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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, 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
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SOUTHERN OHIO COAL COMPANY
STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(in thousands)
OPERATING REVENUES - Sales to Parent $71,227
COST OF OPERATION 68,596
OPERATING INCOME 2,631
INTEREST CHARGES 540
OPERATING INCOME BEFORE FEDERAL INCOME TAXES 2,091
FEDERAL INCOME TAXES ON OPERATIONS 1,825
NET INCOME FROM OPERATIONS 266
NONOPERATING INCOME 146
NET INCOME $ 412
STATEMENT OF RETAINED EARNINGS
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(in thousands)
BALANCE AT BEGINNING OF PERIOD $23,338
NET INCOME 412
CASH DIVIDENDS DECLARED 412
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,
1999
(in thousands)
ASSETS
MINING PLANT:
Mining Plant in Service $383,808
Construction Work in Progress 327
Total Mining Plant 384,135
Accumulated Depreciation and Amortization 264,237
NET MINING PLANT 119,898
OTHER PROPERTY AND INVESTMENTS 87,544
CURRENT ASSETS:
Cash and Cash Equivalents 22,233
Accounts Receivable:
General 4,142
Affiliated Companies 16,181
Coal 393
Materials and Supplies 11,191
Other 766
TOTAL CURRENT ASSETS 54,906
REGULATORY ASSETS 26,768
DEFERRED CHARGES 1,736
TOTAL $290,852
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SOUTHERN OHIO COAL COMPANY
BALANCE SHEET
(UNAUDITED)
September 30,
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:
Notes Payable 30,000
Finance Obligations 15,476
TOTAL LONG-TERM DEBT 45,476
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases 23,540
Accrued Postretirement Benefits Other Than Pensions 42,817
Accrued Reclamation Costs 22,083
Operating Reserves 15,330
TOTAL OTHER NONCURRENT LIABILITIES 103,770
CURRENT LIABILITIES:
Long-term Debt Due Within One Year 11,480
Short-term Debt 5,200
Accounts Payable:
General 6,236
Affiliated Companies 3,421
Taxes Accrued 2,479
Interest Accrued 333
Accrued Vacation Pay 3,638
Workers' Compensation Claims 10,003
Accrued Rent 3,295
Obligations Under Capital Leases 19,066
Other 3,673
TOTAL CURRENT LIABILITIES 68,824
DEFERRED INCOME TAXES 3,458
DEFERRED CREDITS 1,292
TOTAL $290,852
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SOUTHERN OHIO COAL COMPANY
INFORMATION CONCERNING MINE OPERATIONS AND CAPITAL IMPROVEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 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 AEP'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 September 30, 1999 would increase
expenses by approximately $30.7 million (including interest). The
Company has made no provision for any possible impact from this
matter.
The Company made payments of taxes and interest attributable to
COLI interest deductions for taxable years 1991-1998 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 is seeking
refunds through litigation of all amounts paid plus interest.
In order to resolve this issue, the Company filed suit against
the United States (US) in the US District Court for the Southern
District of Ohio in March 1998. A US Tax Court judge recently
decided in the Winn-Dixie Stores v. Commissioner case that a
corporate taxpayer's COLI interest deductions should be disallowed.
Notwithstanding the decision in Winn-Dixie, management believes, and
has been advised by outside counsel, that it has a meritorious
position and will vigorously pursue its 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 SEPTEMBER 30, 1999
(in thousands, except as noted)
<CAPTION>
July through
September
1999
<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, 10.43% per annum, 2.6075% per quarter .026075
C. Earnings Allowable on Equity Investment
1. Current Quarter $ 1,165
2. Year-to-Date $ 3,504
D. Net Income per Statement of Income (a) $ 412
Add: Interest Charges 540
Less: Nonoperating Income 146
E. Applied Cost-of-Capital Billing Adder:
1. Current Quarter $ 806
2. Year-to-Date $ 2,385
II. Coal Billing Calculation - Meigs Division:
A. Total Operating Expenses (b) $ 70,421
B. Add: Cost-of-Capital Billing Adder as Applied per E. 1. of Section I 806
C. Cost Applicable to Current Quarter Coal Billings to Ohio Power $ 71,227
D. Coal Sold and Shipped in Current Quarter to Ohio Power (in tons) 1,090,119
E. Average Price per Ton to Ohio Power (in dollars) (C/D) $ 65.34
(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.
</TABLE>
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SOUTHERN OHIO COAL COMPANY
STATEMENT OF COST OF OPERATION
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
(in thousands)
Direct Labor-UMW* $ 2,219
Indirect Labor-UMW* 6,531
Benefits-UMW* 4,535
Salaries and Benefits-Nonunion 4,354
Operating Supplies 3,569
Repair Parts and Materials 6,476
Electricity and Other Utilities 1,685
Outside Services-Maintenance, Haulage and Reclamation 4,831
Taxes Other Than Federal Income Taxes** 1,626
Rental of Equipment 7,549
Depreciation, Depletion and Amortization 4,818
Mining Cost Normalization*** 11,595
Other Production Costs 5,572
Subtotal 65,360
Transfers of Production Costs (to)/from Coal Inventory 3,236
Total $68,596
* 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 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, 1999
Net
Gross Accumulated Carrying
Cost Provisions Amount
(in thousands)
Description
Surface Lands $ 7,578 $ - $ 7,578
Mining Structures and Equipment 240,336 170,603 69,733
Coal Interests (net of depletion) 1,745 - 1,745
Mine Development Costs 134,149 93,634 40,515
Total Mining Plant
in Service $383,808 $264,237 $119,571
