<PAGE>
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>       
                                                   Year Ended December 31,       
                                      1996       1995        1994        1993        1992   
                                                        (in thousands)

<S>                                <C>         <C>         <C>         <C>         <C>       
            
INCOME STATEMENTS DATA:
  Operating Revenues               $323,321    $328,144    $307,443    $294,252    $313,216 
  Operating Expenses                281,978     279,123     261,354     255,516     264,964 
  Operating Income                   41,343      49,021      46,089      38,736      48,252 
  Nonoperating Income (Loss)           (594)          3        (102)         59         221 
  Income Before Interest Charges     40,749      49,024      45,987      38,795      48,473 
  Interest Charges                   23,776      23,896      20,714      20,764      21,936 
  Net Income                       $ 16,973    $ 25,128    $ 25,273    $ 18,031    $ 26,537 

<CAPTION>
                                                         December 31,       
                                      1996       1995        1994         1993       1992   
                                                        (in thousands)
<S>                                 <C>        <C>         <C>          <C>        <C>       
                    
BALANCE SHEETS DATA:
  Electric Utility Plant            $951,602   $879,657    $851,912     $807,428   $780,856 
  Accumulated Depreciation 
    and Amortization                 286,640    270,590     259,984      248,673    238,342 
  Net Electric Utility Plant        $664,962   $609,067    $591,928     $558,755   $542,514 
  Total Assets                      $833,579   $772,198    $739,795     $695,866   $616,700 

  Common Stock and 
    Paid-in Capital                 $159,200   $129,200    $119,200     $109,200   $109,200 
  Retained Earnings                   84,090     91,381      89,173       85,296     89,957 
  Total Common 
    Shareholder's Equity            $243,290   $220,581    $208,373     $194,496   $199,157 

  Long-term Debt (a)                $293,198   $292,525    $253,583     $253,495   $254,097 
  Total Capitalization and
    Liabilities                     $833,579   $772,198    $739,795     $695,866   $616,700 

(a)  Including portion due within one year.
/TABLE
<PAGE>
MANAGEMENT'S NARRATIVE ANALYSIS
OF RESULTS OF OPERATIONS

     Net income for 1996 decreased $8.2 million or 32.5% due mainly to the
unfavorable effect on sales of mild weather in the second half of 1996 and the
unfavorable effect on operation and maintenance expenses of a scheduled
maintenance outage of Big Sandy Plant Unit 2.  The unit, 800 mw of the
Company's total generating capacity of 1,060 mw, was out of service for 95
days in 1996 for general boiler inspection and repair.  The unavailability of
generating capability meant that the Company had to buy replacement power to
meet internal demand and that it had fewer sales to the AEP System Power Pool
(Power Pool).  The maintenance outage also produced additional maintenance
expenses in 1996.

Operating Revenues Decrease

     In 1996 operating revenues decreased $4.8 million (less than 2%) as
revenues from retail and wholesale sales decreased, partly offset by a rise in
transmission service revenues.

Operating Expenses Increase

     The significant changes in operating expenses were:

                                          Increase From
(dollars in millions)                     Previous Year   
                                      Amount           %  

Fuel. . . . . . . . . . . . . . . . .$(12.6)        (15.7)
Purchased Power . . . . . . . . . . .   8.0           9.1
Other Operation . . . . . . . . . . .   1.1           2.4
Maintenance . . . . . . . . . . . . .   4.9          17.6
Federal Income Taxes. . . . . . . . .   1.4          33.0

     The decrease in fuel expense and the increases in purchased power
expense and maintenance expense were caused by the largest maintenance outage
at Big Sandy Plant Unit 2 in its two decade history.  The maintenance outage
decreased net generation 18% resulting in the reduction to fuel expense and
the increase in purchased power expense as additional energy was purchased
from the Power Pool to meet demand.  Maintenance expense increased due to the
boiler repairs and other maintenance activities during the outage.

      Other operation expense increased due to amortization of demand side
management program costs commensurate with recovery in rates; increased costs
associated with marketing and customer services and an increase in write-offs
of uncollectible accounts receivable.  These increases in other operation
expense were offset in part by the recognition of gains on the sale of
emission allowances and the favorable effects of severance costs recorded in
1995 related to a planned staffing reduction.  The increased expenses for
marketing and customer services reflect the Company's efforts to improve
customer service.

     The increase in federal income tax expense was due to changes in certain
book/tax differences accounted for on a flow-through basis for ratemaking
purposes and the completion in March 1996 of the amortization of deferred
federal income taxes in excess of the statutory tax rate as ordered by the
Kentucky Public Service Commission.  These increases were partly offset by a
decrease in pre-tax operating income.
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT



To the Shareholder and Board of
Directors of Kentucky Power Company:

We have audited the accompanying balance sheets of Kentucky Power Company as
of December 31, 1996 and 1995, and the related statements of income, retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1996.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kentucky Power Company as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.



/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP
Columbus, Ohio
February 25, 1997
<PAGE>
<PAGE>
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
                                                           Year Ended December 31,  
                                                        1996        1995        1994  
                                                               (in thousands)
<S>                                                    <C>         <C>         <C> 
OPERATING REVENUES                                     $323,321    $328,144    $307,443 

OPERATING EXPENSES:
  Fuel                                                   67,697      80,337      62,072 
  Purchased Power                                        96,485      88,472      94,565 
  Other Operation                                        46,347      45,253      39,237 
  Maintenance                                            32,793      27,877      31,967 
  Depreciation and Amortization                          25,123      24,434      23,047 
  Taxes Other Than Federal Income Taxes                   7,790       8,431       7,825 
  Federal Income Taxes                                    5,743       4,319       2,641 
      TOTAL OPERATING EXPENSES                          281,978     279,123     261,354 

OPERATING INCOME                                         41,343      49,021      46,089 

NONOPERATING INCOME (LOSS)                                 (594)          3        (102)

INCOME BEFORE INTEREST CHARGES                           40,749      49,024      45,987 

INTEREST CHARGES                                         23,776      23,896      20,714 

NET INCOME                                             $ 16,973    $ 25,128    $ 25,273 


<CAPTION>
STATEMENTS OF RETAINED EARNINGS
                                                          Year Ended December 31,      
                                                        1996        1995        1994  
                                                                (in thousands)
<S>                                                     <C>         <C>         <C>
RETAINED EARNINGS JANUARY 1                             $91,381     $89,173     $85,296 

NET INCOME                                               16,973      25,128      25,273 

CASH DIVIDENDS DECLARED                                  24,264      22,920      21,396 

RETAINED EARNINGS DECEMBER 31                           $84,090     $91,381     $89,173 

See Notes to Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
BALANCE SHEETS
<CAPTION>
                                                                    December 31,
                                                                  1996        1995  
                                                                   (in thousands)  
ASSETS
<S>                                                              <C>         <C>
ELECTRIC UTILITY PLANT:
   Production                                                    $244,805    $230,054 
   Transmission                                                   264,563     261,619 
   Distribution                                                   329,184     313,783 
   General                                                         64,650      59,611 
   Construction Work in Progress                                   48,400      14,590 
              Total Electric Utility Plant                        951,602     879,657 
   Accumulated Depreciation and Amortization                      286,640     270,590 
              NET ELECTRIC UTILITY PLANT                          664,962     609,067 

OTHER PROPERTY AND INVESTMENTS                                      6,452       6,438 

CURRENT ASSETS:
   Cash and Cash Equivalents                                        1,106       1,031 
   Accounts Receivable:                                                           
      Customers                                                    22,862      23,283 
      Affiliated Companies                                          2,198       4,150 
   Miscellaneous                                                    3,529       2,739 
   Allowance for Uncollectible Accounts                              (272)       (259)
   Fuel - at average cost                                           9,244       3,526 
   Materials and Supplies - at average cost                        13,175      12,481 
   Accrued Utility Revenues                                         8,175      13,500 
   Prepayments                                                      2,011       1,701 
                 TOTAL CURRENT ASSETS                              62,028      62,152 

REGULATORY ASSETS                                                  88,776      82,388 

DEFERRED CHARGES                                                   11,361      12,153 

                 TOTAL                                           $833,579    $772,198 

See Notes to Financial Statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>  
<CAPTION>
                                                                     December 31,    
                                                                   1996        1995  
                                                                    (in thousands)     
CAPITALIZATION AND LIABILITIES
<S>                                                               <C>         <C>
CAPITALIZATION:
   Common Stock - Par Value $50:
      Authorized - 2,000,000 Shares
      Outstanding - 1,009,000 Shares                              $ 50,450    $ 50,450
   Paid-in Capital                                                 108,750      78,750
   Retained Earnings                                                84,090      91,381
                Total Common Shareholder's Equity                  243,290     220,581
   First Mortgage Bonds                                            179,305     224,235
   Notes Payable                                                    75,000        -   
   Subordinated Debentures                                          38,893      38,854
                TOTAL CAPITALIZATION                               536,488     483,670

OTHER NONCURRENT LIABILITIES                                        19,467      15,031

CURRENT LIABILITIES:
   Long-term Debt Due Within One Year                                 -         29,436
   Short-term Debt                                                  51,675      27,050
   Accounts Payable - General                                       16,272      11,608
   Accounts Payable - Affiliated Companies                          14,785      10,158
   Customer Deposits                                                 3,409       3,704
   Taxes Accrued                                                     5,064       7,972
   Interest Accrued                                                  5,217       5,853
   Other                                                             9,199      13,283
                 TOTAL CURRENT LIABILITIES                         105,621     109,064

DEFERRED INCOME TAXES                                              153,538     145,005

DEFERRED INVESTMENT TAX CREDITS                                     17,007      18,397

DEFERRED CREDITS                                                     1,458       1,031

COMMITMENTS AND CONTINGENCIES (Note 3)

                    TOTAL                                         $833,579    $772,198
/TABLE
<PAGE>
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
                                                              Year Ended December 31, 
                                                           1996        1995        1994  
                                                                  (in thousands)
<S>                                                      <C>         <C>         <C>
OPERATING ACTIVITIES:
   Net Income                                            $ 16,973    $ 25,128    $ 25,273 
   Adjustments for Noncash Items:
      Depreciation and Amortization                        25,196      24,507      23,124 
      Deferred Income Taxes                                 1,864      (2,380)     (1,239)
      Deferred Investment Tax Credits                      (1,390)     (1,478)     (1,453)
   Changes in Certain Current Assets and Liabilities:
      Accounts Receivable (net)                             1,596      (8,467)      2,692 
      Fuel, Materials and Supplies                         (6,412)      5,343      (4,141)
      Accrued Utility Revenues                              5,325      (4,372)      1,348 
      Accounts Payable                                      9,291       2,346         964 
   Other (net)                                             (7,410)      1,162        (247)
        Net Cash Flows From Operating Activities           45,033      41,789      46,321 

INVESTING ACTIVITIES:
   Construction Expenditures                              (75,816)    (39,264)    (53,119)
   Proceeds from Sales of Property                            250        -          1,215 
        Net Cash Flows Used For Investing Activities      (75,566)    (39,264)    (51,904)

FINANCING ACTIVITIES:
   Capital Contributions from Parent Company               30,000      10,000      10,000 
   Issuance of Long-term Debt                              74,985      38,647        -    
   Retirement of Long-term Debt                           (74,738)       -           -    
   Change in Short-term Debt (net)                         24,625     (28,100)     17,000 
   Dividends Paid                                         (24,264)    (22,920)    (21,396)
        Net Cash Flows From (Used For) 
          Financing Activities                             30,608      (2,373)      5,604 

Net Increase in Cash and Cash Equivalents                      75         152          21 
Cash and Cash Equivalents January 1                         1,031         879         858 
Cash and Cash Equivalents December 31                    $  1,106    $  1,031     $   879 

See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS

1.  SIGNIFICANT ACCOUNTING POLICIES:

Organization

     Kentucky Power Company (the Company or KPCo) is a
wholly-owned subsidiary of American Electric Power Company, Inc.
(AEP Co., Inc.), a public utility holding company.  KPCo is
engaged in the generation, purchase, transmission and
distribution of electric power in eastern Kentucky and does
business as American Electric Power (AEP).  The Company provides
electric power to 167,000 retail customers in its service
territory.  Wholesale electric power is supplied to neighboring
utility systems, power marketers and the AEP System Power Pool. 
As a member of the AEP System Power Pool (Power Pool) and a
signatory company to the AEP Transmission Equalization Agreement,
KPCo's facilities are operated in conjunction with the facilities
of certain other AEP affiliated utilities as an integrated
utility system.

Regulation

     As a subsidiary of AEP Co., Inc., the Company is subject to
regulation by the Securities and Exchange Commission (SEC) under
the Public Utility Holding Company Act of 1935 (1935 Act). 
Retail rates are regulated by the Kentucky Public Service
Commission (KPSC).  The Federal Energy Regulatory Commission
(FERC) regulates wholesale rates.

Basis of Accounting

     As a cost-based rate-regulated entity, KPCo's financial
statements reflect the actions of regulators that may result in
the recognition of revenues and expenses in different time
periods than enterprises that are not rate regulated.  In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," regulatory assets (deferred expenses) and regulatory
liabilities (deferred income) are recorded to reflect the
economic effects of regulation.

Use of Estimates

     The preparation of these financial statements in conformity
with generally accepted accounting principles requires in certain
instances the use of management's estimates.  Actual results
could differ from those estimates.
<PAGE>
Utility Plant

     Electric utility plant is stated at original cost and is
generally subject to first mortgage liens.  Additions, major
replacements and betterments are added to the plant accounts. 
Retirements from the plant accounts and associated removal costs,
net of salvage, are deducted from accumulated depreciation.  The
costs of labor, materials and overheads incurred to operate and
maintain utility plant are included in operating expenses.

Allowance for Funds Used During Construction (AFUDC)

     AFUDC is a noncash nonoperating income item that is
recovered with regulator approval over the service life of
utility plant through depreciation and represents the estimated
cost of borrowed and equity funds used to finance construction
projects.  The amounts of AFUDC for 1996, 1995 and 1994 were not
significant.

Depreciation and Amortization

     Depreciation is provided on a straight-line basis over the
estimated useful lives of property and is calculated largely
through the use of composite rates by functional class as
follows:

                                              Composite
Functional Class                              Depreciation
of Property                                   Annual Rates

Production                                        3.8%
Transmission                                      1.7%
Distribution                                      3.5%
General                                           2.5%

     Expenditures to remove retired plant are recovered through
depreciation charges included in rates.

Cash and Cash Equivalents

     Cash and cash equivalents include temporary cash investments
with original maturities of three months or less.

Operating Revenues

     Revenues include the accrual of electricity consumed but
unbilled at month-end as well as billed revenues.

Fuel Cost

     Changes in retail jurisdictional fuel costs are deferred
until reflected in billings to customers in later months through
a fuel adjustment mechanism.  Wholesale jurisdictional fuel cost
changes are expensed and billed as incurred.

<PAGE>
Income Taxes

     The Company follows the liability method of accounting for
income taxes as prescribed by SFAS 109, "Accounting for Income
Taxes."  Under the liability method, deferred income taxes are
provided for all temporary differences between book cost and tax
basis of assets and liabilities which will result in a future tax
consequence.  Where the flow-through method of accounting for
temporary differences is reflected in rates, deferred income
taxes are recorded with related regulatory assets and liabilities
in accordance with SFAS 71.

Investment Tax Credits

     Based on directives of regulatory commissions, the Company
reflected investment tax credits in rates on a deferral basis. 
Commensurate with rate treatment deferred investment tax credits
are being amortized over the life of the related plant
investment.  The Company's policy with regard to investment tax
credits for nonutility property was to practice the flow-through
method of accounting.

Debt

     Gains and losses on reacquired debt are deferred and
amortized over the term of the reacquired debt in accordance with
rate-making treatment.  If the debt is refinanced the
reacquisition costs are deferred and amortized over the term of
the replacement debt commensurate with their recovery in rates.

     Debt discount or premium and debt issuance expenses are
amortized over the term of the related debt, with the
amortization included in interest charges.

Other Property and Investments

     Other property and investments are stated at cost.


2. EFFECTS OF REGULATION:

     In accordance with SFAS 71 the financial statements include
assets (deferred expenses) and liabilities (deferred income)
recorded in accordance with regulatory actions to match expenses
and revenues in cost-based rates.  Regulatory assets are expected
to be recovered in future periods through the rate-making process
and regulatory liabilities are expected to reduce future cost
recoveries.  Among other things, application of SFAS 71 requires
that the Company's rates be cost-based regulated.  The Company
has reviewed all the evidence currently available and concluded
that it continues to meet the requirements to apply SFAS 71.  In
the event a portion of the Company's business were to no longer
meet those requirements, net regulatory assets would have to be
written off for that portion of the business and assets would
have to be tested for possible impairment.
<PAGE>
   Regulatory assets and liabilities are comprised of the
following:
                                             December 31,  
                                           1996       1995
                                           (in thousands)
Regulatory Assets:
  Amounts Due From Customers for
   Future Income Taxes                   $84,238    $77,568
  Other                                    4,538      4,820

  Total Regulatory Assets                $88,776    $82,388

Regulatory Liabilities:
  Deferred Investment Tax Credits        $17,007    $18,397
  Other*                                   1,142        787

  Total Regulatory Liabilities           $18,149    $19,184

* Included in Deferred Credits on the Balance Sheets.

3. COMMITMENTS AND CONTINGENCIES:

Construction

     Construction expenditures for the years 1997-1999 are
estimated to be $191 million and, in connection therewith, cer-
tain commitments have been made.

Fuel Supply

     Long-term fuel supply contracts generally contain clauses
that provide for periodic price adjustments.  The contracts are
for various terms, the longest of which extends to the year 2001
and contain various clauses that would release the Company from
its obligation under certain force majeure conditions.  The fuel
adjustment mechanism generally provides for recovery of changes
in the cost of fuel.

Loan Guarantees

     A constructive marketing program enables residential
customers to borrow from area banks to purchase energy efficient
electrical equipment, such as heat pumps.  KPCo guarantees loan
principal plus interest.  The guaranteed amounts totaled $14.6
million at December 31, 1996.

Litigation

     KPCo is involved in a number of legal proceedings and
claims.  While management is unable to predict the outcome of
litigation, it is not expected that the resolution of these
matters will have a material adverse effect on the results of
operations or financial condition.


4. RELATED-PARTY TRANSACTIONS:

     KPCo has a Unit Power Purchase Agreement with AEP Generating
Company (AEGCo) an affiliated company, which expires in 1999. 
The agreement provides for the Company to purchase 15% of the
total output of the two unit 2,600-mw capacity Rockport Plant. 
Under the Unit Power Purchase Agreement there is a demand charge
for the right to receive the power, which is payable even if the
power is not taken.  The amount of the demand charge is such that
when added to other amounts received by AEGCo, it will enable
AEGCo to recover all its fixed expenses including a FERC-approved
rate of return on common equity.

     Demand charges and energy purchases under the Unit Power
Purchase Agreement were included in purchased power expense as
follows:

                             Year Ended December 31,   
                            1996       1995       1994 
                                  (in thousands)

Demand Charge             $39,622    $39,608    $40,587
Energy Charge              27,743     29,027     28,711
     Total                $67,365    $68,635    $69,298

     Benefits and costs of the System's generating plants are
shared by members of the AEP System Power Pool.  Under the terms
of the System Interconnection Agreement, capacity charges and
credits are designed to allocate the cost of the System's gener-
ating reserves among the Power Pool members based on their
relative peak demands and generating reserves.  Power Pool
members are compensated for the out-of-pocket costs of energy
delivered to the Power Pool and charged for energy received from
the Power Pool.

     Operating revenues include $28.0 million in 1996, $38.9
million in 1995 and $31.6 million in 1994 for energy supplied to
the Power Pool.

     Charges for Power Pool capacity, which is a charge for the
right to receive power and payable even if the power is not
taken, and for energy received from the Power Pool were included
in purchased power expense as follows:

                             Year Ended December 31,   
                            1996       1995       1994 
                                  (in thousands)

Capacity Charge           $ 6,425    $ 6,489    $ 1,921
Energy Charge              19,741      9,493     18,103
     Total                $26,166    $15,982    $20,024

     Power Pool members share in wholesale sales to unaffiliated
entities made by the Power Pool.  The Company's share of these
wholesale power pool sales was included in operating revenues in
the amount of $26.7 million in 1996, $19.2 million in 1995 and
$19.9 million in 1994.

     In addition, the Power Pool purchases power from
unaffiliated companies for immediate resale to other unaffiliated
utilities.  The Company's share of these purchases was included
in purchased power expense and totaled $3.0 million in 1996, $3.9
million in 1995 and $5.2 million in 1994.  Revenues from these
transactions including a transmission fee are included in the
above Power Pool wholesale operating revenues.

     AEP System companies participate in a transmission equal-
ization agreement.  This agreement combines certain AEP System
companies' investments in transmission facilities and shares the
costs of ownership of those facilities in proportion to the
System companies' respective peak demands.  Pursuant to the terms
of the agreement, other operating expense includes equalization
credits of $3.3 million, $3.5 million and $4.3 million in 1996,
1995 and 1994, respectively.

     American Electric Power Service Corporation (AEPSC) provides
certain managerial and professional services to AEP System
companies.  The costs of the services are billed by AEPSC on a
direct-charge basis to the extent practicable, and on reasonable
bases of proration for indirect costs.  The charges for services
are made at cost and include no compensation for the use of
equity capital, which is furnished to AEPSC by AEP Co., Inc. 
Billings from AEPSC are expensed or capitalized depending on the
nature of the services rendered.  AEPSC and its billings are
subject to the regulation of the SEC under the 1935 Act.


5. BENEFIT PLANS:

     KPCo participates in the AEP System pension plan, a
trusteed, noncontributory defined benefit plan covering all
employees meeting eligibility requirements.  Benefits are based
on service years and compensation levels.  Pension costs are
allocated by first charging each System company with its service
cost and then allocating the remaining pension cost in proportion
to its share of the projected benefit obligation.  The funding
policy is to make annual trust fund contributions equal to the
net periodic pension cost up to the maximum amount deductible for
federal income taxes, but not less than the minimum required
contribution in accordance with the Employee Retirement Income
Security Act of 1974.  Net pension plan costs for the years ended
December 31, 1996, 1995 and 1994 were $812,000, $573,000 and
$1,046,000, respectively.

     An employee savings plan is offered which allows
participants to contribute up to 17% of their salaries into
various investment alternatives, including AEP Co., Inc. common
stock.  An employer matching contribution, equaling one-half of
the employees' contribution to the plan up to a maximum of 3% of
the employees' base salary, is invested in AEP Co., Inc. common
stock.  The Company's annual contributions totaled $687,000 in
1996, $720,000 in 1995 and $718,000 in 1994.

     Postretirement benefits other than pensions (OPEB) are
provided for retired employees under an AEP System plan. 
Substantially all employees are eligible for postretirement
health care and life insurance if they retire from active service
after reaching age 55 and have at least 10 service years.  OPEB
costs are determined by the application of AEP System actuarial
assumptions to each operating company's employee complement.  The
annual accrued costs, which includes the recognition of
one-twentieth of the prior service transition obligation, were
$2.8
million in 1996 and $2.4 million in 1995 and 1994.  The funding
policy for AEP's OPEB plan is to make contributions to an
external Voluntary Employees Beneficiary Association trust fund
equal to the incremental OPEB costs (i.e., the amount that the
total postretirement benefits cost under SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions,"
exceeds the pay-as-you-go amount).  Contributions were $1.3
million in 1996, $1.6 million in 1995 and 1994.


 6.   COMMON SHAREHOLDER'S EQUITY:

     The Company received from AEP Co., Inc. cash capital
contributions of $30 million in 1996 and $10 million in both 1995
and 1994 which were credited to paid-in capital.  There were no
other transactions affecting common stock and paid-in capital
accounts in 1996, 1995 and 1994.

7.  FEDERAL INCOME TAXES:
                                              
The details of federal income taxes as reported are as
follows:
<TABLE>                                                           
<CAPTION>                                        
                                                         Year Ended December 31, 
                                                       1996       1995       1994  
                                                             (in thousands) 
<S>                                                  <C>         <C>        <C>     
Charged (Credited) to Operating Expenses (net):
  Current                                            $ 5,118     $7,935     $ 5,097 
  Deferred                                             1,857     (2,373)     (1,198)
  Deferred Investment Tax Credits                     (1,232)    (1,243)     (1,258)
    Total                                              5,743      4,319       2,641 
Charged (Credited) to Nonoperating Income (net):
  Current                                               (473)      (163)       (227)
  Deferred                                                 7         (7)        (41)
  Deferred Investment Tax Credits                       (158)      (235)       (195)
    Total                                               (624)      (405)       (463)
Total Federal Income Taxes as Reported               $ 5,119    $ 3,914     $ 2,178 
</TABLE>

<PAGE>
  The following is a reconciliation of the difference between the
amount of federal income taxes computed by multiplying book
income before federal income taxes by the statutory tax rate, and
the amount of federal income taxes reported.
<TABLE>
<CAPTION>                                                  
                                                          Year Ended December 31,  
                                                        1996       1995       1994  
                                                              (in thousands) 
<S>                                                    <C>         <C>       <C>     
Net Income                                             $16,973     $25,128   $25,273 
Federal Income Taxes                                     5,119       3,914     2,178 
Pre-tax Book Income                                    $22,092     $29,042   $27,451 

Federal Income Taxes on Pre-tax Book Income
  at Statutory Rate (35%)                              $ 7,732     $10,165   $ 9,608 
Increase (Decrease) in Federal Income Taxes
  Resulting From the Following Items:
    Depreciation                                         1,694        (648)     (671)
    Removal Costs                                         (979)       (979)     (979)
    Amortization of Deferred Federal Income Tax
     in Excess of the Statutory Tax Rate                  (339)     (1,355)   (1,355)
    Allowance For Funds Used During Construction          (389)       (390)     (392)
    Percentage Repair Allowance                           (445)       (433)     (428)
    Corporate Owned Life Insurance                        (479)       (826)     (615)
    Investment Tax Credits (net)                        (1,390)     (1,478)   (1,453)
    Prior Year Federal Income Tax Accrual Adjustment        -          -      (1,100)
    Other                                                  (286)      (142)     (437)
Total Federal Income Taxes as Reported                  $ 5,119    $ 3,914   $ 2,178 
Effective Federal Income Tax Rate                         23.2%      13.5%      7.9% 
</TABLE>
  
  The following tables show the elements of the net deferred tax
liability and the significant temporary differences that gave
rise to it:
                                         December 31,    
                                      1996         1995
                                       (in thousands)

Deferred Tax Assets                 $  30,919   $  29,653
Deferred Tax Liabilities             (184,457)   (174,658)
  Net Deferred Tax Liabilities      $(153,538)  $(145,005)

Property Related Temporary
  Differences                       $(108,276)  $(105,234)
Amounts Due From Customers For
  Future Federal Income Taxes         (18,734)    (18,228)
Deferred State Income Taxes           (30,711)    (25,487)
All Other (net)                         4,183       3,944
    Total Net Deferred
      Tax Liabilities               $(153,538)  $(145,005)

  KPCo joins in the filing of a consolidated federal income tax
return with its affiliates in the AEP System.  The allocation of
the AEP System's current consolidated federal income tax to the
System companies is in accordance with SEC rules under the 1935
Act.  These rules permit the allocation of the benefit of current
tax losses to the System companies giving rise to them in
determining their current tax expense.  The tax loss of the
System parent company, AEP Co., Inc. is allocated to its
subsidiaries with taxable income.  With the exception of the loss
of the parent company, the method of allocation approximates a sepa-
rate return result for each company in the consolidated group.

  The AEP System has settled with the Internal Revenue Service
(IRS) all issues from the audits of the consolidated federal
income tax returns for the years prior to 1991.  Returns for the
years 1991 through 1993 are presently being audited by the IRS. 
During the audit the IRS agents requested a ruling from their
National Office that certain interest deductions relating to
corporate owned life insurance (COLI) claimed by the Company for
1991 through 1993 should not be allowed.  The COLI program was
established in 1992 as part of the Company's strategy to fund and
reduce the cost of medical benefits for retired employees.  AEP
filed a brief with the IRS National Office refuting the agents'
position.  Although no adjustments have been proposed, a
disallowance of the COLI interest deductions through December 31,
1996 would reduce earnings by approximately $5 million  (including 
interest).  Management believes it will ultimately prevail on
this issue and will vigorously contest any adjustments that may
be assessed.  Accordingly, no provision for this amount has been
recorded.  In the opinion of management, the final settlement of
open years will not have a material effect on results of
operations.


8.  LEASES:

  Leases of property, plant and equipment are for periods up to
30 years and require payments of related property taxes,
maintenance and operating costs.  The majority of the leases have
purchase or renewal options and will be renewed or replaced by
other leases.

  Lease rentals are generally charged to operating expenses in
accordance with rate-making treatment.  The components of rental
costs are as follows:
                                     Year Ended December 31,    
                                    1996       1995      1994  
                                          (in thousands)
Operating Leases                  $  402      $ 564    $  653 
Amortization of Capital 
  Leases                           2,652      2,111     1,646 
Interest on Capital Leases           707        513       459 
  Total Rental Costs              $3,761     $3,188    $2,758 

<PAGE>
  Properties under capital leases and related obligations recorded on
the Balance Sheets are as follows:
                                          December 31,    
                                       1996        1995
                                         (in thousands)    

Electric Utility Plant:
 Production                           $  1,586     $ 1,352
  General                               18,475      13,731
    Total Electric Utility Plant        20,061      15,083
 Accumulated Amortization                7,211       5,664
    Net Properties under Capital Lease $12,850     $ 9,419

Capital Lease Obligations:
  Noncurrent Liability                 $ 9,833      $7,064
  Liability Due Within One Year          3,017       2,355
    Total Capital Lease Obligations    $12,850      $9,419

  Capital lease obligations are included in other noncurrent and other
current liabilities on the Balance Sheets.  Properties under operating
leases and related obligations are not included in the Balance
Sheets.
  
  Future minimum lease payments consisted of the following at December
31, 1996:
                                                          Non-      
                                                          cancelable  
                                         Capital          Operating  
                                         Leases           Leases     
                                             (in thousands)        
  1997                                   $ 3,651          $   492  
  1998                                     2,961              286 
  1999                                     2,499              160 
  2000                                     1,943               98     
  2001                                     1,208               11 
  Later Years                              2,388                -     
  Total Future Minimum Lease Payments     14,650           $1,047  
  Less Estimated Interest Element          1,800                           
Estimated Present Value of
    Future Minimum Lease Payments        $12,850             

<PAGE>
9. LONG-TERM DEBT AND LINES OF CREDIT:

  Long-term debt was outstanding as follows:
                                           December 31,  
                                         1996      1995
                                         (in thousands)
First Mortgage Bonds:
  5 1/8% due January 1, 1996           $   -     $ 29,436
  7.20%  due December 1, 1999            35,000    35,000
  8.95%  due May 10, 2001                20,000    20,000
  8.90%  due May 21, 2001                40,000    40,000
  7 7/8% due September 1, 2002             -       45,000
  6.65%  due May 1, 2003                 15,000    15,000
  6.70%  due June 1, 2003                15,000    15,000
  6.70%  due July 1, 2003                15,000    15,000
  7.90%  due June 1, 2023                15,000    15,000
  7.90%  due June 1, 2023                25,000    25,000
  Unamortized Discount (net)               (695)     (765)
    Total                               179,305   253,671

Notes Payable to Banks:
  6.42% due April 1, 1999                25,000      -
  6.57% due April 1, 2000                25,000      -
  7.445% due September 20, 2002          25,000      -   
                                         75,000      -   

Junior Subordinated Deferrable
  Interest Debentures
  8.72% Series A
   due June 30, 2025                     40,000    40,000
  Unamortized Discount                   (1,107)   (1,146)
    Total                                38,893    38,854
Less Portion Due Within One Year           -       29,436

    Total                              $293,198  $263,089


  Certain first mortgage bond indentures contain maintenance and
replacement provisions requiring the deposit of cash or bonds
with a trustee or, in lieu thereof, certification of unfunded property
additions.

  At December 31, 1996 annual long-term debt payments, excluding
premium and discount, are as follows:

                                                 Principal Amount
                                                  (in thousands)

 1997                                                $   -      
 1998                                                    -      
 1999                                                  60,000   
 2000                                                  25,000                 
 2001                                                  60,000   
 Later Years                                          150,000   
   Total                                              $295,000                 

  Short-term debt borrowings are limited by provisions of the 1935 Act to $150
million. Lines of credit are shared with AEP System companies and at
December 31, 1996 and 1995 were available in the amounts of $409 million and
$372 million, respectively.  Commitment fees of approximately 1/8 of 1% of the
unused short-term lines of credit are paid each year to the banks to maintain
the lines of credit. 
Outstanding short-term debt consisted of:
                                              Year-end
                              Balance         Weighted
                            Outstanding       Average
                          (in thousands)   Interest Rate

December 31, 1996:
  Notes Payable              $33,800           6.1%
  Commercial Paper            17,875           6.5%
    Total                    $51,675           6.2%
December 31, 1995:
  Notes Payable              $15,950           6.1%
  Commercial Paper            11,100           6.1%
    Total                    $27,050           6.1%


10.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

  The carrying amount of cash and cash equivalents, accounts receivable,
short-term debt and accounts payable approximates fair value because of the
short-term maturities of these instruments.  At December 31, 1996 and 1995 the
fair value of long-term debt was $304 million and $307 million, respectively,
based on quoted market prices for the same or similar issues and the current
interest rates offered for debt of the same remaining maturities.  The
carrying amount for long-term debt was $293.2 million and $292.5 million
at December 31, 1996 and 1995, respectively.


11. SUPPLEMENTARY INFORMATION:
                                 Year Ended December 31,  
                                 1996       1995     1994
                                      (in thousands)
Cash was paid for:
  Interest (net of
    capitalized amounts)       $24,069    $23,581  $20,604
  Income Taxes                   9,012      6,453    7,606
Noncash Acquisitions under
    Capital Leases were          6,322      3,651    3,339


12. UNAUDITED QUARTERLY FINANCIALINFORMATION:

Quarterly Periods      Operating      Operating      Net
     Ended              Revenues       Income      Income 

1996
 March 31               $88,589       $13,158      $6,756
 June 30                 78,730         8,301       2,369
 September 30            78,499        10,393       4,441
 December 31             77,503         9,491       3,407

1995
 March 31                85,302        13,643       7,815
 June 30                 72,699         8,562       2,547
 September 30            79,532        12,171       6,000
 December 31             90,611        14,645       8,766