AEP

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2000, for American Electric Power Company, Inc. (AEP) and its subsidiaries. The filing includes consolidated financial statements for AEP and separate statements for its principal operating subsidiaries, including AEP Generating Company, Appalachian Power Company, Central Power and Light Company, and others.

A material event during the period was the completion of the merger with Central and South West Corporation (CSW) on June 15, 2000. The merger was accounted for as a pooling of interests, and financial statements have been retroactively adjusted to reflect the combined entity.

Key Financial Metrics (Six Months Ended June 30, 2000)

Note: Debt figures include short-term debt, long-term debt, and long-term debt due within one year. Total debt increased primarily due to higher short-term borrowings to fund operations and the Cook Plant restart.

Material Changes Versus Prior Period

• Net Income Decline: Net income decreased by $253 million (66%) year-to-date compared to 1999. The decline was driven by $161 million in non-recoverable merger costs, a $33 million write-down of a Chilean investment, and increased costs associated with restarting the Cook Nuclear Plant.
• Revenue Growth: Total revenues increased by $332 million (6%), primarily due to increased wholesale sales to neighboring utilities and higher natural gas prices in worldwide operations.
• Expense Increases: Fuel and purchased power expenses rose by $235 million (15%) due to higher natural gas costs. Maintenance and other operation expenses increased by $125 million (10%), largely due to Cook Plant restart expenditures.
• Merger Costs: $161 million in merger transaction and transition costs were expensed in the current period, which were not present in the prior year.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects the costs of the Cook Nuclear Plant extended outage and restart efforts to have a material adverse effect on future results and cash flows until the second unit is restarted. The annual amortization of deferred restart costs is estimated at $40 million through 2003.

Regarding the merger, settlement agreements provide for sharing net merger savings with customers. If realized savings are significantly less than required rate reductions, future results could be adversely affected.

Significant Risks and Contingencies

• Cook Nuclear Plant: Unit 2 restarted in July 2000. Unit 1 restart is scheduled for Q1 2001 with an additional estimated cost of $145 million, bringing the total restart estimate to $719 million. Delays or failure to restart Unit 1 would have a greater material adverse effect.
• Industry Restructuring: Legislation in Ohio, Texas, Virginia, and West Virginia is transitioning the industry from cost-based regulation to market pricing. This requires the discontinuance of SFAS 71 accounting.
  • Ohio: Regulatory assets of approximately $757 million (pre-tax) are at risk of write-off if the Public Utilities Commission of Ohio (PUCO) does not approve the transition plan providing for recovery. A final determination is expected by October 2000.
  • Texas: Central Power and Light Company (CPL) seeks to securitize $764 million of regulatory assets, pending resolution of legal appeals. A final determination on stranded costs will occur in a 2004 true-up proceeding.
• COLI Litigation: The IRS is reviewing the deductibility of interest on Corporate Owned Life Insurance (COLI) for 1991-1996. A disallowance could reduce earnings by approximately $318 million (including interest). Management has not accrued for this loss but is litigating.
• Environmental Compliance: Compliance with EPA NOx reduction rules and Texas regulations could require capital expenditures of approximately $1.8 billion. Penalties for Clean Air Act violations regarding plant modifications could also be substantial.
• Shareholder Litigation: Class action lawsuits allege false statements regarding the Cook Plant's condition. Management intends to oppose these vigorously.

Investor Verification Checklist

• Cook Plant Restart Status: Verify the timeline and cost certainty for the restart of Cook Nuclear Plant Unit 1, scheduled for Q1 2001.
• Ohio Regulatory Approval: Monitor the PUCO's decision on the transition plan filing, which determines the recoverability of ~$757 million in regulatory assets.
• Texas Securitization Appeals: Track the resolution of legal appeals regarding CPL's $764 million securitization order, which impacts stranded cost recovery.
• COLI Litigation Outcome: Assess the potential $318 million exposure from the IRS disallowance of COLI interest deductions.
• Merger Savings Realization: Evaluate whether actual merger savings meet the thresholds required to avoid adverse impacts from customer rate reduction riders.
• NOx Compliance Costs: Review the final capital expenditure requirements for NOx emission reductions, currently estimated at $1.8 billion.