ML17334B304

1988 Annual Rept. W/890410 Ltr

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

Text

<4cELERaTED DlUBUTloN DEMOwsTB10K 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: 3 R TXTLE: 50.71(b)Annual Financial Report D NOTES: S RECIPIENT ID.CODE/NAME PD3-1 PD COPIES LTTR ENCL 1 1 RECIPIENT ID CODE/NAME STANG,J COPIES LTTR ENCL 1 0 INTERNAL: AEOD/DOA EXTERNAL LPDR 01 1 1 1 1 1 1 AEOD/DSP/TPAB NRC PDR 1 1 1 1 R NOIR'IO ALL"RIDS" RECXPXENZS:

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 A.B.Davis-Region III p$gK O5OOO'=.PDI..

ENCLOSURE 1 TO AEP:NRC:0909E INDIANA MICHIGAN POWER COMPANY'S 1988 ANNUAL REPORT C Cg, ENCLOSURE 2 TO AEP:NRC:0909E

'0 1989 Internal Cash Flow Projection for Donald C.Cook Nuclear Plant (5 Millions)Projected 1989 Actual 1988 Net income after taxes Less dividends paid Retained earnings Adjustments:

Depreciation and amortization Deferred income taxes and investment tax credits AFUDC Total adjustments Internal cash flow Average quarterly cash flow Average cash balances and short-term investments 151.8 135.9 15.9 146.3 26.8 (57.2)115.9 131.8 32.6 10.5 134 138 (4)152 (13)" (55)84 80 20 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)

<E h r.G diana Michigan Power Company!8P0419'0328 881231 PDR ADOCK 05000315',, I PDR Contents 4(~~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 Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Retained Earnings Notes to Consolidated Financial Statements Independent Auditors'eport Operating Statistics Dividends and Price Ranges of Cumulative Preferred Stock 5-7 9-10 12 13-23 24 25-26 27 INDIANA MICHIGAN POWER 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)W.A.BLACK RICHARD E.DISBROW JOHN E.DOLAN (b)WILLIAM N.D'ONOFRIO A.R.GtASSBURN M.R.HARRELL (a)GERALD P.MALONEY RICHARD C.MENGE R.E.PRATER (C)JOSEPH H.VIPPERMAN W.E.WALTERS (C)W.S.WHITE, JR.DAVID H.WILLIAMS, JR.(d)Officers W.S.WHITE, JR.Chairman of the Board and Chief Executive Officer W.A.BLACK President and Chief Operating Officer RICHARD C.MENGE (e)Senior Vice President MILTON P.ALEXICH Vice President RICHARD E.DISBROW Vice President JOHN E.DOLAN (b)Vice President WILLIAM N.D'ONOFRIO Vice President A.JOSEPH DOWD Vice President RICHARD F.HERING Vice President GERALD P.MALONEY Vice President JOSEPH H.VIPPERMAN Vice President DAVID H.WiLLIAMS, JR.(d)Vice President PETER J.DEMARIA Treasurer JOHN F.DILORENZO, JR.Secretary EUO BAFILE Assistant Secretary and Assistant Treasurer JEFFREY D.CROSS Assistant Secretary CARL J.MOOS Assistant Secretary JOHN B.SHINNOCK Assistant Secretary JOAN ST.JAMES (t)Assistant Secretary LEONARD V.ASSANTE Assistant Treasurer BRUCE M.BARBER Assistant Treasurer JAMES D.HUEBNER (g)Assistant Treasurer GERALD R.KNORR Assistant Treasurer 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 (e)Elected March 1, 1988 (I)Resigned January 1~1989 (g)Resigned February 1, 1989 INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES Selected Consolidated Financial Data Year Ended December 31, 1988 1987 1986 (in thousands) 1985 1984 INCOME STATEMENTS DATA'PERATING REVENUES-ELECTRIC.......TOTAL OPERATING EXPENSES OPERATING INCOME TOTAL OTHER INCOME AND DEDUCTIONS

....INCOME BEFORE INTEREST CHARGES.......NET INTEREST CHARGES NET INCOME PREFERRED STOCK DIVIDEND REQUIREMENTS

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

.NET ELECTRIC UTILITY PLANT TOTAL, ASSETS...........

~~~~~~~~~~~~COMMON STOCK AND OTHER PAID.IN CAPITAL..RETAINED EARNINGS TQTAL CDMMDN SHAREDWNER's EQUITY......CUMULATIVE PREFERRED STOCK'.NOT SUBJECT TO MANDATORY REDEMPTION SUBJEGT To MANDATDRY REDEMPTI0N (a)L0NG-TERM DEBT (a)(a)Including portion due within one year.1,218,060 1,118,254 3,193,211 3,035,027 3,993,046 3,956,563 1,018,455 962,670 868,192 2,961,367 3,849,208 3,144,856 3,763,595 3,072,814 3,658,647 838,347 161,443 828,347 145,302 828,347 113,123 828,347 100,130 828,344 94,317 999,790 973,649 941,470 928,477 922,661 197,000 25,030 1,575,220 197,000 32,030 1,591,768 197,000 79,030 1,421,523 197,000 86,030 1,442,070 197,000 93,197 1,347,623$4,411,271$4,153,281$3,979,822$4,107,526$3,941,006 Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Net Income Net income decreased by 9%in 1988 following a 9%in-crease in 1987.The decrease in 1988 resulted primarily from the negative effect of the loss in 1987 of a major wholesale customer.This was partially offset by the tax effect of costs associated with nuclear decommissioning trust funds, a non-recurring charge in 1987 relating to wholesale power trans-actions, which is reflected in other income and deductions, and an increase in total allowance for funds used during con-struction.

The 1987 increase resulted mostly from an increase in operating income which was partially offset by a decrease in other income and deductions and an increase in total in-terest charges.Outlook Wholesale Customers The Company lost one major wholesale customer in 1987 and received notice from another to terminate service.In the first instance the Company had a long-term contract that ex-pired on Oecember 31, 1987 to provide 400,000 kilowatts of energy (200,000 kilowatts after February 1, 1987)to an un-affiliated utility.This contract contributed approximately 7%and 12%of the Company's total operating revenues and 19%and 37%of the Company's earnings applicable to common stock before any pro forma adjustment for AEP System in-tercompany transactions in 1987 and 1986, respectively.

In the second situation a wholesale customer notified the Company in 1987 that it planned to terminate purchasing energy from the Company and requested transmission wheel-ing arrangements with the Company effective August1, 1988.However, the existing contract was extended for one year and the Company entered into an agreement for transmission wheeling service and partial load requirements for this whole-sale customer effective August 1, 1989.Service by the Com-pany to this customer was at an average level of 180,000 kilowatts in 1988, 170,000 kilowatts in 1987 and 162,000 kilowatts in 1986 and contributed approximately 5%, 4%and 3%of the Company's total operating revenues and 16%, 12%and 11%of the Company's earnings applicable to common stock before any pro forma adjustment for AEP System in-tercompany transactions in 1988, 1987 and 1986, respec-tively.If this contract did not exist, the Company would have been required to make payments in a lesser amount, or al-ternatively been entitled to more receipts, due to operation of the AEP System Pool.After pro forma adjustment for AEP System intercompany transactions, the aggregate contribu-tion of this contract would have been approximately11%, 8%and 8%of the Company's earnings applicable to common stock in 1988, 1987 and 1986, respectively.

Regulatory Environment The electric utility industry operates in a regulatory envi-ronment that makes it difficult to predict whether new plant additions will be fully included in rate base upon their dedi-cation to public service.This is of concern to the Company since it has under construction Rockport Plant Unit 2 (Rock-port 2)which is expected to be completed in late 1989.See"Rockport Plant Unit 2" in Note 2 of the Notes to Consolidated Financial Statements.

E conomy The economy of the Company's service territory has re-covered from the recession of 1982.Industrial production is up reflecting a new competitiveness not only within the United States but also in the global marketplace.

Economic growth is expected to continue for a period of time.However, the long-term economic well-being of the region is subject to the effects of recession, inflation, foreign currency fluctuations and other influences, which could adversely impact the future results of operations of the Company.Acid Rain Legislation The Company consumed over 4 million tons of coal in 1988 to generate nearly 9 billion kilowatthours of electricity.

Pro-posals are being considered by Congress that would plac severe environmental restrictions on emissions from co burned to produce electricity.

These"acid rain" proposals could require the Company to make substantial capital in-vestments and to incur substantial increased operating costs in order to comply.The impact on the Company's financial condition is dependent upon passage of final legislation and future rate-making treatment.

Deregulation In 1988, the Federal Energy Regulatory Commission pro-posed rules that would effectively deregulate the generation of electricity for certain power producers.

These proposals if adopted as issued would radically alter the electric utility in-dustry.The proposed rules would create a new class of power producers exempt from most forms of rate regulation that.could enter or leave the market as their interests and financial conditions dictate.The Company like all electric utilities is obligated to provide its customers with all of their power needs.If utilities become agents that cannot manage their power supply then, in the Company's view, reliability would be impaired.Since reliability of electric service is of para-mount importance under an obligation to serve, the Company has opposed the proposed rules.If these or other rules con-cerning deregulation are adopted, the long-term effect on the financial condition of the Company is indeterminable.

INDIANA MICHIGAN POWER COMPANY ANO SIJBSIDIARIES perating Revenues and Energy Sales Operating revenues decreased 3%in 1988 compared to a 7%decrease in1987.The decrease in1988 revenues resulted primarily from a decrease in wholesale sales partially offset by the record level of kwh sales to retail customers.

The 1987 decrease came mostly because of a 14%decrease in overall sales of electric energy.The elements that gave rise to changes in operating revenues are summarized below.Revenues from wholesale customers decreased 15%dur-ing 1988 on a 14%decrease, in kwh sales, following a 27%decrease in revenues in 1987 on a 35%decrease in kwh sales.The decreases in kwh sales in both years were mostly caused by the expiration of a long-term contract with a wholesale customer (discussed previously).

In 1987, however the im-pact of lower kwh sales was offset partially by an increase in the average wholesale realization as the Company pursued sales with higher profit margins.The 1987 decline in energy sales was also caused by an increase in available energy supply from unaffiliated generating capacity that had been out of service for an extended time and the addition of new gen-erating units by unaffiliated utilities.

Revenues from retail customers (residential, commercial and industrial) increased 2%in 1988 after a 5%increase in 1987.The higher revenues in 1988 were attributable to the.cord level of kwh sales (13 billion kwh).The continued onomic improvement in the Company's service area cou-led with hot summer weather led to the record level of kwh sales to all retail customer classes.The effect on revenues of the higher kwh sales level was largely offset by a reduction in rates as lower Federal income taxes and average fuel costs were passed on to customers.

The increase in 1987 revenues reflected a 7%increase in kwh sales and improvement in revenues from each customer class.Operating Expenses Total operating expenses decreased 3%after a 12%de-crease in 1987.The components of operating expenses that caused the changes are discussed below.Fuel expense, the single largest expense of the Company, increased 11%in 1988 after a 10%decline in 1987.The 1988 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.Purchased and interchange power expense decreased by 54%in 1988 and 43%in 1987.In 1988, the change was caused mostly from increased availability of the Company's internal generation as well as lower net cost per kwh of pur-chased and interchange power and a slight decrease in the Company's total load requirements.

The 1987 change was primarily due to the assignment of certain rights to purchase power from AEP Generating Company (AEGCo), an affiliated company, to an unaffiliated company.This decrease was par-tially offset by increased interchange power transactions, pri-marily with affiliated companies, in order to replace internal generation lost because of outages..Maintenance expense increased15%

in1987.Factors con-tributing to the comparatively higher levels of expense in 1987 were additional maintenance activities for nuclear plant and other maintenance activities.

Federal income taxes declined 45%in 1988 following a 21%decrease in 1987.The 1988 decrease in Federal income tax expense was primarily due to the decrease in pre-tax book operating income, while the 1987 decrease came mostly from the decrease in the statutory Federal income tax rate as a result of the Tax Reform Act of 1986.The Company was granted reductions in its annual base rate levels to reflect a reduction in the Federal income tax rate to 34%.and other cost-of-service items.Therefore, the re-ductions in tax rates had a minimal effect on earnings.Other provisions in the Tax Reform Act of 1986, such as those relating to depreciation and repeal of investment tax credit, will result in reduced internal cash flow.However, these other provisions are not anticipated to have a material impact on net earnings.Allowance For Funds Used During Construction The total allowance for funds used during construction (AFUDC)increased in 1988 and the proportion of AFUDC included in net income increased to 38%(32%net of income taxes)in 1988 from 30%(25%net of income taxes)in 1987.The increase in the proportion of AFUDC included in net in-come resulted from additional construction expenditures on Rockport 2 being subject to the allowance.

6 Liquidity and Capital Resources-Construction Program The Company's plant and property additions for 1988 amounted to$323 million, a 30%increase over 1987.Con-struction expenditures for the three-year period 1989-1991 are estimated at$457 million.This includes the completion of construction of the second1,300-megawatt generating unit at the Rockport Plant, Rockport 2.In addition, the Company could be required to make substantial additional capital ex-penditures if acid rain legislation similar to that currently pro-posed is enacted into law.Debt and Preferred Stock Financing The Company generally issues short-term debt (commer-cial paper and bank loans)to provide interim financing of construction expenditures in excess of available internally generated and other funds.The Company then periodically reduces short-term debt with the proceeds from sales of long-term debt and preferred stock securities and with investments in its common equity by AEP.Issuance of senior securities is expected to be modest in the next few years since all of the Company's projected con-struction expenditures for 1989-1991 are expected to be fi-nanced with internally generated funds and proceeds from the sale and leaseback of Rockport 2 discussed below.If any additional amounts are needed in excess of internally gen-erated funds, they will have to be raised externally, as in the past, through sales of securities, short-term borrowings and investments in the Company's common equity by AEP.At December 31, 1988, the Company had unused short-term lines of credit of approximately

$292 million which were shared with other System companies.

Cook Nuclear Plant The Cook Nuclear units have been exhibiting indications of intergranular corrosion (IGC)in the steam generator tubing, a condition which has developed in other pressurized water reactors.This led to a decision to operate Unit 2 at 80%power and Unit 1 at 90%power as a steam-generator life conservation measure.The IGC problem in the Unit 1 steam generators has been occurring at a slower rate than in Unit 2, but it is possible that the Unit 1 steam generators may have to be replaced eventually.

However, there are no present plans for such replacement.

In April 1988, Unit 2 was taken out of service to replace the unit's steam generators, refuel the unit and perform the 10-year anniversary service inspec-tion as required by the Nuclear, Regulatory Commission.

The 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.Rockport Plant Unit 2 The Company and AEGCo, an affiliate, which jointly ow the Rockport Plant have signed a commitment letter agree-ment to sell and leaseback their interests in Rockport 2.At'ecember 31, 1988, the Company and AEGCo had expended$1.1 billion on Rockport 2.The Company and AEGCo expect to use the net proceeds from the sale, estimated to be$1.4 billion after taxes, to reduce their capitalization, including the redemption by the Company of certain publicly held first mort-gage bonds and preferred stock.The sale will not have an effect on 1989 net income since the net gain will be deferred and amortized over the lease term.The leases are expected to be recorded as operating leases.The Company and AEGCo expect to sell a substantial por-tion of the unit's capacity to unaffiliated utilities under long-term unit power agreements.

One such agreement to supply 250 megawatts for a 20 year period to an unaffiliated utility has been signed.Recovery of the costs of capacity not sold to unaffiliated utilities and the timing of such recovery are subject to future regulatory proceedings.

See"Rockport Plant Unit 2" in Note 2 of the Notes to Consolidated Financial Statements for additional information.

Effects of Infiation Inflation continues to affect the Company, even though the inflation rate has been relatively low in recent years.Sine the rate-making process limits the Company to recovery o the historical cost of assets, economic losses are experienced when the inflated value of the assets is not recovered.

How-ever, such losses are offset partly by the economic gains that result from the repayment of long-term debt with inflated dollars.New Accounting Standards The Financial Accounting Standards Board (FASB)has is-sued a new accounting standard regarding income taxes that the Company will be required to adopt in the future which is discussed in Note 3 of the Notes to Consolidated Financial Statements.

The FASB has proposed a new accounting standard that would require a change in accounting for post-retirement ben-efits other than pensions from an expense as paid method to an accrual method.This proposal would require the amorti-zation of prior service costs over a minimum of 15 years and has a tentative effective date'of 1992.The impact on the Company's financial position is dependent upon issuance of a final standard and future rate-making treatment.

INDIANA MICHIGAN POWER COMPANY AND SVBSIDIARIES Consolidated Statements of Income OPERATING REYENUEs-ELECTRIc Year Ended December 31, 1988 1987 (in thousands)

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

Fuel for Electric Generation

.Purchased and Interchange Power (net).Other Maintenance Depreciation and Amortization

.Amortization (Deferral) of Rockport Phase-in Costs.Taxes Other Than Federal Income Taxes., Federal Income Taxes Total Operating Expenses.OPERATING INCOME OTHER INCOME ANO DEOUCTIONS:

Allowance for Equity Funds Used During Construction

.Deferred Return-Rockport Plant Other Total Other Income and Deductions

.ICOME BEFORE INTEREST CHARGES...............

232,946 47,503 161,532 89,545 120,145 18,089 56,271 41,592?67,623 215,443 27,023 16,431 43,454 258,897 208,931 102,644 156,310 91,807 116,915 (4,488)46,730 75,373 794,222 223,046 26,055 31,442~669)56,828 279,874 233,241 180,620 157,500 80,171 112,188 (10,732)51,291 95,872 900,151 191,144 25,397 43,438~1.930)66,905 258,049 NTEREST CHARGES: Long-term Debt.Short-term Debt and Other Allowance for Borrowed Funds Used During Construction

.Net Interest Charges NET INCOME PREFERRED STOCK DIVIOENO REQUIREMENTS EARNINGS APPLICABLE To COMMON STOCK See Notes to Consolidated Financial Statements.

130,649 6,635~30,192)131,093 5,712~23,297)124,333 7,843~26,603)113,508 107,092 105,568 152,481 26,256 166,366 20,955 151,805 18,848$132,957$145,411$126,225 Consolidated Balance Sheets ASSETS December 31, 1988 1987 (in thousands)

ELECTRIC UTILITY PLANT: Production Transmission Distribution

.General (includes nuclear fuel).Construction Work in Progress Total Electric Utility Plant Accumulated Provisions for Depreciation and Amortization

.NET ELECTRIC UTILITY, PLANT OTHER PROPERTY ANO INVESTMENTS

$2,331,581 737,919 423,729 206,068 711,974 4,411,271 1,218,060 3,193,211 301 931$2,269,325 725,047 397,214 207,722 553,973 4,153,281 1,i i 8,254 3,035,027 283,313 CURRENT AssETs: Cash and Cash Equivalents Special Deposits-Restricted Funds.Accounts Receivable:

Customers Associated Companies Miscellaneous

.Allowance for Uncollectible Accounts Fuel-at average cost.Materials and Supplies-at average cost Accrued Utility Revenues Other.Total Current Assets 8,425 2,168 39,847 9,087 19,648 (483)51,289 25,929 27,512 8,649 192,071 13,461 17,928 71,730 7,058 15,475 (634)70,728 22,975 51,576 7,942 278,239 DEFERREO DEBITS: Deferred Depreciation and Return-Rockport Plant.Deferred Nuclear Fuel Disposal Costs.Other.Total Deferred Debits.Total.See Notes to Consolidated Financial Statements.

148,840 51,026 105 961 170,413 56,434 133,137 305,833 359,984$3,993,046$3,956,563 INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES CAPITALIZATION AND LIABILITIES December 31, 1988 1987 (in thousands)

CAPITALIZATION:

Common Stock-No Par Value: Authorized ;500,000 Shares Outstanding

-1,400,000 Shares Other Paid-in Capital Retained Earnings Total Common Shareowner's Equity Cumulative Preferred Stock: Not Subject to Mandatory Redemption

.Subject to Mandatory Redemption Long-term Debt.Total Capitalization

.OTHER NONCURRENT LIABILITIES CURRENT LIABILITIES:

Long-term Debt Due Within One Year.Notes Payable..................

Commercial Paper Accounts Payable: General: Associated Companies.Taxes Accrued Interest Accrued.Obligations Under Capital Leases Other.Total Current Liabilities DEFERRED CREDITS: Deferred Income Taxes Deferred Investment Tax Credits Other.Total Deferred Credits S 56,584 781,763 161,443 999,790 197,000 25,030 1,563,720 2 755,545 207,637 11,500 7,950 27,900 55,210 14,836 4,285 36,353 43,037 47,866 248,937 535,829 194,726 , 20,377 750,932 S 56,584 771,763 145,302 973,649 197,000 32,030 1,539,737 2,742,416 193,692 52,031 41,451 17,576 46,198 37,112 43,856 48,928 287,152 542,298 171,559 19,446 733,303 C0MMITMENTs AND C0NTINGENGIEs (Note 11)Total.$3,993,046$3,956,563 10 Consolidated Statements of Cash Flows 1988 Year Ended December 31, 1987 1986 (in thousands)

CAsH FLows FR0M OPERATING ACTIvITIEs:

Net Income.Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation and Amortization

.Deferred Income Taxes.Deferred Investment Tax Credits Allowance for Equity Funds Used During Construction

.Changes in Certain Current Assets and Liabilities:

Accounts Receivable (net)Fuel, Materials and Supplies Accrued Utility Revenues.Accounts Payable Amortization of Deferred Nuclear Fuel Disposal Costs..Deferred Return-Rockport Plant.Other (net)Net Cash Provided by Operating Activities

.....CASH FLOWS FROM INVESTING ACTIVITIES:

Plant and Property Additions.Allowance for Equity Funds Used During Construction

...Cash Used for Plant and Property Additions.Proceeds from Sales of Property.Net Cash Used by Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES:

Capital Contributions from Parent.Issuance of Long-term Debt.Change in Short-term Debt (net).Retirement of Cumulative Preferred Stocks Retirement of Long-term Debt Dividends Paid on Common Stock Dividends Paid on Preferred Stocks Net Cash Used by Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents

.....Cash and Cash Equivalents at Beginning of Year.Cash and Cash Equivalents at End of Year Supplemental Disclosure:

Cash Paid During the Year For: Interest (net of Allowance for Borrowed Funds Used During Construction)

.Income Taxes Noncash Investing Activities:

Plant Acquired Under Capital Leases See Notes to Consolidated Financial Statements.

S 151,805 S 166,366 146,280 3,161 23,672 (27,023)25,530 16,485 24,064 11,019 5,408~15,968 364,433 (276,545)27,023 (249,522)1,117 120,310 13,597 (7,700)(26,055)10,952 (14,293)(2,576)(402)12,207 (31,442)24,329 265,293 (206,941)26,055 (180,886)1,816 10,000 50,000 35,850 p,ooo)p4,o5o)(116,816)~19,048)$121,064)(5,036)13,461 S 8,425 376,811'49,925)

(50,917)(222,005)(113,232)~22.607)~81.875)4,348 9,113 3 13,461$106,283 67,019 46,791$107,389 70,655 41,046~248,405 f179,070)S 152,481 107,915 24,219 25,328 (25,397)(3,636)(9,361)22,615 (10,571)13,247 (43,438)8,836.262,238 (175,776)25,397 (150,379)9,547~140,832 197,681 49,925 (7,000)(228,432)(113,232)~26,456~127,514)(6,108)15,221 8 9,113$107,972 22,614 33,099 11 INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES Consolidated Statements of Retained EarningsBalance at Beginning of Year.Net Income.Total 1988$145,302 151,805 297,107 1987 (in thousands)

$113,123 166,366 279,489 Year Ended December 31.1986$100,130 152,481 252,611 Cash Dividends Declared: Common Stock Cumulative Preferred Stock: 4)/e%Series.4.56%Series.4.12%Series.7.08%Series.7.76%Series............

8.68%Series.12%Series.$2.15 Series.............

$2.25 Series....,........

$2.75 Series.$3.63 Series.Total Dividends Balance at End of Year.e Notes to Consolidated Financial Statements.

116)816-495 273 165 2,124 2,716 2,604 1,198 3,440 3,600 2 233 135,664$161,443 113,232 495 273 165 2,124 2,716 2,604 1,558 3,440 3,600 2,673 1,307 134,187$145,302 113,232 495 273 165 2,124 2,716 2,604 1,918 3,440 3,600 3,113 5,808 139,488$113,123 12 Notes to Consolidated Financial Statements 1.Significant Accounting Policies: Principles of Consolidation The consolidated financial statements include the accounts of Indiana Michigan Power Company (the Company)and its wholly owned subsidiaries.

Significant intercompany trans-actions have been eliminated in consolidation.

The common stock of the Company is wholly owned by American Electric Power Company, Inc.(AEP).System of Accounts The accounting and rates of the Company are subject in certain respects to the requirements of state regulatory bodies and in certain respects to the requirements of the Federal Energy Regulatory Commission (FERC).The consolidated fi-nancial statements have been prepared on the basis of the uniform system of accounts prescribed by the FERC.Electric Uti%'ty Plant;Depreciation and Amortization; Other Property and Investments Electric utility plant is stated at original cost.Generally, the plant of the Company is subject to first mortgage liens.'he Company capitalizes, as a construction cost, an allow-ance for funds used during construction (AFUDC), an item not representing cash income, which is defined in the appli-'cable regulatory systems of accounts as the net cost of bor-rowed funds used for construction purposes and a reasonable rate on equity funds when so used.The composite rates used by the Company after compounding on a semi-annual basis were 10.25%in 1988 and 11.5%in 1987 and 1986.The Company provides for depreciation on a straight-line basis over the estimated useful lives of the property.The current provisions are determined largely with the use of com-posite rates by functional class of property.Operating expenses are charged with the costs of labor, materials, supervision and other costs incurred in maintaining the properties.

Property accounts are charged with costs of betterments and major replacements of property, and the accumulated provisions for depreciation are charged with re-tirements, together with removal costs less salvage.Other property and investments are generally stated at cost.Cash and Cash Equivalents 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 by the FERC to be cash and cash equivalents.

Temporary cash investments include highly liquid investments purchased with a maturity of three months or less.The 1987 and 1986 con-solidated statements of funds have been restated to conform to the current-period cash flows presentation.

Income Taxes Deferred Federal income taxes are provided to the extent that such amounts are reflected in revenue levels.The Corri-pany normalizes the effect of tax reductions resulting from investment tax credits utilized in connection with current Fed-eral income tax accruals consistent with rate-making policies.The Company's subsidiaries generally use the flow-through method of accounting for investment tax credits and practice deferred tax accounting for the effects of certain timing differences.

Operating Revenues The Company accrues unbilled revenues for electric service rendered subsequent to the last billing cycle through month-end.Operating revenues derived from a certain wholesale cus-tomer represented approximately 7%of total operating rev-enues for 1987 and 12%for 1986.The contract with this customer expired on December 31, 1987.Fuel Costs The Company bills its fuel costs under a fuel recovery mechanism designed to reflect in rates changes in costs of fuel as ordered by various regulatory bodies.Accordingly, the Company accrues revenue relating to unrecovered fuel.Sale of Receivables In December 1988 the Company entered into an agreement to sell undivided interests in designated pools of customer accounts receivable and accrued utility revenues, with limited recourse, up to a maximum of$50,000,000 at any one time.Undivided interests in new pools may be sold as collections reduce previously sold interests.

The agreement expires in December 1993 and may be terminated at any time prior thereto.The Company received proceeds of$79,000,000 dur-ing the year.At December 31, 1988 approximately

$50,000,000 remains to be collected.

13 INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES

'ther In accordance with regulatory approvals, the Company rec-ognizes the gain or loss on reacquired debt in income in the year of reacquisition unless such debt is refinanced in which case the gain or loss is deferred and amortized over the term of the replacement debt.Debt discount or premium and debt expenses are being amortized over the lives of the related debt issues, and the amortization thereof is included in other interest charges.The Company is committed under a unit power agreement with AEP Generating Company (AEGCo), also an AEP subsid-iary, to puichase 70%of AEGCo's Rockport Plant capacity unless it is sold to unaffiliated utilities.

Certain prior-period amounts have been reclassified to con-form to current-period presentation.

2.Hate Matters: Rockport Plant Unit 1 The Company has phase-in plans in both its Indiana and FERC jurisdictions for Unit 1 of the Rockport Plant (Rockport 1).Rockport1 is a1,300-megawatt generating unit that began commercial operation in December 1984 and is jointly owned by the Company and AEGCo.At December 31, 1988 and1987, the Company had unamortized deferred returns of 115,351,000 and$131,970,000, respectively, and un-mortized deferred depreciation of$33,489,000 and$38,443,000, respectively which are being amortized on a straight-line basis through 1997.The Company has been engaged in state and Federal rate proceedings to modify its phase-in plans to comply with SFAS 92"Regulated Enterprises

-Accounting for Phase-in Plans." SFAS 92 allows the deferral of costs for future re-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.The Company has a rate proceeding with the remaining wholesale customers that includes, among other things, com-pliance with the 10-year recovery period.A final order is pending.In'the opinion of management, the ultimate reso-lution will not have a significant effect on results of operations.

Rockport Plant Unit 2 In January 1989, the Company and AEGCo signed a com-mitment letter agreement to sell and leaseback their respective 50%interests in a1,300-megawatt unit they are constructing at the Rockport Plant (Rockport 2).The Company and AEGCo have expended$1.1 billion on Rockport 2 through December 1988.This agreement calls for the Company and AEGCo to sell their interests in Rockport 2 in late 1989, just prior to commercial operation, and simultaneously for each company to lease a 50%interest in the unit for an initial term of 33 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 at the date of the sale is estimated to be$1.3 billion.The net gain from the sale will be deferred and amortized over the initial lease term.The leases are expected to be recorded as operating leases.In December 1988, the Company signed a unit power agreement with an unaffiliated utility to supply 250 megawatts from Rockport 2 for a 20 year period expected to begin in January1990.

It is expected that an additional 500 megawatts of Rockport 2 capacity will be sold by the Company and AEGCo to unaffiliated utilities under long-term unit power agree-ments.Recovery of the costs of capacity not sold to unaffi-liated utilities and the timing of such recovery are subject to future regulatory proceedings.

The above transactions are subject to regulatory approval and other conditions.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3.Federal Income Taxes: The details of Federal income taxes as reported are as follows: 1988 Year Ended December 31, Year Ended December 31, 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.Net Income Federal Income Taxes Pre.tax Book Income 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

.Allowance for Funds Used During Construction and Miscellaneous Items Capitalized on the Books but Deducted for Tax Purposes Deferred Return-Rockport Plant Tax Exempt Income-Nuclear Decommissioning Trust Funds.Other Investment Tax Credits (net)Total Federal Income Taxes as Reported.Effective Federal Income Tax Rate 1988$151,805 39,884$191,689 3,129 (12,079)2,112 (4,066)(7,429)(6,957)S 39,884 20.8%1987 (in thousands)

$166,366 72,200$238.566 5,104 (13,965)(5,447)(1,603)(7,315)$72,200 30.3%1986$152,481 86,473$238,954 6,242 (15,529)(9,228)(1,152)(3,779)S 86,473 36.2%15 INDIANA MICHIGAN POWER COMPANY AND SVBSIDIARIES The following are the principal components of Federal income taxes as reported: I 1988 Year Ended December 31~1987 1986 , (in thousands)

Current: Federal Income Taxes.investment Tax Credits Total Current Federal Income Taxes.Deferred: Depreciation (liberalized, ADR and ACRS)Allowance for Borrowed Funds Used During Construction and Miscellaneous Items Capitalized

.Unrecovered and Levelized Fuel Nuclear Decommissioning Costs Spent Nuclear Fuel Fee Unbilled Revenue Deferred Return-Rockport Plant Other Total Deferred Federal Income Taxes Total Deferred Investment Tax Credits Total Federal Income Taxes as Reported S65,918 385 66,303 S 68,308 (31,382)36,926 S 43,680 (30,629)(a)13,051 4,737 15,328 26,272 5,186 3,931 9,448 (8,278)(9,327)(2,466)16,432 (b)(4,235)(4,820)(1,737)251 (7,845)(4,202)(2,839)(4,247)(3,538)5,315 9,818 (5.439)5,173 (1,941)3,161 13,597 24,219 23,672 (a)(7,700)25,328 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+onsolidated Federal income tax return with their affiliated ompanies in the AEP System.The allocation of the AEP System's consolidated Federal income tax to the System com-panies is iri accordance with Securities and Exchange Com-mission (SEC)rules under the Public Utility Holding Company Act of 1935.These rules permit the allocation of the benefit of current tax losses to the System companies giving rise to such losses in determining taxes currently payable.The tax loss of the System parent company, AEP, is allocated to its subsidiaries with taxable income.With the exception of the loss of tlie parent company, the method of allocation ap-proximates a separate return result for each company in the consolidated group.Consolidated investment tax credits uti-lized are allocated to the System companies giving rise to them.:.At December 31, 1988, the cumulative net amount of in-come tax timing differences on which deferred taxes have not been provided totaled$487,000,000.

The System reached settlements with the Internal Revenue Service (IRS)for all issues from the audits of the consolidated Federal income tax returns for the years prior to 1983.Returns for the years 1983 and 1984 are being audited by the IRS.In the opinion of management, the final settlement of open years will not have a material effect on the earnings of the Company.In December 1987, the Financial Accounting Standards Board issued SFAS 96"Accounting for Income Taxes" which requires that companies adopt the liability method of ac-counting for income taxes.SFAS 96 must be adopted by the Company no later than January 1990 on a restated basis or as a cumulative effect of an accounting change in the year of adoption.The Company has not yet determined if it will adopt SFAS 96 on a restated or prospective basis.When the new standard is adopted, total assets and lia-bilities will increase significantly to reflect previously unre-corded deferred tax assets and liabilities on temporary differences and related regulatory assets and liabilities.

In addition', existing deferred taxes will be adjusted to the level required at the currently existing statutory tax rate.While the computations are not yet completed, it is expected that a significant portion of the required deferred income tax ad-justments will be offset by regulatory assets and liabilities.

The effect of implementing the new standard on the Com-pany's financial condition has not yet been determined.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4.Supplementary Income Statement Information and Related-party Transactions:

Electric operating revenues shown in the Consolidated Statements of Income include sales of energy to REP System companies of approximately

$34,000,000,$35,000,000, and$33,000,000 for the years ended December 31, 1988, 1987 and 1986, respectively.

Operating expenses shown in the Consolidated Statements of Income include certain items not shown separately, as follows: American Electric Power Service Corporation (AEPSC)pro-vides certain services to the Company and the affiliated com-panies in the AEP System.The costs of the services are determined by the service company on a direct charge basis to the extent practicable and on reasonable bases of proration for indirect costs.The charges for services are made on a cost basis and include no compensation for the use of equity capital, all of which is furnished to the service company by AEP.The service company is subject to the regulation of the SEC under the Public Utility Holding Company Act of 1935.Purchased and Interchange Power (net): Purchased Power (a)...Interchange Power (net): AEP System Electric Utilities Other Companies....Total..........

Taxes Other Than Federal Income Taxes: Real and Personal Property Taxes~~~~~~~~~~~~~State Gross Receipts, Excise and Franchise Taxes and Miscellaneous State and Year Ended Oecember 31~1988 1987 1986 (in thousands)

$24,371 S 42,139$170,047 24,190 (1.058)$47,503 ,62,991 (2.486)$102.644 10,720 (147)$180.620$32,339$28,002$27,795 5.Common Stock and Other Paid-in Capital: The Company received a$10,000,000 cash capital contri-bution from its parent in 1988.There were no other changes in either of the aforementioned accounts in 1988, 1987 or 1986.6.Retained Earnings: Various restrictions on the use of the Company's retained earnings for cash dividends on common stock and other pur-poses are contained in or result from covenants in mortgage indentures, debenture and bank loan agreements, charter provisions, and orders of regulatory authorities.

Approxi-mately$45,900,000 at December 31, 1988, was restricted.

Local Taxes..........

12,361 9,383 13,832 State Income Taxes.......4,913',306 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.

INDIANA MICHIGAN POWER 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:

Series 4I/8%4 56%4.12%7 08%7 76%8.68%$2.15$2.25 Year-end Call Price$106.125 102 102.728 102.91 103.44 103.10 26.08 26.13 Par Value$100 100 100 100 100 100 25 25 Shares Outstanding December 31~1988 120,000 60,000 40,000 300,000 350,000 300,000 1,600,000 1,600,000 Amount December 31, 1988 1987 (in thousands)

S 12,000 S 12,000 6,000 6,000 4,000 4,000 30,0M 30,000 35,000 35,000 30,000 30,000 40,000 40,000 40,000 40.000$197,000$197,000 B.Cumulative Preferred Stock Subject to Mandatory Redemption:

Par Value$106 27.07 Number of Shares Redeemed Amount Shares Year Ended December 31~Outstanding December 31, Series (a)Call Price 1988 1987 1986 December 31~1988 1988 1987 (in thousands) 12%(b)S1M 30,000 30,000*30,000 77,325 S 7,733$10,733$2.75 (c)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 FINANCIAL STATEMENTS (Continued)

First Mortgage Bonds.........Sinking Fund Debentures Notes Payable to Banks Installment Purchase Contracts...

Other Long.term Debt (a)......Less Portion Due Within One Year.....Total 1988 1987 (in thousands)

$1,019,036$1,092,684 7,648 7,813 130,000 80,000 307,732 307,511 110,804 103,760 1,575,220 1,591,768 11,500 52,031$1,563,720$1.539.737 (a)Nuclear Fuel Disposal Costs.See Note 11.First mortgage bonds outstanding were as follows: December 31, 1988 1987 (in thousands)

%Rate Oue 3r/>>1988-February 1.......43/>>1988-November 1......tt~/>>1990-June1.........4'/>>1993-August 1........7r/>>1997-February 1.....:.9>>/>>1997-July 1 7 1998-May 1 8'/e 2000-April 1 9i/r 2003-June 1 (a).......~Br/>>2003-December 1......9i/z 2008-March 1........13'/>>2013-August 1........9>>/>>2015-October 1.......9>>/>>2016-July 1 83/>>2017-February 1.......10i/>>2017-May 1 Unamortized Discount (net).........S 22,974 17,557 16.000 42,902 50,000 75,000 35,000 50,000 208,000 40,000 100,000 64,578 100,000 100,000 100,000 75,000 (4.327)42,902 50,000 75,000 35,000 50,000 196,500 40,000 100,000 58,704 100,000.100,000 100,000 75,000 (4,070)Less Portion Due Within One Year Total 1,019,036 11,500 1,092,684 52,031$1,007,536$1,040,653 (a)The 9'I~%series due 2003 requires sinking fund payments of$11,500,000 annually on June 1, through 1991 and$13,500,000 annually on 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 a maximum 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.

The indentures relating to the first mortgage bonds contain improvement, maintenance and replacement provisions re-quiring the deposit of cash or bonds with the trustee, or in lieu thereof, certification of unfunded property additions.

The sinking fund debentures are due May 1, 1998 at an interest rate of 7t/4%.At December 31, 1988 and 1987, the principal amounts of debentures reacquired in anticipation of sinking fund requirements were$2,552,000 and S2,687,000, respectively.

In addition to the sinking fund requirements the Company may call additional debentures of up to S300,000 annually.8.Long-term Debt, Lines of Credit, and Compensating Balances: Long-term debt by major category was outstanding as follows: December 31~Unsecured promissory notes payable to banks have been entered into by the Company as follows: December 31~1988 1987 (in thousands)

S 25,000$-25,000 20,000 20,000 20,000 20,000 40,000 40,000$130,000$80,000 9.02%due 1990 (a)9.10%due 1990 (a)9.12%due 1990..9.18%due 1990..9.28%due 1991 Total (a)Interest rate is subject to adjustment on November 30, 1989.Installment purchase contracts have been entered into by the-Company in connection with the issuance of pollution control revenue bonds by governmental authorities as follows: December 31, 1988 1987 (in thousands)

%Rate Due City of Lawrenceburg, indiana: 8>>/2 2006-July 1 7'2006-May 1 6r/>>2006-May 1 City of Rockport, fndiana: 9i/>>2005-June 1......9i/.2010-June 1......9i/.2014-August 1.....7ih (a)2014-August 1.....(b)2014-August 1.....City of Sullivan, Indiana: 73/>>2004-May I 6r/>>2006-May 1 7>>h 2009-May 1 Unamortized Discount Total S 25,000 40,000 12,000$25,000 40,000 12,000 6,500 33,500 50,000 50,000 50,000 7,000 7,000 25,000 25,000 13,000 13,000 (4,268)(4,489)$307.732 S307,511=(a)Adjustable interest rate will change August 1~1990 and every five years thereafter.(b)Variable interest rate is determined weekly.The average weighted interest was 5.9%for 1988 and 5.5%for 1987.Under the terms of certain installment purchase contracts, the Company is required to pay purchase price installments in amounts sufficient to enable the cities to pay interest on and the principal (at stated maturities and upon mandatory redemption) of related pollution control revenue bonds issued to finance the construction of pollution control facilities at certain generating plants of the Company.On certain series the principal will be payable at stated maturities or on the demand of the bondholders at periodic interest adjustment dates.Certain series are supported by letters of credit from a bank which expire in 1990 and 1992.Portions of the proceeds of the installment purchase con-tracts are deposited with trustees and may be used only for specified construction expenditures.

These funds are shown on the balance sheets as special deposits-restricted funds.'9 INDIANA MICHIGAN POWER COMPANY AND SVBSIDIARIES Long-term debt, excluding premium or discount, outstand-ng at December 31, 1988 is due as follows: Principal Amount (in thousands) 1989........................

$11,5M 1990...., 101,500 1991 51,500 1992 13,500 1993......................

56,402 Later Years,................

1.349,156 Total$1,583.558 The Company had unused short-term bank lines of credit of approximately

$292,000,000 and$285,000,000 at December 31, 1988 and 1987, respectively, under which notes could be issued with no maturity more than 270 days.Available lines of credit are subject to withdrawal at the banks'ptions and such lines are shared with other AEP System companies.

In accordance with informal agreements with the banks, compensating balance deposits of up to 10%or equiv-alent fees are retluired to maintain the lines of credit.Sub-stantially all bank balances are maintained by the Company to compensate the banks for services and for the Company's share of both used and available lines of credit.9.Leases: The Company and its subsidiaries, as part of their opera-tions, lease property, plant and equipment for periods up to 35 years.Most of the leases require the payment of related property taxes, maintenance costs and other costs of oper-ation.The Company and its subsidiaries expect that, in the normal course of business, leases generally will be renewed or replaced by other leases.The majority of the leases have purchase options or renewal options for substantially all of the economic lives of the properties.

The following is an analysis of properties under capital leases and related obligations:

December 31~1988 1987 (in thousands)

Electric Utility Plant: Production S 8,358 Distribution 14,603 General: Nuclear Fuel (net of amortization)

.......Other Total Electric Utility Plant...........

Accumulated Provisions for Amortization Net Electric Utility Plant Other Property.Accumulated Provisions for Amortization 16,331 17,065 Net Other Property....,...........

803 2,297 Net Properties under Capital Leases....$167,920$170,830 Obligations under Capital Leases (a)....$167,920$170,830 (a)including an estimated$43,037,000 and$43,856,000 at December 31, 1988 and 1987, respectively, due within one year.S 8,406 14,603 131,970 35,541 190,472 23,355 167,117 17,134 Payments made under capital leases include S49,014,000,$55,557,000 and$61,409,000 of amortization expense for the years ended December 31, 1988, 1987 and 1986, respectively.

Future minimum lease payments, by year and in the ag-gregate, for capital leases and noncancelable operating leases of the Company and its subsidiaries consisted of the following at December 31, 1988: 1989 1990 1991 1992 1993 Later Years Total Future Minimum Lease Payments Capital Operating~leases a)Leases (in thousands)

S 8,000 S 20,000 6,000 20,000 5,000 19,000 4,MO 16,000 4,000 15,000 39 000 170 000 66,000$260.000 Less Estimated Interest Element Included Therein Estimated Present Vatue of Future Minimum Lease Payments...30,000$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 FINANCIAL STATEMENTS (Continued) obligations are certain leases in which portions of the related rentals are paid for or reimbursed by associated companies in the AEP System based on their usage of the leased property.The Company and its subsidiaries cannot predict the extent to which or proportion in which the associated companies will utilize the properties under such leases in the future.Rentals for all operating leases are classified approximately as follows: Year Ended December 31~1988 1987 1986 (in thousands)

$11,000$11,000$10,000 Operating Expenses Clearing and Miscellaneous Accounts (portions ol which are charged to income)Total 6,000 5.000 7.000 ,$17,000$16.000$17,000 In January 1989, the Company signed a commitment letter agreement to sell and leaseback Rockport 2 as discussed in Note 2.10.Pension Plan: The Company and its subsidiaries participate with other companies in the AEP System in a trusteed, noncontributory defined benefit plan to provide pensions, subject to certain eligibility requirements, for all their employees.

Plan benefits are determined by a formula which considers each partici-pant's highest average earnings, years of accredited service and social security benefits.Pension costs for the plan are allocated to each System company on the basis of each com-pany's share of the total System projected benefit obligation.

The Company and its subsidiaries'unding policy is to make annual contributions to the plan equal to the amounts de-ductible for Federal income tax purposes.Net pension cost of the defined benefit plan for the years ended December 31, 1988 and 1987 was approximately

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

In 1986 the Company and its subsidiaries recorded no pension cost.In addition to providing pension benefits, the Company and its subsidiaries provide certain health care benefits for retired employees.

Substantially all of the Company and its subsi-diaries'.employees may become eligible for these benefits if they have completed 10 years of continuous service at re-tirement.The cost of retiree health care benefits is recognized 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.

11~Commitments and Contingencies:

Construction The constructio(t budget of the Company and its subsidi-aries for the years 1989-1991 is estimated at$457,000,000, and, in connection therewith, commitments have been made.Litigation The Company and AEPSC have been involved in litigation with Terre Haute Industries, Inc.(THI)over a contract for construction of an electrostatic precipitator at the Breed Plant.In July 1988, the Supreme Court of Indiana denied a petition for an appeal of a decision by the Court of Appeals of Indiana regarding an award for damages.The Court of Appeals of Indiana had reversed part of a lower court decision by re-ducing a$4,934,000 award for compensatory damages and dropping a$12,000,000 award for punitive damages.The Company recorded a liability in 1983, including interest, for 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 and requested a rehearing with the Indiana Supreme Court.The matter is pending.In the opinion of management the ultimate resolution of this matter should not have a significant effect on the earnings of the Company.Environmental Matters The Company and its subsidiaries are subject to regulation by Federal, state and local authorities with respect to air-and water-quality control and other environmental matters, and are subject to zoning and other regulation by local authorities.

Although the cumulative, long-term effect of changing environmental requirements upon the Company and its sub-sidiaries cannot be estimated at present, compliance with such requirements may make it necessary, at costs which may be substantial, to retrofit existing facilities with additional air-pollution-control equipment; to change fuel supplies to lower sulfur content coal;to construct cooling towers or some other closed-cycle cooling systems;to undertake new meas-ures in connection with the storage, transportation and dis-posal of by-products and wastes;to curtail or cease operations at existing facilities, and to delay the commercial operation of, or make design changes with respect to, facil-ities under construction.

INDIANA MICHIGAN POWER COMPANY AND SUBSIDIARIES Legislative proposals are pending before the U.S.Congress at expressly seek to control acid deposition.

If any of these ills become law, significant reductions in the emission of sulfur dioxide and nitrogen oxide from various existing Com-pany generating plants could be required.These reductions would entail very substantial capital and operating costs that, in turn, could necessitate substantial rate increases by the Company.In addition, a number of states and environmental organizations have pending in the courts proceedings under the Clean Air Act seeking reductions in the emission of sulfur dioxide in certain midwestern states.Further, the U.S.Environmental Protection Agency is con-sidering a number of significant policy changes in its rules governing sulfur dioxide emissions.

Adoption of any of the contemplated policy changes could require substantial ex-penditures to accomplish reductions in sulfur dioxide emis-sions from the Company's coal-fired generating plants.Transmission Equalization Agreement The Company participates with other AEP System com-panies in a transmission equalization agreement.

This agree-ment pools certain AEP System companies'nvestments in transmission facilities and shares among the parties the costs of ownership in proportion to the parties'espective demand atios.The FERC had permitted the agreement to be imple-ented, effective January1985, subject to refund.The agree-ment as filed provided for the companies to pool their investments in extra-high voltage facilities (345 kv and above)and to phase in the equalization of costs over the period1985-1989.In December1988, the FERC issued a final order approving the agreement with certain modifications that require, among other things, the companies to pool their investments in all high voltage transmission facilities (138 kv and above)and to eliminate the phase-in feature.Both of these changes be-came effective prospectively in August 1988.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.

Nuclear Insurance The Company is subject to the Price-Anderson Act which limits the public liability of a licensee of a nuclear plant for a single nuclear incident to the amount of primary liability in-surance available from private sources and an industry ret-rospective deferred premium assessment plan.The Company maintains the maximum private insurance available of$200,000,000 for its two-unit Donald C.Cook Nuclear Plant (Cook Plant).Amendments to the Price-Anderson Act, effec-tive August 1988, increased the limits of public liability to$7,608,800,000 based on 112 reactors currently being sub-ject to the Act.The maximum standard deferred premium that the Company may be assessed, in the event of a nuclear incident at any licensed nuclear power plant in the United States, is$63,000,000 per reactor, but an assessment may not exceed$10,000,000 in any one year.If public liability claims and authorized legal costs exceed the amount of lia-bility insurance and deferred premiums, a licensee must pay a surcharge of up to 5 percent of the standard deferred pre-mium for such claims and costs.Thus, if damages in excess of private insurance result from a nuclear incident, the Com-pany could be assessed its pro rata share of the liability up to a maximum of$126,000,000 for its two reactors, in annual installments of$20,000,000, plus$6,300,000 for excess claims and costs.There is no limit on the number of incidents for which the Company could be assessed these sums.The Company also has property insurance for damage to the Cook Plant facilities in the amount of$1.7 billion.The primary layer of$500,000,000 is provided through nuclear insurance pools.The excess coverage above$500,000,000 is provided through insurance pools ($400,000,000) and Nu-clear Electric Insurance Limited (NEIL).NEIL's excess prop-erty insurance program provides$825,000,000 in coverage.The maximum assessment under this program could be$9,200,000 (seven and one-half times the annual premium on a 100%coverage basis).22 0 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

NEIL's extra-expense program provides insurance to cover extra costs of replacement power resulting from a prolonged accidental outage of a nuclear unit.The Company's policy insures against such increased costs up to approximately

$2,350,000 per week (starting 21 weeks after the outage)for one year and$1,175,000 per week for the second year, or 80%of those amounts per unit if both units are down for the same reason.The Company would be subject to a retrospec-tive premium of up to$8,154,000 (five times annual pre-mium)if NEIL's losses exceeded its accumulated funds.Some potential losses or liabilities may not be insurable or the amount of insurance carried may not be sufficient to meet potential losses and liabilities, including liabilities relating to damage to the Cook Plant and costs of replacement power in the event of a nuclear incident at the Cook Plant.Future losses or liabilities which are not completely insured, unless allowed to be recovered through rates, could have a material adverse effect on the financial condition of the Company.Disposal of Spent Nuclear Fuel and Nuclear Decommissioning The Nuclear Waste Policy Act establishes Federal respon-sibility for the permanent disposal of spent nuclear fuel.Dis-posal costs are paid by fees assessed against owners of 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 to the fund a fee of one mill per kilowatthour, which th Company is currently recovering from its customers.

In June 1983, the Company entered into a contract with DOE for the disposal of spent nuclear fuel.Under terms of the contract the Company must pay over a period of 10 years to the U.S.Treasury a fee estimated at approximately

$71,964,000, ex-clusive of interest, for the disposal of nuclear fuel consumed prior to April 7, 1983.The Company has deferred this amount plus accrued interest on its balance sheet and has received regulatory approval for the recovery of this amount and is amortizing the amount deferred as it is being recovered.

An independent consulting firm employed by the Company has estimated that the cost of decommissioning the Cook Plant could range from$284,000,000 to$321,000,000 in 1986 dollars.The Company has received regulatory approval in each of its jurisdictions for the recovery of nuclear decom-missioning costs associated with the Cook Plant.The Com-pany intends to reevaluate periodically amounts collected for such costs and to seek regulatory approval to revise such amounts as necessary.

Funds recovered through the rate-making process for dis-posal of spent nuclear fuel consumed prior to April 7, 1983 and for nuclear decommissioning have been deposited in ex-ternal funds for the future payment of such costs.12.Unaudited Quarterly Financial Inforrnatlo:

The following consolidated quarterly financial adjustments (consisting of only normal recurring Quarterly Periods Operating Operating Ended Revenues Income (in thousands) information is unaudited but, in the opinion of the Company, includes all accruals)necessary for a fair presentation of the amounts shown: Net Quarterly Periods Operating Operating Net Income Ended Revenues Income Income Rn Ihousnndsh 1988 March 31 June 30 September 30....December 31....$243,617 224,026 266,690 248,733$66,340 48167 58,860 42,076$46,498 28,871 39,848'6,588 1987 March 31 June 30 September 30.....December 31$253,638 241,653 283,944 238,033$59,738 48,999 52,881 61,428$47,390 37,989 38,914 42,073 23 INDIANA MICHIGAN POWER 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.(C (<(A d)i4((.W I 4 (L(.P 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...........

With Electric Heating Total Residential Commercial

.Industrial Miscellaneous Total Retail.Wholesale (sales for resale)............

Total from Kilowatt-hour Sales....Provision for Revenue Refunds.........Total Net of Provision for Revenue Refunds............

Other Operating Revenues Total Electric Operating Revenues.I$189,845$186,418$174,550 96,145 90,261 90,881 175,534 90,949$150,334 82,739 285,990 194,982 233)855 11,645?26,4?2 248,283 276,679 191,352 235,470 11,533 715,034 293,379 265,431 184,276 219,344 11,171 680,222 400,779 266,483 181,240 213,161 11,234 672,118 396,980 233,073 150,733 173,986 9,666 567,458 414,390 974,?55 1,008,413~1,800)1,081,001 1,069,098 541~105)981,848~12,494 1,081,542 9,753 1,068,993 9,800 1,008,413 8,855 969,354 10,197 972,955 10,111$983,066$1,017,268$1,091,295$1,078,793$979,551 SOURCES AND SALES OF ENERGY (in millions of kilowatt-hours):

Sources: Net Generated-Steam: Fossil Fuel Nuclear Fuel Net Generated-Hydroelectric

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

Without Electric Heating.With Electric Heating...Total Residential Commercial

.Industrial Miscellaneous Total Retail.Wholesale (sales for resale)..Total Sales 2,825 1,5?1 4,396 3,290 5,036 228 12,950 6,425 19,3?5 2,719 1,445 4,164 3,142 4,834 221 12,361 7,472 19,833 2;536 1,442 3,978 3,007 4,371 212 11,568 11,522 23,090 2,557 1,481 4,038 2,968 4,282 216 11,504 10,957 22,461 2,534 1,561 4,095 2,870 4,201 209 11,375 13,435 25 INDIANA MICHIGAN POWER COMPANY AND SVBSIDIARIES PERATING STATISTICS (Concluded)

AYERAGE CosT 0F FUEL C0NsUMED (in cents): Per Million Btu: Coal.Nuclear.Ov'e rail Per Kilowatt-hour Generated:

Coal.Nuclear.Overall 1988 182 70 120 1.81.77 1.26 1987 190 75 117 1.87.84 1.25 1986 185 74 118 1.82.83 1.25 1985 194 80 136 1.97.86 1.42 1984 189 65 103 1.83.70 1.08 REBIDENTIAL SERYICE-AYERAGEs: Annual Kwh Use per Customer: Total.With Electric Heating.Annual Electric Bill: Total.With Electric Heating..Price per Kwh (in cents): Total.With Electric Heating.10,596 18,551$689.33$1,135.46 6.51 6.12 10,146 17,341$674.13$1,083.10 6.64 6.25 9,813 17,716$654.88$1,116.86 6.67 6.30 10,050 18,486$663.18$1,135.42 6.60 6.14 10,249 19,771$583.35$1,048.27 5.69 5.30 NUMBER OF ELECTRIC CUSTOMERS:

Year-End: Retail: Residential:

Without Electric Heating....With Electric Heating......Total Residential Commercial Industrial Miscellaneous

.Total Retail Wholesale (sales for resale).....Total Electric Customers..332,488 85,635 418,123 45,249 4,479 1,984 469,835 108 469,943 328,937 84.442 413,379 44,207 4,345 1,946 463,877 105 463,982 325,623 82,324 407,947 43,689 3,882 1,846 457,364 106 457,470 322,922 80,734 403,656 43,017 3,701 1,852 452,226 104 452,330 321,286 79,823 401,109 42,912 3,415 1,584 449,020 105 449,125 26 INDIANA MICHIGAN POWER COMPANVQ,'ividends and Price Ranges of Cumulative Preferred Stock By Quafters (1988 and 1987)Cumulative Preferred Stock 1st 1988-Quarters 2nd 3rd 4th 1st 1987-Quarters 2nd 3rd($100 Par Value)4~/s%Series Dividends Paid Per Share Market Price-$Per Share (MSE)-High Low 4.56%Series Dividends Paid Per Share Market Price-S Per Share (OTC)Ask (high/low)

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

Bid (highflow) 7.08%Series Dividends Paid Per Share Market Price-S Per Share (NYSE)-.High-Low 7.76%Series Dividends Paid Per Share Market Price-S Per Share (NYSE)-High-Low 8.68%Series Dividends Paid Per Share Market Price-S Per Share (NYSE)-High-Low 12%Series Dividends Paid Per Share Market Price-$Per Share (NYSE)-High-Low ($25 Par Value)$2.15 Series Dividends Paid Per Share Market Price-$Per Share (NYSE)-High-Low S2.25 Series Dividends Paid Per Share Market Price-S Per Share (NYSE)-High-Low$2.75 Series Dividends Paid Per Share Market Price-$Per Share (NYSE)-High-Low$3.63 Series (a)Dividends Paid Per Share Market Price-$Per Share (NYSE)-High-Low$1.14$1.14$1.14$1.14$1.14$1.14 S1.14$1.14$1.03$1.03$1.03$1.03$1.03$1.03$1.03$1.03$1.77$1.77$1.77$1.77$1.77$1.77$1.77$1.77 77/s 70l>>70'I>>71 I>>68s/s 68'/s 67'/z 67'/>>$1.94$1.94$1.94$1.94 81/s 77/s 77'/>>78/s 75 74'/>>73'/>>73$2.17$2.17 S2.17$2.17 91s/s 86'/z 85'/>>87'/z 82'lz 82'/z 80'/z 81$3.00$3.00$3.00$3.00 107 107'/z 106 108'/z 101'/>>103'/z 102'/z 103 88 79 84'/>>70'/s 75'/>>" 67'/s 71 61s/s$1.94$1.94$1.94$1.94 96'/z 93'/85'/s 80$2.17$2.17 104'/s 102 99'/>>, 90'/z 82M 72s/>>$2.17 90'/s 87 76 65$2.17 85'/z'9'/s

$3.00 S3.00$3.00$3.00 10SV~108 103 104 107'/z 103 107s/s 101'/>>$0.5375$0.5375$0.5375$0.5375'0.5375$0.5375$0.5375$0.5375 25 22 25 23'/s 23'/z 21'/>>22'/s 21'/z 26'ls 24 25'/>>21'/z 23'I>>19'/s 22'/s 18'/z$0.5625$0.5625$0.5625$0.5625$0.5625$0.5625$0.5625$0.5625 24'ls 22 24'/>>22'/z 24 22'/>>23'/>>21z/s 27 24'/>>26'/s 23'lz 26 20'/z 24 20$0.6875$0.6875$0.6875$0.6875$0.6875$0.6875$0.6875$0.6875 27'/z 26'/z 27s/s-26'I>>27 26'/>>271/2 26'/z 27'/>>26'/>>$0.9075 31 27'/>>26'/>>26 26'/z 25'/s 27 25$1.03125$1.03125$1.03125$1.03125$1.03125$1.03125$1.03125$1.03125 43'/s 43 41z/s 41'/z 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 Ll~

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

~1 0 ENCJ OSURE 2 TO AEP: NRC: 0909E~~1989 Internal Cash Flow Projection for Donald C.Cook Nuclear Plant (5 Millions)Projected 1989 Actual 1988 Net income after taxes.Less dividends paid Retained earnings Adjustments:

Depreciation and amortization Deferred income taxes and investment tax credits AFUDC Total adjustments Internal cash flow Average quarterly cash flow Average cash balances and short-term investments 151.8 135.9 15.9 146.3 26.8 (57.2)115.9 131.8 32.6 10.5 134 138 (4)152 (13)(55)84 80 20 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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