<PAGE>
WINDSOR COAL COMPANY
Page
CONTENTS
Statements of Income and Statements of Retained Earnings . . 1
Statements of Cash Flows . . . . . . . . . . 2
Balance Sheets . . . . . . . . . . . . 3-4
Notes to Financial Statements . . . . . . . . 5-11
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<TABLE>
WINDSOR COAL COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . $64,741 $68,555 $57,615
OPERATING EXPENSES
(including depreciation, depletion
and amortization of mining plant of
$4,594,000 in 1998, $4,441,000 in
1997 and $4,789,000 in 1996) . . . . 65,959 66,973 55,931
OPERATING INCOME (LOSS). . . . . . . . (1,218) 1,582 1,684
NONOPERATING INCOME. . . . . . . . . . 739 223 93
INCOME (LOSS) BEFORE INTEREST CHARGES. (479) 1,805 1,777
INTEREST CHARGES . . . . . . . . . . . 2 14 14
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES. . . . . . . . . . . . . (481) 1,791 1,763
FEDERAL INCOME TAX EXPENSE (CREDIT). . (604) 631 400
NET INCOME . . . . . . . . . . . . . . $ 123 $ 1,160 $ 1,363
</TABLE>
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<TABLE>
STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1. . . . . . $ 78 $1,268 $ 245
NET INCOME . . . . . . . . . . . . . . 123 1,160 1,363
CASH DIVIDENDS DECLARED. . . . . . . . 186 2,350 340
RETAINED EARNINGS DECEMBER 31. . . . . $ 15 $ 78 $1,268
See Notes to Financial Statements.
</TABLE>
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<TABLE>
WINDSOR COAL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . $ 123 $ 1,160 $ 1,363
Adjustments for Noncash Items:
Depreciation, Depletion and
Amortization . . . . . . . . . . 4,594 4,441 4,790
Deferred Income Taxes. . . . . . . (3,948) (3,526) (3,545)
Accrued Other Postretirement
Benefits . . . . . . . . . . . . 1,844 1,134 1,231
Accrued Rent and Royalty . . . . . 2,047 1,496 2,131
Reclamation Reserve. . . . . . . . 2,821 2,600 1,343
Changes in Certain Current
Assets and Liabilities:
Accounts Receivable. . . . . . . . 1,876 460 (1,972)
Coal, Materials and Supplies . . . 617 (682) (17)
Accounts Payable . . . . . . . . . 506 1,817 (813)
Other (net). . . . . . . . . . . . . 1,055 1,495 385
Net Cash Flows From Operating
Activities. . . . . . . . . . 11,535 10,395 4,896
INVESTING ACTIVITIES:
Construction Expenditures. . . . . . (53) (956) (68)
Proceeds from Sales of Property. . . 10 3 5
Net Cash Flows Used For
Investing Activities. . . . . (43) (953) (63)
FINANCING ACTIVITIES:
Capital Contributions Returned
to Parent Co. . . . . . . . . . . . (8,876) (2,000) -
Retirement of Long-term Debt . . . . (794) (569) (569)
Dividends Paid . . . . . . . . . . . (186) (2,350) (340)
Net Cash Flows Used For
Financing Activities. . . . . (9,856) (4,919) (909)
Net Increase in Cash and Cash
Equivalents . . . . . . . . . . . . . 1,636 4,523 3,924
Cash and Cash Equivalents January 1. . 8,460 3,937 13
Cash and Cash Equivalents December 31. $10,096 $ 8,460 $ 3,937
See Notes to Financial Statements.
</TABLE>
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<TABLE>
WINDSOR COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1998 1997
(in thousands)
<S> <C> <C>
ASSETS
MINING PLANT:
Surface Lands. . . . . . . . . . . . . . . . . . $ 633 $ 634
Mining Structures and Equipment. . . . . . . . . 47,537 49,431
Coal Interests (net of depletion). . . . . . . . 945 1,227
Mine Development Costs . . . . . . . . . . . . . 10,041 10,041
Construction Work in Progress. . . . . . . . . . - 25
Total Mining Plant . . . . . . . . . . . 59,156 61,358
Accumulated Depreciation and Amortization. . . . 39,514 35,322
NET MINING PLANT . . . . . . . . . . . . 19,642 26,036
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . 10,096 8,460
Accounts Receivable - General. . . . . . . . . . 4,414 953
Accounts Receivable - Affiliated Companies . . . 1,562 6,899
Coal - at average cost . . . . . . . . . . . . . 51 144
Materials and Supplies - at average cost . . . . 3,979 4,503
Other. . . . . . . . . . . . . . . . . . . . . . 291 244
TOTAL CURRENT ASSETS . . . . . . . . . . 20,393 21,203
REGULATORY ASSETS. . . . . . . . . . . . . . . . . 918 527
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . 9,346 5,033
DEFERRED CHARGES . . . . . . . . . . . . . . . . . 290 371
TOTAL. . . . . . . . . . . . . . . . . . $50,589 $53,170
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
WINDSOR COAL COMPANY
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
December 31,
1998 1997
(in thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
SHAREOWNER'S EQUITY:
Common Stock - Par Value $0.10:
Authorized - 5,000 Shares
Outstanding - 4,064 Shares . . . . . . . . . . $ - $ -
Paid-in Capital. . . . . . . . . . . . . . . . . - 8,876
Retained Earnings. . . . . . . . . . . . . . . . 15 78
TOTAL SHAREOWNER'S EQUITY. . . . . . . . 15 8,954
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 6,572 7,366
OTHER NONCURRENT LIABILITIES:
Obligations Under Capital Leases . . . . . . . . 710 1,559
Postretirement Benefits Other Than Pensions. . . 10,136 8,292
Accrued Reclamation Costs. . . . . . . . . . . . 6,763 3,942
Other. . . . . . . . . . . . . . . . . . . . . . 11,093 8,807
TOTAL OTHER NONCURRENT LIABILITIES . . . 28,702 22,600
CURRENT LIABILITIES:
Long-term Debt Due Within One Year . . . . . . . 570 570
Accounts Payable - General . . . . . . . . . . . 1,453 3,237
Accounts Payable - Affiliated Companies. . . . . 3,147 857
Workers' Compensation. . . . . . . . . . . . . . 1,998 2,105
Obligations Under Capital Leases . . . . . . . . 929 1,395
Other. . . . . . . . . . . . . . . . . . . . . . 2,607 1,838
TOTAL CURRENT LIABILITIES. . . . . . . . 10,704 10,002
REGULATORY LIABILITIES:
Amounts Due To Parent Company For
Future Income Tax Benefits. . . . . . . . . . . 4,253 3,879
Other. . . . . . . . . . . . . . . . . . . . . . 343 314
TOTAL REGULATORY LIABILITIES . . . . . . 4,596 4,193
DEFERRED CREDITS . . . . . . . . . . . . . . . . . - 55
CONTINGENCIES (Note 2)
TOTAL. . . . . . . . . . . . . . . . . . $50,589 $53,170
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE>
WINDSOR COAL COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Regulation
Windsor Coal Company (the Company or WCCo), is a wholly-owned subsidiary
of Ohio Power Company (OPCo), which is a subsidiary of American Electric
Power Company, Inc. (AEP Co., Inc.), a public utility holding company.
The Company conducts underground mining operations in West Virginia on
properties owned or leased by OPCo or the Company. Coal is mined and sold
to generating units wholly owned by OPCo and jointly owned by OPCo and an
unaffiliated company at prices regulated by the Securities and Exchange
Commission (SEC) under the Public Utility Holding Company Act of 1935
(1935 Act). The prices billed are sufficient to recover expenses and
provide for a return on OPCo's equity investment excluding retained
earnings. The Company also has been authorized to sell coal to
unaffiliated companies with the net proceeds used to reduce the price of
coal sold to OPCo. The majority of the Company's coal production is
shipped to OPCo's Cardinal Plant.
Basis of Accounting
As a cost-based rate-regulated entity, WCCo's financial statements reflect
the actions of regulators that 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. Such
deferrals are amortized commensurate with their inclusion in billings to
OPCo.
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.
Coal Supply Agreement
Pursuant to a coal supply agreement with OPCo, the Company is obligated to
deliver substantially all coal it mines to OPCo and entitled to receive
payment for all costs incurred, even under circumstances in which such
coal is not mined and/or delivered due to a natural disaster, labor unrest
or any other forced or voluntary cessation or curtailment of mining,
either temporary or permanent.
<PAGE>
Mining Plant and Depreciation, Depletion and Amortization
Mining plant is stated at cost and includes expenditures for mine
development. Mine development includes all costs to develop the mines in
excess of amounts realized from coal produced during the mine development
period. As a subsidiary of a regulated public utility, an allowance for
funds used during construction (AFUDC) is recorded as a noncash income
item that is recovered over the service life of mining plant through
depreciation and represents a reasonable return on funds used to finance
construction projects. The amounts of AFUDC for 1998, 1997 and 1996 were
not significant.
Depreciation, depletion and amortization are provided over the estimated
useful asset lives and are calculated by use of the straight-line method
for mining structures and equipment and by use of the units-of-production
method for coal interests and mine development costs.
Costs of ordinary maintenance, repairs, renewals and minor replacements of
property are expensed while major additions of property, replacements of
property and betterments are capitalized. Mining plant and related
accumulated provisions for depreciation, depletion and amortization are
relieved upon disposition of the related property with any gain or loss
recorded as income or expense in the period of disposition. Such gains
and losses are included in costs billed to OPCo under the coal supply
agreement.
Cash and Cash Equivalents
Cash and cash equivalents include temporary cash investments with original
maturities of three months or less.
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 the
Company's coal billings and OPCo's fuel rates, deferred income taxes are
recorded with related regulatory assets and liabilities in accordance with
SFAS 71.
Black Lung Benefits and Workers' Compensation
The Company is liable under the Federal Coal Mine Health and Safety Act of
1969 (Act), as amended, to pay certain black lung benefits to eligible
present and former employees. A Black Lung Benefits Trust is maintained
under the Internal Revenue Code which, based on the most recent actuarial
study, is fully funded. No accruals for Black Lung liabilities were made
in 1998, 1997 or 1996.
The Company is self-insured for workers' compensation. The estimated
present value of workers' compensation claims is provided based on known
events and claims.
<PAGE>
Reclamation
The Surface Mining and Reclamation Act of 1977 established minimum
standards for the final closure of mines after their coal resources are
exhausted. This would include, among other things, sealing the portals at
underground mines and the removal or covering of refuse piles and water
settling ponds. Reclamation costs are recorded and billed to OPCo in
accordance with the coal supply agreement.
2. CONTINGENCIES
The Company 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, cash flows or financial condition.
The Company recovers all costs from OPCo under the coal supply agreement.
3. CONTINUATION OF MINING OPERATIONS
The Clean Air Act Amendments of 1990 (CAAA) require significant reductions
in sulfur dioxide and nitrogen oxide emissions from OPCo's generating
plants with the Phase I reductions effective January 1, 1995 and Phase II
effective January 1, 2000. OPCo's Phase I compliance efforts did not
impact the Company. To meet Phase II compliance, tentative plans propose
switching Cardinal Plant Unit 1, which is supplied by the Company, to
lower sulfur coal from unaffiliated sources in 2000.
Management anticipates closing the Windsor mining operation in December
2000 in order to comply with the Phase II requirements of the CAAA or it
could close earlier if it is no longer economical to continue mining
operations. The cost of a shutdown would be substantial and would include
not only any possible loss on disposition of assets but also employee
benefits, lease commitments, unaccrued reclamation and other shutdown
costs. All shutdown costs will be recoverable from OPCo under the coal
supply agreement.
4. OTHER RELATED-PARTY TRANSACTIONS
American Electric Power Service Corporation (AEPSC) provides certain
managerial and professional services to AEP System companies including
WCCo. 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 capitalized or expensed 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
The Company participates in the United Mine Workers of America (UMWA)
pension plan, a defined contribution plan which covers its UMWA employees.
Contributions totaled $218,000 in 1998, $327,000 in 1997 and $283,000 in
1996. As of June 30, 1998, the UMWA actuary estimates that the Company's
share of the UMWA pension plans unfunded vested liabilities was
approximately $5.3 million. In the event the Company ceases or
significantly reduces mining operations or contributions to the UMWA
pension plans, a withdrawal obligation may be triggered for all or a
portion of the Company's share of the unfunded vested liability at the
time mining operations cease.
The Company participates in the AEP System qualified pension plan, a
defined benefit plan which covers all employees, except participants in
the UMWA pension plans. Net pension costs for the years ended December
31, 1998, 1997 and 1996 were $103,000, $95,000 and $119,000, respectively.
A defined contribution employee savings plan offered to non-UMWA employees
required that the Company make contributions to the plan totaling $86,000
in 1998, $81,000 in 1997 and $76,000 in 1996.
Postretirement medical benefits for the Company's UMWA employees who have
retired or will retire after January 1, 1976 (post 1975 UMWA retirees) are
the liability of the Company. The AEP System provides certain other
benefits for retired employees under an AEP System plan. The annual
accrued costs for these plans were $2.6 million in 1998, $1.8 million in
1997 and $1.9 million in 1996.
Several UMWA health plans pay the postretirement medical benefits for the
Company's UMWA retirees who retired before January 2, 1976 and their
survivors plus retirees and others whose last employer is no longer a
signatory to the UMWA contract or is no longer in business. Required
annual payments to these plans totaled $271,000 in 1998, $345,000 in 1997
and $98,000 in 1996.
The Energy Policy Act of 1992 (Energy Act) permits recovery of excess
Black Lung Trust funds of the AEP System to pay certain postretirement
medical benefits under one of the UMWA health plans. Reimbursement
limitations apply to the System's excess funding. The Company has a fund
surplus that it is able to transfer to other AEP System companies that are
members of the fund and have a deficit. In June 1998 management decided
to cease reimbursing retiree medical costs due to the reduced levels of
available Black Lung surplus and proposed new rules that could liberalize
the current claims process. The amounts of Black Lung surplus utilized in
accordance with the Energy Act were $513,000 in 1998, $502,000 in 1997 and
$579,000 in 1996. In addition, the amounts of Black Lung surplus utilized
include $175,000 in 1998, $37,000 in 1997 and $101,000 in 1996 reallocated
from the surplus Black Lung trust fund of other System member companies.
The Company's share of the Black Lung Trust funds surplus at December 31,
1998, 1997 and 1996 was $1,766,000, $1,000 and $841,000, respectively.
<PAGE>
6. FEDERAL INCOME TAXES
The details of federal income taxes are as follows:
Year Ended December 31,
1998 1997 1996
(in thousands)
Current (net) . . . . . . . . . . . . . . $ 3,344 $ 4,157 $ 3,945
Deferred (net) . . . . . . . . . . . . . . (3,948) (3,526) (3,545)
Total Federal Income Taxes . . . . . . . . $ (604) $ 631 $ 400
Federal income taxes as reported are different from pre-tax book income
multiplied by the statutory tax rate predominantly due to the practice of
flow-through accounting for book/tax differences associated with self-insurance
reserves.
The Company joins in the filing of a consolidated federal income tax
return with its affiliated companies 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 separate
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 1996 are
presently open and under audit by the IRS. In the opinion of management,
the final settlement of open years will not have a material effect on
results of operations and cash flows.
The following tables show the elements of the net deferred tax asset and
the significant temporary differences giving rise to such deferrals:
December 31,
1998 1997
(in thousands)
Deferred Tax Assets . . . . . . . . . . . . . . $14,380 $10,930
Deferred Tax Liabilities. . . . . . . . . . . . (5,034) (5,897)
Net Deferred Tax Assets . . . . . . . . . . . $ 9,346 $ 5,033
Property Related Temporary Differences. . . . . $(3,569) $(4,854)
Amounts Due To Parent Company
For Future Federal Income Taxes . . . . . . . 1,027 1,243
Self-Insurance Reserves . . . . . . . . . . . . 994 1,251
Accrued Postretirement Expenses . . . . . . . . 3,643 2,958
Accrued Leased Asset Book Rent Expense. . . . . 1,012 830
Accrued Book Royalty Expense. . . . . . . . . . 1,807 1,234
Accrued Mine Reclamation Expense. . . . . . . . 2,355 1,380
Deferred State Income Taxes . . . . . . . . . . 1,309 327
All Other (net) . . . . . . . . . . . . . . . . 768 664
Total Net Deferred Tax Assets . . . . . . . . $ 9,346 $ 5,033
<PAGE>
7.
SUPPLEMENTARY CASH FLOW INFORMATION
Year Ended December 31,
1998 1997 1996
(in thousands)
Cash was paid for:
Interest . . . . . . . . . . . . . . . $ 5 $ 14 $ 13
Income Taxes . . . . . . . . . . . . . 3,685 5,669 5,306
Noncash acquisitions under capital
leases were . . . . . . . . . . . . . . 383 1,685 291
8. LEASES
Leases of property, plant and equipment are for periods of up to 20 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 as long as mining operations
continue.
Lease rentals for both operating and capital leases are generally charged
to operating expenses. The components of rental cost are as follows:
Year Ended December 31,
1998 1997 1996
(in thousands)
Operating Leases . . . . . . . . . . . . . $ 4 $ 906 $ 943
Amortization of Capital Leases . . . . . . 1,243 976 883
Interest on Capital Leases . . . . . . . . 151 154 155
Total Rental Costs. . . . . . . . . $1,398 $2,036 $1,981
Properties under capital leases and related obligations recorded on the
Balance Sheets are as follows:
December 31,
1998 1997
(in thousands)
Mining Plant Under Capital Leases. . . . . . . . $5,917 $7,482
Accumulated Amortization. . . . . . . . . . . . 4,278 4,528
Net Property under Capital Leases . . . . . $1,639 $2,954
Capital Lease Obligations:
Noncurrent Liability . . . . . . . . . . . . $ 710 $1,559
Liability Due Within One Year. . . . . . . . 929 1,395
Total Capital Lease Obligations. . . . . $1,639 $2,954
Properties under operating leases and related obligations are not included
in the Balance Sheets.
<PAGE>
Future minimum lease rentals, consisted of the following at December 31,
1998:
Capital
Leases
(in thousands)
1999 . . . . . . . . . . . . . . . . . . . . . . . $1,009
2000 . . . . . . . . . . . . . . . . . . . . . . . 647
2001 . . . . . . . . . . . . . . . . . . . . . . . 63
2002 . . . . . . . . . . . . . . . . . . . . . . . 11
2003 . . . . . . . . . . . . . . . . . . . . . . . 5
Later Years. . . . . . . . . . . . . . . . . . . . 21
Total Future Minimum Lease Rentals . . . . . . . . 1,756
Less Estimated Interest Element Included Therein . 117
Estimated Present Value of
Future Minimum Lease Rentals. . . . . . . . . . . $1,639
9. RETURN OF CAPITAL
In October 1997 the Company returned $2,000,000 to its parent out of
capital and reduced the par value of its authorized common shares from
$100 per share to $0.10 per share, thereby reducing its stated capital
from $406,000 to $406. In the first quarter of 1998 the Company returned
to its parent $8,876,000 out of capital surplus.
10. LONG-TERM DEBT
Long-term debt was outstanding as follows:
December 31,
1998 1997
(in thousands)
Advances from Parent - 6% open account . . . . . . . $ - $ 225
Finance Obligations. . . . . . . . . . . . . . . . . 7,142 7,711
7,142 7,936
Less Portion Due Within One Year . . . . . . . . . . 570 570
Total. . . . . . . . . . . . . . . . . . . . . . $6,572 $7,366
Finance obligations were entered into for the West Liberty portal in 1989,
the Long's Run Ventilation facility in 1992 and the Short Creek Acid Mine
Drainage facility in 1994 through sale and leaseback transactions. The
term on these obligations is 20 years (Long's Run is for 10 years with a
10-year renewal) with a bargain purchase option at expiration of the
agreements. In accordance with SFAS 98, the transactions did not qualify
as a sale and leaseback for accounting purposes. Future minimum payments
under these agreements are $570,000 per year for 1999 through 2003 and
$4,292,000 in later years.
