AEP

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, for American Electric Power Company, Inc. (AEP) and its subsidiaries, including AEP Generating Company, Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company, and Ohio Power Company. AEP operates primarily as a regulated domestic electric utility with additional worldwide non-regulated electric and gas operations. The filing includes consolidated financial statements and management discussion for the parent company and individual statements for its subsidiaries.

Key Financial Metrics (Consolidated)

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by $30 million (25%) in the second quarter and $30 million (11%) year-to-date compared to 1998. The primary drivers were the extended outage of the Cook Nuclear Plant and mild weather conditions reducing demand.
• Revenue Mix: Domestic regulated utility revenues decreased ($60 million in Q2, $19 million YTD) due to lower wholesale prices and reduced sales. Conversely, worldwide non-regulated revenues increased significantly ($146 million in Q2, $278 million YTD), driven by the December 1998 acquisitions of CitiPower (Australia) and Louisiana Intrastate Gas.
• Expense Increases: Maintenance and other operation expenses rose due to costs associated with preparing the Cook Nuclear Plant for restart. Worldwide non-regulated expenses also increased due to business development and acquisition-related costs.
• Interest Costs: Interest and preferred dividends increased by 24% year-to-date, primarily due to additional borrowings to fund non-regulated operations and acquisitions.

Guidance, Outlook, Risks, and Contingencies

Merger with Central and South West Corporation (CSW)

AEP is pursuing a merger with CSW, expected to close in the first quarter of 2000. Regulatory approvals have been secured from the NRC, Arkansas, Louisiana, Oklahoma, Indiana, and Kentucky. Settlements have been reached with FERC trial staff and Texas regulators, though a final FERC order is expected in Q1 2000. The merger is contingent on regulatory approvals and pooling-of-interests accounting treatment.

Cook Nuclear Plant Shutdown

Both units of the Cook Plant remain shut down due to safety system issues. Restart is scheduled for April 2000 (Unit 2) and September 2000 (Unit 1). Total restart expenditures are estimated at $574 million, with $192 million spent through June 30, 1999. A $129 million regulatory asset has been recorded for unrecovered fuel costs. Settlements with Indiana and Michigan regulators allow for cost deferrals and amortization over five years.

Regulatory and Environmental Risks

• Restructuring Legislation: New laws in Virginia and Ohio (signed July 6, 1999) mandate industry restructuring and customer choice. AEP faces potential write-offs of generation-related regulatory assets ($60 million in Virginia; $640 million in Ohio) if recovery mechanisms are not approved.
• Air Quality Compliance: Preliminary estimates indicate NOx compliance could require approximately $1.5 billion in capital expenditures for the AEP System. Costs are uncertain and depend on compliance alternatives.
• 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 $316 million. AEP has made no provision for this potential loss.
• Year 2000 (Y2K): AEP has spent $35 million on Y2K readiness, with an additional $13-$21 million estimated. Management believes the risk of outages is no higher than normal operational risks.

Investor Verification Checklist

• Cook Plant Restart Timeline: Verify if the April and September 2000 restart dates for Cook Plant units are met, as delays would significantly increase costs and impact earnings through 2003.
• CSW Merger Approval: Monitor the final FERC order expected in Q1 2000 and any remaining state regulatory hurdles (e.g., Texas final order expected Q4 1999).
• Regulatory Asset Recovery: Track the outcome of the Ohio and Virginia restructuring processes to determine if the $640 million (Ohio) and $60 million (Virginia) in regulatory assets will be recovered or written off.
• COLI Litigation Status: Review developments in the lawsuit against the U.S. regarding COLI interest deductions, which poses a potential $316 million earnings risk.
• NOx Compliance Costs: Assess final capital expenditure requirements for NOx emission reductions, currently estimated at $1.5 billion system-wide.