assessed, in the event of a nuclear governing sulfur dioxide emissions. Adoption of any of the incident at any licensed nuclear power plant in the United contemplated policy changes could require substantial ex- States, is $ 63,000,000 per reactor, but an assessment may penditures to accomplish reductions in sulfur dioxide emis- not exceed $ 10,000,000 in any one year. If public liability sions from the Company's coal-fired generating plants. claims and authorized legal costs exceed the amount of lia-bility insurance and deferred premiums, a licensee must pay Transmission Equalization Agreement a surcharge of up to 5 percent of the standard deferred pre-The Company participates with other AEP System com- mium for such claims and costs. Thus, if damages in excess panies in a transmission equalization agreement. This agree- of private insurance result from a nuclear incident, the Com-ment pools certain AEP System companies'nvestments in pany could be assessed its pro rata share of the liability up transmission facilities and shares among the parties the costs to a maximum of $ 126,000,000 for its two reactors, in annual of ownership in proportion to the parties'espective demand installments of $ 20,000,000, plus $ 6,300,000 for excess atios. The FERC had permitted the agreement to be imple- claims and costs. There is no limit on the number of incidents ented, effective January1985, subject to refund. The agree- for which the Company could be assessed these sums.

ment as filed provided for the companies to pool their The Company also has property insurance for damage to investments in extra-high voltage facilities (345 kv and above) the Cook Plant facilities in the amount of $ 1.7 billion. The and to phase in the equalization of costs over the period1985- primary layer of $ 500,000,000 is provided through nuclear 1989. insurance pools. The excess coverage above $ 500,000,000 In December1988, the FERC issued a final order approving is provided through insurance pools ($ 400,000,000) and Nu-the agreement with certain modifications that require, among clear Electric Insurance Limited (NEIL). NEIL's excess prop-other things, the companies to pool their investments in all erty insurance program provides $ 825,000,000 in coverage.

high voltage transmission facilities (138 kv and above) and The maximum assessment under this program could be to eliminate the phase-in feature. Both of these changes be- $ 9,200,000 (seven and one-half times the annual premium came effective prospectively in August 1988. on a 100% coverage basis).

Pursuant to the terms of the agreement, the Company re-corded credits of $ 36,996,000, $ 26,025,000 and

$ 10,672,000 for transmission services in other operation ex-pense for the years ended December 31, 1988, 1987 and 1986, respectively.

22

0 NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Concluded)

NEIL's extra-expense program provides insurance to cover to the fund a fee of one mill per kilowatthour, which th extra costs of replacement power resulting from a prolonged Company is currently recovering from its customers. In June accidental outage of a nuclear unit. The Company's policy 1983, the Company entered into a contract with DOE for the insures against such increased costs up to approximately disposal of spent nuclear fuel. Under terms of the contract

$ 2,350,000 per week (starting 21 weeks after the outage) for the Company must pay over a period of 10 years to the U.S.

one year and $ 1,175,000 per week for the second year, or Treasury a fee estimated at approximately $ 71,964,000, ex-80% of those amounts per unit if both units are down for the clusive of interest, for the disposal of nuclear fuel consumed same reason. The Company would be subject to a retrospec- prior to April 7, 1983. The Company has deferred this amount tive premium of up to $ 8,154,000 (five times annual pre- plus accrued interest on its balance sheet and has received mium) if NEIL's losses exceeded its accumulated funds. regulatory approval for the recovery of this amount and is Some potential losses or liabilities may not be insurable or amortizing the amount deferred as it is being recovered.

the amount of insurance carried may not be sufficient to meet An independent consulting firm employed by the Company potential losses and liabilities, including liabilities relating to has estimated that the cost of decommissioning the Cook damage to the Cook Plant and costs of replacement power in Plant could range from $ 284,000,000 to $ 321,000,000 in the event of a nuclear incident at the Cook Plant. Future losses 1986 dollars. The Company has received regulatory approval or liabilities which are not completely insured, unless allowed in each of its jurisdictions for the recovery of nuclear decom-to be recovered through rates, could have a material adverse missioning costs associated with the Cook Plant. The Com-effect on the financial condition of the Company. pany intends to reevaluate periodically amounts collected for such costs and to seek regulatory approval to revise such Disposal of Spent Nuclear Fuel amounts as necessary.

and Nuclear Decommissioning Funds recovered through the rate-making process for dis-The Nuclear Waste Policy Act establishes Federal respon- posal of spent nuclear fuel consumed prior to April 7, 1983 sibility for the permanent disposal of spent nuclear fuel. Dis- and for nuclear decommissioning have been deposited in ex-posal costs are paid by fees assessed against owners of ternal funds for the future payment of such costs.

nuclear plants and deposited into the Nuclear Waste Fund created by the Act. For the disposal of nuclear fuel consumed after April 6, 1983 by the Cook Plant, the Company must pay

12. Unaudited Quarterly Financial Inforrnatlo:

The following consolidated quarterly financial information is unaudited but, in the opinion of the Company, includes all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the amounts shown:

Quarterly Periods Operating Operating Net Quarterly Periods Operating Operating Net Ended Revenues Income Income Ended Revenues Income Income (in thousands) Rn Ihousnndsh 1988 1987 March 31 $ 243,617 $ 66,340 $ 46,498 March 31 $ 253,638 $ 59,738 $ 47,390 June 30 224,026 48167 28,871 June 30 241,653 48,999 37,989 September 30.... 266,690 58,860 39,848 September 30..... 283,944 52,881 38,914 December 31 .... 248,733 42,076 '6,588 December 31 238,033 61,428 42,073 23

INDIANAMICHIGANPOWER COMPANY AND SUBSIDIARIES Independent Auditors'eport 08IOitt8 H8Ski8S+38 lS 155 East Broad Street Cotumt<us, Ohio 432153650 (614) 221 ~ 1000 ITT Te/ex: 4995627 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, 1988 and 1987 and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1988.

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 reas'onable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Indiana Michigan Power Company and its subsidiaries at December 31, 1988 and 1987 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1988 in conformity with generally accepted accounting principles.

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February 21, 1989-24

e, c Operating Statistics 1988 1987 1986 1985 ELEGTRIG OPERATING REYENUEs (in thousands):

From Kilowatt-hour Sales:

Retail:

Residential:

Without Electric Heating ........... $ 189,845 $ 186,418 $ 174,550 175,534 $ 150,334 With Electric Heating 96,145 90,261 90,881 90,949 82,739 Total Residential 285,990 276,679 265,431 266,483 233,073 Commercial . 194,982 191,352 184,276 181,240 150,733 Industrial 233)855 235,470 219,344 213,161 173,986 Miscellaneous 11,645 11,533 11,171 11,234 9,666 Total Retail . ?26,4?2 715,034 680,222 672,118 567,458 Wholesale (sales for resale) ............ 248,283 293,379 400,779 396,980 414,390 Total from Kilowatt-hour Sales .... 974,?55 1,008,413 1,081,001 1,069,098 981,848 Provision for Revenue Refunds ......... ~1,800) 541 ~105) ~12,494 Total Net of Provision for Revenue Refunds ............ 972,955 1,008,413 1,081,542 1,068,993 969,354 Other Operating Revenues 10,111 8,855 9,753 9,800 10,197 Total Electric Operating Revenues . $ 983,066 $ 1,017,268 $ 1,091,295 $ 1,078,793 $ 979,551 I

SOURCES AND SALES OF ENERGY (in millions of kilowatt-hours):

Sources:

Net Generated Steam:

Fossil Fuel 8,?0? 6,662 8,187 7,933 7,071 Nuclear Fuel 9,?91 10,060 10,986 7,800 12,913 Net Generated Hydroelectric ... ?0 62 79 74 68 Subtotal 18,568 16,784 19,252 15,807 20,052 Purchased . 1,?00 2,558 4,941 3,248 4;913 Net Interchange ?3? 1,947 542 4,948 1,353 Total Sources ... 21,005 21,289 24,735 24,003 26,318 Less: Losses, Company Use, Etc.. 1,630 1,456 1,645 1,542 1,508 Net Sources 19,3?5 19,833 23,090 22,461 24,810 Sales:

Retail:

, Residential:

Without Electric Heating . 2,825 2,719 2;536 2,557 2,534 With Electric Heating ... 1,5?1 1,445 1,442 1,481 1,561 Total Residential 4,396 4,164 3,978 4,038 4,095 Commercial . 3,290 3,142 3,007 2,968 2,870 Industrial 5,036 4,834 4,371 4,282 4,201 Miscellaneous 228 221 212 216 209 Total Retail . 12,950 12,361 11,568 11,504 11,375 Wholesale (sales for resale) .. 6,425 7,472 11,522 10,957 13,435 Total Sales 19,3?5 19,833 23,090 22,461 25

INDIANA MICHIGANPOWER COMPANY AND SVBSIDIARIES PERATING STATISTICS (Concluded) 1988 1987 1986 1985 1984 AYERAGE CosT 0F FUEL C0NsUMED (in cents):

Per Million Btu:

Coal . 182 190 185 194 189 Nuclear . 70 75 74 80 65 Ov'e rail 120 117 118 136 103 Per Kilowatt-hour Generated:

Coal . 1.81 1.87 1.82 1.97 1.83 Nuclear . .77 .84 .83 .86 .70 Overall 1.26 1.25 1.25 1.42 1.08 REBIDENTIAL SERYICE AYERAGEs:

Annual Kwh Use per Customer:

Total . 10,596 10,146 9,813 10,050 10,249 With Electric Heating . 18,551 17,341 17,716 18,486 19,771 Annual Electric Bill:

Total . $ 689.33 $ 674.13 $ 654.88 $ 663.18 $ 583.35 With Electric Heating .. $ 1,135.46 $ 1,083.10 $ 1,116.86 $ 1,135.42 $ 1,048.27 Price per Kwh (in cents):

Total . 6.51 6.64 6.67 6.60 5.69 With Electric Heating . 6.12 6.25 6.30 6.14 5.30 NUMBER OF ELECTRIC CUSTOMERS:

Year-End:

Retail:

Residential:

Without Electric Heating .... 332,488 328,937 325,623 322,922 321,286 With Electric Heating ...... 85,635 84.442 82,324 80,734 79,823 Total Residential 418,123 413,379 407,947 403,656 401,109 Commercial 45,249 44,207 43,689 43,017 42,912 Industrial 4,479 4,345 3,882 3,701 3,415 Miscellaneous . 1,984 1,946 1,846 1,852 1,584 Total Retail 469,835 463,877 457,364 452,226 449,020 Wholesale (sales for resale) ..... 108 105 106 104 105 Total Electric Customers .. 469,943 463,982 457,470 452,330 449,125 26

INDIANAMICHIGANPOWER COMPANVQ,'ividends and Price Ranges of Cumulative Preferred Stock By Quafters (1988 and 1987) 1988 Quarters 1987 Quarters 1st 2nd 3rd 4th 1st 2nd 3rd Cumulative Preferred Stock

($ 100 Par Value) 4~/s% 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 43'/s 43 Low 41z/s 41'/z 4.56% Series Dividends Paid Per Share $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 S1.14 $ 1.14 Market Price S Per Share (OTC)

Ask (high/low)

Bid (high/low) 4,12% Series Dividends Paid Per Share $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 Market Price $ Per Share (OTC)

Ask (high/low)

Bid (highflow) 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 S Per Share (NYSE) .High 77/s 70l>> 70'I>> 71 I>> 88 84'/>> 75'/>> 71 Low 68s/s 68'/s 67'/z 67'/>> 79 70'/s "

67'/s 61s/s 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 81 /s 77/s 77'/>> 78/s 96'/z 93'/ 82M 76 Low 75 74'/>> 73'/>> 73 85'/s 80 72s/>> 65 8.68% Series Dividends Paid Per Share $ 2.17 $ 2.17 S2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 $ 2.17 Market Price S Per Share (NYSE) High 91s/s 86'/z 85'/>> 87'/z 104'/s 102 90'/s Low 82'lz 82'/z 80'/z 81 99'/>>, 90'/z 87 85'/z'9'/s 12% Series Dividends Paid Per Share $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00 S3.00 $ 3.00 $ 3.00 Market Price $ Per Share (NYSE) High 107 107'/z 106 108'/z 10SV~ 108 107'/z 107s/s Low 101 '/>> 103'/z 102'/z 103 103 104 103 101'/>>

($ 25 Par Value)

$ 2.15 Series Dividends Paid Per Share $ 0.5375 $ 0.5375 $ 0.5375 $ 0.5375 '0.5375 $ 0.5375 $ 0.5375 $ 0.5375 Market Price $ Per Share (NYSE) High 25 25 23'/z 22'/s 26'ls 25'/>> 23'I>> 22'/s Low 22 23'/s 21'/>> 21'/z 24 21'/z 19'/s 18'/z S2.25 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'ls 24'/>> 24 23'/>> 27 26'/s 26 24 Low 22 22'/z 22'/>> 21z/s 24'/>> 23'lz 20'/z 20

$ 2.75 Series Dividends Paid Per Share $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 $ 0.6875 Market Price $ Per Share (NYSE) High 27'/z 27s/s 27 271/2 27'/>> 26'/>> 26'/z 27 Low 26'/z -

26'I>> 26'/>> 26'/z 26'/>> 26 25'/s 25

$ 3.63 Series (a)

Dividends Paid Per Share $ 0.9075 Market Price $ Per Share (NYSE) High 31 Low 27'/>>

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 April 1987.

27

The Company's Annual Report (Form 10-K) to the Securities and Exchange Commission will be available on or about March 31, 1989 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 nsfer Agent and Registrar of Cumulative Preferred Stock Morgan Shareholder Services Trust Company 30 West Broadway, New York, N.Y. 10007-2192

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Leko Mlc big en MICHIGAN OHIO INDIANA WEST VIRGINIA VIRGINIA KENTUCKY LEGEND indiana Michigan Power Co. Area Other AEP operating TENNESSEE companies'reas Q MaJor power plant

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ENCJ OSURE 2 TO AEP: NRC: 0909E 1989 Internal Cash Flow Projection for Donald C. Cook Nuclear Plant (5 Millions)

Actual Projected 1988 1989 Net income after taxes 151.8 134

. Less dividends paid 135.9 138 Retained earnings 15.9 ( 4)

Adjustments:

Depreciation and amortization 146.3 152 Deferred income taxes and investment tax credits 26.8 (13)

AFUDC (57.2) (55)

Total adjustments 115.9 84 Internal cash flow 131.8 80 Average quarterly cash flow 32.6 20 Average cash balances and short-term investments 10.5 15 Total 43.1 35 8 Ownership in all operating nuclear units: Unit 1 and Unit 2 100%

Maximum Total Contingent Liability $ 20.0 million (2 units)

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