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SOUTHERN OHIO COAL COMPANY
QUARTERLY REPORT PER REQUIREMENTS
OF HOLDING COMPANY ACT RELEASE NO. 26573
FOR THE QUARTER ENDED MARCH 31, 1999
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
Calculation of Allowed Cost of Capital -
Effective April 1, 1999 8
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SOUTHERN OHIO COAL COMPANY
STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 1999
(UNAUDITED)
(in thousands)
OPERATING REVENUES $47,741
COST OF OPERATION 44,717
OPERATING INCOME 3,024
INTEREST CHARGES 546
OPERATING INCOME BEFORE FEDERAL INCOME TAXES 2,478
FEDERAL INCOME TAXES ON OPERATIONS 2,146
NET INCOME FROM OPERATIONS 332
NONOPERATING INCOME 83
NET INCOME $ 415
STATEMENT OF RETAINED EARNINGS
FOR THE QUARTER ENDED MARCH 31, 1999
(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)
March 31,
1999
(in thousands)
ASSETS
MINING PLANT:
Mining Plant in Service $375,610
Construction Work in Progress 1,715
Total Mining Plant 377,325
Accumulated Depreciation and Amortization 249,332
NET MINING PLANT 127,993
OTHER PROPERTY AND INVESTMENTS 88,982
CURRENT ASSETS:
Cash and Cash Equivalents 11,338
Accounts Receivable:
General 4,387
Affiliated Companies 6,351
Coal 4,236
Materials and Supplies 10,724
Other 474
TOTAL CURRENT ASSETS 37,510
REGULATORY ASSETS 31,814
DEFERRED CHARGES 11,756
TOTAL $298,055
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SOUTHERN OHIO COAL COMPANY
BALANCE SHEET
(UNAUDITED)
March 31,
1999
(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 - Finance Obligations 51,314
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases 24,753
Accrued Postretirement Benefits Other Than Pensions 39,434
Operating Reserves 36,411
TOTAL OTHER NONCURRENT LIABILITIES 100,598
CURRENT LIABILITIES:
Long-term Debt Due Within One Year 11,093
Short-term Debt 6,000
Accounts Payable:
General 5,327
Affiliated Companies 3,793
Taxes Accrued 3,914
Interest Accrued 333
Accrued Vacation Pay 3,847
Workers' Compensation Claims 7,920
Accrued Rent 3,338
Obligations Under Capital Leases 14,391
Other 5,668
TOTAL CURRENT LIABILITIES 65,624
DEFERRED INCOME TAXES 11,100
DEFERRED CREDITS 1,387
TOTAL $298,055
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SOUTHERN OHIO COAL COMPANY
INFORMATION CONCERNING MINE OPERATIONS AND CAPITAL IMPROVEMENTS
FOR THE QUARTER ENDED MARCH 31, 1999
As discussed in Note 2, of the Notes to Financial Statements in the
1998 Annual Report, the deductibility of certain interest deductions
related to American Electric Power's corporate owned life insurance
(COLI) program for taxable years 1991-1996 is under review by the
Internal Revenue Service (IRS). Adjustments have been or will be
proposed by the IRS disallowing COLI interest deductions. A
disallowance of COLI interest deductions through March 31, 1999 would
reduce earnings by approximately $30.6 million (including interest).
The Company has made no provision for any possible earnings impact from
this matter.
In 1998 the Company made payments of taxes and interest
attributable to COLI interest deductions for taxable years 1991-1997 to
avoid the potential assessment by the IRS of any additional above market
rate interest on the contested amount. These payments to the IRS are
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 plus
interest.
In order to resolve this issue, the Company filed suit against the
United States in the US District Court for the Southern District of Ohio
in March 1998. Management believes that it has a meritorious position
and will vigorously pursue this lawsuit. In the event the resolution of
this matter is unfavorable, the Company expects to recover from Ohio
Power Company (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 MARCH 31, 1999
(in thousands, except as noted)
<CAPTION> January through
March
1999
<S> <C>
I. Calculation of Cost-of-Capital Compensation:
A. 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 Nos. 26573,
10.51% per annum, 2.6275% per quarter .026275
C. Earnings Allowable: (re investment in item A)
1. Current Quarter $ 1,174
2. Year-to-Date $ 1,174
D. Net Income per Statement of Income (a) $ 415
Add: Interest Charges 546
Less: Nonoperating Income 83
E. Applied Cost-of-Capital Billing Adder:
1. Current Quarter $ 878
2. Year-to-Date $ 878
II. Coal Billing Calculation - Meigs Division:
A. Total Operating Expenses (b) $ 46,863
B. Add: Cost-of-Capital Billing Adder as Applied per E. 1. of Section I 878
C. Cost Applicable to Current Quarter Coal Billings to Ohio Power $ 47,741
D. Coal Sold and Shipped in Current Quarter to Ohio Power (in tons) 1,268,022
E. Average Price per Ton to Ohio Power (in dollars) (C/D) $37.65
(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 MARCH 31, 1999
(in thousands)
Direct Labor-UMW* $ 2,219
Indirect Labor-UMW* 7,008
Benefits-UMW* 6,543
Salaries and Benefits-Nonunion 5,163
Operating Supplies 3,450
Repair Parts and Materials 6,979
Electricity and Other Utilities 2,066
Outside Services-Maintenance, Haulage and Reclamation 2,718
Taxes Other Than Federal Income Taxes** 1,810
Rental of Equipment 7,037
Depreciation, Depletion and Amortization 5,323
Mining Cost Normalization*** (8,985)
Reclamation
Other Production Costs 5,828
Subtotal 47,159
Transfers of Production Costs (to)/from Coal Inventory (2,442)
Total $ 44,717
* United Mine Workers of America.
** Excludes FICA, Federal Unemployment and State Unemployment Taxes.
These costs are reflected in employee benefits.
*** Represents the deferral/accrual required to establish a selling
price based on forecasted results for 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
March 31, 1999
Net
Gross Accumulated Carrying
Cost Provisions Amount
(in thousands)
Description
Surface Lands $ 7,629 $ - $ 7,629
Mining Structures and Equipment 231,691 161,554 70,137
Coal Interests (net of depletion) 2,141 - 2,141
Mine Development Costs 134,149 87,778 46,371
Total Mining Plant in Service $375,610 $249,332 $126,278
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OHIO POWER COMPANY'S (OPCo's) ACTIVE COAL MINES
CENTRAL OHIO COAL COMPANY; SOUTHERN OHIO COAL - MEIGS;
AND WINDSOR COAL COMPANY
ALLOWED AFTER-TAX COMPOSITE COST-OF-CAPITAL IS 10.43%
EFFECTIVE 4-1-99
THE 10.43% IS OPCo's WEIGHTED AVERAGE COST-OF-CAPITAL AND WAS
CALCULATED AS FOLLOWS:
CAPITALIZATION AFTER-TAX
@12/31/98 PERCENT EFFECTIVE WEIGHTED
COMPONENT (000) OF TOTAL COST RATE OF RETURN
Long-term Debt $ 993,647(a) 41.92% 7.38%(c) 3.09%
Preferred Stock 29,220 1.23% 5.00%(c) 0.06%
Common Stock 1,347,681(b) 56.85% 12.81%(d) 7.28%
Total $2,370,548 100.00% 10.43%*
Authorization: HCAR 35-26573 dated 9-13-96
(SEC File No. 70-8611).
(a) Includes long-term debt due in one year and is net of
unamortized debt premium and discount, unamortized debt
expense and unamortized loss on reacquired debt.
(b) Common equity includes premium on preferred stock and
excludes undistributed subsidiary earnings.
(c) Embedded cost at 12/31/98.
(d) No more than the rate allowed by the PUCO in a retail rate
proceeding involving OPCo and settled in 1995.
* Rate will be applied for billing purposes to the twelve
month period commencing April 1, 1999.
