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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
COMMISSION REGISTRANTS; STATES OF INCORPORATION; I.R.S. EMPLOYER
FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NOS.
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1-3525 AMERICAN ELECTRIC POWER COMPANY, INC. (A New York Corporation) 13-4922640
0-18135 AEP GENERATING COMPANY (An Ohio Corporation) 31-1033833
1-3457 APPALACHIAN POWER COMPANY (A Virginia Corporation) 54-0124790
0-346 CENTRAL POWER AND LIGHT COMPANY (A Texas Corporation) 74-0550600
1-2680 COLUMBUS SOUTHERN POWER COMPANY (An Ohio Corporation) 31-4154203
1-3570 INDIANA MICHIGAN POWER COMPANY (An Indiana Corporation) 35-0410455
1-6858 KENTUCKY POWER COMPANY (A Kentucky Corporation) 61-0247775
1-6543 OHIO POWER COMPANY (An Ohio Corporation) 31-4271000
0-343 PUBLIC SERVICE COMPANY OF OKLAHOMA (An Oklahoma Corporation) 73-0410895
1-3146 SOUTHWESTERN ELECTRIC POWER COMPANY (A Delaware Corporation) 72-0323455
0-340 WEST TEXAS UTILITIES COMPANY (A Texas Corporation) 75-0646790
1 Riverside Plaza, Columbus, Ohio 43215
Telephone (614) 223-1000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X. No.
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Indicate by check mark if disclosure of delinquent filers with respect to
American Electric Power Company, Inc. pursuant to Item 405 of Regulation S-K
(229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark if disclosure of delinquent filers with respect to
Appalachian Power Company. Indiana Michigan Power Company or Ohio Power Company
pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements of Appalachian Power
Company or Ohio Power Company incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
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AEP Generating Company, Columbus Southern Power Company, Kentucky Power
Company, Public Service Company of Oklahoma and West Texas Utilities Company
meet the conditions set forth in General Instruction I(1)(a) and (b) of Form
10-K and are therefore filing this Form 10-K with the reduced disclosure format
specified in General Instruction I(2) to such Form 10-K.
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED
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AEP Generating Company None
American Electric Common Stock,
Power Company, Inc. $6.50 par value................................. New York Stock Exchange
Appalachian Power 8-1/4% Junior Subordinated Deferrable
Company Interest Debentures, Series A, Due 2026....... New York Stock Exchange
8% Junior Subordinated Deferrable
Interest Debentures, Series B, Due 2027....... New York Stock Exchange
7.20% Senior Notes, Series A, Due 2038.............. New York Stock Exchange
7.30% Senior Notes, Series B, Due 2038................New York Stock Exchange
Columbus Southern 8-3/8% Junior Subordinated Deferrable
Power Company Interest Debentures, Series A, Due 2025........ New York Stock Exchange
7.92% Junior Subordinated Deferrable
Interest Debentures, Series B, Due 2027........ New York Stock Exchange
CPL Capital I 8.00% Cumulative Quarterly Income
Preferred Securities, Series A, Liquidation
Preference $25 per Preferred Security............New York Stock Exchange
Indiana Michigan 8% Junior Subordinated Deferrable
Power Company Interest Debentures, Series A, Due 2026........ New York Stock Exchange
7.60% Junior Subordinated Deferrable
Interest Debentures, Series B, Due 2038..........New York Stock Exchange
Kentucky Power 8.72% Junior Subordinated Deferrable
Company Interest Debentures, Series A, Due 2025........ New York Stock Exchange
Ohio Power Company 8.16% Junior Subordinated Deferrable
Interest Debentures, Series A, Due 2025........ New York Stock Exchange
7.92% Junior Subordinated Deferrable
Interest Debentures Series B, Due 2027..........New York Stock Exchange
7-3/8% Senior Notes, Series A, Due 2038............. New York Stock Exchange
PSO Capital I 8.00% Trust Originated Preferred
Securities, Series A, Liquidation
Preference $25 per Preferred Security.......... New York Stock Exchange
SWEPCo Capital I 7.875% Trust Preferred Securities,
Series A, Liquidation amount $25
per Preferred Security......................... New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
REGISTRANT TITLE OF EACH CLASS
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AEP Generating Company None
American Electric Power Company, Inc. None
Appalachian Power Company None
Central Power and Light Company 4.00% Cumulative Preferred Stock, Non-Voting, $100 par value
4.20% Cumulative Preferred Stock, Non-Voting, $100 par value
Columbus Southern Power Company None
Indiana Michigan Power Company 4.125% Cumulative Preferred Stock, Non-Voting, $100 par value
Kentucky Power Company None
Ohio Power Company 4.50% Cumulative Preferred Stock, Voting, $100 par value
Public Service Company of Oklahoma None
Southwestern Electric Power Company 4.28% Cumulative Preferred Stock, Non-Voting, $100 par value
4.65% Cumulative Preferred Stock, Non-Voting, $100 par value
5.00% Cumulative Preferred Stock, Non-Voting, $100 par value
West Texas Utilities Company None
AGGREGATE MARKET VALUE
OF VOTING AND NON-VOTING NUMBER OF SHARES
COMMON EQUITY HELD OF COMMON STOCK
BY NON-AFFILIATES OF OUTSTANDING OF
THE REGISTRANTS AT THE REGISTRANTS AT
FEBRUARY 1, 2002 FEBRUARY 1, 2002
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AEP Generating Company None 1,000
($1,000 par value)
American Electric Power Company, Inc. $13,478,213,062 322,368,167
($6.50 par value)
Appalachian Power Company None 13,499,500
(no par value)
Central Power and Light Company None 6,755,535
($25 par value)
Columbus Southern Power Company None 16,410,426
(no par value)
Indiana Michigan Power Company None 1,400,000
(no par value)
Kentucky Power Company None 1,009,000
($50 par value)
Ohio Power Company None 27,952,473
(no par value)
Public Service Company of Oklahoma None 9,013,000
($15 par value)
Southwestern Electric Power Company None 7,536,640
($18 par value)
West Texas Utilities Company None 5,488,560
($25 par value)
NOTE ON MARKET VALUE OF COMMON EQUITY HELD BY NON-AFFILIATES
American Electric Power Company, Inc. owns, directly or indirectly, all of
the common stock of AEP Generating Company, Appalachian Power Company, Central
Power and Light Company, Columbus Southern Power Company, Indiana Michigan Power
Company, Kentucky Power Company, Ohio Power Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company
(see Item 12 herein).
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K
INTO WHICH DOCUMENT
DESCRIPTION IS INCORPORATED
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Portions of Annual Reports of the following companies for the fiscal year Part II
ended December 31, 2001:
AEP Generating Company
American Electric Power Company, Inc.
Appalachian Power Company
Central Power and Light Company
Columbus Southern Power Company
Indiana Michigan Power Company
Kentucky Power Company
Ohio Power Company
Public Service Company of Oklahoma
Southwestern Electric Power Company
West Texas Utilities Company
Portions of Proxy Statement of American Electric Power Company, Inc. for Part III
2002 Annual Meeting of Shareholders, to be filed within 120 days after
December 31, 2001
Portions of Information Statements of the following companies for 2002 Part III
Annual Meeting of Shareholders, to be filed within 120 days after December
31, 2001:
Appalachian Power Company
Ohio Power Company
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THIS COMBINED FORM 10-K IS SEPARATELY FILED BY AEP GENERATING COMPANY,
AMERICAN ELECTRIC POWER COMPANY, INC., APPALACHIAN POWER COMPANY, CENTRAL POWER
AND LIGHT COMPANY, COLUMBUS SOUTHERN POWER COMPANY, INDIANA MICHIGAN POWER
COMPANY, KENTUCKY POWER COMPANY, OHIO POWER COMPANY, PUBLIC SERVICE COMPANY OF
OKLAHOMA, SOUTHWESTERN ELECTRIC POWER COMPANY AND WEST TEXAS UTILITIES COMPANY.
INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY
SUCH REGISTRANT ON ITS OWN BEHALF. EXCEPT FOR AMERICAN ELECTRIC POWER COMPANY,
INC., EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE
OTHER REGISTRANTS.
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TABLE OF CONTENTS
PAGE
NUMBER
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Glossary of Terms...................................................................... i
Forward-Looking Information............................................................ 1
PART I
Item 1. Business............................................................. 2
Item 2. Properties........................................................... 35
Item 3. Legal Proceedings.................................................... 39
Item 4. Submission of Matters to a Vote of Security Holders.................. 40
Executive Officers of the Registrants.............................................. 40
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 42
Item 6. Selected Financial Data............................................ 42
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition............................. 42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...Risk 43
Item 8. Financial Statements and Supplementary Data........................ 43
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 43
PART III
Item 10. Directors and Executive Officers of the Registrants................ 43
Item 11. Executive Compensation............................................. 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 45
Item 13. Certain Relationships and Related Transactions..................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................... 46
Signatures............................................................................. 49
Index to Financial Statement Schedules................................................. S-1
Independent Auditors' Report........................................................... S-2
Exhibit Index.......................................................................... E-1
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-K are defined
below:
ABBREVIATION OR ACRONYM DEFINITION
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AEGCo................................... AEP Generating Company, an electric utility subsidiary of AEP.
AEP .................................... American Electric Power Company, Inc.
AEP System or the System................ The American Electric Power System, an integrated electric utility system, owned and
operated by AEP's electric utility subsidiaries.
AFUDC................................... Allowance for funds used during construction. Defined in regulatory systems of
accounts as the net cost of borrowed funds used for construction and a reasonable
rate of return on other funds when so used.
APCo.................................... Appalachian Power Company, an electric utility subsidiary of AEP.
Btu..................................... British thermal unit.
Buckeye................................. Buckeye Power, Inc., an unaffiliated corporation.
C3...................................... C3 Communications, Inc.
CAA..................................... Clean Air Act.
CAAA.................................... Clean Air Act Amendments of 1990.
CCD Group............................... CSPCo, CG&E and DP&L.
CERCLA.................................. Comprehensive Environmental Response, Compensation and Liability Act of 1980.
CG&E.................................... The Cincinnati Gas & Electric Company, an unaffiliated utility company.
CO2..................................... Carbon dioxide.
Cook Plant.............................. The Donald C. Cook Nuclear Plant, owned by I&M, located near Bridgman, Michigan.
CPL..................................... Central Power and Light Company, an electric utility subsidiary of AEP.
CSPCo................................... Columbus Southern Power Company, an electric utility subsidiary of AEP.
CSW.................................... Central and South West Corporation.
DOE..................................... United States Department of Energy.
DP&L.................................... The Dayton Power and Light Company, an unaffiliated utility company.
East Zone Companies of AEP.............. APCo, CSPCo, I&M, KEPCo and OPCo.
ERCOT................................... Electric Reliability Council of Texas.
EWG..................................... Exempt wholesale generator.
Federal EPA............................. United States Environmental Protection Agency.
FERC.................................... Federal Energy Regulatory Commission (an independent commission within the DOE).
FUCO.................................... Foreign utility company as defined by PUHCA.
I&M..................................... Indiana Michigan Power Company, an electric utility subsidiary of AEP.
IURC.................................... Indiana Utility Regulatory Commission.
KEPCo................................... Kentucky Power Company, an electric utility subsidiary of AEP.
MTM..................................... Mark-to-market.
NOx..................................... Nitrogen oxide.
NPDES................................... National Pollutant Discharge Elimination System.
NRC..................................... Nuclear Regulatory Commission.
Ohio EPA................................ Ohio Environmental Protection Agency.
OPCo................................... Ohio Power Company, an electric utility subsidiary of AEP.
OVEC.................................... Ohio Valley Electric Corporation, an electric utility company in which AEP and CSPCo
own a 44.2% equity interest.
PCBs.................................... Polychlorinated biphenyls.
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ABBREVIATION OR ACRONYM DEFINITION
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PSO..................................... Public Service Company of Oklahoma, an electric utility subsidiary of AEP.
PUCO.................................... The Public Utilities Commission of Ohio.
PUHCA................................... Public Utility Holding Company Act of 1935, as amended.
QF...................................... Qualifying facility as defined in the Public Utility Regulatory Policies Act of 1978.
RCRA.................................... Resource Conservation and Recovery Act of 1976, as amended.
Rockport Plant.......................... A generating plant, consisting of two 1,300,000-kilowatt coal-fired generating
units, near Rockport, Indiana.
SEC..................................... Securities and Exchange Commission.
SEEBOARD................................ SEEBOARD Group plc, Crawley, West Sussex, United Kingdom.
Service Corporation..................... American Electric Power Service Corporation, a service subsidiary of AEP.
SO2..................................... Sulfur dioxide.
SO2 Allowance........................... An allowance to emit one ton of sulfur dioxide granted under the Clean Air Act
Amendments of 1990.
SPP..................................... Southwest Power Pool.
STPNOC.................................. STP Nuclear Operating Company, a non-profit Texas corporation which operates STP on
behalf of its joint owners including CPL.
SWEPCo.................................. Southwestern Electric Power Company, an electric utility subsidiary of AEP.
TVA .................................... Tennessee Valley Authority.
Vale.................................... Empresa De Electricidade Vale Paranapanema SA, a Brazilian Electric Distribution
Company.
VEPCo................................... Virginia Electric and Power Company, an unaffiliated utility company.
Virginia SCC............................ Virginia State Corporation Commission.
West Virginia PSC....................... Public Service Commission of West Virginia.
West Zone Companies of AEP.............. CPL, PSO, SWEPCo and WTU.
WTU..................................... West Texas Utilities Company, an electric utility subsidiary of AEP.
Zimmer or Zimmer Plant.................. Wm. H. Zimmer Generating Station, a 1,300,000-kilowatt coal-fired generating unit
commonly owned by CSPCo (25.4%), CG&E (46.5%) and DP&L (28.1%), and operated by
CG&E.
ii
FORWARD-LOOKING INFORMATION
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This report made by AEP and certain of its subsidiaries includes
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements reflect assumptions and
involve a number of risks and uncertainties. Among the factors that could cause
actual results to differ materially from forward-looking statements are:
- Electric load and customer growth.
- Abnormal weather conditions.
- Available sources of and prices for coal and gas.
- Availability of generating capacity.
- Litigation concerning AEP's merger with CSW.
- The timing of the implementation of AEP's restructuring plan.
- Risks related to energy trading and construction under contract.
- The speed and degree to which competition is introduced to our power
generation business.
- The ability to recover net regulatory assets, other stranded costs and
implementation costs in connection with deregulation of generation in
certain states.
- New legislation and government regulations.
- The structure and timing of a competitive market for electricity and
its impact on prices.
- The ability of AEP to successfully control its costs.
- The success of new business ventures.
- International developments affecting AEP's foreign investments.
- The effects of fluctuations in foreign currency exchange rates.
- The economic climate and growth in AEP's service and trading
territories, both domestic and foreign.
- The ability of AEP to comply with or to challenge successfully new
environmental regulations and to litigate successfully claims that AEP
violated the CAA.
- Inflationary trends.
- Changes in electricity and gas market prices and interest rates.
- Other risks and unforeseen events.
1
PART I -------------------------------------------------------------------------
Item 1. BUSINESS
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GENERAL
AEP was incorporated under the laws of the State of New York in 1906 and
reorganized in 1925. It is a public utility holding company which owns, directly
or indirectly, all of the outstanding common stock of its domestic electric
utility subsidiaries and varying percentages of other subsidiaries.
Substantially all of the operating revenues of AEP and its subsidiaries are
derived from the marketing and trading of power and gas and the furnishing of
electric service.
The service area of AEP's domestic electric utility subsidiaries covers
portions of the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan,
Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. The generating and
transmission facilities of AEP's subsidiaries are physically interconnected, and
their operations are coordinated, as a single integrated electric utility
system. Transmission networks are interconnected with extensive distribution
facilities in the territories served. The electric utility subsidiaries of AEP,
which do business as "American Electric Power," have traditionally provided
electric service, consisting of generation, transmission and distribution, on an
integrated basis to their retail customers.
At December 31, 2001, the subsidiaries of AEP had a total of 27,726
employees. AEP, as such, has no employees. The operating subsidiaries of AEP
are:
APCo (organized in Virginia in 1926) is engaged in the generation,
sale, purchase, transmission and distribution of electric power to
approximately 917,000 retail customers in the southwestern portion of
Virginia and southern West Virginia, and in supplying electric power at
wholesale to other electric utility companies and municipalities in those
states and in Tennessee. At December 31, 2001, APCo and its wholly owned
subsidiaries had 2,629 employees. Among the principal industries served by
APCo are coal mining, primary metals, chemicals and textile mill products.
In addition to its AEP System interconnections, APCo also is interconnected
with the following unaffiliated utility companies: Carolina Power & Light
Company, Duke Energy Corporation and VEPCo. A comparatively small part of
the properties and business of APCo is located in the northeastern end of
the Tennessee Valley. APCo has several points of interconnection with TVA
and has entered into agreements with TVA under which APCo and TVA
interchange and transfer electric power over portions of their respective
systems.
CPL (organized in Texas in 1945) is engaged in the generation, sale,
purchase, transmission and distribution of electric power to approximately
689,000 customers in southern Texas, and in supplying electric power at
wholesale to other utilities, municipalities and rural electric
cooperatives. At December 31, 2001, CPL had 1,374 employees. Among the
principal industries served by CPL are oil and gas extraction, food
processing, apparel, metal refining, chemical and petroleum refining,
plastics, and machinery equipment.
CSPCo (organized in Ohio in 1937, the earliest direct predecessor
company having been organized in 1883) is engaged in the generation, sale,
purchase, transmission and distribution of electric power to approximately
678,000 customers in Ohio, and in supplying electric power at wholesale to
other electric utilities and to municipally owned distribution systems
within its service area. At December 31, 2001, CSPCo had 1,222 employees.
CSPCo's service area is comprised of two areas in Ohio, which include
portions of twenty-five counties. One area includes the City of Columbus
and the other is a predominantly rural area in south central Ohio. Among
the principal industries served are food processing, chemicals, primary
metals, electronic machinery and paper products. In addition to its AEP
System interconnections, CSPCo also is interconnected with the following
unaffiliated utility companies: CG&E, DP&L and Ohio Edison Company.
2
I&M (organized in Indiana in 1925) is engaged in the generation, sale,
purchase, transmission and distribution of electric power to approximately
567,000 customers in northern and eastern Indiana and southwestern
Michigan, and in supplying electric power at wholesale to other electric
utility companies, rural electric cooperatives and municipalities. At
December 31, 2001, I&M had 2,851 employees. Among the principal industries
served are primary metals, transportation equipment, electrical and
electronic machinery, fabricated metal products, rubber and miscellaneous
plastic products and chemicals and allied products. Since 1975, I&M has
leased and operated the assets of the municipal system of the City of Fort
Wayne, Indiana. In addition to its AEP System interconnections, I&M also is
interconnected with the following unaffiliated utility companies: Central
Illinois Public Service Company, CG&E, Commonwealth Edison Company,
Consumers Energy Company, Illinois Power Company, Indianapolis Power &
Light Company, Louisville Gas and Electric Company, Northern Indiana Public
Service Company, PSI Energy Inc. and Richmond Power & Light Company.
KEPCo (organized in Kentucky in 1919) is engaged in the generation,
sale, purchase, transmission and distribution of electric power to
approximately 173,000 customers in an area in eastern Kentucky, and in
supplying electric power at wholesale to other utilities and municipalities
in Kentucky. At December 31, 2001, KEPCo had 427 employees. In addition to
its AEP System interconnections, KEPCo also is interconnected with the
following unaffiliated utility companies: Kentucky Utilities Company and
East Kentucky Power Cooperative Inc. KEPCo is also interconnected with TVA.
Kingsport Power Company (organized in Virginia in 1917) provides
electric service to approximately 45,000 customers in Kingsport and eight
neighboring communities in northeastern Tennessee. Kingsport Power Company
has no generating facilities of its own. It purchases electric power
distributed to its customers from APCo. At December 31, 2001, Kingsport
Power Company had 58 employees.
OPCo (organized in Ohio in 1907 and re-incorporated in 1924) is
engaged in the generation, sale, purchase, transmission and distribution of
electric power to approximately 698,000 customers in the northwestern, east
central, eastern and southern sections of Ohio, and in supplying electric
power at wholesale to other electric utility companies and municipalities.
At December 31, 2001, OPCo and its wholly owned subsidiaries had 2,297
employees. Among the principal industries served by OPCo are primary
metals, rubber and plastic products, stone, clay, glass and concrete
products, petroleum refining and chemicals. In addition to its AEP System
interconnections, OPCo also is interconnected with the following
unaffiliated utility companies: CG&E, The Cleveland Electric Illuminating
Company, DP&L, Duquesne Light Company, Kentucky Utilities Company,
Monongahela Power Company, Ohio Edison Company, The Toledo Edison Company
and West Penn Power Company.
PSO (organized in Oklahoma in 1913) is engaged in the generation,
sale, purchase, transmission and distribution of electric power to
approximately 502,000 customers in eastern and southwestern Oklahoma, and
in supplying electric power at wholesale to other utilities, municipalities
and rural electric cooperatives. At December 31, 2001, PSO had 989
employees. Among the principal industries served by PSO are natural gas and
oil production, oil refining, steel processing, aircraft maintenance, paper
manufacturing and timber products, glass, chemicals, cement, plastics,
aerospace manufacturing, telecommunications, and rubber goods.
SWEPCo (organized in Delaware in 1912) is engaged in the generation,
sale, purchase, transmission and distribution of electric power to
approximately 431,000 customers in northeastern Texas, northwestern
Louisiana, and western Arkansas, and in supplying electric power at
wholesale to other utilities, municipalities and rural electric
cooperatives. At December 31, 2001, SWEPCo had 1,375 employees. Among the
principal industries served by SWEPCo are natural gas and oil production,
petroleum
3
refining, manufacturing of pulp and paper, chemicals, food processing, and
metal refining. The territory served by SWEPCo also includes several
military installations, colleges, and universities.
Wheeling Power Company (organized in West Virginia in 1883 and
reincorporated in 1911) provides electric service to approximately 41,000
customers in northern West Virginia. Wheeling Power Company has no
generating facilities of its own. It purchases electric power distributed
to its customers from OPCo. At December 31, 2001, Wheeling Power Company
had 64 employees.
WTU (organized in Texas in 1927) is engaged in the generation, sale,
purchase, transmission and distribution of electric power to approximately
189,000 customers in west and central Texas, and in supplying electric
power at wholesale to other utilities, municipalities and rural electric
cooperatives. At December 31, 2001, WTU had 689 employees. The principal
industry served by WTU is agriculture. The territory served by WTU also
includes several military installations and correctional facilities.
Another principal electric utility subsidiary of AEP is AEGCo, which was
organized in Ohio in 1982 as an electric generating company. AEGCo sells power
at wholesale to I&M and KEPCo. AEGCo has no employees.
See Item 2 for information concerning the properties of the subsidiaries of
AEP.
The Service Corporation provides accounting, administrative, information
systems, engineering, financial, legal, maintenance and other services at cost
to the AEP System companies. The executive officers of AEP and its public
utility subsidiaries are all employees of the Service Corporation.
The AEP System is an integrated electric utility system and, as a result,
the member companies of the AEP System have contractual, financial and other
business relationships with the other member companies, such as participation in
the AEP System savings and retirement plans and tax returns, sales of
electricity, transportation and handling of fuel, sales or rentals of property
and interest or dividend payments on the securities held by the companies'
respective parents.
AEP-CSW MERGER
On June 15, 2000, CSW merged with and into a wholly owned merger subsidiary
of AEP with CSW being the surviving corporation. The merger was pursuant to an
Agreement and Plan of Merger, dated as of December 21, 1997, that AEP and CSW
had entered into. As a result of the merger, each outstanding share of common
stock, par value $3.50 per share, of CSW (other than shares owned by AEP or CSW)
was converted into 0.6 of a share of common stock, par value $6.50 per share, of
AEP. CSW's four wholly-owned domestic electric utility subsidiaries are CPL,
PSO, SWEPCo and WTU.
AEP is complying or intends to comply with the following conditions imposed
by the FERC as part of the FERC's order approving the merger:
- Transfer operational control of AEP's east and west transmission
systems to fully-functioning, FERC-approved regional transmission
organizations. See Transmission Services for Non-Affiliates.
- Two interim transmission-related mitigation measures consisting of
market monitoring and independent calculation and posting of available
transmission capacity to monitor the operation of AEP's east
transmission system. AEP implemented these measures upon the
consummation of the merger.
- Divestiture of 550 MW of generating capacity comprised of 300 MW of
capacity in SPP and 250 MW of capacity in ERCOT. AEP must complete
divestiture of the SPP capacity by July 1, 2002. AEP has completed
divestiture of the ERCOT capacity.
The FERC found that certain energy sales of SPP and ERCOT capacity would be
reasonable and effective interim mitigation measures until completion of the
required SPP and ERCOT divestitures. As required by the FERC, the proposed
interim energy sales were in effect when the merger was consummated.
4
Litigation: On January 18, 2002, the U.S. Court of Appeals for the District
of Columbia ruled that the SEC failed to prove that the merger met the
requirements of PUHCA and remanded the case to the SEC for further review. The
court held that the SEC must explain its conclusion that the merger met PUHCA
requirements that utilities be "physically interconnected" and justify its
finding that the merger will result in a combined entity that is confined to a
"single area or region."
In its June 2000 approval of the merger, the SEC agreed with AEP that AEP's
and CSW's systems are interconnected because they have transmission access
rights to a single high-voltage line through Missouri and also meet the PUHCA's
single region requirement because it is now technically possible to centrally
control the output of power plants across many states. In its ruling, the court
held that the SEC failed to explain its conclusions that the transmission
integration and single region requirements are satisfied.
Management believes that the merger meets the requirements of PUHCA and
expects the matter to be resolved favorably.
REGULATION
General
AEP and its subsidiaries are subject to the broad regulatory provisions of
PUHCA administered by the SEC. The public utility subsidiaries' retail rates and
certain other matters are subject to regulation by the public utility
commissions of the states in which they operate. Such subsidiaries are also
subject to regulation by the FERC under the Federal Power Act in respect of
rates for interstate sale at wholesale and transmission of electric power,
accounting and other matters and construction and operation of hydroelectric
projects. I&M and CPL are subject to regulation by the NRC under the Atomic
Energy Act of 1954, as amended, with respect to the operation of the Cook Plant
and STP, respectively.
Possible Change to PUHCA
The provisions of PUHCA, administered by the SEC, regulate all aspects of a
registered holding company system, such as the AEP System. PUHCA requires that
the operations of a registered holding company system be limited to a single
integrated public utility system and such other businesses as are incidental or
necessary to the operations of the system. In addition, PUHCA governs, among
other things, financings, sales or acquisitions of assets and intra-system
transactions.
On June 20, 1995, the SEC released a report from its Division of Investment
Management recommending a conditional repeal of PUHCA, including its limits on
financing and on geographic and business diversification. Specific federal
authority, however, would be preserved over access to the books and records of
registered holding company systems, audit authority over registered holding
companies and their subsidiaries and oversight over affiliate transactions. This
authority would be transferred to the FERC. Following the report, legislation
was introduced in Congress to repeal PUHCA and transfer certain federal
authority to the FERC as recommended in the SEC report. Since 1997, such PUHCA
repeal language has been reintroduced in each session of Congress both as a
separate bill and as part of broader legislation regarding changes in the
electric industry. Legislative hearings were held but neither the House of
Representatives nor the Senate passed any PUHCA repeal legislation. A number of
bills contemplating PUHCA repeal separately and with the restructuring of the
electric utility industry have been introduced in the current Congress. See
Competition and Business Change. If PUHCA is repealed, registered holding
company systems, including the AEP System, will be able to compete in the
changing industry without the constraints of PUHCA. Management of AEP believes
that removal of these constraints would be beneficial to the AEP System.
PUHCA and the rules and orders of the SEC currently require that
transactions between associated companies in a registered holding company system
be performed at cost with limited exceptions. Over the years, the AEP System has
developed numerous affiliated service, sales and construction relationships and,
in some cases, invested significant capital and developed significant operations
in reliance upon the ability to recover its full costs under these provisions.
5
Conflict of Regulation
Public utility subsidiaries of AEP can be subject to regulation of the same
subject matter by two or more jurisdictions. In such situations, it is possible
that the decisions of such regulatory bodies may conflict or that the decision
of one such body may affect the cost of providing service, and so the rates, in
another jurisdiction. In a case involving OPCo, the U.S. Court of Appeals for
the District of Columbia held that the determination of costs to be charged to
associated companies by the SEC under PUHCA precluded the FERC from determining
that such costs were unreasonable for ratemaking purposes. The U.S. Supreme
Court also has held that a state commission may not conclude that a FERC
approved wholesale power agreement is unreasonable for state ratemaking
purposes. Certain actions that would overturn these decisions or otherwise
affect the jurisdiction of the SEC and FERC are under consideration by the U.S.
Congress and these regulatory bodies. Such conflicts of jurisdiction often
result in litigation and, if resolved adversely to a public utility subsidiary
of AEP, could have a material adverse effect on the results of operations or
financial condition of such subsidiary or AEP.
Rates
The rates charged by the electric utility subsidiaries of AEP are approved
by the FERC or one of the state utility commissions as applicable. The FERC
regulates wholesale rates and the state commissions regulate retail rates. In
recent years the number of rate increase applications filed by the operating
subsidiaries of AEP with their respective state commissions and the FERC has
decreased. Under current rate regulation, if increases in operating,
construction and capital costs exceed increases in revenues resulting from
previously granted rate increases and increased customer demand, then it may be
appropriate for certain of AEP's electric utility subsidiaries to file rate
increase applications in the future.
Generally the rates of AEP's operating subsidiaries are determined based
upon the cost of providing service including a reasonable return on investment,
except for the states of Ohio, Texas and Virginia as noted below. Certain states
served by the AEP System allow alternative forms of rate regulation in addition
to the traditional cost-of-service approach. However, the rates of AEP's
operating subsidiaries in those states continue to be cost-based. The IURC may
approve alternative regulatory plans which could include setting customer rates
based on market or average prices, price caps, index-based prices and prices
based on performance and efficiency.
AEP is exposed to risk from changes in the market prices of coal and
natural gas used to generate electricity where generation is no longer regulated
or where existing fuel clauses are suspended or frozen. The protection afforded
by fuel clause recovery mechanisms has either been eliminated by the
implementation of customer choice in Ohio (effective January 1, 2001) and in the
ERCOT power grid area of Texas (effective January 1, 2002) or frozen by
settlement agreements in Indiana, Michigan, and West Virginia. To the extent the
fuel supply of the generating units in these states is not under fixed price
long-term contracts, AEP is subject to market price risk. AEP continues to be
protected against market price changes by active fuel clauses in Oklahoma,
Arkansas, Louisiana, Kentucky, Virginia and the SPP area of Texas.
AEP cannot predict the timing or probability of approvals regarding
applications for additional rate changes, the outcome of action by regulatory
commissions or courts with respect to such matters, or the effect thereof on the
earnings and business of the AEP System. In addition, current rate regulation
may, and in the case of Ohio, Texas and Virginia has been, subject to
significant revision. See Competition and Business Change and the footnote to
the financial statements entitled Customer Choice and Industry Restructuring.
6
CLASSES OF SERVICE
The principal classes of service from which the domestic electric utility
subsidiaries of AEP derive revenues and the amount of such revenues during the
year ended December 31, 2001 are as follows:
AEP
SYSTEM(a) AEGCo APCo CPL CSPCo
--------- ----- ---- --- -----
(IN THOUSANDS)
Wholesale Business:
Residential............................... $ 3,553,216 $ 0 $ 587,062 $ 660,884 $ 477,341
Commercial................................ 2,328,383 0 267,312 473,337 426,444
Industrial................................ 2,388,354 0 353,070 345,071 141,583
Other Retail Customers.................... 419,232 0 77,258 49,007 46,948
Energy Delivery........................... (3,356,000) (575,036) (473,182) (483,219)
------------- -------------- ------------- --------- ---------
Total Retail........................... 5,333,185 0 709,666 1,055,117 609,097
Marketing and Trading-Electricity......... 35,339,641 227,338 5,571,750 1,671,686 3,117,136
Marketing and Trading-Gas................. 14,368,857 0 0 0 0
Unrealized MTM Income:....................
Electric.............................. 209,660 0 29,334 19,930 16,730
Gas................................... 46,990 0 0 0 0
Other..................................... 631,016 210 113,644 101,812 73,681
------------- -------------- ------------- --------- ---------
Total Wholesale Business............ 55,929,349 227,548 6,424,394 2,848,545 3,816,644
------------- -------------- ------------- --------- ---------
Energy Delivery Business:....................
Transmission.............................. 1,029,000 0 180,244 162,734 109,824
Distribution.............................. 2,327,000 0 394,792 310,448 373,395
------------- -------------- ------------- --------- ---------
Total Energy Delivery............... 3,356,000 0 575,036 473,182 483,219
------------- -------------- ------------- --------- ---------
Other Investments:...........................
SEEBOARD.................................. 1,451,233 0 0 0 0
CitiPower................................. 349,773 0 0 0 0
Other..................................... 170,645 0 0 0 0
------------- -------------- ------------- --------- ---------
Total Other Investments............. 1,971,651 0 0 0 0
------------- -------------- ------------- --------- ---------
Total Revenues................ $ 61,257,000 $ 227,548 $ 6,999,430 $ 3,321,727 $ 4,299,863
============= ============== ============= ========= =========
I&M KEPCo OPCo PSO SWEPCo WTU
--- ----- ---- --- ------ ----
(IN THOUSANDS)
Wholesale Business:
Residential............................... $ 350,600 $ 109,882 $ 444,418 $ 381,515 $ 321,022 $ 160,520
Commercial................................ 218,818 47,369 235,220 305,525 226,946 98,153
Industrial................................ 323,157 92,215 526,431 215,038 273,096 60,032
Other Retail Customers.................... 59,983 16,058 68,968 12,746 33,271 44,318
Energy Delivery........................... (314,410) (134,619) (552,713) (261,877) (333,004) (169,036)
--------- --------- --------- --------- -------- -------
Total Retail........................... 638,148 130,905 722,324 652,947 521,331 193,987
Marketing and Trading-Electricity......... 3,783,302 1,364,877 4,848,386 1,258,861 1,653,208 648,527
Marketing and Trading-Gas................. 0 0 0 0 0 0
Unrealized MTM Income:....................
Electric............................. 0 0 23,139 0 10,830 4,390
Gas.................................. 0 0 0 0 0 0
Other..................................... 67,765 28,994 115,840 27,564 56,075 48,331
--------- --------- --------- --------- -------- -------
Total Wholesale Business............ 4,489,215 1,524,776 5,709,689 1,939,372 2,241,444 895,235
--------- --------- --------- --------- -------- -------
Energy Delivery Business:....................
Transmission.............................. 122,345 53,697 167,399 63,045 81,324 75,443
Distribution.............................. 192,065 80,922 385,314 198,832 251,680 93,593
--------- --------- --------- --------- -------- -------
Total Energy Delivery............... 314,410 134,619 552,713 261,877 333,004 169,036
--------- --------- --------- --------- -------- -------
Other Investments:
SEEBOARD.................................. 0 0 0 0 0 0
CitiPower................................. 0 0 0 0 0 0
Other 0 0 0 0 0 0
--------- --------- --------- --------- -------- -------
Total Other Investments............. 0 0 0 0 0 0
--------- --------- --------- --------- -------- -------
Total Revenues................ $ 4,803,625 $1,659,395 $ 6,262,402 $ 2,201,249 $ 2,574,448 $ 1,064,271
========= ========= =========== =========== =========== ===========
- ---------------------------
(a) Includes revenues of other subsidiaries not shown and elimination of
intercompany transactions.
7
SALE OF POWER
AEP's electric utility subsidiaries own or lease generating stations with
total generating capacity of approximately 38,300 megawatts. See Item 2.
Properties, for more information regarding the generating stations. They operate
their generating plants as a single interconnected and coordinated electric
utility system and, in the east zone, share the costs and benefits in the AEP
System Power Pool. As discussed below under AEP System Power Pool, after
corporate separation, the public utility subsidiaries that are no longer
regulated at the state level will participate in a separate power pool. Most of
the electric power generated at AEP's generating stations is sold, in
combination with transmission and distribution services, to retail customers of
AEP's utility subsidiaries in their service territories. See Regulation--Rates.
Some of the electric power is sold at wholesale to non-affiliated companies.
AEP System Power Pool
APCo, CSPCo, I&M, KEPCo and OPCo are parties to the Interconnection
Agreement, dated July 6, 1951, as amended (the Interconnection Agreement),
defining how they share the costs and benefits associated with their generating
plants. This sharing is based upon each company's "member-load-ratio," which is
calculated monthly on the basis of each company's maximum peak demand in
relation to the sum of the maximum peak demands of all five companies during the
preceding 12 months. In addition, since 1995, APCo, CSPCo, I&M, KEPCo and OPCo
have been parties to the AEP System Interim Allowance Agreement which provides,
among other things, for the transfer of SO2 Allowances associated with
transactions under the Interconnection Agreement. As part of AEP's restructuring
settlement agreement filed with the FERC, CSPCo and OPCo would no longer be
parties to the Interconnection Agreement and certain other modifications to its
terms would also be made. See Competition and Business Change--AEP Restructuring
Plan.
Power marketing and trading transactions (trading activities) are conducted
by the AEP Power Pool and shared among the parties under the Interconnection
Agreement. Trading activities involve the purchase and sale of electricity under
physical forward contracts at fixed and variable prices and the trading of
electricity contracts including exchange traded futures and options and
over-the-counter options and swaps. The majority of these transactions represent
physical forward contracts in the AEP System's traditional marketing area and
are typically settled by entering into offsetting contracts. The regulated
physical forward contracts are recorded on a gross basis in the month when the
contract settles.
In addition, the AEP Power Pool enters into transactions for the purchase
and sale of electricity options, futures and swaps, and for the forward purchase
and sale of electricity outside of the AEP System's traditional marketing area.
The following table shows the net credits or (charges) allocated among the
parties under the Interconnection Agreement and Interim Allowance Agreement
during the years ended December 31, 1999, 2000 and 2001:
1999(a) 2000(a) 2001(a)
---- ---- ----
(IN THOUSANDS)
APCo.............. $ (89,100) $(274,000) $(256,700)
CSPCo............. (184,500) (250,400) (251,200)
I&M............... (61,700) 93,900 166,200
KEPCo............. 23,700 (21,500) (27,600)
OPCo.............. 311,600 452,000 369,300
- -------------------------
(a) Includes credits and charges from allowance transfers related to the
transactions.
CPL, PSO, SWEPCo, WTU, and AEP Service Corporation are parties to a
Restated and Amended Operating Agreement originally dated as of January 1, 1997
(CSW Operating Agreement). The CSW Operating Agreement requires the operating
companies of the west zone to maintain specified annual planning reserve margins
and requires the subsidiaries that have capacity in excess of the required
margins to make such capacity available for sale to other AEP subsidiaries as
capacity commitments. The CSW Operating Agreement also delegates to AEP Service
Corporation the authority to coordinate the acquisition, disposition, planning,
design and construction of generating units and to supervise the operation and
maintenance of a central control center. As part of AEP's restructuring
settlement agreement filed with the FERC, CPL and WTU would no longer be parties
to the CSW Operating Agreement and certain other
8
modifications to its terms would also be made. See Competition and Business
Change--AEP Restructuring Plan.
Wholesale Sales of Power to Non-Affiliates
AEP's electric utility subsidiaries also sell electric power on a wholesale
basis to non-affiliated electric utilities and power marketers. Such sales are
either made (i) by individual companies pursuant to various long-term power
agreements or (ii) under the Interconnection Agreement (AEP Power Pool) or the
CSW Operating Agreement. Sales made under the Interconnection Agreement are
allocated among the East Zone subsidiaries based on member-load ratios. Sales
made under the CSW Operating Agreement are allocated among the West Zone
subsidiaries based on participation ratios.
Reference is made to the footnote to the financial statements entitled
Commitments and Contingencies that is incorporated by reference in Item 8 for
information with respect to AEP's long-term agreements to sell power.
TRANSMISSION SERVICES
AEP's electric utility subsidiaries own and operate transmission and
distribution lines and other facilities to deliver electric power. See Item 2
for more information regarding the transmission and distribution lines. AEP's
electric utility subsidiaries operate their transmission lines as a single
interconnected and coordinated system and share the cost and benefits in the AEP
System Transmission Pool. Most of the transmission and distribution services are
sold, in combination with electric power, to retail customers of AEP's utility
subsidiaries in their service territories. These sales are made at rates that
are established by the public utility commissions of the state in which they
operate. See Regulation--Rates. As discussed below, some transmission services
also are separately sold to non-affiliated companies.
AEP System Transmission Pool
APCo, CSPCo, I&M, KEPCo and OPCo are parties to the Transmission Agreement,
dated April 1, 1984, as amended (the Transmission Agreement), defining how they
share the costs associated with their relative ownership of the
extra-high-voltage transmission system (facilities rated 345 kv and above) and
certain facilities operated at lower voltages (138 kv and above). Like the
Interconnection Agreement, this sharing is based upon each company's
"member-load-ratio." See Sale of Power.
The following table shows the net (credits) or charges allocated among the
parties to the Transmission Agreement during the years ended December 31, 1999,
2000 and 2001:
1999 2000 2001
---- ---- ----
(IN THOUSANDS)
APCo......... $ (8,300) $ (3,400) $ (3,100)
CSPCo........ 39,000 38,300 40,200
I&M.......... (43,900) (43,800) (41,300)
KEPCo........ (4,300) (6,000) (4,600)
OPCo......... 17,500 14,900 8,800
CPL, PSO, SWEPCo, WTU, and AEP Service Corporation are parties to a
Transmission Coordination Agreement originally dated as of January 1, 1997
(TCA). The TCA establishes a coordinating committee, which is charged with the
responsibility of overseeing the coordinated planning of the transmission
facilities of the west zone operating subsidiaries, including the performance of
transmission planning studies, the interaction of such subsidiaries with
independent system operators (ISO) and other regional bodies interested in
transmission planning and compliance with the terms of the Open Access
Transmission Tariff (OATT) filed with the FERC and the rules of the FERC
relating to such tariff.
Under the TCA, the west zone operating subsidiaries have delegated to AEP
Service Corporation the responsibility of monitoring the reliability of their
transmission systems and administering the OATT on their behalf. The TCA also
provides for the allocation among the west zone operating subsidiaries of
revenues collected for transmission and ancillary services provided under the
OATT.
Transmission Services for Non-Affiliates
AEP's electric utility subsidiaries and other System companies also provide
transmission services for non-affiliated companies.
9
On April 24, 1996, the FERC issued orders 888 and 889. These orders require
each public utility that owns or controls interstate transmission facilities to
file an open access network and point-to-point transmission tariff that offers
services comparable to the utility's own uses of its transmission system. The
orders also require utilities to functionally unbundle their services, by
requiring them to use their own tariffs in making off-system and third-party
sales. As part of the orders, the FERC issued a pro-forma tariff which reflects
the Commission's views on the minimum non-price terms and conditions for
non-discriminatory transmission service. In addition, the orders require all
transmitting utilities to establish an Open Access Same-time Information System
(OASIS) which electronically posts transmission information such as available
capacity and prices, and require utilities to comply with Standards of Conduct
which prohibit utilities' system operators from providing non-public
transmission information to the utility's merchant employees. The orders also
allow a utility to seek recovery of certain prudently-incurred stranded costs
that result from unbundled transmission service.
In December 1999, FERC issued Order 2000, which provides for the voluntary
formation of regional transmission organizations (RTOs), entities created to
operate, plan and control utility transmission assets. Order 2000 also
prescribes certain characteristics and functions of acceptable RTO proposals.
On July 9, 1996, the AEP System companies filed a tariff conforming with
the FERC's pro-forma transmission tariff.
Since 1998 AEP has engaged in discussions with a group of Midwestern
utilities regarding the development of the Alliance RTO which may take the form
of an ISO or an independent transmission company (Transco), depending upon the
occurrence of certain conditions. The Transco, if formed, would operate
transmission assets that it would own, and also would operate other owners'
transmission assets on a contractual basis.
In 2001 the Alliance companies filed with the FERC a proposed business plan
for the Alliance RTO. In December 2001, the FERC issued an order approving the
proposal of the Midwest ISO (an independent operator of transmission assets in
the Midwest) for an RTO and rejecting the Alliance RTO's business plan and
finding that the Alliance RTO lacks sufficient scope and regional configuration
to exist as a stand-alone RTO. The FERC directed the Alliance companies to
negotiate with the Midwest ISO and others to explore possible combinations.
Following such discussions, on March 5, 2002, the Alliance RTO filed with the
FERC a request for a declaratory order seeking resolution of these issues.
COORDINATION OF EAST AND WEST ZONE OPERATING SUBSIDIARIES
AEP's System Integration Agreement provides for the integration and
coordination of AEP's east and west zone operating subsidiaries, joint dispatch
of generation within the AEP System, and the distribution, between the two
operating zones, of costs and benefits associated with the System's generating
plants. It is designed to function as an umbrella agreement in addition to the
AEP Interconnection Agreement and the CSW Operating Agreement, each of which
will continue to control the distribution of costs and benefits within each zone
for all regulated subsidiaries.
AEP's System Transmission Integration Agreement provides for the
integration and coordination of the planning, operation and maintenance of the
transmission facilities of AEP's east and west zone operating subsidiaries. Like
the System Integration Agreement, the System Transmission Integration Agreement
functions as an umbrella agreement in addition to the AEP Transmission Agreement
and the Transmission Coordination Agreement. The System Transmission Integration
Agreement contains two service schedules that govern:
- The allocation of transmission costs and revenues.
- The allocation of third-party transmission costs and revenues and
System dispatch costs.
The Transmission Integration Agreement anticipates that additional service
schedules may be added as circumstances warrant.
10
CERTAIN POWER AGREEMENTS
OVEC
AEP, CSPCo and several unaffiliated utility companies jointly own OVEC,
which supplies the power requirements of a uranium enrichment plant near
Portsmouth, Ohio, owned by the DOE. The aggregate equity participation of AEP
and CSPCo in OVEC is 44.2%. The aggregate power participation ratio of APCo,
CSPCo, I&M and OPCo is 42.1%. The proceeds from the sale of power by OVEC are
designed to be sufficient for OVEC to meet its operating expenses and fixed
costs and to provide a return on its equity capital. On September 29, 2000, DOE
issued a notice of cancellation of the DOE/OVEC power agreement, such
cancellation to be effective no later than April 30, 2003. In conjunction with
this notice, DOE released all future rights to OVEC's generating capacity,
effective September 1, 2001. DOE was therefore not entitled to any OVEC capacity
beyond August 31, 2001, and the sponsoring companies became entitled to receive
and pay for all OVEC capacity (approximately 2,200MW) in proportion to their
power participation ratios at that time.
Buckeye
Contractual arrangements among OPCo, Buckeye and other investor-owned
electric utility companies in Ohio provide for the transmission and delivery,
over facilities of OPCo and of other investor-owned utility companies, of power
generated by the two units at the Cardinal Station owned by Buckeye and back-up
power to which Buckeye is entitled from OPCo under such contractual
arrangements, to facilities owned by 25 of the rural electric cooperatives which
operate in the State of Ohio at 337 delivery points. Buckeye is entitled under
such arrangements to receive, and is obligated to pay for, the excess of its
maximum one-hour coincident peak demand plus a 15% reserve margin over the
1,226,500 kilowatts of capacity of the generating units which Buckeye currently
owns in the Cardinal Station. Such demand, which occurred on August 8, 2001, was
recorded at 1,344,315 kilowatts.
Reference is made to Wholesale Business Operations -- Structured
Arrangements Involving Capacity, Energy, and Ancillary Services for a discussion
of an agreement with an affiliate of Buckeye to construct and operate a
gas-fired electric generating peaking facility.
Century Aluminum
Century Aluminum of West Virginia, Inc. (formerly Ravenswood Aluminum
Corporation), operates a major aluminum reduction plant in the Ohio River Valley
at Ravenswood, West Virginia. The power requirement of such plant presently is
approximately 357,000 kilowatts. OPCo is providing electric service pursuant to
a contract approved by the PUCO for the period July 1, 1996 through July 31,
2003.
AEGCO
Since its formation in 1982, AEGCo's business has consisted of the
ownership and financing of its 50% interest in the Rockport Plant and, since
1989, leasing of its 50% interest in Unit 2 of the Rockport Plant. The operating
revenues of AEGCo are derived from the sale of capacity and energy associated
with its interest in the Rockport Plant to I&M and KEPCo pursuant to unit power
agreements. Pursuant to these unit power agreements, AEGCo is entitled to
recover its full cost of service from the purchasers and will be entitled to
recover future increases in such costs, including increases in fuel and capital
costs. See Unit Power Agreements. Pursuant to a capital funds agreement, AEP has
agreed to provide cash capital contributions, or in certain circumstances
subordinated loans, to AEGCo, to the extent necessary to enable AEGCo, among
other things, to provide its proportionate share of funds required to permit
continuation of the commercial operation of the Rockport Plant and to perform
all of its obligations, covenants and agreements under, among other things, all
loan agreements, leases and related documents to which AEGCo is or becomes a
party. See Capital Funds Agreement.
Unit Power Agreements
A unit power agreement between AEGCo and I&M (the I&M Power Agreement)
provides for the sale by AEGCo to I&M of all the power (and the energy
associated therewith) available to AEGCo at the Rockport Plant. I&M is
obligated, whether or
11
not power is available from AEGCo, to pay as a demand charge for the right to
receive such power (and as an energy charge for any associated energy taken by
I&M) such amounts, as when added to amounts received by AEGCo from any other
sources, will be at least sufficient to enable AEGCo to pay all its operating
and other expenses, including a rate of return on the common equity of AEGCo as
approved by FERC, currently 12.16%. The I&M Power Agreement will continue in
effect until the date that the last of the lease terms of Unit 2 of the Rockport
Plant has expired unless extended in specified circumstances.
Pursuant to an assignment between I&M and KEPCo, and a unit power agreement
between KEPCo and AEGCo, AEGCo sells KEPCo 30% of the power (and the energy
associated therewith) available to AEGCo from both units of the Rockport Plant.
KEPCo has agreed to pay to AEGCo in consideration for the right to receive such
power the same amounts which I&M would have paid AEGCo under the terms of the
I&M Power Agreement for such entitlement. The KEPCo unit power agreement expires
on December 31, 2004. As part of AEP's restructuring settlement agreement
pending with the FERC, the KEPCo unit power agreement would be extended to
December 31, 2009 for Unit 1 and December 7, 2022 for Unit 2. See Competition
and Business Change--AEP Restructuring Plan.
Capital Funds Agreement
AEGCo and AEP have entered into a capital funds agreement pursuant to
which, among other things, AEP has unconditionally agreed to make cash capital
contributions, or in certain circumstances subordinated loans, to AEGCo to the
extent necessary to enable AEGCo to (i) maintain such an equity component of
capitalization as required by governmental regulatory authorities, (ii) provide
its proportionate share of the funds required to permit commercial operation of
the Rockport Plant, (iii) enable AEGCo to perform all of its obligations,
covenants and agreements under, among other things, all loan agreements, leases
and related documents to which AEGCo is or becomes a party (AEGCo Agreements),
and (iv) pay all indebtedness, obligations and liabilities of AEGCo (AEGCo
Obligations) under the AEGCo Agreements, other than indebtedness, obligations or
liabilities owing to AEP. The Capital Funds Agreement will terminate after all
AEGCo Obligations have been paid in full.
SEASONALITY
Sales of electricity by the AEP System tend to increase and decrease
because of the use of electricity by residential and commercial customers for
cooling and heating and relative changes in temperature.
FRANCHISES
The operating companies of the AEP System hold franchises to provide
electric service in various municipalities in their service areas. These
franchises have varying provisions and expiration dates. In general, the
operating companies consider their franchises to be adequate for the conduct of
their business.
COMPETITION AND BUSINESS CHANGE
General
The public utility subsidiaries of AEP, like many other electric utilities,
have traditionally provided electric generation and energy delivery, consisting
of transmission and distribution services, as a single product to their retail
customers. Proposals are being made and/or legislation has been enacted in
Arkansas, Michigan, Ohio, Oklahoma, Texas, Virginia and West Virginia that would
also require electric utilities to sell distribution services separately. These
measures generally allow competition in the generation and sale of electric
power, but not in its transmission and distribution. However, movement toward
retail deregulation in certain of these states is slowing as a consequence of,
among other things, adverse developments related to deregulation of the electric
industry in California.
Competition in the generation and sale of electric power will require
resolution of complex issues, including who will pay for the unused generating
plant of, and other stranded costs incurred by, the utility when a customer
stops buying power from the utility; will all customers
12
have access to the benefits of competition; how will the rules of competition be
established; what will happen to conservation and other regulatory-imposed
programs; how will the reliability of the transmission system be ensured; and
how will the utility's obligation to serve be changed. As competition in
generation and sale of electric power is instituted, the public utility
subsidiaries of AEP believe that they have a favorable competitive position
because of their relatively low costs. If stranded costs are not recovered from
customers, however, the public utility subsidiaries of AEP, like all electric
utilities, will be required by existing accounting standards to recognize any
stranded investment losses.
Reference is made to Management's Discussion and Analysis of Results of
Operations and Management's Discussion and Analysis of Financial Condition,
Contingencies and Other Matters and the footnote to the financial statements
entitled Customer Choice and Industry Restructuring incorporated by reference in
Items 7 and 8, respectively, for further information with respect to competition
and business change.
AEP Position on Competition
AEP favors freedom for customers to purchase electric power from anyone
that they choose. Generation and sale of electric power would be in the
competitive marketplace. To facilitate reliable, safe and efficient service, AEP
supports creation of independent system operators to operate the transmission
system in a region of the United States. AEP's working model for industry
restructuring envisions a progressive transition to full customer choice.
Implementation of these measures would require legislative changes and
regulatory approvals.
The legislatures and/or the regulatory commissions in many states,
including some in AEP's service territory, are considering or have adopted
"retail customer choice" which, in general terms, means the transmission by an
electric utility of electric power generated by an entity of the customer's
choice over its transmission and distribution system to a retail customer in
such utility's service territory. A requirement to transmit directly to retail
customers would have the result of permitting retail customers to purchase
electric power, at the election of such customers, not only from the electric
utility in whose service area they are located but from another electric
utility, an independent power producer or an intermediary, such as a power
marketer. Although AEP's power generation would have competitors under some of
these proposals, its transmission and distribution would not. As competition
develops in retail power generation, the public utility subsidiaries of AEP
believe that they should have a favorable competitive position because of their
relatively low costs.
Wholesale
The public utility subsidiaries of AEP, like the electric industry
generally, face increasing competition to sell available power on a wholesale
basis, primarily to other public utilities and also to power marketers. The
Energy Policy Act of 1992 was designed, among other things, to foster
competition in the wholesale market (a) through amendments to PUHCA,
facilitating the ownership and operation of generating facilities by "exempt
wholesale generators" (which may include independent power producers as well as
affiliates of electric utilities) and (b) through amendments to the Federal
Power Act, authorizing the FERC under certain conditions to order utilities
which own transmission facilities to provide wholesale transmission services for
other utilities and entities generating electric power. The principal factors in
competing for such sales are price (including fuel costs), availability of
capacity and reliability of service. The public utility subsidiaries of AEP
believe that they maintain a favorable competitive position on the basis of all
of these factors. However, because of the availability of capacity of other
utilities and the lower fuel prices in recent years, price competition has been,
and is expected for the next few years to be, particularly important.
FERC orders 888 and 889, issued in April 1996, provide that utilities must
functionally unbundle their transmission services, by requiring them to use
their own tariffs in making off-system and third-party sales. See Transmission
Services. The public utility subsidiaries of AEP have functionally separated
their wholesale power sales from their transmission functions, as required by
orders 888 and 889.
13
Retail
The public utility subsidiaries of AEP have the exclusive right to sell
electric power at retail within their service areas in the states of Arkansas,
Indiana, Kentucky, Louisiana, Oklahoma, Tennessee and West Virginia.
Furthermore, while customer choice commenced in Michigan on January 1, 2002, I&M
does not have any competing suppliers active in its Michigan service territory
at this time. However, AEP's public utility subsidiaries do compete with
self-generation and with distributors of other energy sources, such as natural
gas, fuel oil and coal, within their service areas. The primary factors in such
competition are price, reliability of service and the capability of customers to
utilize sources of energy other than electric power. With respect to
self-generation, the public utility subsidiaries of AEP believe that they
maintain a favorable competitive position on the basis of all of these factors.
With respect to alternative sources of energy, the public utility subsidiaries
of AEP believe that the reliability of their service and the limited ability of
customers to substitute other cost-effective sources for electric power place
them in a favorable competitive position, even though their prices may be higher
than the costs of some other sources of energy.
Significant changes in the global economy in recent years have led to
increased price competition for industrial companies in the United States,
including those served by the AEP System. Such industrial companies have
requested price reductions from their suppliers, including their suppliers of
electric power. In addition, industrial companies which are downsizing or
reorganizing often close a facility based upon its costs, which may include,
among other things, the cost of electric power. The public utility subsidiaries
of AEP cooperate with such customers to meet their business needs through, for
example, various off-peak or interruptible supply options and believe that, as
low cost suppliers of electric power, they should be less likely to be
materially adversely affected by this competition and may be benefited by
attracting new industrial customers to their service territories.
AEP Restructuring Plan
As a result of deregulating legislation that has been enacted or is being
considered in several of the states in which the AEP public utility subsidiaries
provide service, AEP has reassessed the corporate ownership of its public
utility subsidiaries' assets. Deregulating legislation in some of the states
requires the separation of generation assets from transmission and distribution
assets. On November 1, 2000, AEP filed with the SEC under PUHCA for approval of
a restructuring plan in part to meet the requirements of this legislation. This
application is pending.
On July 24, 2001, AEP filed with the FERC for approval of the restructuring
plan and on December 21, 2001, a settlement agreement with six state regulatory
commissions and other major parties was filed with the FERC. The settlement
agreement is pending approval. FERC approval is necessary before the SEC will
issue its order.
AEP's restructuring plan is designed to align its legal structure and
business activities with the requirements of deregulation. AEP's plan
contemplates the formation of two first tier subsidiaries that would hold the
following public utility assets:
- A subsidiary would hold the assets of public utility subsidiaries that
remain subject to regulation as to rates by at least one state utility
commission. AEP intends for this subsidiary ultimately to hold all
transmission and distribution assets.
- A subsidiary would hold (i) public utility and non-utility
subsidiaries that derive their revenues from competitive activity and
(ii) foreign utility subsidiaries and other investments. AEP intends
for this subsidiary to ultimately hold all generation assets not
subject to regulation.
WHOLESALE BUSINESS OPERATIONS
AEP's wholesale business operations focus on value-driven asset
optimization at each link of the energy chain through the following activities:
- A diversified portfolio of owned assets and structured third party
arrangements, including:
14
- Power generation facilities and renewable energy sources.
- Natural gas pipeline, storage and processing facilities.
- Coal mines and related facilities.
- Barge, rail and other fuel transportation related assets.
- Trade and market energy commodities, including electric power, natural
gas, natural gas liquids, oil, coal, and SO2 allowances in North
America and Europe.
- Price-risk management services and liquidity through a variety of
energy-related financial instruments, including exchange-traded
futures and over-the-counter forward, option, and swap agreements.
- Long-term transactions to buy or sell capacity, energy, and ancillary
services of electric generating facilities, either existing or to be
constructed, at various locations in North America and Europe.
Power Generation Facilities and Renewable Energy Sources
In addition to approximately 38,300 MW listed under Item 2. Properties, AEP
has ownership interests in the generating facilities listed under AEP-Other
Generation of approximately 1,900 MW domestically and 6,700 MW internationally,
of which approximately 1,100 MW is from renewable energy sources.
Natural Gas Pipeline, Storage and Processing Facilities
In June 2001, AEP acquired Houston Pipe Line Company (HPL) and Lodisco LLC
for $727 million from Enron Corp. The acquired assets include: (i) a 4,200-mile
intrastate gas pipeline in Texas with capacity of approximately 2.4 billion
cubic feet per day; (ii) the exclusive right (for 30 years with an additional
20-year extension) to the underground Bammel Storage Facility (one of the
largest natural gas storage facilities in North America) with 118 billion cubic
feet of storage capacity and appurtenant pipelines including the Bammel Loop,
Houston City Loop and the Texas City Loop; and (iii) certain gas marketing
contracts.
AEP acquired Louisiana Intrastate Gas Company, LLC ("LIG") in 1998. LIG's
midstream gas assets include: (i) a 2,000-mile intrastate gas pipeline in
Louisiana with capacity of approximately 800 million cubic feet per day; (ii)
five natural gas processing plants that straddle the pipeline; and (iii) a ten
billion cubic foot underground natural gas storage facility directly connected
to the Henry Hub, one of the most active gas trading areas in North America.
Coal Mines and Related Facilities
In October 2001, to enhance its coal trading and marketing activities, AEP
acquired substantially all the assets of Quaker Coal Company as part of a
bankruptcy proceeding restructuring. AEP paid $101 million to Quaker's creditors
and assumed additional liabilities of approximately $58 million. The acquisition
included property, coal reserves, mining operations and royalty interests in
Colorado, Kentucky, Ohio, Pennsylvania and West Virginia. AEP will continue to
operate the mines and facilities which have approximately 800 employees.
Barge, Rail and Other Fuel Transportation Related Assets
In November 2001, AEP acquired MEMCO Barge Line Inc. for $270 million as
part of its overall asset optimization program. MEMCO is engaged in the
transportation of coal and dry bulk commodities, primarily on the Ohio,
Illinois, and Lower Mississippi rivers. MEMCO owns or leases 1,200 hopper barges
and 30 towboats. The addition of MEMCO's barge assets to AEP's existing fleet
places AEP among the leading barge operators in the country. See Fuel
Supply--Coal and Lignite for other barges and towboats leased by I&M and OPCo.
Trading and Marketing of Energy Commodities
Sales: Based upon volumetric sales in the U.S., Power Markets Weekly ranked
AEP's wholesale trading business No. 2 in electric sales for the first, second
and third quarters of 2001. Platts Gas Daily ranked AEP Nos. 14, 10 and 2 in gas
sales for the
15
first, second and third quarters, respectively, of 2001.
ICEX: To gain access to additional liquidity trading points, AEP acquired
an interest in the internet-based electronic trading system, Intercontinental
Exchange, L.L.C. (ICEX), in 2000 that enables participants to initiate,
negotiate, and execute trades in the crude oil, natural gas, and spot and
forward energy markets. Other investors include global energy companies and
leading investment banking firms.
Structured Arrangements Involving Capacity, Energy, and Ancillary Services
AEP has entered into an agreement with The Dow Chemical Company to
construct a 900 MW cogeneration facility at Dow's chemical facility in
Plaquemine, Louisiana. Commercial operation is expected in 2003. AEP is entitled
to 100% of the facility's capacity and energy and has contracted to sell the
power from this facility to an unaffiliated party.
In January 2000, OPCo and National Power Cooperative, Inc. (NPC), an
affiliate of Buckeye, entered into an agreement relating to construction and
operation of a 510 MW gas-fired electric generating peaking facility to be owned
by NPC. From the commercial operation date (expected in 2002) until the end of
2005, OPCo will be entitled to 100% of the power generated by the facility, and
responsible for the fuel and other costs of the facility. After 2005, NPC and
OPCo will be entitled to 80% and 20%, respectively, of the power of the
facility, and both parties will generally be responsible for the fuel and other
costs of the facility. OPCo will also provide certain back-up power to NPC.
INTERNATIONAL ELECTRIC
Other international holdings of AEP include the following.
Australia: CitiPower Pty. is an electric distribution and retail sales
company in Victoria, Australia. CitiPower serves approximately 240,000 customers
in the city of Melbourne. With about 3,100 miles of distribution lines in a
service area that covers approximately 100 square miles, CitiPower distributes
about 4,800 gigawatt-hours annually. AEP acquired CitiPower in 1998 for U.S.$1.1
billion.
UK: SEEBOARD, headquartered in Crawley, West Sussex and acquired as part of
AEP's merger with CSW, is one of the 12 regional electricity companies formed as
a result of the restructuring and subsequent privatization of the United Kingdom
electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April
1996. SEEBOARD's principal businesses are the distribution and supply of
electricity. In addition, SEEBOARD is engaged in other businesses, including gas
supply, electricity generation, and electrical contracting. SEEBOARD has
approximately 2,000,000 customers and its service area covers approximately
3,000 square miles in Southeast England with the majority of its customers in
Kent, Sussex and parts of Surrey.
Possible Divestitures: On February 3, 2002, AEP announced the appointment
of investment banks to advise AEP on the prospects for divestment of CitiPower
and/or SEEBOARD. Because of pooling of interests accounting restrictions,
imposed as part of AEP's merger with CSW and which expire in June 2002, any
possible divestment of CitiPower and/or SEEBOARD is not anticipated until after
these restrictions lapse.
PRO SERV
Pro Serv offers engineering, construction, project management and other
consulting services for projects involving transmission, distribution or
generation of electric power both domestically and internationally.
AEP COMMUNICATIONS
AEP Communications markets wholesale, high capacity, fiber optic services,
colocation, and wireless tower infrastructure services under the C3 brand with
operations in Arkansas, Kansas, Louisiana, Oklahoma and Texas.
AEP Communications joined with several other energy and telecommunications
companies to form AFN Communications, LLC. (AFN). AFN is a
16
super regional telecommunications company that provides long haul fiber optic
capacity to competitive local exchange carriers, wireless carriers and long
distance companies. AFN does business in New York, Pennsylvania, Virginia, West
Virginia, Ohio, Indiana, Michigan, Illinois, and Kentucky and has approximately
10,000 route miles of fiber optic network.
C3, an entity that was acquired through the merger with CSW, is engaged in
providing fiber optic and collocation services in Texas, Louisiana, Oklahoma,
Arkansas, and Kansas. C3 does business as C3 Networks and has approximately
5,300 route miles of fiber optic network.
Management is evaluating certain of AEP's telecommunications investments
for possible disposal.
CONSTRUCTION PROGRAM
General
The AEP System is continuously involved in assessing the adequacy of its
generation, transmission, distribution and other facilities to plan and provide
for the reliable supply of electric power and energy to its customers. In this
assessment process, assumptions are continually being reviewed as new
information becomes available, and assessments and plans are modified, as
appropriate. Thus, System reinforcement plans are subject to change,
particularly with the restructuring of the electric utility industry and the
move to increasing competition in the marketplace. See Competition and Business
Change.
Generation
Committed or anticipated capability changes to the AEP System's generation
resources includes the expiration of the Rockport Unit 2 sale of 250 megawatts
to Carolina Power & Light Company, an unaffiliated company, on December 31,
2009. See AEP-CSW Merger for a discussion of the divestiture of generating
capacity as part of the merger.
Apart from these changes and temporary power purchases that can be
arranged, there are no specific commitments for additions of new generation
resources on the AEP System. Given the restructuring taking place in the
industry, the extent of the need of AEP's operating companies for any additional
generation resources in the foreseeable future is highly uncertain.
Proposed Transmission Facilities
On September 30, 1997, APCo refiled applications in Virginia and West
Virginia for certificates to build a Wyoming-Cloverdale 765,000-volt Project.
The preferred route for this line was approximately 132 miles in length,
connecting APCo's Wyoming Station in southern West Virginia to APCo's Cloverdale
Station near Roanoke, Virginia.
APCo originally announced this project in 1990. Since then it has been in
the process of trying to obtain federal permits and state certificates. At the
federal level, the U.S. Forest Service (Forest Service) is directing the
preparation of an Environmental Impact Statement (EIS), which is required prior
to granting permits for crossing lands under federal jurisdiction. Permits are
needed from the (i) Forest Service to cross federal forests, (ii) Army Corps of
Engineers to cross the New River and a watershed near the Wyoming Station, and
(iii) National Park Service or Forest Service to cross the Appalachian National
Scenic Trail.
In June 1996, the Forest Service released a Draft EIS and preliminarily
identified a "No Action Alternative" as its preferred alternative for the
original Wyoming-Cloverdale Project. If this alternative were incorporated into
a Final EIS, APCo would not be authorized to cross federal forests administered
by the Forest Service. The Forest Service stated that it would not prepare the
Final EIS until after Virginia and West Virginia determined need and routing
issues on non-federal lands.
West Virginia: On May 27, 1998, the West Virginia PSC issued an order
granting APCo's application for a certificate to construct the
Wyoming-Cloverdale 765,000-volt Project. On March 13, 2002, the West Virginia
PSC issued an order granting APCo's request to construct the line with a
terminus at Jacksons Ferry substation in Virginia instead of the Cloverdale
substation as discussed below under Virginia.
17
Virginia: Following several procedural delays and Hearing Examiner's
rulings, APCo filed a study in May 1999 identifying the Wyoming-Jacksons Ferry
Project as an alternative project to the Wyoming-Cloverdale Project. The
Jacksons Ferry Project proposes a line from Wyoming Station in West Virginia to
APCo's existing 765,000-volt Jacksons Ferry Station in Virginia. APCo estimates
that the Wyoming-Jacksons Ferry line would be 90 miles in length, including 32
miles in West Virginia previously certified. In May 2000, the Virginia SCC held
an evidentiary hearing to consider both projects. On October 2, 2000, the
Hearing Examiner's report to the Virginia SCC recommended approval of the
Wyoming-Jacksons Ferry Alternative Project. On May 31, 2001, the Virginia SCC
issued an order granting APCo's application for a certificate to construct the
Wyoming-Jacksons Ferry 765,000-volt Project.
Proposed Completion Schedule and Estimated Cost: Subsequent to Virginia and
West Virginia granting certificates to construct the Project, the Forest Service
restarted the EIS process and is scheduled to complete and release a supplement
to the Draft EIS in April 2002. The Final EIS process should continue for the
balance of 2002, with a decision on the federal permits anticipated in Spring
2003. APCo has also begun required consultation with the U.S. Fish and Wildlife
Service under the Endangered Species Act, which should be completed concurrently
with the EIS process.
Given the status of the Project permitting process, and assuming that the
projected schedule of the EIS process will be met, management estimates that the
Wyoming-Jacksons Ferry 765,000-volt Project cannot be completed before Summer
2006.
Depending upon the outcome of the EIS permitting process by the Forest
Service, APCo's estimated cost for the Wyoming-Jacksons Ferry Project ranges
from $250 to $280 million, assuming a Summer 2006 in-service date.
Construction Expenditures
The following table shows construction expenditures during 1999, 2000 and
2001 and current estimates of 2002 construction expenditures, in each case
including AFUDC but excluding assets acquired under leases.
1999 2000 2001 2002
ACTUAL ACTUAL ACTUAL ESTIMATE
------ ------ ------ --------
(IN THOUSANDS)
AEP System (a).. $1,679,600 $1,773,400 $1,832,000 $1,820,400
AEGCo........ 8,300 5,200 6,900 45,600
APCo......... 211,400 199,300 306,000 258,200
CPL.......... 255,800 199,500 194,100 172,300
CSPCo........ 115,300 128,000 132,500 145,400
I&M.......... 165,300 171,100 91,100 205,400
KEPCo........ 44,300 36,200 37,200 128,800
OPCo......... 193,900 254,000 344,600 349,700
PSO.......... 104,500 176,900 124,900 80,600
SWEPCo....... 112,900 120,200 112,100 111,900
WTU.......... 52,600 64,500 39,800 51,800
- -----------------------
(a) Includes expenditures of other subsidiaries not shown.
Reference is made to the footnote to the financial statements entitled
Commitments and Contingencies incorporated by reference in Item 8, for further
information with respect to the construction plans of AEP and its operating
subsidiaries for the next three years.
The System construction program is reviewed continuously and is revised
from time to time in response to changes in estimates of customer demand,
business and economic conditions, the cost and availability of capital,
environmental requirements and other factors. Changes in construction schedules
and costs, and in estimates and projections of needs for additional facilities,
as well as variations from currently anticipated levels of net earnings, Federal
income and other taxes, and other factors affecting cash requirements, may
increase or decrease the estimated capital requirements for the System's
construction program.
From time to time, as the System companies have encountered the industry
problems described above, such companies also have encountered limitations on
their ability to secure the capital necessary to finance construction
expenditures.
Environmental Expenditures: Expenditures related to compliance with air and
water quality standards, included in the gross additions to plant of the System,
during 1999, 2000 and 2001 and the current estimate for 2002 are shown below.
Substantial expenditures in addition to the amounts set forth below may be
required by the System in future years in connection with the modification and
18
addition of facilities at generating plants for environmental quality controls
in order to comply with air and water quality standards which have been or may
be adopted.
1999 2000 2001 2002
ACTUAL ACTUAL ACTUAL ESTIMATE
------ ------ ------ --------
(IN THOUSANDS)
AEGCo............. $ 8 $ 70 $ 3,500 27,700
APCo.............. 24,500 2,100 99,200 86,500
CPL............... (a) (a) 2,500 200
CSPCo............. 10,600 6,600 22,500 25,500
I&M............... 4,500 1,900 700 28,500
KEPCo............. 1,900 400 11,200 60,200
OPCo.............. 37,400 91,200 125,300 103,900
PSO............... (a) (a) 400 400
SWEPCo............ (a) (a) 9,200 9,600
WTU............... (a) (a) 800 3,000
------- ------ ------- -------
AEP System (a).. $ 78,908 $102,270 $275,300 $345,500
======== ======== ======== ========
- -----------------------
(a) Amounts not available for west zone companies of AEP prior to AEP-CSW
merger.
FINANCING
It has been the practice of AEP's operating subsidiaries to finance current
construction expenditures in excess of available internally generated funds by
initially issuing unsecured short-term debt, principally commercial paper and
bank loans, at times up to levels authorized by regulatory agencies, and then to
reduce the short-term debt with the proceeds of subsequent sales by such
subsidiaries of long-term debt securities and cash capital contributions by AEP.
If one or more of the subsidiaries are unable to continue the issuance and sale
of securities on an orderly basis, such company or companies will be required to
consider the curtailment of construction and other outlays or the use of
alternative financing arrangements, if available, which may be more costly.
AEP's subsidiaries have also utilized, and expect to continue to utilize,
additional financing arrangements, such as unsecured debt and leasing
arrangements, including the leasing of utility assets and coal mining and
transportation equipment and facilities. Pollution control revenue bonds have
been used in the past and may be used in the future in connection with the
construction of pollution control facilities; however, Federal tax law has
limited the utilization of this type of financing except for purposes of certain
financing of solid waste disposal facilities and of certain refunding of
outstanding pollution control revenue bonds issued before August 16, 1986.
New projects undertaken by AEP's unregulated subsidiaries are generally
financed through equity funds provided by AEP, non-recourse debt incurred on a
project-specific basis, debt issued by such subsidiaries or through a
combination thereof. See Wholesale Business Operations and Item 7 for additional
information concerning AEP's unregulated subsidiaries.
AEP's revolving credit agreements include covenants and events of default
typical for this type of facility, including a maximum debt/capital test and a
$50 million cross-acceleration provision. At December 31, 2001, AEP was in
compliance with its debt covenants. With the exception of a voluntary bankruptcy
or insolvency, any event of default has either or both a cure period or notice
requirement before termination of the agreements. A voluntary bankruptcy or
insolvency would be considered an immediate termination event.
Reference is made to Management's Discussion and Analysis of Results of
Operations and Management's Discussion and Analysis of Financial Condition,
Contingencies and Other Matters incorporated by reference in Item 7 for
information with respect to AEP's plans to restructure its debt to implement
corporate separation. See Competition and Business Change--AEP Restructuring
Plan herein.
FUEL SUPPLY
The following table shows the sources of power generated by the AEP System:
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Coal.................... 76% 79% 79% 78% 74%
Gas..................... 12% 14% 15% 13% 12%
Nuclear................. 8% 3% 3% 5% 11%
Hydroelectric and other. 4% 4% 3% 4% 3%
Variations in the generation of nuclear power are primarily related to
refueling outages and, in 1997 through 2000, the shutdown of the Cook Plant to
respond to issues raised by the NRC.
19
Natural Gas
AEP consumed over 240 billion cubic feet of natural gas during 2001 for the
system operating companies. A majority of the gas fired electric generation
plants are connected to at least two natural gas pipelines, which provides
greater access to competitive supplies and improves reliability. Natural gas
requirements for each plant are supplied by a portfolio of long-term and
short-term purchase and transportation agreements that are acquired on a
competitive basis and based on market prices.
Coal and Lignite
The Clean Air Act Amendments of 1990 provide for the issuance of annual
allowance allocations covering sulfur dioxide emissions at levels below historic
emission levels for many coal-fired generating units of the AEP System. Phase I
of this program began in 1995 and Phase II began in 2000, with both phases
requiring significant changes in coal supplies and suppliers. The full extent of
such changes, particularly in regard to Phase II, however, has not been
determined. See Environmental and Other Matters -- Air Pollution Control --
Title IV Acid Rain Program for the current compliance plan.
In order to meet emission standards for existing and new emission sources,
the AEP System companies will, in any event, have to obtain coal supplies by
entering into additional supply agreements, either on a long-term or spot basis,
at prices and upon terms which cannot now be predicted.
Although AEP believes that in the long run it will be able to secure coal
of adequate quality and in adequate quantities to enable existing and new units
to comply with emission standards applicable to such sources, no assurance can
be given that coal of such quality and quantity will in fact be available. No
assurance can be given either that statutes or regulations limiting emissions
from existing and new sources will not be further revised in future years to
specify lower sulfur contents than now in effect or other restrictions. See
Environmental and Other Matters herein.
The FERC has adopted regulations relating, among other things, to the
circumstances under which, in the event of fuel emergencies or shortages, it
might order electric utilities to generate and transmit electric power to other
regions or systems experiencing fuel shortages, and to rate-making principles by
which such electric utilities would be compensated. In addition, the Federal
Government is authorized, under prescribed conditions, to allocate coal and to
require the transportation thereof, for the use of power plants or major
fuel-burning installations.
System companies have developed programs to conserve coal supplies at
System plants which involve, on a progressive basis, limitations on sales of
power and energy to neighboring utilities, appeals to customers for voluntary
limitations of electric usage to essential needs, curtailment of sales to
certain industrial customers, voltage reductions and, finally, mandatory
reductions in cases where current coal supplies fall below minimum levels. Such
programs have been filed and reviewed with officials of Federal and state
agencies and, in some cases, the state regulatory agency has prescribed actions
to be taken under specified circumstances by System companies, subject to the
jurisdiction of such agencies.
Western coal purchased by System companies is transported to AEP generating
stations by rail and via an affiliated river terminal for subsequent
transloading to barges for final delivery. CPL, PSO and SWEPCo own (in the
aggregate) 2,982 coal hopper cars and APCo, I&M and OPCo lease (in the
aggregate) an additional 4,066 coal hopper cars to be used in unit train
movements. I&M and OPCo lease (in the aggregate) 15 towboats, 454 jumbo barges
and 143 standard barges. Certain subsidiaries of AEP also own or lease coal
transfer facilities at various other locations.
See Wholesale Business Operations--Barge, Rail and Other Fuel
Transportation Related Assets herein for information with respect to the
acquisition of MEMCO Barge Line Inc. in 2001.
The System generating companies procure coal through purchases pursuant to
long-term contracts or spot purchases from affiliated and unaffiliated
producers. The following table shows the amount of coal delivered to the AEP
System during the past five years, the proportion of such coal which was
20
obtained either from coal-mining subsidiaries, from unaffiliated suppliers under
long-term contracts or through spot or short-term purchases, and the average
delivered price of spot coal purchased by System companies:
1997(a) 1998(a) 1999(a) 2000 2001
---- ---- ---- ---- ----
Total coal delivered to
AEP operated plants (thousands of tons)........... 54,292 54,004 54,306 73,259 73,889
Sources (percentage):
Subsidiaries........................................ 14% 14% 12% 9% 4%
Long-term contracts................................. 66% 66% 64% 67% 68%
Spot or short-term purchases........................ 20% 20% 24% 24% 28%
Average price per ton of spot-purchased coal........... $24.38 $25.05 $27.18 $24.03 $27.30
- --------------------
(a) Includes east zone companies only.
The average cost of coal consumed during the past five years by all AEP
System companies is shown below. AEP System companies' data for 1997 includes
only AEGCo, APCo, CSPCo, I&M, KEPCo and OPCo.
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
DOLLARS PER TON
AEP System Companies............................................. $ 29.68 $ 29.87 $ 30.01 $ 31.39 $ 28.55
AEGCo......................................................... 19.30 19.37 20.79 20.65 21.01
APCo.......................................................... 36.09 34.81 33.29 32.84 32.41
CPL........................................................... 26.93 26.93 26.49 25.95 26.78
CSPCo......................................................... 31.69 31.63 29.94 28.50 30.63
I&M........................................................... 23.68 22.61 24.54 23.44 23.57
KEPCo......................................................... 26.76 27.42 26.76 25.35 25.02
OPCo.......................................................... 36.00 38.94 40.56 46.52 35.06
PSO........................................................... 21.11 20.37 20.94 21.21 20.45
SWEPCo........................................................ 23.16 23.02 21.34 22.59 24.22
WTU........................................................... 18.19 21.37 21.72 22.26 23.81
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
CENTS PER MILLION BTU'S
AEP System Companies............................................. 140.13 142.17 141.95 149.12 136.85
AEGCo......................................................... 115.21 112.63 116.90 116.23 118.89
APCo.......................................................... 146.54 141.76 135.40 134.86 135.88
CPL........................................................... 136.40 137.00 135.78 137.86 140.22
CSPCo......................................................... 134.44 134.15 127.42 120.83 131.64
I&M........................................................... 123.36 118.02 121.90 117.99 121.27
KEPCo......................................................... 110.37 112.15 109.91 104.88 104.97
OPCo.......................................................... 151.66 164.44 169.23 194.77 146.87
PSO........................................................... 120.91 116.73 119.54 121.83 116.33
SWEPCo........................................................ 152.79 150.62 143.34 144.96 153.88
WTU........................................................... 109.13 126.22 129.13 131.56 143.21
21
The coal supplies at AEP System plants vary from time to time depending on
various factors, including customers' usage of electric power, space
limitations, the rate of consumption at particular plants, labor unrest and
weather conditions which may interrupt deliveries. At December 31, 2001, the
System's coal inventory was approximately 41 days of normal System usage. This
estimate assumes that the total supply would be utilized by increasing or
decreasing generation at particular plants.
The following tabulation shows the total consumption during 2001 of the
coal-fired generating units of AEP's principal electric utility subsidiaries,
coal requirements of these units over the remainder of their useful lives and
the average sulfur content of coal delivered in 2001 to these units. Reference
is made to Environmental and Other Matters for information concerning current
emissions limitations in the AEP System's various jurisdictions and the effects
of the Clean Air Act Amendments.
AVERAGE SULFUR CONTENT
ESTIMATED REQUIRE- OF DELIVERED COAL
TOTAL CONSUMPTION MENTS FOR REMAINDER ------------------------