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SOUTHERN OHIO COAL COMPANY
QUARTERLY REPORT PER REQUIREMENTS
OF HOLDING COMPANY ACT RELEASE NO. 26573
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
CONTENTS
Page
Statements of Income and Retained Earnings 1
Balance Sheets 2-3
Information Concerning Mine Operations and
Capital Improvements 4
Calculation of Cost of Capital and
Statement of Cost of Commercial Coal Sold and Shipped 5
Statement of Cost of Operation 6
Analysis of Mining Plant in Service 7
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SOUTHERN OHIO COAL COMPANY
STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(in thousands)
OPERATING REVENUES - Sales to Parent $59,992
COST OF OPERATION 57,802
OPERATING INCOME 2,190
INTEREST CHARGES 696
OPERATING INCOME BEFORE FEDERAL INCOME TAXES 1,494
FEDERAL INCOME TAXES ON OPERATIONS 1,276
NET INCOME FROM OPERATIONS 218
NONOPERATING INCOME 197
NET INCOME $ 415
STATEMENT OF RETAINED EARNINGS
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(in thousands)
BALANCE AT BEGINNING OF PERIOD $23,338
NET INCOME 415
CASH DIVIDENDS DECLARED 415
BALANCE AT END OF PERIOD $23,338
The common stock of the Company is wholly owned by Ohio Power Company.
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SOUTHERN OHIO COAL COMPANY
BALANCE SHEET
(UNAUDITED)
September 30,
1998
(in thousands)
ASSETS
MINING PLANT:
Mining Plant in Service $374,432
Construction Work in Progress 1,645
Total Mining Plant 376,077
Accumulated Depreciation and Amortization 234,166
NET MINING PLANT 141,911
OTHER PROPERTY AND INVESTMENTS 89,223
CURRENT ASSETS:
Cash and Cash Equivalents 234
Accounts Receivable:
General 4,155
Affiliated Companies 20,278
Coal 1,586
Materials and Supplies 10,690
Other 286
TOTAL CURRENT ASSETS 37,229
REGULATORY ASSETS 39,638
DEFERRED CHARGES 2,773
TOTAL $310,774
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SOUTHERN OHIO COAL COMPANY
BALANCE SHEET
(UNAUDITED)
September 30,
1998
(in thousands)
CAPITALIZATION AND LIABILITIES
SHAREHOLDER'S EQUITY:
Common Stock - Par Value $1:
Authorized and Outstanding - 5,000 Shares $ 5
Premium on Common Stock 9,996
Other Paid-in Capital 34,693
Retained Earnings 23,338
TOTAL SHAREHOLDER'S EQUITY 68,032
LONG-TERM DEBT:
Notes Payable 30,000
Finance Obligations 27,815
TOTAL LONG-TERM DEBT 57,815
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases 29,226
Accrued Postretirement Benefits Other Than Pensions 36,543
Operating Reserves 36,978
TOTAL OTHER NONCURRENT LIABILITIES 102,747
CURRENT LIABILITIES:
Long-term Debt Due Within One Year 15,719
Short-term Debt 7,500
Accounts Payable:
General 4,355
Affiliated Companies 3,068
Taxes Accrued 1,897
Accrued Vacation Pay 2,917
Workers' Compensation Claims 5,506
Accrued Rent 3,559
Obligations Under Capital Leases 13,808
Other 4,423
TOTAL CURRENT LIABILITIES 62,752
DEFERRED INCOME TAXES 18,068
DEFERRED CREDITS 1,360
TOTAL $310,774
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SOUTHERN OHIO COAL COMPANY
INFORMATION CONCERNING MINE OPERATIONS AND CAPITAL IMPROVEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
As discussed in Note 6, "Federal Income Taxes" of the Notes to
Financial Statements in the 1997 Annual Report, the Internal Revenue
Service (IRS) agents auditing the AEP System's Consolidated federal
income tax returns requested a ruling from their National Office that
certain interest deductions relating to corporate owned life insurance
(COLI) claimed by the Company should not be allowed. As a result of a
suit filed in United States District Court (discussed below) this
request for ruling has been withdrawn. Adjustments have been or will be
proposed by the IRS disallowing COLI interest deductions for taxable
years 1991-96. A disallowance of the COLI interest deduction through
September 30, 1998 would reduce earnings by approximately $30.1 million
(including interest). The Company has made no provision for any
possible adverse earnings impact from this matter.
In order to resolve this issue without further delay, on March 24,
1998, the Company filed suit against the United States in the United
States District Court for the Southern District of Ohio. Management
believes that it has a meritorious position and will vigorously pursue
this lawsuit. In July 1998 the Company made a payment of taxes and
interest attributable to COLI interest deductions for taxable years
1991-96 to avoid the potential assessment by the IRS of any additional
above market rate interest on the contested amount. In September 1998
the Company made an additional payment for the 1997 tax year. The
payments were included on the balance sheet in other property and
investments pending the resolution of this matter. The Company will
seek refund, either administratively or through litigation, of all
amounts paid. In the event the resolution of this matter is
unfavorable, the Company expects to recover from OPCo all of its costs
under the terms of the coal supply agreement.
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<TABLE> SOUTHERN OHIO COAL COMPANY
CALCULATION OF COST OF CAPITAL AND STATEMENT OF COST OF COMMERCIAL COAL SOLD AND SHIPPED
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
(in thousands, except as noted)
<CAPTION>
July through
September
1998
<S> <C>
I. Calculation of Cost-of-Capital Compensation:
A. Equity Investment at Beginning of Period:
Common Stock $ 5
Premium on Common Stock 9,996
Other Paid-in Capital 34,693
44,694
B. Rate of Return Allowable per HCAR No. 26573, 10.51% per annum, 2.6275% per quarter .026275
C. Earnings Allowable on Equity Investment
1. Current Quarter $ 1,174
2. Year-to-Date $ 3,498
D. Net Income per Statement of Income (a) $ 415
Add: Interest Charges 696
Less: Nonoperating Loss 197
E. Applied Cost-of-Capital Billing Adder:
1. Current Quarter $ 914
2. Year-to-Date $ 2,900
II. Coal Billing Calculation - Meigs Division:
A. Total Operating Expenses (b) $ 59,078
B. Add: Cost-of-Capital Billing Adder as Applied per E. 1. of Section I 914
C. Cost Applicable to Current Quarter Coal Billings to Ohio Power $ 59,992
D. Coal Sold and Shipped in Current Quarter to Ohio Power (in tons) 1,155,170
E. Average Price per Ton to Ohio Power (in dollars) (C/D) $ 51.93
(a) The Company sold its Martinka mining division and most of the Martinka related coal reserves to an
unaffiliated company. No return on equity investment associated with these operations has been billed
since the division ceased mining coal effective July 1, 1992. All results associated with the Martinka
division since then are billed to the Parent Company, Ohio Power Company, eliminating any earnings
effect to the Company.
(b) As represented by "Cost of Operation" plus "Federal Income Taxes On Operations" reported in Statement
of Income.
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SOUTHERN OHIO COAL COMPANY
STATEMENT OF COST OF OPERATION
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
(in thousands)
Direct Labor-UMW* $ 2,050
Indirect Labor-UMW* 5,481
Benefits-UMW* 4,551
Salaries and Benefits-Nonunion 4,557
Operating Supplies 3,735
Repair Parts and Materials 8,392
Electricity and Other Utilities 1,687
Outside Services-Maintenance, Haulage and Reclamation 4,991
Taxes Other Than Federal Income Taxes** 1,782
Rental of Equipment 6,900
Depreciation, Depletion and Amortization 4,277
Mining Cost Normalization*** 601
Other Production Costs 6,578
Subtotal 55,582
Transfers of Production Costs (to)/from Coal Inventory 2,220
Total $57,802
* United Mine Workers of America.
** Excludes FICA, Federal Unemployment and State Unemployment.
These costs are reflected in employee benefits.
*** Represents the deferral/accrual required to establish a selling
price based on forecasted results for the remainder of the year.
The amount of mining cost normalization is established on an
"overall" company basis(i.e., not itemized) and is eliminated by
year-end.
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SOUTHERN OHIO COAL COMPANY
ANALYSIS OF MINING PLANT IN SERVICE
AND RELATED ACCUMULATED PROVISIONS FOR
DEPRECIATION AND AMORTIZATION
September 30, 1998
Net
Gross Accumulated Carrying
Cost Provisions Amount
(in thousands)
Description
Surface Lands $ 7,629 $ - $ 7,629
Mining Structures and Equipment 230,106 152,388 77,718
Coal Interests (net of depletion) 2,548 - 2,548
Mine Development Costs 134,149 81,778 52,371
Total Mining Plant
in Service $374,432 $234,166 $140,266
