AEP

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2000, for American Electric Power Company, Inc. (AEP) and its subsidiaries. AEP is a holding company for seven regulated electric utility operating companies serving seven Atlantic and Midwestern states, alongside worldwide non-regulated electric and gas operations. The filing includes consolidated financial statements and separate reports for AEP Generating Company, Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company, and Ohio Power Company.

Key Financial Metrics

Note: Total Debt calculated as Short-term Debt ($1,118M) + Long-term Debt Due Within One Year ($978M) + Long-term Debt ($6,239M).

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by $47 million (31%) to $104 million. This decline was primarily driven by current expenditures and the amortization of previously deferred costs related to the restart of the Cook Nuclear Plant following an extended outage.
• Operating Expenses: Maintenance and other operation expenses increased by $62 million (15%), largely due to Cook Plant restart preparations. Worldwide non-regulated operations expenses rose by $37 million (29%) due to higher natural gas prices.
• Revenue Growth: Total revenues increased by $52 million (3%). Worldwide non-regulated revenues grew by $56 million (39%) due to increased natural gas and gas liquid product prices, offsetting a slight decline in domestic regulated revenues.
• Cash Flow: Net cash flows from operating activities decreased by $115 million to $288 million, reflecting the lower net income and changes in working capital.

Guidance, Outlook, Risks, and Unusual Items

Cook Nuclear Plant Restart

The two-unit Cook Nuclear Plant (owned by Indiana Michigan Power) has been shut down since September 1997. The NRC closed the Confirmatory Action Letter in February 2000, a key step toward restart. Refueling for Unit 2 was completed in April 2000. Total restart expenditures are estimated at $574 million, with $453 million spent through March 31, 2000. $80 million of restart costs were recorded in Q1 2000 expenses. Delays or failure to restart would have a material adverse effect on results.

Merger with Central and South West Corporation (CSW)

The FERC conditionally approved the merger on March 15, 2000. Conditions include transferring transmission control to a regional organization by December 2001 and divesting 550 MW of generating capacity (300 MW in SPP, 250 MW in ERCOT). SEC approval is pending. The merger is expected to close in the second quarter of 2000.

Industry Restructuring and Regulatory Risks

AEP faces significant uncertainty regarding the recovery of regulatory assets in Ohio, Virginia, and West Virginia due to industry restructuring laws.

• Ohio: A stipulation agreement for a transition plan was filed with the PUCO. Recovery of regulatory assets (estimated to exceed $800 million by year-end 2000) is contingent on PUCO approval.
• Virginia & West Virginia: Restructuring plans are in various stages of legislative and regulatory approval. Failure to recover stranded costs could result in material write-offs of regulatory assets.

Legal and Environmental Contingencies

• IRS COLI Litigation: The IRS is reviewing the deductibility of interest on corporate-owned life insurance (1991-1996). A disallowance could reduce earnings by approximately $318 million. AEP is litigating this matter.
• EPA Clean Air Act: The EPA alleges violations regarding modifications to coal-fired plants without preconstruction permits. Penalties and required pollution control equipment costs could be substantial.
• NOx Reductions: Compliance with the EPA's NOx rule could require capital expenditures of approximately $1.6 billion. AEP is seeking rehearing of the court decision upholding the rule.

Investor Verification Checklist

• Cook Plant Timeline: Verify the status of NRC inspections and the actual restart date for Unit 2 and Unit 1 to assess the duration of the financial impact.
• Merger Conditions: Monitor the SEC approval process and the specific plans for divesting the required 550 MW of generation capacity.
• Regulatory Asset Recovery: Track the PUCO (Ohio) and SCC (Virginia) decisions on transition plans and wires charges to determine the risk of regulatory asset write-offs.
• COLI Litigation Outcome: Review developments in the U.S. District Court case regarding the $318 million potential tax liability.
• NOx Compliance Costs: Assess the final compliance strategy and cost estimates for the NOx rule, as the $1.6 billion estimate is preliminary.